New
Bookmarks
Year 2010 Quarter 1: January 1 - 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/.
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
574 Shields Against Validity Challenges in Plato's Cave
---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Choose a
Date Below for Additions to the Bookmarks File
2010
March 31, 2010
February 28
January 31
March
31, 2010
Bob Jensen's New Bookmarks on
March 31, 2010
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 Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at
http://www.searchedu.com/
Bob Jensen's Blogs ---
http://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
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
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.
How to author books and other materials for
online delivery
http://www.trinity.edu/rjensen/000aaa/thetools.htm
How Web Pages Work ---
http://computer.howstuffworks.com/web-page.htm
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
The Master List of Free
Online College Courses ---
http://universitiesandcolleges.org/
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
The Master List of Free
Online College Courses ---
http://universitiesandcolleges.org/
Bob Jensen's threads for online worldwide education and training
alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm
"U. of Manitoba
Researchers Publish Open-Source Handbook on Educational Technology,"
by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---
http://chronicle.com/wiredcampus/index.php?id=3671&utm_source=wc&utm_medium=en
Social Networking for Education: The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses
of Twitter)
Updates will be at
http://www.trinity.edu/rjensen/ListservRoles.htm
Pete Wilson provides some great videos on how to
make accounting judgments ---
http://www.navigatingaccounting.com/
FEI Second Life Video (thank you Edith) ---
If I Were an Auditor ---
http://www.youtube.com/user/feiblog#p/a/u/0/Q-FR_fkTFKY
Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm
Humor Between
March 1 and March 31, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor033110
Humor Between February 1 and February 28, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor022810
Humor Between January 1 and January 31, 2010
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013110
Top Ten Things David Letterman Learned From Ten Area
Accountants ---
http://www.youtube.com/watch?v=VWIlHl3j7CQ
These are so bad they will not change the public image of accountants
However, Richard Cohen talks about me
Fraud Updates have been posted up to December 31, 2009 ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Also see
http://www.trinity.edu/rjensen/Fraud.htm
Humor Videos: Pennsylvania Wants to Show
CPAs Are Funny ---
http://www.webcpa.com/news/Pennsylvania-Wants-to-Show-CPAs-Are-Funny-53291-1.html
Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor
"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F
Do You Want to Teach? ---
http://financialexecutives.blogspot.com/2009/05/do-you-want-to-teach.html
Jensen Comment
Here are some added positives and negatives to consider, especially if you are
currently a practicing accountant considering becoming a professor.
Accountancy Doctoral Program Information from Jim Hasselback ---
http://www.jrhasselback.com/AtgDoctInfo.html
Why must all accounting doctoral programs be social science
(particularly econometrics) "accountics" doctoral programs?
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
What went wrong in accounting/accountics research?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
"The Accounting Doctoral Shortage: Time for a New Model,"
by Neal Mero, Jan R. Williams and George W. Krull, Jr. .
Issues in Accounting Education 24 (4)
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=IAEXXX000024000004000427000001&idtype=cvips&gifs=Yes&ref=no
ABSTRACT:
The crisis in supply versus demand for doctorally qualified faculty members
in accounting is well documented (Association to Advance Collegiate Schools
of Business [AACSB] 2003a, 2003b; Plumlee et al. 2005; Leslie 2008). Little
progress has been made in addressing this serious challenge facing the
accounting academic community and the accounting profession. Faculty time,
institutional incentives, the doctoral model itself, and research diversity
are noted as major challenges to making progress on this issue. The authors
propose six recommendations, including a new, extramurally funded research
program aimed at supporting doctoral students that functions similar to
research programs supported by such organizations as the National Science
Foundation and other science-based funding sources. The goal is to create
capacity, improve structures for doctoral programs, and provide incentives
to enhance doctoral enrollments. This should lead to an increased supply of
graduates while also enhancing and supporting broad-based research outcomes
across the accounting landscape, including auditing and tax. ©2009 American
Accounting Association
Bob Jensen's threads on accountancy doctoral programs are at
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
Jensen Comment
want to apologize for my previous neglect of Rick Lillie’s highly
informative blog. Rick is an experienced CPA
who entered a doctoral program later in
life. He chose, I surmise, to get an
education doctorate in part to better learn
about and do research in education and
learning technology. He knows more about
education technology than almost all
accounting professors and currently teaches
financial accounting with an eye to learning
and education technologies ---
http://iaed.wordpress.com/about/
In any case,
one blog that I will most certainly not
neglect in the future is at
http://iaed.wordpress.com/
Bob
Jensen's threads on professors who blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
"Understanding the Web of Learning: A Work-in-Process," by Rick
Lillie, Thinking Outside the Box, November 22. 2009 ---
http://iaed.wordpress.com/2009/11/22/understanding-the-web-of-learning-a-work-in-process/
I enjoy moments where “dots connect” and I realize
how “connections” cause or influence other things. Connecting the dots
between books or articles that I read is sometimes pretty exciting.
For example, previously I read Friedman’s
The World is Flat. While I did not
agree with all of his positions, Friedman helped me to better understand
implications of globalization. Currently, I am reading Bonk’s
The World is Open: How Web Technology Is Revolutionizing Education.
A common thread (dot connector) between Friedman and
Bonk is importance of the internet and Web 2.0 technologies in enabling
worldwide connection and interaction.
Generally, my blog postings focus on technology
tools and their uses in teaching-learning processes. This posting steps
away from technology tools per se to connecting dots between what Friedman
and Bonk have to say about how technology is changing the ways we live,
learn, communicate, and collaborate.
If you have not read these books, I suggest them to
you. I think you will enjoy the read and conclude the time well spent.
Rick Lillie (CalState San Bernardino)
Rick Lillie's education, learning, and technology blog is at
http://iaed.wordpress.com/
Bob Jensen's threads on professors who blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
March 24, 2010 message to the AECM
I think professors who do not open share extensively on the Web
miss the boat.
Selfishness has its own punishments, and generosity has its own rewards.
Scroll most of the way down in this message for an example from XXXXX
Will Yancey was a pioneer in open sharing on the Web ---
http://www.trinity.edu/rjensen/Yancey.htm
Will made a very good living consulting and found that open sharing pays
back enormously, much better in his case than any kind of paid advertising.
But if you would’ve known Will you would’ve also discovered that he shared
openly out of the kindness of his big heart. I doubt that he even thought
about payback when he commenced to open share so generously.
I was also
an early-on open sharing professor and never once did so with the thought of
payback in mind. However, I am forwarding the message below to show that
once of the benefits of open sharing is payback ---
http://www.trinity.edu/rjensen/threads.htm
Once again, however, I stress that I would open share if there
was not a penny of monetary payback. I open share because it makes me feel
good to make a difference in the academy of professors and students.
When you do open share technical content, potential clients find
your work using Google, Bing, and other Web crawlers.
I think professors who do not open share extensively miss the boat.
Selfishness has its own punishments, and generosity has its own rewards.
My threads on this type of problem are at
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
My excel workbook contains an “Effective” spreadsheet at in the
133ex05a.xls file at
http://www.cs.trinity.edu/~rjensen/
I also provide a 133ex05a.wmv video at
http://www.cs.trinity.edu/~rjensen/video/acct5341/
Professors Who Blog ---
http://www.trinity.edu/rjensen/accountingnews.htm
How I made my money consulting ---
http://www.trinity.edu/rjensen/theory01.htm#ConsultingMoney
My Outstanding Educator Award Speech ---
http://www.trinity.edu/rjensen/000aaa/AAAaward_files/AAAaward02.htm
Bob Jensen
From:
XXXXX
Sent: Wednesday, March 24, 2010 4:26 PM
To: Jensen, Robert
Subject: Interest Rate Swap Valuation?
Hi Bob,
I found you on the internet. We are doing a Dec 31 2009
audit and our client obtained a mortgage loan in 2009, and entered into a
fixed rate mortgage rate swap on the loans interest. I would like to get a
fair value quote for the swap at Dec. 31,2009. Would you be available to
consult with us on this valuation? Please advise interest and your fee?
Accounting Theory Courses
Accounting theory courses seem to vary across the board
as do AIS courses in comparison to most other accounting courses that are
structured largely by the CPA examination and relatively uniform textbooks in
basic, intermediate, and advanced accounting courses.
Some programs gave up teaching accounting theory, in
part because there really aren't any good new textbooks in accounting theory,
and the older textbooks are outdated.
There are many bases from which accounting theory might
be taught;
Suggestions below are broad categories having considerable overlap:
·
Historical Base ---
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory
Modern Science and Ancient Wisdom ---
http://www.trinity.edu/rjensen/theory01.htm#AncientWisdom
"A Wisdom 101 Course!" February 15, 2010 ---
http://www.simoleonsense.com/a-wisdom-101-course/
"Overview of Prior Research on Wisdom," Simoleon Sense,
February 15, 2010 ---
http://www.simoleonsense.com/overview-of-prior-research-on-wisdom/
"An Overview Of The Psychology Of Wisdom," Simoleon Sense,
February 15, 2010 ---
http://www.simoleonsense.com/an-overview-of-the-psychology-of-wisdom/
·
Opposing Theories of Accounting Hall of Fame Theorists (not all
were theorists) ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/
·
Creative Accounting Base ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
And ---
http://www.trinity.edu/rjensen/theory01.htm#OBSF2
One course I would like to develop would relate the
great theories of management and sociology to roles accounting might play
under such theories:
I would also like to develop an accounting theory course
on the interaction of accounting controls, stewardship accounting, and the
evolution of fraud. The focus would be upon the theory of preventing fraud:
Added Later
Another topic I overlooked for a theory course would be focus on accounting for
the “shadow economy” ---
http://www.trinity.edu/rjensen/theory01.htm#ShadowEconomy
And any accounting theory
course should not overlook the huge problem of accounting for intangibles and
contingencies ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
These are at the very center of the systemic and intractable problems of
financial and managerial accounting.
Abe Briloff:
Accounting Hall of Fame or Infame?
Yesterday the name of
Abe Briloff was raised on the AECM.
I knew Abe
personally. He’s one of my heroes in life. One of the reasons is that he wanted
to make auditing more professional and conscionable without destroying private
sector auditing in the process.
My Hero ---
http://www.uic.edu/classes/actg/actg593/Readings/Investments/Life%20and%20career%20of%20Abe%20Briloff.pdf
What was wrong is the
way the large auditing firms reacted with negativism and haughty arrogance
rather than working with Abe to avoid what happened with Andersen and now the
other big firms in the wake of the banking scandals of 2008. A better way for
firms to have reacted to Briloff is to work with him on ways to improve their
audits.
What is also tragic
is that Abe Briloff has not yet been admitted to the Accounting Hall of Fame ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/
I will not speculate
here as to what I guess (only a guess) is the main reason he’s not been inducted
into the Hall of Fame. In my eyes, he’s one of the most deserving potential Hall
of Famers. But he took the path less traveled among all Hall of Fame members to
date. Abe’s writings are still models to behold on how to read financial
statements with the skepticism of a true accountant.
Abe’s writings remain
very good source material for students of financial accounting. When he talked
(wrote) the capital markets listened. How many other accounting professors can
say the same? George Foster questioned whether stock prices reacted more to what
Briloff said or to the fact that Briloff said anything about a corporation’s
financial statements.
For example an events study such as the discovery by
George Foster that the publication of a Barrons' paper by Abe Briloff was highly
correlated with a plunge in share prices of McDonalds Corporation tells us
something about an association between Briloff's accounting publication and
capital market events. But correlation is not causation. Foster's study could
not really tell us if the accounting issue (dirty pooling) or the mere fact that
Briloff said something negative about McDonalds in Barrons actually caused the
plunge in share prices.
To find his best
stuff, check to see if your college library has access to the archives of
Barrons where he wrote his infamous columns. You might also check out such
references as his book:
More
Debits Than Credits: The Burnt Investor's Guide to Financial Statements
Additional examples have been provided over the
years by Abe. The following is Table 1 from a paper entitled "Briloff and the
Capital Markets" by George Foster, Journal of Accounting Research, Volume
17, Spring 1979 ---
http://www.jstor.org/view/00218456/di008014/00p0266h/0
As George Foster points out, what makes Briloff
unique in academe are the detailed real-world examples he provides. Briloff
became so important that stock prices reacted instantly to his publications,
particularly those in Barron's. George formally studied market reactions
to Briloff articles.
Companies Professor Briloff criticized for
misleading accounting reports experienced an average drop in share prices of 8%.
TABLE 1
Articles of Briloff Examined |
|
Article |
Journal/Publication Date |
Companies
Cited That Are Examined in This Note |
1. |
"Dirty Pooling" |
Barron's
(July 15, 1968) |
Gulf and Wesern: Ling-Temco-Vought (LTV) |
2. |
"All a Fandangle?" |
Barron's
(December 2, 1968) |
Leasco Data Processing: Levin-Townsend |
3. |
"Much-Abused Goodwill" |
Barron's
(April 28, 1969) |
Levin-Townsend; National General Corp. |
4. |
"Out of Focus" |
Barron's
(July 28, 1969) |
Perfect Film & Chemical Corp. |
5. |
"Castles of Sand?"
|
Barron's
(February 2, 1970)
|
Amrep Corp.; Canaveral International; Deltona Corp.;
General Development Corp.; Great Southwest Corp.; Great Western United,
Major Realty; Penn Central |
6. |
"Tomorrow's Profits?" |
Barron's
(May 11, 1970) |
Telex |
7. |
"Six Flags at Half-Mast?" |
Barron's
(January 11, 1971) |
Great Southwest Corp.; Penn Central |
8. |
"Gimme Shelter"
|
Barron's
(October 25, 1971)
|
Kaufman & Broad Inc.; U.S. Home Corp.; U.S. Financial
Inc. |
9. |
"SEC Questions Accounting"
|
Commercial and Financial Chronicle
(November 2, 1972) |
Penn Central
|
10. |
"$200 Million Question" |
Barron's
(December 18, 1972) |
Leasco Corp. |
11. |
"Sunrise, Sunset" |
Barron's
(May 14, 1973) |
Kaufman & Broad |
12. |
"Kaufman & Broad--More Questions? |
Commercial and Financial Chronicle
(July 12, 1973) |
Kaufman & Broad
|
13. |
"You Deserve a Break..." |
Barron's
(July 8, 1974) |
McDonald's |
14. |
"The Bottom Line: What's Going on at I.T.T." (Interview
with Briloff) |
New York Magazine
(August 12, 1974)
|
I.T.T.
|
15. |
"Whose Deep Pocket?" |
Barron's
(July 19, 1976) |
Reliance Group Inc. |
Also
see William Brighnti's 2+2 tribute
Accountants CPA Hartford CT William Brighenti CPA
[accountantscpahartford@GMAIL.COM]
http://www.accountingweb.com/blogs/briggsie/barefoot-accountant/how-much-2-plus-2
March 23, 2010 reply
from James R. Martin/University of South Florida
[jmartin@MAAW.INFO]
I agree
Bob, Briloff is a hero.
Here
are a few more of Briloff's papers I copied from MAAW's bibliography.
For the JSTOR links go to
http://maaw.info/BibliographyB.htm
Briloff,
A. J. 1958. Price level changes and financial statements: A critical
reappraisal. The Accounting Review (July): 380-388. .
Briloff,
A. J. 1961. Price level changes and financial statements at the threshold of
the new frontier. The Accounting Review (October): 603-607.
Briloff,
A. J. 1964. Needed: A revolution in the determination and application of
accounting principles. The Accounting Review (January):12-15.
Briloff,
A. J. 1966. Old myths and new realities in accountancy. The Accounting
Review (July): 484-495. (JSTOR link). (Discussion of three accounting myths
related to: 1. The Gap in GAAP, 2. The communication Gap regarding the
auditor's responsibility, and 3. The communication Gap related to management
services and auditor independence).
Briloff,
A. J. 1967. Dirty pooling. The Accounting Review (July): 489-496.
Briloff,
A. J. 1967. The Effectiveness of Accounting Communication. Frederick A.
Praeger, Inc. Review by T. J. Burns. (JSTOR link).
Briloff,
A. J. 1972. Unaccountable Accounting. HarperCollins. Review by H.E. Milller.
See also Benston, G. J. 1974. Unaccountable accounting. Journal of
Accounting Research (Autumn): 348-354. (JSTOR link).
Briloff,
A. J. 1974. Prescription for change. Management Accounting (July): 63-65,
71.
Briloff,
A. J. 1976. More Debits Than Credits: The Burnt Investor's Guide to
Financial Statements. HarperCollins.
Briloff,
A. J. 1981. The Truth About Corporate Accounting. HarperCollins.
Briloff,
A. J. 1995. Review of Strengthening the professionalism of the independent
auditor, report to the public oversight board of the SEC practice section.
Accounting Horizons (September): 125-130.
Briloff,
A. J. 1996. America Online/ On a roll: A case study in investigative
accounting. Behavioral Research In Accounting (8 Supplement): 1-11.
Briloff,
A. J. 2002. Beyond the Brilovian critique: A Brilovian rejoinder.Accounting
and the Public Interest (2): 94-96.
March 23, 2010 reply
from Paul Williams
[Paul_Williams@NCSU.EDU]
Bob, One of my heroes, too. His treatment by both the US accounting academy
and the profession is nothing less than sordid. We all know that the powers
that be tried to revoke his certification over a technical error in an
engagement letter with a client of Abe's firm, which consists of one blind
man and his daughter. An issue of Critical Perspectives on Accounting Vol.
12, No. 2, 2001 is devoted to the Briloff affair. The affair was a paper Abe
wrote (originally titled Garbage In, Garbage Out) that was critical of the
COSO report. It was submitted to Accounting Horizons and received less that
respectful treatment. Subsequent events proved Abe was right -- Enron and
Andersen were not small clients of small firms. Abe was prescient about what
was to befall us two years after he wrote the paper. The stonewalling on
that paper , the refusal to share data with Abe were not in the best
traditons of scholarship. The Public Interest Section gave Abe our Exemplar
Award many years ago. I agree he should be in the Hall of Fame. I could tell
you some stories about his remarkable generosity, but will just leave it at,
"He is a very generous person!" To paraphrase Pete Axthelm, "There are many
men who are great accountants, but very few accountants who are great men."
Abe is a great man.
March 23, 2010 reply
from Dale
Flesher [mailto:acdlf@olemiss.edu]
Bob:
I noticed your posting about
Briloff. Have you seen the newly published biography by my former doctoral
student Richard Criscione? See below.
Dale
Click Here
http://books.emeraldinsight.com/display.asp?K=9781848555884&cur=GBP&sf1=kword_index&sort=sort_date%2Fd&st1=Briloff&sf2=eh_cat_class&st2=E02&button_login=Go&m=1&dc=1
Synopsis
"Studies in the Development of Accounting Thought" works to inform
readers of the historical foundations on which the profession is based,
the historical antecedents of today's accounting institutions, the
historical impact of accounting, as well as exploring the lives and
works of pre-eminent individuals in the profession's history. Recent
volumes have addressed: the founders of accounting in mid-nineteenth
century and the origins of the Institute of Chartered Accountants of
Scotland; the life and work of accountant Stuart Chase (1888-1985), and
his concerns about waste, conservation, social action, justice, ethics
and fairness; and the evolving nature of accounting regulation, looking
at the overwhelming number of systems and checks that practising
accountants face in the wake of modern management fraud. The series is
edited by Gary J. Previts, Past President of the American Accounting
Association and Professor at Weatherhead School of Management, Case
Western Reserve University, and Robert Bricker, Professor and Ernst &
Young Faculty Fellow at Weatherhead, CWRU.
Health-Care Taxes Put Spotlight on Tax-Exempt
Municipal Bonds
The latest
wrinkle in the muni-verse: the health-care reform legislation signed
by President Barack Obama on Mar. 23.
One widely
discussed feature of the bill is a new Medicare tax that levies 3.8% on wages
and other kinds of income, starting in 2013. The tax would not apply to interest
on tax-exempt bonds and other forms of unearned income, such as any gain from
the sale of a principal residence, that are excluded from gross income under the
U.S. income tax code, according to a footnote in the Joint Committee on
Taxation's Technical Explanation of the revenue provisions of the Reconciliation
Act of 2010. That may seem like a no-brainer, but R.J. Gallo, senior portfolio
manager for muni bonds at Federated Investors in Pittsburgh, says he's received
calls from a few brokers asking whether munis would be exempt from the
additional tax.
David Bogoslaw, “Health-Care Taxes
Put Spotlight on Munis," Business Week, March 23. 2010 ---
http://www.businessweek.com/investor/content/mar2010/pi20100323_076507.htm?link_position=link1
"Health Care Reform Insights From Harvard Business School Faculty," by
HBS Faculty Members, Harvard Business Review Blog, March 25, 2010 ---
http://blogs.hbr.org/cs/2010/03/health_care_reform_insights_fr.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
In the wake of the passage of sweeping health care
reform legislation by the U.S. Congress, the political battle over the bill
seems destined to continue. But what do Harvard Business School faculty
experts, whose research applies a management lens to health care policy and
delivery, think about the bill's content? And what are the next steps for
improving patient care and containing costs?
Richard Bohmer Physician and Professor of Management Practice at
Harvard Business School. Author of Designing Care: Aligning the
Nature and Management of Health Care.
Insurance reform is a necessary but not sufficient
component of U.S. health care reform. We need to think very hard as well
about the optimal way of caring for a particular type of patient and then
how to pay for that optimal way. For me, the optimal way is the function of
a science: What is possible in terms of drugs, technology, devices,
information technology, and personnel; then secondarily, consider the
current regulations in place and the payment models.
There is an important set of discussions to be had
around how we actually organize care, with all sorts of managerial and
strategic decisions to be made at a policy and national level. Yet at ground
zero, lots of interesting experiments are underway, with professionals
trying different ways of configuring and managing services. On that list I
include experiments with disease management programs, substituting nurse
practitioners for physicians in certain circumstances, the in-store clinic
model for treatment of simple diseases, and experiments with IT to enable
precise electronic communication between patients and doctors so that real
medical discussions can be had at a distance.
At the national level we don't hear much about
these innovations; yet they present an equally important set of issues. We
need to make a distinction between debating how it will be paid for and what
the "it" is that is paid for.
Several factors are pushing us to change how we
deliver care. Perhaps the most important of these is changing expectations.
Patients are used to good service from other industries, and they expect
higher performance than they see in the health care sector. They obviously
worry a lot about whether their insurance will cover the medical services
they need, but they are also concerned about the care they get — how
accurate, reliable, and fail-safe it is, as well as how responsive and
convenient. Employers expect better outcomes, and of course they and
patients want fewer errors and fewer patients harmed by care that was
intended to cure their disease. Finally, all health care's constituents
expect better value.
As for innovation, our prevailing model has been
that knowledge flows into medical and nursing practice from funded external
research. In this model it is the role of provider organizations to bring
knowledge published in the medical and nursing literatures to bear on
individual patients by selecting the right therapies and the right way of
implementing those therapies — a one-way flow of knowledge from the research
community to the delivery community to each individual patient.
However, routine practice is itself a fertile
source of innovations in care, in both what to do and how to do it. Medical
knowledge and how to operationalize it can be learned through taking care of
patients, and delivery organizations create knowledge for themselves. This
is knowledge flow not from bench-side-to-bedside, but from
bedside-to-bedside. New insights derived from practice can be brought to
bear for the benefit of each subsequent patient.
Given the increased expectations of performance, we
now need to design care by asking nitty-gritty design questions such as: How
is care going to be delivered? Who will do what, when, where, and how? How
will they hand over tasks and decision rights and accountability to the next
person who will do what, when, where, and how? And how does technology
support these decisions?
Hence, a lot of health care reform is a management
problem. It can't be solved by policymakers acting at a distance. That is
why we should help doctors understand the managerial issues related to their
clinical practice. My involvement with the MD/MBA program at Harvard
Business School is part of that belief. A not-for-profit institution
deserves to be as well managed as a for-profit institution. In terms of
health care delivery, the absence of a profit motive doesn't mean that
people should tolerate poorly designed processes and symptoms, especially
when organizational performance is a necessary component of realizing the
best clinical outcomes for individual patients.
Adapted from the 11/23/09 HBS Working Knowledge article,"Management's
Role in Reforming Health Care."
Bob Jensen's threads on health care ---
http://www.trinity.edu/rjensen/health.htm
Denny Beresford finally got it through my thick skull that the billion-dollar
write-offs of selected corporations are mandatory in FAS 106, leaving these
corporations no choice with respect to write offs in the year the universal
health care act was enacted.
March 28, 2010 message from Denny Beresford
Bob,
I'm amazed that you and
others (apparently including this anonymous former "top executive in a Big Four
accounting firm") apparently still seem to believe that the charges announced by
AT&T and some other large companies are somehow voluntary or arbitrary - even
opportunities for "cookie jar accounting." On Friday, KPMG issued its Defining
Issues publication 10-16 (unfortunately I printed it out and then deleted the
link so I can't reference here) which is titled, "New Health Care Legislation
Creates an Income Tax Charge for Some Companies." I suspect that all of the
firms will have publications on the street by early next week.
This is a fairly complex
issue and it doesn't apply to too many companies. But for those it does affect,
the charge is likely to be quite material. And it must be recorded in the period
in which the legislation is enacted according to authoritative FASB guidance.
I apologize if I am
misinterpreting either your views on this or your anonymous adviser (although
it's hard to misinterpret his quoted words). But let's not confuse what
companies have to do under generally accepted accounting principles with some
other matters where they might be allowed to apply more management judgment.
Denny Beresford
Jensen Comment on this "Vast CEO Conspiracy"
Here’s the latest wisdom on this issue from the hallowed halls of the U.S.
Congress.
"AT&T plans $1 billion write-down tied to health law :
Telecom giant joins Caterpillar and Deere in outlining expense," by Jeffrey
Bartash, The Wall Street Journal, March 26, 2010 ---
http://www.marketwatch.com/story/att-sees-1-billion-write-down-tied-to-health-law-2010-03-26?dist=afterbell
Among its many changes, the new health-care law
eliminated a tax deduction that companies used to cut the cost of
drug-benefit programs for retired workers. President Obama signed the
massive health-care overhaul into law earlier this week in a big victory for
ruling Democrats.
News Hub: Health Costs for CompaniesThe health
reform bill eliminated a subsidy for companies that operated as a double
deduction. Companies such as John Deere and Caterpillar will face new costs
up to $150 million, Ellen Schultz reports. Yet companies that still offer
retiree drug benefits, mostly older industrial concerns or those with
unionized employees, say the end of the deduction could force them to alter
their benefit plans. In other words, they might curtail or even cancel them.
"As a result of this legislation, including the
additional tax burden, AT&T will be evaluating prospective changes to the
active and retiree health care benefits offered by the company," AT&T said
in a filing with the government on Friday.
An AT&T spokesman declined to comment further on
the filing.
Earlier this week, Verizon Communications sent a letter to employees suggesting that changes
to their health-care plans could be afoot. AT&T and Verizon are the two
largest phone companies in the U.S. and include a substantial number of
unionized workers.
Several million retirees are estimated to receive
drug benefits from a few thousand companies. If those retirees were shifted
to the federal Medicare program, the government would to pick up the
expense. Whether savings from elimination of the subsidy would offset those
higher Medicare costs is unclear.
Under the old law, companies received a federal
subsidy worth up $1,330 per retiree if they provided former workers with
drug-care benefits. At the same time, however, companies could deduct the
value of the subsidy from their taxable income. See blog on whether the new
health care law already is hurting business
White House spokesman Robert Gibbs on Thursday said
the government merely eliminated a tax loophole that effectively allowed a
company to benefit twice from one law.
The AT&T announcement is sure to cause a ripple in
Washington. Republicans have already assailed the administration for what
they say are excessive costs saddled on business by the health-care law. The
issue is sure to be part of their campaign against Democrats in the fall
elections.
Democrats say the health-care law will become more
popular over time and they point out that it also includes substantial new
subsidies for business.
"There's $10 billion in health-care reform for
support for businesses with early retirees," Gibbs said
Updates on Bifurcation Accounting for Embedded
Derivatives
An example of an embedded derivative is the option in a
mortgage contract that allows the borrower to pay off the mortgage before the
maturity date of the mortgage. Most embedded derivatives have underlyings that
are “clearly and closely related” to the underlyings of the host contracts, as
is usually the case with an embedded option to pay off the balance due on a note
before its maturity date. However, there are many instances where embedded
options do not meet the “clearly and closely related” tests of FAS 133. When
these tests are not met, the embedded options must be bifurcated and accounted
for as derivative contracts under FAS 133 and its amendments.
I provide some illustrations of bifurcation in my free FAS
133 examination materials at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/ExamMaterial/PracticeQuestions/
Other examination helpers are at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/
There have been some recent changes in both the U.S. and
international standards.
First the IASB parted ways with the FASB by not requiring
embedded derivative contracts to be bifurcated for any such embedded derivatives
even if the underlyings are not at all clearly and closely related.
Second, the FASB has now taken a step closer to the IASB by
not requiring that certain credit derivatives be bifurcated even if they are not
clearly and closely related to their host contracts ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=150909
Today, the
FASB issued Accounting Standards Update 2010-11, to clarify the type of
embedded credit derivative that is exempt from embedded derivative
bifurcation requirements.
Only one form of embedded credit derivative qualifies for the exemption
one that is related only to the subordination of one financial
instrument to another.
As a result, entities that have contracts containing an embedded credit
derivative feature in a form other than such subordination may need to
separately account for the embedded credit derivative feature.
When the Amendments Are Effective:
An entity must apply the amended guidance as of the beginning of its
first fiscal quarter beginning after June 15, 2010.
The update can be downloaded by clicking
here. |
|
Bob Jensen’s free tutorials and videos on accounting for
derivative financial instruments and hedging activities are linked at
http://www.trinity.edu/rjensen/caseans/000index.htm
European Business Schools in 2010: They're Soaring
Business Week ---
http://www.businessweek.com/globalbiz/europe/special_reports/20100317european_b-schools_report.htm?link_position=link1
Just the Facts!
"Tax Provisions of Health Care Reform Legislation Covered in Briefing by CCH,"
SmartPros, March 22, 2010 ---
http://accounting.smartpros.com/x69050.xml
Also read the CCH Special Tax Briefing on health care reform:
http://tax.cchgroup.com/Legislation/Final-Healthcare-Reform-03-10.pdf
"EITF Reaches Five Final Consensuses (milestone
method of revenue recognition)," KPMG Defining Issues, March 2010
---
http://www.us.kpmg.com/microsite/DefiningIssues/2010/di-10-15-eitf-reaches-five-final-consensuses.pdf
The FASB’s Emerging Issues
Task Force reached five final Consensuses on the milestone method of revenue
recognition, insurers’ accounting for majority-ownership interests in mutual
funds owned through a separate account, casino base jackpot liabilities, the
effect of a loan modification when the loan is part of a pool of acquired
loans that deteriorated in credit quality prior to acquisition and the pool
is accounted for as a single asset, and the effect of denominating the
exercise price of a share-based payment award in the currency of the market
in which the underlying equity security trades.1 Proposed Consensuses were
reached on health care entity issues concerning the presentation of
insurance claims and related insurance recoveries and measuring charity care
for disclosure.
The Task Force also
discussed revenue recognition for health care entities and deferred
acquisition costs for insurance contracts.
n a separate
action, the SEC staff announced at the meeting temporary guidance related to
Venezuelan foreign currency issues. The FASB is expected to ratify the new
Consensuses at its March 31 meeting and, if it does, the Consensuses will
become authoritative GAAP. The proposed Consensuses will be exposed for
public comment if the FASB gives its approval at its March 31 meeting and
will be considered at a future EITF meeting.
Milestone Method of Revenue Recognition (EITF 08-9)
EITF 08-9 provides guidance on applying the
milestone method to milestone payments for achieving specified performance
measures when those payments are related to uncertain future events. Under
the final Consensus, the scope of this Issue is limited to transactions
involving research or development if the milestone payment is to be
recognized in its entirety in the period the milestone is achieved.
The milestone method should not be applied to
transactions within the scope of other authoritative literature on revenue
recognition (i.e., construction contract accounting).
Entities can make an accounting policy election to
recognize arrangement consideration received for achieving specified
performance measures during the period in which the milestones are achieved,
provided certain criteria are met. Although the milestone method is an
accounting policy election, other methods that would result in recognizing a
milestone in its entirety during the period it was achieved would not be
acceptable for milestones if the criteria are not met.
Under the EITF’s final Consensus, the milestone
method is a valid application of the proportional performance model for
revenue recognition if the milestones are substantive and there is
substantive uncertainty about whether the milestones will be achieved. The
Task Force agreed that whether a milestone is substantive is a judgment that
should be made at the inception of the arrangement. To meet the definition
of a substantive milestone, the consideration earned by achieving the
milestone (1) would have to be commensurate with either the level of effort
required to achieve the milestone or the enhancement in the value of the
item delivered, (2) would have to relate solely to past performance, and (3)
should be reasonable relative to all deliverables and payment terms in the
arrangement. No bifurcation of an individual milestone is allowed. There can
be more than one milestone in an arrangement.
A simplified example that Defining Issues has
published before illustrates the revenue recognition question related to
milestones. Assume that all other relevant revenue-recognition criteria are
met and the only question is the pattern of revenue recognition. Bio agrees
to perform research-and-development services on a new drug for Pharma and is
to be reimbursed at a rate of $200 per hour. Pharma agrees to pay Bio an
additional $5 million if clinical trials are successfully completed. The
trials are expected to be completed by the expiration of approximately half
of the project’s expected total of 50,000 hours. Bio performs 30,000 hours
of services during the reporting period in which the agreement begins;
clinical trials are successfully completed; and Bio continues to believe
that 50,000 hours of service will be required to perform under the
agreement. Pharma has paid Bio $11 million during the period: $6 million for
the 30,000 hours of R&D service provided plus $5 million for successfully
completing the clinical trials. An additional $4 million in fees is expected
to be received as the remaining 20,000 hours of service are provided in
future periods. What is the timing and amount of revenue that should be
recognized? Assuming that the milestone was determined to be substantive,
the $5 million milestone payment would be recognized as a performance bonus
when the clinical trials are successfully completed.
Continued in article
EITF documents can be downloaded from
http://www.fasb.org/jsp/FASB/Page/PreCodSectionPage&cid=1218220137031
Bob Jensen's threads on revenue recognition are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
History of Greed : Financial Fraud from Tulip Mania to Bernie Madoff
---
http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470601809.html
In his new book, History of Greed, noted financial
fraud expert David E. Y. Sarna posits that the major scandals that came to
light in 2008, like most of those in the last two hundred years are just the
superficial manifestations of a system that, at its core, is based on fraud,
greed and dishonesty. The root cause of the markets’ malaise, in one word,
is “greed.” In two words, it is “easy money.” The quest for easy money took
many forms, and each greedy person involved in the financial world found his
or her own lucrative niche.
Through anecdotal examples, History of Greed
provides an in-depth, behind-the-scenes look at the world of financial
fraud, large and small. Millions of dollars are made every day (mostly by
promoters and insiders) and lost every day (mostly by innocent but greedy
investors) in the markets for these smaller stocks. The market for smaller
stocks is a giant casino in which the dice are loaded and the cards are
marked. Unlike some of the more exotic greed strategies, like
hard-to-comprehend complex derivatives, this one is easy for everyone to
understand. Sarna looks at smaller cases of fraud and major financial panics
and fruads such as AIG, Goldman Sachs, Enron, and Twentieth Century Ponzi
schemes.
American History
of Fraud ---
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
Derivative
Financial Instruments History of Fraud ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Free Basic Financial Accounting Examination Samples
If you are interested in some free samples of financial accounting examinations,
Joe Hoyle is in a sharing mood ---
http://joehoyle-teaching.blogspot.com/2010/03/second-test-in-financial-accounting.html
It’s No
Joke on April 1 Fools Day
Joe Hoyle Schedules a Webinar on Engaging Your Financial Accounting Students
I will be doing a 60 Minute webinar for
FlatWorldKnowledge at 2 p.m. on April 1, 2010. At that time, I will be
discussing the challenge of "Engaging Your Financial Accounting Students." I
want to share some of the ideas that I use in my own classs here at the
University of Richmond. As all teachers know, if students are interested in the
material, the learning process goes 100 times better. This presentation is being
made in connection with the publication of my new Financial Accounting textbook
(written with C. J. Skender of UNC).
Joe Hoyle, Teaching Financial Accounting Blog, March 25, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/03/engaging-your-financial-accounting.html
If you would like to register for this program, go to
https://www2.gotomeeting.com/register/950022658 .
What is not clear is what archive will be available following the Webinar.
Since Joe seems to literally share everything about his teaching, I suspect he
will also have a great deal to say about his April 1 Webinar later on in his
blog ---
http://joehoyle-teaching.blogspot.com/
Joe open shares an updated and free financial accounting textbook
---
http://www.trinity.edu/rjensen/electronicliterature.htm#Textbooks
Scroll down to Hoyle
Question
Will the big auditing firms survive the explosion in lawsuits stemming from
questionable audits of failed firms in the wake of the 2008 economic collapse?
Where Were the Auditors? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Will the Largest International Auditing Firms Survive? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
"For The Auditors Nothing’s Over Until It’s Over: Or Is It?" by
Francine McKenna, re: The Auditors, March 23, 2010 ---
http://retheauditors.com/2010/03/23/for-the-auditors-nothings-over-until-its-over-or-is-it/
The leadership of the Big 4 audit firms – Deloitte,
Ernst & Young, KPMG and PricewaterhouseCoopers – are scared witless. The
auditors prefer to be Switzerland. That is, they prefer to remain neutral.
They don’t like the kind of attention that Ernst & Young is getting. They
like the soft, managed,
scripted kind of attention for
Davos,
diversity,
charitable endeavors and support of
higher education.
Until the
Lehman Bankruptcy Examiner’ Report was issued on
March 11th, the auditors had experienced a “good crisis.” No
serious scrutiny of their behavior, no testimony before the various
investigative committees of the US Congress and only a few lawsuits that had
not yet come to trial.
October 2008, Gavin Hinks in
Accountancy Age:
“Speaking at a meeting of accountants from
across the world at the Mansion House yesterday,
Paul Boyle said:
‘So far at least, auditing has had a good crisis.’
Detractors, Boyle added, had been vague in
their complaints and had misunderstood the role of auditor, on the one
hand, and corporate governance and financial services supervision, on
the other. These statements are notable because Boyle is clearly
sticking up for the profession. If he had thought the opposite he would
presumably not addressed the subject during the speech. This is active
backing for auditors.”
So much for that.
The Lehman Bankruptcy Examiner threw the word
“fraud” into the financial crisis conversation.
The words “auditor malpractice’” followed.
It’s quite likely EY will be called before the US House
Oversight Committee to testify about the Lehman
bankruptcy. David Einhorn, a member of the much maligned
“short club,” will probably be called to testify,
too.
I criticized Ernst & Young in mid-2008 for not
questioning
Lehman’s CFO revolving door. Lehman had chosen
another non-CPA CFO, the second one in less than three years. I was
following the lead of another
Cassandra, David
Einhorn. Einhorn is now being heralded because he questioned Lehman’s
accounting, in spite of being ridiculed and damned for it at the time. He’s
getting almost as much applause as the “whistleblower” du jour,
Matthew Lee.
Einhorn has also recently been vindicated in
another case where he called foul and faced harsh
criticism.
The SEC’s watchdog found that the agency
failed to properly pursue serious allegations made against Allied
Capital, a public company that invests in small to midsize businesses.
But after heavy lobbying by Allied Capital, the agency aggressively
pursued the hedge fund manager who had challenged the value of Allied’s
investments…The case…began in 2002, when a hedge fund manager named
David Einhorn explained in a speech that he bet against Allied Capital’s
stock by short-selling it because he thought Allied overvalued its
holdings.
Other investors proceeded to short Allied’s
stock, which declined sharply in value.
About the same time, Einhorn began
contacting the SEC by phone and letter to explain his skepticism about
Allied Capital’s accounting techniques. Allied also worked behind the
scenes to urge the SEC to investigate whether Einhorn was engaging in
illegal behavior to undermine the company’s shares, according to the
inspector general’s report.
Without any specific evidence of
wrongdoing, Allied met with SEC investigators in June 2002 to urge them
to investigate Einhorn. Shortly thereafter, the SEC opened a probe,
questioning Einhorn about his trading activities, subpoenaing documents,
and seeking his telephone records and a list of clients. Soon after
investigators started looking at Einhorn, they concluded that he had
done nothing wrong.
Sources tell me that the SEC Inspector General’s
report on the Allied Capital investigation paints an even worse picture of
the SEC than those involved ever expected. For example, it was the SEC
lawyer who grilled Einhorn that later became a lobbyist for Allied and was
the one who hired private investigators to steal Greenlight Capital’s phone
records. Allied Capital’s auditor is
KPMG. They are
not yet accused of any wrongdoing, but
the report also discusses the
mis-valuations that Allied was originally accused
of by Greenlight.
Maybe it’s time to start listening to the “shorts”
and the contrarians.
Many ask me if Ernst & Young will fail because of
Lehman. I
have answered that in previous posts.
In short, not immediately.
Maybe E&Y won’t be the first of the remaining Big 4
to fail. The leadership of the Big 4 are terrified because any one of them
could be thrust into the harsh spotlight the way Ernst & Young has been. At
any time.
Because they’re all on the brink.
Take KPMG. When the
New Century Trustee v. KPMG US and KPMG International
lawsuit comes to trial, you can bet the media will suddenly remember there’s
an auditor smoking gun there, too. Mr. Missal, the New Century bankruptcy
examiner, found emails that uncovered the same kind of disregard for KPMG’s
experts and their risk and quality gurus that we saw in Arthur Andersen’s
handling of Enron. New Century is more like Enron for that reason than EY/Lehman
is. So far. That we know of.
Depending on how well
Steven Thomas tries it, the media will be all over
the “KPMG will fail” scenario. Losing the case carries a $1 billion dollar
price tag for KPMG. There’s also significant implications for the global
network business model in addition to the enormous costs of KPMG defending
themselves in the meantime.
Arthur Andersen’s partner ignored his own expert’s
advice in
Enron. KPMG is accused of doing the same in New
Century. All for the sake of keeping a lucrative client. EY may have done
the same to hold onto Lehman. Certainly the
long, lucrative relationship between EY and Lehman
paints a similar picture of mercenary motivation.
When EY’s Lehman audit team ran into the growing
use of Repo 105 transactions, or the declining market value of the CDOs, or
the Archstone REIT or any of the other problematic accounting issues
mentioned in the Examiner’s report, one of four scenarios took place:
- The audit team didn’t ask for advice from
their technical GAAP and SEC reporting/disclosure specialists at EY
headquarters. The team went along and did what had always been done in
the past: They acquiesced to Lehman CFOs. After all it was the Lehman
CFO Goldfarb, an EY alumni who designed the transactions and approved
the accounting treatments. When Sarbanes-Oxley outlawed the revolving
door of audit partners moving into high level positions at clients, Dick
Fuld chose non-accountants who didn’t know better, would not question
and weren’t interested in accounting.
- Or…The audit team asked for advice from their
technical GAAP and SEC reporting/disclosure specialists at EY
headquarters. The headquarters specialists blessed the existing
treatment. After all it was Lehman CFOs who were EY alumni who had
designed the transactions and approved the accounting treatments.
- Or…The audit team asked for advice from their
technical GAAP and SEC reporting/disclosure specialists at EY
headquarters. The audit team received advice that the problematic issues
represented unacceptable treatments according to current standards.
And/or the experts suggested disclosures to clarify Lehman’s position.
When this answer was brought to the audit partners they dismissed it and
acquiesced to the Lehman executives. That’s similar the KPMG/New Century
scenario.
- Or…The audit team asked for advice from their
technical GAAP and SEC reporting/disclosure specialists at EY
headquarters. The audit team received advice that the problematic issues
represented unacceptable accounting treatments according to standards.
When this answer was brought to the audit partners they raised the
issue with Lehman executives, encouraged them to stop manipulating the
balance sheet without disclosures using Repo 105 or to write down assets
such as Archstone or the CDOs and were rebuffed. Lehman executives
threatened to fire them and replace them with another firm like KPMG and
EY backed down. We may never know if this happened unless or until EY
partners are forced to settle charges and flip on the Lehman
executives.
Or take the massive Satyam fraud-related litigation
facing PricewaterhouseCoopers. When the courts in the Southern District of
New York decide that
PwC’s motions to dismiss are denied,
PricewaterhouseCoopers will face a flood of lawsuits that will dwarf New
Century v. KPMG. The publicity over EY/Lehman should make it difficult for
the court to accept any lame excuses from PwC. PwC’s argument is that the
case should be tried in India but they are
fighting in India to have the case dismissed.
New York courts will now hear age discrimination
litigation that names PwC as a defendant because the courts agreed that
decisions about PwC partnership are made in New York. That
same theory can certainly be applied when it comes to PwC global leadership
(elected to represent the interests of the owners of its largest member
firms) and their control over a global client like Satyam. Satyam is a PwC
client that was listed on the New York Stock Exchange. The global leadership
exerted control over member firm India because it has significant strategic
importance to the global leadership.
The global leadership exerted that control
using the PwC International Limited legal construct.
The
Satyam saga is far from over. The PCAOB
recently sanctioned two fairly low-level PW India staff.
(They are actually employees of local Indian member
firm
Lovelock and Lewes.)
These employees are now “barred from being an associated person of a [PCAOB]
registered public accounting firm” because they would not cooperate in the
Satyam investigation.
I asked PCAOB spokesperson Colleen Brennan if there
was more to come. What about the Price Waterhouse India partners that were
jailed?
The order says formal investigation
started Jan 8, 2009. It is now 14 months later and the outcome is that
they wouldn’t talk to you. What took so long?
Generally speaking the
investigative process requires getting relevant audit work papers and
other documents and scheduling the testimony of witnesses.
Particularly in cases where witnesses are located abroad, which is the
case here, the staff works with the witnesses and their counsel
regarding an appropriate location for the testimony. Depending on the
location, different planning goes into scheduling the testimony. Under
the Board’s rules, witnesses are allowed to have counsel present during
their testimony. In this instance, the auditors obtained new counsel
during the investigative process which led to a postponement of the
original testimony.
Is this it on your Satyam
activities? What else is PCAOB doing to address the Satyam matter?
The order mentions that the Board
issued an order of formal investigation relating to the audits of
Satyam. We cannot comment further.
What are next steps for PCAOB on
Satyam? The disciplinary
proceedings as to these respondents are complete. The Board does not
comment one way or another about the specifics of its investigative
inventory. (We cannot confirm that we have an ongoing investigation
because Section 105(b)(5)(A) of the Act. This is the first case where we
barred someone only for non-cooperation with Enforcement.)
Has the Board charged any other
Lovelock & Lewes personnel, or Lovelock & Lewes, the firm, in connection
with the Satyam audit? We
cannot comment on whether others have been or will be charged. These
orders only address the conduct of Messrs. Ravindernath and Prasad.
Are the Board’s investigation and
disciplinary proceedings in connection with this matter completed?
These disciplinary proceedings are
completed as to Messrs. Ravindernath and Prasad. The Board does not
comment one way or another about the specifics of its nonpublic
investigative inventory, or about any proceedings that may be in
litigation before the Board, which are non-public as required by the
Sarbanes-Oxley Act.
What prompted the Board to
investigate the audits and reviews of Satyam’s financial statements?
The orders disclose that
Satyam filed a Form 6-K with the SEC on January 7, 2009, that its
chairman had revealed that he had inflated key financial results,
and the Board issued an order of formal investigation on January 8,
2009.
Is the SEC also investigating this
matter? Do you expect the SEC also to take enforcement action against
Satyam management, or the auditors in this matter?
As a matter of policy, the Board
does not comment on SEC investigations.
Don’t forget Deloitte has its own subprime/crisis
litigation already on the docket. They are named in lawsuits related to the
acquisition of
Merrill Lynch by Bank of America and the failure of Bear Stearns,
as well as the bankruptcy of Washington
Mutual.
Finally…
PwC, EY and KPMG are named in significant
Madoff feeder fund litigation and it looks like
those cases are
starting to move through the courts. There are
billions of dollars in damages that will probably be paid.
Each of the largest global audit firms could take a
hit of $1 billion if forced to. They would find a way to come up with the
cash. But they don’t want to. A $1 billion dollar settlement would make a
significant impact on any of the firms. A settlement or judgment,
especially of that size, would make it very difficult to stay in business
even if the firm remained technically viable.
But there are several $1 billion claims out there.
All four of the largest firms are suffocating under the weight of the
potential claims and the cost to defend them as well as the distraction from
normal business activities and the impact on morale.
The Big 4 feels the pain on a rotating basis, only
for a short for a while, and only whenever a painful exposé such as the
Lehman bankruptcy report surfaces or a case gets closer to trial. Then the
media moves on. Very few cases against the auditors went to trial in the
past. There are many reasons for this. But the sheer volume of cases filed
given number of scandals, frauds and failures, is giving plaintiff’s lawyers
and regulatory enforcement more practice than ever before. The plaintiff’s
lawyers, in particular are talking to each other, sharing information and
getting better at their arguments with each filing.
The tide’s gone out and left the audit firms high
and dry.
Which case will be the showcase trial of the new
millennium? Which billion dollar case will
make it to the jury first? Which case will force
legislators and regulators to admit the business model for public accounting
is irreparably broken?
Bob Jensen's threads on accounting firm litigation are at
http://www.trinity.edu/rjensen/fraud001.htm
The Financial Accounting Standards Board moved last
year to close the loophole that Lehman is accused of using, Bushee says. A new
rule, FAS 166, replaces the 98%-102% test with one designed to get at the intent
behind a repurchase agreement. The new rule, just taking effect now, looks at
whether a transaction truly involves a transfer of risk and reward. If it does
not, the agreement is deemed a loan and the assets stay on the borrower's
balance sheet.
Best Explanation to Date:
"Lehman's Demise and Repo 105: No Accounting for Deception,"
Knowledge@Wharton, March 31, 2010 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2464
The collapse of Lehman Brothers in September 2008
is widely seen as the trigger for the financial crisis, spreading panic that
brought lending to a halt. Now a 2,200-page report says that prior to the
collapse -- the largest bankruptcy in U.S. history -- the investment bank's
executives went to extraordinary lengths to conceal the risks they had
taken. A new term describing how Lehman converted securities and other
assets into cash has entered the financial vocabulary: "Repo 105."
While Lehman's huge indebtedness and other mistakes
have been well documented, the $30 million study by Anton Valukas, assigned
by the bankruptcy court, contains a number of surprises and new insights,
several Wharton faculty members say.
Among the report's most disturbing revelations,
according to Wharton finance professor
Richard J. Herring, is the picture of Lehman's
accountants at Ernst & Young. "Their main role was to help the firm
misrepresent its actual position to the public," Herring says, noting that
reforms after the Enron collapse of 2001 have apparently failed to make
accountants the watchdogs they should be.
"It was clearly a dodge.... to circumvent the
rules, to try to move things off the balance sheet," says Wharton accounting
professor professor
Brian J. Bushee, referring to Lehman's Repo 105
transactions. "Usually, in these kinds of situations I try to find some
silver lining for the company, to say that there are some legitimate reasons
to do this.... But it clearly was to get assets off the balance sheet."
The use of outside entities to remove risks from a
company's books is common and can be perfectly legal. And, as Wharton
finance professor
Jeremy J. Siegel points out, "window dressing" to
make the books look better for a quarterly or annual report is a widespread
practice that also can be perfectly legal. Companies, for example, often
rush to lay off workers or get rid of poor-performing units or investments,
so they won't mar the next financial report. "That's been going on for 50
years," Siegel says. Bushee notes, however, that Lehman's maneuvers were
more extreme than any he has seen since the Enron collapse.
Wharton finance professor professor
Franklin Allen suggests that the other firms
participating in Lehman's Repo 105 transactions must have known the whole
purpose was to deceive. "I thought Repo 105 was absolutely remarkable – that
Ernst & Young signed off on that. All of this was simply an artifice, to
deceive people." According to Siegel, the report confirms earlier evidence
that Lehman's chief problem was excessive borrowing, or over-leverage. He
argues that it strengthens the case for tougher restrictions on borrowing.
A Twist on a Standard Financing Method
In his report, Valukas, chairman of the law firm
Jenner & Block, says that Lehman disregarded its own risk controls "on a
regular basis," even as troubles in the real estate and credit markets put
the firm in an increasingly perilous situation. The report slams Ernst &
Young for failing to alert the board of directors, despite a warning of
accounting irregularities from a Lehman vice president. The auditing firm
has denied doing anything wrong, blaming Lehman's problems on market
conditions.
Much of Lehman's problem involved huge holdings of
securities based on subprime mortgages and other risky debt. As the market
for these securities deteriorated in 2008, Lehman began to suffer huge
losses and a plunging stock price. Ratings firms downgraded many of its
holdings, and other firms like JPMorgan Chase and Citigroup demanded more
collateral on loans, making it harder for Lehman to borrow. The firm filed
for bankruptcy on September 15, 2008.
Prior to the bankruptcy, Lehman worked hard to make
its financial condition look better than it was, the Valukas report says. A
key step was to move $50 billion of assets off its books to conceal its
heavy borrowing, or leverage. The Repo 105 maneuver used to accomplish that
was a twist on a standard financing method known as a repurchase agreement.
Lehman first used Repo 105 in 2001 and became dependent on it in the months
before the bankruptcy.
Repos, as they are called, are used to convert
securities and other assets into cash needed for a firm's various
activities, such as trading. "There are a number of different kinds, but the
basic idea is you sell the security to somebody and they give you cash, and
then you agree to repurchase it the next day at a fixed price," Allen says.
In a standard repo transaction, a firm like Lehman
sells assets to another firm, agreeing to buy them back at a slightly higher
price after a short period, sometimes just overnight. Essentially, this is a
short-term loan using the assets as collateral. Because the term is so
brief, there is little risk the collateral will lose value. The lender – the
firm purchasing the assets – therefore demands a very low interest rate.
With a sequence of repo transactions, a firm can borrow more cheaply than it
could with one long-term agreement that would put the lender at greater
risk.
Under standard accounting rules, ordinary repo
transactions are considered loans, and the assets remain on the firm's
books, Bushee says. But Lehman found a way around the negotiations so it
could count the transaction as a sale that removed the assets from its
books, often just before the end of the quarterly financial reporting
period, according to the Valukas report. The move temporarily made the
firm's debt levels appear lower than they really were. About $39 billion was
removed from the balance sheet at the end of the fourth quarter of 2007, $49
billion at the end of the first quarter of 2008 and $50 billion at the end
of the next quarter, according to the report.
Bushee says Repo 105 has its roots in a rule called
FAS 140, approved by the Financial Accounting Standards Board in 2000. It
modified earlier rules that allow companies to "securitize" debts such as
mortgages, bundling them into packages and selling bond-like shares to
investors. "This is the rule that basically created the securitization
industry," he notes.
FAS 140 allowed the pooled securities to be moved
off the issuing firm's balance sheet, protecting investors who bought the
securities in case the issuer ran into trouble later. The issuer's
creditors, for example, cannot go after these securities if the issuer goes
bankrupt, he says.
Because repurchase agreements were really loans,
not sales, they did not fit the rule's intent, Bushee states. So the rule
contained a provision saying the assets involved would remain on the firm's
books so long as the firm agreed to buy them back for a price between 98%
and 102% of what it had received for them. If the repurchase price fell
outside that narrow band, the transaction would be counted as a sale, not a
loan, and the securities would not be reported on the firm's balance sheet
until they were bought back.
This provided the opening for Lehman. By agreeing
to buy the assets back for 105% of their sales price, the firm could book
them as a sale and remove them from the books. But the move was misleading,
as Lehman also entered into a forward contract giving it the right to buy
the assets back, Bushee says. The forward contract would be on Lehman's
books, but at a value near zero. "It's very similar to what Enron did with
their transactions. It's called 'round-tripping.'" Enron, the huge Houston
energy company, went bankrupt in 2001 in one of the best-known examples of
accounting deception.
Lehman's use of Repo 105 was clearly intended to
deceive, the Vakulas report concludes. One executive email cited in the
report described the program as just "window dressing." But the company,
which had international operations, managed to get a legal opinion from a
British law firm saying the technique was legal.
Bamboozled
The Financial Accounting Standards Board moved last
year to close the loophole that Lehman is accused of using, Bushee says. A
new rule, FAS 166, replaces the 98%-102% test with one designed to get at
the intent behind a repurchase agreement. The new rule, just taking effect
now, looks at whether a transaction truly involves a transfer of risk and
reward. If it does not, the agreement is deemed a loan and the assets stay
on the borrower's balance sheet.
The Vakulas report has led some experts to renew
calls for reforms in accounting firms, a topic that has not been
front-and-center in recent debates over financial regulation. Herring argues
that as long as accounting firms are paid by the companies they audit, there
will be an incentive to dress up the client's appearance. "There is really a
structural problem in the attitude of accountants." He says it may be
worthwhile to consider a solution, proposed by some of the industry's
critics, to tax firms to pay for auditing and have the Securities and
Exchange Commission assign the work and pay for it.
The Valukas report also shows the need for better
risk-management assessments by firm's boards of directors, Herring says.
"Every time they reached a line, there should have been a risk-management
committee on the board that at least knew about it." Lehman's ability to get
a favorable legal opinion in England when it could not in the U.S.
underscores the need for a "consistent set" of international accounting
rules, he adds.
Siegel argues that the report also confirms that
credit-rating agencies like Moody's and Standard & Poor's must bear a large
share of the blame for troubles at Lehman and other firms. By granting
triple-A ratings to risky securities backed by mortgages and other assets,
the ratings agencies made it easy for the firms to satisfy government
capital requirements, he says. In effect, the raters enabled the excessive
leverage that proved a disaster when those securities' prices fell to
pennies on the dollar. Regulators "were being bamboozled, counting as safe
capital investments that were nowhere near safe."
Some financial industry critics argue that big
firms like Lehman be broken up to eliminate the problem of companies being
deemed "too big to fail." But Siegel believes stricter capital requirements
are a better solution, because capping the size of U.S. firms would cripple
their ability to compete with mega-firms overseas.
While the report sheds light on Lehman's inner
workings as the crisis brewed, it has not settled the debate over whether
the government was right to let Lehman go under. Many experts believe
bankruptcy is the appropriate outcome for firms that take on too much risk.
But in this case, many feel Lehman was so big that its collapse threw
markets into turmoil, making the crisis worse than it would have been if the
government had propped Lehman up, as it did with a number of other firms.
Allen says regulators made the right call in
letting Lehman fail, given what they knew at the time. But with hindsight
he's not so sure it was the best decision. "I don't think anybody
anticipated that it would cause this tremendous stress in the financial
system, which then caused this tremendous recession in the world economy."
Allen, Siegel and Herring say regulators need a
better system for an orderly dismantling of big financial firms that run
into trouble, much as the Federal Deposit Insurance Corp. does with ordinary
banks. The financial reform bill introduced in the Senate by Democrat
Christopher J. Dodd provides for that. "I think the Dodd bill has a
resolution mechanism that would allow the firm to go bust without causing
the kind of disruption that we had," Allen says. "So, hopefully, next time
it can be done better. But whether anyone will have the courage to do that,
I'm not sure."
Bob Jensen's threads on the Lehman/Ernst controversies are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
"Accounting firms facing rise in negligence claims amid credit crunch
fallout," by Alex Spence, London Times, March 29, 2010 ---
http://business.timesonline.co.uk/tol/business/law/article7079418.ece
Leading accounting firms are facing more
professional negligence claims as they are targeted by investors who lost
money in the credit crunch.
There were 13 negligence cases against accountants
in the High Court last year, according to research by Reynolds Porter
Chamberlain, the City law firm, compared with four claims in the previous
five years.
Although the number of claims last year was far
lower than the 61 that reached the High Court in the wake of the dot-com
collapse — when auditors were criticised for their their role in corporate
scandals such as those involving Enron and WorldCom — lawyers predict that
this is the beginning of a wave of cases that will emerge from the financial
crisis.
“The sudden jump in professional negligence claims
suggests that cases relating to the credit crunch have started to reach the
courts,” Jane Howard, a partner of Reynolds Porter Chamberlain, said.
The big accounting firms are often regarded by
investors as their best hope of recovering losses in the aftermath of a
company failure, because they are perceived as having deep pockets and
remain standing while other parties may have disappeared or been declared
insolvent.
In 2005 Ernst & Young was sued for £700 million by
Equitable Life, its former audit client, after the insurance company almost
collapsed. The claim was dropped but could have bankrupted the accountant’s
UK division if it had succeeded.
Further cases relating to the financial crisis have
been filed against the big accounting firms in other countries. KPMG was
sued for $1 billion by creditors of New Century, a failed American sub-prime
lender, and PricewaterhouseCoopers has faced questions over its audit of
Satyam, the Indian outsourcing company that was hit by an accounting fraud.
Several firms are facing lawsuits relating to their auditing of the feeder
funds that channelled investors into Bernard Madoff’s Ponzi scheme.
Ms Howard said that claims in the British courts
would be likely to centre on allegations that accountants had failed to spot
a fraud while auditing a company’s accounts or that they had overvalued a
company’s assets.
The accountants’ tax practices may also face
accusations of negligently mis-selling schemes intended to mitigate or defer
income or capital gains tax, or of giving bad advice to clients about the
risk of a successful challenge by the taxman.
The role of auditors in the financial crisis had
received relatively little scrutiny until this month when Ernst & Young, one
of the “big four”, was cast into the spotlight for its auditing of Lehman
Brothers, the collapsed investment bank.
A strongly critical 2,200-page report by Anton
Valukas, an examiner appointed by a federal bankruptcy court in New York,
criticised Ernst & Young’s advice to Lehman as failing to measure up to
professional standards. The firm, which has defended its work, could now
face legal action by the bank’s creditors, although lawyers said that this
was likely to take place in the United States rather than in the UK.
It is more difficult for investors to sue
accountants successfully for negligence in Britain than in the United
States, lawyers said, because the legal threshold for proving liability is
higher.
“We’ve seen a lot of threats of credit
crunch-related claims against accountants that are highly speculative and
often fall by the wayside at the pre-action stage when firmly rebutted,” Ms
Howard said.
Last year, in the most recent big negligence case
against a City accountant, Britain’s law lords threw out a
multimillion-pound claim against Moore Stephens, which had been accused of
failing to uncover a £58 million fraud at Stone & Rolls, a commodity trader
that it had audited from 1997 to 2001.
The case centred on whether Moore Stephens should
have known that Stone & Rolls was allegedly being used by its managing
director as a vehicle for defrauding banks through a letter-of-credit scam.
The law lords dismissed the claim on the ground
that the company’s liquidators could not pursue the auditors for losses
suffered as a result of the company’s own behaviour. However, the judges’
split decision provided less clarity about auditors’ liability for fraud
than the industry had hoped for.
Although negligence cases can be difficult to win,
accounting firms are worried about the threat of legal action. They can be
held liable for the full amount of losses in the event that a business that
they audit collapses, even if they were only partly to blame.
The accountants fear that a big lawsuit, such as
that faced by Ernst & Young over Equitable Life, could put one of them out
of business.
Led by the big four, the profession has lobbied the
Government to encourage companies to cap their auditors’ liability. So far
their efforts have failed.
Bob Jensen's threads on the clouded future of auditing firms ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
A Lehman/Ernst Teaching Case
First of all I might note that an article in The Economist supports
what I've been saying all along ---
that Lehman's Repo 105 contracts supported by their auditors had only one
purpose --- to deceive the public
"Beancounters in a bind Banks’ professional advisers come under scrutiny," The
Economist, March 20, 2010, Page 81 ---
http://www.economist.com/business-finance/displaystory.cfm?story_id=15721559
Some of its counterparty banks get a slap on the
wrist for changing the terms of their collateral demands, for instance. But
the strongest criticism of those who interacted with the flailing firm is
reserved for Lehman’s auditor, Ernst & Young (E&Y), for failing to “question
and challenge improper or inadequate disclosures”. The main “accounting
gimmick” hidden from investors, but apparently known to the auditor, was
called Repo 105. This technique helped the firm flatter its numbers by
temporarily moving assets off its balance-sheet at the end of each quarter.
Lawyers are also in the spotlight: unable to find an American law firm to
approve the transaction as a “true sale” of assets, Lehman got the nod from
Linklaters in London. Both E&Y and Linklaters deny any wrongdoing.
Although Repo 105 appears to have been in line
with American accounting standards, its effect was to deceive.
The technique allowed Lehman to reduce its reported leverage substantially
and thus avoid ruinous ratings downgrades as it fought for survival.
Investors would like to think that auditors consider not just the letter of
the rules but their spirit, too. The examiner concluded that there was
enough evidence to support a case for malpractice against E&Y.
Continued in article"
From The Wall Street Journal Accounting Weekly Review on March 26,
2010
Note that Ernst & Young is disputing some portions of the Examiner's Report with
regard to the whitleblower
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Lehman Insider's Letter Warned About Violating Code of Ethics
by: Michael
Corkery
Mar 20, 2010
Click here to view the full article on WSJ.com
TOPICS: Bankruptcy,
Business Ethics, Code of Ethics, Ethics, Financial Statement Fraud, Fraud,
Internal Controls, Management Fraud, whistleblower
SUMMARY: Matthew
Lee, a Lehman Brothers Holdings Inc. senior vice president, warned in a May
2008 letter that he believed "senior management" may have violated Lehman's
internal code of ethics by misleading investors and regulators about the
true value of the firm's assets. Mr. Lee's complaints echo those of many
investors and analysts at the time, who questioned whether Lehman was
delaying write-downs to avoid potentially crippling losses. Mr. Lee, a
14-year veteran who headed the firm's global balance-sheet and legal-entity
accounting, said Lehman had "tens of billions of dollars of unsubstantiated
balances, which may or may not be 'bad,' or non-performing assets." "I
believe the manner in which the Firm is reporting [certain] assets is
potentially misleading to the public and various governmental agencies," Mr.
Lee wrote.
CLASSROOM APPLICATION: The
Lehman bankruptcy court's report offers us a current-events case study in
financial statement fraud, as well as whistleblowing law and companies'
codes of ethics. This article also connects our course material with law and
ethics, showing students that the things they are learning in various
classes in the business school are connected. Educated business students
need to see the connections and overlap that occurs.
QUESTIONS:
1. (Introductory)
What warnings did Mr. Lee include in his letter to Lehman officers? What
were his concerns? What evidence did he offer?
2. (Advanced)
What happened to Mr. Lee after he verbally complained? After he submitted
his letter? What has happened to Lehman Brothers since then? Were Mr. Lee's
concerns accurate or were they incorrect accusations?
3. (Introductory)
What was "Repo 105"? Why did Lehman implement this plan? What are the
problems with this plan? Point to specific rules in GAAP that Lehman
violated with this plan. How should those transaction have been booked
according to GAAP?
4. (Advanced)
What is a whistleblower? What is the value of whistleblowing to the
accounting profession and to society? What are the risks involved for
employees who decide to whistleblow? What do you think whistleblowing laws
should include? Why?
5. (Introductory)
What was the ultimate resolution between Mr. Lee and Lehman Brothers? Which
terms of the agreement are known? Why do you think Lehman made this
decision? How would this settlement be booked?
6. (Advanced)
How could this situation have been prevented? What could Lehman management
have done when they heard Mr. Lee's complaints? Could the situation have
been remedied at that point? Why or why not? Who was ultimately responsible
for Lehman's problems and the treatment of Mr. Lee?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Lehman Whistle-Blower's Fate: Fired
by Michael Corkery
Mar 15, 2010
Online Exclusive
The Lehman Whistleblower's Letter
by Michael Corkery
Mar 19, 2010
Online Exclusive
"Lehman Insider's Letter Warned About Violating Code of Ethics: Top
Executives Told Firm Misled Investors on Assets; Problems in Mumbai," by by:
Michael Corkery, The Wall Street Journal, March 20, 2010 ---
http://online.wsj.com/article/SB10001424052748704534904575132120222684184.html?mod=djem_jiewr_AC_domainid
Matthew Lee, a Lehman Brothers Holdings Inc. senior
vice president, warned in a May 2008 letter that he believed "senior
management" may have violated Lehman's internal code of ethics by misleading
investors and regulators about the true value of the firm's assets.
View Full Image
Photo by Catherine Lee Matthew Lee's complaints
echo those of investors and analysts at the time, who questioned whether
Lehman was delaying write-downs to avoid potentially crippling losses.
Mr. Lee addressed his letter to then-Chief
Financial Officer Erin Callan and Chief Risk Officer Chris O'Meara, among
others, only days before he was ousted from the firm. Portions of the letter
were excerpted in the U.S. Bankruptcy Court examiner's report on Lehman
released last week. A full version of the letter was reviewed Friday by The
Wall Street Journal. Ms. Callan didn't return a phone call seeking comment.
Mr. Lee's complaints echo those of many investors
and analysts at the time, who questioned whether Lehman was delaying
write-downs to avoid potentially crippling losses. Mr. Lee, a 14-year
veteran who headed the firm's global balance-sheet and legal-entity
accounting, said Lehman had "tens of billions of dollars of unsubstantiated
balances, which may or may not be 'bad,' or non-performing assets."
"I believe the manner in which the Firm is
reporting [certain] assets is potentially misleading to the public and
various governmental agencies," Mr. Lee wrote.
On Friday, Senate Banking Committee Chairman
Christopher Dodd (D., Conn.) asked the Justice Department to investigate
alleged accounting manipulations that took place at Lehman and that were
detailed in the 2,200-page examiner's report.
More
What Central Figures at Lehman Knew The Lehman
Whistleblower's Letter In the May 18, 2008, letter, Mr. Lee specifically
criticized the accounting controls in Lehman's Mumbai office. "There is a
very real possibility of a potential misstatement of material facts being
efficiently distributed by that office," Mr. Lee wrote.
At the time, one India investment was drawing
scrutiny from Lehman critics, including David Einhorn of hedge fund
Greenlight Capital Inc. Mr. Einhorn questioned why the Wall Street firm had
written up the value of a power plant there, known as KSK Energy Ventures,
during the first quarter of 2008. In a speech to investors on May 21, Mr.
Einhorn, who was betting that Lehman's stock would decline, said the firm
had booked a $400 million to $600 million gain in the first quarter by
writing up the value of KSK Energy.
Lehman said in the spring of 2008 that it booked
the gains because an investor had invested in the venture at a higher
valuation than Lehman's investment. In his May 21 speech, Mr. Einhorn said
Lehman later said that it valued KSK based on its "expected" pre-IPO
financing, as well as other factors.
Mr. Lee's lawyer, Erwin Shustak, of San Diego, said
his client had complained orally for several months to his boss, Martin
Kelly, Lehman's former global financial controller, about many of the same
issues he raised "formally" in his letter. Mr. Kelly declined to comment,
through a Barclays PLC spokesman, where he now works. According to the
examiner's report, Mr. Kelly had raised concerns to top executives about the
firm's accounting tactic, known as "Repo 105," which temporarily moved
billions of dollars off its balance sheet, according to the examiner's
report. The Lehman bankruptcy estate declined to comment.
Mr. Shustak said his client was demoted about two
months before he wrote the letter, which was drafted with help from the
attorney. Mr. Lee was terminated a few days after he wrote the letter.
Lehman's auditors, Ernst & Young LLP, referred to
the document as a "whistleblower letter" that was "pretty ugly," according
to the examiner's report. In a statement, Ernst & Young said Lehman
management determined that Mr. Lee's "allegations were unfounded."
"Mr. Lee believes he has been the victim of
retaliation for bringing what he believed, in good faith, to have been
ethical and securities law violations by Lehman to Lehman's managements'
attention," Mr. Shustak wrote in a letter to Jack Johnson, a former member
of the general counsel's staff, that was reviewed by The Wall Street
Journal.
After being terminated in May, Mr. Lee was asked to
return to Lehman on June 12 to be interviewed by Ernst & Young auditors
about his complaints, his lawyer said. That is when Mr. Lee brought up his
concerns about Lehman's use of Repo 105.
Mr. Shustak also wrote that Mr. Lee, who is now 56
years old, was considering filing a discrimination complaint because he was
the "victim of age discrimination in what appears to be a company wide
decision to replace more senior, higher paid employees, such as Mr. Lee, all
over the age of forty years of age, with younger, less experienced and less
expensive employees."
The letter added: "At time same time, Mr. Lee would
prefer to resolve his dispute with Lehman amicably."
Mr. Lee and Lehman ultimately negotiated a
severance agreement, which his lawyer said precluded him from filing a
lawsuit or a whistle-blower complaint under the Sarbanes-Oxley Act.
Bob Jensen's threads on the Lehman/Ernst scandal are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
March 30, 2010 message from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
In the last day or so the SEC staff has sent the
letter below to the CFO of 20 or so very large financial institutions
including insurance companies.
Denny Beresford
Sample Letter Sent to Public Companies Asking for
Information Related to Repurchase Agreements, Securities Lending
Transactions, or Other Transactions Involving the Transfer of Financial
Assets
In March 2010, the Division of Corporation Finance
sent the following illustrative letter to certain public companies
requesting information about repurchase agreements, securities lending
transactions, or other transactions involving the transfer of financial
assets with an obligation to repurchase the transferred assets.
March 2010
Name Chief Financial Officer XYZ Company
Address
Dear Chief Financial Officer:
We are currently reviewing your Form 10-K for
fiscal year ended ______. In our effort to better understand the
decisions you made in determining the accounting for certain of your
repurchase agreements, securities lending transactions, or other
transactions involving the transfer of financial assets with an
obligation to repurchase the transferred assets, we ask that you provide
us with information relating to those decisions and your disclosure.
With regard to your repurchase agreements,
please tell us whether you account for any of those agreements as sales
for accounting purposes in your financial statements. If you do, we ask
that you:
* Quantify the amount of repurchase agreements
qualifying for sales accounting at each quarterly balance sheet date for
each of the past three years. * Quantify the average quarterly balance
of repurchase agreements qualifying for sales accounting for each of the
past three years. * Describe _all_ the differences in transaction terms
that result in certain of your repurchase agreements qualifying as sales
versus collateralized financings. * Provide a detailed analysis
supporting your use of sales accounting for your repurchase agreements.
* Describe the business reasons for structuring the repurchase
agreements as sales transactions versus collateralized financings. To
the extent the amounts accounted for as sales transactions have varied
over the past three years, discuss the reasons for quarterly changes in
the amounts qualifying for sales accounting. * Describe how your use of
sales accounting for certain of your repurchase agreements impacts any
ratios or metrics you use publicly, provide to analysts and credit
rating agencies, disclose in your filings with the SEC, or provide to
other regulatory agencies. * Tell us whether the repurchase agreements
qualifying for sales accounting are concentrated with certain
counterparties and/or concentrated within certain countries. If you have
any such concentrations, please discuss the reasons for them. * Tell us
whether you have changed your original accounting on any repurchase
agreements during the last three years. If you have, explain
specifically how you determined the original accounting as either a
sales transaction or as a collateralized financing transaction noting
the specific facts and circumstances leading to this determination.
Describe the factors, events or changes which resulted in your changing
your accounting and describe how the change impacted your financial
statements.
For those repurchase agreements you account for
as collateralized financings, please quantify the average quarterly
balance for each of the past three years. In addition, quantify the
period end balance for each of those quarters and the maximum balance at
any month-end. Explain the causes and business reasons for significant
variances among these amounts.
In addition, please tell us:
* Whether you have any securities lending
transactions that you account for as sales pursuant to the guidance in
ASC 860-10. If you do, quantify the amount of these transactions at each
quarterly balance sheet date for each of the past three years. Provide a
detailed analysis supporting your decision to account for these
securities lending transactions as sales. * Whether you have any other
transactions involving the transfer of financial assets with an
obligation to repurchase the transferred assets, similar to repurchase
or securities lending transactions that you account for as sales
pursuant to the guidance in ASC 860. If you do, describe the key terms
and nature of these transactions and quantify the amount of the
transactions at each quarterly balance sheet date for the past three
years. * Whether you have offset financial assets and financial
liabilities in the balance sheet where a right of setoff — the general
principle for offsetting — does not exist. If you have offset financial
assets and financial liabilities in the balance sheet where a right of
setoff does not exist, please identify those circumstances, explain the
basis for your presentation policy, and quantify the gross amount of the
financial assets and financial liabilities that are offset in the
balance sheet. For example, please tell us whether you have offset
securities owned (long positions) with securities sold, but not yet
purchased (short positions), along with any basis for your presentation
policy and the related gross amounts that are offset.
Finally, if you accounted for repurchase
agreements, securities lending transactions, or other transactions
involving the transfer of financial assets with an obligation to
repurchase the transferred assets as sales and did not provide
disclosure of those transactions in your Management’s Discussion and
Analysis, please advise us of the basis for your conclusion that
disclosure was not necessary and describe the process you undertook to
reach that conclusion. We refer you to paragraphs (a)(1) and (a)(4) of
Item 303 of Regulation S-K.
As noted above, we seek to better understand
the basis for your decisions and your disclosure. Please provide us with
a written response to these questions within ten business days from the
date of this letter or tell us when you will respond. Upon our review of
your response to these questions, we may have additional comments that
we will provide to you with any other comments we may have on your Form
10-K.
Please contact me if you have any questions.
Sincerely,
Senior Assistant Chief Accountant
/http://www.sec.gov/divisions/corpfin/guidance/cforepurchase0310.htm/
Far from going unnoticed, Lehman's Repo 105
transactions are destined to take a prominent place in the annals of accounting
scandals — somewhere between Enron's infamous special-purpose entities and AIG's
booby-trapped credit default swaps.
"SEC to CFOs: More Repo Disclosure: In its latest "Dear CFO" letter,
the SEC is seeking more information on why some repurchase agreements are being
booked as sales" by Marie Leone, CFO.com, March 31, 2010 ---
http://www.cfo.com/article.cfm/14487561/c_14487542?f=home_todayinfinance
The Securities and Exchange Commission is asking
public-company CFOs for additional information about repurchase agreements,
or repos, the transactions that Lehman Brothers used to make its balance
sheet look healthier before the investment bank collapsed into bankruptcy.
The SEC wants companies to help the regulator
"better understand" the accounting treatment used to record repos, and to
provide details about how management determines whether to record repos as a
sale or a collateralized financing. The commission would like to know, for
example, how many repos qualified for sales accounting treatment each
quarter for the past three years, whether those sales were concentrated with
certain counterparties or countries, the business reason for structuring
such transactions as sales, and whether a company has changed its original
accounting treatment for any of the repos.
Issued in March in the form of a "Dear CFO" letter,
the SEC's request for additional information seems "granular and broad at
the same time," says Wallace Enman, a vice president and senior accounting
analyst with Moody's Investor Services. He says that if companies were to
use the letter as a guide, they would create "relatively robust" disclosures
about repos. A sample letter was posted on the SEC's Website on Monday.
While SEC comment letters are usually directed at a
single company, Dear CFO letters cover issues that affect a large swath of
companies. But the repo letter "is not a typical Dear CFO letter where we
provide companies with our views on accounting and disclosure matters they
should consider," says SEC spokesman John Nester. "In this case, we are
seeking very specific information from companies about repurchase agreements
and similar transactions."
Nester says that based on company responses, the
SEC could ask issuers to amend their filings or modify disclosures in future
filings. But so far the commission has not concluded that any company has
failed to comply with generally accepted accounting principles, violated any
SEC rules, or failed to provide appropriate disclosures.
This isn't the first time the SEC has questioned
companies about the way they apply asset-transfer accounting rules. Since
2004, the SEC has exchanged 171 comment letters with 93 different companies
about whether agreements to transfer financial assets are treated as a sale
or a temporary transaction under U.S. GAAP, according to research firm Audit
Analytics.
For his part, Enman says the questions are the
SEC's way of making sure that Lehman's so-called Repo 105 technique doesn't
go unnoticed. Indeed, in an interview with CNBC this week, SEC Chairman Mary
Schapiro said the commission is looking at all the issues surrounding Repo
105, both at Lehman and other financial institutions. "We want to make sure
their accounting and disclosures are accurate when it comes to
characterizing repurchases," said Schapiro.
One for the Books
Far from going unnoticed, Lehman's Repo 105
transactions are destined to take a prominent place in the annals of
accounting scandals — somewhere between Enron's infamous special-purpose
entities and AIG's booby-trapped credit default swaps.
Earlier this month, Anton Valukas, the
court-appointed examiner in the Lehman bankruptcy case, released a
2,200-page report on the collapse of the investment bank, devoting more than
300 pages to Repo 105. While the report did not find that Lehman violated
asset-transfer accounting rules, it said that the investment bank was not as
forthcoming as it should have been in its financial-statement disclosures.
Valukas faulted Lehman for not revealing enough to
investors about the purpose of Repo 105 transactions and how they affected
the bank's leverage ratios. However, internal Lehman e-mail messages made
public in the report quoted Lehman executives as describing the repos as
balance-sheet "window dressing" and an "accounting gimmick."
In general, repos are used to buy and sell groups
of securities, usually Treasury securities, in short-term transactions,
typically overnight. The securities are put up as collateral by a borrower
and in exchange, the borrower receives cash from counterparties that charge
interest. Since the securities are treated as collateral and the agreement
stipulates that the borrower has an obligation to pay back the cash in short
order, the transaction is considered a financing for accounting purposes,
and the transaction remains on the balance sheet.
In the case of Repo 105, however, Lehman
overcollateralized the transactions by pledging $105 million for $100
million in cash. As a result, the investment bank — with the blessing of a
legal opinion from UK law firm Linklaters — categorized Repo 105 as a sale
for accounting purposes. The sales accounting treatment enabled Lehman to
remove the securities from its balance sheet and use the cash from the
"sale" to pay down other debt and improve its overall leverage ratios.
Lehman repeated the transaction again and again,
including at the end of the last three quarters the bank was solvent.
According to the Valukas report, "Lehman employed off-balance sheet devices
. . . to temporarily remove securities inventory from its balance sheet,
usually for a period of seven to ten days, and to create a materially
misleading picture of the firm's financial condition in late 2007 and 2008."
Then, a few days into the new quarter, Lehman would borrow funds to repay
the repo borrowing plus interest, repurchase the securities, and restore the
assets to its balance sheet.
"My Commentary Part 1: Ernst & Young’s Letter To Audit Committee Members,"
by Francine McKenna, re: The Auditors, March 31, 2010 ---
http://retheauditors.com/2010/03/31/my-commentary-part-1-ernst-youngs-letter-to-audit-committee-members/
"My Commentary Part 2: Ernst & Young’s Letter To Audit Committee Members,"
by Francine McKenna, re: The Auditors, April 4, 2010 ---
http://retheauditors.com/2010/04/04/my-commentary-part-2-ernst-young%e2%80%99s-letter-to-audit-committee-members/
Jensen Comment
Francine is not so impressed with the E&Y defense to date.
Bob Jensen's threads on the Lehman/Ernst Controversies are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Bob Jensen's threads on the Lehman/Ernst controversies are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Bob Jensen's threads on Repo 105 accounting are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
"Lessons from the Lehman Autopsy: The SEC can learn from Anton
Valukas, the lawyer who led a probe into Lehman—and uncovered accounting
chicanery that regulators largely ignored," by Paul M. Barrett, Business
Week via the Young CPA Network, March 24, 2010 ---
http://ow.ly/1qJvx
In 2008, Anton R. Valukas, a trial attorney in
Chicago, published a four-page stiletto thrust of an essay entitled
"Arrogance: My Favorite Sin." The piece, included in a lawyers' guide to
cross-examination, recounted Valukas' delight in using understated
questioning to tempt executives into making implausible statements of the
sort that reliably alienate jurors. "Frequently, the smartest witnesses—the
most sophisticated and the most arrogant—are most susceptible to this type
of examination," he wrote.
The piece reads today like a preamble to Valukas'
voluminous autopsy of Lehman Brothers, which he performed as the
court-approved bankruptcy examiner in the investment bank's formal
unwinding. The 2,200-page Lehman report, released on Mar. 11, constitutes
the single most penetrating document we have on the recent misbehavior on
Wall Street. Valukas' earlier primer suggests why he did such an exemplary
job: Although he heads a prestigious corporate law firm, Jenner & Block, the
former federal prosecutor just plain resents dissembling by big shots in
expensive suits. Not coincidentally, Jenner, a pillar of the Chicago
business elite, sues Wall Street institutions as often as it defends them.
In the interest of preventing future Lehman
disasters, we might ponder how to transplant Valukas' zeal into Washington's
financial beat cops. That could help preclude the need to call him back
again as corporate pathologist.
He'd be a hard man to clone. During a four-decade
career, Valukas, 66, has represented all manner of white-collar rogues. When
called to public service, he used his knowledge of the market's shadowy
corners to prosecute well-heeled miscreants. In the late 1980s, as U.S.
Attorney in Chicago, he sent agents disguised as commodity traders to clean
up the futures exchanges. The probe protected investors and led to a slew of
indictments. Some called him the Rudy Giuliani of the Midwest.
Unlike Giuliani, Valukas avoided elective politics
and returned to his law firm. He prospered at Jenner, not least in his
yearlong assignment as the Lehman examiner. Backed by colleagues from
Jenner, he went over millions of pages of documents, interviewed scores of
witnesses, and billed the Lehman estate $38.4 million. I'd say it was money
well spent. His findings will provide the script for what's likely to be a
theatrical airing in April, when Representative Barney Frank (D-Mass.)
convenes his House Financial Services Committee to interrogate Lehman's
former CEO, Richard S. Fuld Jr., and other participants in the debacle.
Dubious Behavior What Valukas brought to the
endeavor was a no-nonsense lack of deference toward Wall Street game
playing, says Francine McKenna, a former managing director at
PricewaterhouseCoopers. "That's a Chicago thing," adds McKenna, herself a
resident of the city. She now runs an investigative Web site called Re: The
Auditors. "The mindset is: I've been around the block, I know how the game
is played, and I'm not impressed by fancy names," she says.
As the Lehman examiner, Valukas doggedly unmasked
the dubious behavior of executives once lauded as among Wall Street's
conquering heroes. Fuld insisted to Valukas that he knew nothing about the
accounting trickery called Repo 105, which was used to hide the bank's
financial decline. Fuld's self-portrait—a veteran CEO blithely unfamiliar
with the workings of his company—was not just implausible; it could support
lucrative civil claims that he "was at least grossly negligent," as Valukas
wrote. The examiner noted that Fuld's denials were undercut by evidence that
he was thoroughly briefed on the chicanery.
Contacted by phone, Valukas declined to comment.
Fuld's attorney, Patricia Hynes, has said her client told the truth and did
nothing wrong.
"My Commentary Part 1: Ernst &
Young’s Letter To Audit Committee Members,"
by Francine McKenna, re: The Auditors, March 31, 2010 ---
http://retheauditors.com/2010/03/31/my-commentary-part-1-ernst-youngs-letter-to-audit-committee-members/
Bob Jensen's threads on the Lehman/Ernst scandal are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
"In Pari Delicto: Are Auditors Equally At Fault In The Big Fraud Cases?"
by Francine McKenna, Re: The Auditors, March 9, 2010 ---
http://retheauditors.com/2010/03/09/in-pari-delicto-are-auditors-equally-at-fault-in-the-big-fraud-cases/
The phrase in pari delicto
sounds like something dirty to me. Maybe I’m still preoccupied with the
accusation that I’m
producing accounting pornography.
“…the etymology of the term [pornography] is: “Etymology: Greek
pornographos, adjective, writing about prostitutes, from porn prostitute
+ graphein to write; akin to Greek pernanai to sell, porosjourney “
That implies accounting porn is writing about accounting
prostitutes. That being the case, then Francine McKenna, Sam Antar,
Tracy Coenen and Bob Jensen all engage in accounting porn. They write
about the corporate executives and audit firm partners that prostitute
their accounting reports in the search for fictitious profits and all
too real unearned bonuses. In other words, accounting fraud is
accounting prostitution…”
In pari delicto,
for those of you not lawyers or legal argument junkies like me, is “Latin
for “in equal fault”. It’s a legal
term used to indicate that two persons or entities are equally at fault,
whether we’re talking about a
crime or
tort. The phrase is most commonly used by
courts when relief is being denied to both parties
in a
civil action because of wrongdoing by both
parties. The phrase means, in essence, that since both parties are equally
at fault, the court will not involve itself in resolving one side’s claim
over the other, and whoever possesses whatever is in dispute may continue to
do so in the absence of a superior claim.”
There are two active cases where this doctrine and
defense is being employed by auditors trying to avoid liability for fraud.
In Teachers’ Retirement System of Louisiana
v. PricewaterhouseCoopers LLP, No. 454, 2009 (Del. March 4, 2010), one
of many AIG suits that PwC is involved in directly or indirectly, the
Delaware Supreme Court used a procedure provided for under the New
York Rules of Court to
certify a question of law to New York’s highest court, the New York Court of
Appeals.This matter involves an appeal from the
Delaware Court of Chancery regarding the oft-cited AIG case which
denied a motion to dismiss claims against the top officials of AIG for
breach of fiduciary duty based on Delaware law. However, the claims against
the auditor, PwC, were dismissed based on New York law. The Plaintiff’s are
appealing the Chancery Court’ decision regarding PwC. (Summary borrowed for
accuracy from Francis Pileggi at
Delaware Litigation.com who alerted me to this most
unusual move by the Chancery Court.)
The Court of Chancery held that the claims against PwC
were governed by New York law, and that based on the allegations of
the Complaint, AIG’s senior officers did not “totally abandon[]”
AIG’s interests—as would be required under New York law to establish
the “adverse interest” exception to imputation. Accordingly, the Court
of Chancery held that the wrongdoing of AIG’s senior officers is imputed
to AIG.3 The Court of Chancery concluded that, once the wrongdoing
was imputed to AIG, AIG’s claims against PwC were barred by New York’s
in pari delicto doctrine and by the related Wagoner line of
standing cases in the United States Court of Appeals for the Second
Circuit.
This Court hereby certifies the following question to the New
York Court of Appeals:
Would the doctrine of in pari delicto bar a derivative
claim under New York law where a corporation sues its outside auditor
for professional malpractice or negligence based on the auditor’s
failure to detect fraud committed by the corporation; and, the
outside auditor did not knowingly participate in the corporation’s
fraud, but instead, failed to satisfy professional
standards in its audits of
the corporation’s financial statements?
The other case where the in pari
delicto defense has tied the litigation into knots and
caused some stops and starts is in Kirschner v. KPMG LLP et al.,
case number 09-2020, in the U.S. Court of Appeals for the Second Circuit
which is about the
Refco fraud.
The
Second Circuit certified the questions about
an exception to the in pari delicto defense.
Now they have two high profile cases against auditors to consider. From
Law360.com:
Not one to go down easy, the bankruptcy trustee for
Refco Inc. brought his suit implicating
Mayer Brown LLP,
KPMG LLP and other corporate giants in the massive Refco fraud to a
federal appeals court…The U.S. Court of Appeals for the Second Circuit
found Monday that trustee Marc S. Kirschner’s fight to revive his claims
against the clutch of corporate insiders raised critical unresolved
questions concerning the bankruptcy trustee’s standing under New York
law to sue third parties for Refco’s fraud.
The trustee alleges outside counsel Mayer Brown, auditors
Ernst & Young LLP, [Grant Thornton]
PricewaterhouseCoopersLLP, Banc of America Securities LLC and
several other insiders are liable for defrauding Refco’s creditors,
namely by helping the defunct brokerage conceal hundreds of millions of
dollars in uncollectible debt.
Steve Jakubowski, a local Chicago lawyer who writes
the
Bankruptcy Litigation Blog, sponsored a guest
post in January by Catherine Vance, one of the
fiercest critics of the “expansive” use of the in pari delicto
defense. He introduces her post this way:
Whatever you may think about the fact that Refco’s outside corporate
counsel, Joe Collins, was convicted on 5 criminal counts and
sentenced today to 7 years in prison, one has to wonder how the
system got so turned upside down on the civil side that while the law
firm’s lead lawyer is torched in criminal court, his firm is summarily
dismissed from a civil case for precisely the same conduct on a simple
motion to dismiss (based on a theory that
the Refco trustee lacked standing to bring suit to recover for damages
arising from a fraudulent scheme devised and carried out by Refco’s own
senior management). One could argue that this result is unique to
the Second Circuit (and
the Seventh) because of the Wagoner decision and its progeny (which
are not followed in the First, Third, Fifth, Eighth, or Eleventh
Circuits). Even in those circuits, however, management’s wrongful
conduct has been imputed to the corporation under the in pari delicto
doctrine to just as effectively knock the props out from civil actions
involving some of the most spectacular commercial frauds of the century.
Ms. Vance wrote an article entitled, In
Pari Delicto, Reconsidered, in which she
posited–as none had before–that the in pari delicto
doctrine is being inappropriately used by federal courts to supplant
traditional tort law defenses that derive from state, not federal, law.
The way I see it, the in pari delicto
doctrine is being used like a pair of needle nosed pliers by
audit firm defense lawyers to diffuse a bomb – huge liability for some of
the biggest frauds in history. The in pari delicto
doctrine attempts to pull the auditors’ tails from the fire by excusing any
of their guilty acts due to the approval of those acts by potentially
equally guilty executives. The law allows these executives to continue to
“stand in the shoes” of the shareholder plaintiffs even after their guilt
has been determined. The theory is that the executives perpetrated the fraud
for the benefit of the corporation and never “totally abandoned” it, as
would be required for the “adverse interest” exception.
Auditors who should otherwise be tested on their
fulfillment of their public duty are instead getting reprieves because
courts have been unwilling to impose the
“adverse interest” exception as expansively as
they have the in pari delicto defense itself. How
can executives who are successfully sued, been subject to regulatory
sanctions or, in the case of the Refco executives, plead guilty to criminal
activities, still be considered representatives of the corporation’s
interests? They should forfeit the right to stand in the shoes of the
corporation’s shareholders in derivative suits and therefore to shield other
potentially guilty or negligent parties.
The situation gets complicated in a bankruptcy case
such as Refco since, traditionally according to
Section 541 of a decision called
In re PSA, Inc, “property of the bankruptcy
estate consists of all legal or equitable interests of the debtor, including
causes of action, as of the commencement of the bankruptcy case. A
bankruptcy estate’s causes of action, therefore, as well as the attendant
defenses thereto, transfer to the bankruptcy trustee frozen and fixed as
they existed at the commencement of the bankruptcy case. As a result, an
“innocent” bankruptcy trustee “stands in the shoes” of the pre-petition
debtor and may be unable to prevail on estate causes of action where the
pre-bankruptcy debtor participated or was complicit in the wrongful acts
upon which the estate attempts to sue.”
A trustee in bankruptcy must have
standing to sue anyone on behalf of the
creditors and other injured parties. Unfortunately, this habit of allowing
guilty parties to continue to drive the bankruptcy bus by having the
actions
of the guilty officers “imputed” to the corporation
and, therefore, in bankruptcy to the trustee
potentially threatens the trustee’s ability to sue “co-conspirators.”
It’s just nuts.
Akin Gump summarizes critics of this line of
reasoning this way:
The purpose of the in pari delicto defense,
they argue, is to prevent a party who is complicit in wrongdoing from
prevailing against their joint actors. In their view, the intercession
of an innocent trustee whose duty it is to maximize the value of the
estate for the debtor’s creditors purges the taint of the debtor’s
wrongdoing, and that to hold otherwise would simply elevate the legal
fiction of section 541 over the purpose of the in pari delicto defense.
Ms. Vance reminds us in her
treatise that in
pari delicto was ushered into modern
bankruptcy jurisprudence as a part of the
deepening insolvency
discussion. I’ve written about deepening insolvency many times as it relates
to the auditors who, by continuing to provide false and negligent clean
audit opinions, allow a company to go deeper and deeper into debt and ruin,
thereby significantly diminishing any remaining value for stakeholders once
the gig is up.
The deepening insolvency
arguments have been
shot down by no less than
Judge Posner whose pernicious pragmatism forces
him to engage in the self-delusion that helping companies remain “viable”
via fraud doesn’t hurt anyone. This fantasy presupposes the company to be a
person and not the embodiment of the goals and objectives, hopes and dreams,
faith and trust of the shareholders, employees, creditors, and community
that count on it to continue legally and honorably instead. I suppose a
Supreme Court that allows corporations to donate money to political
campaigns in an exercise of their inalienable
constitutional rights would not find this idea so strange.
Continued in article
"My Commentary Part 1: Ernst &
Young’s Letter To Audit Committee Members," by Francine McKenna, re: The
Auditors, March 31, 2010 ---
http://retheauditors.com/2010/03/31/my-commentary-part-1-ernst-youngs-letter-to-audit-committee-members/
Bob Jensen's threads on auditor fraud and negligence are at
http://www.trinity.edu/rjensen/fraud001.htm
Adding Videos to PowerPoint Slides
March 11, 2010 message from XXXXX
Bob,
I am wondering if you know of any websites where I
can gain access to watch camtasia-style (or narrated powerpoints)
videos/lectures of upper level accounting instruction?
My Dean asked me to look into creating an
asynchronous, distance/hybrid accounting program. I want to get an idea of
what is out there. I think the classes I need are:
AIS Cost Intermediate 1 and 2 Tax Auditing Advanced
GNP or NFP Any other advanced accounting, like advanced cost.
Thank you,
XXXXX
March 11, 2010 reply from Bob Jensen
Firstly, I would begin
with the asynchronous way basic accounting is taught at BYU almost entirely
with variable-speed videos even to resident students living on campus ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo
Next I would enter a number of search terms into YouTube ---
http://www.youtube.com/
Examples include:
Accounting Information Systems
Accounting Ethics
Intermediate accounting
Advanced accounting
Governmental accounting
Hedge accounting
Cost Accounting
Managerial Accounting
Fair Value Accounting
Auditing
SAP or ERP
XBRL
I have a few accounting
theory Camtasia videos at
http://www.cs.trinity.edu/~rjensen/video/acct5341/
Links to my other online materials (including PowerPoint presentations) are
at
http://www.trinity.edu/rjensen/caseans/000index.htm
http://www.trinity.edu/rjensen/fraud001.htm
My PowerPoint
presentations and Excel workbooks are linked at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/
I suggest you contact my
good friend Amy Dunbar about how she uses Camtasia videos in her online tax
courses ---
Amy.Dunbar@business.uconn.edu
In the future U.S.
accounting programs will be building in more and more IFRS. Here there’s a
heck of a lot of free educational material available ---
http://www.trinity.edu/rjensen/theory01.htm#IFRSlearning
There are some good cases available, especially from the Big Four.
There is also a lot of
free XBRL material, including some good videos ---
http://www.xbrl.org/Home/
Click on “Education and Training”
The AICPA has a library of
both fee and free videos ---
http://www.aicpa.org/
Enter the search term “video”
Other organizations have
some deals on videos for courses, including the IIA, Certified Fraud
Examiners, etc.
There’s a ton of free
material on ethics and fraud.
The OKI ---
http://www.okiproject.org/view/html/site/oki
MIT’s Open Courseware Links ---
http://ocw.mit.edu/OcwWeb/web/home/home/index.htm
Click on the Sloan School for accounting, finance, and other business open
courseware materials
MIT’s Video Lecture Browser (better for the sciences
than business) ---
http://web.sls.csail.mit.edu/lectures/
"MIT's Management School Shares Teaching Materials (Cases) Online,"
by Steve Kolowich, Chronicle of Higher Education, January 27, 2009
---
Click Here
Though some business schools charge for the “case studies” they develop as
teaching aids, the Massachusetts Institute of Technology announced today
that it is making a set of teaching materials available free online.
MIT’s Sloan School of Management has unveiled a set of case studies, videos,
interactive teaching tools, and teacher’s notes on a new Web site called MIT
Sloan Teaching Innovation Resources ---
https://mitsloan.mit.edu/MSTIR/IndustryEvolution/Pages/default.aspx
The announcement comes eight years after MIT created its OpenCourseWare
project, which makes instructional materials for courses available online
for free.
Other open sharing materials provided by
prestigious universities can be found at
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Oh my Gosh!
I forgot to
mention the AAA Commons where there’s now a great deal of available,
including syllabi, tutorials, course materials, videos, and textbook
recommendations ---
http://commons.aaahq.org/pages/home
Soon many of the
AAA Commons pages will be available to the world in general and not just AAA
members. Among other things this makes the resources available to all of
your students
Bob Jensen
Bob Jensen's threads on distance education and training alternatives are
at
http://www.trinity.edu/rjensen/crossborder.htm
Roger Collins shows why you may maybe would prefer to
become a rocket scientist---
http://www.sos.ca.gov/business/corp/pdf/mergers/corp-mergerintr.pdf
Another one from that Ketz guy
"Iffiness of IFRS," by J. Edward Ketz, SmartPros, March 2010
---
http://accounting.smartpros.com/x69096.xml
On February 24, the SEC issued its "Statement in
Support of Convergence and Global Accounting Standards." Curiously, while
the SEC did indeed affirm its "strong commitment" to IFRS, it may have
unwittingly given voice to the concerns of dissidents. Finally!
The report begins
with a documentation of the SEC’s commitment to a set of high-quality
accounting standards. Quite naturally, this history includes a discussion
of its own report on a principles-based accounting system. The reader
should recall that this previous study merely provides a list of unproven
assertions about principles-based accounting, including greater
comparability for investors and lowered costs of capital for corporations.
Rather than providing evidence, the SEC merely enumerates these articles of
faith.
At least this time around the SEC adopted a go-slow policy and hoped that
the IASB would improve its IFRS in six areas. These concerns question
whether IFRS is the Holy Grail it is portrayed to be primarily because of
various implementation and administrative issues. Let’s turn to these
issues.
First, the SEC says that IFRS must be sufficiently developed to apply the
system to the U.S. reporting system. The SEC then indicates there are
concerns with respect to the comprehensiveness, the auditability and
enforceability, and the consistent and high-quality application of IFRS.
The SEC staff notes that commentators have criticized IFRS because they
allow savvy managers significant wiggle room to manipulate accounting
numbers and disclosures and thwart efforts by auditors to perform
high-quality audits. Indeed, some wonder whether principles-based annual
reports are even capable of being audited. Another issue raised by the SEC
is whether standards will be uniformly enforced around the globe—the answer
is of course not. The real questions are how divergent will this
enforceability be and what will be its significance.
Second, the SEC probes the independence of the IASB, especially since
much of its operating funds comes from corporate donations. Do you think
that maybe, just maybe, corporate donors want something in return? Whether
the board is free from undue influence won’t require much research since
economic theory posits that managers have huge incentives to gain control
over the IASB. As an aside, many have criticized the FASB for moving at the
pace of a tortoise. Do they realize that the IASB will make the FASB seem
like a hare?
Third, will investors understand IFRS? The SEC staff promises to
empirically assess the current knowledge of investors about the IFRS. I
wouldn’t waste the resources. Except for institutional investors, the
answer is they don’t understand IFRS, and they won’t have any incentives to
learn until the change is imminent. More importantly, as the costs for
learning IFRS are large, we probably shouldn’t worry about investors. Let
them depend on the skills and independence of financial statement
researchers and analysts.
Fourth, IFRS could have unknown effects in areas other than investments,
the domain of the SEC. For example, financial statements are used by
industry and anti-trust regulators and federal and state taxing agencies.
Will an adoption of IFRS have a perverse effect on national and state
policies?
Fifth, the SEC speculates about the impact of adopting IFRS on issuers,
including changes to accounting information systems, implications for
contracts that depend on accounting numbers, and concerns about corporate
governance. My short response is that it’s about time the SEC started
thinking about these issues. It is fairly clear to me that the adoption of
IFRS will require many issuers to keep dual systems for several years.
Annual reports are utilized for too many things to move wholly to IFRS. In
turn this will add to the costs of adoption and to its complexity.
Sixth, the SEC mentions human capital readiness. Except for the Big Four
and some of the largest corporations, is anybody ready for the transition?
If the IASB opened up its data base and supplied users with free training
materials, then maybe managers and analysts and accountants could prepare
themselves for the transition—unless the banking industry or Congress
decides to introduce new and worse problems for the business community.
As I survey this list, I again marvel at the rush to IFRS. The benefits
do not appear to match or exceed the costs of the adoption. Nonetheless, I
suppose we shall find ourselves employing IFRS within a decade. Hopefully
this pause by the SEC will address some of the most glaring challenges.
Of all the issues listed, the most important is this: whether IFRS
statements can be audited and what will happen in the courtroom after a firm
experiences severe declines in its stock price. I predict that
principles-based accounting will become rules as judges and juries fill in
the details left out by the accounting profession and create accounting case
law. And then where will the benefit be?
This essay reflects the opinion of the
author and not necessarily the opinion of The Pennsylvania State University.
An analysis of the Ketz editorial, by David Albrecht ---
http://profalbrecht.wordpress.com/2010/03/29/ed-ketz-a-beacon-of-sound-reason-about-ifrs/
Bob Jensen's threads on IFRS are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
January 2010 IFRS Update from Ernst & Young ---
http://commons.aaahq.org/files/7d1fad745e/January_2010_IFRS_outlook.pdf
January 2010 Comparison of US GAAP versus IFRS from Ernst & Young
http://commons.aaahq.org/files/2ddee9578c/IFRS_Basics_Novemberr2009_BB1856.pdf
Bob Jensen's threads on free IFRS learning resources (including real-world
cases) ---
http://www.trinity.edu/rjensen/theory01.htm#IFRSlearning
March 24, 2010 message from Roger Collins
[Rcollins@TRU.CA]
http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article7073658.ece
"The investigation was sparked by auditors at KPMG
Fides Peat in Switzerland working for the Swiss Federal Banking Commission
in 2004 after they stumbled upon documents detailing the transfer of €20
million by Alstom into various shell companies, according to The Wall Street
Journal".
Roger
Roger Collins
TRU School of Business & Economics
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/fraudUpdates.htm
"The Two-Part CMA Exam for 2010," by James Martin, MAAW's Blog,
March 20, 2010 ---
http://maaw.blogspot.com/2010/03/new-two-part-cma-exam-2010.html
Also see
http://maaw.info/ArticleSummaries/ArtSumBrauschWhitney2010.htm
Bob Jensen's threads on management accounting are at
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting
"Top Five: Secrets of a CPA Start-Up," by Rick Telberg, CPA
Trendlines, March 8, 2010 ---
Click Here
http://cpatrendlines.com/2010/03/08/top-five-secrets-of-a-cpa-start-up/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+cpatrendlines%2FtPxN+%28CPA+Trendlines%29
Together, Brian and Darren Wendroff are working to
innovate every aspect of how an accounting firm works. Take just five
examples of their leading edge strategies:
- Adopting flexible and supportive human
resources policies — The firm’s tele-work policy was put in
place to support a healthy work-life balance and to attract and retain
the best talent for the money. But it also came in handy during the
“snowpocalypse” that hit Washington in February, which otherwise might
have ground their tax season to a halt.
- Pursuing Web- and cloud-based business
solutions — The firm is a pioneer in QuickBooks Online and sits
on an Intuit advisory board. Their CRM system, Highrise, is all SaaS.
And they manage many firm processes through Google Docs.
- Aggressive experimentation with social
media marketing — Twitter has yielded five new clients in the
last year, billing about $14,000 annually. And the firm picked up two
more in January. The last time I checked
@wendroffcpa,
they had over 13,000 followers. By comparison,
@PwC_LLP,
representing the largest accounting firm on the planet, had about 3,700.
- Ruthless dedication to changing with
client criticism — The firm sends out a client satisfaction
survey twice a year, which is unusual enough. But they use the
super-simple
Net Promoter Score developed in part by Bain &
Co. And they follow up with a memo to their client base baring the
results and sharing their plans to improve.
- Practicing the “sow-before-you-reap”
verse is the new age marketing Bible — The firm offers free
“Ask-a-CPA” Webinars on basic accounting or tax tips for clients and
non-clients alike. For business owners with at least $2 million in
annual turnover, Wendroff & Associates organizes CEO peer-to-peer
groups. “It’s a group where C-Level executives or business owners can
talk frankly about issues affecting their organizations,” Darren says.
“We wanted to join a group like this, and couldn’t find one, so we
created ours.” The meetings are invitation-only, highly structured,
single-topic and followed by a memo to all, which actually reads more
like a Harvard Business School case study than minutes from a meeting.
It wasn’t always this way. When Brian first started
the firm, he admits his fees were set too low and he was attracting the
wrong clients. Today, fees are set to cover overhead and salaries, plus
enough to plow back into the business. And the firm is now getting the right
kind of clients — the kinds who want more than just bookkeeping or tax prep,
but want and need strategic services.
The proof? Wendroff says, “Nearly every company we
worked with last year grew through the recession.”
Derivative Financial Instruments and Their
Fraud Timeline ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
March 24, 2010 message from Miklos A. Vasarhelyi
[miklosv@ANDROMEDA.RUTGERS.EDU]
Does
anyone understand how the derivative contracts goldman create for Greece
obfuscated its financial conditions?
how much is this a problem today for banks and industrials?
miklos
March 24, 2010 reply from Bob Jensen
Hi Miklos,
Especially note Titlos PLC
---
http://www.cs.trinity.edu/~rjensen/Calgary/CD/DerivativesTitlosPLC.pdf
Note the relatively early
date on the article below (and especially note the comments that follow the
article)
"Open Source Inquiry Opportunity: Some of Goldman's Greece Swaps ," Naked
Capitalism, February 15, 2010
Click Here
http://www.nakedcapitalism.com/2010/02/open-source-inquiry-opportunity-some-of-goldmans-greece-swaps-made-public.html
In a
New York Times op-ed late last year,
Bill Black,
Frank Partnoy,
and Eliot Spitzer called for an open
source investigation:
we know where the answers are. They
are in the trove of e-mail messages
still backed up on A.I.G. servers,
as well as in the key internal
accounting documents and financial
models generated by A.I.G. during
the past decade. Before releasing
its regulatory clutches, the
government should insist that the
company immediately make these
materials public. By putting the
evidence online, the government
could establish a new form of “open
source” investigation.
Once the documents are available for
everyone to inspect, a thousand
journalistic flowers can bloom, as
reporters, victims and angry
citizens have a chance to piece
together the story. In past cases of
financial fraud — from the complex
swaps that Bankers Trust sold to
Procter & Gamble in the early 1990s
to the I.P.O. kickback schemes of
the late 1990s to the fall of Enron
— e-mail messages and internal
documents became the central
exhibits in our collective
understanding of what happened, and
why.
Now it is worth noting that the emphasis
in the Black/Partnoy/Spitzer argument
was to get a lot of eyeballs on a large
stash of source material that is
presumably pretty accessible to the
public, namely, e-mails.
But there is a second line of potential
open-source inquiry that would be at
least as valuable: getting people who
have expertise in certain types of
documentation to look probe transaction
documentation for deals that were
deceptive or had significant negative
outcomes. Even with more and more
investigators of various sorts getting
their noses into various suspect-looking
activities, a lot of the destructive
behavior took place in the form of
transactions that industry participants
at the time would argue fell within
normal, accepted practice. Understanding
what was deficient about prevailing
practice is therefore key to developing
durable reforms.
For instance, one of the requirements in
the FDIC’s proposed securitization
reforms is to have the participants
disclose their motivations and
intentions as well as their fees. That
means that parties like Goldman and
Deutschebank, who teed up CDOs for the
purpose of them taking a short position
would have had to disclose that
objective under the proposed
regulations.
Reader Nick has
provided a link to
one of the now-infamous Goldman-Greek
government swaps,
which served to
camouflage the magnitude of its fiscal
deficits from the EU. His comments:
I came across the prospectus for the
5.1bn Euro Titlos PLC Asset Backed
Notes which Goldman arranged for
Greece in 2008.
This was the restructuring of a
controversal 2005 swap, which, in
turn, related to the infamous
“Aeolos” deal in 2001. Aeolos was
the SPV which GS and the “Hellenic
Civil Aviation Authority” used
to enable the Greeks to hide its
borrowing and enter the EU under
false pretenses.
See page 47 of the pdf file (page 43
of the document) under “Use of
Proceeds”. I’m curious that no
mention of Greece’s real motivation
to do this deal — or previous ones —
is mentioned. (Maybe it’s in the
doc, but I sure couldn’t find it.)
Will the final net result of these
derivative trades be a transfer from
German and French taxpayers to
Greece along with $300mm or so to
GS?
Yves here. Per the remarks above on the
FDIC, I’m not surprised at all regarding
the lack of disclosure. And Nick’s
comment raises a more basic point: how
the use of forms and mechanisms from
regulated markets have served to lull
investors and issuers into a false sense
of security.
Now here, Greece presumably knew exactly
what it was doing. The whole point of
this deal was to allow it to hide its
failure to live up to its Maasricht
obligations.
But even though I have looked at various
types of deal documents for decades,
something that should have been
blindingly obvious occurred to me only
tonight. This document, like all of its
cousins, says very clearly that the
securities (in this case, notes) will
not be registered with the SEC, but will
be listed on the Luxembourg stock
exchange. So this one at least is
subject to certain disclosure
requirements. But as Nick points out,
you sure couldn’t tell what the real
motivation for the note deal was from
this prospectus (as in the stated aim,
while not necessarily untrue, was not
the real driver).
But investors have over the
course of decades come to expect that
documents like this make a full and fair
disclosure. The use of
this particular form of presentation
conveys the message (among others) that
everything you need to know to invest is
here. It may be somewhat obscured by
clever lawyering or the relegation of
key facts to financial footnotes, but
the belief surrounding documents like
this is that the investors have been
told what they needed to know.
But we now know they weren’t. The SEC
has a key notion in its disclosure
rules, that failure to state a material
fact is a no-no. It isn’t just that what
a prospectus says has to be accurate, it
also must not omit to state any material
fact that would make the statements in
the disclosure documents false or
misleading.
And where did the chicanery that led to
the crisis take place? Not in areas
subject to the full force of SEC
regulations, but areas completely
outside its reach (derivatives) or where
much weaker rules were operative (the
rule 3a-7 exemption for asset backed
securities).
In case readers think I am making
overmuch of this process, consider:
propaganda similarly suborns existing
channels, in this case, the media. Most
people believe that the press and TV
tell them what they need to know, both
in the sense that what they say is
accurate, and anything they fail to
cover must not be newsworthy. And even
though we have had some stark evidence
to the contrary, that the media can be
used by the state for its own ends
(witness the Creel Commission in World
War I, as well as the run-up to the Iraq
war) as well as influenced by powerful
private interests, the conditioning,
which is to trust the media, remains
very much intact.
So as much as I welcome and encourage
reader comments on the document that
Nick pointed out, I’d also welcome
reader input on where they think
disclosure fell short, and why.
Bob Jensen's free
tutorials on derivatives and accounting for derivative financial instruments and
hedging activities are at
http://www.trinity.edu/rjensen/caseans/000index.htm
What is the world is going to happen to private sector versus
public sector auditing?
The big difference between private sector auditors versus
government auditors is that we can sue the private sector auditors over and over
and over until they make serious efforts to get it right. Virtually nothing is
being done to make the government’s auditors get it right.
What
my inside contacts in the large firms are telling me is that more than ever
efforts are now being made to make their auditors independent to a point where
they will stand up to their largest and most lucrative clients and demand that
there be better GAAP and GAAS conformance ---
Advancing Quality through Transparency Deloitte LLP Inaugural
Report ---
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency
Report.pdf
I think the PCAOB audit reviews have contributed in a small but
marked way to improve audits. But there’s a long way, miles and miles, to go
before we sleep ---
http://www.trinity.edu/rjensen/fraud001.htm
It’s
Market Versus the Government!
The question is what’s the alternative? Those that want a
Government’s Central Planning Board to allocate resources in the economy (in
place of markets) are aiming the world economy for disaster, confusion, and
disruption. And who keeps the government honest? At the moment the GAO declares
that it’s impossible to audit our largest government agencies like the Pentagon,
the IRS, etc. Government accountability, accounting, and auditing are in much
worse shape than our far less-than-perfect private sector accountability,
accounting, and auditing.
The Sad State of Government Accounting ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
The Sad State of Private Sector Accounting ---
http://www.trinity.edu/rjensen/fraud001.htm
No
Resource Allocation System Can Exist Without Accountability, Accounting, and
Auditing
Accountability, accounting, and auditing are necessary under any type of
resource stewardship and resource allocation system. At one extreme we have
markets, investors, and creditors who rely upon audits and stewardship
accounting of the private sector market participants. The FASB and the IASB do
indeed, in my viewpoint, focus on the information needs of those investors and
creditors. The auditing firms, however, are faced with what Tom Selling calls a
“broken model” where those being audited choose their auditors and negotiate the
audit fees. This is certainly problematic if not completely broken.
The Government’s resource allocation system brought us the Jack
Murtha Airport with its full security system, air controller system, six flights
a day to only one destination, and less than 50 passengers a day. It’s a
taxpayer cash flow black hole.
At the other extreme we have the government auditors who cannot
get any type of handle on how to audit the enormous agencies to a point with
the auditors have just given up on total system audits. Nobody audits the
Pentagon after the GAO declared it “unauditable.”
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
The world is not perfect, and certainly financial and commodities
markets were manipulated by Enron, Lehman, Merrill, etc. Andersen’s audits were
among the worst in the history of the world, and Andersen got its just dessert
for not enforcing quality control of its audits. Government is the land of
corrupt resource allocation that usually leads to even less efficient resource
allocations than the market-based resource allocations.
I think auditing of banks has been a sham by virtually all the
auditing firms, and these firms will soon pay a heavy price in court for
certifying fiction of bank accounting for the thousands of banks that recently
went “bank”rupt. Unless the large auditing firms overcome their sham audits of
banks, they too will bite the dust.
The
question is whether the professionalism/independence recovery efforts of all the
large auditing firms can save them is still open to question. After all these
years since Andersen imploded, I think the Wall Street bank audits indicate that
the big auditing firms, in Art Wyatt’s wording, “still didn’t get it.” Art Wyatt
was the lead executive research partner for Andersen. After Andersen imploded,
Art observed the lack of professionalism in the surviving auditing firms and
concluded that “They Still Don’t Get It” ---
http://aaahq.org/AM2003/WyattSpeech.pdf
But the real problem in my viewpoint is not the mixing of consulting and
auditing nearly as much as it is the "too big to lose" clients (read that as
auditing firms being unwilling to quit the audit after spending so much time and
money gearing up for the big-client audit).
Can
you hear us now?
The question is whether the auditing firms, in the wake of the banking collapse
and bailout, are more seriously listening and, more importantly, finally doing
the right thing. Investors are amazingly tolerant of the cycles of scandal and
promised reforms in the capital markets. The Dow remained amazingly high
during all the recent Wall Street scandals and bailouts. And investors and
creditors will have their day in court when they bring the bankers and their
auditors to the dock ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
But nobody is bringing the broken government accounting and
auditing system to the dock. You can’t usually sue the government. Many of the
recent frauds could’ve been prevented or mitigated by the SEC, but the SEC is
not being held accountable for its huge failures, especially under an
incompetent political hack named Chris Cox.
Question
What’s
the big difference between Soviet Union Accounting in 1960 and accounting in the
U.K. and the U.S. in 2010?
Answer
In the Soviet Union the public could not haul the sham auditors into court.
Accounting in the Soviet Union really was fiction writing at all levels of
enterprise. In the Soviet Union there could never be a Prem Sikka, an Abe
Briloff, a Frank Partnoy, a Mark Lewis, a Lynn Turner, or a CBS Sixty Minutes.
Why does Prem Sikka now want to destroy our market system and model us after the
Soviet Union? Perhaps I’m being unfair to Prem. He tears at the foundations of
markets without ever suggesting what he thinks should take their place for an
economy’s resource allocation system. Others like Partnoy, Lewis, and Turner
want to “make markets be markets” with better accountability and auditing”
"Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
Why
aren’t we hauling the GAO and the SEC and government watchdogs in general into
court and demanding that they make at least as much effort at reform as the
private sector accountants and auditors?
The
big difference between private sector auditors versus government auditors is
that we can sue the private sector auditors over and over and over until they
make serious efforts to get it right. Virtually nothing is being done to make
the government’s auditors get it right.
http://www.trinity.edu/rjensen/fraud001.htm
Absolutely Must-See CBS Sixty Minutes Videos
You, your students, and the world in general really should repeatedly study the
following videos until they become perfectly clear!
Two of them are best watched after a bit of homework.
Video 1
CBS Sixty Minutes featured how bad things became when poison was added to loan
portfolios. This older Sixty Minutes Module is entitled "House of Cards" ---
http://www.cbsnews.com/video/watch/?id=3756665n&tag=contentMain;contentBody
This segment can be understood without much preparation except that it would
help for viewers to first read about Mervene and how the mortgage lenders
brokering the mortgages got their commissions for poisoned mortgages passed
along to the government (Freddie Mack and Fannie Mae) and Wall Street banks. On
some occasions the lenders like Washington Mutual also naively kept some of the
poison planted by some of their own greedy brokers.
The cause of this fraud was separating the compensation for brokering mortgages
from the responsibility for collecting the payments until the final payoff
dates.
First Read About Mervene ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Then Watch Video 1 at
http://www.cbsnews.com/video/watch/?id=3756665n&tag=contentMain;contentBody
Videos 2 and 3
Inside the Wall Street Collapse (Parts 1 and 2) first shown on March 14,
2010
Video 2 (Greatest Swindle in the History of the World) ---
http://www.cbsnews.com/video/watch/?id=6298154n&tag=contentMain;contentAux
Video 3 (Swindler's Compensation Scandals) ---
http://www.cbsnews.com/video/watch/?id=6298084n&tag=contentMain;contentAux
My wife and I watched Videos 2 and 3 on March 14. Both videos feature one of
my favorite authors of all time, Michael Lewis, who hhs been writing (humorously
with tongue in cheek) about Wall Street scandals since he was a bond salesman on
Wall Street in the 1980s. The other person featured on in these videos is a
one-eyed physician with Asperger Syndrome who made hundreds of millions of
dollars anticipating the collapse of the CDO markets while the shareholders of
companies like Merrill Lynch, AIG, Lehman Bros., and Bear Stearns got left
holding the empty bags.
The major lessons of videos 2 and 3 went over the head of my wife. I think
that viewers need to do a bit of homework in order to fully appreciate those
videos. Here's what I recommend before viewing Videos 2 and 3 if you've not been
following details of the 2008 Wall Street collapse closely:
This
is not necessary to Videos 2 and 3, but to really appreciate what suckered
the Wall Street Banks into spreading the poison, you should read about how
they all used the same risk diversification mathematical function --- David
Li's Gaussian Copula Function:
Can the
2008 investment banking failure be traced to a math error?
Recipe for Disaster: The Formula That Killed Wall Street ---
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html
Some highlights:
"For five years, Li's formula, known as a
Gaussian copula function, looked
like an unambiguously positive breakthrough, a piece of financial technology
that allowed hugely complex risks to be modeled with more ease and accuracy
than ever before. With his brilliant spark of mathematical legerdemain, Li
made it possible for traders to sell vast quantities of new securities,
expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street
banks to ratings agencies and regulators. And it became so deeply
entrenched—and was making people so much money—that warnings about its
limitations were largely ignored.
Then the model fell apart." The article goes on to show that correlations
are at the heart of the problem.
"The reason that ratings agencies and investors felt so safe with the
triple-A tranches was that they believed there was no way hundreds of
homeowners would all default on their loans at the same time. One person
might lose his job, another might fall ill. But those are individual
calamities that don't affect the mortgage pool much as a whole: Everybody
else is still making their payments on time.
But not all calamities are individual, and tranching still hadn't solved all
the problems of mortgage-pool risk. Some things, like falling house prices,
affect a large number of people at once. If home values in your neighborhood
decline and you lose some of your equity, there's a good chance your
neighbors will lose theirs as well. If, as a result, you default on your
mortgage, there's a higher probability they will default, too. That's called
correlation—the degree to which one variable moves in line with another—and
measuring it is an important part of determining how risky mortgage bonds
are."
I would highly recommend reading the entire thing that gets much more
involved with the
actual formula etc.
The “math error” might truly be have been an error or it might have simply
been a gamble with what was perceived as miniscule odds of total market
failure. Something similar happened in the case of the trillion-dollar
disastrous 1993 collapse of Long Term Capital Management formed by Nobel
Prize winning economists and their doctoral students who took similar
gambles that ignored the “miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM
The rhetorical question
is whether the failure is ignorance in model building or risk taking using
the model?
- You should understand how the Wall Street Banks used the big credit
rating agencies to give AAA ratings to sell CDO bonds that should've instead
been rated as junk bonds. Michael Lewis in Video 2 seems to think the credit
rating agencies were just naive and were manipulated by the Wall Street
bankers. I'm more inclined to think the CRAs were knowingly and greedily
part of the frauds ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
CRA ---
http://en.wikipedia.org/wiki/Credit_rating_agency
- You should also understand what a credit default swap (CDS) is and how
Video 2 above keeps calling it unregulated credit "insurance." Essentially,
this is how some banks, particularly Goldman Sachs was "insuring" against
the value collapse of the poisoned CDOs they were creating and selling. The
"insurance" company brokering the AIG credit default swaps was AIG.
CDS ---
http://en.wikipedia.org/wiki/Credit_default_swap
Here's how they worked ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
- Understand how some Wall Street Banks were better connected in the
Treasury Department and Federal Reserve than other banks. In particular,
Goldman Sachs alumni were practically in charge while
Hank
Paulson (former Goldman Sachs CEO) was U.S. Treasury Secretary. Why did
Paulson save Goldman Sachs and let others watch their shareholders get wiped
out like Lehman Bros., Bear Stearns, Merrill Lynch, etc.? Understand why
saving Goldman Sachs with TARP money entailed saving AIG since saving AIG
was crucial to paying off the CDS insurance.
- For the above three videos it is not necessary to understand the lack of
professionalism (at best) among the bank auditors that never provided any
warning that thousands of banks that failed had badly underestimated bad
debts and overvalued poisoned loan portfolios. The above videos do not get
into the failings of the CPA auditors in this regard, but you can read about
these failings at
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
For more on the inside track of all of this I highly recommend Janet
Tavakili's great book entitled Dear Mr. Buffett (Wiley, 2009). Videos 1-3
will help you understand some of the technicalities in her fantastic and very
depressing book.
Here are some of the take-aways from the three CBS videos above:
- The root cause of the 2008 meltdown of Wall Street was really the
failings on Main Street where the poison was first added to mortgages by
Main Street brokers who were willing to broker mortgages (including
re-financings) that were bound to be defaulted. Note that the problem was
not just in brokering mortgages for poor people (Barney's Rubble). Poisoned
mortgages were also being written for higher income people who were
borrowing beyond their means for those four-car garage dream houses with
swimming pools and marble floors. In other words the root cause was the
ability to broker a poisoned mortgage and then sell it to Freddie Mack,
Fannie Mae, and the Wall Street Banks.
- The next cause of the 2008 meltdown was David Li's risk diversification
formula that all the Wall Street banks were using on the theory that default
risk of mortgage investments could be diversified by crumbling mortgage
cookies into crumbs that were reassembled into thousands of CDOs (each CDO
having only a small crumble of each mortgage's poison). With the blessings
of credit rating agencies, these CDO bonds were then sold as AAA-rated when
in fact they were worse than junk.
- Videos 2 and 3 above stress how the underlying cause of allowing a
one-eyed physician with Asperger Syndrome make hundreds of millions dollars
by detecting the collapse of the CDO values way in advance of the Wall
Street pros is that the Wall Street pros were paid not to look for the CDO
risks. And the bank CDO sellers who perhaps did understand the risks were
willing to screw their eimployers (such as Lehman, Bear Stearnes, etc.)
because it was so easy to steal hundreds of millions from these employers
who were even willing and still are willing to pay them bonuses in spite of
their thefts.
- After the government bailed them out, the Wall Street banks that
survived because of the government's bailout are still paying out billions
in bonuses. One of my favorite quotes in Video 2 goes something like:
"If Goldman does not pay its best people billions in bonuses they will quit
and go to JP Morgan, and if JP Morgan does not pay its best people billions
in bonuses they will quit and go to Goldman." Meanwhile the taxpayers got
screwed out of nearly a trillion dollars.
- Video 2 leaves us with the impression that Wall Street is no longer a
value-added part of U.S. economy. The TARP in reality is truly the
Greatest Swindle in the History of the World
---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Meanwhile the surviving swindlers and their credit rating agencies and their
auditors are still thriving as if nothing has happened. Opps! I forgot that
the credit rating agencies and auditing firms still have some multi-billion
shareholder lawsuits pending that do threaten their survival. But a lot of
big swindlers still have their yachts thanks to Hank and Ben and Tim.
I highly recommend the outstanding and often humorous books of both
Michael Lewis and Frank Partnoy.
My timeline of these books and the scandals they write about can be found at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Related CBS Sixty Minutes videos are as follows:
I also recommend watching all the David Walker videos on YouTube.
Watch them and weep.
I also recommend watching all the David Walker videos on YouTube.
Watch them and weep.
March 16, 2010 reply from Paul Williams
[Paul_Williams@NCSU.EDU]
Bob, I concur -- I watched 60 Minutes last night
and the interview with Michael Lewis was spellbinding. What emerges from
Lewis descriptions is just how much of the financial crisis can be laid at
the feet of modern finance theory -- that which emerged out of Chicago and
such places back in the late fifties and sixties. As Keynes remarked about
practical men (the remainder of that familiar observation is even more
prescient, "Mad men in authority who hear voices in the air distill their
particular frenzy from some academic scribbler of a few years back.").
In modern finance theory (starting with portfolio
theory of Markowitz, then the CAPM) asset prices became simply a function of
other asset prices and financial markets were made into a closed system The
fixation on betas make asset prices a function of other asset prices within
that market and become theoretically disconnected from the real economy that
purportedly underlies the value of everything. There is a book that just
came out titled, The Quants," about the takeover of Wall Street by the math
types (PhDs in physics that could make more money as "analysts" than as
physicists).
The tragedy in every Greek tragedy has its origins
in hubris and modern finance theory has contributed more to the hubris that
Lewis decribed than anything else. Lewis observation about capitalism being
destroyed by the capitalists brings to mind Alan Wolfe's observation that
throughout history it has always been capitalism's critics that have saved
it from itself.
This time it may not happen because financial
reform seems to have no traction. Recalling an earlier photo, circulated on
AECM, taken on Wall Street, if the F... won't jump on his own, maybe he
needs a little push.
Ah, the innocence of youth.
What really happened in the poisonous CDO markets?
The
Senior Thesis
"The Story of the CDO Market Meltdown: An Empirical Analysis," by Anna
Katherine Barnett-Hart, Harvard University, March 19, 2010 ---
http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf
I previously mentioned three CBS Sixty Minutes videos that are must-views for
understanding what happened in the CDO scandals. Two of those videos centered on
muckraker Michael Lewis. My friend, the Unknown Professor, who runs the
Financial Rounds Blog, recommended that readers examine the Senior Thesis of a
Harvard student.
"Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead," by Peter
Lattman, The Wall Street Journal, March 20, 2010 ---
http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/tab/article/
Deal Journal has yet to
read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit
stores today. We did, however, read his acknowledgments, where Lewis praises
“A.K. Barnett-Hart, a Harvard undergraduate who had just written a thesis about
the market for subprime mortgage-backed CDOs that remains more interesting than
any single piece of Wall Street research on the subject.”
While unsure if we can
stomach yet another book on the crisis, a killer thesis on the topic? Now that
piqued our curiosity. We tracked down Barnett-Hart, a 24-year-old financial
analyst at a large New York investment bank. She met us for coffee last week to
discuss her thesis, “The Story of the CDO Market Meltdown: An Empirical
Analysis.” Handed in a year ago this week at the depths of the market collapse,
the paper was awarded summa cum laude and won virtually every thesis honor,
including the Harvard Hoopes Prize for outstanding scholarly work.
Last October,
Barnett-Hart, already pulling all-nighters at the bank (we agreed to not name
her employer), received a call from Lewis, who had heard about her thesis from a
Harvard doctoral student. Lewis was blown away.
“It was a classic example
of the innocent going to Wall Street and asking the right questions,” said Mr.
Lewis, who in his 20s wrote “Liar’s Poker,” considered a defining book on Wall
Street culture. “Her thesis shows there were ways to discover things that
everyone should have wanted to know. That it took a 22-year-old Harvard student
to find them out is just outrageous.”
Barnett-Hart says she
wasn’t the most obvious candidate to produce such scholarship. She grew up in
Boulder, Colo., the daughter of a physics professor and full-time homemaker. A
gifted violinist, Barnett-Hart deferred admission at Harvard to attend
Juilliard, where she was accepted into a program studying the violin under
Itzhak Perlman. After a year, she headed to Cambridge, Mass., for a broader
education. There, with vague designs on being pre-Med, she randomly took “Ec
10,” the legendary introductory economics course taught by Martin Feldstein.
“I thought maybe this
would help me, like, learn to manage my money or something,” said Barnett-Hart,
digging into a granola parfait at Le Pain Quotidien. She enjoyed how the subject
mixed current events with history, got an A (natch) and declared economics her
concentration.
Barnett-Hart’s interest
in CDOs stemmed from a summer job at an investment bank in the summer of 2008
between junior and senior years. During a rotation on the mortgage
securitization desk, she noticed everyone was in a complete panic. “These CDOs
had contaminated everything,” she said. “The stock market was collapsing and
these securities were affecting the broader economy. At that moment I became
obsessed and decided I wanted to write about the financial crisis.”
Back at Harvard, against
the backdrop of the financial system’s near-total collapse, Barnett-Hart
approached professors with an idea of writing a thesis about CDOs and their role
in the crisis. “Everyone discouraged me because they said I’d never be able to
find the data,” she said. “I was urged to do something more narrow, more
focused, more knowable. That made me more determined.”
She emailed scores of
Harvard alumni. One pointed her toward LehmanLive, a comprehensive database on
CDOs. She received scores of other data leads. She began putting together charts
and visuals, holding off on analysis until she began to see patterns–how Merrill
Lynch and Citigroup were the top originators, how collateral became heavily
concentrated in subprime mortgages and other CDOs, how the credit ratings
procedures were flawed, etc.
“If you just randomly
start regressing everything, you can end up doing an unlimited amount of
regressions,” she said, rolling her eyes. She says nearly all the work was in
the research; once completed, she jammed out the paper in a couple of weeks.
“It’s an incredibly
impressive piece of work,” said Jeremy Stein, a Harvard economics professor who
included the thesis on a reading list for a course he’s teaching this semester
on the financial crisis. “She pulled together an enormous amount of information
in a way that’s both intelligent and accessible.”
Barnett-Hart’s thesis is
highly critical of Wall Street and “their irresponsible underwriting practices.”
So how is it that she can work for the very institutions that helped create the
notorious CDOs she wrote about?
“After writing my thesis,
it became clear to me that the culture at these investment banks needed to
change and that incentives needed to be realigned to reward more than just
short-term profit seeking,” she wrote in an email. “And how would Wall Street
ever change, I thought, if the people that work there do not change? What these
banks needed is for outsiders to come in with a fresh perspective, question the
way business was done, and bring a new appreciation for the true purpose of an
investment bank - providing necessary financial services, not creating
unnecessary products to bolster their own profits.”
Ah, the innocence of
youth.
The Senior
Thesis
"The Story of the CDO Market Meltdown: An Empirical Analysis," by Anna
Katherine Barnett-Hart, Harvard University, March 19, 2010 ---
http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf
A
former colleague and finance professor at Trinity University recommends
following up this Harvard student’s senior thesis with the following:
Rene M. Stulz. 2010. Credit default swaps and the credit crisis. J of
Economic Perspectives, 24(1): 73-92 (not free) ---
http://www.aeaweb.org/jep/index.php
Bob Jensen’s threads on the CDO and CDS scandals ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Legal Research References and Links ---
http://www.trinity.edu/rjensen/fraud001.htm
March 13, 2010 message from David Albrecht
[albrecht@PROFALBRECHT.COM]
I know that most Big4
lawsuits are settled out of court. Is there anyplace on the web a listing of
Big 4 lawsuits?
Although it might be argued
that settling is a business decision, I think a settlement is a symbolic
defeat by the CPA firm.
David Albrecht
March 14, 2010 reply from Bob Jensen
Hi
David,
Lawyers are going to use their very expensive legal research databases. A
list of sources in the U.S. is provided in
http://en.wikipedia.org/wiki/Legal_Research
I
know of no free Web reference that records all criminal and civil actions
where a Big Four firm is a defendant.
Big Four lawsuits can arise in over 100 nations (recently one of the largest
actions in history was filed in Hong Kong, where the Ernst & Young partner
in charge was actually jailed) ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
The Audit
Analytics database has a lot of the auditor lawsuits classified by year ---
http://www.auditanalytics.com/
Examples for 2006 are at
http://www.trinity.edu/rjensen/AuditingFirmLitigationNov2006.pdf
In
the U.S. there are both state and federal jurisdictions. And there can be
individual or class action lawsuits brought by plaintiffs. One of the better
sources for federal securities class action lawsuits is the Stanford
University Law School Federal Class Action Clearinghouse ---
http://securities.stanford.edu/
But this by no means covers most of the lawsuits against large auditing
firms. In fact, the database has surprisingly few hits for Big Four firms.
Many of the SEC lawsuits are not in this database.
Keep in mind that auditors are usually secondary in lawsuits with their
clients being the primary defendants. Most of the lawsuits are probably
filed in the state where a corporate client is licensed as a corporation,
which gives Delaware a lot of lawsuits.
For the past ten years I’ve tried to keep tidbits on the highly publicized
lawsuits involving large auditing firms ---
http://www.trinity.edu/rjensen/fraud001.htm
Interestingly, auditing firms sometimes win in courts, as recently happened
when Ernst & Young emerged as a winner.
For lawsuits dealing with derivative financial instruments I also have a
tidbit timeline at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Of
course the lawyers are going to use their very expensive legal research
databases. A list of sources in the U.S. is provided in
http://en.wikipedia.org/wiki/Legal_Research
I
don’t have time at the moment, but it would be interesting to see how much
PwC provides in the Comperio database. Since this database is heavily used
by clients, my guess is that Comperio is not a good source for searching
auditor lawsuits.
There are also instances where an auditing firm is a plaintiff, usually
where it is suing a former client.
There can also be criminal cases like the recent case where the managing
partner of PwC in England was charged with stealing money from PwC to pay
for the luxurious tastes of his mistress ---
http://www.trinity.edu/rjensen/fraud001.htm#PwC
Bob Jensen
March 14, 2010 reply from Orenstein, Edith
[eorenstein@FINANCIALEXECUTIVES.ORG]
Some
limited data regarding litigation for the six largest audit firms (U.S. data
only, as of 2007) was provided by the Center for Audit Quality (CAQ) - an
affiliate of the AICPA, in reports to the
U.S. Treasury Advisory Committee on the Auditing Profession (ACAP).
For example,
among
CAQ's reports to ACAP,
CAQ's Jan. 23, 2008 report to ACAP included a section on
Litigation. A caveat in the CAQ report states:
"Information regarding litigation is highly sensitive, because of the risk
that the data could be used
unfairly against a firm in litigation. For these reasons, the data presented
in this report were gathered from the six audit firms and aggregated (the
data relate only to claims against the six U.S. firms and do not include
claims in U.S. courts against any non-U.S. firms that are members of the
same networks). To prevent "reverse engineering" of the data to tie specific
facts to a specific lawsuit or firm, the data have been grouped - for
example, aggregating data from several different years. The litigation data
discussed in this report do not include information relating to government
inquiries, investigations, or enforcement actions.31" [Footnote 31 in the
CAQ report states: "2007 litigation data in this report reflect submissions
by five firms of information as of December 20, 2007 and by one firm of
information as of November 30, 2007."]
Additionally,
CAQ's Second Supplement to ACAP (4/16/08) included data on private
actions and shareholder class actions.
Treasury's
ACAP published its
final report in 2008; here is related summary in
FEI blog.
Edith
Orenstein
Director of Accounting Policy Analysis and Communications
Financial Executives International (FEI)
1250 Headquarters Plaza, West Tower, 7th Floor
Morristown, NJ 07932
(973) 765-1046
eorenstein@financialexecutives.org
web:
www.financialexecutives.org
blog:
www.financialexecutives.blogspot.com
twitter:
www.twitter.com/feiblog
March 14,2010
message from Francine McKenna
[retheauditors@GMAIL.COM]
Dave,
I try to keep up as best I can on litigation against
the auditors. It's not easy since I am not an attorney and do not have
access to their databases. I depend of the "kindness of lawyer strangers"
to help me often.
It's not easy since auditors are often one of many
defendants in a class action lawsuit , for example. Often news reports or
other blog posts do not include all the defendants if auditors are not the
focus of the story. Which they are often not. Which is why my site is
useful.
I look at the lists compiled by Kevin LaCroix on his
site DandODiary.com of securities litigation and class action suits, Francis
Pileggi of DelawareLitigation.com also mentions suits against or by auditors
(as in the Deloitte suit against their own Vice Chairman ) when they make it
to Delaware Chancery Court. They both keep an eye out for me now and it was
Frans=cis who alerted me to both the judgement against Deloitte's Flanagan
and the recent "in pari delicto" case against pwC.
I also use a site called Justia to look for all other
suits against the firms, often focused on suits in Federal Courts.
http://dockets.justia.com/
The Stanford Law School database is also useful for
getting the actual filings and documents.
http://securities.stanford.edu/
Interestingly PwC does a great job tracking everyone
else's 10b-5 litigation - except their own. You will never see auditor
litigation broken out in their report.
http://10b5.pwc.com/public/Default.aspx
Bob is right to say that there's a whole slew of suits,
at times very large and important that are outside of the US, such as the
ones in Hong Kong against EY. For that I count on Google Alerts (and my
blog readers) to alert me, sometimes at odd hours of the night, of new
developments.
http://retheauditors.com/category/auditor-litigation/
http://retheauditors.com/2009/07/11/mckenna-on-auditor-litigation-securities-dockets-mid-year-update/
fm
Repo105 ---
http://en.wikipedia.org/wiki/Repo_105
Thanks XXXXX for the heads up!
Dear Bob,
Please don't forward this email with my name, but I thought
you may find the info below of interest, you may (or may not) want to
cut/paste info below to share with others; if you do share it, please
don't attribute the comments to me, it can just be someone
who prefers to be anonymous). Thank you!
www.repo105.com strikes me as possibly being a spam site, maybe even
authored by someone overseas, due to some misspellings on their site
including "Bernie Maddof" and "Dick Chaney."
Moreover, it looks like the site may have been set up to get attention of
people looking for info on "Repo 105" but drives them to their own business
which apparently is selling FX or gold trading, e.g. this para. on their
website:
"Financial markets may well roil in the throws of
this latest revelation, especially if the practice is shown to be widespread
From
XXXXX
Jensen Comment
An evolving site that might one day be quite good for Repo 105 information
might be
http://en.wikipedia.org/wiki/Repo_105
Currently I think my links below will be more useful on this accounting
controversy.
Bob Jensen’s threads on
the Lehman/Ernst Repo 105 mess will soon be available at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Also see
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Former employees of Big Four firms (alumni) have a blog that is generally
upbeat and tends not to be critical of their former employers
However, with respect to the impact of the Lehman Bankruptcy Examiners Report,
this Big Four Blog is unusually critical of Ernst and Young and predicts a very
tough time for E&Y in the aftermath.
The next few days will reveal how the regulators,
erstwhile shareholders of Lehman and other stakeholders will move against E&Y.
Valukas’ statement that there is sufficient evidence to show that E&Y was
negligent is enough to spur a whole host of law suits. E&Y is in a very tough
spot now, and while it may escape an imploding collapse like Andersen, the long
tail of Lehman is sure to create a strong whiplash with painful monetary,
reputational and punitive
"Ernst and Young Found Negligent in Lehman Report, Tough
Consequences," The Big Four Blog, March 17, 2010 ---
http://bigfouralumni.blogspot.com/2010/03/ernst-and-young-found-negligent-in.html
There’s been so much press on the recently released
report on the spectacular failure of Lehman Brothers by Anton Valukas, so
we’ll just focus on the key elements which involve Lehman’s auditor Ernst &
Young.
Valukas is highly critical of E&Y’s work, claiming
that they did not perform the due diligence needed by audit firms, the
ultimate watchdog of investors’ interests. He believes there is a case of
negligence and professional malpractice against the firm. Though in a very
limited sense Lehman perhaps followed standard accounting principles, and
this is the basis on which E&Y signed off on their annual and quarterly
filings, they wrongly categorized a repo as a sale to knowingly report a
lower leverage ratio, they exceeded internal limits on the infamous Repo
105, and they found a loophole in the British system to execute these
transactions, and keep them off the public eye.
Lehman was clearly at fault and grossly fraudulent
in hiding this from investors, and then obfuscating answers to clear
questions from analysts. Is Ernst and Young equally culpable?
E&Y should have been more rigorous in pursuing this
issue, knowing that it was material, being misrepresented and highly abused.
With full knowledge of its usage, and then signing off on SEC documents is
definitely negligent.
E&Y is now being investigated by the FRC in the UK
and very likely in due course by the SEC. The Saudi government has already
cancelled E&Y’s security license in the kingdom. The law suits are yet to
hit the wires, but they are coming. The key is whether a criminal indictment
of the firm is likely, recall that this is what brought down Andersen.
Dealing with civil suits is only a matter of money, but a criminal charge is
going to send clients away in droves. The critical question is whether the
industry can withstand the loss of a $20 billion accounting giant, the
consequences of a Big Three are quite hard to imagine.
E&Y was recently hit with a $8.5 million fine by
the SEC for its involvement with Bally Fitness, and in that settlement E&Y
agreed to tighten internal procedures and refrain from audit abuse. So the
SEC is unlikely to look favorably on this.
The next few days will reveal how the regulators,
erstwhile shareholders of Lehman and other stakeholders will move against
E&Y. Valukas’ statement that there is sufficient evidence to show that E&Y
was negligent is enough to spur a whole host of law suits.
E&Y is in a very tough spot now, and while it may
escape an imploding collapse like Andersen, the long tail of Lehman is sure
to create a strong whiplash with painful monetary, reputational and punitive
consequences.
Bob Jensen's threads on the Examiner's Report aftermath can be found at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Lehman/Ernst Teaching Case on the Largest Bankruptcy in History
March 18, 2010 message from Bob Jensen
Dear Jim,
The Repo 105 issue was more like having a poisoned CDO bond worth $1 that
you sell for $1,000 with a guaranteed buyback in a week for $1,005. That way
you report a sale for $1,000, an asset of $0 in the balance sheet for a
“sold investment,” and $0 for the liability to buy it back. Sounds like a
bad economic deal and a great OBSF ploy. Of course it’s not necessarily
boosting earnings if you paid more than $1,000 for the CDO cookie crumbles
in the first place in the first place.
But it sure beats writing investments down from $1,000 to a $1.
Ernst and Young claims using these contracts to keep billions of dollars
of poison investments and unbooked debt out of the financial statements
result fairly present the financial status of sales and liabilities in the
financial statements.
Do our Accounting 101 and Auditing 101 students concur?
God help this profession if our students side with Ernst & Young!
Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is
an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
Bob Jensen
Lehman/Ernst Teaching Case on the Largest Bankruptcy in History
From The Wall Street Journal Accounting Weekly Review on March 19, 2010
Examiner: Lehman Torpedoed Lehman
by: Mike
Spector, Susanne Craig, Peter Lattman
Mar 11, 2010
Click here to view the full article on WSJ.com
TOPICS: Advanced
Financial Accounting, Debt, Degree of Operating Leverage, Disclosure,
Revenue Recognition
SUMMARY: "A
federal judge released a scathing report on the collapse of Lehman Brothers
Holdings Inc. that singles out senior executives, auditor Ernst & Young and
other investment banks for serious lapses that led to the largest bankruptcy
in U.S. history...." The report focuses on the use of "repos" to improve the
appearance of Lehman's financial condition as it worsened with the market
declines beginning in 2007. "Mr Valukus, chairman of law firm Jenner &
Block, devotes more than 300 pages alone to balance sheet manipulation..."
through repo transactions. As explained more fully in the related articles,
repurchase agreements are transactions in which assets are sold under the
agreement that they will be repurchased within days. Yet, when Lehman
exchanged assets with a value greater than 105% of the cash received for
them, the company would report it as an outright sale of the asset, not a
loan, thus reducing the firms apparent leverage. These transactions were
based on a legal opinion of the propriety of this treatment made for their
European operations, but the company never received such an opinion letter
in the U.S., so Lehman transferred assets to Europe in order to execute the
trades. The second related article clarifies these issues. Of course, this
was but one significant problem; other forces helped to "tip Leham over the
brink" into bankruptcy including J.P. Morgan Chases' "demands for collateral
and modifications to agreements...that hurt Lehman's liquidity...."
CLASSROOM APPLICATION: The
questions ask students to understand repurchase agreements and cases in
which financing (borrowing) transactions might alternatively be treated as
sales. The role of the auditor, in this case Ernst & Young, also is
highlighted in the article and in the questions in this review.
QUESTIONS:
1. (Introductory)
What report was issued in March 2010 regarding Lehman Brothers? Summarize
some main points about the report.
2. (Advanced)
Based on the discussion in the main and first related articles, describe the
"repo market'. What is the business purpose of these transactions?
3. (Advanced)
How did Lehman Brothers use repo transactions to improve its balance sheet?
Note: be sure to refer to the related articles as some points in the main
article emphasize the impact of removing the assets that are subject to the
repo agreements from the balance sheet. The main point of your discussion
should focus on what else might have been credited in the entries to record
these transactions.
4. (Introductory)
Refer to the second related article. What was the role of Lehman's auditor
in assessing the repo transactions? What questions have been asked of this
firm and how has E&Y responded?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Lehman Maneuver Raises Accounting Question.
by David Reilly
Mar 13, 2010
Online Exclusive
"Examiner: Lehman Torpedoed Lehman," by: Mike Spector, Susanne Craig, Peter
Lattman, The Wall Street Journal, Mar 11, 2010 ---
http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html?mod=djem_jiewr_AC_domainid
A scathing report by a U.S. bankruptcy-court
examiner investigating the collapse of Lehman Brothers Holdings Inc. blames
senior executives and auditor Ernst & Young for serious lapses that led to
the largest bankruptcy in U.S. history and the worst financial crisis since
the Great Depression.
In the works for more than a year, and costing more
than $30 million, the report by court-appointed examiner Anton Valukas
paints the most complete picture yet of the free-wheeling culture inside the
158 year-old firm, whose chief executive Richard S. Fuld Jr. prided himself
on his ability to manage market risk.
The document runs thousands of pages and contains
fresh allegations. In particular, it alleges that Lehman executives
manipulated its balance sheet, withheld information from the board, and
inflated the value of toxic real estate assets.
Lehman chose to "disregard or overrule the firm's
risk controls on a regular basis,'' even as the credit and real-estate
markets were showing signs of strain, the report said.
In one instance from May 2008, a Lehman senior vice
president alerted management to potential accounting irregularities, a
warning the report says was ignored by Lehman auditors Ernst & Young and
never raised with the firm's board.
The allegations of accounting manipulation and
risk-control abuses potentially could influence pending criminal and civil
investigations into Lehman and its executives. The Manhattan and Brooklyn
U.S. attorney's offices are investigating, among other things, whether
former Lehman executives misled investors about the firm's financial picture
before it filed for bankruptcy protection, and whether Lehman improperly
valued its real-estate assets, people familiar with the matter have said.
The examiner said in the report that throughout the
investigation it conducted regular weekly calls with the Securities and
Exchange Commission and Department of Justice. There have been no
prosecutions of Lehman executives to date.
Several factors helped to tip Lehman over the brink
in its final days, Mr. Valukas wrote. Investment banks, including J.P.
Morgan Chase & Co., made demands for collateral and modified agreements with
Lehman that hurt Lehman's liquidity and pushed it into bankruptcy.
Lehman's own global financial controller, Martin
Kelly, told the examiner that "the only purpose or motive for the
transactions was reduction in balance sheet" and "there was no substance to
the transactions." Mr. Kelly said he warned former Lehman finance chiefs
Erin Callan and Ian Lowitt about the maneuver, saying the transactions posed
"reputational risk" to Lehman if their use became publicly known.
In an interview with the examiner, senior Lehman
Chief Operating Officer Bart McDade said he had detailed discussions with
Mr. Fuld about the transactions and that Mr. Fuld knew about the accounting
treatment.
In an April 2008 email, Mr. McDade called such
accounting maneuvers "another drug we r on." Mr. McDade, then Lehman's
equities chief, says he sought to limit such maneuvers, according to the
report. Mr. McDade couldn't be reached to comment.
In a November 2009 interview with the examiner, Mr.
Fuld said he had no recollection of Lehman's use of Repo 105 transactions
but that if he had known about them he would have been concerned, according
to the report.
Mr. Valukas's report is among the largest
undertaking of its kind. Those singled out in the report won't face
immediate repercussions. Rather, the report provides a type of road map for
Lehman's bankruptcy estate, creditors and other authorities to pursue
possible actions against former Lehman executives, the bank's auditors and
others involved in the financial titan's collapse.
One party singled out in the report is Lehman's
audit firm, Ernst & Young, which allegedly didn't raise concerns with
Lehman's board about the frequent use of the repo transactions. E&Y met with
Lehman's Board Audit Committee on June 13, one day after Lehman senior vice
president Matthew Lee raised questions about the frequent use of the
transactions.
"Ernst & Young took no steps to question or
challenge the nondisclosure by Lehman of its use of $50 billion of
temporary, off-balance sheet transactions," Mr. Valukas wrote.
In a statement, Mr. Fuld's lawyer, Patricia Hynes,
said, "Mr. Fuld did not know what those transactions were—he didn't
structure or negotiate them, nor was he aware of their accounting
treatment."
An Ernst & Young statement Thursday said Lehman's
collapse was caused by "a series of unprecedented adverse events in the
financial markets." It said Lehman's leverage ratios "were the
responsibility of management, not the auditor."
Ms. Callan didn't respond to a request for comment.
An attorney for Mr. Lowitt said any suggestion he breached his duties was
"baseless." Mr. Kelly couldn't be reached Thursday evening.
As Lehman began to unravel in mid-2008, investors
began to focus their attention on the billions of dollars in commercial real
estate and private-equity loans on Lehman's books.
The report said that while Lehman was required to
report its inventory "at fair value," a price it would receive if the asset
were hypothetically sold, Lehman "progressively relied on its judgment to
determine the fair value of such assets."
Between December 2006 and December 2007, Lehman
tripled its firmwide risk appetite.
But its risk exposure was even larger, according to
the report, considering that Lehman omitted "some of its largest risks from
its risk usage calculations" including the $2.3 billion bridge equity loan
it provided for Tishman Speyer's $22.2 billion take over of apartment
company Archstone Smith Trust. The late 2007 deal, which occurred as the
commercial-property market was cresting, led to big losses for Lehman.
Lehman eventually added the Archstone loan to its
risk usage profile. But rather than reducing its balance sheet to compensate
for the additional risk, it simply raised its risk limit again, the report
said.
Bob Jensen's threads on the Lehman financial and accounting fraud are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Where Were the Auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
From the Free
Wall Street Journal Educators' Reviews for December 6, 2001
TITLE: Audits of Arthur
Andersen Become Further Focus of Investigation
SEC REPORTER: Jonathan Weil
DATE: Nov 30, 2001 PAGE: A3 LINK:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1007059096430725120.djm
TOPICS: Advanced Financial Accounting, Auditing
SUMMARY: This article
focuses on the issues facing Arthur Andersen now that their work on
the Enron audit has become the subject of an SEC investigation. The
on-line version of the article provides three questions that are
attributed to "some accounting professors." The questions in this
review expand on those three provided in the article.
QUESTIONS:
1.) The first question the SEC might ask of Enron's auditors is
"were financial statement disclosures regarding Enron's transactions
too opaque to understand?" Are financial statement disclosures
required to be understandable? To whom? Who is responsible for
ensuring a certain level of understandability?
2.) Another question that
the SEC could consider is whether Andersen auditors were aware that
certain off-balance-sheet partnerships should have been consolidated
into Enron's balance sheet, as they were in the company's recent
restatement. How could the auditors have been "unaware" that certain
entities should have been consolidated? What is the SEC's concern
with whether or not the auditors were aware of the need for
consolidation?
3.) A third question that
the SEC could ask is, "Did Andersen auditors knowingly sign off on
some 'immaterial' accounting violations, ignoring that they
collectively distorted Enron's results?" Again, what is the SEC's
concern with whether Andersen was aware of the collective impact of
the accounting errors? Should Andersen have been aware of the
collective amount of impact of these errors? What steps would you
suggest in order to assess this issue?
4.) The article finishes
with a discussion of expected Congressional hearings into Enron's
accounting practices and into the accounting and auditing standards
setting process in general. What concern is there that the FASB "has
been working on a project for more than a decade to tighten the
rules governing when companies must consolidate certain off-balance
sheet 'special purpose entities'"?
5.) In general, how
stringent are accounting and auditing requirements in the U.S.
relative to other countries' standards? Are accounting standards in
other countries set in the same way as in the U.S.? If not, who
establishes standards? What incentives would the U.S. Congress have
to establish a law-based system if they become convinced that our
private sector standards setting practices are inadequate? Are you
concerned about having accounting and reporting standards
established by law?
6.) The article describes
revenue recognition practices at Enron that were based on "noncash
unrealized gains." What standard allows, even requires, this
practice? Why does the author state, "to date, the accounting
standards board has given energy traders almost boundless latitude
to value their energy contracts as they see fit"?
Reviewed By: Judy Beckman,
University of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
From the Free
Wall Street Journal Educators' Reviews for December 20, 2001
TITLE: Enron Debacle Spurs
Calls for Controls
REPORTER: Michael Schroeder
DATE: Dec 14, 2001
PAGE: A4
LINK:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1008282666768929080.djm
TOPICS: Accounting Fraud, Accounting, Accounting Irregularities,
Auditing, Auditing Services, Disclosure, Disclosure Requirements,
Fraudulent Financial Reporting, Securities and Exchange Commission
SUMMARY: In light of
Enron's financial reporting irregularities and subsequent bankruptcy
filing, Capitol Hill and the SEC are considering new measures aimed
at improving financial reporting and oversight of accounting firms.
Related articles discuss additional regulation that is being
considered as a result of this reporting debacle.
QUESTIONS:
1.) Briefly describe Enron's questionable accounting practices. What
accounting changes are being proposed in light of the Enron case?
Certainly this is not the first incidence of questionable financial
reporting. Why is the reaction to the Enron case so extreme?
2.) Discuss Representative
Paul Kanjorski's view of regulation of the accounting profession.
What system of accounting regulation is currently in place? Discuss
the advantages and disadvantages of both private-sector and
public-sector regulation.
3.) What changes are
proposed in the related article, "The Enron Debacle Spotlights Huge
Void in Financial Regulation?" Do these changes strictly relate to
financial reporting issues? Are operational decisions or financial
reporting decisions responsible for Enron's current financial
position?
4.) In the related article,
"Enron May Spur Attention to Accounting at Funds," it is argued that
fund managers will "start taking a more skeptical view of annual
reports or footnotes . . . they don't understand." Are you surprised
by this comment? Do you blame accounting for producing confusing
financial reports or the fund managers for investing in companies
with confusing financial reports?
TITLE: Double Enron Role
Played by Andersen Raises Questions
REPORTER: Michael Schroeder
DATE: Dec 14, 2001
PAGE: A4 LINK:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1008289729306300000.djm
TOPICS: Accounting, Auditing, Auditing Services, Auditor
Independence, Consulting, Internal Auditing
SUMMARY: In addition to
auditing Enron's financial statements, Arthur Andersen LLP also
provided internal-auditing and consulting services to Enron.
Providing additional services to Enron raises questions about
Andersen's independence.
QUESTIONS:
1.) What is independence-in-fact? What is
independence-in-appearance? Did Andersen violate either
independence-in-fact or independence-in-appearance? Why or why not?
2.) If Enron had made good
business decisions and had continued reporting positive financial
results, would we be discussing Andersen's independence with respect
to Enron? Why do we wait until something bad happens to become
concerned?
3.) Do you think providing
internal auditing and consulting services gave Andersen a better
understanding of Enron's business and operations? Should additional
understanding of the business and operations enable Andersen to
provide a "better" audit? What was wrong with Andersen providing
consulting and internal-audit services to Enron?
Reviewed By: Judy Beckman,
University of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
--- RELATED ARTICLES ---
TITLE: The Enron Debacle Spotlights Huge Void in Financial
Regulation
REPORTERS: Michael Schroeder and Greg Ip
PAGE: A1
WSJ ISSUE: Dec 13, 2001
LINK:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1008202066979356000.djm
TITLE: When Bad Stocks
Happen to Good Mutual Funds: Enron Could Spark New Attention to
Accounting
REPORTER: Aaron Lucchetti
PAGE: C1
WSJ ISSUE: Dec 13, 2001
LINK:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1008196294985520800.djm |
Lehman, Ernst, and Andersen Questions for Your Students
Why didn't FAS 121, FAS 142, and SAS 85 apply to the poisoned CDOs with severely
impaired values in Lehman?
Why didn't FAS 121 and SAS 85 apply to the poisoned SPEs of Enron?
Hint
First read about FAS 121 and FAS 142 at
http://www.cogentvaluation.com/pdf/AssetImpairmentTransitioningUnderFAS142.pdf
In any event, Andersen does not appear to have
applied the GAAP requirement to recognize asset impairment (FAS 121). From our
reading of the Powers Report, the put-options written by the SPEs that,
presumably, offset Enron's losses on its merchant investment, were not
collectible, because the SPEs did not have sufficient net assets. (Details on
the SPEs' financial situations should have been available to Andersen.) GAAP (FAS
5) also requires a liability to be recorded when it is probable that an
obligation has been incurred and the amount of the related loss can reasonable
be estimated. The information presently available indicates that Enron's
guarantees on the SPEs and Kopper's debt had become liabilities to Enron. It
does not appear that they were reported as such.
"ENRON: what happened and what we can learn from it," by George J.
Benston and Al L. Hartgraves, Journal of Accounting and Public Policy,
2002, pp. 125-137:
In any event, Andersen does not appear to have
applied the GAAP requirement to recognize asset impairment (FAS 121). From
our reading of the Powers Report, the put-options written by the SPEs that,
presumably, offset Enron's losses on its merchant investment, were not
collectible, because the SPEs did not have sufficient net assets. "ENRON:
what happened and what we can learn from it," by George J. Benston and Al L.
Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-137:
3.3 Independent public accountants (CPAs)
The highly respected firm of Arthur Andersen
audited and unqualifiedly signed Enron's financial statements since 1985.
According to the Powers Report, Andersen was consulted on and participated
with Fastow in setting up the SPEs described above. Together, they crafted
the SPEs to conform to the letter of the GAAP requirement that the ownership
of outside, presumably independent, investors must be at least 3% of the SPE
assets. At this time, it is very difficult to understand why they determined
that Fastow was an independent investor. Kopper's independence also is
questionable, because he worked for Fastow. In any event, Andersen appears,
at best, to have accepted as sufficient Enron's conformance with the minimum
specified requirements of codified GAAP. They do not appear to have realized
or been concerned that the substance of GAAP was violated, particularly with
respect to the independence of the SPEs that permitted their activities to
be excluded from Enron's financial statements and the recording of
mark-to-market-based gains on assets and sales that could not be supported
with trustworthy numbers (because these did not exist). They either did not
examine or were not concerned that the put obligations from the SPEs that
presumably offset declines in Enron's investments (e.g., Rhythms) were of no
or little economic value. Nor did they require Enron to record as a
liability or reveal as a contingent liability its guarantees made by or
though SPEs. Andersen also violated the letter of GAAP and GAAS by allowing
Enron to record issuance of its stock for other than cash as an increase in
equity. Andersen also did not have Enron adequately report, as required,
related-party dealings with Fastow, an executive officer of Enron, and the
consequences to stockholders of his conflict of interest.
4.1 GAAP
We believe that two important shortcomings have
been revealed. First, the US model of specifying rules that must be followed
appears to have allowed or required Andersen to accept procedures that
accord with the letter of the rules, even though they violate the basic
objectives of GAAP accounting. Whereas most of the SPEs in question appeared
to have the minimum-required 3% of assets of independent ownership, the
evidence outlined above indicates that Enron in fact bore most of the risk.
In several important situations, Enron very quickly transferred funds in the
form of fees that permitted the 3% independent owners to retrieve their
investments, and Enron guaranteed the SPEs liabilities. Second, the
fair-value requirement for financial instruments adopted by the FASB
permitted Enron to increase its reported assets and net income and thereby,
to hide losses. Andersen appears to have accepted these valuations (which,
rather quickly, proved to be substantially incorrect), because Enron was
following the specific GAAP rules.
Andersen, though, appears to have violated some
important GAAP and GAAS requirements. There is no doubt that Andersen knew
that the SPEs were managed by a senior officer of Enron, Fastow, and that he
profited from his management and partial ownership of the SPEs he
structured. On that basis alone, it seems that Andersen should have required
Enron to consolidate the Fastow SPEs with its financial statements and
eliminate the financial transactions between those entities and Enron.
Furthermore, it seems that the SPEs established by Fastow were unlikely to
be able to fulfill the role of closing put options written to offset losses
in Enron's merchant investments. If this were the purpose, the options
should and would have been purchased from an existing institution that could
meet its obligations.
Andersen also seems to have allowed Enron to
violate the requirement specified in FASB Statement 5 that guarantees of
indebtedness and other loss contingencies that in substance have the same
characteristics, should be disclosed even if the possibility of loss is
remote. The disclosure shall include the nature and the amount of the
guarantee. Even if Andersen were correct in following the letter, if not the
spirit of GAAP in allowing Enron to not consolidate those SPEs in which
independent parties held equity equal to at least 3% of assets, Enron's
contingent liabilities resulting from its loan guarantees should have been
disclosed and described.
In any event, Andersen does not appear to have
applied the GAAP requirement to recognize asset impairment (FAS 121). From
our reading of the Powers Report, the put-options written by the SPEs that,
presumably, offset Enron's losses on its merchant investment, were not
collectible, because the SPEs did not have sufficient net assets. (Details
on the SPEs' financial situations should have been available to Andersen.)
GAAP (FAS 5) also requires a liability to be recorded when it is probable
that an obligation has been incurred and the amount of the related loss can
reasonable be estimated. The information presently available indicates that
Enron's guarantees on the SPEs and Kopper's debt had become liabilities to
Enron. It does not appear that they were reported as such.
GAAP (FAS 57) specifies that relationships with
related parties "cannot be presumed to be carried out on an arm's-length
basis, as the requisite conditions be competitive, free-market dealings may
not exist". As Executive Vice President and CFO, Fastow clearly was a
"related party". SEC Regulation S-K (Reg. §229.404. Item 404) requires
disclosure of details of transactions with management, including the amount
and remuneration of the managers from the transactions. Andersen does not
appear to have required Enron to meet this obligation. Perhaps more
importantly, Andersen did not reveal the extent to which Fastow profited at
the expense of Enron's shareholders, who could only have obtained this
information if Andersen had insisted on its inclusion in Enron's financial
statements.
4.2 GAAS
SAS 85 warns auditors not to rely on management
representations about onset values, liabilities, and related-party
transactions, among other important items. Appendix B to SAS 85 illustrates
the information that should be obtained by the auditor to review how
management determined the fair values of significant assets that do not have
readily determined market values. We do not have access to Andersen's
working papers to examine whether or not they followed this GAAS
requirement. In the light of the Wall Street Journal report presented above
of Enron's recording a fair value for the Braveheart project with
Blockbuster Inc., though, we find it difficult to believe that Andersen
followed the spirit and possibly not even the letter of this GAAS
requirement.
SAS 45 and AICPA, Professional Standards, vol. 1,
AU sec. 334 specify audit requirements and disclosures for transactions with
related parties. As indicated above, this requirement does not appear to
have been followed.
An additional lesson that should be derived from
the Enron debacle is that auditors should be aware of the ability of
opportunistic managers to use financial engineering methods, to get around
the requirements of GAAP. For example, derivatives used as hedges can be
structured to have gains on one side recorded at market or fair values while
offsetting losses are not recorded, because they do not qualify for
restatement to fair-value. Another example is a loan disguised as a sale of
a corporation's stock with guaranteed repurchase from the buyer at a higher
price. If this subterfuge were not discovered, liabilities and interest
expense would be understated. Thus, as auditors have learned to become
familiar with computer systems, they must become aware of the means by which
modern finance techniques can be used to subvert GAAP.
"What Is Accounting Pornography?" by David Albrecht, The Summa,
March 9, 2010 ---
http://profalbrecht.wordpress.com/2010/03/09/what-is-accounting-pornography/
Jensen Comment
The courts cannot define "pornography" except as it depicts nude children and/or
eroticism featuring underage children.
Hence if David's definition of "accounting pornography" is to stand court
tests it must feature children in accounting acts like dirty debits or childish
credits.
Hi David,
Accounting Pornography breaks down in to three categories --- solos, couples,
and groupies.
At the end of her blog post Francine suggests that Repos 105 OBSF ploys should
perhaps fall under the Groupie Category (her word is Fraternité).
“Liberté, Egalité,
Fraternité: Big Lehman Brothers Troubles For Ernst & Young,” By Francine
McKenna, re; The Auditors, March 15, 2010 ---
http://retheauditors.com/2010/03/15/liberte-egalite-fraternite-lehman-brothers-troubles-for-ernst-young-threaten-the-big-4-fraternity/
Begin Quote (about how top financial executives at
Lehman were former E=&Y auditors of Lehman)
That kind of comfort and
confidence in your client and their technical competence comes from a long,
lucrative relationship. But it must have been more than that. It could not have
possibly come from confidence in the CFO suite, given its revolving door and the
lack of accounting interest and aptitude in later years.
No.
Ernst and Young’s confidence in Lehman’s CFO leadership was rooted in
fraternity. Both Christopher O’Meara and
David Goldfarb,
his predecessor who was CFO from 2000 to 2004, are Ernst and Young alumni.
Prior to joining Lehman Brothers in 1994, Mr. O’Meara worked as a senior
manager in Ernst & Young’s Financial Services practice. Prior to joining Lehman
Brothers in 1993, Mr. Goldfarb served as the Senior Partner of the Ernst &
Young’s Financial Services practice, where he worked from 1979 to 1993.
Mr. Goldfarb, the former EY
Senior Partner, was the Lehman CFO who created the Repo 105 transactions.
End Quote
Jensen Comment
But the Lehman-E&Y Fraternity was merely a local chapter of the larger National
Fraternity. The National Fraternity appears to have been among the FASB, the
Credit Rating Agencies (read that Moody’s) and Big Four alumni working in all
the troubled Wall Street Banks. When drowning in the poison of AAA-rated CDO
Bond Investments that should’ve been rated as junk, the Repo 105 wash sale ploys
were invented to keep the poisoned bond investments off the balance sheet at
fair values along with the wash sale debt obligation to buy them back about a
week after a Wall Street bank’s books closed for the year.
Frank
Partnoy and Lynn Turner proclaim these fiction transactions are all part of the
“fiction” balance sheets of Wall Street banks ---
http://www.rooseveltinstitute.org/sites/all/files/Off-Balance Sheet
Transactions.pdf
The video is at
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Fraternity brothers at the FASB apparently joined in this groupie by making FAS
140 mushy enough to make Repo 105 deceptive sales appear to be legitimate.
Lehman could sell a poisoned CDO bond the day before the books closed as long as
the Repo 105 sales contract had an iron-clad clause to buy the poisoned CDO bond
back at a higher price in about a week. This was a costly Hail Mary effort to
hide the poisoned CDO bonds from the balance sheet and “pretend” with an
orgiastic gasp that the poisoned bonds were sold at a phony price immensely
greater than true fair value of junk.
And yet the FASB continues to stand before the congregation and preach the
virtues of “Fair Value Accounting.”
The FASB makes a huge deal in FAS 133 and FAS 157 about booking financial
contracts at fair value, but in FAS 140 allows its fraternity brothers on Wall
Street (and their Big Four auditors) not to even have to disclose billions in
Repo 105 buy-back obligations. Even an Accounting 101 student can tell the FASB
that this wasn’t really a sale, and even if it was a sale the obligation to buy
it back should’ve been booked as debt.
Francine had the right idea about this being a groupie. But she only hints at a
local chapter of the groupie. I take that back. She does provide the slightest
hint of a National Chapter of that fraternity.
“Liberté, Egalité,
Fraternité: Big Lehman Brothers Troubles For Ernst & Young,” By Francine
McKenna, re; The Auditors, March 15, 2010 ---
http://retheauditors.com/2010/03/15/liberte-egalite-fraternite-lehman-brothers-troubles-for-ernst-young-threaten-the-big-4-fraternity/
Begin Quote (actually she’s quoting the Examiner’s
Report)
Lehman initiated its Repo 105 program sometime
in 2001, soon after SFAS 140 took effect in September 2000 Lehman’s outside
auditors and lawyers participated in the firm’s review of SFAS 140. Indeed,
Lehman vetted the concept of a SFAS 140 repo transaction with its outside
auditor, before the firm formalized a Repo 105 accounting policy and
approved Repo 105 transactions for use by firm personnel.
(Bankruptcy Examiner’s Report
V3, page 765)
End Quote
What’s ironic is that Lehman could not even find a shyster law firm in the U.S.
to bless its Repo 105 transactions. If you can’t get a U.S. law firm to lie for
you it must really be a rotten lie. Lehman and E&Y had to go all the way to
England to find a shyster law firm.
"Repos Played a Key Role in Lehman's Demise: Report Exposes Lack of
Information And Confusing Pacts With Lenders," by Suzanne Craig and Mike Spector,
The Wall Street Journal, March 13, 2010 ---
http://online.wsj.com/article/SB20001424052748703447104575118150651790066.html#mod=todays_us_money_and_investing
The rare look into the
repo market embedded in the report comes 18 months after Lehman Brothers
collapsed in the U.S.'s largest bankruptcy filing. While top Lehman executives
were quick to blame the real-estate market for their woes, the exhaustive report
singles out senior executives and auditor Ernst & Young for serious lapses.
The report exposed for
the first time what appears to be an accounting slight of hand known as a Repo
105 transaction, where Lehman was able to book what looked like an ordinary
asset for cash as an out-and-out sale, drastically reducing its leverage and
making its financial picture look better than it really was. The transactions
often were done in flurries in a financial quarter's waning days, before Lehman
reported earnings.
Four days prior to the
close of the 2007 fiscal year, Jerry Rizzieri, a member of Lehman's fixed-income
division, was searching for a way to meet his balance-sheet target, according to
the report. He wrote in an email: "Can you imagine what this would be like
without 105?"
A day before the close of
Lehman's first quarter in 2008, other employees scrambled to make balance-sheet
reductions, the report said. Kaushik Amin, then-head of Liquid Markets, wrote to
a colleague: "We have a desperate situation, and I need another 2 billion from
you, either through Repo 105 or outright sales. Cost is irrelevant, we need to
do it."
Marie Stewart, the former
global head of Lehman's accounting policy group, told the examiner the
transactions were "a lazy way of managing the balance sheet as opposed to
legitimately meeting balance-sheet targets at quarter end."
Lehman's use of this
accounting technique goes back to the start of the decade when Lehman business
units from New York and London met to discuss how the firm could manage its
balance sheet using accounting rules that had taken effect in September 2000.
Lehman soon created the "Repo 105" maneuver: Because assets the firm moved
amounted to 105% or more of the cash it received in return, Lehman could treat
the transactions as sales and remove securities inventory that otherwise would
have to be kept on its balance sheet.
Because no U.S. law firm
would bless the transaction, Lehman got an opinion letter from London-based law
firm Linklaters. That letter essentially blessed using the maneuver for Lehman's
European broker-dealer under English law. If one of Lehman's U.S. entities
needed to engage in a Repo 105 transaction, the firm moved the securities to its
European arm to conduct the deal on the U.S. entity's behalf, the report found.
That is likely why the counterparties on the repo transactions were largely a
group of seven non-U.S. banks. These included Germany's Deutsche Bank AG,
Barclays PLC of the U.K. and Japan's Mitsubishi UFJ Financial Group.
In a statement, a
Linklaters spokeswoman said the report "does not criticize" the legal opinions
it gave Lehman "or suggest or say they were wrong or improper." The law firm
said it was never contacted during the investigation.
Jensen Comment
Although Lehman could not find a shady U.S. law firm to "bless the transaction,"
Ken Lay at Enron managed to find a shady U.S. law firm to bless the Raptors'
transactions after Sherron Watkins (an Enron executive) sent her infamous
whistle blowing memo to both Ken Lay and to Andersen executives in Chicago.---
http://www.trinity.edu/rjensen/FraudEnron.htm
Yogi Berra says Lehman following Enron bankruptcies this
is “Déjà vu all over again.”
Francine Does Her Homework
"Send Lawyers, Guns And Money… The Big 4 And Their Litigation," by
Francine McKenna, re: The Auditors, March 2, 2010 ---
http://retheauditors.com/2010/03/02/send-lawyers-guns-and-money-the-big-4-and-their-litigation/
Following the big lawsuits against the audit firms
is fairly easy. Updates on subprime and financial crisis suits typically
hit my Google Alerts. There area few more like the Banco Espiritu Santo v.
BDO Seidman case and the case against PwC re: Satyam that have their very
own customized alerts. And
Kevin LaCroix
can be counted on to pick up the odd securities class action suit naming an
auditor for sport and he also tracks all of the Madoff related filings.
Every once and a while I depend on the kindness of handsome strangers to
catch the latest update like when
Francis Pileggi
told us the what happened in Delaware Chancery Court with Deloitte’s suit
against accused inside trader and their own ex-Vice chairman Tom Flanagan.
The big lawsuits – the ones that accuse the firms
of accounting malpractice or various federal securities law violations –
have been chronicled on this site and by fellow writers such as
James Peterson
ad infinitum. The accounting industry’s response to
these threats is to ask for liability caps. As if we don’t have enough
moral hazard in the financial system with “too big to fail,” the
auditors want to institutionalize their insulation from accountability to
their clients, the shareholders, with a policy of “too few to pay for
their mistakes.”
If only the lawsuits claiming lack of audit prowess
were the only ones they had to worry about. Unfortunately for them, and for
their “partners” who go along for the ride leaving the management of
“matters” up to senior leadership acting as caretakers for the 5-10 years
they are at the top of the heap, there are so many more suits that just show
what lousy managers they are.
Here are some of the more interesting lawsuits and
legal matters facing each of the Big 4.
Deloitte
DOJ Defends Document Request Targeting Deloitte
The U.S. Department of Justice has
turned to a federal appeals court in Washington, D.C., in the hope
of forcing the accounting firm Deloitte LLC to turn over tax-related
documents that government lawyers say are
not protected by the work product privilege…As part of a civil tax
suit in federal district court in Louisiana, the government is
seeking certain documents that Dow turned over to Deloitte during
the firm’s audit of the company.
[DOJ Tax Division lawyer Judith] Hagley
on Friday argued that the work product privilege does not apply to
the documents Dow turned over to Deloitte because the documents were
prepared during what Hagley said was the ordinary course of business
– and not prepared for litigation purposes.
Ex-Deloitte Exec Settles Insider Trading Charges
A former Deloitte tax professional has
agreed to pay approximately $144,000 to settle insider trading
charges with the Securities and Exchange Commission.
The SEC filed settled insider trading
charges against four individuals, including John A. Foley, who
served as an employee benefits specialist at Deloitte between July
2005 and May 2007. The others who settled the SEC charges were Aaron
M. Grassian, Timothy L. Vernier, and Bradley S. Hale. They were
accused of participating in insider trading in the securities of
four public companies — Crocs, Inc., YRC Worldwide, Inc.,
Spectralink Corporation and SigmaTel, Inc. — over a 22-month period,
yielding illegal profits totaling $210,580.62.
As
GoingConcern.com told us:
Despite the high standard that Deloitte
holds you to — higher than the SEC, PCAOB, and the AICPA, we might
add — this happened, “Based on our own reviews and that of the PCAOB,
we believe compliance with our independence policies is not what it
should be, and the PCAOB has, in fact, questioned our commitment to
adhere to our own policies. This is clearly not acceptable.”
Our contributor Francine McKenna
reminded us that Deloitte didn’t think too much of the PCAOB’s
report from last year, “They [are] the same firm that famously
responded to the PCAOB’s latest inspection report, ‘How
dare you second guess us?‘”
Although Deloitte won a
preliminary victory against Flanagan, they
obviously still have a lot of work to do to improve their independence
compliance function and are still subject to PCAOB and
SEC enforcement actions and potential
sanctions.
In the meantime, they did
settle Parmalat,
but now they’re named in
several suits related to the Merrill Lynch
acquisition by Bank of America and the Bear Stearns failure. Deloitte
is the only Big 4 firm to have escaped any Madoff feeder fund exposure
even though they are supposedly the
number one choice of hedge funds.
Ernst & Young
Ernst & Young has its own inside trader case to go
along with
the ones we saw a few months ago and the rest of
the SEC sanctions they’re collecting.
A former Ernst & Young LLP partner was sentenced
to a year and a day in prison on Monday after he
was convicted last year of fraud charges in an insider-trading scheme
where he allegedly tipped a Pennsylvania broker about pending corporate
takeovers.
At a hearing, U.S. District Judge Miriam
Goldman Cedarbaum in Manhattan sentenced James Gansman, a lawyer who
resigned from Ernst & Young in October 2007. He was convicted of six
counts of securities fraud, but acquitted of conspiracy and three
securities fraud counts in May 2009.
Ernst & Young Auditors Accused in Investment Case
The Securities and Exchange Commission
has instituted public administrative proceedings against two former
Ernst & Young auditors who failed to uncover the misappropriation of
client funds by an investment advisor they were auditing.
The proceedings were instituted against
two CPAs: Gerard A.M. Oprins, 50, who had been a partner in Ernst &
Young’s financial services practices group since 1995; and Wendy
McNeely, 33, a former audit manager in E&Y’s financial services
group who now works for another firm.
In addition to the myriad of suits relating to the
Lehman collapse and their
Madoff feeder fund exposure, Ernst and Young
recently went through a terrible phase focused on their
Bally’s sanctions, the
Akai scandal and
another fraud in Hong Kong.
The EY list includes the usual employment
discrimination lawsuits that all of the firms face, in particular given the
significant cuts they have all made to their ranks during the last two
years. Ernst & Young also has
several filings related to writedowns at Regions
Financial Corporation. Regions is
the largest audit client of Ernst & Young LLP’s Birmingham office.
Back in 2003, that office’s largest client had been
HealthSouth Corp., which turned out to be a massive fraud. Tough luck…
The Regions board and management team, as well as
Ernst and Young, are accused of “continued
reporting a grossly inflated value of the goodwill attributable to the
AmSouth acquisition,” which later caused a large $6 billion write-down equal
to more than 60 percent of the total acquisition, according to
the lawsuit.
Bankruptcy cases are some of the biggest
moneymakers for the firms now globally but can become contentious.
MP calls for probe into Nortel jobs
A MP has written to the insolvency
regulator calling for an investigation into the actions of Nortel’s
administrator Ernst & Young (E&Y).
“Ernst & Young’s handling of this
insolvency case has been woeful and it would appear that they may have
failed to pay appropriate regard to redundancy and employment
legislation,” he said.
Next I’ll summarize which cases KPMG and
PricewaterhouseCoopers are spending their legal dollars on.
Francine
Bob Jensen's threads on public accounting firm litigations are at
http://www.trinity.edu/rjensen/fraud001.htm
Question
Were the Ernst & Young's auditors negligent or cleverly deceived or complicit in
the deception by the Lehman Brothers?
More from the examiner’s report:
Lehman never publicly disclosed its use of Repo 105
transactions, its accounting treatment for these transactions, the
considerable escalation of its total Repo 105 usage in late 2007 and into
2008, or the material impact these transactions had on the firm’s publicly
reported net leverage ratio. According to former Global Financial Controller
Martin Kelly, a careful review of Lehman’s Forms 10‐K and 10‐Q would not
reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its
Repo 105 practice even though Kelly believed “that the only purpose or
motive for the transactions was reduction in balance sheet”; felt that
“there was no substance to the transactions”; and expressed concerns with
Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers
– Erin Callan and Ian Lowitt – advising them that the lack of economic
substance to Repo 105 transactions meant “reputational risk” to Lehman if
the firm’s use of the transactions became known to the public. In addition
to its material omissions, Lehman affirmatively misrepresented in its
financial statements that the firm treated all repo transactions as
financing transactions – i.e., not sales – for financial reporting purposes.
"Report
Details How Lehman Hid Its Woes as It Collapsed," by Michael de la Merced and
Andrew Ross Sorkin, The New York Times, March 11, 2010 ---
http://www.nytimes.com/2010/03/12/business/12lehman.html?src=me
It is the Wall Street
equivalent of a coroner’s report — a
2,200-page document
that lays out, in new
and startling detail, how
Lehman Brothers
used accounting sleight of hand to conceal
the bad investments that led to its undoing.
The report, compiled by an examiner for the bank,
now bankrupt, hit Wall Street with a thud late Thursday. The 158-year-old
company, it concluded, died from multiple causes. Among them were bad
mortgage holdings and, less directly, demands by rivals like JPMorgan Chase
and Citigroup, that the foundering bank post collateral against loans it
desperately needed.
But the examiner, Anton R. Valukas, also for the
first time, laid out what the report characterized as “materially
misleading” accounting gimmicks that Lehman used to mask the perilous state
of its finances. The bank’s bankruptcy, the largest in American history,
shook the financial world. Fears that other banks might topple in a cascade
of failures eventually led Washington to arrange a sweeping rescue for the
nation’s financial system.
According to the report, Lehman used what amounted
to financial engineering to temporarily shuffle $50 billion of troubled
assets off its books in the months before its collapse in September 2008 to
conceal its dependence on leverage, or borrowed money. Senior Lehman
executives, as well as the bank’s accountants at Ernst & Young, were aware
of the moves, according to Mr. Valukas, the chairman of the law firm Jenner
& Block and a former federal prosecutor, who filed the report in connection
with Lehman’s bankruptcy case.
Richard S. Fuld Jr., Lehman’s former chief
executive, certified the misleading accounts, the report said.
“Unbeknownst to the investing public, rating
agencies, government regulators, and Lehman’s board of directors, Lehman
reverse engineered the firm’s net leverage ratio for public consumption,”
Mr. Valukas wrote.
Mr. Fuld was “at least grossly negligent,” the
report states, adding that Henry M. Paulson Jr., who was then the Treasury
secretary, warned Mr. Fuld that Lehman might fail unless it stabilized its
finances or found a buyer.
Lehman executives engaged in what the report
characterized as “actionable balance sheet manipulation,” and “nonculpable
errors of business judgment.”
The report draws no conclusions as to whether
Lehman executives violated securities laws. But it does suggest that enough
evidence exists for potential civil claims. Lehman executives are already
defendants in civil suits, but have not been charged with any criminal
wrongdoing.
A large portion of the nine-volume report centers
on the accounting maneuvers, known inside Lehman as “Repo 105.”
First used in 2001, long before the crisis struck,
Repo 105 involved transactions that secretly moved billions of dollars off
Lehman’s books at a time when the bank was under heavy scrutiny.
According to Mr. Valukas, Mr. Fuld ordered Lehman
executives to reduce the bank’s debt levels, and senior officials sought
repeatedly to apply Repo 105 to dress up the firm’s results. Other
executives named in the examiner’s report in connection with the use of the
accounting tool include three former Lehman chief financial officers:
Christopher O’Meara, Erin Callan and Ian Lowitt.
Patricia Hynes, a lawyer for Mr. Fuld, said in an
e-mailed statement that Mr. Fuld “did not know what those transactions were
— he didn’t structure or negotiate them, nor was he aware of their
accounting treatment.”
Charles Perkins, a spokesman for Ernst & Young,
said in an e-mailed statement: “Our last audit of the company was for the
fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman’s
financial statements for that year were fairly presented in accordance with
Generally Accepted Accounting Principles (GAAP), and we remain of that
view.”
Bryan Marsal, Lehman’s current chief executive, who
is unwinding the firm, said in a statement that he was evaluating the report
to assess how it might help in efforts to advance creditor interests.
Repos, short for repurchase agreements, are a
standard practice on Wall Street, representing short-term loans that provide
sometimes crucial financing. In them, firms essentially lend assets to other
firms in exchange for money for short periods of time, sometimes overnight.
But Lehman used aggressive accounting in its Repo
105 transactions: it appears to have structured transactions such that they
sold securities at the end of the quarter, but planned to buy them back
again days later. These assets were mostly illiquid real estate holdings,
meaning that they were hard to sell in normal transactions.
Continued in article
Jensen Comment
The links to Volumes 1-9 of the Examiner's Report ---
http://dealbook.blogs.nytimes.com/2010/03/11/lehman-directors-did-not-breach-duties-examiner-finds/#reports
(Scroll Down)
“A Lehman senior vice
president raised questions about the propriety of these transactions as early as
May 2008, but the report said that the accountants at Ernst & Young “took no
steps to question or challenge the non-disclosure of its use of $50bn of
temporary, off balance sheet transactions” ---
http://www.ft.com/cms/s/0/1be0aca2-2d79-11df-a262-00144feabdc0.html?nclick_check=1
Regarding FIN 41
Here’s a somewhat disturbing action by the FASB (caving in to Wall Street banks)
--
http://edmontonobservers.net/fasb-eases-up-on-repo-funding-source/
March 14, 2010 reply from Bob Jensen
Hi Jim,
Your link word wrapped badly, so I snipped it to
http://snipurl.com/petersonlehman
You seem to ignore the many serious internal control weakness that Section
404 audits uncovered, e.g. at Kodak. But that's another matter.
No matter how we take the Examiner's report and the
possible politics involved, it all boils down to a naïve investor (perhaps a
first-year accounting student) looking up at the Lehman's new Repo 105 suit
of clothes and exclaiming the "Emperor's not wearing a stitch of clothes."
A standard setter on the IASB sent me a private
message this morning stated the following"
“As for Repo 105,
I did read Volume 1 of the report. Common sense tells me that if I “sell”
something but have a binding obligation to buy it back, I really didn’t sell
it – no matter what the technicalities of an accounting rule might say.”
This may be as simple as the Accounting 101 cheating
that Worldcom kept from its Board and the public.
And Andersen's sorry audit of Worldcom was a simple
violation of Auditing 101.
Let's not make these Repo 105 transactions too
complicated as the Emperor rides by in his new suit of Repo 105 clothes ---
http://en.wikipedia.org/wiki/Emperor%27s_New_Clothes
The Repo 105 uproar boils down to the simplicity of
Accounting 101.
And the Ernst & Young audit is a violation of Auditing 101 no matter what
rules are donned by the Emperor.
Bob Jensen
"Calif
County Accuses Lehman Executives, Auditor Of Fraud In Suit," CNN, November
13, 2008 ---
Click Here
http://money.cnn.com/news/newsfeeds/articles/djf500/200811131743DOWJONESDJONLINE000915_FORTUNE5.htm
The San Mateo County (Calif.) Investment Pool sued
executives of bankrupt Lehman Brothers Holdings Inc. (LEHMQ)
and their accountants, accusing them of fraud, deceit
and misleading accounting practices that led to the loss
of more than $150 million in county funds.
The suit, filed in San Francisco Superior Court, said
executives of the former Wall Street investment bank
made repeated public statements about its financial
strength while privately scrambling to save it from
collapse.
The suit names former Lehman Chief Executive Richard S.
Fuld Jr., former Chief Financial Officers Christopher M.
O'Meara and Erin Callan, former President Joseph M.
Gregory, certain directors and Ernst & Young, Lehman's
auditor.
It accused Lehman of hiding its exposure to
mortgage-related losses while reporting record profits
for fiscal year 2007 and giving bonuses to its
executives.
"The defendants focused their efforts on trying to save
their company and their jobs with little or no regard to
how their egregious actions harmed those who in good
faith invested in Lehman Brothers," said San Mateo
County Counsel Michael Murphy. "In our view, their
actions were blatantly illegal."
The San Mateo County Investment Pool consists of the
county, school districts, special districts and other
public agencies in the county.
San Mateo County Supervisors Richard Gordon and Rose
Jacobs Gibson called for a federal investigation of the
allegations in the suit, and Supervisor Jerry Hill,
newly elected to the state Assembly, will request
hearings on how many California public entities face
similar losses.
Representatives of Lehman and of Ernst & Young were not
immediately available to comment.
This is but one of many lawsuits and criminal
investigations to be faced Ernst & Young and the other
large auditing firms. Survival of the Big Four will be
precarious ---
http://www.trinity.edu/rjensen/Fraud001.htm
|
|
March 11, 2010 reply from
LynnETurne@aol.com
I’m forwarding this message from Lynn Turner without comment,
because I’m in a bit over my head on this without having studied the
nine-volume set of the Examiner’s report (2,200 pages). In fairness, I will
probably still be in over my head after reading the 2,200 pages.
Lynn Turner is a former Coopers partner who became SEC Chief
Accountant ---
http://www.s-ox.com/dsp_getSpotlightDetails.cfm?CID=2611
He’s one of my professional heroes, and I’ve enjoyed on occasion
sharing a speaking platform with him.
Robert E. (Bob) Jensen
Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
Tel. 603-823-8482
www.trinity.edu/rjensen
From:
LynnETurne@aol.com [mailto:LynnETurne@aol.com]
Sent: Friday, March 12, 2010 2:07 PM
To: Jensen, Robert
Subject: Fwd: The Lehman Examiners Report on Auditorfs
From: eorenstein@financialexecutives.org
To: lynneturne@aol.com
Sent: 3/12/2010 11:56:58 A.M. Mountain Standard Time
Subj: RE: The Lehman Examiners Report on Auditorfs
Lynn, are you on Prof. Bob Jensen’s listserve (technically, it’s an
accounting listserve out of Loyola University, but Bob Jensen is the most
frequent poster/unofficial chairman of that listserve, so to speak). There
have been numerous posts on their listserve today on that topic (the AECM
listserve, and the CPAs-L listserve), they would probably be interested in
the info you have provided here, including your attachment, you may want to
forward this material to Bob at
rjensen@trinity.edu if you’d like him to share it. Thank you. Regards,
Edith
From:
LynnETurne@aol.com [mailto:LynnETurne@aol.com]
Sent: Friday, March 12, 2010 1:44 PM
To: lynneturne@aol.com
Subject: The Lehman Examiners Report on Auditorfs
Below is the discussion regarding the independent auditors from the
Examiner's report on Lehman. It provides and excellent case study for
students as it properly highlights how the courts and SEC have consistently
said auditors cannot merely hide behind "GAAP." This concept is also
engrained in the language of Sarbanes Oxley which requires executives to
sign off on the fair presentation of financial statements without mentioning
GAAP.
The report also states the auditor did not inform the audit committee of the
transactions in question. There have been other enforcement cases in which
it was found the auditor did not inform the audit committee of questionable
accounting practices. The PCAOB has done work in past years on the standard
for communications between the auditor and audit committee but has never
updated that standard.
From the Lehman Examiner Report - Volume 3, beginning page 945:
"(3) Lehman’s Board of Directors
Without exception, former Lehman directors were unaware of Lehman’s
Repo
105 program and transactions.3642
As discussed in greater detail below, Lehman’s own Corporate Audit group led
by Beth Rudofker, together with Ernst & Young, investigated allegations
about balance
sheet substantiation problems made in a May 16, 2008
“whistleblower” letter sent to
senior management by Matthew Lee.3643 On June 12, 2008, during the
investigation, Lee
informed Ernst & Young about Lehman’s use of $50 billion of Repo 105
transactions in
the second quarter of 2008.3644 At a June 13, 2008 meeting,
Ernst & Young failed to
disclose that allegation to the Board’s Audit Committee.3645
Former Lehman director Cruikshank recalled that he made very clear he wanted
a full and thorough investigation into each allegation made by Lee, whether
the allegation was contained in Lee’s May 16, 2008 letter or raised by Lee
in the course of
the investigation.3646 Another former Lehman director, Berlind, similarly
stated that the
Audit Committee explicitly instructed Lehman’s Corporate Audit Group and
Ernst &
Young to keep the Audit Committee informed of all of Lee’s allegations.3647
Berlind also
said that he would have wanted to know about Lehman’s Repo 105 program and
that if
he had known about Lehman’s Repo 105 transactions, he would have asked
Lehman’s
auditors to test the transactions to ensure they were appropriate.3648 Upon
learning from
the Examiner the volume of Repo 105 transactions at quarter‐end
in late 2007 and 2008,
Sir Christopher Gent said that he believed the volume mandated disclosure to
the Audit
Committee and further investigation.3649
Dr. Kaufman, on the other hand, stated that he would have wanted to know
about Repo 105 transactions only if they were “huge” and fraudulent, by
which he
meant in violation of specific accounting rules or in violation of the
law.3650 Dr.
Kaufman did not believe that $50 billion in Repo 105 transactions was
significant even if
that volume changed Lehman’s net leverage ratio by approximately two
points.3651 Dr.Kaufman considered a four or five point change in the net
leverage ratio to be
significant.3652
In late 2007 and 2008, management made numerous presentations to the Board
regarding balance sheet reduction and deleveraging; in no case was the use
of Repo 105
transactions disclosed in those presentations.3653
i) Ernst & Young’s Knowledge of Lehman’s Repo 105 Program
During several Rule 30(b)(6)‐type3654
interview sessions, the Examiner
interviewed members of Ernst & Young’s Lehman audit team regarding Ernst &
Young’s knowledge of and involvement in Lehman’s Repo 105 program.
(1) Ernst & Young’s Comfort with Lehman’s Repo 105 Accounting
Policy
The Examiner interviewed Ernst & Young’s lead partner on the Lehman audit
team, William Schlich, regarding Lehman’s Repo 105 program. According to
Schlich,
Ernst & Young had been aware of Lehman’s Repo 105 policy and
transactions for many
years.3655
Consistent with the statements of Lehman’s John Feraca (Secured Funding
Desk), Schlich stated that Lehman introduced its Repo 105 Accounting Policy
on the
heels of the FASB’s promulgation of SFAS 140.3656
During that time, Ernst & Young
“discussed” the Repo 105 Accounting Policy (including Lehman’s structure for
Repo
105 transactions) and Ernst & Young’s team had a number of additional
conversations
with Lehman about Repo 105 over the years.3657 However, according to Schlich,
Ernst &Young had no role in the drafting or preparation of Lehman’s Repo 105
Accounting
Policy.3658
Schlich stated definitively that Ernst & Young had no advisory role with
respect
to Lehman’s use of Repo 105 transactions and that Ernst & Young did not
“approve”
the Accounting Policy.3659 Rather, according to Schlich, Ernst & Young
“bec[a]me
comfortable with the Policy for purposes of auditing financial
statements.”3660
Following “consultation and dialogue” about the proper interpretation and
application of SFAS 140, Ernst & Young “clearly. . .concurred with Lehman’s approach”
to SFAS 140 and subsequent literature by FASB on the issue of “control” of
assets
involved in a repo transactions.3661 Ernst &
Young’s view, however, was not based upon
an analysis of whether actual Repo 105 transactions complied with SFAS
140.3662 Rather,
Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely
“theoretical.”3663 In other words, Ernst & Young solely assessed Lehman’s
understanding of the requirements of SFAS 140 in the abstract and as
reflected in its
Accounting Policy; Ernst & Young did not opine on the propriety of the
transactions as a balance sheet management tool.3664 Ernst & Young did not
review the Linklaters letter,
referenced in the Accounting Policy Manual.3665
According to Martin Kelly, it was not unusual for him to discuss various
issues,
including Repo 105, with Ernst & Young.3666 Indeed, Kelly recalled
specifically speaking
with Schlich about Repo 105 transactions soon after becoming Financial
Controller on
December 1, 2007, in an effort to learn more about the program and “to
understand
[Ernst & Young’s] approach before talking to Callan.”3667
Kelly “wanted to ensure that Ernst & Young analyzed the program in the same
way that [Marie] Stewart [Global Head of Accounting Policy] had analyzed
it.”3668
Kelly’s conversations with Ernst & Young focused on the accounting treatment
of Repo
105 transactions.3669 According to Kelly,
Ernst & Young “was comfortable with the
treatment under GAAP for the same reasons that Lehman was comfortable.”3670
Kelly also discussed with Ernst & Young Lehman’s inability to get a true
sale opinion under United States law for Repo 105 transactions.3671 Kelly
could not recall whether he
discussed with Ernst & Young his discomfort with Lehman’s Repo 105
program.3672
(2) The “Netting Grid”
Throughout 2007, Lehman maintained a document entitled “Accounting Policy
Review Balance Sheet Netting and Other Adjustments,” known colloquially
among
Lehman’s Accounting Policy and Balance Sheet Groups, as well at Ernst &
Young, as
the “Netting Grid.” The Netting Grid identified and described various
balance sheet
netting mechanisms employed by Lehman: one such balance sheet mechanisms was
Lehman’s use of Repo 105 transactions.3673
Lehman provided the Netting Grid to Ernst & Young at least in August 2007
(the
close of Lehman’s third quarter 2007) and in November 2007 (the close of
Lehman’s
fiscal year 2007).3674 Notably, the Netting Grid provided by Lehman to Ernst
& Young in
August 2007 and November 2007 only contained Repo 105 volumes from November
30, 2006 and February 28, 2007.3675 Schlich was unaware whether Ernst &
Young asked
Lehman to provide its second quarter 2007 and third quarter 2007 Repo 105
usage
figures or a forecast of Lehman’s fourth quarter 2007 Repo 105 numbers.3676
Ernst & Young reviewed the Netting Grid, analyzed the various balance sheet
netting mechanisms identified in the Netting Grid, and used the document in
connection with its 2007 year‐end audit of
Lehman.3677 According to Schlich,
Ernst &
Young, as part of its review of Lehman’s Netting Grid, approved of Lehman’s
internal Repo 105 Accounting Policy only, and did not pass upon the actual
practice.3678
The Netting Grid described the transactions and United States GAAP reference
as follows: “Under certain conditions that meet the criteria described in
paragraphs 9
and 218 of SFAS 140,
Lehman policy permits reverse repo and repo agreements to be
recharacterized as purchases and sales of inventory.”3679
With respect to Lehman’s use
of Repo 105 transactions to reduce its net balance sheet, the Netting Grid
sets forth the conclusion that Lehman’s “current practice [for Repo 105] is
correct.”3680 Schlich noted
that this conclusion about the Repo 105 practice was Lehman’s, not Ernst &
Young’s.3681
To test Lehman’s conclusion, however, Ernst & Young “reviewed how Lehman
applied
the control provisions of the accounting rules.”3682
Ernst & Young’s review, however, applied only to the accounting basis for
these
transactions, not to their volume or purpose. Specifically, Ernst & Young’s
review and
analysis of Lehman’s Repo 105 program did not account for the volumes of
Repo 105
transactions Lehman undertook at quarter‐end.3683
Indeed, Schlich was unable to
confirm or deny the volumes of Repo 105 transactions Lehman undertook at
Lehman’s
fiscal year‐end 2007, or in the first two quarter‐ends
of 2008.3684 Nor was Schlich able to
confirm or deny that Lehman’s use of Repo 105 transactions was increasing in
late 2007
and into mid 2008.3685
(a) Quarterly Review and Audit
Through Schlich, Ernst & Young maintained that its duties as Lehman’s
auditor
required it to ensure that transactions were accounted for correctly (i.e.,
that they
complied with accounting rules) and that Lehman’s financial disclosures were
not materially misstated.3686 According to Schlich, Ernst & Young’s audit
did not require
Ernst & Young to consider or review the volume or timing of Repo 105
transactions.3687
Accordingly, as part of its year‐end
2007 audit, Ernst & Young did not ask Lehman
about any directional trends, such as whether its Repo 105 activity was
increasing
during fiscal year 2007.3688 Notably, as part of its quarterly review
process, Ernst &
Young did not audit any of Lehman’s Repo 105 transactions.3689
(3) Ernst & Young Would Not Opine on the Materiality of
Lehman’s Repo 105 Usage
Ernst & Young, through Schlich,
was unwilling to
comment to the Examiner on
the materiality of the volume of Lehman’s quarter‐end
Repo 105 transactions.3690 Asked
whether, as part of its responsibility to ensure Lehman’s financial
statements were not
materially misstated,
Ernst & Young should
have considered the possibility that strict technical adherence to SFAS 140
or any other specific accounting rule could nonetheless lead to a material
misstatement in Lehman’s publicly‐reported
financial statements,
Schlich refrained from comment.3691
When pressed further, Schlich stated that the volume of any particular
transaction impacts neither the question of whether accounting rules are
applied correctly, nor the question of whether a financial statement is
materially misleading.3692
However, Schlich eventually acknowledged that “when you look at a balance
sheet
issue, volume is a factor.”3693
Notably,
the definition of “materiality” contained in a “walk‐through”
document
related to Ernst & Young’s 2007 fiscal year‐end
audit of Lehman was: “any transaction
that would move Lehman’s firm‐wide
net leverage by 0.1 or more.”3694 This
definition
reflected “Lehman’s determination of a materiality threshold” in connection
with
Lehman’s own criteria for when to consider reopening and adjusting its
balance
sheet.3695
When Schlich was asked what level of impact to Lehman’s firm‐wide
net assets
Ernst & Young would have considered “material,” Schlich replied that Ernst &
Young
did not have a hard and fast rule defining materiality in the balance sheet
context, and
that, with respect to balance sheet issues, “materiality” depends upon the
facts and
circumstances.3696 Schlich agreed that Lehman made no specific disclosures
about Repo 105 transactions in its Forms 10‐K and
Form 10‐Q,
including the MD&A section.3697
Schlich believed, however, that Lehman’s public filings would have included
general
language regarding secured borrowings and compliance with SFAS 140.3698
Schlich was
not aware whether Ernst & Young ever discussed Lehman’s disclosures vel non
of Repo
105 activity with senior Lehman management.3699
(4) Matthew Lee’s Statements Regarding Repo 105 to Ernst &
Young
On May 16, 2008,
Matthew Lee, then‐Senior
Vice President in the Finance
Division responsible for Lehman’s Global Balance Sheet and Legal Entity
Accounting,
sent a letter to certain members of Lehman’s senior management
identifying possible violations of Lehman’s Ethics Code related to
accounting/balance sheet issues.3700 Lehman involved Ernst & Young in its
investigation of the concerns raised in Lee’s May
16, 2008 letter.3701
Subsequently, less than a month later, on June 12, 2008, Ernst & Young –
Schlich
and Hillary Hansen – interviewed Lee.3702 Hansen’s notes of the interview
reveal that
Lee made certain statements to Ernst & Young about Lehman’s Repo
105 practice,
including, most notably, the volume of Repo 105 activity that Lehman engaged
in at
quarter‐end
(May 31, 2008).3703 Hansen’s notes specifically recount Lee’s allegation that
Lehman moved $50 billion of inventory off its balance sheet at quarter‐end
through
Repo 105 transactions and that
these assets returned to the balance sheet approximately
a
week later.3704
When interviewed by the Examiner, Schlich did not recall Lee saying anything
about Repo 105 transactions during that interview, although he did not
dispute the
authenticity of Hansen’s notes from the Lee interview.3705 In spite of
Hansen’s notes,
Schlich maintained that Ernst & Young did not know that Lehman engaged in
the
following Repo 105 activity during the listed time periods: $49.1 billion at
first quarter
2008 (Feb. 29, 2008); and $50.38 billion at second quarter 2008 (May 31,
2008).3706
During the Examiner’s interview of Hansen, Hansen recalled that while Ernst
&
Young questioned Lee about his May 16, 2008 letter, Lee “rattled off” a list
of additional
issues and concerns he held, one of which was Lehman’s use of Repo 105
transactions.3707 Ernst & Young had no further conversations with Lee about
Repo 105
transactions.3708 Prior to her interview of Lee in June 2008, Hansen had
heard the term
Repo 105 “thrown around” but she did not know its meaning; according to
Hansen,
Schlich described Repo 105 transactions to her shortly after they met with
Lee.3709
Following Ernst & Young’s June 12, 2008 interview of Lee, Schlich and Hansen
met with Lehman’s Gerard Reilly to discuss Lee’s assertions regarding
improper valuations.3710 During that meeting, Hansen informed Reilly of the
$50 billion Repo 105
figure Lee provided during Ernst & Young’s interview of Lee.3711 According
to Schlich,
Reilly (now deceased) told the auditors that he had no knowledge that Lehman
used
Repo 105 transactions to move $50 billion in assets off its balance
sheet.3712 “Hillary
[Hansen] took away from the meeting with Reilly that he did not know and it
was not
$50 billion.”3713
On June 13, 2008 – the day after Lee informed Ernst & Young of the $50
billion in
Repo 105 transactions that Lehman undertook at the end of the second quarter
2008 –
Ernst & Young spoke to Lehman’s Audit Committee
but did not inform the committee
of Lee’s
allegation, even though the Chairman of the Audit Committee had clearly
stated that he wanted every allegation made by Lee – whether in Lee’s May 16
letter or during the course of the investigation – to be investigated.3714
Ernst & Young met with
the Audit Committee on July 8, 2008, to review the second quarter financial
statements and again did not mention Lee’s allegations regarding Repo
105.3715 On July 22, 2008,
Ernst & Young was also present when Beth Rudofker, Head of Corporate Audit,
gave a
presentation to the Audit Committee on the results of the investigation into
Lee’s
allegations.3716
Ernst & Young did not disclose to the Audit Committee – either during the
meetings or in private executive sessions after – that Lee made an
allegation related to
Repo 105 transactions being used to move assets off Lehman’s balance sheet
at quarterend.
3717 Cruikshank told the Examiner that he would have expected to be told
about
Lee’s Repo 105 allegations.3718 Similarly, Sir Gent told the Examiner that
the alleged volume of Lehman’s Repo 105 transactions mandated disclosure to
the Audit
Committee as well as further investigation.3719
Ernst & Young did not follow‐up on
either Lee’s allegations regarding Lehman’s
Repo 105 activity or Reilly’s claim that he had no knowledge of Lehman’s
alleged $50
billion Repo 105 usage figure.3720 Ernst & Young signed a Report of
Independent
Registered Public Accounting Firm for Lehman’s second quarter 2008 Form 10‐Q
on
July 10, 2008, less than four weeks after Schlich and Hansen interviewed
Lee.3721
(5) Accounting‐Motivated
Transactions
Ernst & Young did not evaluate the possibility that Repo 105
transactions were accounting‐motivated
transactions that lacked a business purpose.3722
Schlich
characterized the off‐balance sheet treatment of Lehman’s assets in Repo 105
transactions as a consequence of the accounting rules, rather than a motive
for the
transactions.3723
j) The Examiner’s Conclusions
There is sufficient evidence to support a determination by a trier of fact
that
Lehman’s failure to disclose that it relied upon Repo 105 transactions to
temporarily
reduce the firm’s net balance sheet and net leverage ratio was materially
misleading. In
addition, a trier of fact could find that Lehman affirmatively
misrepresented its
accounting treatment for repos by stating that Lehman treated repo
transactions as
financing transactions rather than sales for financial reporting purposes,
despite the fact
that Lehman treated tens of billions of dollars in repo transactions –
namely, Repo 105
transactions – as true sale transactions.
The Examiner thus concludes that sufficient evidence exists from which a
trier of fact could find the existence of a colorable claim that certain
Lehman officers breached
their fiduciary duties to Lehman and its shareholders by causing the company
to file deficient and materially misleading financial statements, thereby
exposing the company
to potential liability.
Certain officers of Lehman not only failed to inform the public of
its reliance on Repo 105 transactions to reduce its balance sheet, they also
failed to
advise Lehman’s Board of Directors of the firm’s Repo 105 practice. Thus,
the Examiner
concludes that a trier of fact could find that certain Lehman officers
breached their
fiduciary duties to Lehman’s Board of Directors by failing to inform them
of: (1) the
firm’s reliance upon Repo 105 to reduce the balance sheet at quarter‐end,
(2) the rampup
in Repo 105 usage in mid‐to‐late 2007 and 2008, (3) the impact of these transactions
on Lehman’s publicly reported net leverage ratio, or (4) the fact that
Lehman did not
disclose its Repo 105 practice in its publicly reported financials
statements and MD&A.
(1) Materiality
The materiality of information is evaluated from the perspective of a
reasonable
investor.3724 Information is deemed material if there is “a substantial
likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the ‘total mix’ of information made
available.”3725
Materiality does not require, however, that the information be of a type
that would
cause an investor to change his investment decision.3726
(a) Whether Lehman’s Repo 105 Transactions Technically
Complied with SFAS 140 Does Not Impact Whether a
Colorable Claim Exists
This Report does not reach the question of whether Lehman’s Repo 105
transactions technically complied with the relevant financial accounting
standard, SFAS
140, because the answer to that question does not impact whether a colorable
claim
exists regarding Lehman’s failure to disclose its Repo 105 practice and
whether that
failure rendered the firm’s financial statements materially misleading.
Even if Lehman’s use of Repo 105 transactions technically
complied with SFAS 140, financial statements may be materially misleading
even when they do not violate GAAP.3727 The Second Circuit has explained
that “GAAP itself recognizes that technical compliance with particular GAAP
rules may lead to misleading financial statements, and
imposes an overall requirement that the statements as a whole accurately
reflect the financial status of the company.”3728
Similarly, as noted in In re Global Crossing Ltd. Securities Litigation,
even if a
defendant established that its accounting practices
“were in technical compliance with
certain individual GAAP provisions . . . this would not necessarily insulate
it from liability. This is because, unlike other regulatory systems, GAAP’s
ultimate goals of fairness and accuracy in reporting require more than mere
technical compliance.”3729
The court
explained that “when viewed as a whole,” GAAP has no “loopholes” because its
purpose, shared by the securities laws, is “to increase investor confidence
by ensuring
transparency and accuracy in financial reporting.”3730
Technical compliance with
specific accounting rules does not automatically lead to fairly presented
financial statements. “Fair presentation is the touchstone for determining
the adequacy of disclosure in financial statements. While adherence to
generally accepted accounting principles is a tool to help achieve that end,
it is not necessarily a guarantee of fairness.”3731 Moreover,
registrants are “required to provide whatever additional information would
be necessary to make the statements in their financial reports fair and
accurate, and not
misleading.”3732
This view is echoed in an SEC enforcement order, concluding that GAAP
compliance does not excuse a misleading or less than full disclosure
regarding a
transaction, especially if the transaction’s purpose is “the attainment of a
particular
financial reporting result.”3733 “[E]ven if the transactions comply with
GAAP, the issuer
is required to evaluate the material accuracy and completeness of the
presentation
made by its financial statements.”3734 Issuers must “ensure that the way
they publicly
portray themselves discloses, as required, the material elements of [their]
economic and
business realities and risks.”3735
3732 Id.
(citing 17 C.F.R. § 240.10b‐5(b)
and 17 C.F.R. § 230.408 (requiring that “in addition to the information
expressly required to be included in a registration statement, there shall
be added such further material information, if any, as may be necessary to
make the required statements, in the light of the circumstances under which
they are made, not misleading”) (emphasis added); see also SEC
v. Seghers, 298 Fed. App’x 319, 331 (5th Cir. 2008)
(“The Commission’s proof of
Segher’s misrepresentations and omissions does not depend on compliance with
GAAP, but instead depends on evidence that Segher’s statements and omissions
were false or misleading to investors.”); United
States v. Olis, Civil Action No. H‐07‐3295, Criminal No. H‐03‐217‐01,
2008 WL 5046342, at *20 (S.D. Tex. Nov. 21, 2008) (“The scheme to defraud
alleged and proved in this case did not turn on whether the treatment
accorded to Project Alpha in Dynegy’s financial statements technically
complied with GAAP or whether Olis and his coconspirators intended to
violate GAAP but, instead, on whether the defendants’ disclosures about
Project Alpha intentionally omitted material facts that caused Dynegy’s
financial statements to be materially false and misleading.”) (citing United
States v. Rigas, 490 F.3d 208, 221 (2d Cir. 2007), and United States v.
Ebbers, 458 F.3d 110, 125‐26
(2d Cir. 2006)).
Repo105 ---
http://en.wikipedia.org/wiki/Repo_105
Repo105.com ---
http://www.repo105.com/
"Colorable claims exist that Ernst & Young did not
meet professional standards, both in investigating Lee's allegations and in
connection with its audit and review of Lehman's financial statements."
For those of you who don't have time to read the entire 2,200-page
Examiners Report
that's so unkind to Ernst & Young and Lehman Executives
"Excerpts from the Lehman Report," The Wall Street Journal,
March 13, 2010 ---
http://online.wsj.com/article/SB10001424052748704131404575117682843690948.html?mod=todays-us-money-and-investing
Thursday, a U.S. bankruptcy-court examiner
investigating the collapse of Lehman Brothers Holdings Inc. released a
scathing 2,200-page report. Here are some highlights.
* * *
Criminal Case? -- "Colorable Claims"
The allegations lodged by a bankruptcy-court
examiner have raised questions about whether prosecutors could build a case
against former Lehman executives.
"Colorable claims exist against the senior officers
who were responsible for balance sheet management and financial disclosure,
who signed and certified Lehman's financial statements and who failed to
disclose Lehman's use and extent of Repo 105 transactions to manage its
balance sheet."
--From
the report, volume 1, executive summary,
page 20
"Colorable claims exist that Ernst & Young did
not meet professional standards, both in investigating Lee's allegations and
in connection with its audit and review of Lehman's financial statements."
--From
the report, executive summary, page 21
"The Examiner finds colorable claims against
JPMorgan Chase ("Chase") and CitiBank in connection with modifications of
guaranty agreements and demands for collateral in the final days of Lehman's
existence. The demands for collateral by Lehman's Lenders had direct impact
on Lehman's liquidity pool; Lehman's available liquidity is central to the
question of why Lehman failed."
--From
the report, executive summary, page 24
* * *
Whistleblower Letter -- "On Its Face Pretty Ugly"
Lehman employee Matthew Lee will gain fame as
one of whistleblowers who tried to prevent the company's demise. The report
says Lehman's auditors refer to Matthew Lee's letter to senior management as
a "whistleblower letter" and an "ugly" one at that. No wonder Lehman's
senior management and outside auditors, Ernst & Young, said they were
"stressed."
"[W]e are also dealing with a whistleblower
letter, that is on its face pretty ugly and will take us a significant
amount of time to get through. I am confident from what I have seen it
shouldn't result in any significant issues around financial reporting, but
again there is a lot of work to do yet. This combined with some very
difficult accounting issues around off balance sheet items is adding stress
to everyone." (From a June 8, 2008, email from William Schlich, a former
lead partner on Ernst & Young's Lehman team)
--From
the report: Volume 3, page 961
Repo 105 -- "Another drug we r on"
The examiner criticized Lehman for the "materially
misleading" approach it took to represent its financial condition. He
focused on the so-called "repo" market, in which firms sell assets in
exchange for cash to fund operations, often just overnight or for a few
days.
The examiner said that Lehman -- anxious to
maintain favorable credit ratings -- engaged in an accounting device known
within the firm as "Repo 105" to essentially park about $50 billion of
assets away from Lehman's balance sheet. The move helped Lehman look like it
had less debt on its books.
"In this way, unbeknownst to the investing public,
rating agencies, Government regulators, and Lehman's Board of Directors,
Lehman reverse engineered the firm's net leverage ratio for public
consumption."
--From
the report, volume 3, page 739
* * *
The Repo 105 strategy sparked debate inside Lehman,
according to the report. In an April 2008 email, Bart McDade called such
accounting maneuvers "another drug we r on." Mr. McDade, then Lehman's
equities chief, says he sought to limit such maneuvers, according to the
report (page 763..
Numerous internal Lehman e-mails referred to Repo
105 transactions in pejorative terms, such as "balance sheet
window-dressing."
An illustrative example is found in the following
July 2008 e-mail exchange:
"Vallecillo: "So what's up with repo 105? Why are
we doing less next quarter end?"
McGarvey: "It's basically window-dressing. We are
calling repos true sales based on legal technicalities. The exec committee
wanted the number cut in half."
Vallecillo: "I see . . . so it's legally do-able
but doesn't look good when we actually do it? Does the rest of the street do
it? Also is that why we have so much BS [balance sheet] to Rates Europe?
McGarvey: "Yes, No and yes. :)"
--From
the report, volume 3, pages 860-866:
* * *
Senior management exerted pressure, particularly at
or near quarter-end, to utilize the Repo 105 mechanism to meet the
firm-imposed balance sheet targets:
Four days before the close of Lehman's fiscal year
in November 2007, Mitch King wrote to Marc Silverberg: "Let me know if we
have room for any more repo 105. I have some more I can put in over month
end." Jerry Rizzieri, who reported directly to Kaushik Amin, replied to
King: "Can you imagine what this would be like without 105?"
--From
the report, volume 3, pages 860-866:
* * *
J.P. Morgan's Collateral Demands -- "Part Art,
Part Science, and Part Catch Up"
Several factors helped to tip Lehman over the brink
in its final days. Investment banks, including J.P. Morgan Chase & Co., made
demands for collateral and modified agreements with Lehman that hurt
Lehman's liquidity and pushed it into bankruptcy.
On September 11, J.P. Morgan executives met to
discuss significant valuation problems with securities that Lehman had
posted as collateral over the summer. J.P. Morgan concluded that the
collateral was not worth nearly what Lehman had claimed it was worth, and
decided to request an additional $5 billion in cash collateral from Lehman
that day. Discussions between Lehman and J.P. Morgan executives were tense.
According to J.P. Morgan witnesses, Steven Black, a senior J.P. Morgan
executive, communicated the $5 billion collateral request to Richard Fuld by
telephone on September 9. Black stated that he explained that the collateral
was intended to cover J.P. Morgan's exposure to Lehman in its entirety.
Lehman posted $5 billion in cash to JPMorgan by the afternoon of Friday,
Sept. 12.
Mr. Black described J.P. Morgan's formulation of
the $5 billion amount to the examiner as "part art, part science, and part
catch up."
"Black stated that he relayed to Fuld that JPMorgan
was not trying to solve JPMorgan's problem by creating new problems for
Lehman. He asserted that he told Fuld that, if Lehman was "near the edge,"
Fuld should say so. According to Black, Fuld asked whether JPMorgan was
interested in making a capital infusion, but JPMorgan was not. Black stated
that he advised Fuld that if Lehman were skating close to the edge, Lehman
should call the Federal Reserve so that the Federal Reserve could "herd the
cats" needed to assist Lehman. According to Black, Fuld said Lehman was not
anywhere close to the point of needing such assistance."
From the report, Volume 4, page 95
* * *
More on J.P. Morgan's Role -- Good Faith and Fair
Dealing?
"Notwithstanding J.P. Morgan's concerns with the
quantity and quality of collateral posted by Lehman, Lehman believed that
J.P. Morgan was overcollateralized. There is no evidence, however, that
Lehman requested in writing the return of the billions of dollars of
collateral it had posted in September. Lehman did informally request the
return of at least some of its collateral, and J.P. Morgan returned some
securities to Lehman on September 12. J.P. Morgan did not, however, release
any of the cash collateral that Lehman had posted in response to the
September 9 and September 11 requests.
"Finally, the examiner concludes that the evidence
may support the existence of a colorable claim – but not a strong claim –
that J.P. Morgan breached the implied covenant of good faith and fair
dealing by making excessive collateral requests to Lehman in September 2008.
A trier of fact would have to consider evidence that the collateral requests
were reasonable and that Lehman waived any claims by complying with the
requests."
--
From the report, volume 4, page 1071
* * *
'Hail Mary' to Warren Buffett:
New details in the report contain insights on why
Buffett passed on Lehman. They open a window on his methods for assessing
management and some of the red flags that waved him off.
"Fuld and Buffett spoke on Friday, March 28, 2008.
They discussed Buffett investing at least $2 billion in Lehman.2439 Two
items immediately concerned Buffet during his conversation with Fuld.2440
First, Buffett wanted Lehman executives to buy under the same terms as
Buffett.2441 Fuld explained to the Examiner that he was reluctant to require
a significant buy‐in from Lehman executives, because they already received
much of their compensation in stock.2442 However, Buffett took it as a
negative that Fuld suggested that Lehman executives were not willing to
participate in a significant way.2443 Second, Buffett did not like that Fuld
complained about short sellers.2444 Buffett thought that blaming short
sellers was indicative of a failure to admit one's own problems."
--From
the report, Volume 2, page 480
* * *
How Liquid was Lehman's Liquidity Pool?
"[T]he importance of liquidity to investment bank
holding companies cannot be overstated. Broker-dealers are dependent on
short-term financing to fund their daily operations, and a robust liquidity
pool is critical to a broker-dealer's access to such financing."
--From
the report, volume 4, page 1066
"By the second week of September 2008, Lehman found
itself in a liquidity crisis; it no longer had sufficient liquidity to fund
its survival. Thus, an understanding of Lehman's collateral transfers, and
Lehman's attendant loss of readily available liquidity, is essential to a
complete understanding of why Lehman ultimately failed."
--
From the report, volume 4, page 1084
"Lehman represented in regulatory filings and in
public disclosures that it maintained a liquidity pool that was intended to
cover expected cash outflows for 12 months in a stressed liquidity
environment and was available to mitigate the loss of secured funding
capacity. After the Bear Stearns crisis in March 2008, it became acutely
apparent to Lehman that any disruption in liquidity could be catastrophic;
Lehman thus paid careful attention to its liquidity pool and how it was
described to the market. Lehman reported the size of its liquidity pool as
$34 billion at the end of first quarter 2008, $45 billion at the end of
second quarter, and $42 billion at the end of the third quarter. Lehman
represented that its liquidity pool was unencumbered – that it was composed
of assets that could be "monetized at short notice in all market
environments."
"The Examiner's investigation of Lehman's transfer
of collateral to its lenders in the summer of 2008 revealed a critical
connection between the billions of dollars in cash and assets provided as
collateral and Lehman's reported liquidity. At first, Lehman carefully
structured certain of its collateral pledges so that the assets would
continue to appear to be readily available (i.e., the Overnight Account at
JPMorgan, the $2 billion comfort deposit to Citi, and the three-day notice
provision with BofA). Witness interviews and documents confirm that Lehman's
clearing banks required this collateral and without it would have ceased
providing clearing and settlement services to Lehman or, at the very least,
would have required Lehman to prefund its trades. The market impact of
either of those outcomes could have been catastrophic for Lehman. Lehman
also included formally encumbered collateral in its liquidity pool. Lehman
included the almost $1 billion posted to HSBC and secured by the U.K. Cash
Deeds in its liquidity pool; Lehman included the $500 million in collateral
formally pledged to BofA; Lehman included an additional $8 billion in
collateral posted to JPMorgan and secured by the September Agreements; and
Lehman continued to include the $2 billion at Citi, even after the Guaranty
and DCSA amendments."
--
From the report, volume 4, page 1082-1083
* * *
"This Section of the Report examines the
circumstances surrounding Lehman's provision of approximately $15 to $21
billion in collateral (both in cash and securities) to its clearing banks,
and Lehman's simultaneous inclusion of those funds in its reported liquidity
pool."
"Critically, the collateral posted by Lehman with
its various clearing banks was initially structured in a manner that enabled
Lehman to claim the collateral as nominally lien-free (at least overnight),
and continue to count it in its reported liquidity pool. However, by
September 2008, much of Lehman's reported liquidity was locked up with its
clearing banks, and yet this fact remained undisclosed to the market prior
to Lehman's bankruptcy."
--
From the report, volume 4, page 1067
Also see
http://documents.nytimes.com/lehman-brothers-repo-105-valukas-report#p=1
From the Lehman Examiner Report - Volume 3, beginning page 945
as Forwarded (with highlights) to Bob Jensen by Lynn Turner
"(3) Lehman’s Board of Directors
Without exception, former Lehman directors were unaware of Lehman’s
Repo
105
program and transactions.3642
As discussed in greater detail below, Lehman’s own Corporate Audit group led
by Beth Rudofker, together with Ernst & Young, investigated allegations about
balance
sheet substantiation problems made in a May 16, 2008
“whistleblower” letter sent to
senior management by Matthew Lee.3643 On June 12, 2008, during the
investigation, Lee
informed Ernst & Young about Lehman’s use of $50 billion of Repo 105
transactions in
the second quarter of 2008.3644 At a June 13, 2008 meeting,
Ernst & Young failed to
disclose that allegation to the Board’s Audit Committee.3645
Former Lehman director Cruikshank recalled that he made very clear he wanted
a full and thorough investigation into each allegation made by Lee, whether the
allegation was contained in Lee’s May 16, 2008 letter or raised by Lee in the
course of
the investigation.3646 Another former Lehman director, Berlind, similarly stated
that the
Audit Committee explicitly instructed Lehman’s Corporate Audit Group and Ernst &
Young to keep the Audit Committee informed of all of Lee’s allegations.3647
Berlind also
said that he would have wanted to know about Lehman’s Repo 105 program and that
if
he had known about Lehman’s Repo 105 transactions, he would have asked Lehman’s
auditors to test the transactions to ensure they were appropriate.3648 Upon
learning from
the Examiner the volume of Repo 105 transactions at quarter‐end
in late 2007 and 2008,
Sir Christopher Gent said that he believed the volume mandated disclosure to the
Audit
Committee and further investigation.3649
Dr. Kaufman, on the other hand, stated that he would have wanted to know
about Repo 105 transactions only if they were “huge” and fraudulent, by which he
meant in violation of specific accounting rules or in violation of the law.3650
Dr.
Kaufman did not believe that $50 billion in Repo 105 transactions was
significant even if
that volume changed Lehman’s net leverage ratio by approximately two points.3651
Dr.Kaufman considered a four or five point change in the net leverage ratio to
be
significant.3652
In late 2007 and 2008, management made numerous presentations to the Board
regarding balance sheet reduction and deleveraging; in no case was the use of
Repo 105
transactions disclosed in those presentations.3653
i) Ernst & Young’s Knowledge of Lehman’s Repo 105 Program
During several Rule 30(b)(6)‐type3654
interview sessions, the Examiner
interviewed members of Ernst & Young’s Lehman audit team regarding Ernst &
Young’s knowledge of and involvement in Lehman’s Repo 105 program.
(1) Ernst & Young’s Comfort with Lehman’s Repo 105 Accounting
Policy
The Examiner interviewed Ernst & Young’s lead partner on the Lehman audit
team, William Schlich, regarding Lehman’s Repo 105 program. According to Schlich,
Ernst & Young had been aware of Lehman’s Repo 105 policy and
transactions for many
years.3655
Consistent with the statements of Lehman’s John Feraca (Secured Funding
Desk), Schlich stated that Lehman introduced its Repo 105 Accounting Policy
on the
heels
of the FASB’s promulgation of SFAS 140.3656
During that time, Ernst & Young
“discussed” the Repo 105 Accounting Policy (including Lehman’s structure for
Repo
105 transactions) and Ernst & Young’s team had a number of additional
conversations
with Lehman about Repo 105 over the years.3657 However, according to Schlich,
Ernst &Young had no role in the drafting or preparation of Lehman’s Repo 105
Accounting
Policy.3658
Schlich stated definitively that Ernst & Young had no advisory role with respect
to Lehman’s use of Repo 105 transactions and that Ernst & Young did not
“approve”
the Accounting Policy.3659 Rather, according to Schlich, Ernst & Young “bec[a]me
comfortable with the Policy for purposes of auditing financial statements.”3660
Following “consultation and dialogue” about the proper interpretation and
application of SFAS 140, Ernst & Young “clearly. . .concurred with Lehman’s approach”
to
SFAS 140 and subsequent literature by FASB on the issue of “control” of assets
involved in a repo transactions.3661 Ernst &
Young’s view, however, was not based upon
an analysis of whether actual Repo 105 transactions complied with SFAS 140.3662
Rather,
Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely
“theoretical.”3663 In other words, Ernst & Young solely assessed Lehman’s
understanding of the requirements of SFAS 140 in the abstract and as reflected
in its
Accounting Policy; Ernst & Young did not opine on the propriety of the
transactions as a balance sheet management tool.3664 Ernst & Young did not
review the Linklaters letter,
referenced in the Accounting Policy Manual.3665
According to Martin Kelly, it was not unusual for him to discuss various issues,
including Repo 105, with Ernst & Young.3666 Indeed, Kelly recalled specifically
speaking
with Schlich about Repo 105 transactions soon after becoming Financial
Controller on
December 1, 2007, in an effort to learn more about the program and “to
understand
[Ernst & Young’s] approach before talking to Callan.”3667
Kelly “wanted to ensure that Ernst & Young analyzed the program in the same
way that [Marie] Stewart [Global Head of Accounting Policy] had analyzed
it.”3668
Kelly’s conversations with Ernst & Young focused on the accounting treatment of
Repo
105 transactions.3669 According to Kelly,
Ernst & Young “was comfortable with the
treatment under GAAP for the same reasons that Lehman was comfortable.”3670
Kelly also discussed with Ernst & Young Lehman’s inability to get a true sale
opinion under United States law for Repo 105 transactions.3671 Kelly could not
recall whether he
discussed with Ernst & Young his discomfort with Lehman’s Repo 105 program.3672
(2) The “Netting Grid”
Throughout 2007, Lehman maintained a document entitled “Accounting Policy
Review Balance Sheet Netting and Other Adjustments,” known colloquially among
Lehman’s Accounting Policy and Balance Sheet Groups, as well at Ernst & Young,
as
the “Netting Grid.” The Netting Grid identified and described various balance
sheet
netting mechanisms employed by Lehman: one such balance sheet mechanisms was
Lehman’s use of Repo 105 transactions.3673
Lehman provided the Netting Grid to Ernst & Young at least in August 2007 (the
close of Lehman’s third quarter 2007) and in November 2007 (the close of
Lehman’s
fiscal year 2007).3674 Notably, the Netting Grid provided by Lehman to Ernst &
Young in
August 2007 and November 2007 only contained Repo 105 volumes from November 30,
2006 and February 28, 2007.3675 Schlich was unaware whether Ernst & Young asked
Lehman to provide its second quarter 2007 and third quarter 2007 Repo 105 usage
figures or a forecast of Lehman’s fourth quarter 2007 Repo 105 numbers.3676
Ernst & Young reviewed the Netting Grid, analyzed the various balance sheet
netting mechanisms identified in the Netting Grid, and used the document in
connection with its 2007 year‐end audit of
Lehman.3677 According to Schlich,
Ernst &
Young, as part of its review of Lehman’s Netting Grid, approved of Lehman’s
internal Repo 105 Accounting Policy only, and did not pass upon the actual
practice.3678
The Netting Grid described the transactions and United States GAAP reference
as follows: “Under certain conditions that meet the criteria described in
paragraphs 9
and
218 of SFAS 140,
Lehman policy permits reverse repo and repo agreements to be
recharacterized as purchases and sales of inventory.”3679
With respect to Lehman’s use
of Repo 105 transactions to reduce its net balance sheet, the Netting Grid sets
forth the conclusion that Lehman’s “current practice [for Repo 105] is
correct.”3680 Schlich noted
that this conclusion about the Repo 105 practice was Lehman’s, not Ernst &
Young’s.3681
To test Lehman’s conclusion, however, Ernst & Young “reviewed how Lehman applied
the control provisions of the accounting rules.”3682
Ernst & Young’s review, however, applied only to the accounting basis for these
transactions, not to their volume or purpose. Specifically, Ernst & Young’s
review and
analysis of Lehman’s Repo 105 program did not account for the volumes of Repo
105
transactions Lehman undertook at quarter‐end.3683
Indeed, Schlich was unable to
confirm or deny the volumes of Repo 105 transactions Lehman undertook at
Lehman’s
fiscal year‐end 2007, or in the first two quarter‐ends
of 2008.3684 Nor was Schlich able to
confirm or deny that Lehman’s use of Repo 105 transactions was increasing in
late 2007
and into mid 2008.3685
(a)
Quarterly Review and Audit
Through Schlich, Ernst & Young maintained that its duties as Lehman’s auditor
required it to ensure that transactions were accounted for correctly (i.e., that
they
complied with accounting rules) and that Lehman’s financial disclosures were not
materially misstated.3686 According to Schlich, Ernst & Young’s audit did not
require
Ernst & Young to consider or review the volume or timing of Repo 105
transactions.3687
Accordingly, as part of its year‐end
2007 audit, Ernst & Young did not ask Lehman
about any directional trends, such as whether its Repo 105 activity was
increasing
during fiscal year 2007.3688 Notably, as part of its quarterly review process,
Ernst &
Young did not audit any of Lehman’s Repo 105 transactions.3689
(3)
Ernst & Young Would Not Opine on the Materiality of
Lehman’s Repo 105 Usage
Ernst & Young, through Schlich,
was unwilling to
comment to the Examiner on
the materiality of the volume of Lehman’s quarter‐end
Repo 105 transactions.3690 Asked
whether, as part of its responsibility to ensure Lehman’s financial statements
were not
materially misstated,
Ernst & Young should
have considered the possibility that strict technical adherence to SFAS 140 or
any other specific accounting rule could nonetheless lead to a material
misstatement in Lehman’s publicly‐reported
financial statements,
Schlich refrained from comment.3691
When pressed further, Schlich stated that the volume of any particular
transaction impacts neither the question of whether accounting rules are applied
correctly, nor the question of whether a financial statement is materially
misleading.3692
However, Schlich eventually acknowledged that “when you look at a balance sheet
issue, volume is a factor.”3693
Notably,
the definition of “materiality” contained in a “walk‐through”
document
related to Ernst & Young’s 2007 fiscal year‐end
audit of Lehman was: “any transaction
that
would move Lehman’s firm‐wide
net leverage by 0.1 or more.”3694 This
definition
reflected “Lehman’s determination of a materiality threshold” in connection with
Lehman’s own criteria for when to consider reopening and adjusting its balance
sheet.3695
When Schlich was asked what level of impact to Lehman’s firm‐wide
net assets
Ernst & Young would have considered “material,” Schlich replied that Ernst &
Young
did not have a hard and fast rule defining materiality in the balance sheet
context, and
that, with respect to balance sheet issues, “materiality” depends upon the facts
and
circumstances.3696 Schlich agreed that Lehman made no specific disclosures about
Repo 105 transactions in its Forms 10‐K and
Form 10‐Q,
including the MD&A section.3697
Schlich believed, however, that Lehman’s public filings would have included
general
language regarding secured borrowings and compliance with SFAS 140.3698 Schlich
was
not aware whether Ernst & Young ever discussed Lehman’s disclosures vel non of
Repo
105 activity with senior Lehman management.3699
(4)
Matthew Lee’s Statements Regarding Repo 105 to Ernst &
Young
On May 16, 2008,
Matthew Lee, then‐Senior
Vice President in the Finance
Division responsible for Lehman’s Global Balance Sheet and Legal Entity
Accounting,
sent a letter to certain members of Lehman’s senior management
identifying possible violations of Lehman’s Ethics Code related to
accounting/balance sheet issues.3700 Lehman involved Ernst & Young in its
investigation of the concerns raised in Lee’s May
16, 2008 letter.3701
Subsequently, less than a month later, on June 12, 2008, Ernst & Young – Schlich
and Hillary Hansen – interviewed Lee.3702 Hansen’s notes of the interview reveal
that
Lee made certain statements to Ernst & Young about Lehman’s Repo
105 practice,
including, most notably, the volume of Repo 105 activity that Lehman engaged in
at
quarter‐end
(May 31, 2008).3703 Hansen’s notes specifically recount Lee’s allegation that
Lehman moved $50 billion of inventory off its balance sheet at quarter‐end
through
Repo 105 transactions and that
these assets returned to the balance sheet approximately
a
week later.3704
When interviewed by the Examiner, Schlich did not recall Lee saying anything
about Repo 105 transactions during that interview, although he did not dispute
the
authenticity of Hansen’s notes from the Lee interview.3705 In spite of Hansen’s
notes,
Schlich maintained that Ernst & Young did not know that Lehman engaged in the
following Repo 105 activity during the listed time periods: $49.1 billion at
first quarter
2008 (Feb. 29, 2008); and $50.38 billion at second quarter 2008 (May 31,
2008).3706
During the Examiner’s interview of Hansen, Hansen recalled that while Ernst &
Young questioned Lee about his May 16, 2008 letter, Lee “rattled off” a list of
additional
issues and concerns he held, one of which was Lehman’s use of Repo 105
transactions.3707 Ernst & Young had no further conversations with Lee about Repo
105
transactions.3708 Prior to her interview of Lee in June 2008, Hansen had heard
the term
Repo 105 “thrown around” but she did not know its meaning; according to Hansen,
Schlich described Repo 105 transactions to her shortly after they met with
Lee.3709
Following Ernst & Young’s June 12, 2008 interview of Lee, Schlich and Hansen
met with Lehman’s Gerard Reilly to discuss Lee’s assertions regarding improper
valuations.3710 During that meeting, Hansen informed Reilly of the $50 billion
Repo 105
figure Lee provided during Ernst & Young’s interview of Lee.3711 According to
Schlich,
Reilly (now deceased) told the auditors that he had no knowledge that Lehman
used
Repo 105 transactions to move $50 billion in assets off its balance sheet.3712
“Hillary
[Hansen] took away from the meeting with Reilly that he did not know and it was
not
$50 billion.”3713
On June 13, 2008 – the day after Lee informed Ernst & Young of the $50 billion
in
Repo 105 transactions that Lehman undertook at the end of the second quarter
2008 –
Ernst & Young spoke to Lehman’s Audit Committee
but did not inform the committee
of Lee’s
allegation, even though the Chairman of the Audit Committee had clearly stated
that he wanted every allegation made by Lee – whether in Lee’s May 16 letter or
during the course of the investigation – to be investigated.3714
Ernst & Young met with
the Audit Committee on July 8, 2008, to review the second quarter financial
statements and again did not mention Lee’s allegations regarding Repo 105.3715
On July 22, 2008,
Ernst & Young was also present when Beth Rudofker, Head of Corporate Audit, gave
a
presentation to the Audit Committee on the results of the investigation into
Lee’s
allegations.3716
Ernst & Young did not disclose to the Audit Committee – either during the
meetings or in private executive sessions after – that Lee made an allegation
related to
Repo 105 transactions being used to move assets off Lehman’s balance sheet at
quarterend.
3717 Cruikshank told the Examiner that he would have expected to be told about
Lee’s Repo 105 allegations.3718 Similarly, Sir Gent told the Examiner that the
alleged volume of Lehman’s Repo 105 transactions mandated disclosure to the
Audit
Committee as well as further investigation.3719
Ernst & Young did not follow‐up on
either Lee’s allegations regarding Lehman’s
Repo 105 activity or Reilly’s claim that he had no knowledge of Lehman’s alleged
$50
billion Repo 105 usage figure.3720 Ernst & Young signed a Report of Independent
Registered Public Accounting Firm for Lehman’s second quarter 2008 Form 10‐Q
on
July 10, 2008, less than four weeks after Schlich and Hansen interviewed
Lee.3721
(5) Accounting‐Motivated
Transactions
Ernst & Young did not evaluate the possibility that Repo 105
transactions were accounting‐motivated
transactions that lacked a business purpose.3722
Schlich
characterized the off‐balance sheet treatment of Lehman’s assets in Repo 105
transactions as a consequence of the accounting rules, rather than a motive for
the
transactions.3723
j)
The Examiner’s Conclusions
There is sufficient evidence to support a determination by a trier of fact that
Lehman’s failure to disclose that it relied upon Repo 105 transactions to
temporarily
reduce the firm’s net balance sheet and net leverage ratio was materially
misleading. In
addition, a trier of fact could find that Lehman affirmatively misrepresented
its
accounting treatment for repos by stating that Lehman treated repo transactions
as
financing transactions rather than sales for financial reporting purposes,
despite the fact
that Lehman treated tens of billions of dollars in repo transactions – namely,
Repo 105
transactions – as true sale transactions.
The Examiner thus concludes that sufficient evidence exists from which a trier
of fact could find the existence of a colorable claim that certain Lehman
officers breached
their
fiduciary duties to Lehman and its shareholders by causing the company to file
deficient and materially misleading financial statements, thereby exposing the
company
to
potential liability.
Certain officers of Lehman not only failed to inform the public of
its reliance on Repo 105 transactions to reduce its balance sheet, they also
failed to
advise Lehman’s Board of Directors of the firm’s Repo 105 practice. Thus, the
Examiner
concludes that a trier of fact could find that certain Lehman officers breached
their
fiduciary duties to Lehman’s Board of Directors by failing to inform them of:
(1) the
firm’s reliance upon Repo 105 to reduce the balance sheet at quarter‐end,
(2) the rampup
in Repo 105 usage in mid‐to‐late 2007 and 2008, (3) the impact of these transactions
on Lehman’s publicly reported net leverage ratio, or (4) the fact that Lehman
did not
disclose its Repo 105 practice in its publicly reported financials statements
and MD&A.
(1)
Materiality
The materiality of information is evaluated from the perspective of a reasonable
investor.3724 Information is deemed material if there is “a substantial
likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor
as having significantly altered the ‘total mix’ of information made
available.”3725
Materiality does not require, however, that the information be of a type that
would
cause an investor to change his investment decision.3726
(a)
Whether Lehman’s Repo 105 Transactions Technically
Complied with SFAS 140 Does Not Impact Whether a
Colorable Claim Exists
This Report does not reach the question of whether Lehman’s Repo 105
transactions technically complied with the relevant financial accounting
standard, SFAS
140, because the answer to that question does not impact whether a colorable
claim
exists regarding Lehman’s failure to disclose its Repo 105 practice and whether
that
failure rendered the firm’s financial statements materially misleading.
Even if Lehman’s use of Repo 105 transactions technically
complied with SFAS 140, financial statements may be materially misleading even
when they do not violate GAAP.3727 The Second Circuit has explained that “GAAP
itself recognizes that technical compliance with particular GAAP rules may lead
to misleading financial statements, and
imposes an overall requirement that the statements as a whole accurately reflect
the financial status of the company.”3728
Similarly, as noted in In re Global Crossing Ltd. Securities Litigation, even if
a
defendant established that its accounting practices
“were in technical compliance with
certain individual GAAP provisions . . . this would not necessarily insulate it
from liability. This is because, unlike other regulatory systems, GAAP’s
ultimate goals of fairness and accuracy in reporting require more than mere
technical compliance.”3729
The court
explained that “when viewed as a whole,” GAAP has no “loopholes” because its
purpose, shared by the securities laws, is “to increase investor confidence by
ensuring
transparency and accuracy in financial reporting.”3730
Technical compliance with
specific accounting rules does not automatically lead to fairly presented
financial statements. “Fair presentation is the touchstone for determining the
adequacy of disclosure in financial statements. While adherence to generally
accepted accounting principles is a tool to help achieve that end, it is not
necessarily a guarantee of fairness.”3731 Moreover,
registrants are “required to provide whatever additional information would be
necessary to make the statements in their financial reports fair and accurate,
and not
misleading.”3732
This view is echoed in an SEC enforcement order, concluding that GAAP
compliance does not excuse a misleading or less than full disclosure regarding a
transaction, especially if the transaction’s purpose is “the attainment of a
particular
financial reporting result.”3733 “[E]ven if the transactions comply with GAAP,
the issuer
is required to evaluate the material accuracy and completeness of the
presentation
made by its financial statements.”3734 Issuers must “ensure that the way they
publicly
portray themselves discloses, as required, the material elements of [their]
economic and
business realities and risks.”3735
3732 Id.
(citing 17 C.F.R. § 240.10b‐5(b)
and 17 C.F.R. § 230.408 (requiring that “in addition to the information
expressly required to be included in a registration statement, there shall be
added such further material information, if any, as may be necessary to make the
required statements, in the light of the circumstances under which they are
made, not misleading”) (emphasis added); see also SEC v. Seghers,
298 Fed. App’x 319, 331 (5th Cir. 2008)
(“The Commission’s proof of Segher’s misrepresentations and omissions
does not depend on compliance with GAAP, but instead depends on evidence that
Segher’s statements and omissions were false or misleading to investors.”); United States v. Olis, Civil Action No. H‐07‐3295,
Criminal No. H‐03‐217‐01, 2008 WL 5046342, at *20 (S.D. Tex. Nov. 21, 2008) (“The scheme
to defraud alleged and proved in this case did not turn on whether the treatment
accorded to Project Alpha in Dynegy’s financial statements technically complied
with GAAP or whether Olis and his coconspirators intended to violate GAAP but,
instead, on whether the defendants’ disclosures about Project Alpha
intentionally omitted material facts that caused Dynegy’s financial statements
to be materially false and misleading.”) (citing United States v. Rigas, 490
F.3d 208, 221 (2d Cir. 2007), and United States v. Ebbers, 458 F.3d 110, 125‐26 (2d Cir. 2006)).
This is just a reminder that
the survival of auditing firms other than Ernst & Young are threatened by
shareholder/creditor lawsuits resulting from audits of failed banks and the
virtual failure of all auditors to issue going concern opinions of thousands of
banks that failed in 2008 and 2009.
Where Were the Auditors ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Even the crooked credit rating agencies are suing the auditors.
Bob Jensen's threads on all
Big Four firms ---
http://www.trinity.edu/rjensen/fraud001.htm
"E&Y launches defence of Lehman audit: Letter goes out to clients,"
by Gavin Hinks, Accountancy Age, March 23, 2010 ---
http://ow.ly/1qjQW
Ernst & Young has launched a defence of its work as
auditor of collapsed investment bank Lehman writing letters directly to
clients, according to Reuters.
Ernsy & Young were accused of negligence in their
audit of Lehman in a 2,000 page report published two weeks ago by the US
bankruptcy examiner Anton Valukas.
(Click
here to see our Lehman special report).
The firm's response, according to
Reuters, has seen some partners write to clients
informing them that the lead audit partner "promptly" called the chairman of
Lehman's audit committee when he learned of a key letter from a
whistleblower about accounting at the bank.
The E&Y letter, seen by
Reuters, reportedly says that the lead partner
insisted that the Lehman management inform the watchdog, the Securities and
Exchange Commission, and the Federal Reserve Bank of the letter.
E&Y say that the letter was
discussed with the Lehman audit committee at least three times.
Criticism of Lehman in the
examiner's report centered on the accounting treatment of so called Repo 105
transactions.
These involve the short-term sale
of
assets in order to
raise cash. The deals come with an agreement to buy the assets back at a
later date. As a result the assets remain on the seller's balance sheet
because control of the assets has not been surrendered.
In Lehman's case the bankruptcy
examiner claimed the bank used a technicality to get risky assets off its
balance sheet. This was achieved by offering assets worth 105% of the cash
received in consideration. Because this would not cover the cost of buying
the assets back, control is said to have been lost, under US rules, and the
assets could be taken off the balance sheet temporarily, even though Lehman
would pay to take them back later. The difference between the price received
for the assets and the sum paid to take them back is called the 'haircut'.
The E&Y letter to clients said the
firm believes it "will prevail" if the examiner's claims turn into court
action against the firm.
Reuters
reports that the letter also reveals that the time leading up to the
collapse of Lehman was, for E&Y, "among the most turbulent periods in our
economic history."
The letter insists the failure of
Lehman came about as a result of a collapse in liquidity caused by declining
asset values and a
loss of market confidence. The firm reportedly insists it was not as a
result of accounting or disclosure issues.
The examiner's report said that
there could be "colorable claims" against the auditor.
Bob Jensen's threads on Ernst & Young's troubles are at
http://www.trinity.edu/rjensen/fraud001.htm
Ernst & Young Explains Its Side of the Lehman Bankruptcy Examiner's Report
Controversy
March 19, 2010 message from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
In light of the extensive
discussion of the Lehman Bros. and E&Y matter on this listserv over the past
couple of weeks, I thought readers might be interested in the message I've
copied below. This was sent to me in my capacity as an audit committee
chairman.
I hope this might balance the
discussion somewhat. I would observe that to date the postings have been
based mainly on newspaper accounts of the bankruptcy examiner's lengthy
report that was completed for the purpose of determining whether the
bankruptcy estate might have claims against various parties. In effect,
basing one's conclusions about a situation on this source material is
roughly equivalent to a judge or jury reaching a decision after hearing only
the prosecution's side of the case. While the message below is necessarily
very brief, I think it illustrates that there are other facts and arguments
that should be fairly evaluated before anyone is found guilty in the court
of public opinion or otherwise.
Denny Beresford
I hope this note finds you
well and enjoying the early days of Spring.
In light of your role in our
Audit Committee Leadership Network, I am sending you this note to brief you
on a matter given there have been extensive media reports about the release
of the Bankruptcy Examiner’s Report relating to the September 2008
bankruptcy of Lehman Brothers. As you may have read, Ernst & Young was
Lehman Brothers’ independent auditors.
The concept of an examiner’s
report is a feature of US bankruptcy law.
It does not represent the
views of a court or a regulatory body, nor is the Report the result of a
legal process. Instead, an examiner’s report is intended to identify
potential claims that, if pursued, may result in a recovery for the bankrupt
company or its creditors. EY is confident we will prevail should any of the
potential claims identified against us be pursued.
We wanted to provide you with
EY’s perspective on some of the potential claims in the Examiner’s Report.
We also wanted to address certain media coverage and commentary on the
Examiner’s Report that has at times been inaccurate, if not misleading.
A few key points are set out
below.
*_General Comments_*
· EY’s last audit was for the
year ended November 30, 2007. Our opinion stated that Lehman’s financial
statements for 2007 were fairly presented in accordance with US GAAP, and we
remain of that view. We reviewed but did not audit the interim periods for
Lehman’s first and second quarters of fiscal 2008.
· Lehman’s bankruptcy was the
result of a series of unprecedented adverse events in the financial markets.
The months leading up to Lehman’s bankruptcy were among the most turbulent
periods in our economic history. Lehman's bankruptcy was caused by a
collapse in its liquidity, which was in turn caused by declining asset
values and loss of market confidence in Lehman. It was not caused by
accounting issues or disclosure issues.
· The Examiner identified _no_
potential claims that the assets and liabilities reported on Lehman’s
financial statements (approximately
$691 billion and $669 billion
respectively, at November 30, 2007) were improperly valued or accounted for
incorrectly.
*_Accounting and Disclosure
Issues Relating to Repo 105 Transactions_* · There has been significant
media attention about potential claims identified by the Examiner related to
what Lehman referred to as “Repo 105” transactions. What has not been
reported in the media is that the Examiner _did not_ challenge Lehman’s
accounting for its Repo 105 transactions.
·As recognized by the
Examiner, all investment banks used repo transactions extensively to fund
their operations on a daily basis; these banks all operated in a high-risk,
high-leverage business model.
Most repo transactions are
accounted for as financings; some (the Repo
105 transactions) are
accounted for as sales if they meet the requirements of SFAS 140.
· The Repo 105 transactions
involved the sale by Lehman of high quality liquid assets (generally
government-backed securities), in return for which Lehman received cash. The
media reports that these were “sham transactions” designed to off-load
Lehman’s “bad assets” are inaccurate.
· Because effective control of
the securities was surrendered to the counterparty in the Repo 105
arrangements, the accounting literature (SFAS 140) /required /Lehman to
account for Repo 105 transactions as sales rather than financings.
· The potential claims against
EY arise solely from the Examiner’s conclusion that these transactions
($38.6 billion at November 30, 2007) should have been specifically disclosed
in the footnotes to Lehman’s financial statements, and that Lehman should
have disclosed in its MD&A the impact these transactions would have had on
its leverage ratios if they had been recorded as financing transactions.
· While no specific
disclosures around Repo 105 transactions were reflected in Lehman’s
financial statement footnotes, the 2007 audited financial statements were
presented in accordance with US GAAP, and clearly portrayed Lehman as a
leveraged entity operating in a risky and volatile industry. Lehman’s 2007
audited financial statements included footnote disclosure of off balance
sheet commitments of almost $1 trillion.
· Lehman’s leverage ratios are
not a GAAP financial measure; they were included in Lehman’s MD&A, not its
audited financial statements. Lehman concluded no further MD&A disclosures
were required; EY did not take exception to that judgment.
· If the Repo 105 transactions
were treated as if they were on the balance sheet for leverage ratio
purposes, as the Examiner suggests, Lehman’s reported gross leverage would
have been 32.4 instead of 30.7 at November 30, 2007. Also, contrary to media
reports, the decline in Lehman’s reported leverage from its first to second
quarters of 2008 was not a result of an increased use of Repo 105
transactions*. *Lehman’s Repo 105 transaction volumes were comparable at the
end of its first and second quarters.
*_Handling of the
Whistleblower’s Issues_*
· The media has inaccurately
reported that EY concealed a May 2008 whistleblower letter from Lehman’s
Audit Committee. The whistleblower letter, which raised various significant
potential concerns about Lehman’s financial controls and reporting /but did
not mention Repo 105/, was directed to Lehman’s management. When we learned
of the letter, our lead partner promptly called the Audit Committee Chair;
we also insisted that Lehman’s management inform the Securities & Exchange
Commission and the Federal Reserve Bank of the letter. EY’s lead partner
discussed the whistleblower letter with the Lehman Audit Committee on at
least three occasions during June and July 2008.
· In the investigations that
ensued, the writer of the letter did briefly reference Repo 105 transactions
in an interview with EY partners. He also confirmed to EY that he was
unaware of any material financial reporting errors. Lehman’s senior
executives did not advise us of any reservations they had about the
company’s Repo 105 transactions.
· Lehman’s September 2008
bankruptcy prevented EY from completing its assessment of the
whistleblower’s allegations. The allegations would have been the subject of
significant attention had EY completed its third quarter review and 2008
year-end audit.
Should any of the potential
claims be pursued, we are confident we will prevail.
March 20, 2010 reply from Bob Jensen
Hi Denny,
Thank you for this. I was worried that Ernst & Young
would refrain from commenting on this hot topic that will probably end up in
pending litigation.
The E&Y response is terribly discouraging to me
because the audit firm tries to hide behind the letter of the rules of GAAP
rather than the spirit of GAAP. Yesterday I pointed out that USC's Jerry
Arnold (who is truly an expert on the rules of GAAP) tried to earn his
million dollars defending Enron's founder, Ken Lay, by arguing in court that
Enron abided by the letter of GAAP (except where Andy Fastow was lying about
SPEs and really embezzling money from Enron itself). In Ken Lay's case
Arnold's testimony did not prevent his client's being found guilty on ten
counts of fraud and conspiracy to mislead investors in Enron's audited
financial statements. In court, the verdicts often focus on the spirit of
the law instead of the letter of the law.
I am particularly distressed by the following claim
(in the message below) by Ernst & Young:
Begin Quotation
Because effective control of the securities was
surrendered to the
counterparty in the Repo 105 arrangements, the
accounting literature
(SFAS 140) /required /Lehman to account for
Repo 105 transactions as
sales rather than financings.
End Quotation
If Lehman is obligated in a matter of days to buy
back the poisoned Repo 105 securities at prices greater than the “selling
prices” I have a hard time with the auditor’s assertion that these were
legitimate sales where the seller gave up control. The buyer is not like to
keep those securities or sell them to anybody other than Lehman since the
selling prices were phony inflated prices way above fair market value.
This is a Jerry Arnold déjà vu where auditors are
trying to hide behind the letter of accounting rules but not the spirit of
accounting rules. It makes a mockery out of the “present fairly” concept. If
this was anything but a ploy from having to show impaired-value assets on
the balance sheet I will eat my hat.
I will never, ever accept the E&Y argument that the
2007 audited report of Lehman fairly presented the poison CDO investments of
Lehman. The poison in those CDOs existed before the end of 2007, and surely
the auditors must've known the bad debt reserves were underestimated by
hundreds of billions of dollars. Where were the asset impairment tests
required for auditors?
Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
It seems to me that there’s a whole lot more
professionalism issues involved in the Lehman audits and reviews just like
there should’ve been a whole lot more involved in the Enron audits and
reviews.
In any event, Andersen does not appear to
have applied the GAAP requirement to recognize asset impairment (FAS 121).
From our reading of the Powers Report, the put-options written by the SPEs
that, presumably, offset Enron's losses on its merchant investment, were not
collectible, because the SPEs did not have sufficient net assets.
"ENRON: what happened and what we can learn from it," by George J. Benston
and Al L. Hartgraves, Journal of Accounting and Public Policy, 2002,
pp. 125-137:
3.3 Independent public accountants (CPAs)
The highly respected firm of Arthur Andersen
audited and unqualifiedly signed Enron's financial statements since 1985.
According to the Powers Report, Andersen was consulted on and participated
with Fastow in setting up the SPEs described above. Together, they crafted
the SPEs to conform to the letter of the GAAP requirement that the ownership
of outside, presumably independent, investors must be at least 3% of the SPE
assets. At this time, it is very difficult to understand why they
determined that Fastow was an independent investor. Kopper's independence
also is questionable, because he worked for Fastow. In any event, Andersen
appears, at best, to have accepted as sufficient Enron's conformance with
the minimum specified requirements of codified GAAP. They do not appear to
have realized or been concerned that the substance of GAAP was violated,
particularly with respect to the independence of the SPEs that permitted
their activities to be excluded from Enron's financial statements and the
recording of mark-to-market-based gains on assets and sales that could not
be supported with trustworthy numbers (because these did not exist). They
either did not examine or were not concerned that the put obligations from
the SPEs that presumably offset declines in Enron's investments (e.g.,
Rhythms) were of no or little economic value. Nor did they require Enron to
record as a liability or reveal as a contingent liability its guarantees
made by or though SPEs. Andersen also violated the letter of GAAP and GAAS
by allowing Enron to record issuance of its stock for other than cash as an
increase in equity. Andersen also did not have Enron adequately report, as
required, related-party dealings with Fastow, an executive officer of Enron,
and the consequences to stockholders of his conflict of interest.
4.1 GAAP
We believe that two important shortcomings
have been revealed. First, the US model of specifying rules that must be
followed appears to have allowed or required Andersen to accept procedures
that accord with the letter of the rules, even though they violate the basic
objectives of GAAP accounting. Whereas most of the SPEs in question
appeared to have the minimum-required 3% of assets of independent ownership,
the evidence outlined above indicates that Enron in fact bore most of the
risk. In several important situations, Enron very quickly transferred funds
in the form of fees that permitted the 3% independent owners to retrieve
their investments, and Enron guaranteed the SPEs liabilities. Second, the
fair-value requirement for financial instruments adopted by the FASB
permitted Enron to increase its reported assets and net income and thereby,
to hide losses. Andersen appears to have accepted these valuations (which,
rather quickly, proved to be substantially incorrect), because Enron was
following the specific GAAP rules.
Andersen, though, appears to have violated
some important GAAP and GAAS requirements. There is no doubt that Andersen
knew that the SPEs were managed by a senior officer of Enron, Fastow, and
that he profited from his management and partial ownership of the SPEs he
structured. On that basis alone, it seems that Andersen should have
required Enron to consolidate the Fastow SPEs with its financial statements
and eliminate the financial transactions between those entities and Enron.
Furthermore, it seems that the SPEs established by Fastow were unlikely to
be able to fulfill the role of closing put options written to offset losses
in Enron's merchant investments. If this were the purpose, the options
should and would have been purchased from an existing institution that could
meet its obligations.
Andersen also seems to have allowed Enron to
violate the requirement specified in FASB Statement 5 that guarantees of
indebtedness and other loss contingencies that in substance have the same
characteristics, should be disclosed even if the possibility of loss is
remote. The disclosure shall include the nature and the amount of the
guarantee. Even if Andersen were correct in following the letter, if not
the spirit of GAAP in allowing Enron to not consolidate those SPEs in which
independent parties held equity equal to at least 3% of assets, Enron's
contingent liabilities resulting from its loan guarantees should have been
disclosed and described.
In any event, Andersen does not appear to have
applied the GAAP requirement to recognize asset impairment (FAS 121). From
our reading of the Powers Report, the put-options written by the SPEs that,
presumably, offset Enron's losses on its merchant investment, were not
collectible, because the SPEs did not have sufficient net assets.
(Details on the SPEs' financial situations should have been available to
Andersen.) GAAP (FAS 5) also requires a liability to be recorded when it is
probable that an obligation has been incurred and the amount of the related
loss can reasonable be estimated. The information presently available
indicates that Enron's guarantees on the SPEs and Kopper's debt had become
liabilities to Enron. It does not appear that they were reported as such.
GAAP (FAS 57) specifies that relationships
with related parties "cannot be presumed to be carried out on an
arm's-length basis, as the requisite conditions be competitive, free-market
dealings may not exist". As Executive Vice President and CFO, Fastow
clearly was a "related party". SEC Regulation S-K (Reg. §229.404. Item 404)
requires disclosure of details of transactions with management, including
the amount and remuneration of the managers from the transactions. Andersen
does not appear to have required Enron to meet this obligation. Perhaps
more importantly, Andersen did not reveal the extent to which Fastow
profited at the expense of Enron's shareholders, who could only have
obtained this information if Andersen had insisted on its inclusion in
Enron's financial statements.
4.2 GAAS
SAS 85 warns auditors not to rely on
management representations about onset values, liabilities, and
related-party transactions, among other important items. Appendix B to SAS
85 illustrates the information that should be obtained by the auditor to
review how management determined the fair values of significant assets that
do not have readily determined market values. We do not have access to
Andersen's working papers to examine whether or not they followed this GAAS
requirement. In the light of the Wall Street Journal report presented above
of Enron's recording a fair value for the Braveheart project with
Blockbuster Inc., though, we find it difficult to believe that Andersen
followed the spirit and possibly not even the letter of this GAAS
requirement.
SAS 45 and AICPA, Professional Standards, vol.
1, AU sec. 334 specify audit requirements and disclosures for transactions
with related parties. As indicated above, this requirement does not appear
to have been followed.
An additional lesson that should be derived
from the Enron debacle is that auditors should be aware of the ability of
opportunistic managers to use financial engineering methods, to get around
the requirements of GAAP. For example, derivatives used as hedges can be
structured to have gains on one side recorded at market or fair values while
offsetting losses are not recorded, because they do not qualify for
restatement to fair-value. Another example is a loan disguised as a sale of
a corporation's stock with guaranteed repurchase from the buyer at a higher
price. If this subterfuge were not discovered, liabilities and interest
expense would be understated. Thus, as auditors have learned to become
familiar with computer systems, they must become aware of the means by which
modern finance techniques can be used to subvert GAAP.
The above findings from the Powers Report appear to be inconsistent with
the testimony of four years later.
"Accountants: Enron Financials Correct ," by Michael Graczyk (Associated
Press Writer), SmartPros, May 4, 2006 ---
http://accounting.smartpros.com/x52873.xml
May 4, 2006 (Associated Press) — Last-minute
changes to quarterly earnings reports prosecutors contend were ordered by
Enron Corp. Chief Executive Jeffrey Skilling to improve the company's
reputation on Wall Street were accurate, and not the result of improper
tapping of company reserves, a defense expert testified Wednesday.
"The whole process of financial reporting, in
a company as large as Enron, to get financial statements out ... is an
enormous undertaking," said Walter Rush, an accounting expert hired by
Skilling. "And people are scrambling, trying to get these estimates put
together.
"There are changes going on up to the very
last second. It is universal. Every company goes through this."
Rush was the second consecutive accounting
expert to take the stand, following University of Southern California
professor Jerry Arnold, who testified for Enron founder and former CEO
Kenneth Lay.
They are among the last defense witnesses, as
lawyers for the two top chiefs at Enron expect to conclude their case early
next week, the 15th week of their federal fraud trial.
Mark Koenig, former head of investor relations
at Enron, testified early in the trial that he believed top Enron executives
were so bent on meeting or beating earnings expectations to keep analysts
bullish on the company's stock that they made or knew of overnight changes
to estimates. Paula Rieker, Koenig's former top lieutenant, said Koenig told
her Skilling ordered abrupt last-minute changes to two quarterly earnings
reports to please analysts and investors.
"They could have just had a bad number," Rush
said, referring to Koenig's and Rieker's testimony about a late-night change
in a fourth-quarter 1999 report that boosted earnings per share from 30
cents to 31 cents.
Arthur Andersen, Enron's outside accounting
firm, already had the 31-cent number days earlier, Rush said.
"They could have been a couple steps behind
the way the process was evolving," he said of Koenig and Rieker.
In addition, Rush said the intention to "beat
the street," a phrase attributed to Skilling, was typical in business.
"Companies set goals and forecasts for
themselves all the time," Rush said.
Prosecutors also contend Enron achieved its
rosy earnings by drawing improperly from reserves. But Rush, responding
specifically to second-quarter earnings in 2000, said a transfer from one
reserve was not material since Enron had another, underreported reserve.
"That number had the effect of understating
Enron's profits," he said.
He also disputed government contentions Enron
executives improperly moved parts of the company's retail operation into its
highly profitable wholesale business unit to hide financial problems under
the guise of an accounting process called "resegmentation."
"I do believe it was properly disclosed and
properly accounted for," Rush said, adding that he believed Enron went
beyond the rules in disclosing particulars about the resegmentation.
"The rules only require we tell we have made a
resegmentation. You just merely need to alert the reader there has been a
change."
Earlier Wednesday, Arnold repeated his
sentiment that Lay did not mislead investors about the company's financial
health in the weeks before it filed for bankruptcy protection in December
2001.
Arnold said third-quarter 2001 financial
statements cited by Lay in discussions with investors complied with
Securities and Exchange Commission rules.
"That is my view," he said, answering repeated
questions about the quarter when Enron reported $638 million in losses and a
$1.2 billion reduction in shareholder equity.
The government contends Lay knew many Enron
assets were overvalued and that losses were coming and misrepresented this
to the public.
Several former high-ranking Enron executives
have testified Lay misled investors when he said the losses were one-time
events.
"I disagree with their interpretation," Arnold
said, who noted his company had been paid $1 million for his work on the
Enron defense.
Only 10 minutes into his testimony Wednesday,
U.S. District Judge Sim Lake grew impatient when Arnold and prosecutor
Andrew Stolter repeatedly went round and round on the same question.
"I'm not going to have sparring over minor,
uncontroverted issues," a clearly irritated Lake barked.
Skilling, who testified earlier, and Lay, who
wrapped up six days on the witness stand Tuesday, are accused of repeatedly
lying to investors and employees about Enron when prosecutors say they knew
the company's success stemmed from accounting tricks.
Skilling faces 28 counts of fraud, conspiracy,
insider trading and lying to auditors, while Lay faces six counts of fraud
and conspiracy.
The two men counter no fraud occurred at Enron
other than that committed by a few executives, like Fastow, who stole money
through secret side deals. They attribute Enron's descent into bankruptcy
proceedings to a combination of bad publicity and lost market confidence.
Bob Jensen
March 20, 2010 reply from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
Bob,
This will be my one and only response to your
comment.
As "the guy who wrote GAAP" for 10 plus years, it's
pretty hard for me to criticize anyone who followed the letter of the rules.
However, much more important is to understand the context of SFAS 140. While
I was gone from the Board when it was developed, I was there for its
predecessor, SFAS 125. That standard involved a very long, laborious process
of determining extremely precise rules for when liabilities should and
shouldn't be "derecognized" from the balance sheet. I can't tell you how
many meetings we had with lawyers involved with securitization transactions
and the like. In the end the document attempted to walk a fine line like
Goldilocks of getting it "just right"- trying to derecognizing those
liabilities where responsibility for obligations had truly been passed to
third parties while leaving those on the balance sheet the ones for which
the substance of an obligation was retained. In the typical fashion of
standards setting, that necessitated very precise rules including legal
opinions in some cases.
Not too long after SFAS 125 was issued, it became
clear that it wasn't working very well and it wasn't accomplishing the "just
right" objective. So the Board began another project that took several more
years and resulted in SFAS 140. Still more (or, rather, different) rules
were developed in an effort to accomplish the same objective of keeping true
obligations on the balance sheet and derecognizing those for which risks and
rewards of ownership had passed to third parties.
SFAS 140 has been seen as not fully satisfactory by
many parties, most notably because of the "QSPE" exception that allowed
Fannie Mae and many other large financial institutions to keep huge amounts
of securitization trusts and similar amounts off the balance sheet when the
trusts were considered set up on "auto pilot." The FASB changed this last
year through SFAS 166 and 167 and Fannie Mae will consolidate $2.5 trillion
of trust assets and liabilities that it doesn't own or owe in its first
quarter 2010 financial statements.
The bottom line is that this has been a highly
contentious aspect of accounting for many years. GAAP has been evolving and
it may evolve further. Would we have been better off with a "principle
based" approach? I personally doubt it although a New York Times article on
Friday suggested exactly that. The rules based approach to this general area
is far from perfect but I think it at least has resulted in more consistency
from company to company. I shudder to think how individual companies would
have applied a judgmental approach in an area like this.
Denny Beresford
March 20, 2010 reply from Bob Jensen
Hi Denny,
I will not prolong the agony, but I surely would
like to have someone explain to me how the Repo 105 accounting in the
particular context used by Lehman served any economic purpose other than to
deceive investors and creditors in the financial statements.
How in the world can the auditors conclude that
Lehman severed "all controls" over poisoned investments that they were 100%
certain would come back to Lehman in a few days. There was zero chance that
the market values of these poisoned CDOs would bounce back.
What could Lehman possibly gain other than balance
sheet trickery?
Would Lehman have even entered into these Repo 105
transactions if Lehman had to book the buy-back obligations as debt having
higher values than the sales prices at inflated and phony values.
I'm not sure auditors should follow any rules-based
standards for transactions only intended to deceive. Egads! Will Patricia
Walters love to hear me say that. Darn! She'll hang this one over my head
for as long as I live.
I think I'm interpreting principles-based a little
differently than you.
You are taking a micro view from the specific rules in FAS 140. I'm taking a
macro view that auditors have both a right and a duty to look at any
transactions that have only one purpose --- to deceive investors and/or
possibly members of the board. Accordingly auditors have a right and a duty
to disclose more to the persons being deceived, whether they are members of
the board of directors or individual investors.
Also the seeking out an opinion from an
England-based law firm has shades of Enron painted all over it in the eyes
of many of us in the academy. This is especially the case for those of us
that remember how Ken Lay hired a shyster law firm to whitewash the whistle
blowing of Sherron Watkins ---
http://www.trinity.edu/rjensen/FraudEnron.htm
You know the story. If it walks like a duck, quacks
like a duck, and looks like a duck then it probably is a duck.
I really think that all Big Four auditors have for
years been helping Wall Street banks write fiction in their financial
statements.
Frank Partnoy and Lynn Turner contend that Wall
Street bank accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be
Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
Thanks Denny.
Bob Jensen
Bob Jensen's threads on the Lehman Examiner's Report ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Question
It appears that Lehman is was trying to whitewash it's creative accounting with
a ruling from a shady law firm.
Because no U.S. law firm would bless the
transaction, Lehman got an opinion letter from London-based law firm
Linklaters. That letter essentially blessed using the maneuver for Lehman's
European broker-dealer under English law. If one of Lehman's U.S. entities
needed to engage in a Repo 105 transaction, the firm moved the securities to
its European arm to conduct the deal on the U.S. entity's behalf, the report
found. That is likely why the counterparties on the repo transactions were
largely a group of seven non-U.S. banks. These included Germany's Deutsche
Bank AG, Barclays PLC of the U.K. and Japan's Mitsubishi UFJ Financial
Group.
What other loser corporation and its auditing firm sought to hide behind a
shady law firm's blessing on deceptive accounting?
Hint: The law firm was contacted after a whistle blower notified both the
client's CEO and the its auditing firm.
Answer
If you don't recall the answer, scroll down past the following tidbit.
"Repos Played a Key Role in Lehman's Demise: Report Exposes Lack of
Information And Confusing Pacts With Lenders," by Suzanne Craig and Mike Spector,
The Wall Street Journal, March 13, 2010 ---
http://online.wsj.com/article/SB20001424052748703447104575118150651790066.html#mod=todays_us_money_and_investing
The rare look into the repo market embedded in the
report comes 18 months after Lehman Brothers collapsed in the U.S.'s largest
bankruptcy filing. While top Lehman executives were quick to blame the
real-estate market for their woes, the exhaustive report singles out senior
executives and auditor Ernst & Young for serious lapses.
The report exposed for the first time what appears
to be an accounting slight of hand known as a Repo 105 transaction, where
Lehman was able to book what looked like an ordinary asset for cash as an
out-and-out sale, drastically reducing its leverage and making its financial
picture look better than it really was. The transactions often were done in
flurries in a financial quarter's waning days, before Lehman reported
earnings.
Four days prior to the close of the 2007 fiscal
year, Jerry Rizzieri, a member of Lehman's fixed-income division, was
searching for a way to meet his balance-sheet target, according to the
report. He wrote in an email: "Can you imagine what this would be like
without 105?"
A day before the close of Lehman's first quarter in
2008, other employees scrambled to make balance-sheet reductions, the report
said. Kaushik Amin, then-head of Liquid Markets, wrote to a colleague: "We
have a desperate situation, and I need another 2 billion from you, either
through Repo 105 or outright sales. Cost is irrelevant, we need to do it."
Marie Stewart, the former global head of Lehman's
accounting policy group, told the examiner the transactions were "a lazy way
of managing the balance sheet as opposed to legitimately meeting
balance-sheet targets at quarter end."
Lehman's use of this accounting technique goes back
to the start of the decade when Lehman business units from New York and
London met to discuss how the firm could manage its balance sheet using
accounting rules that had taken effect in September 2000. Lehman soon
created the "Repo 105" maneuver: Because assets the firm moved amounted to
105% or more of the cash it received in return, Lehman could treat the
transactions as sales and remove securities inventory that otherwise would
have to be kept on its balance sheet.
Because no U.S. law firm would bless the
transaction, Lehman got an opinion letter from London-based law firm
Linklaters. That letter essentially blessed using the maneuver for Lehman's
European broker-dealer under English law. If one of Lehman's U.S. entities
needed to engage in a Repo 105 transaction, the firm moved the securities to
its European arm to conduct the deal on the U.S. entity's behalf, the report
found. That is likely why the counterparties on the repo transactions were
largely a group of seven non-U.S. banks. These included Germany's Deutsche
Bank AG, Barclays PLC of the U.K. and Japan's Mitsubishi UFJ Financial
Group.
In a statement, a Linklaters spokeswoman said the
report "does not criticize" the legal opinions it gave Lehman "or suggest or
say they were wrong or improper." The law firm said it was never contacted
during the investigation.
Jensen Comment
Although Lehman could not find a shady U.S. law firm to "bless the transaction,"
Ken Lay at Enron managed to find a shady law firm to bless the Raptors'
transactions after Sherron Watkins (an Enron executive) sent her infamous
whistle blowing memo to both Ken Lay and to Andersen executives in Chicago.
"Warning on Enron Recounted," by Alexei Barrionuevo, The New York
Times, March 16, 2006 ---
http://www.nytimes.com/2006/03/16/business/businessspecial3/16enron.html?_r=1&oref=slogin
Ms. Watkins, 46,
attracted national attention after testifying before Congress in February 2002
about Enron's collapse two months earlier. She was named one of Time magazine's
people of the year in 2002 for raising red flags about the company's accounting
while still working there. She has since written a book with a Houston
journalist about Enron's fall, and formed a consulting practice that advises
companies on governance issues.
Defense lawyers, during
combative cross-examination, tried to paint Ms. Watkins as an opinionated
fame-seeker who had profited from the Enron scandal on the lecture circuit. The
defense lawyers also suggested that Ms. Watkins was never charged with insider
trading for selling Enron shares because she was wrong in believing that the
Raptors were fraudulent.
Prosecutors contend that
the partnerships and hedges Ms. Watkins testified about were part of a broad
effort by Mr. Skilling and Mr. Lay to manipulate earnings and hide debt. The
former chief executives are accused of overseeing a conspiracy to deceive
investors about Enron's finances so they could profit by selling Enron shares at
inflated prices.
Defense lawyers contend
that prosecutors are seeking to criminalize normal business practices and that
the Enron executives were the victims of thieving subordinates like Andrew S.
Fastow, the former chief financial officer.
Ms. Watkins's appearance
on the stand came as the government neared the end of its case. Judge Simeon T.
Lake III said Wednesday that he estimated that the case could be wrapped up by
the end of April.
Ben F. Glisan Jr., a
former Enron treasurer, is scheduled to take the stand next week. Mr. Glisan
pleaded guilty to conspiracy and is currently serving a five-year prison term.
In often-colorful
testimony, Ms. Watkins recounted how she became concerned around June 2001 that
about a dozen Enron assets were being hedged, or guaranteed against loss, by the
Raptors vehicles, which she soon learned contained only Enron stock. The Raptors
were intertwined with partnerships run by Mr. Fastow, who became Ms. Watkins's
boss that summer. The value of the assets, she said, "had tanked," dragged down
by Enron's plummeting share price.
After doing some
investigation, she wrote an anonymous letter about her concerns, then on Aug.
22, 2001, she met with Mr. Lay to discuss them. The meeting came about a week
after Mr. Lay had stepped back into the role of chief executive after the
resignation of Mr. Skilling.
At the meeting, they
discussed a letter of hers in which she had said that she was "incredibly
nervous that Enron would implode in a wave of accounting scandals." She also
noted to Mr. Lay that employees were talking about a "handshake deal" that Mr.
Fastow had with Mr. Skilling that ensured that Mr. Fastow would not lose money
on transactions done with the LJM partnership, which Mr. Fastow was running.
Mr. Lay seemed to take
her seriously, Ms. Watkins testified.
Days after the meeting, she
learned that Vinson & Elkins, the law firm that had originally approved the
Raptors, was doing the internal investigation into the partnerships. The firm,
after consulting with Arthur Andersen, Enron's auditor, issued a report saying
that while the "optics" or appearances were bad, the accounting was appropriate.
Ms. Watkins said she
remained adamant that Andersen, which had received several high-profile
setbacks, should not be trusted.
"I thought this was
bogus," she said of the investigation.
Concerned that Enron was
manipulating its financial statements, Ms. Watkins stepped up efforts to leave
the company, which she had begun shortly after she concluded the Raptors could
be fraudulent. She did not leave until after the bankruptcy.
Ultimately, Mr. Lay
decided to unwind the Raptors and take a write-off in a single quarter rather
than restate the accounting of Enron's financial statements. Ms. Watkins, under
questioning from Chip B. Lewis, a lawyer for Mr. Lay, conceded that while that
was not her preference, "continuing the fraud would have been worse."
Defense lawyers sparred
with Ms. Watkins from the outset. Mr. Lewis placed a copy of Ms. Watkins's book,
"Power Failure," in front of her, calling it a "housewarming present."
Ms. Watkins acknowledged
that she could not explain why prosecutors did not charge her with insider
trading for selling Enron shares.
Continued in article
"Enron Employee Told Lay Last Summer Of Concerns About Accounting
Practices," by Michael Schroeder and John Emshwiller, The Wall Street
Journal, January 15, 2002 ---
http://interactive.wsj.com/articles/SB1011043581125393520.htm
A House committee asked
Enron Corp. for information related to a newly discovered letter written by an
Enron employee last summer warning the company's chairman about its accounting
practices, which prompted an internal investigation.
That inquiry,
conducted by Enron's outside law firm, Vinson & Elkins, "has the appearance of a
whitewash," said House Energy and Commerce Committee spokesman Ken Johnson.
A committee investigator
combing through 40 boxes of documents supplied by Enron found the letter over
the weekend. The author, Sherron Watkins, an Enron Global Finance executive who
wasn't identified further, questioned the propriety of accounting methods,
writing: "I am incredibly nervous that we will implode in a wave of accounting
scandals."
Enron, suffering from a
crisis of confidence by investors, filed for Chapter 11 bankruptcy-court
protection on Dec. 2, shielding it from creditors as it seeks to reorganize.
In concluding its review
of the matters raised in the letter, Vinson & Elkins told Enron that "further
widespread investigation by independent counsel and auditors" was unwarranted.
But the firm warned that "bad cosmetics" involving the transactions and the
decline of Enron's stock posed the "serious risk of adverse publicity and
litigation."
The internal review was
dated Oct. 15, 2001 -- one day before Enron announced its big third-quarter loss
and a $1.2 billion reduction in shareholder equity because of losses later
associated with various partnerships involving Enron officials.
Ms. Watkins's letter and
the lawyers' conclusion were quoted Monday in a request for additional documents
from the House committee to Enron Chairman Kenneth Lay; the firm's outside
auditor, Arthur Andersen LLP; and Vinson & Elkins. The panel is seeking
additional information about the letter and Enron's response to it.
Joe Householder, a
spokesman for Vinson & Elkins, said the firm had received the committee's
request for information, but that "we're not prepared to respond yet to the
specific questions in the letter."
An Enron spokesman didn't
return a call seeking comment. Ms. Watkins, who no longer works for Enron
Global, couldn't be reached for comment.
Her letter to Mr. Lay
questioned special-purpose entities that Enron used to help keep its debt off
its books, the adequacy of public disclosure and the financial impact of the
decline of Enron's stock.
The committee said the
existence of the internal investigation suggests that "senior officials at Enron
and Andersen were aware of the controversial financial transactions and
accounting practices that would ultimately contribute significantly to Enron's
demise."
Mr. Johnson said Vinson &
Elkins "had one hand tied behind its back" by Enron officials as it began its
review of Ms. Watkins's warnings. "As part of Vinson & Elkins's mandate for
investigating the letter, they were told [by Enron officials] not to second
guess Arthur Andersen and not to analyze specific transactions," he said.
Ms. Watkins wasn't the
first Enron insider to raise concerns about partnerships related to Chief
Financial Officer Andrew Fastow. Sometime before the end of 2000, then-Enron
Treasurer Jeffrey McMahon went to company President Jeffrey Skilling and
complained about potential conflicts of interest posed by partnerships operated
by Mr. Fastow, which began in 1999 and early 2000. Mr. Fastow quit the
partnerships last July.
Mr. Skilling didn't share
Mr. McMahon's concerns, say people familiar with the matter. Mr. McMahon
requested and received reassignment to another post. In October, Mr. McMahon was
named as successor to Mr. Fastow as Enron's chief financial officer in the face
of rising controversy over the partnerships.
Ms. Watkins's August 2001
letter came when what now appears to be the first major crack in Enron's facade
appeared. Mr. Skilling, who had been given the chief-executive post earlier in
the year, unexpectedly resigned on Aug. 14. He initially cited unspecified
personal reasons.
But in an interview the
next day, he said that his frustration over Enron's falling stock price played a
major role in his decision to quit after only six months as chief executive.
That remark has since raised questions about whether Mr. Skilling saw problems
ahead for Enron because some of its partnership arrangements relied heavily on
the use of Enron stock and their stability could be threatened by a falling
price.
Separately, Andersen
issued a statement providing more details about an e-mail sent by an in-house
attorney that resulted in the destruction by Andersen employees of numerous
Enron-related audit documents.
Mr. Odom forwarded the
e-mail to David Duncan, the partner in charge of the Enron audit as a reminder
of the firm's existing policy, Andersen said. The firm added that the e-mails
"are not a representation that there were no inappropriate actions" and said it
is continuing to investigate the matter.
Andersen's
records-retention policy goes into great detail about what documents should be
kept for what periods of time and when they should be disposed of. But the
policy does note, "In cases of threatened litigation, no related information
will be destroyed." At the time the e-mail was sent, no subpoenas had been
issued, but Enron's problems were mounting and drawing the attention of
attorneys representing shareholders.
"Liberté, Egalité, Fraternité: Big Lehman Brothers Troubles For Ernst &
Young," by Francine McKenna, re: The Auditors, March 15, 2010 ---
http://retheauditors.com/2010/03/15/liberte-egalite-fraternite-lehman-brothers-troubles-for-ernst-young-threaten-the-big-4-fraternity/
Ernst & Young, the audit firm, had a long and
lucrative relationship with Lehman Brothers. Lehman Brothers has paid EY
more than $160 million in audit and other fees since fiscal year 2001.
Although this isn’t nearly as much as
Goldman Sachs and AIG pay PwC – almost $230
million a year combined in 2008 – it was still a huge amount and represented
a significant client relationship for Ernst & Young.
It all started with Shearson Lehman American
Express back in 1975. Lehman Brothers inherited an audit relationship with
Ernst & Young when Lehman was
spun off from American Express in 1994. Current
Ernst & Young Global Chairman Jim Turley
cut his teeth on American Express.
“The decision to make Lehman Brothers an
independent company again, owned by American Express shareholders and
Lehman employees, completes American Express’s effort to rid itself of
the draining weight of its extraordinary, and ultimately unsuccessful,
expansion in the 1980s…the two companies will share no directors and
that Richard S. Fuld Jr. will continue as president and chief
executive of Lehman. Fuld, in a brief telephone press
conference, said Lehman was vigorously pursuing its plan to cut costs by
$200 million but could not say if that would result in further loss of
jobs. “It is much more important for us to talk in terms of
dollars and not in terms of people,” he said.”
Ernst and Young (EY) was fired by American Express
at the end of 2004. After a string of issues
with independence that threatened their
credibility and ability to accept new audit work, American Express
unceremoniously dumped them and hired PricewaterhouseCoopers.
“In 2003, Amex shelled out $23 million to
E&Y in audit fees, and $3.5 million for other services. The audit fee
was the largest paid by any U.S.-based E&Y client…an E&Y spokesman
declined to comment on the reasons the firm was dropped…E&Y has been in
the Securities and Exchange Commission’s (SEC) cross-hairs for about a
year, including one probe into whether the audit firm violated federal
auditor independence rules by entering a so-called profit-sharing
agreement in the 1990s with Amex’s travel-service unit…”
But EY’s relationship with Lehman continued until
the bitter end. So it comes as no surprise to me that
EY had a hard time acting independently with their
“sticky” client. Lehman Bankruptcy Examiner Anton Valukas, of local Chicago
Jenner & Block, sums it up nicely:
The Examiner concludes that sufficient
evidence exists to support colorable claims against Ernst & Young LLP
for professional malpractice arising from Ernst & Young’s failure to
follow professional standards of care with respect to
communications with Lehman’s Audit Committee, investigation of a
whistleblower claim, and audits and reviews of Lehman’s public filings.
(V3, Pg 1027)
For my first installment in this series, let’s take
each “colorable claim” individually and give them a
Red
(toast) ,Yellow
(may be vulnerable), or Green
(not likely to be too damaging) rating. I’m not going
to repeat the details from
Anton Valukas’ superb
Bankruptcy Examiner Report
in detail. I’ll offer my opinion and analysis on the “colorable claims,”
EY’s potential defenses, and any details or issues I believe may not have
been covered or any questions left unanswered.
(There’s a great summary of E&Y’s myriad sins and
probably soon-to-be ill-fated Financial Services Office over at
Zerohedge. I will be writing more about this
story, including looking more deeply into the
valuation issues, the impact on the other large
audit firms, the role of
Lehman’s internal audit function, the specific
accounting for the Repo 105 transactions, the relationship of this
bankruptcy to the
Lehman bankruptcy case in the UK, and
my prior theory about the fraud and additional
theories for litigation. )
Ernst & Young failed to
follow professional standards of care with respect to communications with
Lehman’s Audit Committee.
Ernst & Young failed to
follow professional standards of care with respect to an investigation of a
whistleblower claim
Lehman’s own Corporate Audit group
led by Beth Rudofker, together with Ernst & Young, investigated
allegations about balance sheet substantiation problems made in a May
16, 2008 “whistleblower” letter sent to senior management by Matthew
Lee. On June 12, 2008, during the investigation, Lee informed Ernst &
Young about Lehman’s use of $50 billion of Repo 105 transactions in the
second quarter of 2008. At a June 13, 2008 meeting, Ernst & Young failed
to disclose that allegation to the Board’s Audit Committee. (V3
page 945)
As the lawyers would say, the optics are
bad here. The Audit Committee asks EY to support Lehman’s internal auditor
in investigating a
“whistleblower’s” allegations of balance sheet
improprieties. The auditors interview the “whistleblower” and then don’t
say anything at any of the Audit Committee meetings. Turns out what Mr. Lee
the “whistleblower” was alleging is what the examiner believes is the
fundamental problem and grounds for “colorable claims” against top officers
and EY.
The word “whistleblower” is colored with tons of
emotion post-Enron. We now look at those called “whistleblowers” and see
heroes. But let’s look at what I think may have actually happened. Internal
Audit, not EY, was in charge of the investigation.
They “naturally” asked their trusted, all-things-to-all-people advisor, EY,
to help.
That was their first mistake. If I’ve said it
once, I’ve said it a thousand times: The external auditor should not be
conducting or assisting with internal investigations of potential fraud or
illegal acts by top executives. I wrote about it at
Siemens, subject of the largest ever FCPA
settlement in history. KPMG,
their auditor, got sued.
The external auditor should stay the hell away from
internal investigations because they may get caught up in something they
would rather not know. They may want to claim plausible deniability. And a
company should not engage the external auditor to support internal
investigations especially regarding fraud or illegal acts by top management.
Do they do it to be cheap or to keep dirty laundry inside? The external
auditor is too often part of the problem, an enabler, instead of part of the
solution.
If Lehman had hired another firm, a law firm or
anyone except their external auditor, to do the investigation, the
investigation would have been
covered end to end in privilege, the external
auditor may or
may not (in this case EY would have been better
not) have been included in the “circle of privilege,” and the investigation
would have been completed professionally.
However, by supporting this investigation, EY was
essentially doing internal audit work, a prohibited
service under Sarbanes-Oxley
for independence reasons. It’s shocking to me that
the EY audit partners did not at least turn over the investigation to EY’s
Forensic Accounting and Investigations Practice in order to provide some
semblance of independence and professionalism.
Even though EY may have been an unwilling party to
knowledge of an ugly situation right before an audit committee meeting, they
got stuck. They had an obligation under AU 380, as the external auditor -
not as an investigator – to inform the Audit Committee. They could have
been on the other side being informed – or not – instead of being the one
supposed to be doing the informing.
AU 380, the rules
for auditor communication with the Audit Committee, are very clear. But
they relate to the auditors role as an auditor not the role of an
auditor who is lent as muscle to an internal investigation. By playing the
“trusted advisor” they screwed themselves.
Stoplight? Yellow.
Looks bad, but EY may be able to talk their way out of
this one once it gets to court. They need to explain how they were still
looking into the issue, doing their “auditor” work and make sure their full
but limited role and responsibilities for the process are explained. If they
lose on this chalk it up to another case of audit partners wanting to be
supermen to their clients, the corporation’s executives, rather than looking
out for their own best interests. Unfortunately in this situation, the
shareholders were probably going to lose either way.
Ernst & Young failed to
follow professional standards of care with respect to audits and reviews of
Lehman’s public filings.
The Examiner finds that sufficient evidence
exists to support the finding of colorable claims against Richard Fuld,
Christopher O’Meara, Erin Callan, and Ian Lowitt in connection with
their actions in causing or allowing Lehman to file periodic reports
that did not disclose Lehman’s use of Repo 105 transactions and against
Ernst & Young for its failure to meet professional standards in
connection with that lack of disclosure…While there were credible facts
and arguments presented by each that may form the basis for a successful
defense, the Examiner concluded that these possible defenses do not
change the now final conclusion that there is sufficient evidence to
support a finding that claims of breach of fiduciary duty exist against
Fuld, O’Meara [CFO 2004-2007], Callan [CFO 12/07 to 6/2008], and Lowitt
[CFO 6/2008 to Chapter 11 9/08] and a colorable claim of professional
malpractice exists against Ernst & Young.” (V3, pages 990-991)
This one
is about mandated disclosure and unfortunately for EY – and these Lehman
executives – it looks like a prima facie case of securities laws
violation for the executives and malpractice for EY.
Color
this stoplight RED
for “EY is burnt toast.”
EY’s only
hope is perhaps an “in pari delicto” defense. The Lehman
executives will surely be subject to civil and criminal fraud charges. In
that case, given the challenges for a Bankruptcy Trustee who, strictly
speaking, stands in the shoes of felons whose actions may be imputed to
Lehman the corporation, EY may be able to try what PwC and Grant
Thornton/PwC/EY have tried in the
AIG and Refco cases coming before the New York Court of Appeals. But
if those questions are resolved in favor of the plaintiffs, EY will not be
able to count on Fuld, O’Meara, Callan and Lowitt to shield them from
accountability.
Why did
this happen? Well, any obfuscation, if intentional, was meant to fool
investors, ratings agencies,
short sellers, counterparties and anyone else
whose confidence the Lehman executives required. They wanted to appear
to be in better financial shape than they really were – for as long as
possible.
They may have been prolonging the inevitable, but
at some point they knew the inevitable would occur. Liquidity crises are
rarely sudden. But they are often suddenly acknowledged. In Lehman’s case,
the Bear Stearns failure was probably the bell that tolled hollow, loud and
clear.
So why did EY “fail to meet professional standards”
in connection with that lack of disclosure?
Brad
Hintz, Lehman’s CFO in the late 1990’s told Bloomberg
on March 12, “over ten years, a lot of venial sins add
up…” I’m assuming he means the mortal sin of accounting manipulation. I
think that over almost ten years EY may have ignored a lot of venial sins
until “the drug we’re on,” as Lehman’s McDade calls the now notorious
Repo 105 transactions,
added up to the mortal sin of accounting manipulation that was hidden form
investors by lack of disclosure.
Brad Hintz told me that the average CFO tenure
post-Lehman IPO 1994 was 540 days. The Examiners’s Report refers to three
CFOs during the period under examination alone. I’ve already told you what
was wrong with the last two,
Callan and Lowitt. You can sense their boredom and disdain for
accounting details when you read their testimony.
Continued in article
Bob Jensen's threads on Ernst & Young's troubles are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Bob Jensen's threads on the Enron/Andersen scandals are
at
http://www.trinity.edu/rjensen/FraudEnron.htm
Bob Jensen's threads on all large international auditing firms ---
http://www.trinity.edu/rjensen/fraud001.htm
My Hero Lawyer, Professor, and Wall Street Financial Expert Weighs In
Question
In the bankruptcy court examiner's report on Lehman's downfall, is Volume 3 more
or less important than Volume 2?
Answer
For Ernst & Young it is probably Volume 3, but my true hero exposing Wall Street
scandals opts for Volume 2.
My favorite Wall Street books exposing the inside greed and fraud on Wall
Street are those written by Frank Partnoy. My timeline of his exposes can be
found at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds .
Professor Partnoy's Senate Testimony was among the first solid explanations
of how derivative financial instruments frauds took place at Enron. His entire
testimony can be found at
http://www.trinity.edu/rjensen/FraudEnron.htm#FrankPartnoyTestimony
See his explanation of the infamous Footnote 16 of the Year 2000 Enron Annual
report ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Senator
His books are among the funniest and best books I've ever read in my life,
even better than the books of Michael Lewis.
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
They are the most dog-eared and scruffed up books in my entire library.
"Lehman Examiner Punted on Valuation,"
by Frank Partnoy, Professor of Law and Finance University of San Diego School of
Law and author of Fiasco, Infectious Greed, and
The Match King
Naked Capitalism, March 14, 2010 ---
http://www.nakedcapitalism.com/2010/03/frank-partnoy-lehman-examiner-punted-on-valuation.html
The buzz on the Lehman bankruptcy examiner’s report
has focused on Repo 105, for good reason. That scheme is one powerful
example of how the balance sheets of major Wall Street banks are fiction. It
also shows why Congress must include real accounting reform in its financial
legislation, or risk another collapse. (If you have 8 minutes to kill, here
is my
recent talk on the off-balance sheet problem, from
the Roosevelt Institute financial conference.)
But an even more
troubling section of the Lehman report is not Volume 3 on Repo 105. It is
Volume 2, on Valuation. The Valuation
section is 500 pages of utterly terrifying reading. It shows that, even
eighteen months after Lehman’s collapse, no one – not the bankruptcy
examiner, not Lehman’s internal valuation experts, not Ernst and Young, and
certainly not the regulators – could figure out what many of Lehman’s assets
and liabilities were worth. It shows Lehman was too complex to
do anything but fail.
The report cites extensive evidence of valuation
problems. Check out page 577, where the report concludes that Lehman’s high
credit default swap valuations were reasonable because Citigroup’s marks
were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s
valuations the objective benchmark?
Or page 547, where the report describes how
Lehman’s so-called “Product Control Group” acted like Keystone Kops: the
group used third-party prices for only 10% of Lehman’s CDO positions, and
deferred to the traders’ models, saying “We’re not quants.” Here are two
money quotes:
While the function of the Product Control Group
was to serve as a check on the
desk marks set by Lehman’s traders, the CDO product controllers were
hampered in
two respects. First, the Product Control Group did not appear to have
sufficient
resources to price test Lehman’s CDO positions comprehensively. Second,
while the
CDO product controllers were able to effectively verify the prices of
many positions
using trade data and third‐party prices, they did not have the same
level of quantitative sophistication as many of the desk personnel who
developed models to price CDOs. (page 547)
Or this one:
However, approximately a quarter of Lehman’s
CDO positions were not affirmatively priced by the Product Control
Group, but simply noted as ‘OK’ because the desk had already written
down the position significantly. (page 548)
My favorite section describes the valuation of
Ceago, Lehman’s largest CDO position. My corporate finance students at the
University of San Diego School of Law understand that you should use higher
discount rates for riskier projects. But the Valuation section of the report
found that with respect to Ceago, Lehman used LOWER discount rates for the
riskier tranches than for the safer ones:
The discount rates used by Lehman’s Product
Controllers were significantly understated. As stated, swap rates were
used for the discount rate on the Ceago subordinate tranches. However,
the resulting rates (approximately 3% to 4%) were significantly lower
than the approximately 9% discount rate used to value the more senior S
tranche. It is inappropriate to use a discount rate on a subordinate
tranche that is lower than the rate used on a senior tranche. (page 556)
It’s one thing to have product controllers who
aren’t “quants”; it’s quite another to have people in crucial risk
management roles who don’t understand present value.
When the examiner compared Lehman’s marks on these
lower tranches to more reliable valuation estimates, it found that “the
prices estimated for the C and D tranches of Ceago securities are
approximately one‐thirtieth of the price reported by Lehman. (pages 560-61)
One thirtieth? These valuations weren’t even close.
Ultimately, the examiner concluded that these
problems related to only a small portion of Lehman’s overall portfolio. But
that conclusion was due in part to the fact that the examiner did not have
the time or resources to examine many of Lehman’s positions in detail
(Lehman had 900,000 derivative positions in 2008, and the examiner did not
even try to value Lehman’s numerous corporate debt and equity holdings).
The bankruptcy examiner didn’t see enough to bring
lawsuits. But the valuation section of the report raises some hot-button
issues for private parties and prosecutors. As the report put it, there are
issues that “may warrant further review by parties in interest.”
For example, parties in interest might want to look
at the report’s section on Archstone, a publicly traded REIT Lehman acquired
in October 2007. Much ink has been spilled criticizing the valuation of
Archstone. Here is the Report’s finding (at page 361):
… there is sufficient evidence to support a
finding that Lehman’s valuations for its Archstone equity positions were
unreasonable beginning as of the end of the first quarter of 2008, and
continuing through the end of the third quarter of 2008.
And Archstone is just one of many examples.
The Repo 105 section of the Lehman report shows
that Lehman’s balance sheet was fiction. That was bad. The Valuation section
shows that Lehman’s approach to valuing assets and liabilities was seriously
flawed. That is worse. For a levered trading firm, to not understand your
economic position is to sign your own death warrant.
|
Selected works of FRANK PARTNOY
Bob Jensen at Trinity University
1. Who is Frank
Partnoy?
Cheryl Dunn
requested that I do a review of my favorites among the
“books that have influenced [my] work.” Immediately
the succession of FIASCO books by Frank Partnoy
came to mind. These particular books are not the best
among related books by Wall Street whistle blowers such
as Liar's Poker: Playing the Money Markets by
Michael Lewis in 1999 and Monkey Business: Swinging
Through the Wall Street Jungle by John Rolfe and
Peter Troob in 2002. But in1997. Frank Partnoy was the
first writer to open my eyes to the enormous gap between
our assumed efficient and fair capital markets versus
the “infectious greed” (Alan Greenspan’s term) that had
overtaken these markets.
Partnoy’s succession
of FIASCO books, like those of Lewis and Rolfe/Troob
are reality books written from the perspective of inside
whistle blowers. They are somewhat repetitive and
anecdotal mainly from the perspective of what each
author saw and interpreted.
My favorite among
the capital market fraud books is Frank Partnoy’s latest
book Infectious Greed: How Deceit and Risk Corrupted
the Financial Markets (Henry Holt & Company,
Incorporated, 2003, ISBN: 080507510-0- 477 pages). This
is the most scholarly of the books available on business
and gatekeeper degeneracy. Rather than relying mostly
upon his own experiences, this book drawn from Partnoy’s
interviews of over 150 capital markets insiders of one
type or another. It is more scholarly because it
demonstrates Partnoy’s evolution of learning about
extremely complex structured financing packages that
were the instruments of crime by banks, investment
banks, brokers, and securities dealers in the most
venerable firms in the U.S. and other parts of the
world. The book is brilliant and has a detailed and
helpful index.
What did I learn
most from Partnoy?
I learned about the
failures and complicity of what he terms “gatekeepers”
whose fiduciary responsibility was to inoculate against
“infectious greed.” These gatekeepers instead
manipulated their professions and their governments to
aid and abet the criminals. On Page 173 of
Infectious Greed, he writes the following:
Page #173
When
Republicans captured the House of Representatives in
November 1994--for the first time since the Eisenhower
era--securities-litigation reform was assured. In a
January 1995 speech, Levitt outlined the limits on
securities regulation that Congress later would support:
limiting the statute-of-limitations period for filing
lawsuits, restricting legal fees paid to lead
plaintiffs, eliminating punitive-damages provisions from
securities lawsuits, requiring plaintiffs to allege more
clearly that a defendant acted with reckless intent, and
exempting "forward
looking
statements"--essentially, projections about a company's
future--from legal liability.
The Private
Securities Litigation Reform Act of 1995 passed easily,
and Congress even overrode the veto of President
Clinton, who either had a fleeting change of heart about
financial markets or decided that trial lawyers were an
even more
important
constituency than Wall Street. In any event, Clinton
and Levitt disagreed about the issue, although it wasn't
fatal to Levitt, who would remain SEC chair for another
five years.
He later introduces
Chapter 7 of Infectious Greed as follows:
Pages
187-188
The
regulatory changes of 1994-95 sent three messages to
corporate CEOs. First, you are not likely to be
punished for "massaging" your firm's accounting
numbers. Prosecutors rarely go after financial fraud
and, even when they do, the typical punishment is a
small fine; almost no one goes to prison. Moreover,
even a fraudulent scheme could be recast as mere
earnings management--the practice of smoothing a
company's earnings--which most executives did, and
regarded as perfectly legal.
Second,
you should use new financial instruments--including
options, swaps, and other derivatives--to increase your
own pay and to avoid costly regulation. If complex
derivatives are too much for you to handle--as they were
for many CEOs during the years immediately following the
1994 losses--you should at least pay yourself in stock
options, which don't need to be disclosed as an expense
and have a greater upside than cash bonuses or stock.
Third, you
don't need to worry about whether accountants or
securities analysts will tell investors about any hidden
losses or excessive options pay. Now that Congress and
the Supreme Court have insulated accounting firms and
investment banks from liability--with the Central Bank
decision and the Private Securities Litigation Reform
Act--they will be much more willing to look the other
way. If you pay them enough in fees, they might even be
willing to help.
Of course,
not every corporate executive heeded these messages.
For example, Warren Buffett argued that managers should
ensure that their companies' share prices were accurate,
not try to inflate prices artificially, and he
criticized the use of stock options as compensation.
Having been a major shareholder of Salomon Brothers,
Buffett also criticized accounting and securities firms
for conflicts of interest.
But for
every Warren Buffett, there were many less scrupulous
CEOs. This chapter considers four of them: Walter
Forbes of CUC International, Dean Buntrock of Waste
Management, Al Dunlap of Sunbeam, and Martin Grass of
Rite Aid. They are not all well-known among investors,
but their stories capture the changes in CEO behavior
during the mid-1990s. Unlike the "rocket scientists" at
Bankers Trust, First Boston, and Salomon Brothers, these
four had undistinguished backgrounds and little training
in mathematics or finance. Instead, they were
hardworking, hard-driving men who ran companies that met
basic consumer needs: they sold clothes, barbecue
grills, and prescription medicine, and cleaned up
garbage. They certainly didn't buy swaps linked to
LIBOR-squared.
The book
Infectious Greed has chapters on other capital
markets and corporate scandals. It is the best account
that I’ve ever read about Bankers Trust the Bankers
Trust scandals, including how one trader named Andy
Krieger almost destroyed the entire money supply of New
Zealand. Chapter 10 is devoted to Enron and follows up
on Frank Partnoy’s invited testimony before the United
States Senate Committee on Governmental Affairs, January
24, 2002 ---
http://www.senate.gov/~gov_affairs/012402partnoy.htm
The controversial
writings of Frank Partnoy have had an enormous impact on
my teaching and my research. Although subsequent
writers wrote somewhat more entertaining exposes, he was
the one who first opened my eyes to what goes on behind
the scenes in capital markets and investment banking.
Through his early writings, I discovered that there is
an enormous gap between the efficient financial world
that we assume in agency theory worshipped in academe
versus the dark side of modern reality where you find
the cleverest crooks out to steal money from widows and
orphans in sophisticated ways where it is virtually
impossible to get caught. Because I read his 1997 book
early on, the ensuing succession of enormous scandals in
finance, accounting, and corporate governance weren’t
really much of a surprise to me.
From his insider
perspective he reveals a world where our most respected
firms in banking, market exchanges, and related
financial institutions no longer care anything about
fiduciary responsibility and professionalism in
disgusting contrast to the honorable founders of those
same firms motivated to serve rather than steal.
Young men and women
from top universities of the world abandoned almost all
ethical principles while working in investment banks and
other financial institutions in order to become not only
rich but filthy rich at the expense of countless pension
holders and small investors. Partnoy opened my eyes to
how easy it is to get around auditors and corporate
boards by creating structured financial contracts that
are incomprehensible and serve virtually no purpose
other than to steal billions upon billions of dollars.
Most importantly,
Frank Partnoy opened my eyes to the psychology of
greed. Greed is rooted in opportunity and cultural
relativism. He graduated from college with a high sense
of right and wrong. But his standards and values sank
to the criminal level of those when he entered the
criminal world of investment banking. The only
difference between him and the crooks he worked with is
that he could not quell his conscience while stealing
from widows and orphans.
Frank Partnoy has a
rare combination of scholarship and experience in law,
investment banking, and accounting. He is sometimes
criticized for not really understanding the complexities
of some of the deals he described, but he rather freely
admits that he was new to the game of complex deceptions
in international structured financing crime.
2. What really
happened at Enron? ---
http://www.trinity.edu/rjensen/FraudEnron.htm#FrankPartnoyTestimony
3. What are some
of Frank Partnoy’s best-known works?
Frank Partnoy,
FIASCO: Blood in the Water on Wall Street (W. W.
Norton & Company, 1997, ISBN 0393046222, 252 pages).
This is the first of a somewhat
repetitive succession of Partnoy’s “FIASCO” books that
influenced my life. The most important revelation from
his insider’s perspective is that the most trusted firms
on Wall Street and financial centers in other major
cities in the U.S., that were once highly professional
and trustworthy, excoriated the guts of integrity
leaving a façade behind which crooks less violent than
the Mafia but far more greedy took control in the
roaring 1990s.
After selling a succession of phony
derivatives deals while at Morgan Stanley, Partnoy blew
the whistle in this book about a number of his
employer’s shady and outright fraudulent deals sold in
rigged markets using bait and switch tactics.
Customers, many of them pension fund investors for
schools and municipal employees, were duped into complex
and enormously risky deals that were billed as safe as
the U.S. Treasury.
His books have received mixed reviews,
but I question some of the integrity of the reviewers
from the investment banking industry who in some
instances tried to whitewash some of the deals described
by Partnoy. His books have received a bit less praise
than the book Liars Poker by Michael Lewis, but
critics of Partnoy fail to give credit that Partnoy’s
exposes preceded those of Lewis.
Frank Partnoy,
FIASCO: Guns, Booze and Bloodlust: the Truth About High
Finance (Profile Books, 1998, 305 Pages)
Like his earlier books, some investment
bankers and literary dilettantes who reviewed this book
were critical of Partnoy and claimed that he
misrepresented some legitimate structured financings.
However, my reading of the reviewers is that they were
trying to lend credence to highly questionable offshore
deals documented by Partnoy. Be that as it may, it
would have helped if Partnoy had been a bit more
explicit in some of his illustrations.
Frank Partnoy,
FIASCO: The Inside Story of a Wall Street Trader
(Penguin, 1999, ISBN 0140278796, 283 pages).
This is a
blistering indictment of the unregulated OTC market
for derivative financial instruments and the million
and billion dollar deals conceived in investment
banking. Among other things, Partnoy describes
Morgan Stanley’s annual drunken skeet-shooting
competition organized by a “gun-toting strip-joint
connoisseur” former combat officer (fanatic) who
loved the motto: “When derivatives are outlawed
only outlaws will have derivatives.” At that event,
derivatives salesmen were forced to shoot entrapped
bunnies between the eyes on the pretense that the
bunnies were just like “defenseless animals” that
were Morgan Stanley’s customers to be shot down even
if they might eventually “lose a billion dollars on
derivatives.”
This book has one of the best accounts of the
“fiasco” caused almost entirely by the duping of
Orange
County ’s Treasurer (Robert Citron)
by the unscrupulous Merrill Lynch derivatives
salesman named Michael
Stamenson. Orange
County eventually lost over a billion
dollars and was forced into bankruptcy. Much of
this was later recovered in court from Merrill
Lynch. Partnoy calls
Citron and Stamenson
“The Odd Couple,” which is also the title of Chapter
8 in the book.Frank Partnoy, Infectious Greed:
How Deceit and Risk Corrupted the Financial Markets
(Henry Holt & Company, Incorporated, 2003, ISBN:
080507510-0, 477 pages)Frank Partnoy, Infectious
Greed: How Deceit and Risk Corrupted the Financial
Markets (Henry Holt & Company, Incorporated,
2003, ISBN: 080507510-0, 477 pages)
Partnoy shows how corporations gradually
increased financial risk and lost control over overly
complex structured financing deals that obscured the
losses and disguised frauds pushed corporate officers
and their boards into successive and ingenious
deceptions." Major corporations such as Enron, Global
Crossing, and WorldCom entered into enormous illegal
corporate finance and accounting. Partnoy documents the
spread of this epidemic stage and provides some
suggestions for restraining the disease.
"The Siskel and
Ebert of Financial Matters: Two Thumbs Down for the
Credit Reporting Agencies" by Frank Partnoy,
Washington University Law Quarterly, Volume 77, No. 3,
1999 ---
http://ls.wustl.edu/WULQ/
4. What are
examples of related books that are somewhat more
entertaining than Partnoy’s early books?
Michael Lewis,
Liar's Poker: Playing the Money Markets (Coronet,
1999, ISBN 0340767006)
Lewis writes in Partnoy’s earlier
whistleblower style with somewhat more intense and comic
portrayals of the major players in describing the double
dealing and break down of integrity on the trading floor
of Salomon Brothers.
John Rolfe and Peter
Troob, Monkey Business: Swinging Through the Wall
Street Jungle (Warner Books, Incorporated, 2002,
ISBN: 0446676950, 288 Pages)
This is
a hilarious tongue-in-cheek account by Wharton and
Harvard MBAs who thought they were starting out as
stock brokers for $200,000 a year until they
realized that they were on the phones in a bucket
shop selling sleazy IPOs to unsuspecting
institutional investors who in turn passed them
along to widows and orphans. They write. "It took
us another six months after that to realize
that we were, in fact, selling crappy public
offerings to investors."
There are other books along a similar
vein that may be more revealing and entertaining
than the early books of Frank Partnoy, but he was
one of the first, if not the first, in the roaring
1990s to reveal the high crime taking place behind
the concrete and glass of Wall Street. He was the
first to anticipate many of the scandals that soon
followed. And his testimony before the U.S. Senate
is the best concise account of the crime that
transpired at Enron. He lays the blame clearly at
the feet of government officials (read that Wendy
Gramm) who sold the farm when they deregulated the
energy markets and opened the doors to unregulated
OTC derivatives trading in energy. That is when
Enron really began bilking the public.
Some of the many, many
lawsuits settled by auditing firms can be found at
http://www.trinity.edu/rjensen/Fraud001.htm
|
|
The End of Wall Street?
Liars Poker II is called "The End"
The Not-Funny Punch Line is Not Until Page 9 of This Tongue in Cheek Explanation
of the Meltdown on Wall Street!
Now I asked
Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of
the other Wall Street firms—all said what an awful thing it was to go public
(beg for a government bailout)
and how could you do such a thing. But when the
temptation arose, they all gave in to it.” He agreed that the main effect of
turning a partnership into a corporation was to transfer the financial risk
to the shareholders. “When things go wrong, it’s their problem,” he said—and
obviously not theirs alone. When a Wall Street investment bank screwed up
badly enough, its risks became the problem of the U.S. government. “It’s
laissez-faire until you get in deep shit,” he said, with a half chuckle. He
was out of the game.
This is a must read to understand what went wrong on Wall Street ---
especially the punch line!
"The End," by Michael Lewis December 2008 Issue The era that defined Wall Street
is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s
Poker, returns to his old haunt to figure out what went wrong.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true
To this day, the willingness of a Wall Street
investment bank to pay me hundreds of thousands of dollars to dispense
investment advice to grownups remains a mystery to me. I was 24 years old,
with no experience of, or particular interest in, guessing which stocks and
bonds would rise and which would fall. The essential function of Wall Street
is to allocate capital—to decide who should get it and who should not.
Believe me when I tell you that I hadn’t the first clue.
I’d never taken an accounting course, never run a
business, never even had savings of my own to manage. I stumbled into a job
at Salomon Brothers in 1985 and stumbled out much richer three years later,
and even though I wrote a book about the experience, the whole thing still
strikes me as preposterous—which is one of the reasons the money was so easy
to walk away from. I figured the situation was unsustainable. Sooner rather
than later, someone was going to identify me, along with a lot of people
more or less like me, as a fraud. Sooner rather than later, there would come
a Great Reckoning when Wall Street would wake up and hundreds if not
thousands of young people like me, who had no business making huge bets with
other people’s money, would be expelled from finance.
When I sat down to write my account of the
experience in 1989—Liar’s Poker, it was called—it was in the spirit of a
young man who thought he was getting out while the getting was good. I was
merely scribbling down a message on my way out and stuffing it into a bottle
for those who would pass through these parts in the far distant future.
Unless some insider got all of this down on paper,
I figured, no future human would believe that it happened.
I thought I was writing a period piece about the
1980s in America. Not for a moment did I suspect that the financial 1980s
would last two full decades longer or that the difference in degree between
Wall Street and ordinary life would swell into a difference in kind. I
expected readers of the future to be outraged that back in 1986, the C.E.O.
of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them
to gape in horror when I reported that one of our traders, Howie Rubin, had
moved to Merrill Lynch, where he lost $250 million; I assumed they’d be
shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the
risks his traders were running. What I didn’t expect was that any future
reader would look on my experience and say, “How quaint.”
I had no great agenda, apart from telling what I
took to be a remarkable tale, but if you got a few drinks in me and then
asked what effect I thought my book would have on the world, I might have
said something like, “I hope that college students trying to figure out what
to do with their lives will read it and decide that it’s silly to phony it
up and abandon their passions to become financiers.” I hoped that some
bright kid at, say, Ohio State University who really wanted to be an
oceanographer would read my book, spurn the offer from Morgan Stanley, and
set out to sea.
Somehow that message failed to come across. Six
months after Liar’s Poker was published, I was knee-deep in letters from
students at Ohio State who wanted to know if I had any other secrets to
share about Wall Street. They’d read my book as a how-to manual.
In the two decades since then, I had been waiting
for the end of Wall Street. The outrageous bonuses, the slender returns to
shareholders, the never-ending scandals, the bursting of the internet
bubble, the crisis following the collapse of Long-Term Capital Management:
Over and over again, the big Wall Street investment banks would be, in some
narrow way, discredited. Yet they just kept on growing, along with the sums
of money that they doled out to 26-year-olds to perform tasks of no obvious
social utility. The rebellion by American youth against the money culture
never happened. Why bother to overturn your parents’ world when you can buy
it, slice it up into tranches, and sell off the pieces?
At some point, I gave up waiting for the end. There
was no scandal or reversal, I assumed, that could sink the system.
The New Order The crash did more than wipe out
money. It also reordered the power on Wall Street. What a Swell Party A
pictorial timeline of some Wall Street highs and lows from 1985 to 2007.
Worst of Times Most economists predict a recovery late next year. Don’t bet
on it. Then came Meredith Whitney with news. Whitney was an obscure analyst
of financial firms for Oppenheimer Securities who, on October 31, 2007,
ceased to be obscure. On that day, she predicted that Citigroup had so
mismanaged its affairs that it would need to slash its dividend or go bust.
It’s never entirely clear on any given day what causes what in the stock
market, but it was pretty obvious that on October 31, Meredith Whitney
caused the market in financial stocks to crash. By the end of the trading
day, a woman whom basically no one had ever heard of had shaved $369 billion
off the value of financial firms in the market. Four days later, Citigroup’s
C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.
From that moment, Whitney became E.F. Hutton: When
she spoke, people listened. Her message was clear. If you want to know what
these Wall Street firms are really worth, take a hard look at the crappy
assets they bought with huge sums of borrowed money, and imagine what
they’d fetch in a fire sale. The vast assemblages of highly paid people
inside the firms were essentially worth nothing. For better than a year now,
Whitney has responded to the claims by bankers and brokers that they had put
their problems behind them with this write-down or that capital raise with a
claim of her own: You’re wrong. You’re still not facing up to how badly you
have mismanaged your business.
Rivals accused Whitney of being overrated; bloggers
accused her of being lucky. What she was, mainly, was right. But it’s true
that she was, in part, guessing. There was no way she could have known what
was going to happen to these Wall Street firms. The C.E.O.’s themselves
didn’t know.
Now, obviously, Meredith Whitney didn’t sink Wall
Street. She just expressed most clearly and loudly a view that was, in
retrospect, far more seditious to the financial order than, say, Eliot
Spitzer’s campaign against Wall Street corruption. If mere scandal could
have destroyed the big Wall Street investment banks, they’d have vanished
long ago. This woman wasn’t saying that Wall Street bankers were corrupt.
She was saying they were stupid. These people whose job it was to allocate
capital apparently didn’t even know how to manage their own.
At some point, I could no longer contain myself: I
called Whitney. This was back in March, when Wall Street’s fate still hung
in the balance. I thought, If she’s right, then this really could be the end
of Wall Street as we’ve known it. I was curious to see if she made sense but
also to know where this young woman who was crashing the stock market with
her every utterance had come from.
It turned out that she made a great deal of sense
and that she’d arrived on Wall Street in 1993, from the Brown University
history department. “I got to New York, and I didn’t even know research
existed,” she says. She’d wound up at Oppenheimer and had the most
incredible piece of luck: to be trained by a man who helped her establish
not merely a career but a worldview. His name, she says, was Steve Eisman.
Eisman had moved on, but they kept in touch. “After
I made the Citi call,” she says, “one of the best things that happened was
when Steve called and told me how proud he was of me.”
Having never heard of Eisman, I didn’t think
anything of this. But a few months later, I called Whitney again and asked
her, as I was asking others, whom she knew who had anticipated the cataclysm
and set themselves up to make a fortune from it. There’s a long list of
people who now say they saw it coming all along but a far shorter one of
people who actually did. Of those, even fewer had the nerve to bet on their
vision. It’s not easy to stand apart from mass hysteria—to believe that most
of what’s in the financial news is wrong or distorted, to believe that most
important financial people are either lying or deluded—without actually
being insane. A handful of people had been inside the black box, understood
how it worked, and bet on it blowing up. Whitney rattled off a list with a
half-dozen names on it. At the top was Steve Eisman.
Steve Eisman entered finance about the time I
exited it. He’d grown up in New York City and gone to a Jewish day school,
the University of Pennsylvania, and Harvard Law School. In 1991, he was a
30-year-old corporate lawyer. “I hated it,” he says. “I hated being a
lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle
me a job. It’s not pretty, but that’s what happened.”
He was hired as a junior equity analyst, a helpmate
who didn’t actually offer his opinions. That changed in December 1991, less
than a year into his new job, when a subprime mortgage lender called Ames
Financial went public and no one at Oppenheimer particularly cared to
express an opinion about it. One of Oppenheimer’s investment bankers stomped
around the research department looking for anyone who knew anything about
the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying
to figure out which end is up, but I told him that as a lawyer I’d worked on
a deal for the Money Store.” He was promptly appointed the lead analyst for
Ames Financial. “What I didn’t tell him was that my job had been to
proofread the documents and that I hadn’t understood a word of the fucking
things.”
Ames Financial belonged to a category of firms
known as nonbank financial institutions. The category didn’t include J.P.
Morgan, but it did encompass many little-known companies that one way or
another were involved in the early-1990s boom in subprime mortgage
lending—the lower class of American finance.
The second company for which Eisman was given sole
responsibility was Lomas Financial, which had just emerged from bankruptcy.
“I put a sell rating on the thing because it was a piece of shit,” Eisman
says. “I didn’t know that you weren’t supposed to put a sell rating on
companies. I thought there were three boxes—buy, hold, sell—and you could
pick the one you thought you should.” He was pressured generally to be a bit
more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman
didn’t occupy the same planet. A hedge fund manager who counts Eisman as a
friend set out to explain him to me but quit a minute into it. After
describing how Eisman exposed various important people as either liars or
idiots, the hedge fund manager started to laugh. “He’s sort of a prick in a
way, but he’s smart and honest and fearless.”
“A lot of people don’t get Steve,” Whitney says.
“But the people who get him love him.” Eisman stuck to his sell rating on
Lomas Financial, even after the company announced that investors needn’t
worry about its financial condition, as it had hedged its market risk. “The
single greatest line I ever wrote as an analyst,” says Eisman, “was after
Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas
Financial Corp. is a perfectly hedged financial institution: It loses money
in every conceivable interest-rate environment.’ I enjoyed writing that
sentence more than any sentence I ever wrote.” A few months after he’d
delivered that line in his report, Lomas Financial returned to bankruptcy.
Continued in article
Michael Lewis, Liar's Poker: Playing the Money Markets (Coronet, 1999, ISBN
0340767006)
Lewis writes in Partnoy’s earlier whistleblower
style with somewhat more intense and comic portrayals of the major players
in describing the double dealing and break down of integrity on the trading
floor of Salomon Brothers.
Continued at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on the Lehman Examiner's Report ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Do Investors Overvalue Firms With Bloated Balance Sheets?
David A. Hirshleifer University of California, Irvine - Paul Merage School of
Business
Kewei Hou Ohio State University - Department of Finance
Siew Hong Teoh University of California - Paul Merage School of Business
Yinglei Zhang Chinese University of Hong Kong (CUHK) - School of Accountancy
SSRN, February 2004
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=404120
Amy Dunbar
notes that this was subsequently published
Hirshleifer, David, Hou Kewei, Siew Hong Teoh, and Zhang Yinglei. 2004. Do
investors overvalue firms with bloated balance sheets? Journal of Accounting
and Economics 38:297-331.
Abstract:
If investors have limited attention, then accounting outcomes that saliently
highlight positive aspects of a firm's performance will promote high market
valuations. When cumulative accounting value added (net operating income)
over time outstrips cumulative cash value added (free cash flow), it becomes
hard for the firm to sustain further earnings growth. When the balance sheet
is 'bloated' in this fashion, we argue that investors with limited attention
will overvalue the firm, because naïve earnings-based valuation disregards
the firm's relative lack of success in generating cash flows in excess of
investment needs. The level of net operating assets, the difference between
cumulative earnings and cumulative free cash flow over time, is therefore a
measure of the extent to which operating/reporting outcomes provoke
excessive investor optimism. Therefore, if investor attention is limited,
net operating assets will negatively predict subsequent stock returns. In
our 1964-2002 sample, net operating assets scaled by beginning total assets
is a strong negative predictor of long-run stock returns. Predictability is
robust with respect to an extensive set of controls and testing methods.
Bob Jensen's threads on valuation are at
http://www.trinity.edu/rjensen/roi.htm
SEC Warns of Fraudulent Website Targeting Madoff's Victims
The U.S. Securities and Exchange Commission (SEC) on Wednesday warned investors
of a Web site that falsely claims to have recovered $1.3 billion in funds hidden
by convicted Ponzi schemer Bernard Madoff in Malaysia.
SmartPros, March 10, 2010 ---
http://accounting.smartpros.com/x68988.xml
Sherry Mills and Cathleen Burns won the American Accounting
Associations Innovation in Accounting Education Award by using a Lego project to
teach cost accounting ---
http://aaahq.org/awards/awrd6win.htm
March 16, 2010 message from Cathleen Spalding Burns
[Cathleen.Burns@Colorado.EDU]
Sherry and I have been teaching using Legos now for
15 years. We have done a number of presentations at teaching conferences
over the years. Please see this article: "Bringing the Factory to the
Classroom" by Cathleen S. Burns and Sherry K. Mills Journal of
Accountancy, January 1997, pp. 56-60 ---
The link to the Burns and
Mills 1997 article is
http://www.journalofaccountancy.com/Issues/1997/Jan/factory
Cathleen S. Burns, PhD, CPA
----- Director, MS Accounting Program ----- Senior Instructor, Accounting
Division Leeds School of Business, 419 UCB, Boulder, CO 80309-0419 Office:
441 Koelbel ----- 303-492-4076 -----
cathleen.burns@colorado.edu
Bob Jensen's threads on edutainment are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Hollywood's Accounting, Ethics, and Business Movies
Professor Roselyn Morris has a listing of ethics movies and some
accounting movies---
http://ceae.aicpa.org/NR/rdonlyres/1E737CC7-562B-4660-936E-91A817EE669E/0/Morris_2006.pdf
"Perceptions of accountants' ethics: evidence from their portrayal in cinema.:
by Felton, S., Dimnik, T. and Bay, D. (2008, December). Journal
of Business Ethics, 83(2), 217-232.
Abstract: "This article examines popular
representations of accountants' ethics by studying their depiction in
cinema. As a medium that both reflects and shapes public opinion, films
provide a useful resource for exploring the portrayal of the profession's
ethics. We employ a values theoretical framework to analyze 110 movie
accountants on their basic ethical character, ethical behavior, and values."
Hollywood Accounting ---
http://en.wikipedia.org/wiki/Hollywood_accounting
Spout's Movies Tagged for Accounting ---
http://www.spout.com/members/0/tags/accounting/MemberTagFilms.aspx
Amazon's Wall Street Movies ---
http://www.amazon.com/Wall-Street-Movies/lm/R2Q5QMM6BWWEAL
And here are some entrepreneur movies. Of course there are
countless movies that feature business (usually in a bad light).
"Must-See Movies for Entrepreneurs," by Anthony Tjan, Harvard
Business Review Blog, March 12, 2010 ---
http://blogs.hbr.org/tjan/2010/03/mustsee-movies-for-entrepreneu.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
After the Oscars last weekend, I started to think
about which movies have really inspired me as an entrepreneur. Here are
three films I believe that you should not only see, but also share with your
teams. Each ties to an important entrepreneurial and leadership lesson.
Man on Wire
A story of the fanatical pursuit of a dream. Philippe
Petit, a French tightrope walker, was consumed by the idea of walking a wire
between New York's former World Trade twin towers. To do so, he would need
years of planning and would have to do it as a covert mission. When I first
watched this film, I did not know if it was based on a true story or not.
The narrative and grainy black-and-white shots made me constantly question
whether I was wishing for this to be true or if it was just brilliant
story-telling. The fact that Petit is real and actually accomplished the
feat in August of 1974 is beyond incredible. In an
earlier post, I wrote about the thin line that
great entrepreneurs balance between what Oscar Levant described as genius
and insanity. You want someone like Petit to succeed because it seems so
improbable and outlandish that it takes a creative visionary with some
degree of craziness to pull it off. Seeing this movie is an inspiration for
those who dare to think differently and push the boundaries.
More than a Game
This is the inspiring story of a high school
basketball team and their quest for the national title. It is also happens
to be the documentary of the high school basketball team on which superstar
Lebron James played. I loved this movie for so many reasons, but the
inspiration for entrepreneurs is in the unfolding of how Lebron and four of
his closest friends from childhood pursued a dream, Starting as a team of
fifth graders playing and growing up together in some of the poorest
neighborhoods and practicing in a Salvation Army basketball court with
linoleum floors. The movie highlights how the journey is always as important
as the ultimate goal and inspires us to believe that almost anything is
possible with the right people and right dedication.
Slumdog Millionaire
A hugely successful film about how you can create your
own luck. So many successful entrepreneurs I have met talk about the role of
luck in their careers, but it is equally true that they put themselves in
the pathway of opportunity. In some ways this movie was like a modern day
Bollywood version of
Forrest Gump (we all need a little Bubba Gump
shrimp luck in our lives). Both are believable tales because of the
attitudes of the protagonists who, like great entrepreneurs, have a
boundless optimism and openness that allow luck to come to them.
That's it for my Siskel and Ebert moment. I'll see
you all at Netflix.
Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm
IRS Telephone Tax Map
March 12, 2010 message from Scott Bonacker
[lister@BONACKERS.COM]
http://taxmap.ntis.gov/taxmap/
About IRS Tax Map
IRS Tax Map began in 2002 as a prototype to address the business need for
improved access to tax law technical information by our telephone assistors.
Tax Map is built on two technologies: semantic integration and the Topic
Maps international standard (ISO/IEC 13250).
Background
IRS began implementing standard markup languages and creating structured
content for our tax law information in the late 1980s. XML/SGML has allowed
IRS to standardize document syntax and structure but additional standards
were needed to integrate our information sources. IRS chose the Topic Maps
international standard for IRS Tax Map.
IRS Tax Map
IRS Tax Map is a web presentation of an underlying "topic map", best
understood as a kind of subject-oriented database — a database designed to
organize information around subjects of interest to taxpayers. Each subject
has a "topic page" in Tax Map. This page provides central access to
everything that Tax Map knows about the subject. It may have links to the
topic pages of related topics, as well as to relevant forms, instructions,
and publications.
The Tax Map production process adapts to the different kinds of
information produced by the various groups at IRS, and incorporates input
and feedback from IRS Tax Specialists and Tax Map users. Adherence to the
principles of the ISO Topic Maps standard protects the value of this
knowledge, allowing it to be exploited and maintained under changing
conditions.
For more information on the Topic Maps international standard see
Cover Pages hosted by OASIS and the
ISO working group maintaining the standard. For additional information
or comments on IRS Tax Map email us at:
topicmap@irs.gov
Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/bookbob1.htm#010304Taxation
March 6, 2010 message from Hussein Abdulrasool
[hsumar@telus.net]
Hello Bob,
I have a very
useful accounting training website
http://www.accountingscholar.com that provides
free in depth tutorials on over 15 accounting chapters, and specialized
finance topics such as
Time Value of Money ,
Bond Payable at Discounts/Premiums,
Dividend Growth Models,
Convertible/Preferred Shares & Corporate Structure.
I would like
to submit this site for listing on your Accounting resources page:
http://www.trinity.edu/rjensen/ElectronicLiterature.htm
I feel my site
will be a very handy tool for accounting/finance students coming to your
resources page and therefore request you to link to this site:
Title:
Financial Accounting
URL:
http://www.accountingscholar.com
Description:
Free Online Accounting and Finance Training website for students,
professionals & those seeking a career in Business/Finance.
If you have
any questions, feel free to email me back. I can also link back to your
finance related website.
Thank you,
Hussein
hsumar@telus.net
March 6, 2010 reply from Bob Jensen
Thank you Hussein.
Hussein gave me permission to share this open sharing message. I will
soon add it to my threads at
http://www.trinity.edu/rjensen/electronicliterature.htm#Textbook s
Second Life 3-D and Interactive Virtual World Free Software (including
learning experiments) ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife
Professor James Martin provides a summary of the following article in his
MAAW Blog on February 25, 2010 at
http://maaw.info/ArticleSummaries/ArtSumKaplanHaenlein09.htm
Kaplan, A. M. and M. Haenlein. 2009.
The fairyland of Second Life: About virtual social worlds and how to use
them. Business Horizons 52(6): 563-572. |
February 22, 2010 message from James R. Martin, University of South Florida
[jmartin@MAAW.INFO]
For those who would like to learn more about
Accounting in the Second Life environment, I've developed a section on
Second Life with a brief summary of the Johnson-Middleton article, a
bibliography, and a links page. See
http://maaw.info/SecondLifeMain.htm
There are a considerable number of related books,
articles, and You Tube videos, but I have not found much in the accounting
literature. When I find more and learn more I will place it on the pages
mentioned above.
I joined Second Life, developed and avatar, and
have been looking around, but don't know how to do much. Those who are using
Second Life for accounting education purposes have an opportunity to write
about it for publication in the accounting education journals. Many
accounting faculty members would be interested in what they are doing, and
unfortunately, if they don't write about it, they are not likely to get any
credit for their work in the academic environment.
Another idea, perhaps there should be a Second Life
section on AAA Commons. I call the MAAW section "Second Life, Avatars, and
Virtual Worlds".
Bob Jensen's threads on Second Life are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife
March 3, 2010 White Paper Announced in an email message from US Banker.
How Can Fraud
Models Combat New Tricks?
|
Download this White Paper
---
http://www.americanbanker.com/papers/FICO-1015350-1.html
|
What if your fraud detection solution could teach itself to identify new
fraud patterns? That’s adaptive modeling. Learn how adaptive modeling
can work with fraud detection systems that use past transactional and
case disposition data to significantly and measurably improve fraud
detection. Download the white paper, “How Can Fraud Models Combat New
Tricks?” |
Bob Jensen's threads on fraud are linked at
http://www.trinity.edu/rjensen/fraud.htm
Collaboration Software ---
http://en.wikipedia.org/wiki/Collaboration_software
From Rick Lillie's on Thinking Outside the Box
Blog on March 7, 2010 ---
http://iaed.wordpress.com/2010/03/07/collanos-workplace-free-collaboration-workspace/
Collanos
Workplace: Free Collaboration Workspace
March
7, 2010 — Rick Lillie
In an earlier
post, I wrote about the latest book by Curtis J. Bonk,
The World Is Open: How Web Technology is Revolutionizing Education.
Bonk’s book is an excellent read. I highly recommend it to
educators at all levels.
While I am familiar with most of what Bonk
writes about, just about every chapter introduces me to something
new. For example, Chapter 8, “Collaborate or Die!” introduced me to
Collanos Workspace, a free
collaboration workspace software tool developed by
Collanos Software, AG (Zurich,
Switzerland). Collanos Workspace is a workspace tool similar in
design to
Groove workspace, originally
developed by
Ray
Ozzie. Groove is now integrated into
Microsoft Office . Ray Ozzie is the guiding light for Microsoft’s
move toward cloud computing.
"Update to Posting about Collanos Workspace — Exceptional Program," by
Rick Lillie, Thinking Outside the Box Blog, March 11, 2010 ---
http://iaed.wordpress.com/2010/03/11/update-to-posting-about-collanos-workspace-exceptional-program/
Last week, I posted comments about
Collanos Workspace.
I asked several Master of Science in Accountancy (MSA) grad students that I
will direct in a self-study project during Spring Quarter 2010 to download
Collanos Workspace. They have gotten up and running very quickly. So far,
I am really impressed with the features of Collanos Workspace and how easy
it is to use.
While Collanos Workspace does not
have all the built-in bells and whistles of
Microsoft Groove,
the bells and whistles are easily replaced by Web 2.0
tools (e.g., Skype, TokBox, and Google Docs and Spreadsheets). Web 2.0
sharing/collaboration tools can be used in conjunction with the Collanos
Workspace. This is very easy to do.
This morning, one of my students called me on
Skype.
He shared his desktop with me and then opened his
Collanos Workspace. I have two monitor screens, so I opened my Collanos
Workspace on my other monitor. We talked on Skype. He added files and
posted a note to his workspace. Since we were both online, the items he
added instantly added and displayed on my workspace. Outstanding
performance!
I am working on papers with a couple of
colleagues. I am going to do my best to persuade them to download and use
Collanos Workspace. We can work together both live and offline. I cannot
say enough about the convenience that Collanos Workspace offers.
This new tool is taking me back to my “Groove”
days. I really liked Groove and hated to see it get buried as an advanced
feature of Microsoft Office.
Continued in article
Interactive Network Simulation
Inspiration: Games versus Teachers
"Creator of 'The Sims' Talks Educational Gaming," Chronicle of Higher
Education, July 14, 2009 ---
http://chronicle.com/media/video/v55/i41.5/wright/?utm_source=at&utm_medium=en
Introduction to (video) Game Design 2009 ---
http://pod.gscept.com/intro2gd2009.xml
Bob Jensen's threads on edutainment and learning games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Bob Jensen's threads on virtual worlds in education are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife
Bob Jensen's threads on Tools and Tricks of the
Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Headaches of Outsourcing
From Jerry Trites E-Business Blog, March 4, 2010 ---
http://www.zorba.ca/blog.html
Boeing's Supply Chain Management Headache
Boeing began building the much hyped Boeing 787, a
large innovative aircraft built of carbon composites rather than aluminum
approximately seven years ago. The company outsourced heavily, as is common
in this technology enabled age, but they carried it to an extreme. This led
to a whole new world of supply chain management, in which outsourced
suppliers were vying for difficult-to-obtain parts and supplies, which the
suppliers found hard to provide because of the erratic and unplanned nature
of the buying. Eventually Boeing had to take over some of the buying so a
reliable supply of parts could be ensured. Boeing's experience with the 787
is a case study in Supply Chain Management in an outsourced environment, and
carries some important lessons for other companies.
For a good report on the building of the 787, see
this article in Technology Review.
http://www.technologyreview.com/computing/24567/?nlid=2792&a=f
"LecturesOnline and BritannicaU," by Joshua Kim, Inside Higher Ed,
February 28, 2010 ---
http://www.insidehighered.com/blogs/technology_and_learning/lecturesonline_and_britannicau
In
1999, while teaching at West Virginia University, I created a site called
LecturesOnline.org. You can find the original home page for LecturesOnline at
the Internet Archive
site. LecturesOnline.org was created out
of my desire to easily locate materials for teaching, and to share the materials
that I was creating for my classes with other faculty.
The
home page contains the following text:
"LecturesOnline.org is the one-stop site to preview, examine, and download
academically focussed digital work-product, such as PowerPoint lectures,
demonstrations, figures, charts, graphs, and HTML pages. [The site]… tries to
fill a gap in the academic world; the absence of a web site that allows
academics to easily find, distribute, disseminate and trade educational
materials that they produce for teaching."
In
1999, while still teaching at WVU, I started consulting for the Britannica - and
in 2000 I sold LecturesOnline to the company. That same year I left my job at
WVU to join Britannica's new San Francisco based educational start-up. The
original idea was to leverage Britannica's expertise, resources, and brand to
expand the reach and content of LecturesOnline. A site called "BritannicaU"
would develop out of LecturesOnline, one that would fold in Britannica's
multimedia and text content with user-submitted teaching materials and perhaps
content from other sources. The site would be organized around disciplines, the
way a college/university is organized, allowing faculty looking for lecture
material to easily locate high quality content.
This
vision never came to fruition. Looking back, I still think that BritannicaU (or
an expanded LecturesOnline) was a pretty good idea. A site such as BritannicaU
would have (and perhaps still would) fill a need for quality discipline (or
course) specific teaching materials. Faculty still produce tons of PowerPoint
lectures for their own courses, and these lectures are never shared (as they are
locked up in learning management systems or on individual hard drives). At least
a certain percentage of faculty members would be willing to share their teaching
materials, particularly if they got attribution and their material was not
re-purposed for commercial use (this was before Creative Commons). Sharing would
be encouraged if an easy exchange method for borrowing was part of the deal. For
Britannica, mixing their existing content with user submitted materials would
have increased the relevancy and visibility of their brand. I've long thought
that Encyclopædia Britannica content is useful for teaching, and a site like
BritannicaU would have demonstrated this idea.
Why
did BritannicaU never get off the ground? The idea died before we were able to
produce any workable site, it never even made it to the stage of being released
(although a good deal of money was spent on outsourced Web design, consulting
and prototyping).
Some reasons for the failure of BritannicaU:
1)
Business Model: BritannicaU, sort of an
expanded LecturesOnline with Britannica content and a more advanced platform,
may have been a good idea but it would have never been a huge revenue generator.
The whole point of the original site was a nonprofit exchange. Why would faculty
upload their teaching materials if someone else was making money off them? This
tension existed from the day I sold LecturesOnline to Britannica. How would
BritannicaU monetize? Advertising seemed like the only possibility, but again
this would violate the original spirit and rationale of the site. Britannica
could have made the site a dot-org, foregone advertising and decided to live
with the site as channel to market their content as relevant to higher ed
faculty, but that would have cannibalized its paid (subscription) properties. A
"LecturesOnline" brought to you by Britannica probably would have been the best
bet, but Britannica was never interested in moving too far beyond their core
content (or other expensively produced original content), or supporting a
property that did not make money.
2)
Leadership and Experience: The Britannica
Educational Division, initially based in a couple of live/work lofts South of
Market (SOMA) and finally at the Presidio before closing in 2001, recruited some
very smart people. Most of these folks never worked on BritannicaU, as the
inherent lack of a business model quickly doomed the higher ed. site, with the
focus quickly moving to a product called BritannicaSchool for the K-12 market.
As for me, I had really no idea what I was doing and did not have the skills or
influence to make BritannicaU a reality. Someone should write the story of
Britannica's foray in the San Francisco start-up world to launch an education
division, putting this effort into the larger context of Britannica's historical
transformation from print to digital. My role at Britannica was too marginal,
too peripheral and too short-term to write this story, but I hope someone takes
it up. (Note: I'd like to connect with the old San Francisco Britannica.com
Education people).
3)
Technology: Back in 2000 during the
dot-com bubble some crucial technologies and business models were not in place.
User generated content and the read/write Web were not really mainstreams
concepts. Building any kind of website, much less one that would incorporate the
technologies necessary to allow anyone to upload, tag, search, and discover
teaching materials, was an incredibly expensive proposition. Today a site like
this could be built on Drupal, with storage come from Amazon S3, for very little
money. Bandwidth and storage are now cheap, 10 years ago these were expensive
and scarce commodities.
Today, if you go to LecturesOnline.org you will find some Web squatter.
Britannica was never really interested in the idea of user generated and shared
content, and after buying the site from me they never did anything with it. The
dot-com bubble collapsed, Britannica's management and business model changed
(and changed again), and I left the company in late 2001. I'll be forever
grateful for the opportunity that Britannica gave me to participate in a
start-up culture and transition my career from a traditional faculty track to
educational technology. While I never moved full-time to San Francisco (tele-commuting
from West Virginia, where my wife was in medical school), I cherish the time I
spent with all the amazing people who at one time worked at Britannica.com
Education and who still work for the company in Chicago.
If I
could have a "do-over", I think that it would have been smarter to have not sold
LecturesOnline.org to Britannica, and to have maintained the site as an
independent nonprofit. Perhaps I could have figured out a way to have a company
"sponsor" the site, some way to bring the expertise and resources necessary to
scale the idea. Certainly my lack of programming skills, lack of money, the fact
I had a full-time teaching gig, and the state of the technology when I began
LecturesOnline would have made this difficult. I still think that Britannica's
Encyclopædia content is much more useful for teaching than most faculty realize,
and there should be a way to get this material into the hands of people putting
together lectures. Mostly, I'm happy that I had the opportunity to start
something new, try to grow it, and to fail. No doubt that failure is the best
teacher, and I hope to have many more failures in the course of my career.
Distance Education Alternatives ---
http://www.trinity.edu/rjensen/crossborder.htm
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Do you know the speed traps in your hometown?
I might preface this by saying that I'm a law abiding driver who favors more and
more speed traps. Sadly, there is only one speed trap noted below within 30
miles in all directions from our cottage. But we have very little traffic in
these mountains. Our speed trap is at the south exit of Franconia Notch ---
http://en.wikipedia.org/wiki/Franconia_Notch
Drivers tend to put the pedal to the metal as they emerge from the mountain
pass. I might add that the same thing happens closer to where we live at the
north exit of the Notch. But that is not listed as a speed trap.
(Actually,
I found later that there are two other Notch speed traps further south around
the Lincoln exits.).
Do you know the speed traps in your hometown?
http://www.speedtrap.org/speedtraps/stetlist.asp
Jensen Comment
In our current discussion about priorities of
accounting standard setting, it struck me that accounting and auditing standards
should be like speed traps.
As I was writing
this speed trap tidbit, it dawned on me that writing financial accounting
standards is a bit like choosing where to locate speed traps. The goals should
be focused upon where public safety is most at risk. This is not always where
violations are most likely to take place. Rather safety should be focused on
where accidents are most likely to take place because of the violations.
Accounting standards should focus on where the worst abuses of
investor/creditor safety are likely to take place. As in the case of the speed
trap on the south end of Franconia Notch, I don't think this is where safety is
at stake. The south end of Franconia Notch is in the boon docks, and drivers
pushing it to 80 mph on the four-lane I-93 in the middle of nowhere are not
pushing safety to the limit like they are pushing safety to the limit backing
their cars out of parking places in our always-overcrowded Littleton Wal-Mart. I
fear more about cars hitting shopping carts and kids in this parking lot than
accidents up on either end of the Notch.
Incidentally, drivers tend to speed where the Notch exits change to double
lanes, because they've been bottled up for miles at 45-mph on a single lane
inside the Notch. It's like they blame the drivers ahead of them in the Notch
for going so slow and want to zoom around them when there's at long last a
passing lane. But the drivers ahead of them are also speeding up to at least 65
mph such that you have to now get around them you may have to accelerate to 80
mph. I notice this time and time again at each end of the Notch. After zooming
around at 80 mph, those same drivers generally slow down to less than 70 mph
when they come to their senses.
Such is not the case for Wall Street Bankers.
They will
maintain break-neck speeds for their commissions and bonuses.
Frank Partnoy and Lynn Turner contend that Wall Street
bank accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
"23 Reasons Why Companies Choose Integrated XBRL," CFO.com,
February 2010 ---
http://www.cfo.com/whitepapers/index.cfm/displaywhitepaper/14479744
With an Integrated XBRL Solution, the XBRL tagging
process is embedded within the external reporting process. As such, XBRL
tags can be applied and validated at any time within the external reporting
process ý avoiding a "mad rush" to apply the XBRL tags just prior to filing
with the SEC. Integrating XBRL into the external reporting process makes the
tagging, validation and creation of XBRL documents dramatically more
efficient and less error prone.
Bob Jensen's threads on XBRL are at
http://www.trinity.edu/rjensen/xmlrdf.htm
Howard University’s
Center for Accounting Education and Cook Ross Inc. finds that many African
Americans are leaving public accounting out of frustration with a lack of
advancement.
Only 1 percent of public
accounting partners are African American and only 3 percent of CFOs of Fortune
500 companies have minority backgrounds. Accounting firms have been trying to
improve their recruitment of minorities, but efforts to hold on to minority
staffers, particularly African Americans, are falling short. In 2007-2008, 22
percent of all new accounting graduates were minorities, down from 26 percent in
the previous year. Within this group only 4 percent were African Americans in
2007-2008, down from 8 percent in 2006-2007.
Jensen Comment
This is a tragedy, especially for African Americans who passed the CPA
examination. It would be interesting to know how many leaving public accounting
were licensed CPAs.
It would also be nice to know how many African American CPAs left public
accounting for higher paying opportunities, perhaps even higher paying than what
they would be making as CPA firm partners. Corporations aggressively recruit
minority CPAs. We might then get a better idea of the proportion of minority
CPAs who left public accounting because of glass ceilings on promotions and
partnerships.
"KPMG Foundation Celebrates
15th Year of Minority Accounting Doctoral Program," SmartPros, August
1, 2009 ---
http://accounting.smartpros.com/x67298.xml
The KPMG Foundation is
marking the 15th anniversary of its Minority Accounting Doctoral Scholarship
program by announcing today it has awarded a total of $390,000 in scholarships
to 39 minority doctoral scholars for the 2009 - 2010 academic year.
Of the awards, eight are
to new recipients scheduled to begin their accounting doctoral program this
fall, three are to new recipients who have already begun programs, and 28 are
renewals of scholarships previously awarded.
Each of the scholarships
is valued at $10,000 and renewable annually for a total of five years. The
Foundation established the scholarship program in 1994 as part of its ongoing
efforts to increase the number of minority students and professors in business
schools – and has since awarded $8.7 million to minorities pursuing doctorate
degrees.
“We’re proud of the
achievements of our program over the last 15 years, and we have seen a healthy
increase in the number of minority faculty members at our nation’s business
schools, although more work needs to be done,” said Bernard J. Milano, President
of the KPMG Foundation and The PhD Project. “That’s why we continue to award new
scholarships each year and we remain committed to our mission.”
Together with The PhD
Project, a related program whose mission is to increase the diversity of
business school faculty, the Minority Accounting Doctoral Scholarship program
has helped to more than triple the number of minority business professors in the
United States since The PhD Project first began in 1994. Today, there are 985
minority business school professors teaching in the United States. Nearly 400
minority students are currently enrolled in business doctoral programs.
The Minority Accounting
Doctoral Scholarship recipients come from a wide variety of cultures and
backgrounds. This year’s new recipients are:
Continued in article
Jensen Comment
Under the guidance of KPMG Executive Partner Bernie Milano this program became
more than a money awards program. KPMG works with some recipients in customized
counseling and assistance when problems arise for certain individuals still
studying for their doctorates. Various types of problems arise, including some
crises within families.
Minority Hiring
Success Varies Greatly by Discipline: Law, Business, and Sciences Have the
Worst Records
The major cause lies
in the supply chain of PhD graduates. This inspired the KPMG Foundation to
become more proactive in funding minority candidates in selected accountancy
doctoral programs.
One of the reasons for
the shortage of minority undergraduate students in accounting has been the lack
of role models teaching accounting courses in college.
See one of my heroes, Bernie Milano, on Video ---
http://www.diversityinc.com/public/3150.cfm
Bob Jensen's threads on accounting careers are at
http://www.trinity.edu/rjensen/bookbob1.htm#careers
"Catalyst: Women MBAs Lag Behind Men in Jobs, Pay, Promotions," by
Luis Lavelle, Business Week, March 3, 2010 ---
http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2010/03/tktktk_1.html?link_position=link5
There’s a really interesting, albeit not all that
surprising,
report from Catalyst, the group working to expand
opportunities for women in business.
In 2007 and 2008, Catalyst surveyed 9,927 alumni
who graduated from 26 leading business schools in Asia, Canada, Europe, and
the United States. Less than half, 4,143, were men and women who graduated
from full-time MBA programs and were working full-time at the time of the
survey. The goal was to find how women with MBAs fared (relative to men) in
terms of pay and career trajectory after receiving their degrees.
The answer: not well. Even after correcting for
years of experience, industry, and global region, Catalyst found that women
were more likely than men to start their first post-MBA job at a lower
level. That basic finding held even when considering only men and women who
aspired to senior executive level positions, and even among survey
respondents who did not have children. Overall, 60% of women started on the
post-MBA career ladder at the lowest of rungs, entry-level positions. For
men, that number was 46%.
Men also had higher starting salaries than
women—even after taking all the same factors into account. Overall, men had
a pay premium in their first post-MBA jobs of $4,600.
It would be nice to think that once hired women
eventually catch up to men on the career ladder, but you'd be wrong.
Catalyst also found that at the time of the survey men were twice as likely
to have reached the CEO/senior executive level, and had higher salary
growth. Even among men and women who started in entry-level positions and
were otherwise identical in all ways that matter (received their MBAs in the
same year, had the same amount of experience), men still outpaced women in
terms of promotions and pay.
The numbers are depressing, and the authors of the
report, Nancy M. Carter and Christine Silva, were as depressed as anyone by
the findings. They wrote:
Companies pinned hopes on these on these highly
trained graduates from elite MBA programs to help navigate through the
white-water of the global economy. With the same prestigious
credentials, one would expect these women and men to be on equal footing
in the pipeline and their career trajectories gender-blind. What
emerged, however, is evidence that the pipeline is in peril--one that,
for women, is not as promising as expected. While the overall results of
the study are not all that surprising (who hasn't heard the statistic
that women earn only 75 cents for every dollar men earn?), what is
surprising, at least to me, is that this pay gap doesn't disappear when
examining groups of "high potentials" who are virtually identical except
for gender. After all, the typical rationales for the pay gap are things
like career choices, interrupted work histories caused by motherhood,
and other factors specific to women. Correct for them, and at least
theoretically, you should get perfect parity. But you don't. So
something else must be at work--either something nefarious, like
discrimination against women, or something we haven't thought of yet.
I also find this interesting in connection with the
statistics about the number of women pursuing MBAs, which now hovers
somewhere around 30% at top full-time MBA programs. The usual explanation
for this has always been that women are reluctant to enroll in full-time
programs in their late 20s because they're busy starting families. But maybe
something else is at work. If you take the Catalyst research at face value,
then maybe some women already knew what Catalyst is just now discovering and
are making a rational economic choice instead. If pay and career
trajectories for women really are not all they're cracked up to be, then
maybe forking over $300 grand for a top-tier MBA just isn't worth it.
Food for thought. Are there any female MBAs who
feel that they've been passed over for raises or promotions in favor of men,
or who feel the game is somehow rigged in men's favor? Please tell us your
stories.
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/bookbob1.htm#careers
Question
Suppose credit derivatives are declared illegal in all parts of the world other
than the United States.
Will the IASB then be interested in writing a complicated IFRS standard for
credit default swaps?
Answer
The answer is probably yes while CDS accounting is one of the current IEDs on
the roadmap to IFRS and FASB standards convergence. But enthusiasm may wane for
updating the standard for Wall Street's creative contracting not allowed
elsewhere in the world.
"Swaps Come Under Fire: U.S. Regulators, European Leaders Seek More Oversight
on Trades in Derivatives," by Stephen Fidler, Gregory Zuckerman, and Brian
Baskin, The Wall Street Journal, March 10, 2010 ---
http://online.wsj.com/article/SB20001424052748704784904575111191528470212.html#mod=todays_us_page_one
International momentum is building for stricter
oversight of derivatives trading, as a top U.S. regulator recommended new
limits on credit-default swaps and European leaders pushed for a ban on
speculative bets against government debt following recent financial turmoil
in Greece.
In the U.S., Commodity Futures Trading Commission
Chairman Gary Gensler in a speech Tuesday offered his most-specific
criticisms yet of credit-default swaps, the insurance-like contracts often
blamed for the near-collapse of American International Group Inc. during the
financial crisis.
He offered several recommendations to limit their
use—though didn't go so far as to suggest a ban on speculative trading with
credit-default swaps.
"We are to a surprising extent working well with
international regulators," Mr. Gensler said in a question and answer session
after the speech. "I'm optimistic we'll end up at roughly the same spot."
A spokesman said his agency doesn't have the
authority to put some of his recommendations in place but would need to rely
on Congress or other regulators.
German Chancellor Angela Merkel said Tuesday that
her government is backing an initiative to curb the credit-default swaps
market, together with France, Greece and Luxembourg, and she suggested
Europe would forge ahead on its own even if the U.S. didn't go along.
José Manuel Barroso, president of the European
Commission, the European Union's executive arm, said the commission would
examine closely the possibility of banning outright "purely speculative"
trading of the swaps.
The officials' comments mark their strongest stance
yet against credit-default swaps. They fueled the growing debate about
whether swaps contributed to the financial woes sweeping some European
countries—or merely reflected them. Mr. Gensler, who has been calling for
changes in how derivatives are traded for several months, on Tuesday grew
more specific as he singled out credit-default swaps.
The U.S. Securities and Exchange Commission had no
comment on the talks among European regulators about banning certain uses of
credit-default swaps.
Greek Prime Minister George Papandreou brought his
pitch for a crackdown on speculative trades in international financial
markets to the White House Tuesday.
Mr. Papandreou said he "found a very positive
response" from President Barack Obama on a European proposal to curb the
kind of activity he believes has pushed up Greece's borrowing costs and
could trigger another financial crisis.
It's unclear if any of these changes will get off
the ground, or if the U.S. would be willing to go along with the European
proposal.
An administration official said Mr. Obama's
proposed regulatory overhaul, now making its way through Congress, would
make trading more transparent and give regulators better tools to rein in
manipulation.
These would include limits on the size of trading
positions and rules on business conduct. White House spokesman Robert Gibbs
didn't comment on the European swap proposals.
The European leaders Tuesday encouraged global
action from the U.S. and other countries but made clear they wouldn't wait
for it.
"It's important that this is done on the American
side, too, but we think that a step ahead from our side, from the European
Union, would help us," Ms. Merkel said.
Credit-default swaps function like insurance
against a bond default. If a borrower defaults, the CDS holder is paid by
the seller of the protection.
Traders don't need to own the bonds to buy the
protection. Instead, they can use the contracts to make "naked bets" on a
bond's direction.
In recent years, the credit-default swaps market
has boomed. Seven years ago, less than $3 trillion of these contracts were
outstanding; today that has topped $25 trillion, according to the
International Swaps and Derivatives Association.
There is little publicly available information
about who is buying and selling the contracts, which generally are
negotiated in private, off-exchange deals. Thus it is hard for regulators
and others to monitor who is on the hook for selling CDS contracts, and
whether certain investors might be pressuring the contracts on, say, a
nation's or company's debt.
As financial problems mounted for Greece and other
euro-zone countries in recent months, prices of swaps insuring against debt
default by those nations soared, drawing attention to the troubles and
raising questions about whether speculation was worsening them.
Politicians increasingly lashed out against hedge
funds and others assumed to be profiting as prices of the nations' bonds
plunged.
While governments in Europe—where suspicion of
financial markets and speculation tends to run high—have focused on
credit-default swaps trading, a study released Monday by Germany's financial
regulator, BaFin, found no evidence that credit-default swaps have been used
to speculate against Greek national debt.
The study showed the net volume of outstanding
credit-default contracts on Greek national debt has remained unchanged since
January at about $9 billion. This compares to total Greek government debt of
about $400 billion.
"The market data do not show massive speculation in
CDSs," the regulator concluded.
The ban now being discussed in Europe would allow
investors to use the contracts to hedge against possible defaults by
government borrowers, but prevent them from taking purely speculative
positions.
"It's hard to justify why market players should
purchase insurance against risks to which they are not themselves exposed,"
Mr. Barroso said.
The contracts can provide helpful protection for
those who own bonds or have other kinds of exposure.
Any attempt to restrict CDS trades could result in
unintended consequences such as more risk for the financial system and
higher borrowing costs for a range of nations and companies, some analysts
and investors warn.
Restricting credit-default swap trading could push
up borrowing costs for various nations if investors feel they have fewer
ways to protect themselves if the bonds' prices decline.
Tuesday, the cost of CDS protection on debt of
Greece, Italy, Portugal and Spain rose, though it's not clear how much of
the moves, if any, were due to concerns about the future availability of
credit-default swaps.
It is also unclear how "naked" purchases would be
defined or how such a ban would be enforced.
The issue of a ban is expected to be discussed at a
meeting of EU finance ministers in Brussels next week.
Any new law to ban the contracts would have to go
through the EU's often convoluted law-making procedures, and commission
officials said lawyers were still examining whether an outright ban would be
legal.
The commission's Mr. Barroso said it was possible
that European competition policy could be used to address the issue,
allowing the commission to avoid the legislative process and enable it to
act on its own.
However, such action could only follow an unusual
and potentially lengthy inquiry into competitive practices in financial
markets.
Bob Jensen's threads on credit default swaps are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Bob Jensen's timeline of huge derivatives scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Also see
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Bob Jensen's multimedia tutorials on accounting for derivative financial
instruments and hedging activities under FAS 133 and IAS 39 ---
http://www.trinity.edu/rjensen/caseans/000index.htm
Question
When can terminally ill people achieve popularity and great fortune?
Is it worth dying for?
What are the accounting issues is these unusual circumstances for both the
investors and the debtors?
"Investors Tap Into Deathbed Bond Deal," by Mark Maremont and Aparajita
Saha-Bubna, The Wall Street Journal, March 10, 2010 ---
http://online.wsj.com/article/SB20001424052748704784904575112081251438468.html#mod=todays_us_page_one
Billions of dollars in corporate bonds sold to
retail investors come with an unusual provision that could be used to
generate a fast profit. There's just one catch: Investors must team up to
buy the bonds with someone who is about to die
American International Group Inc., Bank of America
Corp., Caterpillar Inc., General Electric Co.'s GE Capital unit and other
major U.S. companies often issue bonds with what is known as a survivor's
option.
In a little-known practice, investors can recruit a
terminally ill person and together they can scoop up these bonds on the open
market at a discount. When the ailing bondholder dies, the surviving
co-owner can then redeem them at face value and potentially turn a quick
profit.
Companies have typically included the macabre
provision as a way to allay fears among ordinary individual
investors—elderly couples who might worry that one spouse could die before
the bonds mature, possibly exposing the survivor to a loss.
But the market's turmoil has made this arrangement
more attractive for professional investors, since some bonds are trading at
a steep discount. Legal and financial experts say there is nothing to
prevent investors from buying the bonds with a dying relative or even a
stranger who is terminally ill.
It isn't clear how many investors have piled into
such bonds since the financial crisis hit, which initially pushed some below
50 cents on the dollar.
Prices have rebounded from their lows. But some
so-called survivor's-option corporate bonds issued by auto lender GMAC
Financial Services, AIG unit American General Financial Services and
student-loan provider SLM Corp. are still being offered at discounts of more
than 20%, according to Knight BondPoint, a unit of Knight Capital Group Inc.
Companies typically issue the bonds because they
want to tap into a regular, stable funding source through retail investors.
Such companies often sell a small amount of bonds each week, say $25
million, through retail brokers.
Usually, there are two ways an investor can cash in
a bond: by selling it to another investor on the open market, or by waiting
until the issuer redeems the bond upon its maturity.
One investor who scored big on the money-back
guarantee is Joseph A. Caramadre, an estate-planning lawyer in Cranston,
R.I. From 2006 to 2009, Mr. Caramadre recruited several dozen terminally ill
people to serve as joint brokerage-account holders. He then bought
survivor's-option bonds trading below face value for each account, according
to Mr. Caramadre's lawyer and federal court records filed in Providence,
R.I., over how to pay out proceeds from the investments.
Continued in article
"Why Women Are the Biggest Emerging Market," by Sylvia Ann Hewlett,
Harvard Business Review Blog, March 8, 2010 ---
http://blogs.hbr.org/hbr/hewlett/2010/03/leverage_your_female_demograph.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
What's the biggest emerging market of them all?
I'll give you a hint: The answer isn't geographic but demographic. The
answer is...women.
Women leaders are the new power behind the global
economy, proclaims
Deloitte Touche Tohmatsu's announcement of its
second annual webcast celebrating
International Women's Day. In developing nations,
women's earned income is growing at 8.1 percent, compared to 5.8 percent for
men. Globally, women control nearly $12 trillion of the $18 trillion total
overall consumer spending, a figure predicted to rise to $15 trillion by
2014.
More significant,
the majority of tertiary degrees are now being awarded to women.
Highly qualified, well-educated and ambitious, these
women are taking over the talent pool from Delhi to Dubai and bringing new
urgency to the issue of managing diversity.
In a speech at the Hidden Brain Drain Summit held
in New York last November, the Right Honorable
Paul Boateng, the U.K.'s first black cabinet
minister and most recently the British High Commissioner to South Africa,
urged representatives of the 57 member organizations to overcome the
obstacles placed in the path of emerging talents. "If you're serious about
growth, if you're serious about innovation, if you're serious about getting
a global reach, then the evidence tells you that you've got to overcome
those obstacles," he said. "The imperative is to move from sentiment to
strategy, to make the leap from survival to success."
Here's how two smart companies are making that leap:
-
Goldman Sachs' ReturnshipSM program is
a novel way of recruiting candidates who, after an extended, voluntary
absence from the workforce, are seeking to re-start their careers. A
returnship serves as a preparatory program, providing "returnees" with
an opportunity to re-learn, sharpen and demonstrate the skills essential
for success in a work environment that may have changed significantly
since their most recent work experience. The eight-week U.S. 2008 pilot
program comprised 11 women. The 2009 program lasted nine weeks and
included 16 returnees chosen from more than 300 applicants.
Acknowledging the importance of Asian markets, the program was expanded
to Hong Kong in the fall of 2009, with an inaugural class of 37
returnees.
-
Google's India Women in Engineering Award Program was launched in
2008 to celebrate young women in college and graduate school who are
pursuing careers in engineering and computer science. That year, 16
women won the $2,000 award for academic excellence and demonstrated
leadership skills; 9 won in 2009, selected from among more than 250
high-caliber applicants. Google senior management and engineers serve as
judges. 2009 winner Anjali Sardana, a Ph.D. candidate at the
Indian Institute
of Technology, says that the award has inspired her to keep pursuing
her dreams: "Not only did the award encourage me to stay in my field, it
has made me confident and given me the spark to mentor other younger
women engineers."
By investing in women in emerging markets,
companies are betting on a brighter future — for a workforce just waiting to
blossom, for economies whose development depends on this new crop of talent,
and, of course, for themselves.
Bob Jensen's threads on careers, including working women opportunities ---
http://www.trinity.edu/rjensen/bookbob1.htm#careers
A New Teaching Case on Executive Options Backdating
Options Backdating ---
http://en.wikipedia.org/wiki/Options_backdating
From The Wall Street Journal Accounting Weekly Review on March 12,
2010
Options Trial to Take New Tack
by: Mark
Maremont
Mar 09, 2010
Click here to view the full article on WSJ.com
TOPICS: Advanced
Financial Accounting, Executive Compensation, Stock Options
SUMMARY: "The
criminal options-backdating trial of the former chief executive of home
builder KB Home, Bruce Karatz, is scheduled to start Tuesday [3/9/2010], in
the latest test of the federal government's checkered attempt to crack down
on a practice that enriched scores of executives around the U.S....The
government alleges that Mr. Karantz reaped millions of dollars in
'undisclosed compensation' to which he wasn't entitled."
CLASSROOM APPLICATION: The
article can be used in coverage of equity-based compensation methods in
financial accounting classes.
QUESTIONS:
1. (Introductory)
As described in the article, what is the practice of backdating stock
options?
2. (Introductory)
Specifically refer to the chart showing the dates of options grant to KB
Home's former CEO, Bruce Karatz, and describe how it evidences the issues in
options backdating.
3. (Advanced)
Describe the accounting for employee compensation through stock options. How
can the government argue that Mr. Karatz received "undisclosed compensation"
if the options actually were issued at a later date than indicated in the
accounting records and the value of the company's stock had increased in the
intervening time?
4. (Introductory)
Refer to the first related article. Many firms opt to issue restricted stock
as compensation to employees. What is restricted stock?
5. (Introductory)
How do you think that the executive-compensation research firm Equilar,
Inc., determined the values of restricted stock issued to executives and
employees?
6. (Advanced)
One reason companies issue restricted stock is "to replace employees'
underwater stock options." What is an "underwater stock option"? How did the
behaviors of backdating stock options help to avoid options going
"underwater" and becoming worthless?
7. (Advanced)
Refer to the second related article. How did research firm Equilar determine
the value of options granted to Silicon Valley tech firms? Why did the
company need to decide on one method to use in its analysis?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Despite Downturn, Top Tech Firms Awarded Big Restricted-Stock Grants
by Pui-Wang Tam
Feb 25, 2010
Online Exclusive
Stock Options Still Popular with Tech Firms
by Pui-Wing Tam
Mar 04, 2010
Online Exclusive
"Options Trial to Take New Tack:
Prosecutors Focus on How Backdating Benefited Former KB Home Chief Executive,"
by Mark Maremont, The Wall Street Journal, March 9, 2010 ---
http://online.wsj.com/article/SB10001424052748703954904575109901879413726.html?mod=djem_jiewr_AC_domainid
The criminal
options-backdating trial of the former chief executive of home builder KB
Home is scheduled to start Tuesday, in the latest test of the federal
government's checkered attempt to crack down on a practice that enriched
scores of executives around the U.S.
Bruce Karatz, who resigned
as CEO of Los Angeles-based KB Home in 2006, will be tried on 20 criminal
counts in U.S. District Court in Los Angeles related to allegations that
between 1999 and 2006 he backdated his own stock options and those of other
executives. He had been one of the home-building industry's highest-paid
executives. The government alleges he reaped millions of dollars in
"undisclosed compensation" to which he wasn't entitled.
Mr. Karatz has pleaded not
guilty and his lawyers have said in legal briefs he never thought he was
committing a crime, calling the government's evidence "gossamer thin." In a
statement, his lawyer John Keker said the accounting rules governing
options-granting "made little sense," but "company after company applied
those rules in good faith, in a way the government now says was wrong."
More than two dozen former
executives of various companies have been criminally charged since 2006 in a
federal crackdown on options backdating. But after a spate of early
convictions and guilty pleas, officials have had setbacks in recent months.
A U.S. judge in Santa Ana,
Calif., recently dismissed criminal charges against former and current
officials of Broadcom Corp., finding prosecutorial misconduct and a lack of
criminal intent. A U.S. judge in St. Louis last month halted a civil trial
against a former official of Engineered Support Systems Inc., finding the
government's case was weak.
Backdating involves
retroactively setting the price of a stock option to a low point in the
stock's value, allowing employees to reap higher profits if the stock is
later sold.
The case against Mr. Karatz
differs in key ways from the Broadcom case. Broadcom's co-founders never
received any backdated options, but Mr. Karatz was the biggest recipient of
KB Home's improperly priced grants. He received roughly half of the total
annual options awarded to all KB corporate officers, according to
prosecutors.
Filings show that at least
four grants to Mr. Karatz were dated at yearly, quarterly or monthly low
points in KB Home's stock.
Prosecutors also allege that
Mr. Karatz tried to cover up the backdating, in part by lying to the
company's top lawyer during a 2006 internal investigation. The allegation,
if proven, could help show criminal intent, by suggesting that Mr. Karatz
knew his conduct was wrong.
A key witness for
prosecutors will be Gary A. Ray, KB Home's ex-head of human resources, who
agreed to cooperate after pleading guilty to a conspiracy charge in 2008.
According to documents filed with the court, Mr. Ray said he initially went
along with the false story about the options granting process, but later
informed Mr. Karatz he couldn't tell KB Home's outside lawyers "the same
lies" he had given to the top internal lawyer.
Jensen Comment
The American Accounting Association in 2007 gave its Notable Contributions to
Accounting Literature Award (and $5,000) to Iowa's finance professor Eric Lie
---
http://aaahq.org/awards/awrd3win.htm
Erik Lie
"On the Timing of CEO Stock Option Awards"
Management Science (May, 2005)
|
|
Bob Jensen's threads on FAS 123-R and the
controversies surrounding employee stock option accounting are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
Updates on Venture Capital, Environmental Accounting, Green Accounitng:
Two Teaching Cases
Venture Capital ---
http://en.wikipedia.org/wiki/Venture_capital
From The Wall Street Journal Accounting Weekly Review on March 12,
2010
Venture-Capital firms Caught in a Shakeout
by: Pui-Wing
Tam
Mar 09, 2010
Click here to view the full article on WSJ.com
TOPICS: Mergers
and Acquisitions, Valuations
SUMMARY: "Venture
firms are struggling to raise new cash, hampered by poor investment returns
and a difficult economy...There were 794 active venture-capital firms in the
U.S. at the end of 2009, meaning they have raised money in the last eight
years, down from a peak of 1,023 in 2005....Many venture-capital
firms...profited handsomely in the boom years in the late 1990s and early
2000....[as well,] their funds typically are set up as long-term, 10-year
investment vehicles that don't quickly close down. But in the past decade,
many start-ups have flopped or have struggled to go public amid an
unwelcoming market for initial public offerings. The tough environment has
been exacerbated by the credit crunch...." The related article assesses top
promising start up companies by assessing management teams and change in
equity valuation over a recent 12-month period.
CLASSROOM APPLICATION: The
article may be used in entrepreneurship, financial accounting, MBA, or
management accounting classes.
QUESTIONS:
1. (Introductory)
What is a venture capitalist? How does a venture capital firm make profits?
2. (Advanced)
How does the article identify the reduction in returns to venture
capitalists in 2009 relative to 2008?
3. (Introductory)
In the related article ranking "the top 50 venture capital-backed firms,"
how does the WSJ assess these firms, implying likely success? Specifically
identify the four criteria used in the analysis.
4. (Advanced)
Given that the firms are not yet publicly traded, does any of the
information in the article help to assess profitability of these firms in
the past year? Explain.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Sizing Up Promising Young Firms
by Colleen DeBaise and Scott Austin
Mar 09, 2010
Page: B6
Where the Smart Money Is
by: Alan
Murray
Mar 08, 2010
Click here to view the full article on WSJ.com
TOPICS: Accounting,
Entrepreneurship, Environmental Cleanup Costs, Investments
SUMMARY: The
article is part of a special section on "Eco:nomics-Creating Environmental
Capital and is based on interviews of venture capitalists John Doerr, a
partner at Kleiner Perkins Caufield & Byers; Vinod Khosla, founder and
managing partner of Khosla Ventures; and Paul Holland, general partner of
Foundation Capital. They comment on their "bets" on clean technology and
respond to a question on what has so far been "a dud" of their investments
in this area.
CLASSROOM APPLICATION: The
article may be used in financial reporting, MBA, entrepreneurship, or
management accounting classes.
QUESTIONS:
1. (Introductory)
What is a venture capitalist? How does a venture capital firm make profits?
2. (Introductory)
What do these three venture capitalists see as an area of opportunity for
investment now in the environmental arena?
3. (Advanced)
What does the interviewer mean when he speaks about a "price on carbon"?
4. (Advanced)
Mr. Doerr says that none of their investments they expect to make an
outstanding rate of return depend on putting a price on carbon. Define
expected rate of return. How could a "price on carbon" make an investment
economically viable which otherwise may not be viable without this "price"?
What is the significance of Mr. Doerr's statement?
5. (Advanced)
What benefit does Mr. Doerr think will come from our government putting in
place a system that will price carbon emissions?
6. (Advanced)
In the related article, start up firms in the solar energy area are assessed
and ranked. What factors does The Journal use to rank these firms? In
particular, given that they are not public and so financial statements are
not available, does The Journal assess profitability over a recent year?
Explain.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
And the Top Clean-Tech Companies Are...
by Colleen DeBaise
Mar 08, 2010
Page: R7
Bob Jensen's
threads on Return on Investment and Valuation ---
http://www.trinity.edu/rjensen/roi.htm
New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge
Fund
After being repeatedly warned for six years that this was a criminal scam
It's beginning to look like a family "affair"
(The SEC's) Swanson
later married Madoff's niece, and their relationship is now under review by the
SEC inspector general, who is examining the agency's handling of the Madoff
case, the Post reported. Swanson, no longer with the agency, declined to
comment, the Post said.
"SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 ---
http://news.yahoo.com/s/nm/20090702/bs_nm/us_madoff_sec
The Washington Post account is at ---
Click Here
A U.S. Securities and
Exchange Commission lawyer warned about irregularities at Bernard Madoff's
financial management firm as far back as 2004, The Washington Post reported on
Thursday, citing agency documents and sources familiar with the investigation.
Genevievette
Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and
Examinations, sent emails to a supervisor saying information provided by Madoff
during her review didn't add up and suggesting a set of questions to ask his
firm, the report said.
Several of the questions
directly challenged Madoff activities that turned out to be elements of his
massive fraud, the newspaper said.
Madoff, 71, was sentenced
to a prison term of 150 years on Monday after he pleaded guilty in March to a
decades-long fraud that U.S. prosecutors said drew in as much as $65 billion.
The Washington Post
reported that when Walker-Lightfoot reviewed the paper documents and electronic
data supplied to the SEC by Madoff, she found it full of inconsistencies,
according to documents, a former SEC official and another person knowledgeable
about the 2004 investigation.
The newspaper said the
SEC staffer raised concerns about Madoff but, at the time, the SEC was under
pressure to look for wrongdoing in the mutual fund industry. Walker-Lightfoot
was told to focus on a separate probe into mutual funds, the report said.
One of Walker-Lightfoot's
supervisors on the case was Eric Swanson, an assistant director of her
department, the Post reported, citing two people familiar with the
investigation.
Swanson later married
Madoff's niece, and their relationship is now under review by the SEC inspector
general, who is examining the agency's handling of the Madoff case, the Post
reported.
Swanson, no longer with
the agency, declined to comment, the Post said.
SEC spokesman John Nester
also declined to comment, citing the ongoing investigation by the agency's
inspector general, the newspaper said.
Our Main Financial Regulating Agency: The SEC Screw
Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to
seriously investigate Bernie Madoff's fund even after being warned by Wall
Street experts across six years before Bernie himself disclosed that he was
running a $65 billion Ponzi fund.
CBS Sixty Minutes on June 14, 2009 ran a rerun that is
devastatingly critical of the SEC. If you’ve not seen it, it may still be
available for free (for a short time only) at
http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
The title of the video is “The Man Who Would Be King.”
Also see
http://www.fraud-magazine.com/FeatureArticle.aspx
Between 2002 and 2008 Harry Markopolos repeatedly told
(with indisputable proof) the Securities and Exchange Commission that Bernie
Madoff's investment fund was a fraud. Markopolos was ignored and, as a result,
investors lost more and more billions of dollars. Steve Kroft reports.
Markoplos makes the SEC look truly incompetent or
outright conspiratorial in fraud.
I'm really surprised that the SEC survived after Chris
Cox messed it up so many things so badly.
As Far as Regulations Go
An annual report issued by
the Competitive Enterprise Institute (CEI) shows that the U.S. government
imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the
$1.2 trillion generated by individual income taxes, and amounts to $3,849 for
every American citizen. According the 2009 edition of Ten Thousand Commandments:
An Annual Snapshot of the Federal Regulatory State, the government issued 3,830
new rules last year, and The Federal Register, where such rules are listed,
ballooned to a record 79,435 pages. “The costs of federal regulations too often
exceed the benefits, yet these regulations receive little official scrutiny from
Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report.
“The U.S. economy lost value in 2008 for the first time since 1990,” Crews said.
“Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on
Americans beyond the $3 trillion officially budgeted” through the regulations.
Adam Brickley, "Government Implemented Thousands of New Regulations
Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---
http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487
Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the
regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur
Levitt to Chris Cox do absolutely nothing to change my belief ---
http://www.trinity.edu/rjensen/FraudRotten.htm
How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry
for regulators who play ball while they are still employed by the government. It
happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so
many people work for the FBI and IRS, it's a little harder for industry to
manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of
the worst offenders whereas other agencies often deal with top management of the
largest companies in America.
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Madoff Inquiry Was Fumbled by S.E.C., Report Says," by David Stout,
The New York Times, September 2, 2009 ---
http://www.nytimes.com/2009/09/03/business/03madoff.html?_r=1&hp
In a damning report on the S.E.C.’s performance,
the agency’s inspector general, H. David Kotz, said numerous “red flags” had
been missed by the agency, including some warnings sounded by journalists, well
before Mr. Madoff’s
Ponzi scheme imploded in 2008.
Mr. Kotz concluded that,
“despite numerous credible and detailed complaints,” the S.E.C. never properly
investigated Mr. Madoff “and never took the necessary, but basic, steps to
determine if Madoff was operating a Ponzi scheme.”
“Had these efforts been
made with appropriate follow-up at any time beginning in June of 1992 until
December 2008, the S.E.C. could have uncovered the Ponzi scheme well before
Madoff confessed,” the report concluded.
That Mr. Madoff’s scheme,
estimated to have fleeced as much as $65 billion from investors who ranged from
the famous to middle-class people who entrusted him with their life savings, was
not caught earlier was not because of his cleverness, the report said. Rather,
it was because the S.E.C. fumbled three agency exams and two investigations
because of inexperience, incompetence and lack of internal communications.
Continued in article
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Thanks Denny,
My threads on the SEC insider scandal are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi
Bob Jensen
-----Original Message-----
From: Dennis Beresford [mailto:dberesfo@terry.uga.edu]
Sent: Monday, March 01, 2010 7:39 AM
To: Jensen, Robert
Subject: New book from the man who should have discovered Madoff
Bob,
See the
NY Times article about Harry Markopolos -
http://www.nytimes.com/2010/02/28/magazine/28fob-q4-t.html?ref=business
His book
"No One Would Listen" about trying to blow the whistle on Madoff was
published yesterday and is available on Amazon and elsewhere. It should
be an interesting read.
Denny
March 1, 2010 reply from
Orenstein, Edith
[eorenstein@FINANCIALEXECUTIVES.ORG]
There is also a website set
up about Markopolos’ book, “No One Would Listen”
http://www.noonewouldlisten.com which includes a tab at the bottom of
the screen that gets you to Resources for Educators/Students
http://lp.wileypub.com/markopolos/index2.html that is instructive for
all
Jensen Comment
Some history of the SEC
scandal from
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi
From The Wall Street Journal Accounting Weekly Review on September 10,
2009
Madoff Report Reveals Extent of Bungling
by Kara Scannell and Jenny Strasburg
Sep 05, 2009
Click here to view the full article on WSJ.com
TOPICS: Auditing, Ponzi Schemes
SUMMARY: "The SEC's inspector general
released the full 477-page version of his report on how the SEC missed red flags
on [Bernard Madoff]....and details just how many opportunities there were for
examiners to find the fraud and how bungled their efforts were." For example,
"one anonymous complaint directed the SEC to a 'scandal of major proportion' by
the Madoff firm and said assets of a specific investor 'have been 'co-mingled'
with funds controlled by the Madoff firm. The SEC called Mr. Madoff's lawyer and
had him ask Mr. Madoff if he managed money for that investor. When the lawyer
said Madoff didn't, the complaint wasn't pursued further. The IG report
concludes that 'accepting the word of a registrant who is alleged to be engaged
in a specific instance of fraud is an inadequate investigation'....SEC Chairman
Mary Schapiro said, 'In the coming weeks, we will continue to closely review the
full report and learn every lesson we can to help build upon the many reforms we
have already put into place since January.'"
CLASSROOM APPLICATION: The article makes
clear the need for auditing roles at the SEC as well as in public accounting
firms auditing general purpose financial statements.
QUESTIONS:
1. (Introductory) What is a "Ponzi Scheme"? When was Mr. Madoff
convicted of running such a scheme? How did this scheme impact Madoff's
investors?
2. (Introductory) Who issued the report on the SEC's failure to uncover
the Madoff scheme before it collapsed and he himself admitted to the crime?
3. (Advanced)
What did "an unnamed hedge-fund manager" say in an email to the SEC? Explain how
each of the points listed in the email indicate the possibility of a Ponzi
scheme in operation.
4. (Introductory) What is "front-running" in trading? How did a senior
examiner explain this trading activity as his choice of action to investigate in
Mr. Madoff's operations?
5. (Advanced) How do you think a choice of action in examination should
be determined if the SEC receives a credible indication of possible fraud in
operating an investment firm such as Mr. Madoff's? How should this choice drive
the determination of expertise needed on an investigatory team?
6. (Advanced) What audit step failure was evident in the SEC
investigatory actions undertaken between December 2003 and March 2004, as
described in the article?
7. (Introductory) What expertise do you think was needed on the
investigative teams handling the Madoff case, at least as described in this
article?
Reviewed By: Judy
Beckman, University of Rhode Island
RELATED ARTICLES:
Ex-SEC Lawyer: Madoff Report Misses Point
by Suzanne Barlyn
Sep 04, 2009
Online Exclusive
'Evil' Madoff Gets 150 Years in Epic Fraud
by Robert Frank and Amir Efrati
Jun 30, 2009
Online Exclusive
"PCAOB Proposes Auditing Standard on
Communications with Audit Committees, Amendments to PCAOB Interim Standards,"
PCAOB News Release, March 29, 2010 ---
http://pcaobus.org/News/Releases/Pages/03292010_StandardAuditCommittees.aspx
Jensen Comment
How do we measure two-way communication?
"GAO Criticizes PCAOB Approach to Audit Risk." by Ken Rankin,
WebCPA, March 5, 2010 ---
http://www.webcpa.com/news/GAO-Criticizes-PCAOB-Approach-Audit-Risk-53505-1.html
A series of freshly reconstituted “risk assessment”
audit standards supported by the accounting industry have come under fire
from the U.S. Government Accountability Office.
In voicing concerns about the Public Company
Accounting Oversight Board’s proposal, GAO officials warned that the present
approach could create confusion among auditors and drive up audit costs for
accounting firms and their clients.
The standards focus on the risk assessment process
and on the auditor’s response to identified risks in client financial
reports.
In addition to offering auditors new guidance on
dealing with “material misstatements” and other types of financial fraud by
their clients, the standards are also intended to provide accountants with
new guidance for planning and executing audits to address those problems.
In advancing the plan late last year, acting PCAOB
chairman Daniel L. Goelzer called the standards “essential to affording
investors reasonable assurance that financial statements are free of
material error.”
Once finalized, Goelzer said, they would “serve as
the bedrock for much of the board’s future standards-setting.”
The risk assessment standards were originally
proposed in 2008, but in response to a flurry of comments offering
suggestions for improvement, the PCAOB rewrote and re-proposed the plan last
December.
While most observers consider the revisions a move
in the right direction, the proposal is continuing to come under attack from
a number of groups.
For her part, the GAO’s Jeanette Franzel expressed
“serious concerns about the PCAOB’s approach to updating its interim
standards,” and warned that the board’s approach may result in “duplication
of and inconsistencies between its standards and those of other established
independent auditing standard-setting organizations.”
Franzel, the GAO’s managing director for financial
management and assurance, said that the board’s plan incorporated modified
versions of other established audit standards without providing clear
explanations for the purpose or meaning of those differences.
“This approach will increase the likelihood of
misinterpretations, inconsistent application of the standards, and higher
costs for all users with a disproportionate burden on smaller and midsized
firms,” she told the PCAOB.
While major accounting firms voiced general support
for the latest version of the standards, even supporters of the plan raised
similar concerns about the board’s approach.
McGladrey & Pullen, for one, expressed appreciation
for the changes made by the PCAOB in the revised standards, but nevertheless
warned that “unnecessary differences between the board’s standards and those
of other standard-setters increase the costs of performing all audits
because firms must develop and maintain two, and even three, audit
methodologies and training programs, with no corresponding benefit to audit
quality.”
Worse yet, these needless differences in audit
standards “can lead to confusion and misunderstanding by auditors of what is
required of them and why, which potentially leads to an erosion of audit
quality,” McGladrey & Pullen said.
Continued in article
Bob Jensen's threads on professionalism and independence in auditing are
at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
Questions
How did fraudulent entries enter Madoff's automated accounting systems?
Why didn't the operations manager detect that something was amiss?
Madoff's Operations Chief Arrested
by: Chad
Bray
Feb 26, 2010
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Fraud, Fraudulent Financial Reporting, Internal Controls, Ponzi Schemes
SUMMARY: "The
longtime director of operations for convicted Ponzi scheme operator Bernard
Madoff's defunct firm was arrested and charged criminally Thursday with
allegedly directing that false accounting entries be made in the firm's
books to conceal Mr. Madoff's fraud."
CLASSROOM APPLICATION: The
article can be used in an accounting class to consider audit steps that
should be taken in testing internal controls over segregation of trust funds
from operations and over general journal entries. Questions also cover an
auditor's responsibility for fraud detection.
QUESTIONS:
1. (Introductory)
Who is Bernard Madoff? Of what crime was he convicted? In your answer,
define the term Ponzi Scheme.
2. (Introductory)
What are the charges now being made against Mr. Madoff's chief of
operations, Daniel Bonventre?
3. (Advanced)
How is it possible for fraudulent entries to be made in an accounting system
in an era of automated accounting systems? In your answer, include a
discussion of the role of general journal entries versus automated system
entries.
4. (Advanced)
What are an outside auditor's responsibilities in detecting fraud and
fraudulent financial reporting? What steps must be taken to consider the
impact of general journal entries versus other system entries?
5. (Advanced)
What is the difference between investment advisory services and
proprietary-trading and market-making operations? Why must funds between
these two operations never be commingled?
6. (Advanced)
Refer to your answer to the above question. Devise an audit step to
ascertain whether any internal control weaknesses exist that could allow for
commingling of funds across these two lines of business.
Reviewed By: Judy Beckman, University of Rhode Island
"Madoff's Operations Chief Arrested," by Chad Bray, The Wall Street
Journal, February 28. 2010 ---
http://online.wsj.com/article/SB10001424052748704479404575087273271559404.html?mod=djem_jiewr_AC_domainid
The longtime director of operations for convicted
Ponzi scheme operator Bernard Madoff's defunct firm was arrested and charged
criminally Thursday with allegedly directing that false accounting entries
be made in the firm's books to conceal Mr. Madoff's fraud.
Prosecutors from the U.S. attorney's office in
Manhattan charged Daniel Bonventre, former operations director at Bernard L.
Madoff Investment Securities LLC, with conspiracy, securities fraud,
falsifying books and records of a broker-dealer, false filings with the
Securities and Exchange Commission and four counts of filing false
federal-tax returns.
A lawyer for Mr. Bonventre declined to comment
Thursday.
Mr. Bonventre, 63 years old, made a court
appearance in New York on Thursday afternoon, where a judge set his bail at
$5 million. He faces as long as 20 years in prison each on the fraud,
falsifying-books-and-records and false-filings charges.
Mr. Bonventre is the sixth person to be charged
criminally in the case, including Mr. Madoff himself.
The SEC also separately brought civil
accounting-fraud charges against Mr. Bonventre, alleging he helped disguise
Mr. Madoff's fraud and financial losses at the Madoff firm by misusing and
improperly recording investor money to create the false appearance of
legitimate income.
"As Bernard Madoff's director of operations, Daniel
Bonventre allegedly authored the fraudulent books that for years effectively
hid the doomed state of an investment firm founded in fraud," said Preet
Bharara, the U.S. attorney in Manhattan.
Prosecutors alleged Mr. Bonventre directed that
false entries be made in the firm's general ledger to conceal the scope of
the firm's investment-advisory operations and to understate the firm's
liabilities by billions of dollars.
Mr. Madoff, 71 years old, admitted in March 2009 to
running a decades-long Ponzi scheme that bilked thousands of investors. He
is serving a 150-year prison term.
Prosecutors have alleged the Ponzi scheme stretched
back to the early 1980s.
In his plea statement, Mr. Madoff said the scheme
was run through the firm's investment-advisory business and that its
proprietary-trading and market-making operations were legitimate. In their
complaint against Mr. Bonventre, prosecutors alleged that from 1997 to 2008,
more than $750 million of investor funds from the investment-advisory
business were used to support the proprietary-trading and market-making
operations.
According to the Bonventre complaint, Mr. Madoff's
firm experienced a liquidity crisis between November 2005 and June 2006
because demands for withdrawals by investment-advisory clients exceeded cash
on hand.
Because the firm hadn't used client money to
purchase securities for those clients in the first place, Mr. Bonventre
allegedly was forced to request $145 million in loans from a bank to meet
the firm's obligations, prosecutors said. About $154 million in bonds held
in investment-advisory clients' accounts were used as collateral for the
loans. Prosecutors didn't identify the bank.
During that period, the firm also drew down more
than $340 million from its lines of credit to meet withdrawal requests,
prosecutors said. Mr. Bonventre monitored those lines of credit as part of
his responsibilities, they said.
He also allegedly created false records that
disguised $262 million in payments to investment-advisory clients from the
bank account that funded the firm's operations, prosecutors said. The
payments were disguised as purchases of bonds and other debt instruments,
they said.
"A fraud of this magnitude requires a coordinated
effort," said George S. Canellos, director of the SEC's New York regional
office. "Bonventre played an essential part by creating bogus financial
records to give [the Madoff firm] the appearance of legitimacy, when in fact
the firm lost money and could not have survived without the fraud."
Mr. Bonventre joined the Madoff firm in August 1968
and worked there until Mr. Madoff's arrest in December 2008, prosecutors
said. He was named the firm's director of operations in 1978.
Prior to working at the Madoff firm, he was an
auditor at a bank, while studying for an associate degree in accounting. He
first worked at Mr. Madoff's firm as an auditor, gathering more
responsibility for back-office operations over time.
Mr. Bonventre allegedly had his own
investment-advisory account at the firm as far back as 1983. Between 2002
and 2006, he allegedly obtained more than $1.8 million in at least three
fictitious backdated trades, prosecutors said.
The SEC separately alleged his profits from the
fake trades were at least $1.9 million. Between 2005 and 2008, Mr. Bonventre
also was paid an annual salary of more than $900,000, the SEC said.
He is charged criminally with filing false tax
returns in 2003, in 2004, in 2006 and in 2007.
Bob Jensen's threads on the Madoff fraud and other Ponzi schemers can be
found at
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi
Oldie But Goodie
"Earnings Manipulation, Pension Assumptions and Managerial Investment
Decisions"
Daniel Bergstresser Harvard Business School
Joshua D. Rauh Northwestern University - Department of Finance; National Bureau
of Economic Research (NBER)
Mihir A. Desai Harvard Business School - Finance Unit; National Bureau of
Economic Research (NBER)
SSRN, May 2005 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=551681
Managers appear to manipulate firm earnings through
their characterizations of pension assets to capital markets and alter
investment decisions to justify, and capitalize on, these manipulations.
Managers are more aggressive with assumed long-term rates of return when
their assumptions have a greater impact on reported earnings. Firms use
higher assumed rates of return when they prepare to acquire other firms,
when they issue equity, when they are near critical earnings thresholds and
when their managers exercise stock options. Changes in assumed returns, in
turn, influence pension plan asset allocations. Instrumental variables
analysis indicates that 25 basis point increases in assumed rates are
associated with 5 percent increases in equity allocations.
Bob Jensen's threads on earnings management and creative accounting ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
Question
How is accountancy practice like mystery writing?
"Mystery Writer," by Gail Farrelly, Journal of Accountancy,
March 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Mar/20092392.htm
Bob Jensen's threads on accounting novels are at
http://www.trinity.edu/rjensen/AccountingNovels.htm
Advanced
Accounting Teaching Case
How should a 34% equity interest be reported?
Coke Near Deal for Bottler
by: Dana Cimilluca, Betsy McKay and Jeffrey McCracken
Feb 25, 2010
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Advanced
Financial Accounting, Consolidations, Investments, Mergers and Acquisitions
SUMMARY: "In
a strategic about-face driven by big changes in consumer tastes, Coca-Cola Co.
was nearing a deal late Wednesday to buy the bulk of its largest bottler,
according to people familiar with the matter." The companies reached agreement
on the transaction and by Friday the WSJ reported a fall in Coke share prices
and a gain on the share values of its bottler, Coca-Cola Enterprises (CCE).
CLASSROOM
APPLICATION: The
article is useful to discuss corporate strategy leading to equity method
investments versus ownership and control.
QUESTIONS:
1. (Introductory) What was the reasoning that Coca-Cola's strategic
organization for decades was based on "setting up large, independent bottlers
run separately from Atlanta-based Coke itself"? What does Coke itself now sell?
2. (Advanced) How did Coke resolve concerns about losing control over its
bottling companies even as it kept "the bottlers' assets off its books"? Why is
this desirable for Coke?
3. (Advanced)
How do you think that Coke accounts for its "34% stake as of the end of last
year" in its largest bottler, Coca-Cola Enterprises (CCE)?
4. (Advanced)
What are the strategic reasons that Coke is now reacquiring its North American
bottling operations? How is the transaction being structured?
5. (Introductory)
Refer to the related article. How did markets react to the closure of this deal?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
Coca-Cola Fizzles, But Dr. Pepper Pops
by Kristina Peterson
Feb 26, 2010
Page: C5
News Hub: Coke's New Deal
by
Feb 25, 2010
Online Exclusive
The Price
of Perfection: That Straw That Saved the 10 Millionth Camel's Back
Contemplate the flip
side of my argument. A 100 percent safe car is impossible to build. As a
manufacturer approaches 100 percent safety, the manufacturing costs increase
exponentially. The real question is what is the customer (or society) willing to
pay for safety as it approaches 100 percent safe. Most consumers would be
willing to pay $20,000 for a car that is 99.8 percent safe but not $100,000 for
a car that is 99.9 percent safe. Are the customers wrong? How would they react
to Washington bureaucrats telling them they had to pay an additional $80,000 for
an incremental 1/10 of 1 percent of safety?
Armstrong Williams, "Toyota’s Deadly Secret." Townhall, March 2, 2010 ---
http://townhall.com/columnists/ArmstrongWilliams/2010/03/02/toyota%e2%80%99s_deadly_secret
Jensen Comment
I purchased a new Subaru last year in the Cash for Clunkers Program. I traded in
my father's 1989 Cadillac that looked and ran like the day it was new. It
accumulated 70,000 miles of absolutely trouble free driving. Now the Subaru cost
me $19,700 plus some extras for heated seats and the extended warranty.
Subaru is rated the
most safe car in its class, but would I have done this deal if the trade-in
price had been $87,000 for some added safety protection currently not available
on new vehicles other than luxury cars like Mecedes models? Probably not, even
though the old Cad I traded in did not even have air bags or various other
safety features that are standard on a 2010 Subaru. Of course, up here we call
it a rush hour traffic if we see two other vehicles on I-93 at 8:00 a.m. or 6:00
p.m.
This begs the question of how much we
should be forced to pay for epsilon improvements in safety? Of course I'm not
talking about unsafe cars that lurch ahead uncontrollably or have defective
braking systems. But my old Cad was extremely tried and true with respect to not
having such severe safety hazards. In fact, the sheer complexity of my new
Subaru with all its computerized controls of almost everything make it more of a
risk in some ways as I drive to the village for milk and bread or a haircut.
This also applies to costs of production
of goods and services. Some medical procedures now cost ten times more than in
1990 for safety benefits that may only save one life out of ten million people.
It certainly seems worth it if you're life is the one saved, but in the grand
scheme of things is this added protection really a luxury that society can no
longer afford? The same question might be raised about many of the current OSHA
requirements for working Americans. How many wannabe workers cannot find jobs
because of more stringent OSHA requirements?
Up here in the mountains, a small
construction company that does a lot of building repair work laid off all of its
full-time workers because of the cost of Workmen's Compensation Insurance. The
former workers became "independent contractors" who now negotiate their own fees
and no longer have benefits like employer-paid health insurance. Outsourced
workers are paid by the job rather than the hour such that they, in turn,
sometimes take more safety risks in their rush to finish jobs quickly.
Bob Jensen's threads on managerial
accounting are at
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting
Hi Tom,
Sarbanes-Oxley Act
(Sarbox, SOX) ---
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act
Sarbanes–Oxley
Section 404: Assessment of internal control ---
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Sarbanes.E2.80.93Oxley_Section_404:_Assessment_of_internal_control
Sarbanes–Oxley 404
and smaller public companies ---
Click Here
The cost of
complying with SOX 404 impacts smaller companies disproportionately, as there is
a significant fixed cost involved in completing the assessment. For example,
during 2004 U.S. companies with revenues exceeding $5 billion spent 0.06% of
revenue on SOX compliance, while companies with less than $100 million in
revenue spent 2.55%.
This disparity
is a focal point of 2007 SEC and U.S. Senate action.[33] The PCAOB intends to
issue further guidance to help companies scale their assessment based on company
size and complexity during 2007. The SEC issued their guidance to management in
June, 2007.
After the SEC
and PCAOB issued their guidance, the SEC required smaller public companies
(non-accelerated filers) with fiscal years ending after December 15, 2007 to
document a Management Assessment of their Internal Controls over Financial
Reporting (ICFR). Outside auditors of non-accelerated filers however opine or
test internal controls under PCAOB (Public Company Accounting Oversight Board)
Auditing Standards for years ending after December 15, 2008. Another extension
was granted by the SEC for the outside auditor assessment until years ending
after December 15, 2009. The reason for the timing disparity was to address the
House Committee on Small Business concern that the cost of complying with
Section 404 of the Sarbanes–Oxley Act of 2002 was still unknown and could
therefore be disproportionately high for smaller publicly held companies. On
October 2, 2009, the SEC granted another extension for the outside auditor
assessment until fiscal years ending after June 15, 2010. The SEC stated in
their release that the extension was granted so that the SEC’s Office of
Economic Analysis could complete a study of whether additional guidance provided
to company managers and auditors in 2007 was effective in reducing the costs of
compliance. They also stated that there will be no further extensions in the
future.
"Fraud Case Casts
Doubt over Sarbox Exemption: An alleged $31 million fraud could quash claims
that internal-controls checks don't matter," by Sarah Johnson - CFO
Magazine, February 1, 2010 ---
http://www.cfo.com/article.cfm/14470842/c_14470994?f=magazine_alsoinside
If allegations
that a finance executive pilfered as much as $31 million over five years from
Koss Corp. prove true, it won't just be bad news for Koss: it may also deal a
blow to those who hope that smaller, publicly traded companies will be exempted
from full compliance with the Sarbanes-Oxley Act.
The well-known
manufacturer of headphones reported $38.3 million in sales last year, so a $31
million theft, even over five years, suggests some serious problems with
internal controls. Koss plans to restate its financials for the past two years
and may go back as far as 2005 to make corrections. Koss's stock spent 21 days
in limbo after Nasdaq halted its trading toward the end of December. At least
one law firm has opened an investigation for a possible shareholder lawsuit.
Koss fired its
accounting firm, Grant Thornton, on New Year's Eve. The auditor responded by
pointing out that Koss is among those companies not yet subject to Sarbox's
Section 404(b), which requires an auditor sign-off of internal controls. "The
company did not engage Grant Thornton to conduct an audit or evaluation of
internal controls over financial reporting," says a spokesperson for the
accounting firm. "Establishing and maintaining effective internal control is
management's and the board's responsibility."
Koss's
management claims the company did have effective internal controls, but the
management report enclosed in its most recent 10-K acknowledges in boilerplate
language that "because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected."
The criminal
case against Sujata "Sue" Sachdeva, Koss's former vice president of finance and
secretary, alleges she used more than $4.5 million of the company's money to buy
clothing, furs, and jewelry at various luxury stores in Milwaukee during the
past two years. Following those initial allegations, Koss has since disclosed
that the extent of the fraud may be worse; an internal investigation has
uncovered additional unauthorized transactions from as far back as five years
ago that total more than $31 million.
Gauging the
Fallout While the Securities and Exchange Commission has continually delayed the
auditor-attestation portion of Section 404 for nonaccelerated filers (companies
with market caps below $75 million), companies like Koss will finally have to
get their auditors to review their internal controls starting this summer
(depending on their fiscal year-end).
Or maybe not.
The major regulatory-reform bill passed by the House in mid-December would
permanently exempt small businesses from 404(b). Small-business proponents have
pushed for the exemption, saying audits of internal controls over financial
reporting are disproportionately costly and perhaps even unnecessary since,
individually, small companies represent only minuscule blips of total market
capitalization in the United States.
That exemption
may disappear as the Senate works on its version of the bill. Investor advocates
certainly hope so. "Investors believe that auditors' expertise can provide
management with additional perspective on the quality of its system of internal
control, which can have a positive impact on the quality of a company's
financial reporting," wrote four investor groups, including the CFA Centre for
Financial Market Integrity, in a recent letter to House members. The Koss case
could bolster such arguments.
Bob Jensen's Fraud
Updates ---
http://www.trinity.edu/rjensen/fraudUpdates.htm
Bob Jensen's
threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/fraud001.htm
"A Brief History of Double Entry Book-keeping (10 Episodes) ," BBC
Radio ---
http://www.bbc.co.uk/programmes/b00r401p
Thanks to Len Steenkamp for the heads up
Jolyon Jenkins investigates how accountants shaped
the modern world. They sit in boardrooms, audit schools, make government
policy and pull the plug on failing companies. And most of us have our
performance measured. The history of accounting and book-keeping is largely
the history of civilisation.
Jolyon asks how this came about and traces the
religious roots of some accounting practices.
Eventually, educators might be able to get copies of these audio files.
Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory
The following tidbit is politically controversial and perhaps should not be
sent out to the AECM. However, I do so in the interest of noting some history of
famous robber barons that many of us were not aware of, particularly the
reference to the following book:
Burton W. Folsom called "The Myth of the Robber Barons: A New Look at
the Rise of Big Business in America" (Young America's Foundation). Prof.
Folsom's core insight is to divide the men of that age into market
entrepreneurs and political entrepreneurs.
What might be of interest to accounting researchers is to investigate
accounting history of the robber barrons' enterprises and the study of how
accounting might ideally differ for market entrepreneurs versus political
entrepreneurs.
Daniel Henninger is one of my favorite columnists for the WST. He often
writes about modern-day accounting scandals.
"Bring Back the Robber Barons: There's a big difference between
entrepreneurs who make a fortune in the market, and those who do so by gaming
the government," by Daniel Henninger, The Wall Street Journal, March
4, 2010 ---
http://online.wsj.com/article/SB10001424052748703862704575099572105775414.html?mod=djemEditorialPage_t
Faced with high, painful unemployment as far as the
eye can see, the government naturally is here to help.
The Senate passed a $15 billion "jobs bill." Its
proudest piece is a tax credit for employers who hire a person out of work
at least 60 days. The employer won't have to pay the 6.2% Social Security
payroll tax for what remains of this year. If the worker stays on the job at
least a year, the government will give the employer $1,000.
As to the earlier $787 billion stimulus bill, Vice
President Joe Biden praised it in Orlando this week as an engine of job
creation, while he stood before a pile of broken concrete and asphalt. The
subject was highways.
Finally, Barack Obama's government now may force
companies to raise wages and benefits by squeezing their federal contracts
if they don't.
Maybe there's a better way.
*** Let's bring back the robber barons.
"Robber baron" became a term of derision to
generations of American students after many earnest teachers made them read
Matthew Josephson's long tome of the same name about the men whose
enterprise drove the American industrial age from 1861 to 1901.
Josephson's cast of pillaging villains was
comprehensive: Rockefeller, Carnegie, Vanderbilt, Morgan, Astor, Jay Gould,
James J. Hill. His table of contents alone shaped impressions of those
times: "Carnegie as 'business pirate'.'' "Henry Frick, baron of coke."
"Terrorism in Oil." "The sack of California."
I say, bring 'em back, and the sooner the better.
What we need, a lot more than a $1,000 tax credit, are industries no one has
thought of before. We need vision, vitality and commercial moxie. This
government is draining it away.
The antidote to Josephson's book is a small classic
by Hillsdale College historian Burton W. Folsom called "The Myth of the
Robber Barons: A New Look at the Rise of Big Business in America" (Young
America's Foundation). Prof. Folsom's core insight is to divide the men of
that age into market entrepreneurs and political entrepreneurs.
Market entrepreneurs like Rockefeller, Vanderbilt
and Hill built businesses on product and price. Hill was the railroad
magnate who finished his transcontinental line without a public land grant.
Rockefeller took on and beat the world's dominant oil power at the time,
Russia. Rockefeller innovated his way to energy primacy for the U.S.
Political entrepreneurs, by contrast, made money
back then by gaming the political system. Steamship builder Robert Fulton
acquired a 30-year monopoly on Hudson River steamship traffic from, no
surprise, the New York legislature. Cornelius Vanderbilt, with the slogan
"New Jersey must be free," broke Fulton's government-granted monopoly.
If the Obama model takes hold, we will enter the
Golden Age of the Political Entrepreneur. The green jobs industry that sits
at the center of the Obama master plan for the American future depends on
public subsidies for wind and solar technologies plus taxes on carbon to
suppress it as a competitor. Politically connected entrepreneurs will spend
their energies running a mad labyrinth of bureaucracies, congressional
committees and Beltway door openers. Our best market entrepreneurs, instead
of exhausting themselves on their new ideas, will run to ground gaming
Barack Obama's ideas.
If the goal is job growth, we need to admit one
fact: Political entrepreneurs create fewer jobs than do market
entrepreneurs. We need new mass markets, really big markets of the sort
Ford, Rockefeller and Carnegie created. Great employment markets are
discoverable only by people who create opportunities or see them in the
cracks of what already exists—a Federal Express or Wal-Mart. Either you
believe that the philosopher kings of the Obama administration can figure
out this sort of thing, or you don't. I don't.
FDIC chief Sheila Bair whacked bank bonuses
Tuesday. People on the East Coast spend too much time around the finance and
insurance industries. If the price of rediscovering the American job machine
is some people across the land getting really rich, it's a small price.
One of the richest now is Larry Ellison, the 1977
founder of Oracle Corp. (49,000 employees), whose tastes run to huge boats,
bigger houses and paying Elton John to play for his friends at the Cow
Palace. Someone in our politics has to find the courage to say, So what? If
the next Ellison and Oracle ripples into American life as many new jobs and
family incomes, I'm happy to be grossed out by parties and boats. The
alternative is a nation of Pecksniffs, choking on virtue.
We live in a world of rising competitors—foreign
robber barons—who don't much care about our endless quest for health-care
justice. The U.S. on its current path to a stage-managed economy floating in
a lake of taxes will keep down the greatest population of intellectual and
managerial firepower the world has seen. The rest of the world admits that,
with the recent exception of the Chinese, who think we're ready to be taken.
We have young people impatient for the chance to do what Carnegie,
Rockefeller and Hill did. Let them.
Continued in article
"Five Ways to Heal American Capitalism," by Roger Marti,
Harvard Business Review Blog, March 3, 2010 ---
http://blogs.hbr.org/cs/2010/03/healing_american_capitalism_to.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Three things have to happen in concert to heal the
ailing American democratic capitalist system:
- Senior executives have to be
helped out of a conflicted state in which they know they are living
inauthentic business lives but are both too
scared of the capital markets and too addicted to stock-based
compensation to change by themselves.
- Boards of directors who have
drunk the Kool-Aid of stock-based compensation need to be saved from
their own delusions about its effectiveness.
- The hedge funds who have
become so emboldened that they now hunt in predatory packs, destroying
companies in order to reap arbitrage profits, need a serious smack-down.
These changes will require government intervention,
not my favorite approach, but sometimes the only way.
Let's start with senior executives. As things
stand, they're expected to predict the future, which they can't do, and are
punished by the capital markets when they are wrong. This causes most of
them to manipulate earnings to make themselves right, which is hardly
conducive to psychological health as I've argued before.
Hence
Prescription #1: Repeal the
'Safe Harbor' provision of the Private Securities Litigation Reform Act of
1995. There should be no safe harbor
whatsoever for "anticipating," "projecting," "expecting," "estimating" or
any of the other "forward-looking" weasel-words used by senior executives
when "predicting" earnings. This will encourage senior executives to break
the habit of giving guidance and, by extension, of manipulating numbers to
hit their guidance numbers. They can get back to the psychologically
rewarding business of actually creating value.
Now boards. They think that stock-based
compensation aligns the interests of executives and shareholders. It
doesn't. It aligns the interests of senior executives with their own bank
accounts for reasons
I have detailed elsewhere.
Boards aren't going to challenge their own dogma,
especially when they are being egged on by the compensation consultants. And
like the executives with respect to guidance, boards are too scared to break
rank and shift from creating incentives to boost expectations to creating
incentives to boost real performance. Hence Prescription #2: Tax at
a rate of 80% gains from stock-based compensation that are based on stock
performance less than five years from the time of the awarding of the
stock-based compensation.
Stock-based compensation is a crummy idea. But it
gets less crummy as the period lengthens over which the performance needs to
occur. Doing the work necessary to have a chance of the stock price being
high five years from award at least gives long-term thinking a fighting
chance. Pushing realization of stock-based compensation to beyond time of
retirement is even better because retired executives can't manipulate
prices. It encourages strong succession planning because your pay-off is
dependent on your successor doing a good job. Hence Prescription #3:
Tax at a rate of 20% gains from stock-based compensation that are based on
stock performance five years or greater from the time of departure from the
company in question.
Let's turn to hedge funds and other market
operators who earn their returns by arbitraging short-term market swings.
They engage in manipulation too; if there aren't enough short-term market
swings to generate the returns they're used to, they will do whatever is
necessary, regardless of legal strictures, to manufacture short-term swings.
Here, we need to attack on two fronts.
First we have to neutralize their profit equation.
Hence Prescription #4: On stock holdings of less than one year,
increase the capital gains tax to 80% and reduce the portion of losses
allowable for tax purposes to 20%. And because these guys are as
sneaky as foxes, declare trading strategies that attempt to circumvent this
tax to be criminal tax evasion — otherwise hedge funds will swap with
non-taxable investors (like charitable foundations) to produce synthetic
holding periods of over one year. To neuter criticism that this will hurt
small investors, create a life-time $1 million exemption for short-term
capital gains and losses for individuals. Individual investors don't screw
up companies; hedge funds do.
Second, we need to dramatically reduce the source
of funds to hedge fund managers by dealing with their biggest supplier of
capital: pension funds. Pension fund managers accept the ridiculous
'2 & 20' fee structure that hedge funds charge
(2% annually of assets under management, plus 20%
of the upside) because pension fund managers love the treats that hedge fund
managers provide: junkets and "conferences" in exotic locales, and even the
payoffs from agents working for the hedge funds, as allegedly happened in
the
Quadrangle Group affair.
Pension funds are the soft underbelly of democratic
capitalism.
Peter Drucker predicted decades ago that
American workers would eventually own the means of production not through a
communist-style revolution but when their pension funds came to own the
biggest piece of American companies.
But the vast majority of US pension fund dollars
are not invested under anything approximating capitalist conditions. As a
worker in a given organization, you are typically forced to have your
pension managed by a single designated fund. And the rule with all
monopolists is that in due course they begin to serve themselves. Hence
Prescription #5: Every worker must have a choice of at least two
pension fund managers. That will give the worker choice and power
—and will discipline the behavior of pension fund managers.
If these five prescriptions were implemented —
which could be relatively straight-forward — we would give companies and
their senior executives the chance and the incentive to focus on building
great companies over the long term rather than subjugating themselves and
their companies to the traders. This would restore authenticity to the lives
of our corporate leaders.
There is a sixth prescription. It is trickier to
implement but it would build very productively on the five above. I will
leave that one for the next post...
Roger Martin
is the Dean of the Rotman School of Management at the University of
Toronto in Canada and the author of
The Design of Business: Why Design Thinking is the Next Competitive
Advantage (Harvard Business Press, 2009). His website is
rogerlmartin.com
Buffett's Gains Beat Every Mutual Fund: Just
Two Come Close Over Past 45 Years
Sam Mamudi, The Wall Street Journal, March 5, 2010 ---
http://online.wsj.com/article/SB20001424052748703502804575102041168014462.html#mod=todays_us_money_and_investing
"When CEOs Have Warren Buffett in Their Boardroom: What's it
like to have America's greatest investor as your shareholder? Buffett's
biographer talks to CEOs who know," by Alice Schroeder, Business Week,
February 25, 2010 ---
http://www.businessweek.com/print/magazine/content/10_10/b4169030631058.htm
Thank you for the heads up Denny.
Alice Schroeder is one of Denny Beresford's former students.
Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory
Bonuses for What?
The only guy to make almost a $100 Million dollars at GE is the CEO who
destroyed shareholder value by nearly 50% in slightly less than a decade
"GE has been an investor disaster under Jeff Immelt," MarketWatch, March
8, 2010 ---
http://www.marketwatch.com/story/ge-has-been-an-investor-disaster-under-jeff-immelt-2010-03-08
When things go well,
chief executives of major companies rack up hundreds of millions of dollars,
even billions, on their stock allotments and options.
It's always justified on
the grounds that they've created lots of shareholder value. But what happens
when things go badly?
For one example, take a
look at General Electric Co. /quotes/comstock/13*!ge/quotes/nls/ge (GE 16.27,
+0.04, +0.22%) , one of America's biggest and most important companies. It just
revealed its latest annual glimpse inside the executive swag bag.
By any measure of
shareholder value, GE has been a disaster under Jeffrey Immelt. Investors
haven't made a nickel since he took the helm as chairman and chief executive
nine years ago. In fact, they've lost tens of billions of dollars.
The stock, which was $40
and change when Immelt took over, has collapsed to around $16. Even if you
include dividends, investors are still down about 40%. In real post-inflation
terms, stockholders have lost about half their money.
So it may come as a shock
to discover that during that same period, the 54-year old chief executive has
racked up around $90 million in salary, cash and pension benefits.
GE is quick to point out
that Immelt skipped his $5.8 million cash bonus in 2009 for the second year in a
row, because business did so badly. And so he did.
Yet this apparent
sacrifice has to viewed in context. Immelt still took home a "base salary" of
$3.3 million and a total compensation of $9.9 million.
His compensation in the
previous two years was $14.3 million and $9.3 million. That included everything
from salary to stock awards, pension benefits and other perks.
Too often, the media just
look at each year's pay in isolation. I decided to go back and take the longer
view.
Since succeeding Jack
Welch in 2001, Immelt has been paid a total of $28.2 million in salary and
another $28.6 million in cash bonuses, for total payments of $56.8 million.
That's over nine years, and in addition to all his stock- and option-grant
entitlements.
It doesn't end there.
Along with all his cash payments, Immelt also has accumulated a remarkable
pension fund worth $32 million. That would be enough to provide, say, a
60-year-old retiree with a lifetime income of $192,000 a month.
Yes, Jeff Immelt has been
at the company for 27 years, and some of this pension was accumulated in his
early years rising up the ladder. But this isn't just his regular company
pension. Nearly all of this is in the high-hat plan that's only available to
senior GE executives.
Immelt's personal use of
company jets -- I repeat, his personal use for vacations, weekend getaways and
so on -- cost GE stockholders another $201,335 last year. (It's something
shareholders can think about when they stand in line to take off their shoes at
JFK -- if they're not lining up at the Port Authority for a bus.)
Bob Jensen's threads on outrageous executive
compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
"A Dangerous Pattern: Rewarding Failure," by Ron Kensas, Harvard
Business Review Blog, March 9, 2010 ---
http://blogs.hbr.org/ashkenas/2010/03/a-dangerous-pattern-rewarding.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Over the past few months there has been growing
anger and frustration about outsized Wall Street bonuses awarded by
institutions that were rescued by taxpayer funds. At the core of this anger
is the feeling that the pursuit of big payoffs caused bankers to develop
complex products and take big risks which ultimately caused the financial
system to crash — and if this dynamic is not curbed, it will happen again.
At the same time, there is also a feeling, reinforced by President Obama,
that Wall Street bankers have not really been held accountable for their
risky actions and, in fact, are being unduly rewarded while everyone else
continues to suffer.
Unfortunately, the focus on Wall Street masks a
more dangerous pattern of rewarding failure that is deeply embedded in the
highest levels of corporate and governmental culture. For example, President
Obama's point person for reforming Wall Street is Treasury Secretary Timothy
Geithner. But somehow Geithner himself has not been held accountable for the
financial crisis. This is despite the fact that as president of the Federal
Reserve Bank of New York Geithner was responsible for the supervision of
Wall Street banks. His reward for allowing these banks to create
unsustainable balance sheets: He was made Treasury Secretary.
Similarly Geithner's boss in the Federal Reserve,
Ben Bernanke, was not held accountable for the interest rate and regulatory
policies that some say caused the crisis. Instead, he was confirmed for a
second term by a wide margin in the Senate. And to complete the failure
trifecta, Lawrence Summers, who supported many of the policies that caused
the financial crisis and resigned from his position as President of Harvard
after making unfortunate statements about the capabilities of women, was
given a senior role as a White House economic policy advisor.
But this culture of rewarding failure is not
limited to the highest levels of government. Virtually every senior
corporate leader of a failed institution walks away with millions of
dollars. Many move on to other senior corporate jobs or board positions.
Take Robert Nardelli as an example. After not getting the top job at GE in
2001, Nardelli became the CEO of Home Depot where he made a series of
strategic missteps and displayed an arrogance that alienated employees and
customers. After being ousted from that job (with millions of dollars) he
was hired by Cerberus to turn around Chrysler — another failure which
ultimately resulted in its acquisition by Fiat. And while thousands of
Chrysler employees and dealers lost their jobs and their incomes, again
Nardelli walked away with his fortune intact and enhanced.
None of this is to blame Geithner, Bernanke,
Summers or Nardelli. The point of this argument is that at the highest
levels of government and corporations, we have accepted a culture of
rewarding failure. That is why perhaps the best job in America is to be a
failed CEO. You receive millions in severance and are once more given
opportunities to either try it again, or serve on a board of directors where
you can again escape accountability for failure. In fact, while President
Obama calls for "clawbacks" of banker's bonuses, nobody seems to be calling
for directors to return the compensation that they received for poorly
"supervising" financial institutions and other corporations that struggle or
fail.
Steve Kerr, former chief learning officer of GE and
Goldman Sachs, notes that the biggest problem with compensation is what he
calls "asking for A while rewarding B." If we are serious about asking for
excellent performance, then we have to stop rewarding failure. It's a simple
equation — and until we get it right, the President's calls for greater
accountability will have a hollow ring.
What do you think?
"Five Ways to Heal American Capitalism," by Roger Marti,
Harvard Business Review Blog, March 3, 2010 ---
http://blogs.hbr.org/cs/2010/03/healing_american_capitalism_to.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
March 10, 2010 reply from Malcolm McLelland
[mjmclell@INDIANA.EDU]
Here's an
interesting article written by George Soros in 1997 that is (was) prescient,
I think, regarding the financial crisis and related issues:
http://www.theatlantic.com/past/docs/issues/97feb/capital/capital.htm .
It seems to get at the core issue quite well.
Cheers,
MMc
Bob Jensen's threads on outrageous executive compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
"GAAP/IFRS Convergence: The SEC's Roadmap is a Highway Leading Nowhere,"
by James Peterson, March 7, 2010 ---
http://www.jamesrpeterson.com/home/2010/03/gaapifrs-convergence-the-secs-roadmap-is-a-highway-leading-nowhere.html
Bob Jensen's threads on the setting of accounting standards are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Another One from That Ketz Guy
"Deferred Income Taxes (Accounting) Should be Put to Rest," by J. Edward
Ketz , AccountingWeb, March 2010 ---
http://accounting.smartpros.com/x68912.xml
One of the silliest constructs in the world of
accounting happens to be deferred income taxes. I don't understand why we
bother with deferred tax liabilities and deferred tax assets because they
are neither liabilities nor assets. If the FASB and the IASB are serious
about principles-based accounting -- which I am becoming to believe is
rhetoric without referents -- then they would eliminate these bastard
accounts without delay.
Consider Procter & Gamble’s annual report for 2009,
for instance. They report deferred income tax assets (net) of $5.2 billion
and deferred income tax liabilities of $13.7 billion. But, are the former
really assets and the latter really debts?
The FASB defines liabilities as “probable future
sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities
in the future as a result of past transactions.” The IASB defines them
similarly as “a present obligation arising from a past event, the settlement
of which results in an outflow of resources embodying future economic
benefits.”
Suppose a business enterprise uses accelerated
depreciation for tax purposes and straight-line for financial reporting such
that depreciation for tax purposes amounts to $320,000 and for financial
purposes $200,000. There is a difference of $120,000 and, if we assume a tax
rate of 25%, this leads to an increase in deferred income taxes of $40,000.
But what is the nature of this $40,000?
This $40,000 is not a probable future sacrifice—the
sacrifice will be in the nature of future taxes paid to the U.S. and other
governments. At most, the $40,000 helps one better to predict future cash
flows for taxes. Yet that does not make this $40,000 a liability.
Even if it were a probable future sacrifice, there
is a bigger problem. This future sacrifice is not a present obligation of
the firm. The incremental tax becomes a “present obligation” only when the
next tax year rolls around. Taxes are statutory requirements that arise only
in the year they are imposed. Just because taxes are an unending penalty for
living in advanced societies doesn’t make any of them present obligations
today (the boulder pushed up the mountain by Sisyphus was actually his
income taxes).
Furthermore, these deferred income tax liabilities
are not a result of past transactions between the tax authority and the
taxpayer. We have the transaction when the taxpayer purchased the plant or
equipment and we have past tax transactions. But, it requires a lot of
imagination to think that any of these transactions give rise to some
present obligation.
If they were liabilities, one would expect them to
be discounted. All long-term obligations are measured at the present value
of their future cash flows, including mortgages and bonds and long-term
notes payable. I think the FASB does not require discounting of deferred tax
liabilities because it knows that fundamentally the numbers used in the
computation of deferred taxes are not cash flows. If they were, discounting
would be meaningful; as they aren’t cash flows, discounting only compounds
this monstrosity.
I view Procter & Gamble’s $13.7 billion of deferred
tax liabilities as not representing probable future sacrifices, nor present
obligations, and certainly not resulting from past transactions. Even if
they were, the number is vastly inflated because they are raw, undiscounted
numbers.
The FASB defines assets as “probable future
economic benefits obtained or controlled by a particular entity as a result
of past transactions or events.” The IASB’s definition is again quite
similar: an asset is “a resource controlled by the entity as a result of
past events and from which future economic benefits are expected to flow to
the entity.”
Suppose a firm has estimated warranty expense of $1
million but the tax expense is zero because nobody has filed a warranty
claim by year-end. The FASB asserts that there is a deferred tax asset of
$250,000 (assuming again the marginal tax rate is 25%) because these
represent future deductible amounts.
Note, however, they are not future economic
benefits yet if for no other reason, the government’s tax laws can change.
Even if they were, they are not the result of any past transactions or
event. Nobody has made a warranty claim; there has only been an adjusting
entry that the entity made within itself. It has not contracted or exchanged
anything involving these warranties. And not requiring any discounting is
again telling—there is no discounting because there is no event and no cash
flows.
A corporation must write down the supposed value of
the deferred tax asset if it is more likely than not that it will not
realize some of the asset. If this asset were real, where is the market
valuation (mark-to-model)? As firms cannot conduct such a valuation (even as
a Level 3 estimate per FAS 157), this valuation process is hollow.
I do not view Procter & Gamble’s deferred income
tax assets of $5.2 billion to be real. Just fluff and nonsense. And who
knows what P&G’s valuation allowance of $104 million means. It certainly
says nothing about valuation.
Probably the most illogical aspect of deferred
taxes occurs on the income statement. P&G determines for 2009 that earnings
from continuing operations before income taxes is $15.3 billion. Then it
records income tax expense of $4.0 billion. This close proximity gives the
reader the idea that there is a relationship between the two, but of course,
there is no association. The actual amounts owed to the IRS are computed on
taxable income, not on the financial reporting earnings before taxes.
Expenses are supposed to be sacrifices incurred
during the operating activities of the entity. Ok, the current portion of
the income tax expense is indeed a sacrifice. But, the deferred portion is
clearly not a sacrifice of any resources of the firm. That’s why firms
employ MACRS—they want to reduce their sacrifices to Uncle Sam.
P&G shows the current portion of income tax expense
in its tax footnote. The current portion is $3.4 billion and the deferred
portion is $0.6 billion.
I realize that academics have shown a statistical
association between market returns and deferred income taxes; however, they
usually overstate their conclusions. The correlation between market returns
and deferred income taxes merely indicates that market agents find the
disclosures useful in predicting future cash outflows to the IRS. This
statistical association doesn’t make these constructs assets or liabilities.
If the FASB wants to require these disclosures, it should require firms to
stick them in a footnote rather than contaminate the balance sheet with
their presence.
Analysts and researchers have an easy time dealing
with the problem of deferred income taxes, as the misinformation is in plain
view. We just eliminate the phony assets and liabilities from the balance
sheet and restate income tax expense to the current portion. Nevertheless,
the FASB and the IASB still should eliminate these deferred accounts and
clean up the balance sheet, especially if they are serious about
principles-based accounting. It makes the financial statements more
representationally faithful and thus more reliable.
This essay reflects the opinion of the author and not necessarily the
opinion of The Pennsylvania State University.
Teaching Case From
The Wall Street Journal Accounting Weekly Review on June 1, 2007
Lifting the Veil on Tax Risk
by Jesse Drucker
The Wall Street Journal
May 25, 2007
Page: C1
Click here to view the full article on
WSJ.com
---
http://online.wsj.com/article/SB118005869184314270.html?mod=djem_jiewr_ac
TOPICS: Accounting,
Accounting Theory, Advanced Financial Accounting, Disclosure
Requirements, Financial Accounting Standards Board, Financial
Analysis, Financial Statement Analysis, Income Taxes
SUMMARY: FIN
48, entitled Accounting for Uncertainty in Income Taxes--An
Interpretation of FASB Statement No. 109, was issued in June
2006 with an effective date of fiscal years beginning after
December 15, 2006. As stated on the FASB's web site, "This
Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition." See
the summary of this interpretation at
http://www.fasb.org/st/summary/finsum48.shtml As
noted in this article, "in the past, companies had to reveal
little information about transactions that could face some risk
in an audit by the IRS or other government entities." Further,
some concern about use of deferred tax liability accounts to
create so-called "cookie jar reserves" useful in smoothing
income contributed to development of this interpretation's
recognition, timing and disclosure requirements. The article
highlights an analysis of 361 companies by Credit Suisse Group
to identify those with the largest recorded liabilities as an
indicator of risk of future settlement with the IRS over
disputed amounts. One example given in this article is Merck's
$2.3 billion settlement with the IRS in February 2007 over a
Bermuda tax shelter; another is the same company's current
dispute with Canadian taxing authorities over transfer pricing.
Financial statement analysis procedures to compare the size of
the uncertain tax liability to other financial statement
components and follow up discussions with the companies showing
the highest uncertain tax positions also is described.
QUESTIONS:
1.) Summarize the requirements of Financial Interpretation No.
48, Accounting for Uncertainty in Income Taxes--An
Interpretation of FASB Statement No. 109 (FIN 48).
2.) In describing the FIN 48 requirements, the author of this
article states that "until now, there was generally no way to
know about" the accounting for reserves for uncertain tax
positions. Why is that the case?
3.) Some firms may develop "FIN 48 opinions" every time a tax
position is taken that could be questioned by the IRS or other
tax governing authority. Why might companies naturally want to
avoid having to document these positions very clearly in their
own records?
4.) Credit Suisse analysts note that the new FIN 48 disclosures
about unrecognized tax benefits provide investors with
information about risks companies are undertaking. Explain how
this information can be used for this purpose.
5.) How are the absolute amounts of unrecognized tax benefits
compared to other financial statement categories to provide a
better frame of reference for analysis? In your answer, propose
a financial statement ratio you feel is useful in assessing the
risk described in answer to question 4, and support your reasons
for calculating this amount.
6.) The amount of reserves recorded by Merck for unrecognized
tax benefits, tops the list from the analysis done by Credit
Suisse and the one done by Professors Blouin, Gleason, Mills and
Sikes. Based only on the descriptions given in the article, how
did the two analyses differ in their measurements? What do you
infer from the fact that Merck is at the top of both lists?
7.) Why are transfer prices among international operations
likely to develop into uncertain tax positions?
Reviewed By: Judy Beckman, University of Rhode Island
|
Teaching Case From The Wall Street Journal Accounting Weekly Review on
February 11, 2005
TITLE: Amazon's Net Is Curtailed by Costs
REPORTER: Mylene Mangalindan
DATE: Feb 03, 2005
PAGE: A3
LINK:
http://online.wsj.com/article/0,,SB110735918865643669,00.html
TOPICS: Financial Accounting, Financial Statement Analysis, Income Taxes,
Managerial Accounting, Net Operating Losses
SUMMARY: Amazon "...had forecast that profit margins would rise in the
fourth quarter, while Wall Street analysts had expected margins to remain
about the same." The company's operating profits fell in the fourth quarter
from 7.9% of revenue to 7%. The company's stock price plunged "14% in
after-hours trading."
QUESTIONS:
1.) "Amazon said net income rose nearly fivefold, to $346.7 million, or 82
cents a share, from $73.2 million, or 17 cents a share a year earlier." Why
then did their stock price drop 14% after this announcement?
2.) Refer to the related article. How were some analysts' projections
borne out by the earnings Amazon announced?
3.) One analyst discussed in the related article, Ken Smith, disagrees
with the majority of analysts' views as discussed under #2 above. Do you
think that his viewpoint is supported by these results? Explain.
4.) Summarize the assessments made in answers to questions 2 and 3 with
the way in which Amazon's operating profits as a percentage of sales turned
out this quarter.
5.) Amazon's results "included a $244 million gain from tax benefits,
stemming from Amazon's heavy losses earlier in the decade." What does that
statement say about the accounting treatment of the deferred tax benefit for
operating loss carryforwards when those losses were experienced? Be specific
in describing exactly how these tax benefits were accounted for.
6.) Why does Amazon adjust out certain items, including the tax gain
described above, in assessing their earnings? In your answer, specifically
state which items are adjusted out of earnings and why that adjustment might
be made. What is a general term for announcing earnings in this fashion?
Reviewed By: Judy Beckman, University of Rhode Island
--- RELATED ARTICLES ---
TITLE: Web Sales' Boom Could Leave Amazon Behind
REPORTER: Mylene Mangalindan
ISSUE: Jan 21, 2005
LINK:
http://online.wsj.com/article/0,,SB110627113243532202,00.html
Bob Jensen's threads on valuation are at
http://www.trinity.edu/rjensen/roi.htm
Derivative Financial Instruments and Hedging in Action
Gradient Analytics Forensic Accounting Firm ---
http://www.gradientanalytics.com/
Gradient Analytics, Inc., founded in 1996 by Don Vickrey and Carr Bettis as
Camelback Research Alliance, Inc. in Scottsdale, Arizona. Gradient Analytics is
an independent equity research company ---
http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=11517448
"There is no question these transactions should be a
red flag for investors," says Carr Bettis, the co-founder of forensic accounting
firm Gradient Analytics and co-author of a recent study on hedging. "The
evidence is pretty compelling that hedges tend to be used before bad news hits
the market." Bettis' research found that in the year after executives and
directors had engaged in hedging, their company's stock often dropped markedly.
He also found evidence of an increase in financial restatements and shareholder
lawsuits during the same period. Executives at MCI, Enron, ImClone (IMCL),
Krispy Kreme—companies that suffered some of the great stock melt-downs of the
last decade—hedged their shares.
"Some CEOs Are Selling Their Companies Short," by Jane Saseen,
Business Week, February 25, 2010 ---
http://www.businessweek.com/magazine/content/10_10/b4169044647894.htm?campaign_id=magazine_related
Thanks to Jim Mahar for the heads up.
For investors in Switch & Data Facilities (SDXC), a
telecom services startup, 2008 was a wild year. From a low of 8.60 in
mid-March, shares more than doubled, to 18.17 three months later. Further
gains seemed likely in late July when CEO Keith Olsen boosted the guidance
he had given Wall Street analysts. But with revenue growth slowing even as
debt payments and other costs jumped, Switch & Data was in the red by
yearend. By November 2008, the shares had fallen to 4.21.
One shareholder avoided much of that drop: the CEO.
On June 19, the day the stock peaked, Olsen contracted with an investment
bank to hedge 150,000 shares—a quarter of his stock in the company—against
losses if the price fell below 18. As part of the complex maneuver, he
agreed to sell his shares to the bank one year later and got an advance of
$2.2 million. Olsen, who disclosed his hedging in public filings, declined
to comment for this story.
Hedges are ways to contain losses if a stock
declines, while still keeping some upside potential if the price keeps
rising (see table for a full explanation). It's a strategy anyone in the
market can employ. But the way hedging is done by CEOs, directors, and other
senior executives may deprive investors of clues about impending problems at
companies. Many grant executives stock as compensation largely because they
want them to have a stake in the company's success or failure. Investors
routinely follow insiders' sales and purchases of company stock as a gauge
of a corporation's prospects. Hedging, though, reduces an executive's
exposure to stock price drops in a way that investors have a hard time
detecting. The complex transactions are structured so that executives still
technically own the shares. And though some really big hedges get noticed at
the time they are made, disclosures of hedging are often vague or buried
deep in the footnotes of obscure public filings.
"There is no question these transactions should be
a red flag for investors," says Carr Bettis, the co-founder of forensic
accounting firm Gradient Analytics and co-author of a recent study on
hedging. "The evidence is pretty compelling that hedges tend to be used
before bad news hits the market." Bettis' research found that in the year
after executives and directors had engaged in hedging, their company's stock
often dropped markedly. He also found evidence of an increase in financial
restatements and shareholder lawsuits during the same period. Executives at
MCI, Enron, ImClone (IMCL), Krispy Kreme—companies that suffered some of the
great stock melt-downs of the last decade—hedged their shares.
Some 107 instances of executive hedging were
reported to the Securities & Exchange Commission in 2009, up from a decade
low of 48 in 2007, according to Bettis, and regulators are beginning to
scrutinize the transactions. Kenneth Feinberg, the U.S. Treasury pay czar,
has banned executives from hedging at the banks and automakers that received
government bailouts. "We wanted to make sure they couldn't undercut the
links we created between compensation and long-term performance," says
Feinberg. If executives at the companies could hedge their stock, he adds,
"they wouldn't have to worry about how [the stock] does."
In 2000 and 2001, billionaire Philip Anschutz
hedged shares of two companies in which he held major stakes, Union Pacific
(UNP) and Anadarko Petroleum (APC). Shorting stock is typically done as part
of a hedging strategy. In Anschutz's case, the bank that arranged the deal,
Donaldson, Lufkin & Jenrette (now part of Credit Suisse Group), shorted
Anschutz's own shares rather than borrowing shares in the market to short.
That was a common technique until tax authorities cracked down on it in
2006. In a case pending before U.S. Tax Court in Washington, the IRS is
arguing that Anschutz's deals were effectively stock sales rather than
hedges, and is seeking $143.6 million in capital gains taxes. Tax lawyers
are watching the case because they say many other executives who early in
the decade allowed their own shares to be shorted the way Anschutz did are
now being audited. If the IRS wins its case, these hedgers could face big
tax bills earlier than expected. Anschutz disputes the IRS's argument and
would not comment for this story.
There are plenty of reasons a senior executive
would hedge if he thought his company's stock was going to slide. In one
type of hedge, called a prepaid variable forward contract, he can get a cash
advance of up to 85% for shares he agrees to sell eventually to an
investment bank. Because he still technically owns the shares, the IRS
doesn't consider a hedge a sale so long as the bank doesn't short the
executive's own shares. So the executive need not pay capital gains taxes
until the hedge expires. Meanwhile, he can still vote the shares and collect
dividends.
U.S. executive hedging first took off in Silicon
Valley during the dot-com era, when transactions averaged around 290 a year.
Investment banks—Morgan Stanley (MS), Goldman Sachs (GS), JPMorgan Chase (JPM),
and Citigroup (C)—rushed to provide hedge services. "I don't know of a bank
that doesn't have a department doing this," says Mark Leeds, a tax lawyer
with Greenberg Traurig. By mid-decade, he adds, transactions worth several
billion had likely been sold. The hedge business helps the banks cement ties
with top executives, which comes in handy when a bank is pitching other
services. And the banks reap rich fees.
SUSPECT CORRELATIONS
Bettis and his co-authors examined 2,010 hedging transactions reported in
filings by 1,181 executives at 911 firms between 1996 and 2006. In the year
preceding executives' hedges, their companies' shares outpaced the market
anywhere from 17% to 31% on average, depending on the type of hedge used,
according to Bettis' analysis, which was completed last year. After the
executives hedged, it's a different story. Shares in companies where the
CEOs, directors, and other top executives had hedged using a variable
forward sale lagged the market by 16.2%, on average. Those where a collar,
another popular hedging transaction, had been used fell behind by 25%.
Roughly 11% of the companies where an executive
used a collar had to restate financials within two years of the hedge
transaction; comparable companies where no hedging occurred had half as many
restatements, Bettis says. Some 11% of the firms that let their executives
buy a variable forward contract faced securities-related suits within a
year, double the number at companies that didn't hedge. "The poor
performance following hedging suggests a number of these trades are
potentially based on privileged information," argues Bettis. The trades
"appear to be tied to events that were known or could reasonably have been
anticipated by the executives," he adds.
SEC officials say executives who hedge fall under
the same rules as those who sell their stock. If an executive were to use a
hedge to protect himself against losses at a time when he possessed specific
material information that the company's performance had stumbled or was
about to, that could potentially bring an insider trading charge. But SEC
spokesman John Heine says the agency has never pursued an insider trading
case against an executive following a hedge.
Missed earnings in the wake of a hedge appear
common, Bettis' research shows. Chattem Chairman and CEO Alexander Guerry
placed a hedge on 60,000 shares of the Chattanooga (Tenn.)-based maker of
Gold Bond foot powder,
Continued in article
Jensen Comment
Note that FAS 133 does not scope in accounting for short sales.
Bob Jensen's tutorials on accounting for derivative financial instruments
and hedge accounting ---
http://www.trinity.edu/rjensen/caseans/000index.htm
"The Difference Between Political Journalists and
B-School Profs," by Justin Fox, Harvard Business Review Blog, March
9, 2010 ---
http://blogs.hbr.org/fox/2010/03/the-difference-between-politic.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
The other night I went to see Mark Halperin and
John Heilemann talk about their 2008 campaign bestseller,
Game Change, at Harvard's Kennedy School.
They were very sharp and entertaining, and they persuaded me to buy the book
(the $8.61 Kindle price was a factor, too). They were also touchier than I
would have expected about the
criticism their book has received for its focus on
the trivial and the personal.
Their defense was that political campaigns turn on
the trivial and the personal, so if you ignore it you ignore the essence of
why one candidate prevails over another. As Heilemann put it (I wasn't
taking notes so this is a bad paraphrase, not a real quote): Voters
didn't choose based on the fact that Hillary Clinton wanted a health
insurance mandate and Barack Obama didn't.
As a defense of the book, I thought this was valid
enough. It was kind of funny when a student in the audience asked
Halperin (a former colleague of mine at Time) what lessons could be
learned from Game Change, and all he could come up with was:
Candidates whose private and public personas are more or less the same
(Barack Obama) tend to have fewer troubles than those with private doings
and attributes that they try to hide or at least play down (John Edwards,
Hillary Clinton). Gee, thanks, guys. That's really informative.
This is of course the core of a long-running and
entirely valid criticism of how the mainstream media cover politics: The
narrative is all about personal characteristics and fleeting controversies,
and leaves those who consume it intellectually undernourished. That debate
gets enough play elsewhere that I won't go into it here, other than link to
this fine
Ezra Klein post about the differing fortunes of
political and policy journalists. But what struck me while listening to
Halperin and Heilemann defend their approach were the echoes of a different
debate that runs through a book I've been reading, Walter Kiechel's
Lords of Strategy (it's an HBS Press book, so
you can discount anything I say as biased, but it really is excellent).
Kiechel tells of the rise of gurus — from the
consultants of Boston Consulting and Bain to Harvard professor Michael
Porter — who cut through the messy realities of business with strategic
abstractions that purported to explain why companies succeed and fail. By
the 1980s, critics were beginning to complain that the whole strategy
exercise was too abstract, that what mattered were people or quirks of
history. Even these critics (Tom Peters, Richard Pascale, Jeffrey Pfeffer)
were operating at level of abstraction that consumers of political
journalism would find deeply foreign. But the basic question was the same:
Are you better off learning the particulars of how a candidate won or a
corporation made money, or focusing on more universal explanations that can
presumably be applied elsewhere?
My general sense is that most of us could use more
of the latter (I like Malcolm Gladwell's
line that "People are experience-rich and
theory-poor"). But, clearly, you can overdo it with the abstraction (a case
in point that I've spent way too much time studying: the
efficient market hypothesis). The real lesson may
be that we always need to be mixing and matching the two approaches, taking
caution not to go too far in one direction or another. Which is why I'd like
to propose a job exchange: Michael Porter takes over Halperin's political
site
The
Page for six months, and Halperin comes to HBS to
teach strategy. Just think: campaign hacks poring over Porter's
Five Forces of Political Competition; MBA students
digging through Indra Nooyi's latest speech in search of gaffes. Wouldn't it
be fun?
Liberal Bias in the Media and in Academe ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#LiberalBias
Bob Jensen's threads on higher education controversies
are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
"Thinking About Teaching," by Joe Hoyle, Teaching Financial
Accounting Blog, February 28, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/02/thinking-about-teaching.html
You may have seen the video below (it is four
minutes long). It had a lot of impact on me when I was creating our new
Financial Accounting textbook. The video was apparently created by the
students you see and really made me think about the state of education
today. As far as I am concerned, education is expensive and, too often, both
boring and inefficient. I wanted to be part of the solution rather than part
of the problem. As a result, I helped design and create this new type of
Financial Accounting textbook.
http://www.youtube.com/watch?v=dGCJ46vyR9o
**
As I have mentioned previously, a few years ago I
wrote a free on-line teaching tips book (https://facultystaff.richmond.edu/~jhoyle/).
I was lucky, a few people read it and told other people and then I got a
very nice review in the Chronicle of Higher Education. As a result, I
started getting emails from around the world about teaching. That was
wonderful.
One day I received an email from a professor in London who said something
like: “you don’t know me but I have read your teaching tips book and have a
quote that I think you are going to love.” And, he was absolutely
correct—this is one of my two or three favorite quotes about teaching.
Whenever I give a teaching presentation, I always use this quote to explain
what I believe is the true secret for becoming a better teacher. It is the
best piece of advice that I can give any teacher who wants to improve.
"Teaching does not come from years of doing it. It actually comes from
thinking about it."
I get pretty decent teaching evaluations from my students and I have won a
few awards. Whenever anyone asks me how I managed to do that, I always say:
“I think about this stuff a lot. Whether it is 6:00 a.m. when I wake up or
10:30 p.m. when I go to bed, teaching and my students and how to help them
learn is always floating around in my head.”
So, today, I decided to tell you about what has been floating around in my
head recently.
It seems to me that college education in my lifetime has focused on the
conveyance of information. One content expert (the teacher) conveys
information to a group of individuals who want (or are required) to gain a
bit of that expertise. Despite what we might say, that process has not
changed too radically in the last four decades since I was a college
student.
However, with the Internet, Google, Bing and the like, information is
readily available to most individuals at any time. It is hard to find a
factual question that you cannot answer in less than one minute using a
search engine. What then is the future purpose of a college education (other
than the acquisition of a very expensive diploma)? If there is no longer a
huge need for the conveyance of information from one generation to the next
because it is so readily available, what are we doing? Don’t we need to know
that before we even start the first class?
Do we who teach in college think about that question enough or just try to
ignore it as best we can?
When I give teaching presentations, we work on developing “fly-on-the-wall”
philosophies. What the heck is that? I ask the members of the audience to
picture the course that is their favorite to teach. Then think of the final
day of the semester when the students file out of the room for the last
time. I ask each of the teachers to pretend they are a fly on the wall right
above the door. If you were that fly on the wall, what would you want to
hear from your students as they exited for the final time?
--The teacher sure conveyed a lot of information??
--I certainly took some great notes this semester??
--I memorized a lot of material so I could pass a test??
From my experience, a lot of teachers teach as if that is their goal. But,
surely that cannot be the reason we became teachers. In 2010, doesn’t it
have to be something more than that? And, if the answer is Yes, then what is
the purpose of a college course?
I can tell you my own personal fly-on-the-wall philosophy but I am not sure
that I am not ready for some change in it. So, if you have suggestions, let
me know.
Here is my mine. On the last day of class, I would love to hear by students
say:
“I never thought I could work so hard. I never thought I could learn so
much. I never thought I could think so deeply. And, it was actually fun.”
What is yours?
Continued in article
Bob Jensen's threads on tools and tricks of the trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Turing Test (a test for the degree of machine "intelligence")
---
http://en.wikipedia.org/wiki/Turing_Test
Can humans distinguish between sequences of real and randomly generated
financial data?
Scientist have developed a new test to find out.
"Scientists Develop Financial Turing Test," MIT's Technology Review,
February 26, 2010 ---
http://www.technologyreview.com/blog/arxiv/24861/?nlid=2780
"'Honest services' fraud: Round 3: Skilling v. U.S., 08-1394,
Argument preview," by Lyle Denniston, Scotus Blog, February 26th,
2010 ---
http://www.scotusblog.com/2010/02/%e2%80%9chonest-services%e2%80%9d-fraud-round-3/
For the third time this Term, the Supreme Court
will examine the scope of the controversial 1988 law that makes it a
crime to commit fraud that deprives someone, such as one’s company, of
“the intangible right of honest services.” It does so in the leading
criminal case growing out of the Enron business scandal. This time,
however, the Court may confront the constitutionality of that law, since
the new case involves a claim that the law is so broadly worded that no
one can know what it outlaws, thus making it unconstitutionally vague.
The case has an added dimension: the Court is asked to spell out how
trial judges should deal with massive negative publicity that surrounds
a criminal case.
Background
In October 2001, the giant energy company,
Enron Corp. — the nation’s seventh largest business firm — suddenly
collapsed and soon was in bankruptcy, wiping out workers’ jobs and
retirees’ savings, and devastating the entire local economy in Houston.
After the company’s fall, the economic and personal disaster was often
compared locally to the devastation of the Sept. 11, 2001, terrorist
attacks on the U.S. The scandal mushroomed, and President George W. Bush
named a special task force to track down any criminality. Three years
after the fall, a major show trial started, after a wave of fevered
calls for revenge for what had been done to Houston, and after other
prosecutions for Enron-related crimes had raised expectations over what
was called the “main event.” The flow of negative news stories dogged
that trial. Now, nearly six years later, in the quiet, decorous chamber
of the Supreme Court, the Justices take their first full-scale look at
that trial, its outcome, and the publicity.
The appeal the Justices will hear focuses on
Jeffrey K. Skilling, a longtime executive of Enron who resigned as CEO
shortly before the scandal broke into public view. Skilling is now in
prison, initially sentenced to 24 years and four months and ordered to
pay $45 million in restitution. Although his sentence is scheduled to be
reviewed anew in lower courts, that review would not directly affect his
conviction. His appeal, though, seeks an entirely new trial, to be held
somewhere other than Houston.
On May 25, 2006, after the four-month trial,
Skilling was convicted of one count of conspiracy to commit securities
fraud and wire fraud (the “honest services” charge is keyed to that
count), 12 counts of securities fraud, five counts of making false
statements to accountants, and one count of insider trading. The jury
found him not guilty of nine counts of insider trading in Enron stock.
His conviction was upheld by the Fifth Circuit Court, but that Court
ordered a new sentencing because of a flaw in calculating the sentence
due under federal Sentencing Guidelines.
Prosecutors charged that Skilling was at the
center of an elaborate plot to deceive investors about the state of
Enron’s fiscal health. The plot allegedly included over-statement of the
company’s financial condition for more than two years in an attempt to
keep the company’s stock price high and rising. (Convicted along with
Skilling was his predecessor as CEO, Kenneth Lay, who died before he
could be sentenced. Others in the case have pleaded guilty.)
Skilling’s challenge to his trial in Houston
and to his conviction and sentence wound through lower courts for more
than two years, then reached the Supreme Court in May of last year. It
arrived on the Court’s docket just shortly before the Court on May 18
agreed to hear two other cases testing the federal “honest services”
fraud law. Those cases are Black v. U.S. (08-876) and Weyhrauch v. U.S.
(08-1196), both heard by the Justices on Dec. 8 and now awaiting
decisions. Neither involves a direct constitutional challenge to that
law. The Black case tests whether that law applies to a private
individual whose alleged fraud did not result in any economic harm to
his company. The Weyhrauch case tests whether the law applies to a state
official if that official did not violate any state law.
Petition for Certiorari
Much of Skilling’s challenge deals with his
claim that he could not possibly have gotten a fair trial in Houston
amid what his lawyers call the “devastating impact” of the scandal on
the entire city and region, and the resulting “vitriolic” and
“blistering” publicity about the accused executives. His attorneys
claimed in the petition that “the community passion” stirred up by the
case “was as dramatic as any in U.S. criminal trial history.”
But, among those who specialize in criminal
law, the case has a higher profile because of its broad challenge to the
constitutionality of the federal law that criminalizes any form of
fraud, if the misconduct deprived another of “the intangible right of
honest services.” That law, enacted by Congress 22 years ago to overturn
a Supreme Court decision (McNally v. U.S., 1987), is a favorite tool of
federal prosecutors, especially in public and private corruption cases.
Its undefined language has led to countless efforts by federal judges to
give it some particular meaning in order to save its constitutionality.
Skilling’s appeal assailed that effort, arguing that the resulting array
of lower-court rulings “is a hodgepodge of oft-conflicting holdings,
statements, and dicta” that “only the most discriminating lawyer or
judge” could understand.
In Skilling’s case, the “honest services” fraud
law was invoked by prosecutors to bolster their overall charge of a
conspiracy to commit securities and wire fraud. One aim of his wire
fraud, prosecutors said, was to deprive Enron of his “honest services.”
They had other theories for the conspiracy count; those are at most
implicitly at issue. The focus of Skilling’s petition, on this point,
was that the “honest services” theory cannot be applied to an individual
who did not make any private gain; his lawyers contended that his only
purpose was to benefit Enron, by boosting the value of its stock. If the
law does not exclude those who had not pursued personal gain, then it
should be struck down as too vague, the petition argued. The Court
should clear up lower-court confusion on the gain issue, the petition
asserted, since three appeals courts allow the law to be applied even
when there was no such gain, while two others do not.
The petition raised the constitutional argument
in a somewhat subtle way. While implying that excluding from the law
cases that do not involve private gain might save the law from being
struck down, it suggested that “even that limitation may not suffice to
save the statute from unconstitutional vagueness.” The implication, of
course, was that the Court would have to strain to uphold the statute
whether or not it narrowed it as Skilling had suggested.
The “honest services” issue was the petition’s
first question. In its second, Skilling asked the Court to rule that, if
negative publicity about a criminal case is so widespread and
inflammatory that it creates “a presumption” that no jury could be fair,
then the conviction must be overturned and a new trial automatically
ordered. The problem cannot be cured, it argued, by questioning
potential jurors to see if they can show that they would be fair and
impartial. If juror questioning might be a remedy for such an indication
of prejudice, the petition argued, the Court should rule that it
actually is a remedy only if prosecutors prove “beyond a reasonable
doubt” that no juror was actually prejudiced.
The Justice Department, in response, urged the
Justices to bypass Skilling’s case or, at most, to hold it for action
until after it decided the Black case on the scope of the “honest
services” law. The government’s first argument against review was that,
since the Fifth Circuit had ordered a new sentencing, the case was not
really final at this stage and thus the Court should not get involved.
Moreover, it noted that Skilling’s lawyers were intending to file a new
motion for a new trial.
In seeking to counter his challenge regarding
the absence of any proof of “private gain,” the Department said that the
prosecutor’s claim of denying “honest services” to Enron was only one of
three theories used to support the fraud conspiracy count against
Skilling. Thus, it contended, the jury verdict on that count would have
been the same even without that theory. On Skilling’s prejudical
publicity claim, the government said that his would not be a good case
to use to review what must be done if publicity has created “a
presumption of jury prejudice” since that presumption was unwarranted in
this case. Such a presumption exists, it argued, only in an extreme
situation, and this case does not meet that standard. Although the Fifth
Circuit had found such a presumption to exist (but allowed it to be
overcome during juror question), the government contended that any such
presumption was overcome in this case by questioning jurors to check for
prejudice. A finding of a presumption of juror bias can be cured without
resorting to automatic reversal and a new trial, it concluded.
Merits Briefs
Skilling’s brief on the merits represented some
new strategic calculations by his attorneys. They put their initial
emphasis on the prejudicial publicity issue, thus giving it more
prominence — perhaps reflecting the fact that, if this succeeded, it
could overturn all of the conviction, not just the conspiracy count
keyed to “honest services” (although the brief does contend that the
problem with the “honest services” charge infected the entire verdict.)
Just as significantly, the brief makes an unmistakable constitutional
attack on the “honest services” law, contending that it simply cannot be
saved no matter how it might be narrowed, because that would not be a
legitimate judicial effort.
The challenge to the publicity surrounding the
case begins at the top of the brief: “Skilling’s trial never should have
proceeded in Houston.” Once it was allowed to go forward there, his
lawyers argued, a conviction was assured. Houston, they contended, was
“rife with the anger and pain engendered by Enron’s collapse,” and
“there was no legitimate justification” for not transferring the case to
a place “where jurors could be presumed impartial, instead of the
opposite.”
Once defense lawyers had demonstrated the
effect of the Enron collapse and the ensuing publicity on the trial, the
brief asserted, there was no way to cure it by asking jurors to confess
to their bias — something they could not be expected to do. In fact, the
juror questioning that did occur came during a “truncated” five-hour
session, “with no individual questioning” of jurors, according to the
brief; that process, it added, “did almost nothing to weed out
prejudices exposed” on the questionnaires the jurors had filled out
before being questioned.
Moving on to the “honest services” issue, the
Skilling brief said that, if the negative publicity was not enough to
assure a conviction, then the prosecutors’ use of a vague statute
cemented their prospect of guilty verdicts for the top Enron brass. That
led into the frontal challenge to the law’s constitutionality, citing
again the “morass of conflict and confusion” about the law’s meaning. It
noted that, while the McNally case had sought to force Congress to
clarify the “honest services” concept, Congress did not do so. The brief
then made a sharp new thrust: “It is beyond the judicial function to
identify…the crime that Congress failed to define.”
As a fallback, the brief suggested that, if the
Justices “were inclined to complete Congress’s work,” they should limit
the “honest services” law to bribes and kickbacks. Going further, the
brief said that the Court, if inclined to read the statute as
encompassing anything beyond bribes and kickbacks, should not include
the kind of conduct in which Skilling was accused of engaging: “pursuing
his normal compensation scheme” without harm to Enron. Only in the
brief’s concluding point did it suggest that the Court should put
outside the law’s scope any conduct that did not involve direct personal
gain at the company’s expense.
The Justice Department’s brief on the merits
accepted the Skilling challenge of putting the prejudicial publicity
issue first, and sought to refute it by contending that it is the
defense counsel’s task to show juror bias, not the prosecutors’ to
refute it. An accused individual, it argued, “is not deprived of a
constitutional right unless he can show that a selected juror was
biased” In the Skilling case, it insisted, the questioning of jurors
about the effect of the publicity was not inadequate; rather, it argued,
the trial judge did a “meticulous and careful” job that, in fact,
“produced an unbiased jury.” The government relied upon the Court’s 1991
decision in Mu’min v. Virginia for the proposition that “a trial judge’s
vigilance in voir dire is fully capable of ferreting out bias and that
the judge’s decisions to seat a juror are entitled to deference on
appeal.”
Moreover, the Department’s brief argued that
the Court has repeatedly shown that it regards the remedy of automatic
reversal of a conviction because of trial error as being available “only
in a very limited class of cases.”
On Skilling’s description of the impact of
Enron’s collapse on the Houston area, the government brief contended
that the Constitution does not guarantee “a trial in a venue whose
populace has no exposure to the effects of the defendant’s crime or
adverse pretrial publicity about it.”
Turning to the constitutionality of the “honest
services” law, the government repeated arguments that it has made in the
other cases this Term involving that law — that is, that the body of
lower court rulings that has built up over the years points in a clear
direction. What those precedents mean, it asserted, is that the statute
is violated if there is “a breach of the duty of loyalty, intent to
deceive, and materiality.” The prosecution of Skilling, it said,
satisfied all three. On the “personal gain” question, the government
brief said that Skilliing, even though pursuing his own compensation
interests, actually was seeking personal gain. By seeking to inflate the
price of Enron stock, it contended, Skilling actually was seeking
“additional personal benefits at the expense of stockholders.”
Among amici briefs, Skilling’s constitutional
assault on the “honest services” law drew strenuous support from the
U.S. Chamber of Commerce, the National Association of Criminal Defense
Lawyers, and Texas defense counsel, and by two right-of-center legal
advocacy groups — the Pacific Legal Foundation and the Cato Institute.
Those two groups made a special effort to try to persuade the Court to
treat the accused in complex business cases to the same protection from
vague criminal laws that ordinary criminals get. The NACDL brief also
sought to reinforce the Skilling challenge on the prejudicial publicity
point, arguing both that jury questioning cannot cure a demonstration of
likely community bias, and that the attempt to do so in this case was
seriously inadequate. The government’s challenge to the Skilling demand
for automatic reversal due to a “presumption” of prejudice from
publicity gained the support of a host of media organizations, arguing
that putting such a presumption beyond possible rebuttal would “create a
significant new incentive to restrict press coverage of the most
intensely followed prosecutions and thwart the value of openness.”
Analysis
It is already clear that there is, among some
members of the Court (most notably, Justice Antonin Scalia), a deep
skepticism about the constitutionality of the “honest services” law. The
decision by Skilling’s lawyers to harden their challenge to it in their
merits brief, and the support that challenge gets from amici, very
likely increase the chances that the Court will be prepared to rule
directly on the law’s validity. The fact that Congress has made no
effort to clarify the law’s scope, in the face of a widely varying array
of interpretations by lower courts, may make the Court reluctant to
re-craft the law itself. The Court has seen, in the three cases this
Term testing the law’s reach, how difficult it seems to be to know what
it actually covers.
There was another small hint to suggest that
the Court, in fact, is quite interested in the constitutional question.
Three days after the Skilling merits brief was filed, with its direct
complaint about the law’s validity, the Court moved the Skilling case
ahead on its docket, to give the Court an earlier chance to hear
lawyers’ argument on it. No one outside the Court knows why it advanced
the case, but the Justices clearly were keen on getting to it.
One potential point of hesitancy, however,
would be the Court’s sometime devotion to the notion that constitutional
judgments should be avoided unless clearly necessary. Skilling’s lawyers
have given the Court a series of alternative approaches that could save
the law by narrowing it. Those are ready at hand, if the Court should
find it difficult to reach five votes to nullify the law outright.
The dispute in Skilling about how to deal with
pervasive negative publicity before and during a criminal trial is more
difficult to analyze. His lawyers have painted a vivid portrait of the
virulence of the publicity surrounding the Enron trial and just as vivid
a picture of the personal and economic wreckage that the scandal-driven
Enron collapse did to the Houston area. Those are portrayals that the
media organizations, as amici, have not been fully successful in
neutralizing. But, even if the Court were moved by the recollection of
the wreckage, it is by no means clear that it would be prepared to opt
for automatic reversal of convictions and a new trial as the sole
available remedy. Perhaps the Court might mandate a more thorough juror
questioning process than was done in the Enron case, however.
The media organizations, in the most
significant point in their brief, noted that the Supreme Court has not
found a case of presumed prejudice by publicity about a criminal trial
since the “watershed case of Sheppard v. Maxwell,” and that was 44 years
ago. (Actually, according to the Justice Department merits brief, the
last instance was somewhat further in the past than that: the case of
Rideau v. Louisiana in 1963, 47 years ago.)
"Analysis: Problems with Enron jury Skilling v. U.S., 08-1394, Argument
recap," by Lyle Denniston, Scotus Blog, March 1, 2010 ----
http://www.scotusblog.com/2010/03/analysis-problems-with-enron-jury/#more-16937
The Supreme Court on Monday found itself shifting
between worry that the judge who tried the biggest Enron scandal case may
not have done enough to assure that a fair jury was chosen, and worry that
the Court should not try to micromanage how trial judges handle that
process. The Justices seemed far more interested in the jury issue than in
the other high-profile question before them in Skilling v. U.S. (08-1394) —
whether former Enron Corp. CEO Jeffrey Skilling was convicted of violating
an unconstitutional law.
With Justice Stephen G. Breyer leading the way, the
Court probed deeply into the questioning of potential jurors at Skilling’s
trial in Houston, examining whether District Judge Sim Lake took too little
time to ferret out potential prejudice or stopped short of following up to
test jurors’ pre-trial intimations — or outright conclusions — that the
accused Enron brass deserved to be convicted. Several of the other Justices
questioned the brevity of that probing, but there was no evident consensus
about what the Court should now do about it. Even Justice Breyer, who was
the most troubled about Judge Lake’s performance (“I’m genuinely concern
about a fair trial”), repeatedly stressed that he did not want the Court to
go too far to second-guess such performances. “I’m worried about controlling
too much,” he said on the second point.
One point, though, was clear: no member of the
Court appeared to embrace Skilling’s core argument that the jury-selection
process, even if more extensive, could never be a cure for massive negative
feeling in a community about a criminal case. The Court appeared to accept
that the Enron prosecution did occur in a pressure-cooker of revenge
sentiment in Houston, yet was not yet ready to lay down sweeping new
limitations on how judges should respond to that kind of atmosphere.
Although Justice Breyer indicated near the end that
at least he would now want to go back over, very carefully, the
questionnaires the Enron jurors had filled out, and the questioning that
they underwent during a mere five-hour session to check for bias, his was
not the only voice of concern. Justice Sonia Sotomayor — a former trial
judge who no doubt is familiar with jury selection for criminal trials —
also displayed considerable skepticism about Judge Lake’s methods. However,
she also was somewhat skeptical about how well Skillling’s defense team had
handled the jury selection process.
Skilling’s lawyer at the podium, Sri Srinivasan,
set the agenda for the hearing by beginning with the juror prejudice issue,
in an apparent indication of a strategy to try to get a completely new trial
for Skilling, rather than a reversal on, say, the conviction for failing to
provide “honest services” to Enron’s shareholders by pushing up the company
stock’s price. (Even when the Court began exploring the “honest services”
law, after Chief Justice John G. Roberts, Jr., raised it, the argument was
somewhat lacking in fervor. That may be an indication that, having already
hear two other cases this Term testing that law’s scope, the Court either
has made up its mind to pare it down or did not see much new about it in
this case, even though Skilling has posed a direct constitutional challenge
to it.)
On the juror bias issue, Srinivasan put most of his
emphasis on the impact on community attitudes from the economic collapse of
Enron, treating the “vitriolic” publicity in the media almost as a secondary
concern. Even if some jurors had paid little or no attention to the
publicity, the jury pool itself was people with local citizens who had felt
the impact, and resented it, he argued. Even though those attitudes emerged
in some of the jurors’ questionnaires, Srinivasan complained, Judge Lake
failed to follow up, and essentially curbed the defense lawyers’ chances to
follow up. Some of the jurors, he said, would not have felt free to return
to the community if they had not brought in convictions.
He was only a little way into his argument before
Justice Breyer started probing for “how we sketch the line” between an
adequate and an inadequate exploration of potential jurors’ actual or
perceived biases. Srnivasan sought to lay down some standards, but Breyer
seemed less than satisfied with that attempt at assistance.
When the Court reached the “honest services” issue,
Skilling’s lawyer sought to reinforce the deep skepticism that some of the
members of the Court are known to already feel about the open-ended sweep of
that law. Srinivasan suggested that the way the Justice Department was now
interpreting that law would suggest that i would reach virtually any lie
that any worker told in the workplace about his job performance.
Deputy Solicitor General Michael R. Dreeben,
defending the verdict in the case as well as Judge Lee’s handling of the
potential bias issue, sought to portray the Skilling team’s depiction of the
procedure as exaggerated. He had uttered only a few sentences, however, when
Justice Sotomayor pressed him on whether there had been any other
“high-profile case” in which juror selection was limited to only five hours.
Dreeben said he knew of none, but insisted there was no problem with the way
it worked out in Skilling’s case.
It was then that he ran into the barrage of
Breyer’s questions. The Justice said he had gone over the entire examination
of potential jurors, and began to point out what he clearly was portraying
as an insufficient response by Judge Lake. One potential juror (who was not
seated) had lost $50,000 to $60,000 as a result of Enron’s collapse, but,
Breyer noted, the judge refused to dismiss her from the case for “cause,” as
the defense asked. After Breyer had gone over several instances, Dreeben
suggested that perceptions of what had gone on might be different now for
someone “sitting with a cold record” rather than having been there for the
actual proceeding.
Continued in article
Bob Jensen's threads on the Enron, Andersen, and Worldcom frauds ---
http://www.trinity.edu/rjensen/FraudEnron.htm
From:
Anonymous
Sent: Tuesday, March 02, 2010 2:38 PM
To: Jensen, Robert
Subject: Former ENRON Prosecutor
Please refer to the previously sent information.
http://lawyersweekly.com/reprints/jenner_block5.htm
Above
attachment is an article from Lawyers Weekly titled "Fighting the
Governmental Efforts to Limit Defense Access to Evidence" co-written by
a former Chief of the Criminal Division of the United States Attorney's
Office for the Eastern District of New York, who oversaw the prosecution of
Enron. The writers are now on the other side of the fence as White Collar
Defense Attorneys.
The
writers' quote from within the article: "Federal prosecutors
continue to interfere improperly with defense access to witnesses and
documents. This article addresses the prosecutorial practices of seeking to
limit defense access to grand jury and trial witnesses, and requesting
corporations to withhold documents from defense counsel representing
corporate executives. These practices are legally and ethically wrong."
"Does Mandatory Adoption of International Financial Reporting Standards in
the European Union Reduce the Cost of Equity Capital?"
by Ole-Kristian Hope and John Christian Langli
The Accounting Review 85 (2), 607 (2010)
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=ACRVAS000085000002000607000001&idtype=cvips&gifs=Yes&ref=no
ABSTRACT:
This study examines whether the mandatory adoption of International
Financial Reporting Standards (IFRS) in the European Union (EU) in 2005
reduces the cost of equity capital. Using a sample of 6,456 firm-year
observations of 1,084 EU firms during the 1995 to 2006 period, I find
evidence that, on average, the IFRS mandate significantly reduces the cost
of equity for mandatory adopters by 47 basis points. I also find that this
reduction is present only in countries with strong legal enforcement, and
that increased disclosure and enhanced information comparability are two
mechanisms behind the cost of equity reduction. Taken together, these
findings suggest that while mandatory IFRS adoption significantly lowers
firms' cost of equity, the effects depend on the strength of the countries'
legal enforcement. ©2010 American Accounting Association
Bob Jensen's threads on IFRS are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Humor Between March 1 and March 31, 2010
Forwarded by Auntie Bev
Subject: elderly couple
An elderly couple, who were both widowed, had been seeing each
other for a while.
Urged on by their friends, they decided it was finally time
to get married. Before the wedding, they went out to dinner and
had a long conversation regarding how their marriage might work.
They discussed finances, living arrangements and so on.
Finally, the old gentleman decided it was time to broach the
subject of
their physical relationship. 'How do you feel about sex?' he
asked, rather
tentatively.
'I would like it infrequently' she replied.
The old gentleman sat quietly for a moment, adjusted his
glasses, leaned
over towards her and whispered, 'Is that one word or two?'
|
|
Forwarded by Scott
A short thread
from somewhere else:
==============================
Has anyone ever
heard of this? I have a client who's absolutely clueless when it comes to
anything taxwise, although reasonably intelligent otherwise. He told me today
that a former employee of the IRS (Director out of the San Francisco office) now
retired told him that he's "what we call a 'blue tag'", meaning "leave him
alone, he doesn't know what he's doing." Just curious.
==============================
First thought I had was about a toe tag, although I don't know if they're blue -
but, then I'm colorblind.
==============================
FROM WHAT I CAN GATHER, a "blue tag" refers to document 7214 a blue paper that
is attached to documents that the IRS is unable to process due to a variety of
reasons.
now i know what to call some of my relatives and clients.
==============================
Scott Bonacker
CPA
Springfield, MO
Forwarded by Auntie Bev
Went down this morning to sign up my dog for welfare.
The lady said, “Dogs are not eligible to draw welfare.”
So I explained to her that my dog is of a minority group, unemployed, lazy,
can't speak English, and has no frigging clue who his Daddy is.
She looked in her policy book to see what it takes to qualify.
My dog gets his first check Friday.
Damn, but this is a great country!
Forwarded by Debbie
The Washington Post's Mensa Invitational once again 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 2009 winners:
1. Cashtration (n.): The act of buying a house, which renders the subject
financially impotent for an indefinite period of time.
2. Ignoranus (n.): A person who's both stupid and an asshole.
3. Intaxication (n.): Euphoria at getting a tax refund, which lasts until you
realize it was your money to start with.
4. Reintarnation (n.): Coming back to life as a hillbilly.
5. 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.
6. Foreploy (n.): Any misrepresentation about yourself for the purpose of
getting laid.
7. Giraffiti (n.): Vandalism spray-painted very, very high
8. Sarchasm (n.): The gulf between the author of sarcastic wit and the person
who doesn't get it.
9. Inoculatte (n.): To take coffee intravenously when you are running late.
10. Osteopornosis (n.): A degenerate disease. (This one got extra credit.)
11. 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.
12. Decafalon (n.): The gruelling event of getting through the day consuming
only things that are good for you.
13. Glibido (n.): All talk and no action.
14. Dopeler Effect (n.): The tendency of stupid ideas to seem smarter when
they come at you rapidly.
15. Arachnoleptic Fit (n.): The frantic dance performed just after you've
accidentally walked through a spider web.
16. Beelzebug (n.): Satan in the form of a mosquito, that gets into your
bedroom at three in the morning and cannot be cast out.
17. Caterpallor (n.): The color you turn after finding half a worm in the
fruit you're eating.
____________________________________________________
The Washington Post has also published the winning submissions to its yearly
contest, in which readers are asked to supply alternate meanings for common
words.
And the winners are:
1. Coffee, n. The person upon whom one coughs.
2. Flabbergasted, adj. Appalled by discovering how much weight one has
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. Absentmindedly answering the door when wearing only a
nightgown.
7. Lymph, v. To walk with a lisp.
8. Gargoyle, n. Olive-flavored mouthwash.
9. Flatulence, n. Emergency vehicle that picks up someone who has been 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, after death, the 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.
Forwarded by Don VanEynde
JUST TEXAS
Pep , Texas 79353
Smiley , Texas 78159
Paradise , Texas 76073
Rainbow , Texas 76077
Sweet Home , Texas 77987
Comfort , Texas 78013
Friendship, Texas 76530
Love the Sun?
Sun City , Texas 78628
Sunrise , Texas 76661
Sunset, Texas 76270
Sundown, Texas 79372
Sunray , Texas 79086
Sunny Side , Texas 77423
Want something to eat?
Bacon , Texas 76301
Noodle , Texas 79536
Oatmeal , Texas 78605
Turkey , Texas 79261
Trout , Texas 75789
Sugar Land , Texas 77479
Salty, Texas 76567
Rice , Texas 75155
Pearland , Texas 77581
Orange , Texas 77630
And top it off with:
Sweetwater , Texas 79556
Why travel to other cities? Texas has them all!
Detroit , Texas 75436
Cleveland , Texas 75436
Colorado City , Texas 79512
Denver City , Texas 79323
Klondike , Texas 75448
Nevada , Texas 75173
Memphis , Texas 79245
Miami , Texas 79059
Boston , Texas 75570
Santa Fe , Texas 77517
Tennessee Colony , Texas 75861
Reno , Texas 75462
Pasadena , Texas 77506
Columbus , Texas 78934
Feel like traveling outside the country?
Athens , Texas 75751
Canadian, Texas 79014
China , Texas 77613
Egypt , Texas 77436
Ireland , Texas 76538
Italy , Texas 76538
Turkey , Texas 79261
London , Texas 76854
New London , Texas 75682
Paris , Texas 75460
Palestine , Texas 75801
No need to travel to Washington D.C.
Whitehouse , Texas 75791
We even have a city named after our planet!
Earth , Texas 79031
We have a city named after our state
Texas City , Texas 77590
Exhausted?
Energy , Texas 76452
Cold?
Blanket , Texas 76432
Winters, Texas
Like to read about History?
Santa Anna , Texas
Goliad , Texas
Alamo , Texas
Gun Barrel City , Texas
Robert Lee , Texas
Need Office Supplies?
Staples, Texas 78670
Want to go into outer space?
Venus , Texas 76084
Mars , Texas 79062
You guessed it.. It's on the state line.
Texline , Texas 79087
For the kids...
Kermit , Texas 79745
Elmo , Texas 75118
Nemo , Texas 76070
Tarzan , Texas 79783
Winnie , Texas 77665
Sylvester , Texas 79560
Other city names in Texas , to make you smile.........
Frognot , Texas 75424
Bigfoot , Texas 78005
Hogeye , Texas 75423
Cactus , Texas 79013
Notrees , Texas 79759
Best, Texas 76932
Veribest , Texas 76886
Kickapoo , Texas 75763
Dime Box , Texas 77853
Old Dime Box , Texas 77853
Telephone , Texas 75488
Telegraph , Texas 76883
Whiteface , Texas 79379
Twitty, Texas 79079
And last but not least, the Anti-Al Gore City
Kilgore , Texas 75662
And our favorites...
Cut n Shoot, Texas
Gun Barrell City , Texas
Hoop And Holler, Texas
Ding Dong, Texas and, of course,
Muleshoe , Texas
Here is what Jeff Foxworthy has to say about folks from Texas ...
If someone in a Lowe's store offers you assistance and they don't work there,
you may live in Texas ;
If you've worn shorts and a parka at the same time, you may live in Texas ;
If you've had a lengthy telephone conversation with someone who dialed a wrong
number, you may live in Texas ;
If 'Vacation' means going anywhere south of Dallas for the weekend, you may live
in Texas ;
If you measure distance in hours, you may live in Texas ;
If you know several people who have hit a deer more than once, you may live in
Texas ;
-
If you install security
lights on your house and garage, but leave both unlocked, you may live in
Texas ;
If you carry jumper cables in your car and your wife knows how to use them,
you may live in Texas
If the speed limit on the highway is 55 mph --you're going 80 and
everybody's passing you, you may live in Texas ;
If you find 60 degrees 'a little chilly,' you may live in Texas ;
If you actually understand these jokes, and share them with all your Texas
friends, you definitely live in Texas.
Here are some little known, very interesting facts about Texas:
1.....Beaumont to El Paso : 742 miles
2... Beaumont to Chicago : 770 miles
3... El Paso is closer to California than to Dallas
4... World's first rodeo was in Pecos , July 4, 1883.
5... The Flagship Hotel in Galveston is the only hotel in North America built
over water. Destroyed by Hurricane Ike -2008!
6. The Heisman Trophy was named after John William Heisman who was the first
full-time coach at Rice University in Houston .
7. Brazoria County has more species of birds than any other area in North
America
8. Aransas Wildlife Refuge is the winter home of North America 's only remaining
flock of whooping cranes.
9. Jalapeno jelly originated in Lake Jackson in 1978. 10. The worst natural
disaster in U.S.... history was in 1900, caused by a hurricane, in which over
8,000 lives were lost on Galveston Island .
11. The first word spoken from the moon, July 20,1969, was " Houston ," but the
space center was actually in Clear Lake City at the time.
12. King Ranch in South Texas is larger than Rhode Island ..
13. Tropical Storm Claudette brought a U.S. rainfall record of 43' in 24 hours
in and around Alvin in July of 1979...
14. Texas is the only state to enter the U.S. by TREATY, (known as the
Constitution of 1845 by the Republic of Texas to enter the Union ) instead of by
annexation. This allows the Texas Flag to fly at the same height as the U.S.
Flag, and may divide into 5 states.
15. A Live Oak tree near Fulton is estimated to be 1500 years old.
16. Caddo Lake is the only natural lake in the state.
17. Dr Pepper was invented in Waco in 1885. There is no period in Dr Pepper..
18. Texas has had six capital cities:
Washington -on- the Brazos, Harrisburg , Galveston ,Velasco, West Columbia and
Austin ...
19. The Capitol Dome in Austin is the only dome in the U.S. which is taller than
the Capitol Building in Washington DC (by 7 feet).
20. The San Jacinto Monument is the tallest free standing monument in the world
and it is taller than the Washington monument.
21. The name ' Texas ' comes from the Hasini Indian word 'tejas' meaning
friends. Tejas is not Spanish for Texas ..
22. The State Mascot is the Armadillo (an interesting bit of trivia about the
armadillo is they always have four babies. They have one egg, which splits into
four, and they either have four males or four females.).
23. The first domed stadium in the U.S. was the Astrodome in Houston .
Y'all git all that?
Forwarded by Maureen
*New
Political Party.*
>
> *Not Democrat, Not Republican, Not Independent.*
>
> *It's called the "PISSED OFF PARTY" (or POP).*
>
> *a.. The U.S. Post Service was established in 1775. You have had 234 years to
get it right and it is broke.*
> *b.. Social Security was established in 1935. You have had 74 years to get it
right and it is broke.*
> *c.. Fannie Mae was established in 1938. You have had 71 years to get
it right and it is broke.*
> *d.. War on Poverty started in 1964. You have had 45 years to get it right;
$1 trillion of our money is confiscated each year and transferred to "the poor"
and they only want more.*
> *e.. Medicare and Medicaid were established in 1965. You have had 44 years to
get it right and they are broke.*
> *f.. Freddie Mac was established in 1970. You have had 39 years to get
it right and it is broke.*
> *g.. The Department of Energy was created in 1977 to lessen our dependence on
foreign oil. It has ballooned to 16,000 employees with a budget of $24
> billion a year and we import more oil than ever before. You had 32 years to
get it right and it is an abysmal failure.*
An Oldie forwarded by Dan
Some, but not all, of these are urban legends
In the
1400's a law was set forth in England that a man was allowed to beat his wife
with a stick
no thicker than his thumb. Hence we have 'the rule of
thumb'
-------------------------------------------
Many years ago in Scotland , a new game was invented. I
t was ruled 'Gentlemen Only...Ladies Forbidden'....and thus, the word GOLF
entered
into the English language.
-------------------------------------------
The first couple to be shown in bed together on prime time TV was Fred and Wilma
Flintstone.
-------------------------------------------
Every day more money is printed for Monopoly than the U.S. Treasury.
-------------------------------------------
Men can read smaller print than women can; women can hear better.
-------------------------------------------
Coca-Cola was originally green.
-------------------------------------------
It is impossible to lick your elbow.
-------------------------------------------
The State with the highest percentage of people who walk to work:
Alaska
-------------------------------------------
The percentage of Africa that is wilderness: 28% (now get this...)
-------------------------------------------
The percentage of North America that is wilderness: 38%
------------------------------------------------------------------------
The average number of people airborne over the U.S. In any given hour:
61,000
------------------------------------------------------------------------
Intelligent people have more zinc and copper in their hair.
------------------------------------------------------------------------
The first novel ever written on a typewriter, Tom Sawyer..
------------------------------------------------------------------------
The San Francisco Cable cars are the only mobile National Monuments.
------------------------------------------------------------------------
Each king in a deck of playing cards represents a great king from history:
Spades - King David
Hearts - Charlemagne
Clubs -Alexander, the Great
Diamonds - Julius Caesar
------------------------------------------------------------------------
111,111,111 x 111,111,111 = 12,345,678,987,654,321
------------------------------------------------------------------------
If a statue in the park of a person on a horse has both front legs in the air,
the person died in battle. If the horse has one front leg in the air, the person
died because of wounds received in battle. If the horse has all four legs on the
ground, the person died of natural causes.
------------------------------------------------------------------------
Only two people signed the Declaration of Independence on July 4, John Hancock
and Charles Thomson. Most of the rest signed on August 2, but the last signature
wasn't added until 5 years later.
------------------------------------------------------------------------
Q. Half of all Americans live within 50 miles of what?
A. Their birthplace
------------------------------------------------------------------------
Q. Most boat owners name their boats.. What is the most popular boat name
requested?
A. Obsession
------------------------------------------------------------------------
Q. If you were to spell out numbers, how far would you have to go until you
would find the letter 'A'?
A. One thousand
------------------------------------------------------------------------
Q. What do bulletproof vests, fire escapes, windshield wipers and laser printers
have in common?
A. All were invented by women.
------------------------------------------------------------------------
Q. What is the only food that doesn't spoil?
A. Honey
------------------------------------------------------------------------
Q. Which day are there more collect calls than any other day of the year?
A. Father's Day
------------------------------------------------------------
In Shakespeare's time, mattresses were secured on bed frames by ropes. When you
pulled on the ropes, the mattress tightened, making the bed firmer to sleep on.
Hence the phrase...'Goodnight, sleep tight'
------------------------------------------------------------------------
It was the accepted practice in Babylon 4,000 years ago that for a month after
the wedding, the bride's father would supply his son-in-law with all the mead he
could drink. Mead is a honey beer and because their calendar was lunar based,
this period was called the honey month, which we know today as the honeymoon.
------------------------------------------------------------------------
In English pubs, ale is ordered by pints and quarts... So in old England , when
customers got unruly, the bartender would yell at them 'Mind your pints and
quarts, and settle down.'
It's where we get the phrase 'mind your P's and Q's'
------------------------------------------------------------------------
Many years ago in England , pub frequenters had a whistle baked into the rim, or
handle, of their ceramic cups. When they needed a refill, they used the whistle
to get some service. 'Wet your whistle' is the phrase inspired by this practice.
------------------------------------------------------------------------
At least 75% of people who read this will try to lick their elbow!
------------------------------------------------------------------------
Don't delete this just because it looks weird. Believe it or not, you can read
it.
I cdnuolt blveiee taht I cluod aulaclty uesdnatnrd waht I was rdanieg. The
phaonmneal pweor of the hmuan mnid Aoccdrnig to rscheearch at Cmabrigde
Uinervtisy, it deosn't mttaer in waht oredr the ltteers in a wrod are, the olny
iprmoatnt tihng is taht the frist and lsat ltteer be in the rghit pclae. The
rset can be a taotl mses and you can sitll raed it wouthit a porbelm. Tihs is
bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a
wlohe. Amzanig huh?
------------------------------------------------------------------------
YOU KNOW YOU ARE LIVING IN 2010 when...
1. You accidentally enter your PIN on the microwave.
2. You haven't played solitaire with real cards in years.
3. You have a list of 15 phone numbers to reach your family of three.
4. You e-mail the person who works at the desk next to you.
5. Your reason for not staying in touch with friends and family is that they
don't have e-mail addresses.
6. You pull up in your own driveway and use your cell phone to see if anyone is
home to help you carry in the groceries..
7. Every commercial on television has a web site at the bottom of the screen
8. Leaving the house without your cell phone, which you didn't even have the
first 20 or 30 (or 60) years of your life, is now a cause for panic and you turn
around to go and get it.
10. You get up in the morning and go on line before getting your coffee.
11. You start tilting your head sideways to smile. : )
12. You're reading this and nodding and laughing.
13. Even worse, you know exactly to whom you are going to forward this message.
14. You are too busy to notice there was no #9 on this list.
15. You actually scrolled back up to check that there wasn't a #9 on this list.
Forwarded by Paula
It takes your food seven seconds to get from your mouth to your stomach.
One human hair can support 3kg (6.6 lb).
The average man's private area is three times the length of his thumb.
Human thighbones are stronger than concrete.
A woman's heart beats faster than a man's...
There are about one trillion bacteria on each of your feet.
Women blink twice as often as men.
The average person's skin weighs twice as much as the brain.
Your body uses 300 muscles to balance itself when you are standing still.
If saliva cannot dissolve something, you cannot taste it. Women reading this
will be finished now.
Men are still busy checking their thumbs.
Forwarded by Gene and Joan
The population of this country is 300 million.
160 million are retired.
That leaves 140 million to do the work.
There are 85 million in school.
Which leaves 55 million to do the work.
Of this there are 35 million employed by the federal government.
Leaving 20 million to do the work.
2.8 million are in the armed forces preoccupied with killing Osama Bin-Laden.
Which leaves 17.2 million to do the work.
Take from that total the 15.8 million people who work for state and city
Governments. And that leaves 1.4 million to do the work.
At any given time there are 188,000 people in hospitals.
Leaving 1,212,000 to do the work.
Now, there are 1,211,998 people in prisons.
That leaves just two people to do the work.
You and me. (I'm retired and working 10-hour days)
Forwarded by Gene and Joan
A man and his wife, moved back home to Iowa, from Ohio . The husband had a
wooden leg, and to insure it back in Ohio cost them $2,000 per year!
When they arrived in Iowa, they went to an insurance agency to see how much
it would cost to insure his wooden leg.
The agent looked it up on the computer and said: '$39.'
The husband was shocked and asked why it was so cheap here in Iowa to insure
it because it cost him $2,000 in Ohio!
The insurance agent turned his computer screen to the couple and said, "Well,
here it is on the screen, it says: Any wooden structure, with a sprinkler system
above it, is $39.... You just have to know how to describe it!"
Forwarded by Auntie Bev
OLD PEOPLE'S MEMORY TEST
This is not a pushover
test. There are 20 questions. Average score is 12. This one will be very
difficult for the younger set. Have fun, but no peeking! When you
forward this to your friends/family,
put your score in the
subject line and
let them know your score. Don't forget to forward it to me, as well.
Good luck youngsters!!
1.
What builds strong bodies 12 ways?
A. Flintstones vitamins
B. The Buttmaster
C. Spaghetti
D. Wonder Bread
E. Orange Juice
F. Milk
G. Cod Liver Oil
2.
Before he was Muhammed Ali, he was....
A. Sugar Ray Robinson
B. Roy Orbison
C. Gene Autry
D. Rudolph Valentino
E. Fabian
F. Mickey Mantle
G. Cassius Clay
3.
Pogo, the comic strip character said, 'We have met the
enemy and...
A. It's you
B. He is us
C. It's the Grinch
D. He wasn't home
E. He's really me an
F. We quit
G. He surrendered
4.
Good night David.
A. Good night Chet
B. Sleep well
C. Good night Irene
D. Good night Gracie
E. See you later alligator
F. Until tomorrow
G. Good night Steve
5.
You'll wonder where the yellow went....
A. When you use Tide
B. When you lose your crayons
C. When you clean your tub
D. If you paint the room blue
E. If you buy a soft water tank
F. When you use Lady Clairol
G. When you brush your teeth with Pepsodent
6.
Before he was the Skipper's Little Buddy, Bob Denver was
Dobie's friend...
A. Stuart Whitman
B. Randolph Scott
C. Steve Reeves
D. Maynard G Krebbs
E. Corky B. Dork
F. Dave the Whale
G. Zippy Zoo
7.
Liar, liar..
A. You're a liar
B. Your nose is growing
C. Pants on fire
D. Join the choir
E. Jump up higher
F. On the wire
G. I'm telling Mom
8.
Meanwhile, back in Metropolis, Superman fights a never
ending battle for truth, justice and...
A. Wheaties
B. Lois Lane
C. TV ratings
D. World peace
E. Red tights
F. The American way
G. News headlines
9.
Hey kids! What time is it?
A. It's time for Yogi
Bear
B. It's time to do your homework
C. It's Howdy Doody Time
D. It's Time for Romper Room
E. It's bedtime
F. The Mighty Mouse Hour
G. Scoopy Doo Time
10. Lions and tigers and
bears...
A. Yikes
B. Oh no
C. Gee whiz
D. I'm scared
E. Oh my
F. Help! Help!
G. Let's run
11.
Bob Dylan advised us never to trust anyone...
A. Over 40
B. Wearing a uniform
C. Carrying a briefcase
D. Over 30
E. You don't know
F. Who says, 'Trust me'
G. Who eats tofu
12.
NFL quarterback who appeared in a television commercial
wearing women's stockings...
A. Troy Aikman
B. Kenny Stabler
C. Joe Namath
D. Roger Stauback
E. Joe Montana
F. Steve Young
G. John Elway
13.
Brylcream.
A. Smear it on
B. You'll smell great
C. Tame that cowlick
D. Grease ball heaven
E. It's a dream
F. We're your team
G. A little dab'll do ya
14.
I found my thrill...
A. In Blueberry muffins
B. With my man, Bill
C. Down at the mill
D. Over the windowsill
E. With thyme and dill
F. Too late to enjoy
G. On Blueberry Hill
15.
Before Robin Williams, Peter Pan was played by...
A. Clark Gable
B. Mary Martin
C. Doris Day
D. Errol Flynn
E. Sally Fields
F. Jim Carey
G. Jay Leno
16.
Name the Beatles....
A. John, Steve, George,
Ringo
B. John, Paul, George, Roscoe
C. John, Paul, Stacey, Ringo
D. Jay, Paul, George, Ringo
E. Lewis, Peter, George, Ringo
F. Jason, Betty, Skipper, Hazel
G. John, Paul, George, Ringo
17.
I wonder, wonder, who..
A. Who ate the
leftovers?
B. Who did the laundry?
C. Was it you?
D. Who wrote the book of love?
E. Who I am?
F. Passed the test?
G. Knocked on the door?
18.
I'm strong to the finish....
A. Cause I eats my
broccoli
B. Cause I eats me spinach
C. Cause I lift weights
D. Cause I'm the hero
E. And don't you forget it
F. Cause Olive Oyl loves me
G. To outlast Bruto
19.
When it's least expected, you're elected, you're the star
today...
A. Smile, you're on
Candid Camera
B. Smile, you're on Star Search
C. Smile, you won the lottery
D. Smile, we're watching you
E. Smile, the world sees you
F. Smile, you're a hit
G. Smile, you're on TV
20.
What do M&M's do?
A. Make your tummy happy
B. Melt in your mouth, not in your pocket
C. Make you fat
D.. Melt your heart
E. Make you popular
F. Melt in your mouth, not in your hand
G. Come in colors
|
Below are
the right answers:
1. D -
Wonder Bread
2. G - Cassius Clay
3. B - He Is Us
4. A - Good night,
Chet
5. G - When you brush
your teeth with
Pepsodent
6. D - Maynard G.
Krebbs
7. C - Pants On Fire
8. F - The American
Way
9. C - It's Howdy Doody
Time
10. E - Oh My
11. D - Over 30
12. C - Joe Namath
13. G - A little dab'll
do ya
14. G - On Blueberry
Hill
15. B - Mary Martin
16. G - John, Paul,
George, Ringo
17. D - Who wrote the
book of Love
18. B - Cause I eats me
spinach
19. A - Smile, you're on
Candid Camera
20. F - Melt In Your
Mouth Not In Your Hand
|
|
|
|
|
|
|
Forwarded by Auntie Bev
HEIGHTENED TERRORIST THREAT RAISES ALERT LEVELS WORLD-WIDE
The English are feeling the pinch in relation to recent terrorist threats and
have raised their security level from "Miffed" to "Peeved." Soon, though,
security levels may be raised yet again to "Irritated" or even "A Bit Cross."
The English have not been "A Bit Cross" since the blitz in 1940 when tea
supplies all but ran out. Terrorists have been re-categorized from "Tiresome" to
a "Bloody Nuisance." The last time the British issued a "Bloody Nuisance"
warning level was during the great fire of 1666.
The Scots raised their threat level from "Pissed Off" to "Let's get the
Bastards" They don't have any other levels. This is the reason they have been
used on the frontline in the British army for the last 300 years.
The French government announced yesterday that it has raised its terror alert
level from "Run" to "Hide". The only two higher levels in France are
"Collaborate" and "Surrender." The rise was precipitated by a recent fire that
destroyed France 's white flag factory, effectively paralysing the country's
military capability. It's not only the French who are on a heightened level of
alert. Italy has increased the alert level from "Shout loudly and excitedly" to
"Elaborate Military Posturing." Two more levels remain: "Ineffective Combat
Operations" and "Change Sides."
The Germans also increased their alert state from "Disdainful Arrogance" to
"Dress in Uniform and Sing Marching Songs." They also have two higher levels:
"Invade a Neighbour" and "Lose".
Belgians, on the other hand, are all on holiday as usual, and the only threat
they are worried about is NATO pulling out of Brussels .
The Spanish are all excited to see their new submarines ready to deploy.
These beautifully designed subs have glass bottoms so the new Spanish navy can
get a really good look at the old Spanish navy.
Americans meanwhile are carrying out pre-emptive strikes, on all of their
allies, just in case.
New Zealand has also raised its security levels - from "baaa" to "BAAAA!".
Due to continuing defense cutbacks (the airforce being a squadron of spotty
teenagers flying paper aeroplanes and the navy some toy boats in the Prime
Minister's bath), New Zealand only has one more level of escalation, which is
"Shit, I hope Austrulia will come end rescue us". In the event of invasion, New
Zealanders will be asked to gather together in a strategic defensive position
called "Bondi".
Australia , meanwhile, has raised its security level from "No worries" to
"She'll be all right, mate". Three more escalation levels remain, "Crikey!', "I
think we'll need to cancel the barbie this weekend" and "The barbie is
cancelled". So far no situation has ever warranted use of the final escalation
level.
Humor Between
March 1 and March 31, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor033110
Humor Between February 1 and February 28, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor022810
Humor Between January 1 and January 31, 2010
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013110
And that's the way it was on March 31, 2010 with
a little help from my friends.
Bob Jensen's gateway to millions of
other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
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
Bob Jensen's past
presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Concerns That Academic Accounting Research is Out of Touch
With Realit
I think leading academic
researchers avoid applied research for the profession because making
seminal and creative discoveries that practitioners have not already
discovered is enormously difficult.
Accounting academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic) From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence
increasingly developed out of the internal dynamics of esoteric
disciplines rather than within the context of shared perceptions
of public needs,” writes Bender. “This is not to say that
professionalized disciplines or the modern service professions
that imitated them became socially irresponsible. But their
contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative –
as there always tends to be in accounts
of the
shift from Gemeinschaft to Gesellschaft.
Yet it
is also clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter
and procedures,” Bender concedes, “at a time when both were
greatly confused. The new professionalism also promised
guarantees of competence — certification — in an era when
criteria of intellectual authority were vague and professional
performance was unreliable.”
But in the epilogue
to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The
risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and
scholasticism (of three types: tedium, high tech, and radical
chic).
The agenda for the next decade, at least as I see it, ought to
be the opening up of the disciplines, the ventilating of
professional communities that have come to share too much and
that have become too self-referential.”
What went wrong in
accounting/accountics research?
How did academic accounting
research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's Personal History in Pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
February
28, 2010
Bob Jensen's New Bookmarks on
February 28, 2010
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 Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at
http://www.searchedu.com/
Bob Jensen's Blogs ---
http://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
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
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.
How to author books and other materials for
online delivery
http://www.trinity.edu/rjensen/000aaa/thetools.htm
How Web Pages Work ---
http://computer.howstuffworks.com/web-page.htm
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
The Master List of Free
Online College Courses ---
http://universitiesandcolleges.org/
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
The Master List of Free
Online College Courses ---
http://universitiesandcolleges.org/
Bob Jensen's threads for online worldwide education and training
alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm
"U. of Manitoba
Researchers Publish Open-Source Handbook on Educational Technology,"
by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---
http://chronicle.com/wiredcampus/index.php?id=3671&utm_source=wc&utm_medium=en
Social Networking for Education: The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses
of Twitter)
Updates will be at
http://www.trinity.edu/rjensen/ListservRoles.htm
Pete Wilson provides some great videos on how to
make accounting judgments ---
http://www.navigatingaccounting.com/
FEI Second Life Video (thank you Edith) ---
If I Were an Auditor ---
http://www.youtube.com/user/feiblog#p/a/u/0/Q-FR_fkTFKY
Humor Between February 1 and February 28, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor022810
Humor Between January 1 and January 31, 2010
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013110
Fraud Updates have been posted up to December 31, 2009 ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Also see
http://www.trinity.edu/rjensen/Fraud.htm
Humor Videos: Pennsylvania Wants to Show
CPAs Are Funny ---
http://www.webcpa.com/news/Pennsylvania-Wants-to-Show-CPAs-Are-Funny-53291-1.html
Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor
"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F
Do You Want to Teach? ---
http://financialexecutives.blogspot.com/2009/05/do-you-want-to-teach.html
Jensen Comment
Here are some added positives and negatives to consider, especially if you are
currently a practicing accountant considering becoming a professor.
Accountancy Doctoral Program Information from Jim Hasselback ---
http://www.jrhasselback.com/AtgDoctInfo.html
Why must all accounting doctoral programs be social science
(particularly econometrics) "accountics" doctoral programs?
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
What went wrong in accounting/accountics research?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
February 23, 2010 message from Ramsey, Donald
[dramsey@UDC.EDU]
JAXWORKS.COM FREE EXCEL
TEMPLATES
INSTRUCTIONS FOR ACCESSING AND RUNNING
This may vary a bit depending on
what version of Excel you have.
You will need to enable macros in
your Excel software.
1. Click on the Office button
2. Click on Excel Options at the
bottom of the screen
3. Click on Add-ins
4. Manage: Excel Add-ins
(should be in view); GO
5. Check Analysis Tool Pak;
Check Analysis Tool Pak VBA
6. You might want to also check
Solver in case you need it some day
7. Click OK
====================================
8. Go to
www.Jaxworks.com
9. On the menu, pick DOWNLOADS.
10. Scroll down to
NeoCalc™ Comprehensive
Break-Even Analysis
11. Click on Download
12. Choose Save if you wish.
13. You might also want to try
their Dynamic Charting download (just above the Neo-Calc).
Best,
Don
Bob Jensen's threads on tools and tricks of the trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Think of What They Might Have Been if They'd Stuck With Accountancy
Before these celebrities hit the big time, they shared
one thing in common: They either studied to become accountants or wanted to
become accountants. In fact, Jagger was so good, he actually earned a
scholarship to study accounting and finance at the London School of Economics
before running off to become a Rolling Stone.
Sam Ali, CPA Trendlines, February 16, 2010 ---
http://ow.ly/16AMde
February 27, 2010 reply from Jagdish Gangolly
[gangolly@GMAIL.COM]
Bob,
Mick Jagger didn't look back, but Brian May (lead
guitarist of Queen) did. Long after the Queen broke up since Freddie
Mercury's passing (Queen with Paul Rogers is non-queen, he is like Wayne
Newton in a sombrero subbing for Mick Jaeger), Brian May went back to
school, completed his PhD in Astrophysics (dissertation on Inter-planetary
dust) at the Imperial College, and is currently the Chancellor of Liverpool
John Moores University.
There have been others who did not look back, like
drummer Roger Taylor (dentistry), bass guitarist John Deacon
(engineering),..
A few years ago I went all the way back to Bombay
for Rollingstones "forty licks" concert. He was then close to qualifying for
social security in Britain, and yet could gallop around the large stage at
Brabourne stadium like plucked chicken. Amazing.
Jagdish S. Gangolly Department of Informatics
College of Computing & Information State University of New York at Albany
Harriman Campus, Building 7A, Suite 220 Albany, NY 12222
In the practitioner literature readers have to be a little careful on the
definition of "analytics." Practitioners often define analytics in terms of
micro-level use of data for decisions such as decisions to adopt a new product
or launch a promotion campaign..
See
Analytics at Work: Smarter Decisions, Better Results, by Tom
Davenport (Babson College) --- ISBN-13: 9781422177693, February
2010
Listen to Tom Davenport being interviewed about his book ---
http://blogs.hbr.org/ideacast/2010/01/better-decisions-through-analy.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
The book does not in general find a niche for analytics for huge decisions
such as mergers, but the above book does review an application by Chevron.
The problem with "big decisions" is that the analytical models generally
cannot mathematically model or get good data on some of the most relevant
variables. In academe, professors often simply assume the real world away and
derive elegant solutions to fantasy-land problems in Plato's Cave. This is all
well and good, but these academic researchers generally ignore validity tests of
their harvests inside Plato's Cave.
574 Shields Against Validity Challenges in
Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
- With a Rejoinder from the 2010 Senior Editor of The Accounting
Review (TAR), Steven J. Kachelmeier
- With Replies in Appendix 4 to Professor Kachemeier by Professors
Jagdish Gangolly and Paul Williams
- With Added Conjectures in Appendix 1 as to Why the Profession of
Accountancy Ignores TAR
- With Suggestions in Appendix 2 for Incorporating Accounting Research
into Undergraduate Accounting Courses
Shielding Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
By Bob Jensen
Table of Contents
- Tom Lehrer on Mathematical Models and Statistics
- TAR versus AMR
- Introduction to Replication Commentaries
- TAR Versus JEC
- Accounting Research Versus Social Science Research
- Mathematical Analytics in Plato's Cave TAR Researchers Playing by
Themselves in an Isolated Dark Cave That the Sunlight Cannot Reach
- High Hopes Dashed for a Change in Policy of TAR Regarding Commentaries
on Previously Published Research
- Rejoinder from the Current Senior Editor of TAR, Steven J. Kachelmeier
- Conclusion and Recommendation for a Journal Named Supplemental
Commentaries and Replication Abstracts
- Appendix 1: Business Firms and Business School Teachers Largely Ignore
TAR Research Articles
- Appendix 2: Integrating Academic Research Into Undergraduate Accounting
Courses
- Appendix 3: Audit Pricing in the Real World
- Appendix 4: Replies from Jagdish Gangolly and Paul Williams
What went wrong in
accounting/accountics research? ---
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
The Sad State of Accountancy Doctoral
Programs That Do Not Appeal to Most Accountants ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
AN ANALYSIS OF THE EVOLUTION OF RESEARCH
CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1
Bob Jensen's threads on accounting theory
---
http://www.trinity.edu/rjensen/theory01.htm
Tom Lehrer on Mathematical Models and
Statistics ---
http://www.youtube.com/watch?v=gfZWyUXn3So
Systemic
problems of accountancy (especially the vegetable nutrition paradox) that
probably will never be solved ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews
Christopher Columbus was perhaps the first
accountant in America. When he left to discover America, he didn’t know where he
was going. When he got there, he didn’t know where he was. When he returned, he
didn’t know where he had been but he journalized daily.
Adapted from Econosseur via Simoleon Sense
Eight Facts about the New Vehicle Sales and Excise Tax Deduction ---
http://www.irs.gov/newsroom/article/0,,id=219139,00.html
IRS Tax Tip 2010-26
If you bought
a new vehicle in 2009, you may be entitled to a
special tax deduction for the sales and excise
taxes on your purchase.
Here are eight
important facts the Internal Revenue Service
wants you to know about this deduction.
- State and
local sales and excise taxes paid on up to
$49,500 of the purchase price of each
qualifying vehicle are deductible.
- Qualified
motor vehicles generally include new cars,
light trucks, motor homes and motorcycles.
- To
qualify for the deduction, the new cars,
light trucks and motorcycles must weigh
8,500 pounds or less. New motor homes are
not subject to the weight limit.
- Purchases
must occur after Feb. 16, 2009, and before
Jan. 1, 2010.
- Purchases
made in states without a sales tax — such as
Alaska, Delaware, Hawaii, Montana, New
Hampshire and Oregon — may also qualify for
the deduction. Taxpayers in these states may
be entitled to deduct other qualifying fees
or taxes imposed by the state or local
government. The fees or taxes that qualify
must be assessed on the purchase of the
vehicle and must be based on the vehicle’s
sales price or as a per unit fee.
- This
deduction can be taken regardless of whether
the buyers itemize their deductions or
choose the standard deduction. Taxpayers who
do not itemize will add this additional
amount to the standard deduction on their
2009 tax return.
- The
amount of the deduction is phased out for
taxpayers whose modified adjusted gross
income is between $125,000 and $135,000 for
individual filers and between $250,000 and
$260,000 for joint filers.
-
Taxpayers who do not itemize must complete
Schedule L, Standard Deduction for Certain
Filers to claim the deduction.
|
|
James Martin, another open sharing professor who appreciates good
photography
"What's New on MAAW?" by hugely open sharing professor James Martin,
MAAW Blog, February 4, 2010 ---
http://maaw.blogspot.com/2010/02/whats-new-on-maaw.html
I took a little time out from building management
and accounting web pages to develop a photo section that includes 12
subsections. Although photos won't help you pass an accounting exam, or
develop a research paper, they can be used in a variety of ways. For
example, you can use them as desktop wallpaper, send them in e-mail
messages, print and send them as (4x6) post cards (particularly to old folks
like mothers and grandmothers that don't use computers), use them in your
screen saver, and even create slide shows and animations. Most of the photos
you'll find on MAAW's photo sections have been or will be used as post cards
to cheer up some of our old relatives stuck in nursing homes. Try it with
your photos, or my photos. I expect the recipients will appreciate your
thoughtfulness.
See
Photos for the various photo sections ---
http://maaw.info/Photos/PhotosMain.htm
Management Accounting and Accounting Web Home Page ---
http://maaw.info/
Bob Jensen's threads on professors who blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Jensen Reminder
Erika and I plan to attend the fabulous American Accounting Association Annual
Meetings in San Francisco (beginning around July 31, 2010)
Here are some pictures of San Francisco ---
http://home.comcast.net/~bzee1b/Zeppelin/Zeppelin.html
I have great memories of the Bay Area since I attended graduate school at
Stanford for six years as a slow learner and two subsequent years in a think
tank for slow learners.
Jensen Reminder
Erika and I plan to attend the fabulous American Accounting Association Annual
Meetings in San Francisco (beginning around July 31, 2010)
Here are some pictures of San Francisco ---
http://home.comcast.net/~bzee1b/Zeppelin/Zeppelin.html
I have great memories of the Bay Area since I attended graduate school at
Stanford for six years as a slow learner and two subsequent years in a think
tank for slow learners.
Columbia University Historical Corporate Reports Online Collection ---
http://www.columbia.edu/cu/lweb/indiv/business/CorpReports.html
The Business and Economics Library at Columbia
University has digitized 770 historic corporate annual reports from their
very extensive print collection. The reports are from 36 companies, and they
range in dates from the 1850s to the 1960s, and are mainly from
"corporations that operated in and around New York City." Visitors can
search for the reports through an "Alphabetical List" or "Subject List", or
browse by clicking on "View the Full List (XLS)". The "Sample Images" that
are featured in the lower right hand corner of the homepage are from "Edison
Electric Illuminating" and "Hudson & Manhattan Railroad Company". Once
visitors choose an image to view, they will be able to view all of the
years' digitized reports for that corporation, by clicking on the "Table of
Contents" dropdown box. Visitors shouldn't miss the greatly detailed
illustration from 1911 of the "Hudson Terminal Buildings", which is one of
the chosen "Sample Images".
Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory
Entrepreneurship Corner [Stanford University audio] ---
http://ecorner.stanford.edu/
Asymmetry in Reporting the Same Contract Fair Value in Two Separate Firms
Question
What happens when PwC's Client A owes Client B in an enormous contractual
obligation in a broken market when both clients are huge auditing clients of
PwC? If the clients want to report widely differing values of the same contract
on their financial statements, what's an auditor to do?
Francine called me yesterday about another matter and our hour-long
conversation drifted to this forthcoming dual-client dilemma, which is not
exactly a prisoner's dilemma, but is very similar.
All I could think of off the top of my head was that this is the kind of
thing "Subject to" opinions were designed for when the amounts involved are very
material in magnitude.
In any case, bravo to Francine for the heads up in writing up this "dilemma."
I think FSP 157 (4) has a huge asymmetry problem here whether or not the two
clients are audited by the same auditing firm. It reminded me of a remark Roman
Weil made years ago regarding the need for booking capital leases. Roman said
that Boeing was reporting sales of airliners to Eastern Airliners, whereas in
the financial statements Eastern Airlines reported no purchases of airliners
from Boeing. Thus there was an asymmetry in accounting for the same contracts.
It has to be very confusing to investors when the same contract is reported
at two values by the contracting companies.
*****************
Good Work Francine
"A Prisoner’s Dilemma: AIG and Goldman Sachs Game Each Other And PwC," by
Franine McKenna, re: The Auditors, February 18, 2010 ---
http://retheauditors.com/2010/02/18/a-prisoners-dilemma-aig-and-goldman-sachs-game-each-other-and-pwc/
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
February 19, 2010 reply from Francine McKenna
[retheauditors@GMAIL.COM]
Thanks Bob,
The prisoner's dilemma is between
AIG and Goldman Sachs. They are playing a game of chicken (which is
actually defined in game theory!) and neither want to publicly shame the
other or accuse of fraud of bad faith and yet neither want to give in to the
other because of self interest. The best would be to compromise, but that's
where the prisoner's dilemma comes in - a betrayal only works if only one
does it. In this case, I believe Goldman was the betrayer by pushing PwC to
say AIG was wrong.
http://en.wikipedia.org/wiki/Chicken_(game)
I did reach out to Doug
Carmichael as you suggested. Hoping he will get back to me. I found some
comments about the "Subject to" not being applicable to uncertainty or
contingency anymore only a going concern opinion.
A
1972 monograph by Douglas R. Carmichael, who is now chief auditor at the
PCAOB, “The Auditor’s Reporting Obligation, The Meaning and Implementation
of the Fourth Standard of Reporting, Auditing Research Monograph 1,”
represents the only definitive study that reviewed the historical
development of the disclaimer of opinion along with proposed criteria for
its application. Carmichael strongly suggested that, in then-present
reporting practice, auditors generally did not issue a disclaimer of opinion
for an isolated uncertainty, even of very large relative magnitude, unless
the issue imperiled the continued existence of the company. In a recent
exchange of e-mails with Carmichael related to the foregoing statement, he
replied that: “The discussion in the monograph is outdated. The audit
reporting requirements no longer require any modification of the report for
an uncertainty other than one that results in substantial doubt about
ability to continue as a going concern. … Also, it does not reflect my
current thinking. Accounting standards and business developments, e.g.,
derivatives, have introduced a range of uncertainty that is not adequately
dealt with in current auditing standards.”
http://www.nysscpa.org/cpajournal/2004/404/essentials/p26.htm
I welcome other thoughts and
suggestions on how to think about this issue, in particular as they relate
to either standards for valuation of derivatives or auditor independence.
Francine
February 20, 2010 reply from Bob Jensen
Hi Francine,
But there are added considerations between Goldman and AIG.
Firstly, I’m not aware of any Prisoner’s Dilemma (PD) experiment where the
government (read that bailout) can intervene in an unknown way, which is
especially the case since the government has such a huge equity interest in
AIG. The government has to decide how this particular contract will affect
the entire future world of financial risk markets and regulation
implications. How much more will the government bailout AIG?
The real world PD game may be one of the government versus
Goldman Sachs, which of course must make Goldman Sachs very nervous. Goldman
would probably have gotten a better deal if this contract (actually
contracts) was settled quickly and quietly while Paulson was still in
command of the bailout. Paulson was not about to let his old bank fail or
even hurt very badly.
Secondly, there is an underlying assumption of rationality in PD
games that is on shaky grounds in the real world. There’ve been extensions
into the concept of “super rationality” ---
http://en.wikipedia.org/wiki/Prisoner%27s_delimma#Douglas_Hofstadter.27s_Superrationality
Thirdly, the PD game assumes this decision is a one shot deal
when in the case of Goldman and AIG there are long-term time implications.
For example, how much will an AIG compromise decision impact its credit
derivatives business in the future and the externalities on the impact on
the credit derivatives markets of its customers and friends and future
employee compensation.
Lastly, there are the externalities of media reporting and
reputations and pending regulations. We’re seeing an enormous example of how
negative press about banker bonuses have had real-world impacts on such
things as the greatly revised bonus levels in Goldman Sachs. This could be
compounded in the press when credit derivative contracts are settled. At the
moment voters in general are increasingly unhappy about being robbed by
banksters.
All I’m saying is that the real world is far too complex in most
instances to fit neatly into the simplistic assumptions of any game theory
application model, including all variations of PD games to date. This is
more than a simple game of “chicken” because there are so many stakeholders
now and in the future that are possibly impacted and will eventually squawk.
And the PD game assumes a stationary (equilibrium) state that
just does not fit the AIG versus Goldman Sachs dispute.
The dynamic world generally is not a steady-state game that can
be reduced to a set of equations that we can populate and solve. By populate
I mean fill in all the missing variables and unspecified parameter values.
This is why game theory is still largely confined to the ivory tower where
very smart people mostly play in “Plato’s Caves” rather than real and
constantly changing worlds ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics
In any case, thank you for a great article.
Bob Jensen
Jim Fuehrmeyer does not post regularly to our listservs, but he
is a lurker who quite often sends me very informative private messages.
Jim retired after 25 years with Deloitte (audit partner). He’s
now an auditing professor at Notre Dame.
I am forwarded a reply sent by Jim to the CPA-L listserv
following the messages instigated by Francine’s prisoner’s dilemma message
regarding two audit clients at PwC who came to hugely different valuations of
the same credit derivatives contracts (for payoffs owed Goldman Sachs by AIG).
From:
THE Internet Accounting List/Forum for CPAs [mailto:CPAS-L@LISTSERV.LOYOLA.EDU]
On Behalf Of Jim Fuehrmeyer
Sent: Monday, February 22, 2010 11:37 AM
To: CPAS-L@LISTSERV.LOYOLA.EDU
Subject: FW: Asymmetry in Reporting the Same Contract Fair Value in Two
Separate Firms
This is always a tough
issue for a firm: knowing that a client is on the other side of a
transaction/valuation issue/revenue recognition issue/leasing issue – you
name it.
The two audit engagement
teams can’t share information with each other. In fact, when these
situations arise, if they have been discussing issues related to their
particular industry, best practices, and so on, they’ll have to stop all
communication so as to not potentially breach client confidentiality
standards. The firm’s national office will get deeply involved, but even at
that level there will be two different consultation teams handling the
matter for the two audit engagement teams. There’s likely only one or two
people who will see both sides and their task is to make sure professional
standards are followed, not that the answers are necessarily the same; and
they have to walk the fine line of not breaching client confidentiality.
This is even more
difficult in an area as subjective as valuing financial instruments where
the outcomes result from estimation processes with multiple inputs that all
have reasonable ranges of their own. Just imagine what this would be like
with a so-called principles based standard that allows even more client
judgment.
It’s easy sometimes to
post a blog and wonder how the auditors didn’t reach the “right answer”
immediately. I don’t think things are ever as simple as they are portrayed
sometimes.
Jim
Jensen Comment
What we are seeing is the greater bag of worms that will be opened up when IFRS
replaces FASB standards in the United States. Relative to FASB standards, IFFRs
international standards replace bright line rules with principles-based
judgments on the application of accounting standards. Whereas bright lines can
greatly constrain how far an auditor may go along with client's judgment
regarding the application of a FASB standard, IFRS standards allow much more
leeway such that it becomes much more likely that independent teams of auditors
within a given auditing firm will allow clients to value identical contracts at
greatly different values such as the actual happening for the credit derivatives
written by AIG for Goldman Sachs.
In the AIG-Goldman "prisoner's
dilemma" the FASB did not have bright line valuation standards for the broken
markets. FSP 157 (4) is a principled-based interpretation much like the
principles-based IFRS standards. Hence the inconsistency of standard application
that Francine pointed out in her prisoner's dilemma illustration may well become
the "rule" (sorry about that) rather than the exception.
With IFRS in the U.S. and what
Jim explains is an absolute rule in auditing firms that audit teams maintain
independence from one another within a given firm, I fully expect to see more
and more of this type of phenomenon where clients value absolutely identical
contracts at differences in value that are highly material in amount for clients
of the same auditing firm.
"A Prisoner’s Dilemma: AIG and Goldman Sachs Game Each Other And PwC," by
Fracine McKenna, re: The Auditors, February 18, 2010 ---
http://retheauditors.com/2010/02/18/a-prisoners-dilemma-aig-and-goldman-sachs-game-each-other-and-pwc/
Bob Jensen's threads on principles based standards versus bright line
standards ---
http://www.trinity.edu/rjensen/theory01.htm#BrightLines
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
Bob Jensen's threads on controversies in the setting of accounting
standards are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
"It’s Mine, Mine All Mine: Can Anyone Catch Lehman Stealing?" by
Francine McKenna, re: The Auditors, February 22, 2010 ---
http://retheauditors.com/2010/02/22/its-mine-mine-all-mine-can-anyone-catch-lehman-stealing/
Most of what’s been written about the financial
crisis and the firms that were forcibly acquired, failed, or bailed out
tends to focus on “fair value” as the feckless culprit.
Satyajit Das
wrote for the site,
Naked Capitalism:
“MtM [mark-to-market] accounting itself is
flawed… There are difficulties in establishing real values of many
instruments. It creates volatility in earnings attributable to
inefficiencies in markets rather than real changes in financial
position…Valuation for all but the simplest instruments today requires a
higher degree in a quantitative discipline, a super computer and a vivid
imagination. For complex structured securities and exotic derivatives,
the only available price is from the bank that originally sold the
security to the investor. Prices available from the purveyor of the
instrument (a concept known as mark-to-myself) strain reasonable
concepts of independence and objectivity…In the global financial crisis,
with the capital markets virtually frozen, the extent of losses on bank
inventories of hard-to-value products and commitments (structured debt
and leveraged loans) was difficult to establish.”
We know that the banks’ “independent” external
auditors had a hard time establishing both fair values and the “extent of
losses on bank inventories of hard-to-value products and commitments.” We
know this because their clients did not tell us about the extent of the
losses until it was too late. There were no
“going concern” warnings for any of the financial
institutions that went bankrupt, were taken over, or were nationalized via
bailout.
We also know that the auditors did a poor and
inconsistent job of
establishing fair values and forcing disclosure of the “extent of losses” on
banks’ investments because
their regulator, the PCAOB, told us so.
Inspection teams also observed instances
where firms’ procedures to test the fair values of financial
instruments, including derivative instruments, loans, and securities,
were inadequate. In these instances, deficiencies included (a) the
failure to gain an understanding of the methods and assumptions used to
develop the fair value measurements of financial instruments that were
illiquid or difficult to price, (b) the reliance on issuer-supplied
pricing information without obtaining corroboration of that information,
and (c) the reliance on confirmation responses from third parties or
counterparties that included disclaimers as to their accuracy and
appropriateness for use in the preparation of financial statements.
How do the auditors, one step removed and ten steps
behind, determine fair values of complex instruments especially in illiquid
markets if even the super-bankers couldn’t get it right? This question
supposes that it’s the auditors’ obligation to determine the values and that
the bankers didn’t get it right.
Neither is true.
What are the auditors’ obligations with regard to
clients’ fair value measurements and disclosures? Auditors do not establish
fair values. Instead, their role is to, “test management’s fair value
measurements and disclosures.” But that obligation is broader than just
taking the word of the
“masters of the universe.”
The auditor should consider using the work
of a specialist if the auditor does not have the necessary skill and
knowledge to plan and perform audit procedures related to fair value.[1]
Observable market prices may exist to assist in testing fair values.
Where they do not and other valuation methods are used, the auditor’s
substantive tests of fair value may involve (a) testing the significant
assumptions, the valuation model, and the underlying data, (b)
developing an independent estimate of fair value for corroborative
purposes or, where applicable, (c) reviewing events or transactions
occurring after the period covered by the financial statements and
before the date of the auditor’s report.
I say it’s outrageous to see
ongoing material “disputes” regarding the fair
value of complex derivatives between counterparties, especially if they are
clients of the same auditor. Critics have suggested that I condone breaches
of client confidentiality. Without betraying client confidentiality, they
ask, how can distinct audit teams compare the values assigned to either side
of same transaction?
One of my
commenters explained it:
Just how many PhD’s with CDS valuation
expertise do you think PwC has lying around in New York? The valuation
of these instruments and the testing of the assumptions would have been
sent to a centralized derivative valuation group to review and test.
Such a team would have had a fairly standard set of guidelines and
testing approach regardless of the team sending it. After validating the
inputs, they would have likely put it through their own sausage machine
/ valuation tool and compared the results. I think there would be a high
probability that the same analysts would have been reviewing the same
instrument for both GS and AIG. And when they notice that GS is using
market derived inputs for the referenced MBS while AIG is using the
historical average default rates and ignoring the market you would have
hoped they might speak up. And when the partner (finally) heard the
rumblings of a problem, even after it has been filtered through the
manager / senior manager “make-it-go-away” screen, he would have asked
“who else deals with this cr_p in the firm? GS… ah, [insert name of old
white guy here] is an old buddy of mine, I’ll just give him a call and
ask him what they do…”
When one excuses the auditors for not getting fair
value right, there’s a follow-on argument that claims no one got it right.
No one could possibly get it right. That’s why the crisis
occurred. That’s what the scoundrels that benefited most from the crisis
would like you to believe.
Reality is the opposite.
Much has been written about how well Goldman Sachs made out as a result
of the crisis. But there are others. Some are getting prosecuted like
Bank of America’s Ken Lewis for hiding losses to
further their interest in millions of bonus dollars. That’s why some are
starting to use the word “fraud” when speaking of Lehman’s collapse.
On February 11th,
Bloomberg’s Jonathan Weil asked why no one is prosecuting Lehman
Brothers executives for fraud:
It is so widely accepted that Lehman Brothers Holdings Inc.’s
balance sheet was bogus that even former Treasury Secretary Hank Paulson
can say it in his new memoir. And still, the government hasn’t found
anyone who did anything wrong at the failed investment bank…In his new
book, “On the Brink,” Paulson doesn’t
point fingers at specific Lehman executives for violating any rules. He
displays amazing candor, though, in describing how Lehman’s asset values
were a gross distortion of the truth. It doesn’t take much imagination
to figure out they didn’t get that way all by themselves.”
A reader, I’ll call him David the CFE,
repeats a story to me to illustrate this point:
“Casey Stengel probably said it best when
he said after the Mets 40-120 season, ‘Gentlemen, not one of you could
have done this on your own. This was a team effort.’ “
Losing $156 billion requires a team effort.
When former Lehman Managing Director
Arthur Doyle reviewed Larry McDonald’s book on Lehman,
he asked the same questions about fraud and Lehman
executives:
“The most important questions of all are
not even asked in “A Colossal Failure of Common Sense,” or in any other
account I have so far seen of the Lehman failure. Simply put, how did
Lehman’s published financial statements, as recently as its final 10-Q
published in July of 2008, show a positive net worth of $26 billion,
when the bankruptcy liquidators are saying that they are looking at a
negative net worth of $130 billion? Doesn’t any or all this constitute
securities fraud? And shouldn’t there be criminal liability for the
executives who signed the firm’s 10-K and 10-Q’s, who under
Sarbanes-Oxley are responsible for material misstatements made in those
documents?”
Bloomberg’s Weil has a theory about why these
crimes are not being prosecuted:
“There’s been much talk the past two years
about moral hazard, which is the risk that companies and their investors
will behave more recklessly when they believe the government will bail
them out. Less has been made of a similar hazard: The danger that
powerful companies won’t follow the law when their executives believe
the government won’t hold them to it…The latter risk threatens not only
our economy, but our democracy. There’s every reason to believe both
kinds are growing.”
David the CFE and I have
another theory:
Collusion.
The crimes are too numerous to prosecute without
indicting the whole system and most of the major players. And because they
were part of the problem before they were theoretically part of the
solution, culpability also attaches to Paulson and Tim Geithner.
David the CFE’s theory is
premised on some of the oldest tricks in the book for manipulating
revenue recognition and, therefore, reported
profits and incentive compensation payouts including stock options -
roundtrips, parking, and channel stuffing. In
another variation on the theme, global trading company Refco used
a round trip loan to
repeatedly hide a related-party transaction incurred to delay disclosure of
significant uncollectible accounts. It’s not like these techniques haven’t
been used before (by AIG, for example) to offload risk and smooth earnings
at quarter- and year-end.
“This
case shows that the Commission will
pursue insurance companies and other financial institutions that market
or sell so-called financial products that are, in reality, just vehicles
to commit financial fraud,” said Stephen M. Cutler, director of the
SEC’s Division of Enforcement.
With regard to
the financial crisis, these revenue recognition fraud techniques may have
been most useful in establishing
“observability” of market prices for otherwise
illiquid assets. Establishing “market prices” via fraudulent, sham
transactions amongst the market participants before quarter-end and year-end
reporting periods would have allowed assets to remain on the books longer at
inflated values and, therefore, to inflate profits and bonuses. “Market
prices” that appeared to support existing valuations sustained the myth. The
investments were not written down until long after the market for subprime
real estate securities started to wilt.
David the CFE explains
this theory in the case of Lehman Brothers:
Nassim Taleb
says about banks: “Banks hire dull people and
train them to be even duller. If they look conservative, it’s only
because their loans go bust on rare, very rare occasions. But bankers
are not conservative at all. They are just phenomenally skilled at
self-deception by burying the possibility of a large, devastating loss
under the rug.
Taleb further states: “Executives will
game the system by showing good performance so they can get their yearly
bonus.”
Lehman paid out $5.2 billion in bonuses in 2006
and $5.7 billion in bonuses in 2007. Did this result from the
executives at the bank gaming the system to increase their bonuses? An
example of burying a large loss under the rug can be found in this
excerpt from Lehman Brothers in its
2006 10-K:
We held
approximately $2.0 billion and $0.7 billion of non-investment grade
retained interests at November 30, 2006 and 2005, respectively. Because
these interests primarily represent the junior interests in
securitizations for which there are not active trading markets,
estimates generally are required in determining fair value. We value
these instruments using prudent estimates of expected cash flows and
consider the valuation of similar transactions in the market.
Junior interests in securitizations.
Lehman and other firms purchased
mortgages that would effectively be resold by them as collateralized
debt obligations. Each of Lehman’s securitizations was broken into
tranches in which senior interests received greater preference with
respect to collections of interest and principal than junior interests
that were entitled to greater profits, if such profits were realized. A
junior interest in a securitization is the lowest level of the tranches
for collateralized debt obligations. Generally, only the
bottom 3% of a
securitization was labeled as equity.
During 2006, housing prices dropped nationally
by at least 5% from the spring of 2006 to Lehman’s Nov. 30, 2006 and the
default rate was increasing as well. With prices of houses dropping and
the default rate increasing, there was a risk of large losses when the
buyer defaults. Thus, the junior interests in securitizations that
Lehman was purportedly investing in were probably already worthless at
the time that Lehman invested in them or at November 30, 2006.
An auditor would have to suspect a material
loss is being hidden and that collusion between several departments at
Lehman Brothers and management’s participation in the deception was
possible.
Ernst and Young, Lehman’s auditors, were
probably unwilling to consider such a possibility because auditors
accept as dogma that collusion between many employees and multiple
departments is unlikely no matter what the motive, i.e., $5.2 billion in
bonuses. Auditing standards also do not consider collusion likely.
Apparently, auditors did not consider the possibility that two different
groups at Lehman Brothers such as the underwriters who sold the
securitization IPOs and the trading departments would collude to hide a
$1.3 billion loss in a junior equity position that could not be sold.
Hiding losses on CDOs
and mortgages purchased for securitization. A reasonable
question to ask was: If Lehman Brothers started the fiscal year ending
Nov. 2007 with $57 billion of CDOs and held them for the year, what
would their estimated loss be? Also: What would the additional loss be
with $32 billion in CDOs and/or mortgages purchased?
Presumably, the losses would be in the range of
$10 billion to $30 billion. By Nov. 2007, everyone knew of the problems
with CDOs. Bear Stearns had already closed two hedge funds investing in
CDOs. Merrill Lynch had made huge write downs and forced out its CEO. My
guess is that Lehman Brothers engaged in schemes to fool the auditor in
order to avoid disclosing losses from their securitizations and
investments in CDOs.
Lehman probably pulled a variation of the old
“telecom swap.” In the “telecom swap” cases,
one telecom company would sell telecom capacity to another telecom and
then purchase the same amount of telecom capacity from the other party.
The firm selling the capacity would book the amount received as revenue
and the firm purchasing the capacity would book the amount received as a
fixed asset. It worked very well in creating fictitious profits for
those firms.
That same trick could be used by financial
institutions in the case of CDOs/CDSs. Let’s say Financial Institution A
sells collateralized debt obligations with a true fair market value of
90 million to Financial Institution B for 100 million dollars in cash.
Financial Institution B purchases collateralized debt obligations with a
true fair market value of 90 million dollars from Financial Institution
A for 100 million dollars in cash.
And then those phony trades are shown as the
“observable” similar transactions in the market.
Did the auditors check for this item? Probably
not. Why not? Because it’s an example of collusion between Lehman and
other companies. Auditors don’t check for collusion no matter how many
times they get fooled by it!
Continued in article
Bob Jensen's threads on the subprime mortgage scandal sleaze ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
From The Wall Street Journal Accounting Weekly Review on February 26,
2010
States Sink in Benefits Hole
by: Amy
Merrick
Feb 18, 2010
Click here to view the full article on WSJ.com
TOPICS: Governmental
Accounting
SUMMARY: The
Pew Center on the states has issued a report on the status of pension,
health-care and other retirement benefits offered to public employees,
finding sever funding shortfalls stemming both from market losses and
deferring funding even during healthy economic times. "Illinois has the
largest pension-funding gap, with only 54% of the necessary contributions
made to pay promised benefits to current and future retirees." Researchers
obtained the data for their analysis from Comprehensive annual financial
reports (CAFR) for fiscal year end 2008, generally falling on June 30 for
most states.
CLASSROOM APPLICATION: The
article is a good one for governmental accounting courses in covering the
CAFR.
QUESTIONS:
1. (Introductory)
Who has issued this report on the status of funding of state retirement and
other post-employment benefits? What is their objective in doing so?
2. (Introductory)
Summarize the findings as reported in this WSJ article. From where did
analysts obtain the information for this report?
3. (Advanced)
How do states, or any employers, establish amounts that should be set aside
to cover defined-benefit pension plans and promises of other post-employment
benefits?
4. (Advanced)
Is the funded status of states' pension and other post-employment benefit
plans shown on the face of the Statement of Net Assets or on the Balance
Sheet for governmental entities? Explain your answer with reasoning based on
GASB and other authoritative requirements.
5. (Advanced)
States have found revenues "consistently lagging behind forecasts." How does
this problem in a state government result in cutting spending, likely
including spending to fund employees; retirement benefits?
Reviewed By: Judy Beckman, University of Rhode Island
"States Sink in Benefits Hole," by: Amy Merrick, The Wall Street
Journal, February 18, 2010 ---
http://online.wsj.com/article/SB10001424052748704398804575071873547372514.html?mod=djem_jiewr_AC_domainid
State governments face a trillion-dollar gap
between the pension, health-care and other retirement benefits promised to
public employees and the money set aside to pay for them, according to a new
report from the Pew Center on the States.
States promised current and retired workers a total
of $3.35 trillion in benefits through June 30, 2008, said the report from
the nonprofit research group, a division of Pew Charitable Trusts. But state
governments had contributed only $2.35 trillion to their benefit plans to
pay current and future bills, the report said.
The Pew report said its estimate of the funding gap
would likely prove conservative, because it didn't account for the massive
investment losses pension funds suffered during the second half of 2008.
Although there was a slight rebound last year, it wasn't nearly enough to
cover the previous losses, Pew said.
Researchers compiled the data by reviewing each
state's comprehensive annual financial report for fiscal year 2008, which
for most states ended June 30, 2008. They also looked at pension-plan annual
reports.
The pension problems started well before the
recession. Even in good times, states were skipping pension payments,
leaving larger holes to fill in future years. State legislatures also
increased benefit levels without setting aside extra money to pay for them.
As a result, annual pension costs for states and
participating local governments more than doubled, to more than $64 billion,
from fiscal 2000 to fiscal 2008, said Susan Urahn, the research group's
managing director.
"We have a significant problem now, but it's a
problem that can be solved," Ms. Urahn said. "If states wait, eventually
they will have an unmanageable crisis on their hands."
Investment returns won't be enough to make up the
shortfall, she said.
Illinois has the largest pension-funding gap, with
only 54% of the necessary contributions made to pay promised benefits to
current and future retirees, the Pew report said. Kansas, Oklahoma, Rhode
Island and Connecticut are close behind, with less than 65% of their pension
benefits currently funded.
Experts recommend that states set aside each year
at least 80% of what actuaries say will be necessary to cover benefit
payments. In 2008, only four states—Florida, New York, Washington and
Wisconsin—had fully funded pension systems, the Pew report said.
In addition, states generally have little set aside
to cover retiree health-care and other nonpension benefits. The Pew report
found states, on average, have funded only 7.1% of these expected costs, and
20 states have no money in reserve for the bills.
The report suggested that states consider lowering
benefit levels and increasing the retirement age for new employees. In the
past two years, 10 states increased required employee contributions to their
benefit plans, the report said.
State budgets are so troubled that most don't have
extra money to make up for missed pension contributions. With revenue
consistently lagging behind forecasts, state governments are cutting
spending, increasing taxes and imposing new fees to eliminate deficits.
The National Conference of State Legislatures says
it doesn't expect state finances to improve for at least two years.
Thirty-five states are projecting a combined budget gap of $55.5 billion for
fiscal year 2011, which begins July 1, 2010 for most states, said Corina
Eckl, the group's director of fiscal programs.
Raising taxes to fill pension coffers would be a
difficult sell to taxpayers, Ms. Urahn said.
Public-sector employees in California and other
states are facing a growing backlash from residents who are having their own
benefits stripped by employers.
My Unfinished Essay on the Pending Collapse of the United States ---
http://www.trinity.edu/rjensen/entitlements.htm
David's February 25, 2010 Book Review
"Shell Games by Sara McIntosh," by David Albrecht, The Summa,
February 25, 2010 ---
http://profalbrecht.wordpress.com/2010/02/25/shell-games-by-sara-mcintosh/
Sara McIntosh (a pseudonym) has published her first
novel, Shell Games, a financial action/thriller. It’s a good first
novel, and well worth the time invested for reading. [ordering
information]
Shell Games is a fun read for anyone.
Accountants, though, will receive an extra dose of enjoyment. The plot is
thrilling. In some tense scenes, I found myself cheating a look at the
final chapter to see how the story ends.
When considering the sub-genre of financial
action/thriller novels that showcase the role of fraud auditor (aka
financial sleuth or forensic accountant), there are few options. Well,
there has been only one serious option–The Devil’s Banker by
Christopher Reich. Shell Games is a pleasant contrast to the heavy
international espionage of Reich.
The Devil’s Banker
is a complicated story of international terrorist money transfer, with
bombs, assassinations and too many characters. It reads much like a Bond
film, with a super sleuth accountant as a Daniel Craig type of 007. The
male protagonist does all the heavy duty accounting, and a female spy does
most of the heavy action. Reich never convinces me, though, that the hero
is truly an accountant. Perhaps it’s because Reich has a finance, not an
accounting background. This is never more apparent than in Reich’s
Numbered Account, a story that would greatly have benefitted from some
nuts-and-bolts accounting, had Reich been able to supply it.
In McIntosh’s Shell Games, though, we
suffer no such handicap. The heroine–super sleuth and super sexy Marjorie
Stevens–is all accountant. She is convincing as a fraud auditor because
McIntosh was a fraud auditor. McIntosh’s bio reveals she was a, “fraud
auditor and financial executive for two of the largest consumer products
companies in the world, [and] uncovered numerous frauds, including one that
earned her … [an award for] ‘Finance Person of the Year’.” In addition, she
“founded her own finance and accounting consulting business, serving Fortune
100 companies” that could investigate fraud in global financial
operations.” Shell Games is convincing because McIntosh truly has
been there and done that, and she is a good enough writer to be able to show
us her former world. Obviously, there is a lot of Sara McIntosh (SM) in
Marjorie Stevens (MS).
McIntosh’s female perspective is a significant
influence. Instead of a male dominated action thriller with several shoot
‘em up scenes, the fast-paced action of Shell Games is moved along by
characterization and charming characters. Be prepared for women that are
effective and efficient in their roles (a woman is up for Chair of the
Securities and Exchange Commission) and men are not. Needless to say, the
women are uber attractive despite having passed their 39th birthdays.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/fraudUpdates.htm
I did not do anything but forward Doug’s request to the
AECM. Hence I’m not personally bragging.
But I do want to brag about the efficiency and
effectiveness of the AECM listserv. After receiving yet another private response
from an AECMer, Doug wrote the following message. What he really means is “thank
you AECM.”
My threads on the history of the AECM are at
http://www.trinity.edu/rjensen/ListservRoles.htm#ListServs
Professor
Jensen,
Another response
from a colleague.
Your assistance
in this matter has been invaluable and the responses most helpful.
I appreciate your assistance more than I can express in
words.
Douglas McWard, CPA
|
Director, Financial Reporting and Compliance
Corporate - Clayton, MO
|
Office (314) 573-9383
|
Fax (314) 573-9455
|
doug.mcward@graybar.com
www.graybar.com - Works to Your Advantage
AECM (Educators)
http://pacioli.loyola.edu/aecm/
AECM is an email Listserv list which provides a forum for
discussions of all hardware and software which can be useful in any way for
accounting education at the college/university level. Hardware includes all
platforms and peripherals. Software includes spreadsheets, practice sets,
multimedia authoring and presentation packages, data base programs, tax
packages, World Wide Web applications, etc
David Albrecht requested that I provide a listing of my favorite "accounting
novels."
When I did an Amazon search of "accounting novels," I got 39 hits, a few of
which are actually accounting novels. Of course this is a biased listing of only
accounting novels that are still in print and for which there are people who
will still pay for these books from Amazon. I'm sorry to say that I've not read
a single one of that listing of "accounting novels." Hence, I'm not a very good
judge of accounting novels. I will, however, be ordering several that look most
interesting to me.
There are really two types of accountancy novels. The first kind (Type 1) is
a novel written primarily to entertain that features accounting in the process
much like it is popular to feature law, psychology, sociology, and anthropology
in novel writing. The second kind (Type 2) is a novel written primarily to teach
accounting that is put into a novel for purposes of attracting and holding the
reader's attention. Most accounting novels of the latter kind are mystery
novels.
I'm sorry to say that I'm disappointed in all the Type 2 accounting novels
that I've ever read (but I've not read them all by any means). As to the
Type 1 accounting novels, I can't find any to recommend even though they all are
top novels according to critics of repute. I think you can learn a lot about
psychology and the criminal mind from some Type 1 books. To the extent that the
criminal mind is focused on an accounting crime like embezzlement, the reader
may learn a great deal about psychology. But what is learned about accounting
seems hardly worth mentioning.
Type 2 novels that are written primarily to teach accounting usually lack
research into the historical settings, and it is often this "realism" of the
setting that separates great novels from hack jobs.
May 27, 2002 message from David
Albrecht [albrecht@PROFALBRECHT.COM]
I'm taking a
few weeks off, and am thinking of reading some novels. A Google search on
"accountant & movies" reveals the following. Can anyone recommend any of
these books? I am purposefully bypassing the accountant books written by a
professor for students. -- Dave Albrecht (Bowling Green State University)
David Dodge wrote
four novels starring a San Francisco tax accountant James “Whit” Whitney,
who becomes a reluctant detective. They are:
- Death and
Taxes (1941)
- Shear the
Black Sheep (1943)
- Bullets for
the Bridegroom (1944)
- It Ain’t Hay
(1946)
Paul Anthony wrote
Old Accountants Never Die
John Grisham wrote
Skipping Christmas
Paul Bennett (crime
thriller author) - Nick Shannon is an accountant who investigates fraud Due
Diligence Collateral Damage False Profits The Money Race
Mike Resnick wrote:
Eros Ascending: Book 1 of Tales of the Velvet Comet
Type 1 Novels
Suppose we begin with somebody's listing of the top 100 novels of all time such
as the listing at
http://www.randomhouse.com/modernlibrary/100bestnovels.html
It's relatively easy to identify some of those that teach economics, the
noteworthy author being Ayn Rand and George Orwell. I'm sorry to say that I
personally cannot recommend a single novel among the classics that I would
recommend as a supplement for teaching accounting.
Nor can I recommend any of my favorite novelists on the basis of accounting?
No! Actually I cannot recommend a favorite novelist without some sort of
criterion. For example, in terms of realism of settings one of my favorite
novelists of all time is Joseph Conrad. However, if I'm planning a long flight I
generally add several books by Agatha Christie and Nagio Marsh to my carry-on
luggage. Give me an old Christie or Marsh re-read to a current James Patterson
or Mary Higgins Clark new-read any day. I do somewhat like Elizabeth George and
PD James, although they often get tedious.
I also don't find any interesting accounting novels among the top banned
books.
The Online Banned Books Page (updated in 2009) ---
http://onlinebooks.library.upenn.edu/banned-books.html
Banned Books ---
http://en.wikipedia.org/wiki/List_of_banned_books
I draw a blank in terms of recommending Type 1 novels for learning
accounting, even those that may feature accountants.
Type 2 Novels
Among the more financially successful Type 2 novels designed to teach management
are the Eliyahu Moshe Goldratt books ---
http://en.wikipedia.org/wiki/Eliyahu_M._Goldratt
I can honestly say that I never read one of his books that I thought was worth a
tinkers damn in spite of the fact that cults have formed in praise of Eliyahu's
fads.
The most financially successful mystery novels designed to teach economics as
well as entertain were those of my former colleague Bill Breit and Ken Elzinga.
Three
mystery novels penned under the name of Marshall Jevons are as follows:
- Murder at the Margin: A
Henry Spearman Mystery, Marshall Jevons (Princeton University
Press, 1993,
ISBN: 0691000980). First published in 1978 by another publishing house.
Murder at the Margin: A Henry Spearman Mystery, Marshall Jevons
(Princeton University Press, 1993,
ISBN: 0691033919).
- The Fatal Equilibrium,
Marshall Jevons (Ballantine books, Inc., 1986,
ISBN: 0345331583).
The Fatal Equilibrium, Marshall Jevons (MIT Press, 1985,
ISBN: 0262100320).
- A Deadly Indifference: A
Henry Spearman Mystery, Marshall Jevons (Princeton University Press,
1998,
ISBN: 0691059691).
Although I never personally thought these were great novels, for a time they
became widely popular as high school adoptions where there is a huge sales
market. One time I wrote a tribute to Bill and Ken at
http://www.trinity.edu/rjensen/acct5341/speakers/muppets.htm
Wherein I wrote my own Muppets screen play about arbitrage.
One of the more serious accounting education mystery novels is Code Blue
by R.E. McDermott, K.D. Stocks, and J. Ogden (Syracuse, UT: Traemus Books, ISBN
0-9675072-0-0, 2000) ---
http://www.traemus-books.com/
What you are about to read represents a new way of
teaching technical material. As the approach is unorthodox, an explanation
is warranted. The format chosen is that of a textbook-novel. It tells the
story of a CPA who accepts a consulting job for a community hospital, a job
that involves him in romance, mystery, murder, intrigue, and...managed care!
My primary purpose in selecting this format is
learning in context. Many learners complain that traditional education fails
to prepare them for the real world. In this textbook-novel, I discuss not
only how to find the right answers but also how to identify the right
questions. My experience has been that the second issue is often far more
important than the first.
In a similar vein, the book stresses the principle
that how a manager does something is often as important as what he or she
does. Some managers fail even though they do the right thing--because they
do it in the wrong way. It is not enough to be sincere; one must be right.
It is not enough to be right; one must be effective!
Creativity is another topic that can best be
covered in the format of a textbook-novel. How does one apply old principles
to a new environment? What process does one follow in breaking a complex
consulting project into manageable tasks?
This book was written for anyone impacted by the
cost of healthcare or interest in one "solution" that has been offered--a
set of principles known as managed care. This audience certainly includes
physicians, nurses, healthcare administrators, accountants, personnel
directors and other executives of businesses that pay the cost through
health insurance premiums.
In a recent Fortune Magazine poll, nearly two out
of three CEOs called skyrocketing medical costs one of the most important
problems facing American corporations. One-third of those surveyed stated
that healthcare costs are the single biggest problem they would face this
decade. The United States currently spends more than $1 trillion for the
healthcare of its citizens. Projections indicate this figure will double
within the next decade.
This book also contains technical material for the
accounting student who is interested in learning more about healthcare cost
accounting. It has been three decades since the number of service-industry
jobs in the United States bypassed those in manufacturing. Still, accounting
textbooks continue to emphasize traditional manufacturing cost accounting
while neglecting or even ignoring the service industry.
Technical supplements, found in the appendix,
illustrate the concepts taught, explain service industry accounting and
contrast it with manufacturing accounting. This material is not essential to
the story line and can be skipped by the more general reader. Questions for
each chapter can be found on the author's web page: http://www.traemus-books.com
As a boy, I lived on the shores of Lake Washington
in the small community of Hunt's Point. Many of the homes have docks, and
one of our neighbors bought an airplane boat--not a plane with floating
pods, as one often sees in that part of the country, but a plane with a
hull--like a boat!
The advantages of such a craft in the Pacific
Northwest are not hard to imagine, but the vehicle had some drawbacks.
Although it did things neither a boat nor airplane could do alone, it didn't
always fly as well as a plane nor sail as well as a boat. This analogy had
come to me as I've studied the art of fiction. I am a hospital administrator
turned consultant as well as a professor of accounting and healthcare
administration. In my formal training, I was taught expository writing.
Fiction is obviously a different animal.
In a professional article, the author begins with
an introductory statement: a thesis that is followed by an explanation and a
summary. Organization is tight--redundancy is discouraged. In fiction, the
author must have a story line that involves opposition. Characters must be
interesting; and the plot must keep moving. Merging the objectives of these
two writing styles presents challenges, especially when the purpose is to
explain the technical principles of managed care, accounting, and finance.
A textbook-novel is not as easy to write as a
textbook and may not be as action focused as a novel. On the other hand, a
textbook-novel is hopefully more informative than many novels and is
certainly more interesting, perhaps even more educational from the
standpoint of context, than a textbook.
As the creator of Code Blue, my goal is to make
learning easy by making it fun. It is up to you to determine how successful
we were in achieving this objective.
Richard E. McDermott
January 1, 2000
The most prolific accounting mystery novel writer is Larry Cumbley at LSU.
Larry eventually took his books into the realm of forensic accounting education.
"SHERLOCK HOLMES AND FORENSIC ACCOUNTING ," D. Larry Crumbley, Stanley H.
Kratchman, and L. Murphy Smith, Texas A&M, March 4, 1997 ---
http://acct.tamu.edu/kratchman/holmes.htm
Larry Crumbley authored or co-authored a number of accounting novels, but
they seemed too formula driven (Larry's a novel writing machine) and never
appealed to my tastes. Many were written under the pen name Iris Weil
Collett and were designed
to teach forensic accounting as well as entertain ---
http://www.bus.lsu.edu/accounting/faculty/lcrumbley/oilgas.html
The best of the Crumbley books may be
Larry Crumbley and Doug Ziegenfuss and (O'Shaughnessy?), Forensic Accounting
Educational Novel, Carolina Academic Press, Second Edition, 2008 ---
http://www.cap-press.com/books/1780
Risk. It's a factor calculated into all big-time
sports operations. But baseball was completely unprepared for the risk of
major league murder in the stands. Fleet Walker, internal auditor for the
New York Yankees, a forensic accountant, a FBI agent, and the protagonist of
The Big R lead the reader through the fundamentals of forensic auditing,
while using their accounting skills and knowledge of baseball history to
track a serial killer who is threatening the national pastime.
Using the form of a novel to stimulate interest,
The Big R is designed to supplement a forensic auditing, internal auditing,
fraud examination, or graduate financial statements course. Readers will
enjoy the suspense of this psychological thriller that integrates the
foundations of forensic accounting and brings these applications to life.
Authors Crumbley, Ziegenfuss, and O'Shaughnessy mix engaging storytelling
with factual and practical information to create a resource guide that is
both entertaining and informative.
Larry's mass-produced books that I'm less fond of include the following:
Collett, I.W., Accosting the Golden Spire, Sun Lakes, AZ 85248:
Thomas Horton & Daughters, 26662 S. New Town Drive, Sun Lakes, AZ 85248,
1988; The Ultimate Rip-off: A Taxing Tale, Sun Lakes, AZ: Thomas
Horton & Daughters, 1988; and L.M. Smith, Trap Doors and Trojan Horses,
Sun Lakes, AZ: Thomas Horton & Daughters, 1991.
Collett, I.W., The Ultimate Rip-off: A Taxing Tale, Sun Lakes,
AZ: Thomas Horton & Daughters, 1988;
Collett, I.W., Accosting the Golden Spire, Sun Lakes, AZ: Thomas
Horton & Daughters, 1988.
Collett, I.W. and L.M. Smith, Trap Doors and Trojan Horses, Sun
Lakes, AZ: Thomas Horton & Daughters, 1991. See M. Opsata, "It was a Dark
and Stormy Night," Dow Jones Investment Advisor, January 1997, pp.
98-102.
Collett, I.W. and Dana Forgione, Costly Reflections in a Midas Mirror,
Sun Lakes, AZ: Thomas Horton & Daughters, 1995.
Smith, K., M. Smith, and D. Crumbley, The Bottom Line is Betrayal,
Dame Publications, Inc., Houston, TX, 1995
Larry Crumbley and Stanley Kratchman, Deadly Art Puzzle: Accounting
for Murder, Dame Publications, Inc., 7800 Bissonnet, Suite 415,
Houston, TX 77074, 1996.
Larry Crumbley, Gary Giroux, and Bob Myers, Nonprofit Sleuths,
Dame Publications, Inc., Houston, TX. See also
http://www.bus.lsu.edu/accounting/faculty/lcrumbley/forensic.html.
Here are a couple of older messages from
http://www.trinity.edu/rjensen/acct5341/speakers/muppets.htm
Christie Malry's Own Double-Entry
August 22, 2005 message from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
I recently purchased Christie Malry's Own
Double-Entry [Paperback] By: B.S. Johnson through Amazon. While I
haven't had a chance to start reading it yet, the following is the
book's description in Amazon:
BS Johnson is one of those experimental
writers, controversial during their lives that subsequently vanishes
from print. Johnson was a journalist, a socialist, and a fine
novelist. Best known for The Unfortunates (his book in a box where
every chapter is separately bound and the reader is invited to read
them in any order he or she wishes), Christie Malry's Own Double
Entry is perhaps his most accessible novel. However, this
"accessibility" is in the midst of a studiedly experimental text.
This is a corruscating satire in which Johnson targets one of the
symbols of capitalism, the double entry system. The very basis of
accountancy, and the manipulation of finance, Johnson turns this
building block on its head as his central character, Christie Malry,
a young man with a future, decides that he will live his life
according to the principles of double entry.
Johnson's novel has acute observations on a
variety of issues in British life that still merit comment. How
working class people come to vote conservative, the manner in which
people's worth is measured financially; and all of this is in the
midst of an angry satire where Malry wreaks vengeance on the system.
It is a bitter cycnical novel, with a dark wit.
There is love, sex, and death; and an
unusual use for shaving foam. And all of this is presented in a
slightly distant way, where Johnson continually turns to the reader
and winks, letting you know this is a novel. Characters are aware of
their place in fiction, and Johnson deconstructs the novel to let
you see how it works. (end of review)
By the way, while it is not on point with your
request, I just finished reading "The World is Flat" and found it to be
one of the most interesting and provocative books I've read in a long
time.
Denny Beresford
August 22, 2005 reply from JOHN STANCIL
[jstancil@VERIZON.NET]
“The Principles” by Barry Cameron and Tom Pryor
( www.icms.net ) is a
novel incorporating the principles of Activity Based Costing.
John Stancil
Although I've great respect for USC's Zoe-Vonna Palmrose, I cannot say her
Thog's Guide co-authored "novel" appealed to me in the least. Maybe I'm just
too dense to find greatness in Thog's Guide.
Conclusion
Hence David, I await your forthcoming enlightenment about the top accounting
novels that I should be reading.
I'm sorry to say that I'm disappointed in all the Type 2 accounting novels
that I've ever read (but I've not read them all by any means). As to the
Type 1 accounting novels, I can't find any to recommend even though they all are
top novels according to critics of repute. I think you can learn a lot about
psychology and the criminal mind from some Type 1 books. To the extent that the
criminal mind is focused on an accounting crime like embezzlement, the reader
may learn a great deal about psychology. But what is learned about accounting
seems hardly worth mentioning.
Congratulations to Edith, David, and the others listed below.
"Top 10 Accounting News Links This Week," by Rick Telberg, CPA
Trendlines, February 19, 2010 ---
http://cpatrendlines.com/2010/02/19/top-10-accounting-news-links-this-week/
What CPAs are clicking on…
- Will Yancey, CPA, Ph.D, web pioneer, dies at age 53.
http://ow.ly/16zVpH
- Happy Valentine’s Day for Accountants: A Love Song for
Virtual CPAs
http://ow.ly/16zKz3
- Hit Song: If I Were An Auditor « The Summa
http://ow.ly/16zhrH
- Calif CPA William Murray Charged with $13 Million Fraud
http://ow.ly/16AcE3
- The Unseen Victims of No Estate Tax – WSJ.com
http://ow.ly/16AbcR
- How Janet Jackson and Mick Jagger Attract Accountants –
DiversityInc.com
http://ow.ly/16AMde
- AccountingWEB’s Level 2 10-Key Speed Test
http://ow.ly/16zoNT
- Will Your Tax Pro Get You Audited? – Forbes.com
http://ow.ly/16AWpX
- A special report on social networking: A world of
connections | The Economist
http://ow.ly/16ADFQ
- Tax Report: The Unseen Victims of No Estate Tax – WSJ.com
http://ow.ly/17ZEI
Bob Jensen's threads on accounting and tax news sites ---
http://www.trinity.edu/rjensen/accountingnews.htm
"Turning Math into Cash: IBM has found a new source of revenue:
using its mathematicians' formulas in business services," by William M.
Bulkeley , MIT's Technology Review, March/April 2010 ---
http://www.technologyreview.com/computing/24556/?nlid=2777
Five years ago, Brenda Dietrich started to
investigate how IBM's 40,000 salespeople could learn to rely a little more
on math than on their gut instincts. In particular, Dietrich, who heads the
company's 200-person worldwide team of math researchers, was asked to see if
math could help managers do a better job of setting sales quotas. She
assigned three mathematicians at IBM's Thomas J. Watson Research Center in
Yorktown Heights, NY, to work on new techniques for predicting how much
business the company could get from a given customer.
The mathematicians collected several years' worth
of data about every sale IBM made around the world. They compared the
results with the sales quotas set at the beginning of the year, most of
which were developed by district sales managers who negotiated them with
sales teams on the basis of past experience. To spot opportunities the sales
teams didn't recognize, the researchers collected external data on IT
spending patterns by industry and combined that information with the
internal sales data. Then they used a technique called high-quantile
modeling--which tries to predict, say, the 90th percentile of a distribution
rather than the mean--to estimate potential spending by each customer and
calculate how much of that demand IBM could fulfill.
Armed with these predictions about how much
equipment IBM should be able to sell to each customer, Dietrich's
mathematicians looked at the size and makeup of the sales team on each
account and compared its actual performance with the theoretical maximum.
Some teams were so small they couldn't sell enough to meet that potential
demand. Other teams were unnecessarily large. So the mathematicians advised
the sales department to shift its staff around, taking less productive
salespeople off the big teams and putting them on teams that had been too
small. Sales in the latter accounts quickly grew.
The two-year project had a tremendous payoff for
IBM. The corporate controller concluded that it generated $1 billion in
additional sales through 2008, the year after the team finished its work,
says Dietrich, a 50-year-old PhD with a sneaking suspicion that the world
would work better if it were run by mathematicians. Since then, IBM has
incorporated high-quantile modeling into its workforce analytics practice, a
service it offers to help clients make decisions about human-resources
issues such as how best to deploy their salespeople.
Continued in article
Where the math fails us ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Comparing Two Documents for Possible Plagiarism
February 8, 2010 message from Hossein Nouri
[hnouri@TCNJ.EDU]
I am looking for a software
that could compare two documents (pdf files) and tell me percentages of
similarities and differences. In addition, The software could point to
similar sentences, etc. The documents are written by different individuals
and most likely not plagiarized. For example, suppose I want to compare two
chapters of two different managerial accounting books on CVP analysis
written by two different authors. What would be a good software to do this?
Hossein Nouri
February 9, 2010 reply from Bob Jensen
Hi Hossein,
There are a number of document comparison software
vendors that mostly focus on plagiarism detection in databases of documents.
Most plagiarism detection programs feature enormous databases of articles
and search algorithms for comparing a given document with one that is
already in print in the database. I summarize some of the major vendors at
http://www.trinity.edu/rjensen/plagiarism.htm
The real trick is to catch a plagiarist who has the
good sense not to copy verbatim. Changes made in the plagiarized item can
include substitution of synonyms or changing English letters to Cyrillic
lettering. Sophisticated document comparison is becoming a real science.
But there also software (usually not free) for
document comparison of two or more submitted pieces. I've not used any of
these and cannot make recommendations other than to note they exist.
Examples can be found at the following sites
http://www.surfwax.com/technology/plagiarism.htm
http://www.plagiarismdetect.com/features.php
http://checkforplagiarism.net/
http://www.checkforplagiarism.net/mnucompare.html
There are many other such services.
Probably the hardest thing to detect is the
borrowing of ideas or portions of writings by completely rewriting the
passages. What we admire greatly in the academy are expert scholars who can
read a passage and identify earlier points in time where ideas originated.
Indeed the greatest challenge for computer
scientists is to write programs where computing machines can perform as well
or better at detecting earlier patterns than human experts. Much of the
experimenting here as been done with the game of chess when trying to get
computers to identify earlier game patterns that grand masters can somehow
still recall better than the machines --- although Big Blue is getting quite
good at comparing patterns of chess moves with the history of chess play.
Gary Kasperov has a fascinating new book on this subject:
"The Chess Master and the Computer," By Garry Kasparov, New York Books,
February 11, 2010 ---
http://www.nybooks.com/articles/23592
Sometimes rewriting can be turned into a positive
learning experience and is done with full permission and transparency ---
http://www.white.k12.ga.us/Intervention/Interventions-Written-Expression.html
There are also some interesting group communications
experiments discussed in Duncan Luce's autobiography at
http://www.socsci.uci.edu/imbs/personnel/luce/pre1990/1989/Luce_Book%20Chapter_1989b.pdf
February 16, 2010 message from Scott Bonacker
[lister@BONACKERS.COM]
Caveat Emptor, Law Students Seeking Outlines
The title of this post isn’t
designed to demonstrate any sort of proficiency in Latin but to alert law
students to the dangers of relying on outlines received from other students.
The risks posed by using passed-down outlines have been threatening law
students for almost as long as there have been law schools, but digital
technology coupled with the internet has multiplied the risk by orders of
magnitude. Ten or fifteen years ago, students could get their hands on
outlines for courses taught in the law school they were attending. In almost
every instance the outline was from a previous semester offering of the
course, taught by the same professor presently teaching the course.
Now, students at any law school can obtain outlines for just about any
course taught at any law school. Recently, my attention was drawn to
Outline Depot, which claims to be “the most
comprehensive source of law school outlines anywhere.” (emphasis in the
original). Perhaps it is, and I’ve not researched that point. Students earn
the right to download outlines by accumulating credits, which can be
obtained by uploading outlines or by purchasing the credits.
The point to which students are desperate to get their hands on outlines is
apparent from what one finds on the site. There are all sorts of red flags
and warning bells.
http://mauledagain.blogspot.com/2010_02_01_archive.html#2661520804417965026
This is
primarily about law schools, and is a blog by a tax law professor no less,
but if there is one there surely is another. Outlines are useful, but in my
case mainly when I make one from material I am reading.
Scott Bonacker
CPA
Springfield, MO
Bob Jensen's threads on cheating are at
http://www.trinity.edu/rjensen/plagiarism.htm
"6 Technologies to Watch in Education," heads up by Tracey Sutherland
(Executive Director of the American Accounting Association). Her link is on the
restricted-entry AAA Commons, so I will link directly to the Chronicle of Higher
Education URL.
"'Horizon Report' Highlights 6 Technologies to Watch in Education," by Marc
Parry, Chronicle of Higher Education, January 14, 2010 ---
http://chronicle.com/blogPost/Horizon-Report-Highlights-6/20525/
The main Horizon report is at
http://www.nmc.org/pdf/2010-Horizon-Report.pdf
Table of Contents
Executive Summary
.......................................................................................................................................
3
Key
Trends
Critical
Challenges
Technologies to Watch
The
Horizon Project
Time-to-Adoption: One Year or Less
Mobile
Computing.....................................................................................................................................
9
Overview
Relevance
for Teaching, Learning, or Creative Inquiry
Mobile
Computing in Practice
For
Further Reading
Open
Content..........................................................................................................................................
13
Overview
Relevance
for Teaching, Learning, or Creative Inquiry
Open
Content in Practice
For
Further Reading
Time-to-Adoption: Two to Three Years
Electronic
Books......................................................................................................................................
17
Overview
Relevance
for Teaching, Learning, or Creative Inquiry
Electronic Books in Practice
For
Further Reading
Simple Augmented
Reality.......................................................................................................................
21
Overview
Relevance
for Teaching, Learning, or Creative Inquiry
Simple
Augmented Reality in Practice
For
Further Reading
Time-to-Adoption: Four to Five Years
Gesture-Based
Computing......................................................................................................................
25
Overview
Relevance
for Teaching, Learning, or Creative Inquiry
Gesture-Based Computing in Practice
For
Further Reading
Visual Data
Analysis................................................................................................................................
29
Overview
Relevance
for Teaching, Learning, or Creative Inquiry
Visual
Data Analysis in Practice
For
Further Reading
Methodology.................................................................................................................................................
33
2010 Horizon Project Advisory Board..........................................................................................................
35
Bob Jensen's threads on education technologies are at
http://www.trinity.edu/rjensen/000aaa/0000start.htm
BLS Projects Strong Jobs
Outlook for Accountants Especially CPAs. The new
“Occupational Handbook” from the Bureau of Labor Statistics at the Department of
Labor reports that job growth for accountants and auditors should surpass 20%
through 2018. The prospects are especially bright for CPAs, according to the
government.
Rick Telberg, CPA Trendlines, February 3, 2010 ---
Click Here
BLS
reports workforce at seasonally adjusted 930,500. January’s 930,500 roster
represents a seasonally adjusted gain of about 10%, one of the largest
month–to-month changes in recent memory. January’s gain followed a 2,700-jobs
gain in December, to 918,4000, a figure which remained relatively unchanged in
the BLS’s monthly revisions.
Rick Telberg, CPA
Trendlines, February 5, 2010 ---
Click Here
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/bookbob1.htm#careers
"Highest-Paid Bachelor’s Degrees: 2010," CNBC, February 2010
---
http://www.cnbc.com/id/29408064/
01. Petroleum Engineering Average starting salary: $86,220
02. Chemical Engineering Average starting salary: $65,142
03. Mining & Mineral Engineering (incl. Geological) Average starting
salary: $64,552
04. Computer Science Average starting salary: $61,205
05. Computer Engineering Average starting salary: $60,879
06. Electrical/Electronics & Communications Engineering Average starting
salary: $59,074
07. Mechanical Engineering Average starting salary: $58,392
08. Industrial/Manufacturing Engineering Average starting salary: $57,734
09. Aerospace/Aeronautical/ Astronautical Engineering Average starting
salary: $57,231
10. Information Sciences & Systems Average starting salary: $54,038
Jensen Warning
I always warned students that the highest starting salary is not the most
important consideration.
Always ask where you will likely be after ten years from the start of the job!
I always warned my students to look first to career opportunities and
externalities
Externalities include compensation growth, high pressure, tension, and extensive
travel (which can be positive or negative)
Externalities include opportunities for continued training, education, and free
time to pursue varied interests
Accounting graduates often want to start in the largest CPA firms for
training and experience with the intention of eventually joining one of the
clients after five or ten years of auditing for the Big Four firm. The client
may offer more exciting challenges and executive management to experienced new
hires.
Among the most important career considerations is opportunity for advancement
and opportunity to shift career tracks
For example, accounting graduates have opportunities to become accounting
professors, in turn, are often the highest paid professors on campus
Other disciplines such as engineering offer much lower probabilities
(relative to accounting PhDs) of landing tenure track job offers in top
universities because there is such a huge supply of new engineering PhD
graduates relative to a huge shortage of new accounting PhD graduates
"All Big
Four Firms Are Best Companies To Work For In 2009," Big Four Blog,
January 22, 2010 ---
http://bigfouralumni.blogspot.com/2010/01/all-big-four-firms-are-best-companies.html
All the Big Four firms recently made Fortune’s 2009 “100 Best Companies to Work
For” list, though not at the very top as we have become very accustomed to
seeing in BusinessWeek or Diversity or Working Mothers magazine. Nonetheless a
very creditable performance against a tough crowd of equally impressive and
quality peers. 2009 sported tougher competition as three of the five firms
dropped rank from the 2008 listing.
In addition, we are seeing a varied picture with firms actively cutting
positions to some minor increases at Deloitte and PwC from 2008 to 2009, in line
with the general decrease in business for these firms in the Americas.
Check out our January 2009 blog post on the 2008
rankings
However, tough external conditions appear to have created some welcome bonuses
for employees, either through additional holidays, a sabbatical program or less
travel.
Fortune has a rigorous process to select these top companies, and with a large
chunk of the selection process based on true employee responses, its hard to
game this list, so makes the results reliable. It conducts the most extensive
employee survey in corporate America with 347 companies in the overall pool.
Two-thirds of a company's score is based on the results of survey sent to a
random sample of employees from each company with questions on attitudes
management's credibility, job satisfaction, and camaraderie. The other third of
the scoring is based on the company's responses on pay and benefit programs,
hiring, communication, and diversity.
Continued in
article
An Upbeat Accounting Recruitment Message in a Down Economy
December 10, 2009 reply from David Fordham, James Madison University
[fordhadr@JMU.EDU]
Francine, Ed, Bob, et al:
Also completely anecdotal but on the other side of
the coin:
I have no knowledge or evidence about audit fees,
firm profits, or even demand for audit services, since I've been way too
busy to spend time with recruiters this semester. But based on what my
colleagues are telling me, the cold air has not seeped down to us yet.
We had more firms at our "meet the firms" night
last month than we've ever had before (56). The number of organizations who
recruited accounting majors here set a new school record (66). Our
percentage of May grads who have job offers already (74%)is exactly the same
as it was this time last year, which was up about 5% before the year before
and up 8% from the year before. The actual COUNT of grads who are graduating
and who have jobs is up about 5% over last year. We haven't yet run our
salary survey (to my knowledge) but from the scuttlebutt in talking with
students, the starting salaries for our grads haven't dropped noticeably, if
at all. I still have firms calling me begging to be guest speakers for my
classes, which means they apparently still have time to spend a day driving
over here to class, and still have money enough to spend the night and go to
a basketball game or something.
We graduate around 120 accounting BBA's per year,
and about 75-80 MSA grads each year (almost all of whom were accounting
BBA's the year before). The bachelor number has been relatively steady the
past few years, but the MSA enrollment has quadrupled over the last 3-4
years as the Virginia 150-hr kicked in a couple years ago.
Regarding curriculum, we too have moved several
courses from the undergrad to the grad level, and our undergrad accounting
degree no longer has sufficient accounting hours to meet the 30-hour minimum
to sit for the exam in Virginia. Students not going for the MSA have to add
the CIS minor to get their 150 hours -- and that minor includes an
accounting technology course which puts them over the 30-hour accounting
hurdle. But those who can get in (minimum GPA, GMAT hurdles, etc.) all go
into the Masters program.
The masters program not only has some accounting
courses that used to be undergrad, it also has the original pioneering
Becker Boot-Camp (totally non-credit) starting the week after graduation.
With the Becker boot camp, we are now in the top ten first-time pass-rates
on the Exam. Since practically all our MSA's go into public accounting, the
arrangement has been a boon to the students. Practically all of them have
the course paid for by their employer after passing the exam.
Again, we are probably not typical. The only way we
know the economy is down is that our salaries remain frozen after several
years, our travel was frozen and while unfrozen now, remains under heavy
restrictions, and my computer is now more than five years old. Fortunately,
donations are up, so I still plan to be at the AAA-IS next month.
Of course, I have to admit, about 2/3rds of our
market is Big Four in the Washington/Baltimore area which may be totally
atypical to the rest of the world. But most (>90%) of our grads start in
public accounting (Big 4, second tier, and a sprinkling of smaller firms),
with almost all of the remainder going to government (the GAO, Secret
Service, DoD, and Dept of Justice all have more offers out to our students
this year than last, and are far more aggressive about trying to get their
reps in front of the students than they have ever been in the past).
Purely anecdotal, and quite likely atypical, but
from our unusual vantage point, accounting is still strong. We have no
shortage of students wanting to major in accounting. Because we remain under
a hiring freeze, we have had to manage enrollments by increasing our
minnimum GPA to declare the major, and are implementing an entrance exam to
enroll in intermediate.
David Fordham
James Madison University
Accounting Majors in Demand
Even when the economy is down, there is room for top
students in the profession. The National Association of Colleges and
Employers’ 2009 Student Survey found that, even though students in the class of
2009 were graduating with fewer jobs available, accounting majors are still in
high demand. Accounting and engineering graduates were among those majors most
likely to have already found jobs. Accounting majors expect to earn an average
starting salary of about $45,000, while engineering grads expect to earn
$58,000.
Journal of Accountancy, July 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Jul/AccountingMajors.htm
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/bookbob1.htm#careers
The Academy of Accounting Historians has changed its domain name from the old
Rutgers site to
http://www.aahhq.org/
I might add to this the links
to free issues of the Accounting Historians Journal:
DIGITAL COPIES OF THE ACCOUNTING HISTORIANS
JOURNAL
(published semi-annually since Volume 4)
Listed in Cabell's Directory of Publishing Opportunities in Accounting
OPEN SOURCES ON LINE
The University of Mississippi Williams
Library
Format: Searchable PDF
Volume 1 (1974) through Volume 34 Number 1 (June 1997) Two Issues per Volume
URL:
http://umiss.lib.olemiss.edu:82/screens/dacopac.html
Textbooks: Purchased Hardcopy vs. Downloadable eBook Purchases vs.
Non-downloadable eBook Leases ---
http://www.trinity.edu/rjensen/eBooksDeal.htm
What's lacking in downloaded Kindle eBooks?
Would you believe the chapter exhibits?
http://www.trinity.edu/rjensen/eBooksDeal.htm
New Tool for Rewriting E-Textbooks: It's the "Wikipedia of
Textbooks"
Macmillan, a major textbook publisher, is today
introducing a new service that will let faculty members to customize digital
textbooks, adding and subtracting chapters, and to rewrite individual sentences
and paragraphs, The New York Times reported. While coursepacks that allow
faculty members to build customized digital or print materials for courses are
common, this system may go further in allowing professors to overhaul a single
existing work.
Inside Higher Ed, February 22, 2010 ---
http://www.insidehighered.com/news/2010/02/22/qt#220816
"Textbooks That Professors Can Rewrite Digitally," by Motoko Rich, The New
York Times, February 21, 2010 ---
http://www.nytimes.com/2010/02/22/business/media/22textbook.html?ref=education
Readers can modify content on the Web, so why not
in books?
In a kind of Wikipedia of textbooks, Macmillan, one
of the five largest publishers of trade books and textbooks, is introducing
software called DynamicBooks, which will allow college instructors to edit
digital editions of textbooks and customize them for their individual
classes.
Professors will be able to reorganize or delete
chapters; upload course syllabuses, notes, videos, pictures and graphs; and
perhaps most notably, rewrite or delete individual paragraphs, equations or
illustrations.
While many publishers have offered customized print
textbooks for years — allowing instructors to reorder chapters or insert
third-party content from other publications or their own writing —
DynamicBooks gives instructors the power to alter individual sentences and
paragraphs without consulting the original authors or publisher.
“Basically they will go online, log on to the
authoring tool, have the content right there and make whatever changes they
want,” said Brian Napack, president of Macmillan. “And we don’t even look at
it.”
In August, Macmillan plans to start selling 100
titles through DynamicBooks, including “Chemical Principles: The Quest for
Insight,” by Peter Atkins and Loretta Jones; “Discovering the Universe,” by
Neil F. Comins and William J. Kaufmann; and “Psychology,” by Daniel L.
Schacter, Daniel T. Gilbert and Daniel M. Wegner. Mr. Napack said Macmillan
was considering talking to other publishers to invite them to sell their
books through DynamicBooks.
Students will be able to buy the e-books at
dynamicbooks.com, in college bookstores and through CourseSmart, a joint
venture among five textbook publishers that sells electronic textbooks. The
DynamicBooks editions — which can be reached online or downloaded — can be
read on laptops and the iPhone from Apple. Clancy Marshall, general manager
of DynamicBooks, said the company planned to negotiate agreements with Apple
so the electronic books could be read on the iPad.
The modifiable e-book editions will be much cheaper
than traditional print textbooks. “Psychology,” for example, which has a
list price of $134.29 (available on Barnes & Noble’s Web site for $122.73),
will sell for $48.76 in the DynamicBooks version. Macmillan is also offering
print-on-demand versions of the customized books, which will be priced
closer to traditional textbooks.
Fritz Foy, senior vice president for digital
content at Macmillan, said the company expected e-book sales to replace the
sales of used books. Part of the reason publishers charge high prices for
traditional textbooks is that students usually resell them in the used
market for several years before a new edition is released. DynamicBooks, Mr.
Foy said, will be “semester and classroom specific,” and the lower price, he
said, should attract students who might otherwise look for used or even
pirated editions.
Instructors who have tested the DynamicBooks
software say they like the idea of being able to fine-tune a textbook.
“There’s almost always some piece here or some piece there that a faculty
person would have rather done differently,” said Todd Ruskell, senior
lecturer in physics at the Colorado School of Mines, who tested an
electronic edition of “Physics for Scientists and Engineers” by Paul A.
Tipler and Gene Mosca.
Frank Lyman, executive vice president of
CourseSmart, said he expected that some professors would embrace the
opportunity to customize e-books but that most would continue to rely on
traditional textbooks.
“For many instructors, that’s very helpful to know
it’s been through a process and represents a best practice in terms of a
particular curriculum,” he said.
Even other publishers that allow instructors some
level of customization hesitate about permitting changes at the sentence and
paragraph level.
“There is a flow to books, and there’s voice to
them,” said Don Kilburn, chief executive of Pearson Learning Solutions,
which does allow instructors to change chapter orders and insert material
from other sources. Mr. Kilburn said he had not been briefed on Macmillan’s
plans.
Mr. Ruskell said he did not change much in the
physics textbook he tested with DynamicBooks. “You don’t just want to say,
‘Oh, I don’t like this, I’m going to do this instead,’ ” he said. “You
really want to think about it.”
Mr. Comins, an author of “Discovering the
Universe,” a popular astronomy textbook, said the new e-book program was a
way to speed up the process for incorporating suggestions that he often
receives while revising new print editions. “I’ve learned as an author over
the years that I am not perfect,” he said. “So if somebody in Iowa sees
something in my book that they perceive is wrong, I am absolutely willing to
give them the benefit of the doubt.”
On the other hand, if an instructor decided to
rewrite paragraphs about the origins of the universe from a religious rather
than an evolutionary perspective, he said, “I would absolutely, positively
be livid.”
Ms. Clancy of Macmillan said the publisher reserved
the right to “remove anything that is considered offensive or plagiarism,”
and would rely on students, parents and other instructors to help monitor
changes.
February 22, 2010 message from
mailto:campbell@rio.edu
Bob:
However, this model could be construed as providing kickbacks to those
professors providing modifications.
This was mentioned later in the article.
Richard J. Campbell
mailto:campbell@rio.edu
February 22, 2010 reply from Bob Jensen
I’m not certain “kickback” is the
correct term if professors are being paid above the board for their
innovative creations and their hard work. Payments, however, should be
rewarded such as payments for providing high quality videos for commercial
books.
The publishers might also take
for-profit advantage of some of the open sharing stuff. For example, a
“customized” textbook might provide links to Susan Crossan’s outstanding
free videos, thereby taking advantage somewhat of her open sharing spirit to
add to the profitability of the commercial textbook ---
http://dept.sfcollege.edu/business/susan.crosson/
It might also be construed as
doing the following two things.
Bad
Once Kindle and the other eTextbook providers get their acts together
regarding eBooks (e.g., providing chapter exhibits), this move by publishing
companies might put the competition out of business if you can only get the
eTextbook revision capabilities if you buy/rent the textbook directly from
the publisher. Welcome to the world or true monopoly pricing of our
textbooks!
Good (and bad)
This move might further destroy the hard copy book market, especially the
used textbook market. This is bad for hard copy book lovers like me, but it
will be more cost efficient for students and will put the sleazy book buyers
that roam our halls out of business.
Bob Jensen
February 20, 2010 message from Richard Campbell
[campbell@RIO.EDU]
The future of publishing:
http://vook.com/vook.php
Richard J. Campbell
mailto:campbell@rio.edu
Vook ---
http://en.wikipedia.org/wiki/Vook
A Vook is a digital book type that combines video,
links to the internet and text into one application that's available both on
the Web and as a mobile application.
Vook officially launched October 1, 2009 with four
debut titles, published in partnership with Atria, an imprint of Simon and
Schuster: Promises, a romance by Jude Deveraux; The 90 Second Fitness
Solution, a fitness book by Pete Cerqua; Embassy, a thriller by Richard
Doetsch; and Return to Beauty, a health book by Narine Nikogosian. Vook
followed up these titles with a Vook version of Gary Vaynerchuk's Crush It!,
released in late 2009. The company has since released a CookVook for Woman's
Day, as well as numerous public domain titles, as well as moving into
production on a Vook with author Seth Godin. On February 10th, 2010, the
company announced a forthcoming Vook with Anne Rice.
Vook was founded by serial Internet entrepreneur
Bradley Inman and came to public attention after being featured in an
article in the New York Times in April, 2009.
Here's a really informative link:
Comparison of eBook formats ---
http://en.wikipedia.org/wiki/Comparison_of_e-book_formats
Bob Jensen's threads on other free textbooks and course videos ---
http://www.trinity.edu/rjensen/electronicliterature.htm
Bob Jensen's threads on open sharing videos and course materials ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
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
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
"Accounting Doctoral Scholars Program Picks Second Crop," Journal
of Accountancy, February 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Feb/ADS.htm
Quality remains
high in the second batch of future accounting Ph.D.s participating in the
Accounting Doctoral Scholars (ADS) program, say program officials.
Thirty applicants
for enrollment in fall 2010 were selected to receive the program’s annual
stipend of $30,000 for up to four years while pursuing a doctorate in
accounting with an emphasis in auditing or tax. The process began with 99
applicants, of whom 60 were invited to meet with program and university
officials Nov. 9, 2009, in Chicago. The group was then further winnowed to
30. All those interviewed, however, had attractive credentials, and as a
whole, the group seemed well-equipped for training future generations of
accountants, organizers said.
“It was very
strong,” said Steve Matzke, manager of the program for the AICPA, of the
latest crop of scholars. “The university representatives, particularly, were
very pleased with the quality of candidates.”
In addition, 27
participants from the program’s first year are continuing their studies.
The Institute
co-sponsors the ADS program with more than 70 of the nation’s largest
accounting firms, 41 colleges and universities and 40 state CPA societies.
The program aims to create 120 additional Ph.D.s in accounting by 2016 and
has raised more than $17 million to support that goal.
“The program in
year one has already exceeded what we expected,” said Denny Reigle, AICPA
director of academic and career development and secretary of the AICPA
Foundation, which administers the program.
Particularly encouraging was the depth of public accounting experience in
tax and auditing among the latest crop of candidates, Reigle said. Besides
having such experience, applicants must be U.S. citizens or permanent
residents committed to a career in teaching and research in auditing or tax.
See
adsphd.org for details.
Jim Hasselback's threads on accountancy doctoral programs ---
http://www.jrhasselback.com/AtgDoctInfo.html
Bob Jensen's threads on accountancy doctoral programs ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
From:
AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU]
On Behalf Of David Albrecht
Sent: Wednesday, February 03, 2010 4:50 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Miller and Bahnson on 150-hour requirement
Paul
Miller and Paul Bahnson, who write a monthly column for Accounting Today,
have just had released their Feb. 15 column, Deja vu all over again.
Interesting, provocative, and something that I was readying to write about.
I totally agree with Miller and Bahnson, and have been touting the article
in some recent Tweets.
http://www.webcpa.com/ato_issues/24_2/the-spirit-of-accounting-d-53161-1.html
David Albrecht
The Spirit of Accounting: Deja vu all over
again
(02/15/2010)
By By Paul B.W. Miller and Paul R. Bahnson
While reading a recent article, Paul B. was struck by an
uncanny similarity between the push to change the profession's educational
requirements that started more than 20 years ago and current efforts by the
large auditing firms and the American Institute of CPAs to promote
International Financial Reporting Standards "convergence." (In this context,
"convergence" means, "Dump the Financial Accounting Standards Board and put
the International Accounting Standards Board in charge.")
As near as we can tell, these two initiatives are pretty much alike, but not
in a good way. This D
The article ("The Ongoing Debate about the Impact of the 150-Hour Education
Requirement on the Supply of Certified Public Accountants," by Lawrence
Gramlin and Andy Rosman, Issues in Accounting Education, November 2009)
provides a perspective on the effects of the 150-hour requirement. It's not
exactly a newsworthy scoop that there has been a decline in new entrants to
accounting in recent years. The study and several others done earlier
examine whether this trend is linked to the change in the education
requirements. This most recent study, which looked at the supply side of the
equation (student enrollments), instead of demand (new jobs), found no
statistical relationship contradicting the findings of several earlier ones.
Mixed evidence like this generally spawns more research and eventually the
scale tips to one side or the other.
KNOWING VS. PROVING
In the meantime, it's human nature to side with a position that makes sense
through one's own experience. Ours says that the change in educational
requirements and the shrinking supply of new accountants are inextricably
intertwined.
The 150-hour requirement was an up-close-and-personal issue for us. For one
thing, we have a combined 60-plus years of helping students prepare to join
the accounting profession. Today's students in Utah are totally conscious
that the additional year of study imposes significant added cost at the very
time that tuition bills are rising far faster than inflation and when
financial aid (besides loans) has fallen victim to budget-cutting.
For many, it's a real hardship to add another year of school and student
loans, instead of harvesting a year's salary as a new graduate. Of course,
their sacrifice would be only a temporary nuisance if their employers added
enough compensation to make the additional education worthwhile. However,
salary surveys consistently show almost no increment is paid for the extra
education. For well-informed students, this lack of return for the upfront
cost undoubtedly makes other pastures (majors) look a whole lot greener.
OTHER FLAWS
The second reason this issue is personal lies in our connection to the
origins of the 150-hour requirement. In the 1970s, the University of Utah
created (at notable cost and effort) a five-year program in accounting.
There was every reason to expect it to do well, except for the unfortunate
fact that less than 10 people signed up in each of the first two years.
(Paul M. was a member of that project development team, and Paul B. was one
of his doctoral students in the 1980s.)
Rather than confront the truth that there was no demand for the product (the
big firms said that they wanted the graduates, but then paid them only about
5 percent more per year than they paid four-year graduates), the founder set
out to lobby the state legislature to pass a law that would require all CPA
Exam candidates in Utah to have completed 150 credit hours. After four years
of hounding, the legislators said yes. The founder started to push this
solution in search of a problem to other schools around the country that
were also embarrassingly short of students for their own new five-year
programs. It spread like wildfire and reached its zenith when he became
chair of the AICPA's Education Committee and got the requirement voted in by
members in 1988.
One key statistic used to persuade legislators and the AICPA was that
five-year students passed the CPA Exam at a higher rate than four-year
students. What no one seemed to realize was that the valid comparison would
be between five-year grads and four-year grads with one year's experience.
Another troubling but ignored statistic was that insignificant salary
premium mentioned earlier. Yet another was that five-year graduates still
went through the same initial training and worked alongside four-year
graduates.
Paul M. published a paper in Issues in Accounting Education in 2003 that
used the institute's own statistics to show that each new job made available
for five-year graduates was offset by two-and-a-half fewer jobs in public
accounting for four-year graduates. Even more stunning was the result that
over 1992-2000, the number of Master's degrees increased by only 910, while
the number of Bachelor's degrees plummeted by 16,205. (That's a ratio of
nearly 18 lost undergraduate degrees for every added graduate degree.)
Still another problem is that schools offering five-year degrees created
additional graduate offerings by paring back their undergraduate offerings.
This arrangement meets the needs of students who want to become CPAs, but
severely handicaps those who leave universities with four-year degrees
seeking work in corporate, governmental or small-business settings.
Who is more valuable to an employer, someone who has spent five years in
higher education or someone who attends a university for four years and then
works a year in the real world? Well, duh ... .
All these reasons compelled us to oppose the move way back then and even
down to this day, as some Colorado CPAs are trying yet again to create a
150-hour requirement in that state, even though it has been imposed twice
before and rescinded both times.
There are other issues as well (such as making CPA certificates less
accessible to minorities, disabled individuals and others who cannot readily
afford another year of tuition), but we think we've illustrated why it's
appropriate to have deep-seated reservations about increased education
requirements.
Continued:
Jensen Comment
I’m dubious of the following quotation:
“Who
is more valuable to an employer, someone who has spent five years in higher
education or someone who attends a university for four years and then works
a year in the real world? Well, duh”
Paul Miller and Paul Bahnson
Duh yourself! What’s necessarily better about only one year
in the real world?
Many professions (engineering, architecture, law, medicine,
etc.) find great value in having more years of college. Why is the accounting
profession such a low-life profession that it only finds benefit in only
requiring a minimal bachelors degree?
I say baloney to turning the clock back. The CPA
examination passage rate should be completely ignored when valuing the benefits
against cost of requiring added graduate study to be a licensed CPA. The CPA
examination is a textbook exam that is primarily passed on taking intense
coaching courses or their equivalent outside the college accounting programs. I
had a student who once passed all four parts of the CPA examination in one
sitting without ever having had a single course in accounting. He could not
afford going back to college after earning a philosophy degree at Colby College
so I loaned him some old Gleim CPA review books. That plus determination and a
good brain is all it took!
More importantly, many, many young people starting out as
accountants in CPA firms and business firms move on into other areas like
management and entrepreneurship. The added communication skills and graduate
course content may be invaluable for both advancement and career change as well
as improving the odds of becoming a partner in a CPA firm. Well, duh . . .
What’s really wrong about the 150-hour requirement is that
it’s not a requirement to have the equivalent of three-full time years of
graduate school modeled after a law degree. Our professionals in this
increasingly complicated world need more education, not less!
Bob Jensen
Cloud Computing ---
http://en.wikipedia.org/wiki/Cloud_computing
QuickBooks Will Cloud-Host Clients' Software and Data Files
Intuit has its head in the clouds this week as it
publicly announces a new hosting program for QuickBooks, allowing QuickBooks
professionals to host their clients' software and data files. This month we also
have several useful tips to share with you. These tips, written by QuickBooks
experts, are designed to help you make the most of your QuickBooks experience.
As always, we welcome your comments and suggestions.
Gail Perry, Managing Editor of the AccountingWeb, email message, February
19, 2010
http://www.accountingweb.com/topic/technology/intuit-introduces-hosting-program-quickbooks
Bob Jensen's threads on WebLedgers are at
http://www.trinity.edu/rjensen/webledger.htm
Data Visualization and Twitter
"Four Ways of Looking at Twitter," by Scott Berinato, Harvard Business
School Publishing Blog, February 18, 2010 ---
http://blogs.hbr.org/research/2010/02/visualizing-twitter.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Data visualization is cool. It's also becoming ever
more useful, as the vibrant online community of data visualizers
(programmers, designers, artists, and statisticians — sometimes all in one
person) grows and the tools to execute their visions improve.
Jeff
Clark is part of this community. He, like many
data visualization enthusiasts, fell into it after being inspired by pioneer
Martin Wattenberg's
landmark treemap that visualized the stock market.
Clark's latest work shows much promise. He's built
four engines that visualize that giant pile of data known as Twitter. All
four basically search words used in tweets, then look for relationships to
other words or to other Tweeters. They function in almost real time.
"Twitter is an obvious data source for lots of text
information," says Clark. "It's actually proven to be a great playground for
testing out data visualization ideas." Clark readily admits not all the
visualizations are the product of his design genius. It's his programming
skills that allow him to build engines that drive the visualizations. "I
spend a fair amount of time looking at what's out there. I'll take what
someone did visually and use a different data source. Twitter Spectrum was
based on things people search for on Google. Chris Harrison did interesting
work that looks really great and I thought, I can do something like that
that's based on live data. So I brought it to Twitter."
His tools are definitely early stages, but even
now, it's easy to imagine where they could be taken.
Take
TwitterVenn. You
enter three search terms and the app returns a venn diagram showing
frequency of use of each term and frequency of overlap of the terms in a
single tweet. As a bonus, it shows a small word map of the most common terms
related to each search term; tweets per day for each term by itself and each
combination of terms; and a recent tweet. I entered "apple, google,
microsoft." Here's what a got:
Continued in article (note the Venn diagram)
Bob Jensen's threads on multivariate data visualization (a favorite topic of
mine)
Visualization of Multivariate Data (including faces) ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm
Bob Jensen's threads on Twitter are at
http://www.trinity.edu/rjensen/ListservRoles.htm
"Youth Teach Financial Literacy at Microsoft in NYC," by Octaviar
Latty, The Huffington Post, February 12, 2010 ---
http://www.huffingtonpost.com/ryan-mack/youth-teach-financial-lit_b_462265.html
On February 12, high school students in the
tri-state area were afforded an opportunity to experience an enriching
workshop at Microsoft in New York City. Aside from learning their usual
curriculum, students as young as eleven years of age, attended a series of
seminars focusing on personal growth and career development.
This event was designed to help students formulate
and perfect a 3-minute presentation commonly known as an "elevated pitch."
Throughout the morning, towards the mid-afternoon, the students would have
acquired the basic skill set necessary to compact a brief and marketable
speech to any audience. With an incentive of two X Box game systems,
students took out their pens and notepads and tediously focused on the
speakers' words and advice.
At the start of the event, CNN Commentator and
Community Activist, Ryan Mack, introduced the young crowd to several
financial empowerment principles as well as functional information about
maintaining credits scores and budgeting. All About Business, a versatile
group of college students, founded by Mack, also accompanied him in speaking
to the students.
Later on in the workshop, the association covered
another segment that introduced the seven steps to financial freedom. All
About Business Community Service Director, Kareem Hertzog said, "This was
another great opportunity for us to spread financial literacy to the youth
and as we continue to expand, we hope to captivate a global presence and
really have an impact on people's lives."
Microsoft program coordinator, Gina Davis, mainly
directed attention to the advantages of internet usage. Davis explained how
the internet can be used as a marketing platform and urged the students to
market themselves in positive ways. In an effort to teach youth how to stay
mindful on social networking sites, Davis also highlighted cases that dealt
with child pornography and child abduction.
Davis said, "I am very excited and encouraged by
all the participation of the high schools that came out today and I hope
they take something from this experience."
Author, scholar, and entrepreneur, Randall Pinkett
illustrated the vital role and value of education by sharing his success
story. His goal was to motivate the audience to be producers of technology
opposed to consumers of technology.
"Necessity is the mother of invention," said
Pinkett as he enlightened the students about their innate ability to see
opportunities other people don't see.
After the speakers left words of encouragement
among the students, they had a chance to work on their individual pitches
within smaller groups to efficiently incorporate what they learned. As the
students stood lined in the front of the convention room, their
presentations where consecutively heard by Microsoft personnel and other
guests of the event. Everyone had an opportunity to participate and share
their accomplishments and goals for the future.
Student, Gabrielle Louis, asserts, "I never
realized how useful technology was until today. Even if I don't go home with
the X Box, I will still leave knowing how important I am to society and the
potential I have to change the world."
Written By Octaviar Latty, Freshman at York College and Reporter for
Ryan Mack's Youth Financial Literacy Group All About Business
Bob Jensen's threads on personal finance are at
http://www.trinity.edu/rjensen/bookbob1.htm#InvestmentHelpers
2010 Update on Creative Accounting and Managed Earnings
From The Wall Street Journal Accounting Weekly Review on February 19,
2010
For Some Firms, a Case of 'Quadrophobia'
by: Scott
Thurm
Feb 13, 2010
Click here to view the full article on WSJ.com
TOPICS: Accounting
Changes and Error Corrections, Accounting Irregularities, Allowance For
Doubtful Accounts, Bad Debts, Earnings Forecasts, Earnings Management,
Earnings Per Share, Earnings Quality
SUMMARY: A
new study by Stanford University-affiliated researchers finds evidence
"...suggesting [that] many companies tweak quarterly earnings to meet
investor expectations, and the companies that adjust most often are more
likely to restate earnings or be charged with accounting violations."
CLASSROOM APPLICATION: The
article covers earnings management and accounting research methods to
uncover it.
QUESTIONS:
1. (Introductory)
Based on the description in the article, what analysis did the Stanford
University-affiliated researchers undertake? What did they find?
2. (Introductory)
Why is this academic study of interest to WSJ readers?
3. (Advanced)
Explain how management can use accounting discretion in the two areas
mentioned in the article--inventory valuation and loan or receivable loss
valuation allowances.
4. (Advanced)
Refer to your answer to the question above. Specifically state how a
judgment might be made in considering the 10th place digit in an earnings
per share calculation.
5. (Introductory)
What are the accounting requirements when a company finds an error in past
reporting? How have the authors associated reporting of error corrections
with previous patterns in earnings per share calculations?
6. (Advanced)
Again refer to your answer to the question above. Why is this pattern of
interest to investors, creditors, and other financial statement users?
Reviewed By: Judy Beckman, University of Rhode Island
Bob Jensen's threads on earnings management are at
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
February 18, 2010 message from David Albrecht
[albrecht@PROFALBRECHT.COM]
I"m sending two links. Teh first is to the WSJ
write-up. The second is to the paper.
http://online.wsj.com/article/SB10001424052748704479704575061481908470618.html?KEYWORDS=quadrophobia
For Some Firms, a Case of 'Quadrophobia'
Study Suggests Companies Tweak Per-Share Earnings to Meet Expectations;
4 Is a Lonely Number By SCOTT THURM A new study provides further
evidence suggesting many companies tweak quarterly earnings to meet
investor expectations, and the companies that adjust most often are more
likely to restate earnings or be charged with accounting violations. The
study, which examined nearly half a million earnings reports over a
27-year period, reached its conclusion by going beyond the standard
per-share earnings results that are reported in pennies and analyzing
the numbers down to the 10th of a cent. That deeper look showed that
companies tend to nudge their earnings numbers up by a 10th of a cent or
two. That lets them round results up to the highest cent. Investors
often snap up shares of companies that beat earnings expectations, even
by a cent, and, likewise, sell off shares of companies that don't make
their numbers. "Managements will exercise accounting discretion to try
to make their numbers look better for Wall Street … in a number of
subtle ways," said Joseph Grundfest, one of the study's authors. Mr.
Grundfest is a law professor at Stanford University and a former member
of the Securities and Exchange Commission. Mr. Grundfest and co-author
Nadya Malenko, a doctoral candidate at the Stanford Graduate School of
Business, said the accounting maneuvers may be legal, even when they
have the effect of boosting reported earnings per share. Most of the
tactics involve judgment calls, such as the value of inventory or the
amount that should be set aside for loans that won't be repaid. The
Securities and Exchange Commission declined to comment.
The authors' conclusions rest on a simple piece
of statistical analysis. When they ran the earnings-per-share numbers
down to a 10th of a cent, they found that the number "4" appeared less
often in the 10ths place than any other digit, and significantly less
often than would be expected by chance. They dub the effect "quadrophobia."
The amounts of money involved can be small. For the typical company in
the study, an increase of $31,000 in quarterly net income would boost
earnings per share by a 10th of a cent. But the overall effect is
striking. In theory, each digit should appear in the 10ths place 10% of
the time. After reviewing nearly 489,000 quarterly results for 22,000
companies from 1980 to 2006, however, the authors found that "4"
appeared in the 10ths place only 8.5% of the time. Both "2" and "3" also
are underrepresented in the 10ths place; all other digits show up more
frequently than expected by chance. Companies tracked by Wall Street
analysts are less likely to report "4s" in the 10ths place of an
earnings-per-share figure particularly when their results are close to
analysts' predictions. Companies with high price-to-earnings ratios also
report fewer "4s." Continued:
Here's the paper.
http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1521272_code254274.pdf?abstractid=1474668
"Quadrophobia: Strategic Rounding of EPS Data ," by Joseph Grundfest and
Nadya Malenko, SSRN, October 14, 2009 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1474668
Bob Jensen's threads on earnings management and creative accounting are at
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
All this now begs the question of how managers of
corporations are adapting to new accounting/financing rules with innovative
sucker punches
Lately on the AECM, debates have recently taken place about what the real
purpose is of standard setters like the IASB, FASB, GASB, SEC, PCAOB, etc.. I
think a major purpose is to make it more difficult for managers of public
corporations and governments to throw sucker punches at the outsiders who invest
in their organizations ---
http://accountingonion.typepad.com/theaccountingonion/2010/01/financial-statement-presentation-a-promising-new-tack.html
The United States is doing an awful job controlling sucker punches in
governmental accounting and auditing so I will pass over this one other than to
point out where you can read about it and weep for the suckers ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
The SEC is doing an awful job in controlling sucker punches in financial
markets ---
http://www.trinity.edu/rjensen/FraudRotten.htm
This is discussed in the article below quoted from The Economist.
I like to think about accountancy standard setting like I think about prize
fighting or Olympic boxing. In prize fighting rules are established to prevent
such things as cheating about the weight classifications of fighters and
prevention of putting steel clamps inside boxing gloves. There are also rules to
prevent sucker punches such as hitting below the belt and before or after the
bell rings for each round. As fighters take advantages of weaknesses in the
rules, rule makers issue new rulings such as rulings on performance enhancing
drugs.
In the roaring technology firm era of the 1990s, there were many startup
companies that took advantages of weaknesses in FASB and SEC standards,
particularly weaknesses on newer ploys to mislead investors with sucker punches
in revenue accounting ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
In the roaring 1990s, companies like Enron threw sucker punches due to
inadequate accounting standards for newer types of financing contracts such as
exotic
derivative financial instruments and
special-purpose entities ---
http://www.trinity.edu/rjensen/FraudEnron.htm
Managers particularly like to sucker punch in the area of creative accounting
and earnings management ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
The FASB made significant progress thus far in the 21st Century in setting
rules against some of the sucker punches that were invented in the roaring
1990s. The IASB is still trying to catch up, and delays in catching up for some
sucker punches like securitization accounting are delaying the SEC roadmap for
eliminating US GAAP and replace it with international IASB standards for
preventing sucker punches.
All this now begs the question of how managers of
corporations are adapting to new accounting/financing rules with
innovative sucker punches.
How firms fool equity analysts
Stockpickers suckered Chief executives pull the wool over analysts’ eyes, again
The Economist, February 6, 2010 Page 72
http://www.economist.com/businessfinance/displaystory.cfm?story_id=15464463
HOW do you pump up the value of your company in
these difficult times? One tried and tested way is to hoodwink equity
analysts, according to a new study* of 1,300 corporate bosses, board
directors and analysts.
The authors found that chief executives commonly
respond to negative appraisals from Wall Street by managing appearances,
rather than making changes that actually improve corporate governance:
boards are made more formally independent, but without actually increasing
their ability to control management. This is typically done by hiring
directors who, although they may have no business ties to the company, are
socially close to its top brass. According to James Westphal, one of the
study’s co-authors, some 45% of the members of nominating committees on the
boards of large American firms have “friendship” ties to the boss—though
this varies widely from company to company.
The tactic pays off with appreciably higher
ratings. At firms that make a strenuous effort to persuade analysts that
such board changes have boosted independence, and thus made management more
accountable, the likelihood of a subsequent stock upgrade rises by 36%, the
study concluded. The chance of a downgrade, meanwhile, falls by 45%.
Why do analysts swallow this self-interested
narrative? Respondents acknowledged that social ties could undermine
independence, but most said they do not have the time to look into such
issues. It would help if companies disclosed such relationships in their
standard company literature, suggests Mr Westphal. He thinks they should
also list shared appointments—when the boss and a director sit together on
another firm’s board.
Depressingly, these market-distorting shenanigans
are part of a pattern. An earlier study found that public companies commonly
enjoy lasting share-price gains from plans that please analysts, such as
share buybacks and long-term incentive schemes for executives, even when
they fail to follow through on announcements. Another concluded that the
further a firm’s profits fall below consensus forecasts, the more favours
its managers bestow on analysts—such as recommending them for jobs and even
securing club memberships for them—and the lower the likelihood of a further
downgrade. If investors rated analysts, those taken in by such blatant
attempts at manipulation would surely earn a “sell”.
The MAAW site has two special links for fraud
and creative accounting:
Professor Martin places every
article and book he finds related to fraud on the following pages:
Auditing Bibliography ---
http://maaw.info/AuditingArticles.htm
Creative Accounting
Bibliography ---
http://maaw.info/CreativeAccountingMain.htm
Bob Jensen's threads on the controversies of accountancy standard setting
are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Bob Jensen's threads on accounting professionalism or lack thereof are at
http://www.trinity.edu/rjensen/fraud001.htm
Bob Jensen's threads on the biggest sucker punches
in the history of the world are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on the
Enron/Andersen scandals are at
http://www.trinity.edu/rjensen/fraud.htm
Bob Jensen's SPE threads are at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Bob Jensen's threads on accounting
theory are at
http://www.trinity.edu/rjensen/theory.htm
Bob Jensen's threads on the state of
accountancy can be found at
http://www.trinity.edu/rjensen/FraudConclusion.htm
Bob Jensen's threads are at
http://www.trinity.edu/rjensen/threads.htm
Ostriches Bury Their Heads in the Sand and Drop Big, Hard Shelled Eggs on
the Ground
They're also prehistoric looking and acting
"The SEC and Some Sort of Ostrich Syndrome," by David Albrecht, The
Summa, February 19, 2010 ---
http://profalbrecht.wordpress.com/2010/02/19/the-sec-and-some-sort-of-ostrich-syndrome/
Should UK GAAP be Replaced by IFRS?
"POLICY PROPOSAL - THE FUTURE OF UK GAAP: RESPONSES PUBLISHED," by Andy
Lymer, Accounting Education News, February 18, 2010 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=150775
The Accounting Standards Board (ASB) of the FRC has
received in excess of 150 high quality responses to its policy proposal:
‘The Future of UK GAAP.’ The responses have been posted on its website.
The proposal was issued in August 2009 and sets out
recommendations for the future reporting requirements for UK and Irish
entities, with an emphasis on moving UK GAAP towards an international
framework.
The responses demonstrate a divergence of views on
many important issues and the ASB will have a challenging task in analysing
them and in coming to firm recommendations.
Continued in article
Bob Jensen's threads on controversies in accounting standard setting ---
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
From The Wall Street Journal Accounting Weekly Review on February 19,
2010
Motorola Sets Split For Early Next Year
by: Roger
Cheng
Feb 12, 2010
Click here to view the full article on WSJ.com
TOPICS: Corporate
Taxation, Dividends, Spinoffs, Tax Laws, Taxation
SUMMARY: The
article describes the split of Motorola into two separate corporations as a
tax free reorganization transaction. "Motorola...will group together its
core handset unit with the unit that makes television set-top boxes, placing
them under co-Chief Executive Sanjay Jha....[and] fellow co-CEO Greg Brown
would oversee a separate company selling two-way radios, bar code scanners
and gear for telecommunications carriers."
CLASSROOM APPLICATION: The
article is useful in corporation taxation courses covering reorganizations.
QUESTIONS:
1. (Introductory)
What is the business purpose for the split of Motorola into two separate
corporations?
2. (Advanced)
Is this business purpose important for assessing tax treatment of this
transaction? Explain.
3. (Introductory)
How are Motorola's assets to be divided among the two corporations that are
party to this reorganization? Explain all that you can identify from the
description in the article.
4. (Advanced)
Co-Chief Executive Sanjay Jha stated that "the split would add value to both
companies." Does this statement indicate that a taxable gain might stem from
this Motorola reorganization? Explain.
5. (Advanced)
Corporate reorganizations are usually described according to the tax code
sub-section within §368 (a) 1 under which they comply with requirements for
tax free treatment. Under which of these sub-sections do you think the
Motorola transaction complies for tax free treatment? Explain your answer.
6. (Advanced)
To whom is the transaction non-taxable, the corporation, its shareholders,
or both?
7. (Advanced)
What tax code section identifies the tax treatment to the Motorola
shareholders receiving the dividend of shares in the new corporation?
Reviewed By: Judy Beckman, University of Rhode Island
Five Online Managerial Accounting Cases
Our AECM friend Richard Sansing (Dartmouth) provides four of his own
managerial accounting cases free on the Web. I found them linked at the AAA
Commons
http://commons.aaahq.org/posts/af3f42724f
Users might get especially high on the sour mash case.
Richard also shares his managerial accounting syllabus at
http://commons.aaahq.org/posts/8bf3b52bb2
Thank you for sharing Richard.
Below is another managerial accounting case shared by the WSJ.
From The Wall Street Journal Accounting Weekly Review on February 5,
2010
Teaching Case for Cost-Profit-Volume Analysis and Foreign Currency
Nintendo Net Falls Despite 'Robust' Holiday Sales
by: Daisuke
Wakabayashi
Jan 28, 2010
Click here to view the full article on WSJ.com
TOPICS: Accounting,
Contribution Margin, Cost-Volume-Profit Analysis, Financial Accounting,
Financial Statement Analysis, Fixed Costs, Managerial Accounting, Ratios,
Variable Costs
SUMMARY: Nintendo
Co. said year-end holiday sales were "robust," suggesting that its Wii game
console had regained its footing after a slowdown in demand, though a strong
yen and price cuts continued to push down the company's profit. To cope with
slowing demand for the Wii, Nintendo cut prices by 20% to $200 ahead of the
holiday shopping season. Revenue also suffered from a strengthening of the
yen against the euro and U.S. dollar, resulting in lower overseas income
when converted into yen terms.
CLASSROOM APPLICATION: The
example in this article offers a case study in the analysis of pricing,
volume, variable costs, and financial statement analysis. It also offers an
example of how foreign currency exchange rates can affect profitability.
Nintendo's decision to decrease pricing generated more volume, but
profitability decreased. Students will see how decision-making can come to
life with this real-life, current case study.
QUESTIONS:
1. (Introductory)
Please explain contribution margin analysis. How does it work, and what
value does it offer? What are the differences between a conventional income
statement and a contribution margin income statement?
2. (Introductory)
Use the contribution margin analysis and income statement to show what
happened with Nintendo's financial results. How were variable and fixed
costs affected in Nintendo's plan? What does the contribution margin income
statement illustrate that is not as evident in a regular income statement?
3. (Introductory)
What is cost-volume-profit analysis? What are some of the tools? What
valuable information can a manager gain from this type of analysis? Apply
CVP analysis tools to the Nintendo situation. What are some of your
observations?
4. (Advanced)
What financial statement analysis tools or ratios could Nintendo management
use to analyze the causes for the decrease in profitability? How could
management use these tools to make changes and forecasts for the future?
5. (Advanced)
What non-financial performance measures should management use to analyze
company performance? What competitive factors should they be considering?
What do you project for the future of the industry? How should your
projections be integrated into Nintendo's planning, forecasting, and
management?
6. (Advanced)
How is it that a firm can increase its sales volume, but experience a
decrease in profitability? What steps can managers take to insure that
increased profitability results increases in sales volume? Was there
anything Nintendo management should have done differently? What should they
do for the future?
7. (Advanced)
Why would management decide to cut the price of its product? What results
was management hoping to achieve? What other factors are at play that could
hinder that goal?
8. (Advanced)
What is the impact of the foreign currency exchange rates on Nintendo's
profitability? Under what conditions do exchange rates increase
profitability? In what ways could they hurt profitability? How could
international firms manage this risk?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Nintendo Net Falls Despite 'Robust' Holiday Sales," by Daisuke Wakabayashi,
The Wall Street Journal, January 28, 2010 ---
http://online.wsj.com/article/SB10001424052748704878904575030403095545036.html?mod=djem_jiewr_AC_domainid
Nintendo Co. said year-end holiday sales were
"robust," suggesting that its Wii game console had regained its footing
after a slowdown in demand, though a strong yen and price cuts continued to
push down the company's profit.
Nintendo said group net income was 192.6 billion
yen ($2.14 billion) for the nine months ended Dec. 31, down 9.4% from a
profit of 212.52 billion yen a year earlier. Revenue fell 23% to 1.182
trillion yen, while operating profit fell 41% to 296.66 billion yen.
To cope with slowing demand for the Wii, Nintendo
cut prices by 20% to $200 ahead of the holiday shopping season. Revenue also
suffered from a strengthening of the yen against the euro and U.S. dollar,
resulting in lower overseas income when converted into yen terms.
The Wii remains the top seller among the current
generation of game consoles, outpacing sales of Microsoft Corp.'s Xbox 360
and Sony Corp.'s PlayStation 3. However, demand started to slow last year
and competitors, especially Sony's PS3, are closing the gap.
Nintendo had a strong holiday quarter boosted by
the introduction of "New Super Mario Bros. Wii," which sold 10.6 million
units world-wide after its November release.
Hiroshi Kamide, analyst at KBC Securities, said
Nintendo can expect brighter prospects with the release of software such as
the new Mario Bros. game and coming sequels of game franchises such as
"Zelda" and "Metroid" later this year.
"It really demonstrates that once Nintendo puts out
its own software, its fortunes turn around pretty quickly," Mr. Kamide said.
For its fiscal year ending March 31, Nintendo said
it will keep its current forecast for a net profit of 230 billion yen on
revenue of 1.5 trillion yen. Analysts polled by Thomson Reuters are
forecasting a full-year net profit of 226.52 billion yen.
Nintendo on Thursday didn't release figures for the
quarter ended Dec. 31, following the company's usual practice of not doing
so until the day after releasing year-to-date figures. Based on Nintendo's
results earlier in the fiscal year, its fiscal third-quarter results appear
to have fallen from the year-earlier period but surpassed expectations of a
profit of 120.5 billion yen from analysts polled by Thomson Reuters.
The company kept its console sales targets
unchanged for the year. It still aims for Wii sales of 20 million units. In
the previous fiscal year, Wii sales totaled 26 million units.
It expects Wii software sales to reach 192 million
units in the fiscal year, compared with a previous estimate of 180 million,
but Nintendo says the rise is the result of how it categorizes software it
sells bundled with hardware versus a substantive difference in its view of
the market.
Nintendo's sales projection for DS handheld
consoles is pegged at 30 million units, unchanged from the company's
previous forecast. The company continues to expect DS software-title sales
of 150 million units.
In a comment on the AAA Commons, the open sharing James Martin states the
following:
For instructional cases and other case studies see
http://maaw.info/CaseStudiesMain.htm
In that section of MAAW you will find a case
bibliography along with IMA cases and Harvard Business cases.
Thank you for sharing Jim!
Bob Jensen's threads on managerial accounting are at
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting
Sarbanes-Oxley Act (Sarbox, SOX) ---
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act
Sarbanes–Oxley Section 404: Assessment of internal control ---
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Sarbanes.E2.80.93Oxley_Section_404:_Assessment_of_internal_control
The most contentious aspect of SOX is Section 404,
which requires management and the external auditor to report on the adequacy
of the company's internal control over financial reporting (ICFR). This is
the most costly aspect of the legislation for companies to implement, as
documenting and testing important financial manual and automated controls
requires enormous effort.
Under Section 404 of the Act, management is
required to produce an “internal control report” as part of each annual
Exchange Act report. See
15 U.S.C. § 7262.
The report must affirm “the responsibility of
management for establishing and maintaining an adequate internal control
structure and procedures for financial reporting.”
15 U.S.C. § 7262(a).
The report must also “contain an assessment, as of the
end of the most recent fiscal year of the
Company, of the
effectiveness of the internal control structure and procedures of the issuer
for financial reporting.” To do this, managers are generally adopting an
internal control framework such as that described in
COSO.
To help alleviate the high costs of compliance,
guidance and practice have continued to evolve. The
Public Company Accounting Oversight Board (PCAOB)
approved
Auditing Standard No. 5 for public accounting
firms on July 25, 2007.
This standard superseded Auditing Standard
No. 2, the initial guidance provided in 2004. The SEC also released its
interpretive guidance on June 27, 2007. It is
generally consistent with the PCAOB's guidance, but intended to provide
guidance for management. Both management and the external auditor are
responsible for performing their assessment in the context of a
top-down risk assessment, which requires
management to base both the scope of its assessment and evidence gathered on
risk. This gives management wider discretion in its assessment approach.
These two standards together require management to:
- Assess both the design and operating
effectiveness of selected internal controls related to significant
accounts and relevant assertions, in the context of material
misstatement risks;
- Understand the flow of transactions, including
IT aspects, sufficient enough to identify points at which a misstatement
could arise;
- Evaluate company-level (entity-level)
controls, which correspond to the components of the
COSO framework;
- Perform a fraud risk assessment;
- Evaluate controls designed to
prevent or detect fraud, including management
override of controls;
- Evaluate controls over the period-end
financial reporting process;
- Scale the assessment based on the size and
complexity of the company;
- Rely on management's work based on factors
such as competency, objectivity, and risk;
- Conclude on the adequacy of internal control
over financial reporting.
SOX 404 compliance costs represent a tax on
inefficiency, encouraging companies to centralize and automate their
financial reporting systems. This is apparent in the comparative costs of
companies with decentralized operations and systems, versus those with
centralized, more efficient systems. For example, the 2007 FEI survey
indicated average compliance costs for decentralized companies were $1.9
million, while centralized company costs were $1.3 million.[31]
Costs of evaluating manual control procedures are dramatically reduced
through automation.
Sarbanes–Oxley 404 and smaller public companies ---
Click Here
The cost of complying with SOX 404 impacts smaller
companies disproportionately, as there is a significant fixed cost involved
in completing the assessment. For example, during 2004 U.S. companies with
revenues exceeding $5 billion spent 0.06% of revenue on SOX compliance,
while companies with less than $100 million in revenue spent 2.55%.
This disparity is a focal point of 2007 SEC and
U.S. Senate action.[33] The PCAOB intends to issue further guidance to help
companies scale their assessment based on company size and complexity during
2007. The SEC issued their guidance to management in June, 2007.
After the SEC and PCAOB issued their guidance, the
SEC required smaller public companies (non-accelerated filers) with fiscal
years ending after December 15, 2007 to document a Management Assessment of
their Internal Controls over Financial Reporting (ICFR). Outside auditors of
non-accelerated filers however opine or test internal controls under PCAOB
(Public Company Accounting Oversight Board) Auditing Standards for years
ending after December 15, 2008. Another extension was granted by the SEC for
the outside auditor assessment until years ending after December 15, 2009.
The reason for the timing disparity was to address the House Committee on
Small Business concern that the cost of complying with Section 404 of the
Sarbanes–Oxley Act of 2002 was still unknown and could therefore be
disproportionately high for smaller publicly held companies. On October 2,
2009, the SEC granted another extension for the outside auditor assessment
until fiscal years ending after June 15, 2010. The SEC stated in their
release that the extension was granted so that the SEC’s Office of Economic
Analysis could complete a study of whether additional guidance provided to
company managers and auditors in 2007 was effective in reducing the costs of
compliance. They also stated that there will be no further extensions in the
future.
"Fraud Case Casts Doubt over Sarbox Exemption: An alleged $31
million fraud could quash claims that internal-controls checks don't matter,"
by Sarah Johnson - CFO Magazine, February 1, 2010 ---
http://www.cfo.com/article.cfm/14470842/c_14470994?f=magazine_alsoinside
If allegations that a finance executive pilfered as
much as $31 million over five years from Koss Corp. prove true, it won't
just be bad news for Koss: it may also deal a blow to those who hope that
smaller, publicly traded companies will be exempted from full compliance
with the Sarbanes-Oxley Act.
The well-known manufacturer of headphones reported
$38.3 million in sales last year, so a $31 million theft, even over five
years, suggests some serious problems with internal controls. Koss plans to
restate its financials for the past two years and may go back as far as 2005
to make corrections. Koss's stock spent 21 days in limbo after Nasdaq halted
its trading toward the end of December. At least one law firm has opened an
investigation for a possible shareholder lawsuit.
Koss fired its accounting firm, Grant Thornton, on
New Year's Eve. The auditor responded by pointing out that Koss is among
those companies not yet subject to Sarbox's Section 404(b), which requires
an auditor sign-off of internal controls. "The company did not engage Grant
Thornton to conduct an audit or evaluation of internal controls over
financial reporting," says a spokesperson for the accounting firm.
"Establishing and maintaining effective internal control is management's and
the board's responsibility."
Koss's management claims the company did have
effective internal controls, but the management report enclosed in its most
recent 10-K acknowledges in boilerplate language that "because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected."
The criminal case against Sujata "Sue" Sachdeva,
Koss's former vice president of finance and secretary, alleges she used more
than $4.5 million of the company's money to buy clothing, furs, and jewelry
at various luxury stores in Milwaukee during the past two years. Following
those initial allegations, Koss has since disclosed that the extent of the
fraud may be worse; an internal investigation has uncovered additional
unauthorized transactions from as far back as five years ago that total more
than $31 million.
Gauging the Fallout While the Securities and
Exchange Commission has continually delayed the auditor-attestation portion
of Section 404 for nonaccelerated filers (companies with market caps below
$75 million), companies like Koss will finally have to get their auditors to
review their internal controls starting this summer (depending on their
fiscal year-end).
Or maybe not. The major regulatory-reform bill
passed by the House in mid-December would permanently exempt small
businesses from 404(b). Small-business proponents have pushed for the
exemption, saying audits of internal controls over financial reporting are
disproportionately costly and perhaps even unnecessary since, individually,
small companies represent only minuscule blips of total market
capitalization in the United States.
That exemption may disappear as the Senate works on
its version of the bill. Investor advocates certainly hope so. "Investors
believe that auditors' expertise can provide management with additional
perspective on the quality of its system of internal control, which can have
a positive impact on the quality of a company's financial reporting," wrote
four investor groups, including the CFA Centre for Financial Market
Integrity, in a recent letter to House members. The Koss case could bolster
such arguments.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/fraudUpdates.htm
Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/fraud001.htm
A Rainbow of Colored Eyeshades
This morning I'm reading a brochure from a friend (from Franconia, New
Hampshire) who put new siding our house. In the brochure he proudly announced
that he's now a
Certified Vinyl Siding Installer. I'm really proud of Chip, although I never
thought he had the best name for a siding installer. He's also the President of
his siding and roofing corporation. I'm glad he wasn't fully certified
when he sided our cottage. He probably charges a lot more now that he's VSI
Certified.
He was smart to get a certified technical skill and skip (a Chip-skip?)
having to study all those dead poets and philosophers.
Yesterday I advocated extending our 150-hour requirement (to sit for the CPA
Examination) to a full three years of accountancy graduate school, thereby
bringing the profession of accountancy more in line with the professions of law
and medicine. In the night I thought about this some more and came to the
conclusion that it's probably a terrible idea to require any college degree to
become a CPA.
- Consider the plight of Greg Green in Year 2024 after struggling through
four years of general education and three more years of accountancy graduate
school. He borrowed $280,000 inflated dollars to complete the undergraduate
degree and had to study chemistry, geology, philosophy, history, political
science, sociology, psychology, etc. Then he had to borrow $360,000 for
three graduate courses in accounting information systems, six courses in
FASB and IFRS standards, two courses in managerial accounting, three
specialized courses in cost accounting, three courses in business law, six
courses in ethics and professionalism, four courses in communications
skills, and a raft of elective courses in three years of study leading up to
Accountancy Degree diploma wrapped in a green eyeshade. No matter how much
college he's struggled with he's still as green as his eyeshade when he
takes his first job at PwC.
- Now consider the better choice made by Olivia Orange in Year 2016. She
didn't have to borrow a dime because right after high school she commenced
as a full-time apprentice in the PwC Financial Derivatives Auditing
Division. Her goal from the start was to become a Certified Hedge
Accountant. She plunged into ten years of full time on-the-job
apprenticeship experience and took 20 very intense and highly specialized
online training courses in derivative financial instruments contracting and
hedge accounting. She not only memorized the 15,063-page IAS 39 backwards
and forwards, she deeply understands every single contract mentioned in
those very technical accounting standards. When Olivia Orange completed a
very, very tough certification examination in this specialty she earned her
orange eyeshade and is far more valuable as a hedge accounting auditor than
is Greg Green who knows almost nothing about IAS 39 because his college
professors quickly flew past those topics they really did not understand
themselves. Olivia doesn't know anything important about chemistry's
Periodic Table,
but who cares? That's certainly not bothering her head about and most
certainly not worth borrowing money to learn more about!
- Now consider Barbara Blue who, after graduating from high school in
2017, was accepted for KPMG's ten-year tax accounting apprenticeship. In
addition to on-the-job full time experience she completed 25 specialized tax
accounting courses, including three courses on FIN 48 (Revision 313). After
a rough certification examination she earned her blue eyeshade Certified Tax
Accountant distinction. What's more important she did not have to borrow
money and waste an immense amount of brain effort reading the works of dead
poets. And she's relieved that she did not have to waste time and money
comparing the philosophies of
Thomas Hobbes
versus
John Bramhall.
- Communications skills are very important for Certified Hedge Accountants
and Certified Tax Accountants. All the largest international accounting
firms provide financial incentives to complete all five year-long online
word crafting courses. After successfully completing Word Crafting Courses
1-5, Olivia Orange and Barbara Blue each receive $50 dollars more per hour
for the remainder of their careers.
- But communications skills entail far more that word crafting. Even more
important are interpersonal relationship skills and public speaking skills.
Both Olivia Orange and Barbara Blue increased their hourly wages by
completing a series of Dale Carnegie Courses ---
http://en.wikipedia.org/wiki/Dale_Carnegie
- After attaining her coveted CHA certificate and orange eyeshade, Olivia
Orange received an offer from PwC for a fast-track partnership if she would
become a hedge accounting auditor in Hong Kong. Furthermore, PwC would fully
pay for ten intense Chinese language training courses. She became a PwC
partner after 12 years with the firm. Barbara Blue eventually headed up the
Tax Division of a Fortune 500 corporation. Greg Green also made partner
after spending 12 years at PwC, but in reality it took him 19 years to get
there if you add seven years of college that Olivia Orange bypassed by
joining PwC immediately after graduating from high school.
- Greg was among the last to take the obsolete generic CPA examination.
The duties of accountants became so specialized that in 2025 the generic CPA
certification was dropped by NASBA in favor of 643 specialized certification
examinations.
Now I ask you?
What's the benefit of borrowing money and wasting brain power on a lot of dead
poets, philosophers, and chemical equations if you really want a truly fast
track to becoming a partner in a large international accounting firm? Is it
really worth all the blood, sweat, and tears just to earn a green-eyeshade
diploma when you could obtain a more valuable on-the-job orange, blue, yellow,
magenta, or some eyeshade other than green?
This morning I'm reading a brochure from a friend (from Franconia, New
Hampshire) who put new siding our house. In the brochure he proudly announced
that he's now a
Certified Vinyl Siding Installer. I'm really proud of Chip, although I never
thought he had the best name for a siding installer. He's also the President of
his siding and roofing corporation. I'm glad he wasn't fully certified
when he sided our cottage. He probably charges a lot more now that he's VSI
Certified.
He was smart to get a certified technical skill and skip (a Chip-skip?)
having to study all those dead poets and philosophers.
Yikes! I'm beginning to not only look like Andy Rooney, I sound like him as
well.
Bob Jensen
"Designing Corporate Governance Systems," by James Martin, MAAW
Blog, January 24, 2010 ---
http://maaw.blogspot.com/
The following is my response to a question related
to designing corporate governance systems.
A Google search on corporate governance systems
generates a large number of articles on this subject. Most of this
literature is in finance and economics journals.
For example: Allen, F. and D. Gale. 2000. Corporate
governance and competition. In Vives, X. (ed) Corporate Governance:
Theoretical and Empirical Perspectives. Cambridge University Press.
Demsetz, H. and K. Lehn. 1985. The structure of
corporate ownership: Causes and consequences. Journal of Political Economy
(93): 1155-1177.
Harris, M. and A. Raviv. 1988. Corporate
governance: Voting rights and majority rules. Journal of Financial Economics
(20): 203-235.
Jensen, M. and W. Meckling. 1976. Theory of the
firm: Managerial behavior, agency costs and ownership structure. Journal of
Financial Economics (3): 305-360.
Jensen, M. and R. Ruback. 1983. The market for
corporate control: The scientific evidence. Journal of Financial Economics
(11): 5-50.
John, K. and L. Senbet. 1998. Corporate governance
and board effectiveness. Journal of Banking and Finance (22): 371-403.
Shleifer, A. and R. W. Vishny. 1997. A survey of
corporate governance. Journal of Finance (June): 737-775.
You may find some useful articles in the agency
theory and capital markets sections of the MAAW site.
Comment Letter from 80 Harvard University
Professors Regarding Corporate Governance
I submitted to the SEC yesterday a comment letter on
behalf of a bi-partisan group of eighty professors of law, business, economics,
or finance in favor of facilitating shareholder director nominations. The
submitting professors are affiliated with forty-seven universities around the
United States, and they differ in their view on many corporate governance
matters. However, they all support the SEC’s “proxy access” proposals to remove
impediments to shareholders’ ability to nominate directors and to place
proposals regarding nomination and election procedures on the corporate ballot.
The submitting professors urge the SEC to adopt a final rule based on the SEC’s
current proposals, and to do so without adopting modifications that could dilute
the value of the rule to public investors.
Lucian Bebchuk, Harvard Law School, on Tuesday August 18, 2009 ---
Click Here
A copy of the comment letter filed with the SEC is available here ---
http://blogs.law.harvard.edu/corpgov/files/2009/08/comment-letter-file-number-s7-10-09.pdf
Jensen
Comment
No doubt these professors got a lot of these ideas when visiting former students
in prison or on probation.
"Executive Compensation and Boards
of Directors," by J. Edward Ketz, SmartPros, July 2009 ---
http://accounting.smartpros.com/x67023.xml
Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/fraud001.htm#Governance
February 5, 2010 message from Francine McKenna
[retheauditors@GMAIL.COM]
An interesting syllabus for a
course at U Central Florida by Steve Sutton.http://www.bus.ucf.edu/ssutton/
Ethics and Professionalism in Accounting and
Auditing (ACG 6835)
Spring 2010
Course Schedule
http://www.bus.ucf.edu/ssutton/A6835_syl_files/A6835_course_schedule.htm
If anyone else includes my
content in their syllabus, please let me know. I am making a list of
professors teaching using "non-traditional" sources.
[retheauditors@GMAIL.COM]
(I'd also love to visit!)
Thanks.
fm
February 6, 2010 reply from Bob Jensen
Hi Francine,
Thank you for the heads-up.
I think the (slow loading) Baylor University video should be
included in the curriculum of every accounting program and possibly the
curriculum of every high school in the U.S.
June 15, 2009 message from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
I apologize if this is
something that has already been mentioned but I just became aware of a very
interesting video of former WorldCom Controller David Meyers at Baylor
University last March -
http://www.baylortv.com/streaming/001496/300kbps_str.asx
The first 20 minutes is
his presentation, which is pretty good - but the last 45 minutes or so of Q&A is
the best part. It is something that would be very worthwhile to show to almost
any auditing or similar class as a warning to those about to enter the
accounting profession.
Denny Beresford
Jensen Comment on Some Things You Can Learn from the Video
David Meyers became a convicted felon largely because he did not say no when his
supervisor (Scott Sullivan, CFO) asked him to commit illegal and fraudulent
accounting entries that he, Meyers, knew were wrong. Interestingly, Andersen
actually lost the audit midstream to KPMG, but KPMG hired the same same audit
team that had been working on the audit while employed by Andersen. David Myers
still feels great guilt over how much he hurt investors. The implication is that
these auditors were careless in a very sloppy audit but were duped by Worldcom
executives rather than be an actual part of the fraud. In my opinion, however,
that the carelessness was beyond the pale --- this was really, really, really
bad auditing and accounting.
At the time he did wrong,
he rationalized that he was doing good by shielding Worldcom from bankruptcy and
protecting employees, shareholders, and creditors. However, what he and other
criminals at Worldcom did was eventually make matters worse. He did not
anticipate this, however, when he was covering up the accounting fraud. He
could've spent 65 years in prison, but eventually only served ten months in
prison because he cooperated in convicting his bosses. In fact, all he did after
the fact is tell the truth to prosecutors. His CEO, Bernard Ebbers, got 25 years
and is still in prison.
The audit team while with
Andersen and KPMG relied too much on analytical review and too little on
substantive testing and did not detect basic accounting errors from Auditing 101
(largely regarding capitalization of over $1 billion expenses that under any
reasonable test should have been expensed).
Meyers feels that if
Sarbanes-Oxley had been in place it may
have deterred the fraud. It also would've greatly increased the audit revenues
so that Andersen/KPMG could've done a better job.
To Meyers' credit, he did
not exercise his $17 million in stock options because he felt that he should not
personally benefit from the fraud that he was a part of while it was taking
place. However, he did participate in the fraud to keep his job (and salary). He
also felt compelled to follow orders the CFO that he knew was wrong.
The hero is detecting the
fraud was Worldcom's internal auditor Cynthia Cooper who subsequently wrote the
book:
Extraordinary Circumstances: The Journey of a Corporate Whistleblower
(Hoboken, New Jersey: John Wiley & Sons, Inc.. ISBN 978-0-470-12429)
http://www.amazon.com/gp/reader/0470124296/ref=sib_dp_pt#
Meyers does note that the
whistleblower, Cooper, is now a hero to the world, but when she blew the whistle
she was despised by virtually everybody at Worldcom. This is a price often paid
by whistleblowers ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
Bob Jensen's threads on
the Worldcom fraud are at
http://www.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud
Other possible source material for ethics, independence, and
professionalism courses is available at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
The above site begins with one of my all time favorite quotations
(from Steve Samek) that indirectly suggests that no matter how much ethics and
professionalism is beat into the heads of students/employees in college and CPE
courses, it might help but probably is like trying to get obese people to lose
200 pounds by taking nutrition courses. Andersen had some of the best ethics and
professionalism courses ever developed, including a very expense set of CDs.
The day Arthur Andersen loses the public's
trust is the day we are out of business.
Steve Samek, Country Managing Partner, United States, on Andersen's
Independence and Ethical Standards CD-Rom, 1999
If a man's poor and not a bad fellow, he's
considered worthless; if he is rich and a very bad fellow, he's considered a
good client.
Attributed to Titus Maccius Plautus, 255 BC to 185 BC
In spite of all the warning signs, Enron was considered to be a juicy client.
Andersen billed Enron over $1 million per week.
Business Ethics ---
http://en.wikipedia.org/wiki/Business_ethics
Lots of Good Links
Business Ethics by Business Week ---
http://bx.businessweek.com/business-ethics/news/
Advancing Quality through Transparency Deloitte LLP Inaugural Report ---
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
In my opinion the best preventative for ethics, independence, and
professionalism violations is a very intensive whistleblower program that is
much more than a sham ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
At Andersen it proved to be a sham!
"Auditor Received Warning on Enron Five Months Ago," by Richard A.
Oppel, Jr., The New York Times, January 17, 2002 ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Hoax
According to
Congressional investigators, the Enron employee, Sherron S. Watkins, called a
former colleague at Andersen on Aug. 20 and told him of her concerns about the
energy company's accounting. About the same time, Ms. Watkins also laid out her
doubts in a letter to Enron's chairman, Kenneth L. Lay, disclosed earlier this
week by a Congressional committee, that warned that the company might be
revealed as an "elaborate accounting hoax."
Ms. Watkins's letter
pointed to new questions about Enron's web of partnerships and raised the
possibility that the company might have to reduce past earnings by $1.3 billion
more than it already has.
In an internal Andersen
memorandum obtained by the House Energy and Commerce Committee, Ms. Watkins's
former colleague at Andersen wrote that "based on our discussion I told her she
appeared to have some good questions."
On the next day, Aug. 21,
four Andersen officials met to discuss Ms. Watkins's concerns, investigators
said. They included David B. Duncan, the lead partner on the Enron account, whom
Andersen fired this week after saying he ordered the destruction of Enron
documents while the company's accounting was under investigation by the S.E.C.
The officials then
"agreed to consult with our firm's legal adviser about what actions to take in
response to Sherron's discussion of potential accounting and disclosure issues,"
according to the memo.
Investigators say
Andersen began the destruction of Enron documents in September and that an
e-mail message from an Andersen lawyer on Oct. 12 re-emphasized Andersen's
policy on destroying documents and encouraged the activity in the firm's Houston
office.
Mr. Duncan, who is
cooperating with authorities, spent hours in Washington today with government
officials who are investigating the failure of Enron, the Houston company that
pioneered energy deregulation and grew to be the nation's seventh-largest
company before seeking bankruptcy protection last fall.
He met for the second
time this week with officials from the Justice Department, which is conducting a
criminal investigation of Enron's collapse. On Monday — the day before Andersen
fired him — Mr. Duncan met with Justice Department officials as well as staff
members from the S.E.C. and agents from the F.B.I., according to people close to
the inquiries.
This afternoon, he spent
more than four hours answering questions from eight investigators for the House
Energy and Commerce Committee, one of several panels in Congress reviewing
Enron's demise. Flanked by his lawyers, Mr. Duncan was not sworn, but he was
warned not to give false statements to Congress. There was no discussion of
giving him immunity for his testimony, investigators said.
"He answered our
questions and provided us with some valuable information, which we are
pursuing," said Ken Johnson, a spokesman for Representative Billy Tauzin, a
Louisiana Republican and chairman of the committee. Mr. Johnson declined to
comment in detail about the interview but said that Andersen's shredding of
documents and handling of the Enron account were discussed.
Continued at
http://www.nytimes.com/2002/01/17/business/17ENRO.html
The “Professional Judgment” Problem: Do the ends justify the means?
"The “Professional Judgment” Problem," by David Albrecht, The Summa,
February 11, 2010 ---
http://profalbrecht.wordpress.com/2010/02/11/the-professional-judgment-problem/
There’s quite a discussion going on over at AECM
now, centered around whether or not corporate disclosures via XBRL tagged
data will be audited, and therefore receive some sort of assurance blessing.
One professor whom I respect a great deal is
arguing that it is in the best interest of companies to make the best and
most honest disclosures as they seek to raise capital, and it is in the best
interest of auditors to associate themselves with only those companies that
make the best and most honest disclosures via XBRL (and presumably via
financial statements, also).
To which I say: hogwash!
I’ve seen enough corporate reporting shenanigans,
and auditor “nod-and-wink” assurance, that I have concluded that there are
indeed sufficient incentives in place for corporate agents to try to game
the system by mis-reporting financial results. I don’t see why, if there is
substantial non-compliance with GAAP, that XBRL tagging would be a refuge of
purity. Moreover, there are incentives in place for auditors to fail to
object to minor transgressions. Some of the times, the incentives are
sufficiently large so that auditors fail to object to major transgressions.
I guess I don’t see why assurance on XBRL reporting will be any different.
I certainly don’t trust corporate executives or
auditors, as classes, to properly exercise “professional” judgment. Oh,
proper judgment may be exercised more than half the time of the time, but
given the risk averse nature of many investors, it is enough for a few bad
apples to give the rest a bad name. It is the many examples of bad reporting
and bad auditing (while admittedly in the minority) that are enough to
destroy trust.
A spouse only need go wayward one time in order to
destroy any trust the other felt. From that point on, the wayward spouse may
be preceived to be untrustworthy even though a majority of days end without
an unsanctioned hookup.
I believe it is not always in a company’s best
interest to make an honest disclosure, and it is not always in an auditor’s
interest to demand proper accounting. That is because many costs to
misbehaving are long-term, but the rewards for transgressing are short term
in nature. When making certain decisions, sometimes the focus of either
corporate executive or auditor can shift to the short-term on a moment’s
notice.
Continued in article
Jensen Comment
David has entered into the very controversial "little white lie" rationalization
of deception. The truth should stand on its own in financial reporting, because
once we start rationalizing little white lies we never know when to stop. Pretty
soon thousand dollar white lies here and hundred dollar white lies there begin
to accumulate until we have over a billion dollar accumulation of lies --- which
is exactly what happened in Worldcom.
If you really want to take up the debate of whether the ends justify the
means, then have your students first watch the video of how Worldcom's
Controller, David Meyers, at the time of the infractions, justified his illegal
actions on the premise that the ends justified the means --- because investors
and employees in Worldcom would be better off by deceptive rather than honest
accounting in the "short term."
June 15, 2009 message from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
I apologize if this is
something that has already been mentioned but I just became aware of a very
interesting video of former WorldCom Controller David Meyers at Baylor
University last March -
http://www.baylortv.com/streaming/001496/300kbps_str.asx
The first 20 minutes is
his presentation, which is pretty good - but the last 45 minutes or so of Q&A is
the best part. It is something that would be very worthwhile to show to almost
any auditing or similar class as a warning to those about to enter the
accounting profession.
Denny Beresford
Jensen Comment on Some Things You Can Learn from the Video
David Meyers became a convicted felon largely because he did not say no when his
supervisor (Scott Sullivan, CFO) asked him to commit illegal and fraudulent
accounting entries that he, Meyers, knew were wrong. Interestingly, Andersen
actually lost the audit midstream to KPMG, but KPMG hired the same same audit
team that had been working on the audit while employed by Andersen. David Myers
still feels great guilt over how much he hurt investors. The implication is that
these auditors were careless in a very sloppy audit but were duped by Worldcom
executives rather than be an actual part of the fraud. In my opinion, however,
that the carelessness was beyond the pale --- this was really, really, really
bad auditing and accounting.
At the time he did wrong, he rationalized that he was doing good by shielding
Worldcom from bankruptcy and protecting employees, shareholders, and creditors.
However, what he and other criminals at Worldcom did was eventually make matters
worse. He did not anticipate this, however, when he was covering up the
accounting fraud. He could've spent 65 years in prison, but eventually only
served ten months in prison because he cooperated in convicting his bosses. In
fact, all he did after the fact is tell the truth to prosecutors. His CEO,
Bernard Ebbers, got 25 years and is still in prison.
The audit team while with Andersen and KPMG relied too much on analytical review
and too little on substantive testing and did not detect basic accounting errors
from Auditing 101 (largely regarding capitalization of over $1 billion expenses
that under any reasonable test should have been expensed).
Meyers feels that if
Sarbanes-Oxley had been in place it may
have deterred the fraud. It also would've greatly increased the audit revenues
so that Andersen/KPMG could've done a better job.
To Meyers' credit, he did not exercise his $17 million in stock options because
he felt that he should not personally benefit from the fraud that he was a part
of while it was taking place. However, he did participate in the fraud to keep
his job (and salary). He also felt compelled to follow orders the CFO that he
knew was wrong.
The hero is detecting the fraud was Worldcom's internal auditor Cynthia Cooper
who subsequently wrote the book:
Extraordinary Circumstances: The Journey of a Corporate Whistleblower
(Hoboken, New Jersey: John Wiley & Sons, Inc.. ISBN 978-0-470-12429)
http://www.amazon.com/gp/reader/0470124296/ref=sib_dp_pt#
Meyers does note that the whistleblower, Cooper, is now a hero to the world, but
when she blew the whistle she was despised by virtually everybody at Worldcom.
This is a price often paid by whistleblowers ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
Bob Jensen's threads on the Worldcom fraud are at
http://www.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud
Pete Wilson provides some great
videos on how to make accounting judgments ---
http://www.navigatingaccounting.com/
Other possible source material for ethics, independence, and
professionalism courses is available at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
"SEC Discord Could Stymie Schapiro's Efforts," by Kara Scannell,
The Wall Street Journal, February 6, 2010 ---
http://online.wsj.com/article/SB20001424052748703894304575047623539208044.html#mod=todays_us_section_b
No one said it would be easy. But one big part of
Securities and Exchange Commission Chairman Mary Schapiro's job—winning the
support she needs from the agency's commissioners—is turning into a
headache.
Since taking over the embattled agency in January
2009, the 54-year-old Ms. Schapiro has brought in a new enforcement chief,
created a division to scout out market risks and laid out an ambitious
rule-making agenda to restore market confidence. The number of formal
investigations launched and temporary restraining orders sought more than
doubled last year from 2008. It takes about six months for the average SEC
rule to make it through the pipeline, down from 10 months.
Suddenly, though, Ms. Schapiro is hitting some
speed bumps inside the SEC. Usually, the five-person panel that must approve
new rules unanimously backs the agency's chairman. Under Ms. Schapiro, who
was sworn in a week after President Barack Obama, SEC commissioners have
splintered four times, with two Republicans suggesting that she is bending
to politics.
Last week, Commissioner Kathleen Casey, a
Republican appointed by President George W. Bush, accused the agency of
placing "the imprimatur of the commission on the agenda of the social and
environmental policy lobby" by issuing guidance encouraging companies to
disclose the effects of climate change on their businesses.
While the measure passed by a 3-2 vote, Ms.
Schapiro has been lambasted by Republican lawmakers. Rep. Spencer Bachus,
the House Financial Services Committee's top Republican, accused her of
pushing a "partisan political agenda."
The discord from within could complicate Ms.
Schapiro's efforts to push through more changes in the second year of her
cleanup. Friday, she said the agency will decide by the end of March on
proposed rules to put brakes on short selling, where investors borrow shares
and then sell them in hopes of making money from the stock's decline.
The ideas being reviewed include a circuit breaker
that would be triggered when a stock falls by a certain percentage. People
familiar with the matter say the agency is looking for steps that would be
the least intrusive to the market. Troy Paredes, a Republican who joined the
commission in 2008, voted for an earlier version of the short-selling
proposal but warned that the SEC needed "room" to "exercise [its] expert
judgment." Mr. Paredes didn't respond to requests for comment. Ms. Casey
also expressed skepticism.
In addition, the SEC is expected to take up soon
the long-controversial issue of whether to let shareholders nominate
director candidates using the ballots that companies mail to shareholders.
Shareholders now must fund their own proxy fights, which rarely happens.
Unions and some institutional investors support
giving shareholders more muscle, while some executives have warned that
frequent director battles could disrupt business and conflict with state
laws. The SEC voted 3-2 last year to issue the proposal for public comment,
with the two Republican commissioners dissenting.
Ms. Schapiro says more than 90% of enforcement
actions and more than 80% of open-meeting votes since she took over have
been approved unanimously. "We haven't shied away from difficult issues
because I think these are times that call for people to make hard choices,"
she said in an interview.
She denies accusations that she is bending over
backward to satisfy Democrats. "While we are interested in Congress's views,
it doesn't drive our agenda," Ms. Schapiro said.
The recent guidance on climate change, for example,
came after the SEC got petitions from investors who "had close to $1.4
trillion under management, and we didn't go anywhere near as far as they
asked us," she said.
Some outsiders say the split votes aren't a sign of
impending paralysis that would derail Ms. Schapiro's agenda as much as her
willingness to impose new regulations. Her predecessors also ran into
opposition from commissioners. But too much resistance could make it hard
for Ms. Schapiro to follow through on her strategy for revamping the SEC
following the financial crisis and Bernard Madoff fraud.
That includes persuading the sharply divided
Congress to give the SEC additional funding and wider authority.
"I would not like to see the commission devolve
into a steady stream of 3-2 votes," said Harvey Pitt, SEC chairman from 2001
to 2003. Ms. Schapiro has "really gotten off to a fabulous start" and is
"very tuned in to what needs to get done at the SEC," Mr. Pitt added.
Richard Roberts, an SEC commissioner from 1990 to
1995, said Ms. Schapiro might have miscalculated in her handling of the
climate-change vote. "When you wade into a polarized issue that's not
necessarily at the center of investor protection, there can be consequences
associated with that that are not always positive," he said.
James Cox, a securities-law professor at Duke
University, said critics of Ms. Schapiro are ignoring recent signs of her
political independence. For instance, she has said the Obama
administration's proposal to designate the Federal Reserve as the nation's
systemic-risk regulator needs to be tempered by a robust council of
regulators, compared with the administration's weaker council. "I give her
high marks of being independent of the administration's position," Mr. Cox
said.
Ms. Schapiro's split votes remind some securities
experts of William Donaldson, a Republican and longtime Wall Street
executive brought in as SEC chairman in 2003 to restore investor confidence
after the Enron and WorldCom scandals. He faced opposition from his own
party while pushing through a rule requiring hedge-fund advisers to register
with the agency. The rule was later tossed out by a federal appeals court.
Harvey Goldschmid, who often voted with Mr.
Donaldson as a Democratic commissioner, says commissioners who don't agree
with the chairman "should also be careful that they not jeopardize the
commission's reputation for independence and integrity by dissenting
unnecessarily."
Bob Jensen's threads on the shortcomings of the SEC are at
http://www.trinity.edu/rjensen/2008Bailout.htm#SEC
"On the Impossibility of Measuring Model Risk," Sandrew,
February 18, 2010 ---
http://sandrew.tumblr.com/post/397168410/on-the-impossibility-of-measuring-model-risk
Thank you Francine for the heads up.
This week The Economist
poked a little fun at the quants:
JPMorgan Chase holds $3 billion of
“model-uncertainty reserves” to cover mishaps caused by quants who have
been too clever by half. If you can make provisions for bad loans, why
not bad maths too?
And in response to this revelation, Francine
McKenna
wondered how the auditors could have signed-off on
the models:
If you need $3 billion of “model reserves” how
[does] PwC attest to [the] models underlying valuations, estimates and
reserves?
It’s worth noting that these model-uncertainty
reserves not only comply with GAAP, but are mandated by it. So in response
to Ms. McKenna’s concern, there is in fact a “GAAP for that.”
FAS 157 Par. C16: This Statement clarifies that
the measurements should be adjusted for risk, that is, the amount market
participants would demand because of the risk (uncertainty) inherent
in a particular valuation technique used to measure fair value (such as
a pricing model) and/or the risk inherent in the inputs to the
valuation technique (a risk premium notion). Accordingly, a measurement
(for example, a “mark-to-model” measurement) that does not include an
adjustment for risk would not represent a fair value measurement if
market participants would include one in pricing the related asset or
liability. [Emphasis mine.]
OK, so now we understand why banks have to
measure model risk, but how do you do it? Well, if you’re being
honest, you don’t. Model risk is impossible to measure. Here’s why.
Pricing Models as Interpolation
First, it’s important to understand what a pricing
model is and why they are used. Pricing models are used for two purposes:
valuation (that is, to come up with fair values for instruments that do not
have directly observed prices—e.g. OTC derivatives) and risk management
(that is, to measure the sensitivities of instruments to particular risks
for the purpose of managing an overall book). Let’s put aside for now the
risk management purpose and focus on the valuation.
The majority of OTC positions are not
“marked-to-model” in any meaningful sense of that term. Yes, there are
pricing models used to value them, but they’re not the scary kind of marks
that skeptics rightly call “mark-to-make-believe.” Most of the time, the
pricing model is simply a fancy (and sometimes expensive) tool to
interpolate between observed market prices.
Let’s say I have an interest rate swap. I can
observe the market prices (rates of various maturities) and as long as my
swap is within the range of my observations, then my pricing model is
calibrated to market. The only modeling I’ve done is to build a rate curve
based on observed inputs and used this curve to discount the contractual
cash flows of the swap. This is simply a robust way to interpolate the
value of my swap from observed quotes on similar instruments (i.e. other
swaps). Now this is obviously a very simple example, but this
model-as-interpolation view can also be said of more complicated, but
traded, instruments like synthetic index CDOs.
What’s this have to do with model risk? When models
are calibrated to observed market prices, and hence where the model is used
an interpolation tool, the model risk is (pretty much) already captured by
the model. This is true even if the model is “wrong”. If the model
calibrates to market, it already reflects the market’s view of the model
risk—at least with respect to the observed instruments to which it’s
calibrated. I should add that even if you’re interpolating between observed
prices, you might have residual model risk—how much residual risk (which
could be significant) depends on the granularity of observed data, among
other things.
True Mark-to-Model Positions and Why Model Risk
is Immeasurable
But wait. If most positions are marked to
prices interpolated between observed quotes, what about the rest? Here’s
where we get into the true mark-to-model issues, and where model risk is
most prevalent. Thankfully, these are easy enough to identify on a balance
sheet. They are anything noted as a “level 3” fair value measure—i.e.
instruments where the value significantly depends on the model itself and on
the unobservable inputs or parameters thereto. Think of a CDO-squared or a
bespoke synthetic CDO.
I promised I’d get to the point about the
impossibility of measuring model risk, so here it is:
- <!--[if !supportLists]-->Model risk is the
risk that you’re using the wrong model.
- <!--[if !supportLists]--><!--[endif]-->The
space of possible models is infinite. That is, there are an infinite
number of models to choose from, including those not yet discovered.
- <!--[if !supportLists]-->No one knows what the
right model is. If you knew which model was the right one, you’d
already be using it. Even if most market participants agree on a model
today, they might discover a better model tomorrow, or simply decide
that no model is sufficient to assess the risks (this has happened).
- <!--[if !supportLists]-->Judgments about the
amount of model risk are necessarily qualitative. The best I could hope
for would be to say that this model feels more certain than that
one.
- <!--[if !supportLists]--><!--[endif]-->Model
risk is recursive. Even if I could quantify the level of model risk,
what model would I use to measure the impact of that model risk on fair
value? Where are the models of model risk? Even if they existed, those
model risk models have model risk, no?
That $3B Model-Uncertainty Reserve
If model risk is immeasurable, where did JPMorgan’s
$3B come from and what does it mean? As to where it came from, I don’t know
the specifics, but I suspect they’ve either: (a) shocked the unobservable
model inputs by some arbitrary amount and taken the worst of the lot or (b)
run some “shadow models” (i.e. run the same positions through multiple known
models) and taken the worst of the lot. Either way, the result is
arbitrary. So as to what it means: not much. At best, it gives us some
insight into the subjective judgments of JPMorgan management with respect to
the quality of their models. So yeah, not much at all.
Bob Jensen's threads on cookie jar accounting are at
http://www.trinity.edu/rjensen/theory01.htm#CookieJar
February 19, 2010 reply from Bob Jensen
Hi Francine,
The Sandrew article is really terrific (thanks for the heads up)
---
http://sandrew.tumblr.com/post/397168410/on-the-impossibility-of-measuring-model-risk
As to the cookie jar question, I think it reduces to an issue of
whether the bad quant reserves are used primarily to smooth income in the
same sense as cookie jar reserves are traditionally used to smooth income.
Or are the bad quant reserves more like bad debt reserves that are used for
better matching under the matching concept where timing of cost write offs
better matches revenues with expenses incurred to generate those revenues.
To me, the Allowance for Bad Quants seems to me to be a bit more
like the Allowance for Bad Debts, but I’ve not really taken time to study
this question in detail.
A great example of cookie jar accounting, aside from the classic examples
allowed in Switzerland, is Tom Selling’s General Motors example ---
http://www.trinity.edu/rjensen/theory01.htm#CookieJarBob
Jensen
"What Do Accounting Professors Talk About?," by David Albrecht, The
Summa, February 1, 2010 ---
http://profalbrecht.wordpress.com/2010/02/01/what-do-accounting-professors-talk-about/
… when permitted to leave their offices for
unsupervised free time?
Most questioners ask only rhetorically.
In response to my statement, “What is I do? I’m an
accounting professor,” I wish I had a nickel for every time I heard
__________ (fill in the blank with a much less than flattering comment about
either accounting, accountants, or accounting classes in college).
In response to my statement, “I’m on an e-mail
listserv with 1,000 other accounting professors,” I wish I had a nickel for
every time I heard __________ (fill in blank with a much less than
flattering comment about how little there is to talk about, and what we talk
about must be exceedingly boring).
So, what did the accounting professors really talk
about today?
- “In my opinion the Number 1 disgrace in higher
education is grade inflation.” And student evaluations of teaching are
identified as the causal factor.
- Rankled by Rankings: The problems with the
ranking of best accounting programs, best accounting departments, best
college, best universities in country, best universities in world.
- Stephen Colbert uses an iPad at the 2010
Grammy.
- Designing Corporate Governance Systems
- Canadian Signs of IFRS Transitions to Come in
the United States
- The enduring impact of transient emotions on
decision making – being predictably irrational. I don’t think anyone
believes in EMH (efficient markets hypothesis) anymore, except
economists, economists advising President Obama, and corporate PR
people.
- Could it be that some audit firms take on
fewer clients when risks of negligence lawsuits increase?
- The major problem in accountics research using
statistical inference is the underlying assumption of stationary-state
is the real world where probabilities on constantly in transition.
- Oh, … and how Dave Albrecht uses retesting to
implement mastery learning concepts in his classes. [Hey, I didn’t even
bring it up.]
I love the experience. The discussions are fodder
for the educated mind. It comes at a cost,though. Reading all these
e-mails takes a significant portion of the three hours I daily devote to
e-mail processing. It can take an hour (or more) to craft a reply. My
reply to item #9 will take many hours and be the next blog post (or 2 or 3)
to The Summa
Creative Destruction: When are you being helped and when are you being
screwed?
Do you wonder if retail store managers grumble about having to take up
multiple shelves just to display the many versions of blades for older versions
of Gillette razors?
Do you grumble these days if your "old" camera (like mine) stores pictures on
miniature CDs that increasingly are not carried by retail stores because the
newer technology calls for miniature DVD disks?
I can sympathize with the DVD replacements since DVD disks really do have
value added in terms of storage space. But is the latest and greatest Gillette
razor blade really noticeably better than the last three generations of Gillette
blades?
And is Gillette simply "creatively destroying" your old and perfectly good
razor by creatively destroying it by making it harder and harder to find blades
to fit it?
And is Gillette creatively making new-style blades force you to buy
replacement blades more often?
So what does Gillette have in store for us?
Since 1971 it has been blades, blades, and more blades. They started with two
and now have five. P&G was wise enough to realize that a razor that needs to be
held with two hands was not functional so they've stopped at five blades (at
least for now). Instead, Gillette has created a new grip, along with five highly
lubricated, laser-thin blades. Is this innovation? And was the race to increase
the number of blades — which borders on a level of comedy typically reserved for
The Onion — innovative? The answer to both questions is yes. Innovation is a
forward-moving process, creating slow and steady progress. But innovation is
different than creative destruction, which is evolutionary and often
revolutionary. If P&G really wants to propel Gillette, they need creative
destruction. So what should Gillette do (or better yet, what should one of their
more nimble competitors do)? Go back to a single blade.
Jeff Stibel, "Gillette, Razor Blades, and Creative Destruction," Harvard
Business Review Blog, February 18, 2010 ---
http://blogs.hbr.org/cs/2010/02/gillette_razor_blades_and_crea.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Gillette is perhaps one
of the most innovative companies in the world, constantly reinventing its own
model, often upending past products in favor of the new in a fit of what most
people call creative destruction. And no surprise, Gillette is
at it again, with
the first new shaver developed since Procter & Gamble bought them in 2005.
A lot has been written
about
creative destruction (including by
yours truly) but very few people actually
understand it. Most people think that it is a process where innovative new
products cripple lumbering dinosaurs. But the irony of creative destruction is
that it is often the less innovative, more mundane changes that are the
most disruptive. Clayton Christensen wrote about this in
The Innovator's Dilemma where he says,
"occasionally disruptive technologies emerge — innovations that result in worse
product performance, at least in the near term.....generally disruptive
technologies underperform established products in mainstream markets. But they
have other features....they are typically cheaper, simpler, smaller, and
frequently, more convenient to use."
This is equally, if not
more true in nature: Evolution is a process of creative destruction, wherein
things evolve over time; not for better or worse in the long run, but for short
term survival. Sometimes this leads to long term survival (cockroaches);
sometimes it leads to demise (dinosaurs). Any study of evolution will show how
nature can overshoot itself — witness the lumbering dinosaurs, so heavily plated
with armor, versus the weaker but soon dominant mammals. What better metaphor
for a big company than a beast that can't see around its own girth to the
upstarts, nibbling away at the grass below. This is the big idea behind creative
destruction — that the march of "progress" is not a smooth upward curve.
So what does Gillette
have in store for us? Since 1971 it has been blades, blades, and more blades.
They started with two and now have five. P&G was wise enough to realize that a
razor that needs to be held with two hands was not functional so they've stopped
at five blades (at least for now). Instead, Gillette has created a new grip,
along with five highly lubricated, laser-thin blades.
Is this innovation? And
was the race to increase the number of blades — which borders on a level of
comedy
typically reserved for The Onion — innovative?
The answer to both questions is yes. Innovation is a forward-moving process,
creating slow and steady progress.
But innovation is
different than creative destruction, which is evolutionary and often
revolutionary. If P&G really wants to
propel Gillette, they need creative destruction. So what should Gillette do (or
better yet, what should one of their more nimble competitors do)? Go back to a
single blade.
A single blade product is
at the essence of creative destruction: In Christensen's words, it is: "cheaper,
simpler, smaller, and...more convenient to use." Dress it up anyway you please;
call it a revolutionary, hand-forged, titanium alloy precision blade. The point
is that a single-blade product is now incredibly disruptive.
Unfortunately, history
has shown that lumbering dinosaurs such as Gillette rarely pursue this strategy
because they aim to innovate instead of creatively destruct — because they think
linearly. Stew Taub, of Gillette's parent company P&G, said, "Shaving is a very
complicated and precise operation." (No wonder the cavemen were so hairy!) It is
only natural to complicate the product with that line of thinking. But someone
will evolve the razor back to a single blade, and I suspect that the savvy
marketers at P&G just might have it in them to break the mold.
Jeffrey M. Stibel is an entrepreneur, a brain scientist, and the author of
Wired for Thought: How the Brain Is Shaping the Future of the Internet.
Jensen Comment
“Creative destruction” creates interesting financial and managerial accounting
problems?
To what extent does Gillette have a “liability” to keep providing
replacements for those “obsolete” razors that may be last year’s models and ten
other older models that customers are still happily using in their bathrooms?
What is Gillette’s strategy for making it increasingly frustrating for customers
to find replacement blades for older models?
From The Wall Street Journal Accounting Weekly Review on
February 12, 2010
Cost Cutting Boosts Profits
by: Paul
Vigna and John Shipman
Feb 05, 2010
Click here to view the full article on WSJ.com
TOPICS: Accounting,
Degree of Operating Leverage, Financial Accounting, Financial Statement
Analysis, Fixed Costs, Horizontal Analysis, Managerial Accounting, Operating
Leverage, Variable Costs
SUMMARY: Fourth-quarter
earnings for U.S. companies so far have rocked compared with a year ago. The
question for this year: How much more can earnings improve? Despite modest
sales growth, corporations have managed to craft their profit growth mainly
through massive cost cutting. For the trend to continue, companies will need
to drive the top line, and that looks to be a key challenge for an economy
where demand is depressed, with at least 10% of the work force unemployed
and another large swath underemployed. The S&P 500 companies are just
breaking a string of nine-straight quarters of profit declines. Many are
going to be reluctant to eat into that newfound earnings growth by ramping
up the work force, given that compensation is one of the largest costs for
any company.
CLASSROOM APPLICATION: This
article discusses increased profitability currently occurring in many
businesses. Much of the gains in profitability have come from cost-cutting
measures. Even with an increase in profitability, many firms are reluctant
to hire as conditions improve because of continued uncertainty about the
economy. The reporters offer a considerable amount of data and discussion to
serve as a basis of a classroom discussion of financial statement analysis,
horizontal analysis, and operating leverage.
QUESTIONS:
1. (Introductory)
What are the current conditions for many companies in the U.S.? What seems
to be the main reason for increased profitability? What are some of the
signs that the companies are doing better?
2. (Advanced)
What are some potential problems with a company's strategy to grow
profitability through cost-cutting? What are the long-term prospects for
success using this strategy?
3. (Advanced)
What information in the article leads you to believe that the economy is
improving? What information indicates that the economy will be affected, at
least for a while?
4. (Introductory)
What is financial statement analysis? What is horizontal analysis? What
information provided in the article uses either of these two types of
analyses?
5. (Advanced)
What are fixed costs? What are variable costs? Is labor a fixed cost or a
variable cost? Why? In what situations could it be either or both? How can a
company structure its hiring to help the business in these types of economic
conditions?
6. (Introductory)
What is operating leverage? How is degree of operating leverage calculated?
How is degree of operating leverage used in management decision-making? How
are companies using it in the article?
7. (Advanced)
Why are companies reluctant to increase hiring? How does hiring figure into
business risk? What will have to happen before companies will feel confident
to hire freely again?
Reviewed By: Linda Christiansen, Indiana University Southeast
"Cost Cutting
Boosts Profits," by: Paul Vigna and John Shipman, The Wall Street Journal,
February 5, 2010 ---
http://online.wsj.com/article/SB10001424052748704041504575045373947332854.html?mod=djem_jiewr_AC_domainid
Fourth-quarter earnings for U.S. companies so far
have rocked compared with a year ago. The question for this year: How much
more can earnings improve?
Among those posting results thus far, the melody
has been sweet. Financial-services companies Visa Inc. and MasterCard Inc.,
for instance, reported profits rose 33% and 23%, respectively, over a year
ago. Earnings overall are running well ahead of last year's dreadful fourth
quarter.
Through Wednesday, with 280 members of the Standard
& Poor's 500 index reporting, operating earnings rising sharply, but the
year-ago quarter was the first time the group as a whole ever lost money.
Excluding financial companies, earnings are up about 47%. Sales gains are
more muted, up only 5.9% for S&P 500 companies thus far, and expected to
rise about 0.9% from the year-earlier quarter. That doesn't even match the
current inflation rate.
Perhaps most heartening about the quarter's results
is that sales are on track to break a string of four consecutive
double-digit-percentage declines. Still, the projected increase is well
below the average 3.95% gain since 1994, according to S&P.
Despite modest sales growth, corporations have
managed to craft their profit growth mainly through massive cost cutting.
For the beat to continue, companies will need to drive the top line, and
that looks to be a key challenge for an economy where demand is depressed,
with at least 10% of the work force unemployed and another large swath
underemployed.
"Until nonfinancials [corporations] see sustained
sales growth, they will not be hiring, and that is the whole ballgame," said
Howard Silverblatt, S&P's senior index analyst.
For 2009, S&P 500 members should see sales down
about $1.1 trillion, or 13% from the prior year. For the fourth quarter,
sales are expected to total about $2.05 trillion, which gets the group back
to the level of the first quarter of 2006. In other words, the intense
recession has set sales of the nation's 500-largest companies back nearly
four years.
The S&P 500 companies are just breaking a string of
nine-straight quarters of profit declines. Many are going to be reluctant to
eat into that newfound earnings growth by ramping up the work force, given
that compensation is one of the largest costs for any company. Automated
Data Processing Inc. said it is hiring new sales staff, even though it
expects that to be a drag on earnings for at least a year.
Cisco Systems Inc. came out with the boldest
outlook this earnings season, pegging sales growth around 25% and announcing
it will hire 2,000 to 3,000 new people to help it handle its growing
business. Not many companies have outlined such a bullish near-term view.
Unfortunately, more companies, including Verizon
Communications Inc., Wal-Mart Stores Inc. and Diebold Inc., continue to pare
workers. And Bristol-Myers Squibb Co. this week froze employee salaries
world-wide for 2010.
And beyond just the profit motive, questions remain
about the strength and durability of any recovery. It's telling that both
MasterCard and Visa are taking a guarded approach to 2010.
"We continue to be cautious about the health of the
consumer," MasterCard Chief Executive Robert Selander said on Thursday.
Agreed Visa Chief Executive Joseph Saunders: "Any recovery will take time
and we'll likely have a few bumps along the way," and added, "A complete
turnaround in the U.S. will arguably take even longer."
Trying to Distinguish Causality from Correlation?
It makes more intuitive sense when they retire early versus when they slightly
cut back on patients
Could it be
that some audit firms take on fewer clients when risks of negligence lawsuits
increase?
"Doctors cut back hours when risk of malpractice suit rises, study shows,"
by Joe Hadsfield, Eureka Alert, January 28, 2010 ---
http://www.eurekalert.org/pub_releases/2010-01/byu-dcb012810.php
A new study shows that the number of hours
physicians spend on the job each week is influenced by the fear of
malpractice lawsuits.
Economists Eric Helland and Mark Showalter found
that doctors cut back their workload by almost two hours each week when the
expected liability risk increases by 10 percent. The study, published in the
new issue of the Journal of Law and Economics, notes that the decline in
hours adds up to the equivalent of one of every 35 physicians retiring
without a replacement.
"The effect of malpractice risk on hours worked
might seem like a small item compared to physicians moving across state
borders or avoiding high-risk specialties like obstetrics," said Showalter,
an economics professor at Brigham Young University. "However, when you
aggregate that across all physicians, the total effect is quite large."
The analysis combined data gathered by insurers
about medical liability risks in each state and medical specialty with
physicians' responses to surveys about their workload and income.
When something changed the risk of medical
liability – such as an adjustment in the maximum amount a jury could award
in malpractice cases – doctors adjusted their workload. When liability risk
went up, doctors saw fewer patients each week to minimize their chance of a
lawsuit. When liability risk went down, doctors saw more patients each week.
The study also found that doctors over 55 and those
that have their own practices are far more sensitive to changes in liability
risk.
Some state courts are currently considering legal
challenges to existing malpractice caps. Missouri and Georgia, for example,
limit or cap non-economic damages that compensate for pain and suffering to
$350,000. Those caps are being contested by representatives of patients.
Despite the large effects, the research does not
endorse a Republican proposal to place a nationwide cap on the size of jury
awards in malpractice cases, the authors note.
"If the cost of providing medical care varies by
state, why should we have a national, one-size-fits-all approach?" Showalter
said. "The same cap would have very different effects in Kansas than in New
York."
Lead author Eric Helland is an economist at Claremont McKenna College
and RAND's Institute for Civil Justice. Both Helland and Showalter have
previously served on the U.S. Council of Economic Advisers.
When Texas capped its punitive damage awards, specialist physicians moved
to Texas at rates higher than the licensing board could keep up with the influx/
Four years after Texas voters approved a
constitutional amendment limiting awards in
medical malpractice lawsuits, doctors are
responding as supporters predicted, arriving from all parts of the country to
swell the ranks of specialists at Texas
hospitals and bring professional health care to
some long-underserved rural areas. “It was hard to believe at first; we thought
it was a spike,” said Dr. Donald W. Patrick, executive director of the medical
board and a neurosurgeon and lawyer. But Dr. Patrick said the trend — licenses
up 18 percent since 2003, when the damage caps were enacted — has held, with an
even sharper jump of 30 percent in the last fiscal year, compared with the year
before.
Ralph Blumenthal, "More Doctors in
Texas After Malpractice Caps," The New York Times, October 5, 2007 ---
http://www.nytimes.com/2007/10/05/us/05doctors.html
"Auditor Musical Chairs," by Francine McKenna, re: The Auditors,
February 12, 2007 ---
http://retheauditors.com/2007/02/12/auditor-musical-chairs/
Bob Jensen discusses the problem of trying to adjust fees on the basis of
lawsuit risks ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics
February 2, 2010
message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]
I just finished
reading Andrew Kea’s paper, Stakeholder Theory in Corporate Law: Has It
Got What It Takes?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531065
I struggle with
the definition of theory for accounting research purposes. After I read
the Wikipedia definition (see below), I concluded that the word theory
as used in the article refers to a “political theory” as opposed to a
“scientific theory.” My questions is what does theory mean in accounting
research?
Many of us learned
in our PhD programs that we should develop a theory and test hypotheses
generated from the theory. We fear that reviewers may criticize the lack
of theory supporting our hypotheses. But what is theory? The author
states, “It should be noted that the stakeholder theory is also known as
the stakeholder model, stakeholder framework or stakeholder
management.” Later in the paper, Kea concludes that stakeholder theory
is unworkable, and he makes convincing arguments to support this
conclusion. But is this research or discussion? Is it enough to simply
tell a story that appeals to common sense? Is that all theory is?
I am a fan of the
so-called Libby boxes that translate a theoretical construct to the
operationalization of the construct. But again I am not sure what
requirements must be met to say that we have a construct based on
theory. Again, is a good story sufficient?
________________________
Wikipedia
(gasp – yes I am a fan of wikipedia) states the following:
The term theory
has two broad sets of meanings, one used in the empirical sciences
(both natural and social) and the other used in philosophy,
mathematics, logic, and across other fields in the humanities. There
is considerable difference and even dispute across academic
disciplines as to the proper usages of the term. What follows is an
attempt to describe how the term is used, not to try to say
how it
ought to be used.
Although the scientific meaning is by far the more commonly used in
academic discourse, it is hardly the only one used, and it would be
a mistake to assume from the outset that a given use of the term
"theory" in academic literature or discourse is a reference to a
scientific or empirically-based theory.
Even
so, since the use of the term theory in scientific or
empirical inquiry is the more common one, it will be discussed
first. (Other usages follow in the section labeled "Theories
formally and generally.")
A theory, in the scientific
sense of the word, is an analytic structure designed to
explain a set of empirical observations.
A scientific theory does two things:
-
it identifies this set of distinct
observations as a class of
phenomena, and
-
makes assertions about the underlying
reality that brings about or affects
this class.
In the scientific or empirical
tradition, the term "theory" is reserved for ideas which meet
baseline requirements about the kinds of empirical observations
made, the methods of classification used, and the
consistency of the theory in its
application among members of the class to which it pertains. These
requirements vary across different scientific fields of
knowledge, but in general theories are
expected to be functional and
parsimonious: i.e. a theory should be the
simplest possible tool that can be used to effectively address the
given class of phenomena.
Amy Dunbar
University of Connecticut
School of Business
Department of Accounting
2100 Hillside Road Unit 1041
Storrs, CT 06269-1041
cell 860-208-2737
amy.dunbar@business.uconn.edu
February 2, 2010
reply from Bob Jensen
Hi Amy,
One thing
that’s entertaining is to read about “Eureka” incidents/inventions ---
http://www.ideafinder.com/history/
Perhaps we should worry less about formalized theories in accounting
research and spend more time seeking Eureka inventions
Without much
formalized theory there’s a Global Reporting Initiative for “Triple
Bottom Reporting” while at the same time Bob Herz has proposed zero
bottom reporting (at least no bottom line) ---
http://www.trinity.edu/rjensen/theory01.htm#TripleBottom
However, I
don’t think there are any Eureka moments here!
For people
that have a lot of trouble sleeping I recommend downloading a random
sampling of the hundreds of hits obtains by inserting the search term
“Accounting Theory” at
http://maaw.info/
Any one article is good enough for a loud snore!
If we could only bottle this stuff it may even work better than
David Albrecht’s Daily Diary.
When I think
of theory I envision Einstein watching trains going in and out of
stations and finding fault with Newton’s purely mathematical concept of
time---
http://www.aip.org/history/einstein/essay-einsteins-time.htm
PLG:
You might approach this in two ways. One would be to look at the
specificity of the way Einstein and his physicist interlocutors treated
time, and the other would be to explore how time was taken up in the
wider cultural sphere. For example, Einstein was very amused by the
"twin paradox" in which one twin travels out and back at relativistic
speeds and ends up much younger than his stay-at-home sibling (he called
this "the thing at its funniest"). But Einstein's heart was always
elsewhere - his real investment was in the invariants he found
(for example, the absolute speed of light, or the identity of the laws
of physics for all inertial reference frame observers). He was
consistently more interested in these aspects of the theory than he was
in the differing perspectives of each observer on space and time. But
clearly the wider public was, and has remained, fascinated precisely
with the relativity of time. From jokes to art and ethics, Einstein has
been invoked to justify the tenet that the most basic of concepts were
"just relative."
So often new
theories attempt to explain things we either don’t understand or things
that are imperfectly explained by conventional wisdom. The advantage of
physics (excepting quantum physics for the moment) is that merely
understanding physical relationships usually does not, in and of itself,
change those relationships --- unlike in the social sciences and
business. In accounting we’re perhaps dealing with phenomena less
interesting to Einstein since there are so few (any?) invariants. Of
course, Einstein did not leave anything to chance so that perhaps he
would’ve reduced human behavior to laws of physics if given enough
“time.” It’s hard to find invariants in our chosen field of research.
Behavioral economics is even destroying the universal guiding hand of
Adam Smith.
Einstein
searched for theories that would explain inconsistencies/deficiencies in
current explanations --- systemic problems. Years ago I tried to
identify some of the systemic problems of accounting for which I’m still
waiting for Eureka inventions --- |
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews
In economics
many of the systemic problems are rooted in externalities which, when
you get down to accounting and law, has a lot to do with stakeholder
“theories.” If externalities are intractable then stakeholder theories
become intractable.
When I ponder
such things I usually call out for Jagdish Gangolly. He doesn’t have the
answers but he can always direct us to citations of failed efforts to
explain systemic problems that remain systemic unsolved problems.
One thing
that is somewhat entertaining is to read about “Eureka”
incidents/inventions ---
http://www.ideafinder.com/history/
"A
Wandering Mind Heads: Straight Toward Insight Researchers Map the
Anatomy." The Wall Street Journal, June 19, 2009 ---
http://online.wsj.com/article/SB124535297048828601.html
It happened to Archimedes in the bath. To Descartes it took place in bed
while watching flies on his ceiling. And to Newton it occurred in an
orchard, when he saw an apple fall. Each had a moment of insight. To
Archimedes came a way to calculate density and volume; to Descartes, the
idea of coordinate geometry; and to Newton, the law of universal
gravity.
Five light-bulb moments of understanding that revolutionized science.
In our fables of science and discovery, the crucial role of insight is a
cherished theme. To these epiphanies, we owe the concept of alternating
electrical current, the discovery of penicillin, and on a less lofty
note, the invention of Post-its, ice-cream cones, and Velcro. The burst
of mental clarity can be so powerful that, as legend would have it,
Archimedes jumped out of his tub and ran naked through the streets,
shouting to his startled neighbors: "Eureka! I've got it."
In today's innovation economy, engineers, economists and policy makers
are eager to foster creative thinking among knowledge workers. Until
recently, these sorts of revelations were too elusive for serious
scientific study. Scholars suspect the story of Archimedes isn't even
entirely true. Lately, though, researchers have been able to document
the brain's behavior during Eureka moments by recording brain-wave
patterns and imaging the neural circuits that become active as
volunteers struggle to solve anagrams, riddles and other brain teasers.
Following the brain as it rises to a mental challenge, scientists are
seeking their own insights into these light-bulb flashes of
understanding, but they are as hard to define clinically as they are to
study in a lab.
To be sure, we've all had our "Aha" moments. They materialize without
warning, often through an unconscious shift in mental perspective that
can abruptly alter how we perceive a problem. "An 'aha' moment is any
sudden comprehension that allows you to see something in a different
light," says psychologist John Kounios at Drexel University in
Philadelphia. "It could be the solution to a problem; it could be
getting a joke; or suddenly recognizing a face. It could be realizing
that a friend of yours is not really a friend."
These sudden insights, they found, are the culmination of an intense and
complex series of brain states that require more neural resources than
methodical reasoning. People who solve problems through insight generate
different patterns of brain waves than those who solve problems
analytically. "Your brain is really working quite hard before this
moment of insight," says psychologist Mark Wheeler at the University of
Pittsburgh. "There is a lot going on behind the scenes."
In fact, our brain may be most actively engaged when our mind is
wandering and we've actually lost track of our thoughts, a new
brain-scanning study suggests. "Solving a problem with insight is
fundamentally different from solving a problem analytically," Dr.
Kounios says. "There really are different brain mechanisms involved."
By most measures, we spend about a third of our time daydreaming, yet
our brain is unusually active during these seemingly idle moments. Left
to its own devices, our brain activates several areas associated with
complex problem solving, which researchers had previously assumed were
dormant during daydreams. Moreover, it appears to be the only time these
areas work in unison.
"People assumed that when your mind wandered it was empty," says
cognitive neuroscientist Kalina Christoff at the University of British
Columbia in Vancouver, who reported the findings last month in the
Proceedings of the National Academy of Sciences. As measured by brain
activity, however, "mind wandering is a much more active state than we
ever imagined, much more active than during reasoning with a complex
problem."
She suspects that the flypaper of an unfocused mind may trap new ideas
and unexpected associations more effectively than methodical reasoning.
That may create the mental framework for new ideas. "You can see regions
of these networks becoming active just prior to people arriving at an
insight," she says.
In a series of experiments over the past five years, Dr. Kounios and his
collaborator Mark Jung-Beeman at Northwestern University used brain
scanners and EEG sensors to study insights taking form below the surface
of self-awareness. They recorded the neural activity of volunteers
wrestling with word puzzles and scanned their brains as they sought
solutions.
Some volunteers found answers by methodically working through the
possibilities. Some were stumped. For others, even though the solution
seemed to come out of nowhere, they had no doubt it was correct.
In those cases, the EEG recordings revealed a distinctive flash of gamma
waves emanating from the brain's right hemisphere, which is involved in
handling associations and assembling elements of a problem. The brain
broadcast that signal one-third of a second before a volunteer
experienced their conscious moment of insight -- an eternity at the
speed of thought.
The scientists may have recorded the first snapshots of a Eureka moment.
"It almost certainly reflects the popping into awareness of a solution,"
says Dr. Kounios.
In addition, they found that tell-tale burst of gamma waves was almost
always preceded by a change in alpha brain-wave intensity in the visual
cortex, which controls what we see. They took it as evidence that the
brain was dampening the neurons there similar to the way we consciously
close our eyes to concentrate.
"You want to quiet the noise in your head to solidify that fragile germ
of an idea," says Dr. Jung-Beeman at Northwestern.
At the University of London's Goldsmith College, psychologist Joydeep
Bhattacharya also has been probing for insight moments by peppering
people with verbal puzzles.
Continued in article
Bob Jensen
February 2, 2010 reply from
Tom Omer tomer@mays.tamu.edu
My reaction is that we have no accounting theory
per se but we have stories about why observed things happen. These stories
are based on other discipline’s theories that relate to the information
produced or incentives in line with observed behavior. This is a struggle
for a discipline where little theory is necessary to explain how
credits=debits but even that can be attributed to laws of physics which
suggest equal and opposite reactions occur in any system or in the oriental
philosophy of jin and jang. We are at sea with regard to which discipline we
believe has the theory to explain what we observed and authors fight for
dominance when one theory is published rather than testing for the
possibilities that a theory, while proposed in a study, might not be the
only theory that explains the phenomena. It can be our salvation to explore
these theories from other disciplines but our downfall if we use traditional
blocking theory to keep out all contenders.
Thomas C. Omer
Ernst & Young Professor of Accounting
Texas A&M University 979-458-1508
tomer@mays.tamu.edu
One thing that’s
entertaining is to read about “Eureka” incidents/inventions ---
http://www.ideafinder.com/history/
Perhaps we should worry less about formalized theories in accounting research
and spend more time seeking Eureka inventions
Bob Jensen's
sleeping elixir on Accounting Theory ---
http://www.trinity.edu/rjensen/theory01.htm
"Feelings, Brain and Prevention of Corruption," Eduardo
Salcedo-Albarán, Isaac De León-Beltrán, and Mauricio Rubio,
International Journal of Psychology Research, Vol. 3, No. 3, 2008, Via SSRN
---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1391104
Abstract:
In this paper we propose an answer for the question: why, sometimes, people
don’t perceive corruption as a crime? To answer this question we use a
neurological and a psychological concept. As humans, we experience our
emotions and feelings in first person, but the neuropsychological mechanism
known as “mirror neurons” makes possible to simulate emotions and feelings
of others. It means that our emotions and feelings are linked with emotions
and feelings of others. When mirror areas in the brain are activated we can
understand and simulate in first person the actions, emotions and feelings
of people. Because of these areas, the observer’s brain acts “as if” it was
experiencing the same action or the same feeling that is perceived. Each
organism establishes causal relations to understand, manipulate and move in
the world. Causal relations can be classified as simple or complex. In a
simple causal relation, cause and effect are close in space and time. When
cause and effect are not close in space and time, the causal relation is
complex. When perceiving or committing homicide, a simple causal relation is
enough for identifying a victim, but when perceiving or committing a public
corruption crime, a complex causal relation must be established for
identifying a victim. When seeing someone committing bribe there is no an
evident victim. If persons can’t identify victims of public corruption
crimes, then they will not generate empathy feelings. When a victim is not
identified and perceived, there is no reason for thinking that harm is being
inflicted and mirror areas in the brain are not activated.
Bob Jensen's threads on behavioral and cultural economics ---
http://www.trinity.edu/rjensen/theory01.htm#Behavioral
The Continuing Saga of Auditing, Independence, Consulting, and
Professionalism and Fees
"The Great American Financial Sandwich: AIG, PwC, and Goldman Sachs," by
Francine McKenna, re: The Auditors, February 2, 2010 ---
http://retheauditors.com/2010/02/02/4151/
It may have been the first time you had
ever heard of AIG. As big as it is, it wasn’t really a household name
outside of the financial services world. And certainly, big as it is, the
average businessperson probably could not describe everything they did and
why.
The Wall Street Journal, September 16, 2008
The U.S. government seized control of
American International Group Inc.
— one of the world’s biggest insurers — in an $85 billion deal that
signaled the intensity of its concerns about the danger a collapse could
pose to the financial system.
The step marks a dramatic turnabout for the
federal government, which had been strongly resisting overtures from AIG
for an emergency loan or some intervention that would prevent the
insurer from falling into bankruptcy. Just last weekend, the government
essentially pulled the plug on
Lehman Brothers Holdings Inc.,
allowing the big investment bank to go under instead of giving it
financial support. This time, the government decided AIG truly was too
big to fail.
The U.S. negotiators drove a hard bargain…
Can you fault the journalists for not
having any idea how incomplete and relatively inaccurate so much of what was
written in haste back then would turn out to be?
The Washington Post, January 26, 2010:
The federal bailout of AIG, which grew to a more
than $180 billion commitment, has attracted controversy and hounded
Paulson, Geithner and other officials who helped orchestrate the
troubled insurer’s rescue in September 2008.
In hearings last week before Congress,
Treasury Secretary Tim Geithner came under fire for the bailout, given his
prior role as Chairman of the New York Federal Reserve Bank, the chief
architect of the deal:
From The Guardian, January 27, 2010
The US treasury secretary
Timothy
Geithner was accused of incompetence, obfuscation and of making
“lame excuses” during a furious hearing on Capitol Hill over the
government’s contentious
bailout of the sprawling insurer AIG.
In an unusually ill-tempered confrontation,
members of Congress from both parties rounded on Geithner over a
decision to use taxpayers’ money to pay out the full $62bn (£38bn) owed
by AIG to banks
such as
Goldman Sachs,
Merrill Lynch,
Barclays and
RBS… The biggest counterparty receiving money from AIG was Goldman
Sachs. Visibly rattled, Geithner was obliged to confirm to the committee
that his chief of staff, Mark Patterson, is a former Goldman Sachs
banker, as is Geithner’s predecessor at the treasury, Henry Paulson. But
he angrily defended those involved…”
But if you’ve been reading my stories
about AIG and their auditor PwC, you would have first heard about AIG in
2007. I start with their earlier accounting issues, restatements,
investigations and lawsuits as a result of, let’s call it,
Crisis One, to differentiate it from Crisis Two
– the $180 billion bailout that became necessary,
suddenly, unexpectedly, as a result of a confluence of unprecedented
economic events and that could not have been
anticipated by anyone, anywhere, in
any way shape of form…
Yeah, right. If you believe that, Joe
Cassano’s got
a great deal for you on a piece of Maiden Lane III. Sounds quite green
and leafy, no?
In
June of 2007, I told you about
former AIG Chairman and founder Maurice Greenberg suing AIG and PwC as a
result of a shareholders derivative suit against him. I said, “Isn’t it time
for PwC to resign as AIG auditor?”
In
August of 2007, Greenberg’s firm
C.V. Starr…
“…which remains an AIG
shareholder—alleges in its petition [to the SEC] that AIG’s longtime
independent auditor should be forced to resign because an AIG
special litigation committee earlier this year authorized shareholders
to pursue a derivative action against PwC in Delaware Chancery Court.
“AIG’s decision to have the derivative plaintiffs prosecute the
claims against PwC on behalf of AIG instead of having AIG’s own counsel
prosecute the claims cannot eliminate the conflict that exists,” the
Starr petition says.”
In
October of 2007, I told you how PwC was sued by
AIG shareholders who filed an amended complaint because when AIG management
took over the shareholders derivative suit, stepping into their shoes, they
did not comply with their wishes and
decided to not sue PwC.
“…filed in Delaware Chancery Court on Friday. AIG
shareholders previously sued in 2004, naming former Chief Executive
Maurice “Hank” Greenberg, former Chief Financial Officer Howard Smith,
PwC and others as defendants. In the amended complaint, filed on Friday,
the shareholders seek damages from PwC and others…
In June, AIG took over the shareholders’ lawsuit
against Greenberg and Smith, becoming sole plaintiff in the case and
leaving shareholders to decide whether to pursue claims against some or
all of the remaining defendants, including PwC.
AIG, the largest U.S. insurer, on Friday restated
its claims against Greenberg and Smith for allegedly breaching the
fiduciary duties they owed the company, while shareholders refiled their
claims against some of the original defendants. AIG “decided not to sue
(PwC) based on the recommendation of a special litigation committee of
AIG’s board of directors” and the company “continues to have
full confidence in the independence of PwC,” a company
spokesman said…
Also in October 2007, in spite of their
role as a defendant in lawsuits by AIG shareholders, in spite of their
longstanding relationship with the firm that was now in so much trouble,
PwC was reappointed as AIG’s auditor, with the
endorsement of Arthur Levitt. Levitt had been
hired by AIG to restore good corporate governance to AIG.
Bloomberg, October 11, 2007:
The company interviewed at least three others over
the course of a year for the job, which starts 2008, said AIG spokesman
Chris Winans.
PricewaterhouseCoopers, AIG’s auditor for more
than two decades, had approved financial results from 2000 to 2005 that
were restated amid Spitzer’s probe, lowering earnings by $3.4 billion.
AIG investors sued the auditor in a Sept. 28 amended filing to recover
losses from the settlement and restatement.
“Many companies involved with corporate scandals
have changed their auditors to regain investor trust,” said
Lynn Turner, a
former chief accountant at the U.S. Securities and Exchange Commission.
… “disappointed” AIG kept “the auditor who failed investors by giving a
clean bill of health on misleading financial statements.”
PwC gets reappointed as auditors, so that
a few months later, they can tell AIG what
a screw-up they’ve been. In my opinion, it’s
too little too late. But what’s
really going on here?
Crisis One litigation is still very much
alive. After PwC’s material weakness determination in early 2008, for the
2007 financials, there was an attempt to amend the ongoing suits to include
a CDO/CDS cause of action. Research to support this request showed that PwC
had been dealing with
closely related accounting issues
as far back as 2002, centered mostly around
EITF 02-3 valuation issues.
The research revealed deep, longstanding
internal controls issues that were now becoming painfully apparent.
Between Crisis One and Crisis Two (i.e.,
the 2004 and prior accounting irregularities that ousted Maurice Greenberg,
and then the 2007 AIGFP mess), the players on both the AIG management side,
and the PwC engagement team side, were pretty much totally traded out.
On the PwC side,
Global Relationship Partner Barry Winograd and Engagement Partner Richard
Mayock stepped down after the 2004 audit year and
Tim
Ryan and Mike McColgan took over
as Global Relationship Partner and Engagement Partner, respectively. The
AIG Expanded Scope Audit, for 2004 and prior, was a Herculean
effort for PwC, involving a tremendous amount of interface with AIG’s own
internal review, the attorney investigations led by law firms Paul Weiss and
Simpson Thacher, as well as ongoing regulatory inquiries.
PwC had to pull out all the stops to come
up with enough staff to complete the task – this was Sarbanes-Oxley prime
push period and resources were constrained and at a premium. Although
Greenberg loudly disagreed
at the time, sources tell me most of
those who had been, and were then, key members of the engagement team, left
the engagement. While the change-outs at the top were largely
political, many of the changes down in the ranks were people who were
completely burned out on AIG, and unwilling to continue on that engagement.
At AIG, those managers such as
Cassano not affected by Crisis One
head chopping, were still in place, and the derivatives business largely
missed out on any magnifying glass treatment as a result of Crisis One.
Based on documents obtained during discovery related to Crisis One, it was
clear PwC the firm was really red faced that they’d “missed it.” When the
replacement audit team moved forward, and then the rumblings of the CDO/CDS
mess started being heard, PwC press releases coming out in February 2008
gave the impression that the firm’s leaders were not about to be caught
asleep at the wheel again. They threw the “material weakness” flag quite
quickly.
And then you read the
Washington Post article about the
now revealed 2007 internal AIG emails, and follow the timeline in 2007. In
retrospect, it’s easy to see that by summer 2007 AIG management had a pretty
good idea its risk of drawdowns on the CDS’s is way more likely than the
“less than remote” characterization in the footnote description of
prior years’ financial.
How much of that early realization got on
the PwC new engagement team radar? How many other big things did they
miss or pretend not to see?
An AIG presentation dated
Nov 2007 was still totally
minimizing any prospective increase in risk.
It was during 2007 that AIG’s conflicts
with Goldman Sachs over collateral for the CDOs became heated.
I wrote in December, based on reports by
Andrew Ross
Sorkin in his book, Too Big To
Fail:
AIG had publicly disclosed the existence of a
collateral dispute with Goldman Sachs over CDOs in November of 2007… AIG
Chairman of the Board Bob Willumstad, according to Sorkin, not PwC,
originally raised red flags in January 2008 regarding the growth of the
collateral gap. Willumstad called in PricewaterhouseCoopers to review
the situation and,
“PwC eventually instructed
AIG to revalue every one of the credit default swaps… and embarrassingly
disclosed that it had found a “material weakness” in [AIG's] accounting
methods.”
…AIG “admitted” that their management may have held
back or even lied to the auditors. AIG
had actually given PwC an out, I said, to keep them close in the
event of litigation or worse…A few pages later, on page 175, Sorkin
describes a Goldman Sachs June 2008 board meeting where the issue of
their collateral dispute with AIG boils over.
“In a videoconference presentation from New York,
a PwC executive (PwC is Goldman Sach’s auditor, too) updates the board
on its dispute with AIG over how it was valuing or in Wall Street
parlance, “marking-to-market,” its portfolio. Goldman executives
considered AIG was “marking to make-believe” as Blankfein told the
board…the afternoon session proceeded with upbraiding
PricewaterhouseCoopers:
“How does it work
inside PwC if you as a firm represent two institutions where you’re
looking at exactly the same collatteral and there’s a clear dispute in
terms of valuation?”
How does it work, indeed. Jon Winkelreid, Goldman’s
co-president, may or may not have received an answer that day. Sorkin
does not report one. I have never heard one.
It must be tough to be PwC, wedged between
two powerful, lucrative, and equally complex clients. The money they’re
raking in provides some solace, I’m sure.
Reuters, July 1, 2009
AIG paid PwC a total of $131 million in audit and
other fees in 2008 and $119.5 million in 2007. ”I want to know what
these fees were paid for,” shareholder Kenneth Steiner of Great Neck,
New York said. “Why didn’t anybody know what was going on? What were the
accountants doing? Were they sleeping?”
For Goldman Sachs, PwC provides not only
audit, audit related, and tax advice, they also provide similar services to
other entities managed by Goldman Sachs subsidiaries. For 2008,
those fees totaled $99.9 million.
Audit fees . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . $56.0 (2008) $49.2 (2007)
Audit-related fees (a) . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 4.1 3.0
Tax fees (b) . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 1.7
2.3
All other fees . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . — — — —
PricewaterhouseCoopers LLP also provides audit and tax
services to certain merchant banking, asset management and similar funds
managed by our subsidiaries. Fees paid to PricewaterhouseCoopers LLP by
these funds for these services were $38.1 million in fiscal 2008 and
$29.5 million in fiscal 2007.
Regardless of the fact that PwC is making
more from AIG right now, both clients are critical and they’re hanging on to
both tightly. So it’s not surprising, under those circumstances, that PwC
tries to minimize conflict with either unless absolutely necessary. In
fact, even though they may have been taken to the woodshed by both in the
past, they’ve escaped any significant public criticism for staying quietly
and peacefully in the middle, neutral like Switzerland, when it comes to the
disputes and conspiracy theories about the relationship between the two
firms and each with the NY Federal Reserve Bank.
It may be that PwC has learned to
play both clients like a fiddle from professional
dancing bears like
Arthur Levitt. As we discussed earlier, Levitt
played a significant role in getting AIG past most of the New York Attorney
General’s scrutiny after their actions against AIG. Part of that healing
process included reappointing PwC as auditor. But Arthur Levitt is also a
paid advisor to Goldman Sachs.
The Wall Street Journal did not mention his prominent role with AIG when
they published a
fawning homage to Levitt from Lloyd Blankfein.
And we’re not often reminded post-
“Goldman Sachs making out like a bandit as a 100 cents on the dollar AIG
counterparty” of the strange choice of Ed
Liddy as CEO of AIG to replace
Mr. Willumstad of “make PwC
revalue the CDO’s and issue a material weakness in internal controls”
fame.
The Wall Street Journal, September 16, 2008
By tapping Mr. Liddy as AIG’s next CEO, the
government is turning to someone with deep experience in the insurance
industry, having served as chief executive of Allstate from 1999 to
2006….Mr. Liddy also has experience pulling apart empires, having helped
dismantle Sears, Roebuck & Co. (from which Allstate was spun off) in the
1990s. Before joining Sears, Mr. Liddy worked under Donald Rumsfeld at
drug maker G.D. Searle & Co. Mr. Liddy is on the board at
Goldman Sachs Group,
the investment bank that Mr. Paulson led before becoming Treasury
Secretary.
Maybe PwC didn’t stand a snowball’s chance
in hell to be a truly independent, objective advocate for shareholders by
forcing a true and fair presentation, in all material respects, of the
financial position of either one of these companies and the results of their
operations and their cash flows in conformity with accounting principles
generally accepted in the United States of America. But is there a truly
good excuse for PwC to not have been a preemptive strike force, a beacon, an
early warning system for shareholders of the financial Armageddon we faced?
They had longstanding, thorough, perfect knowledge of both sets of financial
statements.
Add to this perfect knowledge the
additional capital markets insight PwC has given their audit relationship
with other large global financial institutions such as
JP Morgan, Bank of America, Freddie Mac, Fortis, Barclays,
Northern Rock…
Well, you get the idea.
Why didn’t PwC speak up, act more strongly
to match mismatched valuations between entities like AIG and Goldman Sachs,
raise their hand and shout fire, or at least warn of suffocating black smoke
obscuring woefully inadequate risk management and of pricing “models” strung
together like so many holiday lights electrical cords, faulty wiring and
all, ready to blow the circuits?
Was it the fees?
Well, there’s certainly $230 million plus
reasons in 2008 to play nicey-nice between the two clients. But that
explanation would be too simple.
“ Yves” at NakedCapitalism.com described the syndrome well
when referring to the New York Federal
Reserve and their lousy deal with AIG.
No matter which way you look at it, the picture
that is emerging of the Federal Reserve, as revealed by the ongoing
probes into its AIG bailout, is singularly unflattering.
The explanations for its actions can only support
one of two interpretations: that the Fed was a chump, taken by the
financiers, or a crony, and was fully aware that it was not just
rescuing AIG, but doing so in an overly generous way so as to assist
financial firms in a way it hoped would not be widely noticed or
understood.
I wrote similarly about PwC with regard to
the
Satyam fraud.
The dilemma for the PwC Global senior leadership
“crisis team” now in India is that the answer to the burning question,
“How could Price Waterhouse India let this happen at Satyam?”
has four possible answers:
a) Price Waterhouse India audit technique and
“quality” standards demonstrate the epitome of incompetence and
professional negligence,
b) Price Waterhouse India partners colluded with
Satyam management to commit the fraud,
c) Price Waterhouse India partners were “duped,”
d) Some combination of all three.
None of the answers will win
PricewaterhouseCoopers International Limited a prize.
For an example of incompetence, over and
above that which PwC and their client have already admitted to, let’s talk
about one element of PwC’s audit process at AIG.
From a source:
Staff Accounting Bulletin No. 99 talks about that
elusive concept of “materiality.” In its guidelines, SAB 99 says an
omission or misstatement of an item in a financial report is material
“…if, in light of the surrounding circumstances, the magnitude of the
item is such that it is probable that the judgment of a reasonable
person relying upon the report would have been changed or influenced by
the inclusion or correction of the item.” i.e., qualitative
materiality.
The element of auditor judgment and adequate
subjective “professional skepticism” was lacking, and it allowed the
frauds leading to the 1999-2004 restatements, as well as the
head-in-the-sand failure to identify the impending catastrophe being
created in AIG Financial Products with the CDS / subprime derivative
products. Year after year, the applicable boilerplate footnote in the
financials continued to characterize the risk of ANY claims on those
products, for the Super Senior tranche AIG was insuring, as “less than
remote.” Until, of course, it was too late.
In workpaper after workpaper, PwC whizzes past
areas that subsequently became problematic, by relying on the failure of
the item to reach the established level of QUANTITATIVE materiality
alone, with inadequate subjective analysis of the qualitative.
It’s particularly ironic that, in the AIG/PwC
assessment of “remediation” needs during the Restatement — which
resulted in termination of a number of AIG execs, and demotion or
reassignment of others away from responsibilities for financial
reporting — Joseph Cassano at AIG FP was given a clean bill of health
and allowed to continue unabated down the path toward disaster. If ever
there was a time when “looking under every rock” for more rattlesnakes
was called for, it was during the 2005 Restatement. The fact that PwC
failed to get even a sniff of what was coming a couple of years later
from AIG FP — even after deploying DA&I and dozens of extra auditors to
handle the “Expanded Scope Audit” for 2004 — is very sobering, and
brings into question (as you regularly do) why audits and investigations
are even bothered with.
I don’t think PwC is a complete dupe for
AIG and Goldman Sachs any more than they were in the
Satyam fraud case in India. I heard
rumors in December 2007 that
Goldman Sachs was thinking of dumping PwC. Who knew then how angry Goldman
was at PwC for their client AIG’s intransigence on the collateral call? But
it all worked out, didn’t it? I guess Goldman decided, “Keep your friends
close….and your lackeys closer.”
Continued in article
Concerns About Big Four Audit Firm Survival After the Banking Litigations
---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
Recent PwC Litigation and Settlements ---
http://www.trinity.edu/rjensen/fraud001.htm
Audit Firm Professionalism and Independence Issues ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
"The AICPA Files Lawsuit Challenging Application of Federal Trade
Commission's "Red Flags Rule" to CPAs," New Accountant, November 11,
2009 ---
http://www.newaccountantusa.com/AICPA.pdf
From the Trites E-business Blog (in Canada) ---
http://www.zorba.ca/2010/02/has-social-networking-run-its-course.html
February 22, 2010
Has Social Networking Run Its Course?
A recent poll - unscientific and all - has resulted
in some 400 readers of Internet Evolution to call for the elimination of
Facebook, Myspace and Twitter. The poll asked the question: "If you could
eliminate one Web service, which one would it be?" Biased, for sure, but
nevertheless food for thought.
There are plenty of reasons why social networking
could run out of steam. It started with teenagers, notorious for social
interaction but - - between themselves. Now that it has gone mainstream, it
loses its appeal to them. Also, the privacy and security implications of
social networking are becoming increasingly evident to everyone. That will
turn off many people - as it already has employers and other organizations.
That said, people are inherently social and it
could be that social networking is just going through a fine tuning stage.
Stay tuned.
For a write-up on the survey, follow this link---
http://www.internetevolution.com/author.asp?section_id=466&doc_id=188181&f_src=internetevolution_section_466
Other recent posts to Jerry's E-business Blog ---
http://www.zorba.ca/blog.html
Jerry's home page is at http://www.zorba.ca/
Jensen Comment
Jerry is not given enough credit for being a blogging pioneer. He was one of the
first accounting professors in the world to provide chronological blogs. As I
recall he started blogs on E-commerce and XBRL about the same time, and I'm
sorry that I've not tracked these blogs more closely in recent years. Like good
wine, they've improved with age.
Bob Jensen's threads on professors who blog and social networking ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Our Meaner and Nastier IRS?
February 24, 2010 message from Robert Bowers
[M.Robert.Bowers@WHARTON.UPENN.EDU]
I’m sure this will be a popular item to respond to
in the heat of tax season ”Heat of Tax Season” – btw I am writing from the
Balt-DC area. This past few wks I have had 65” of snow. I can’t find my
office door.
The Question:
In my part of the woods the IRS is cracking down
like I haven’t seen in ages. At the exam, and now Appeals, they are
demanding receipts for every item.
This notwithstanding their own IRM says, if
original receipts are unavailable, secondary records, incl testimony, are
acceptable. This notwithstanding they are ignoring the “Cohan Rule”, wherein
the Court of Appeals ruled that, if receipts are unavailable, reasonable
estimates are allowable.
The IRS’ers in this area have thrown all that out.
Strangely enough, I think the Cohan case is still the law, has never been
overturned. Even stranger, the section on estimates in their own IRM, the
Bible for Appeals, still allows estimates.
So I guess the IRS can change the rules any time
they want. Reverse their own written guidelines, and even reverse the Court
of Appeals.
This flies in the face of everything I have
learned. It certainly runs counter to good accounting practice. If the T/P
cannot estimate at all, the return certainly won’t “present fairly” (to use
an auditing term) the tax liability of that T/P.
Am I venting? I really think those of us on the
firing line need to fight back when there is injustice. Maybe I should have
been one of the three amigos.
Respectfully,
M. Robert Bowers,
CPA Bowers,
Marin & Co Ph. (410) 461-6161 Fax (443-269-2626
e-mail M.Robert.Bowers@Wharton.UPenn.edu
Jensen Comment
Other CPAs report agreeing with Robert Bowers on this observation. I suspect
that it comes from increased pressures (targets?) to extract every last dollar
from taxpayers under the present tax laws when there are monumental deficits in
virtually all cities, states, and an unsmiling Uncle Sam himself.
Two of the world's biggest accounting firms are
reigniting the dispute over the way that banks account for losses - raising
doubts over the long-awaited convergence of global reporting standards.
"Deloitte chief reignites debate over accounting for banks' losses,"
by Rachel Sanderson and Patrick Jenkins, Financial Times, February 15, 2010 ---
http://www.ft.com/cms/s/0/a9cef3fa-19d0-11df-af3e-00144feab49a.html?nclick_check=1
Two of the world's biggest accounting firms are
reigniting the dispute over the way that banks account for losses - raising
doubts over the long-awaited convergence of global reporting standards.
Jim Quigley, global head of "Big Four" accounting
firm Deloitte Touche Tohmatsu has proposed that banks account for losses in
two radically different ways, to meet the opposing demands of politicians
and accountants.
He has told the Financial Times that he is an
"advocate" of banks making loan loss provisions for "incurred losses"
separately from "expected losses" - and reporting them in two different
lines in their accounts.
However, PwC, the world's largest accounting firm,
has previously criticised a similar proposal, saying it would "muddy the
waters".
Mr Quigley's proposal comes as accountants are
grappling with politicians and regulators over how banks make provision for
their losses, in the wake of the financial crisis. The lack of consensus
threatens agreement on a global set of accounting standards by mid 2011 - an
aim of the group of 20 nations - and follows disputes over the use of fair
value or mark-to-market accounting, experts say.
Politicians and regulators have blamed the current
system of "incurred losses" - whereby companies may make provision for loan
losses only as they occur - for exacerbating the crisis, by encouraging a
cyclical approach to risk management.
But that view is questioned by many accountants and
bankers who say that "incurred losses" give investors clarity. Accountants
and bankers are also are sceptical about the "expected loss" model, as they
fear it raises the risk of "cookie jar" accounting, whereby executives put
funds aside during good years only to release them later to cover up bad
performance.
Mr Quigley said he believed that "one way we can
bridge some of the current conflicts in financial reporting is with
transparency". "The two-line idea accomplishes that transparency objective,"
he told the FT. However, PwC, has said it is opposed to putting two lines in
the income statement.
The debate over the use of "expected losses"
centres on whether banks should judge their provisioning over a matter of
months, or over the life cycle of the loan - and whether the provisions
should be taken through profit and loss.
Where were the auditors ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Bob Jensen's threads on fair value accounting ---
http://www.trinity.edu/rjensen/theory01.htm#FairValue
Bob Jensen's threads on accounting standard setting controversies are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
"The Case Against College Education," by Ramesh Ponnuru, Time
Magazine, February 24, 2010 ---
http://www.time.com/time/nation/article/0,8599,1967580,00.html?xid=huffpo-direct
Thank you Ms. Huffington for the heads up.
Even in these days of partisan rancor, there is a
bipartisan consensus on the high value of postsecondary education. That more
people should go to college is usually taken as a given. In his State of the
Union address last month, President Obama echoed the words of countless high
school guidance counselors around the country: "In this economy, a high
school diploma no longer guarantees a good job." Virginia Governor Bob
McDonnell, who gave the Republican response, concurred: "All Americans agree
that a young person needs a world-class education to compete in the global
economy."
The statistics seem to bear him out. People with
college degrees make a lot more than people without them, and that
difference has been growing. But does that mean that we should help more
kids go to college — or that we should make it easier for people who didn't
go to college to make a living? (See the 10 best college presidents.)
---
http://www.time.com/time/specials/packages/article/0,28804,1937938_1937934,00.html
We may be close to maxing out on the first
strategy. Our high college drop-out rate — 40% of kids who enroll in college
don't get a degree within six years — may be a sign that we're trying to
push too many people who aren't suited for college to enroll. It has been
estimated that, in 2007, most people in their 20s who had college degrees
were not in jobs that required them: another sign that we are pushing kids
into college who will not get much out of it but debt.
The benefits of putting more people in college are
also oversold. Part of the college wage premium is an illusion. People who
go to college are, on average, smarter than people who don't. In an economy
that increasingly rewards intelligence, you'd expect college grads to pull
ahead of the pack even if their diplomas signified nothing but their smarts.
College must make many students more productive workers. But at least some
of the apparent value of a college degree, and maybe a lot of it, reflects
the fact that employers can use it as a rough measure of job applicants'
intelligence and willingness to work hard.
We could probably increase the number of high
school seniors who are ready to go to college — and likely to make it to
graduation — if we made the K-12 system more academically rigorous. But
let's face it: college isn't for everyone, especially if it takes the form
of four years of going to classes on a campus.
(See pictures of the college dorm's evolution.) ---
http://www.time.com/time/photogallery/0,29307,1838306_1759869,00.html
To talk about college this way may sound élitist.
It may even sound philistine, since the purpose of a liberal-arts education
is to produce well-rounded citizens rather than productive workers. But
perhaps it is more foolishly élitist to think that going to school until age
22 is necessary to being well-rounded, or to tell millions of kids that
their future depends on performing a task that only a minority of them can
actually accomplish.
The good news is that there have never been more
alternatives to the traditional college. Some of these will no doubt be
discussed by a panel of education experts on Feb. 26 at the National Press
Club, a debate that will be aired on PBS. Online learning is more flexible
and affordable than the brick-and-mortar model of higher education.
Certification tests could be developed so that in many occupations employers
could get more useful knowledge about a job applicant than whether he has a
degree. Career and technical education could be expanded at a fraction of
the cost of college subsidies. Occupational licensure rules could be relaxed
to create opportunities for people without formal education.
It is absurd that people have to get college
degrees to be considered for good jobs in hotel management or accounting —
or journalism. It is inefficient, both because it wastes a lot of money and
because it locks people who would have done good work out of some jobs. The
tight connection between college degrees and economic success may be a
nearly unquestioned part of our social order. Future generations may look
back and shudder at the cruelty of it.
Read more:
http://www.time.com/time/nation/article/0,8599,1967580,00.html?xid=huffpo-direct#ixzz0gYarvwQM
Time's Special Report on Paying for a College Education ---
http://www.time.com/time/specials/packages/0,28757,1838709,00.html
Jensen Comment
I think it is misleading to talk about the "value" of education in terms of the
discounted present value of a degree due to career advantages. Firstly,
education has many intangible values that cannot be measured such as being
inspired to really enjoy some of the dead or living poets.
Secondly, even if college graduates on average make a lot more money,
this is an illustration of how to lie with statistics. A major problem is in the
variance about the mean. Much depends upon where students graduate, what they
majored in for their first degree, whether or not they attended graduate school,
what they majored in in graduate school, where they got their graduate degree,
etc. Average incomes may also be skewed upward by kurtosis and the related
problem of bounds on the left tail of the distribution. Low income levels are
bounded whereas high income levels may explode toward the moon for bankers,
corporate executives, physician specialists, etc.
In any case telling every student to expect more than a million dollars just
for getting a bachelors degree is a big lie!
Bob Jensen's threads on the "Criterion Problem" are at
http://www.trinity.edu/rjensen/assess.htm#CriterionProblem
February 4, 2010 message from Roger Debreceny
[roger@DEBRECENY.COM]
Many
on the list will know Eric Cohen of PwC, one of the founders of the XBRL
community. There is a recent video interview with Eric on YouTube (http://tinyurl.com/ericcoheninterview)
where he covers recent and coming developments on the SEC's interactive data
mandate.
Roger Debreceny
School of Accountancy
Shidler College of Business
University of Hawai'i at Manoa
2404 Maile Way
Honolulu, HI 96822, USA
Google Voice: +1 (513) 393-9393
roger(at)debreceny.com
rogersd(at)hawaii.edu
www.debreceny.com www.twitter.com/debreceny
Sent from Honolulu, Hawaii, United States
"Avoiding Common Errors of XBRL Implementation," by Jon Bartley, Y.S.
Al Chen, and Eileen Taylor, Journal of Accountancy, February 2010
---
http://www.journalofaccountancy.com/Issues/2010/Feb/20092058.htm
Bob Jensen's threads on XBRL are at
http://www.trinity.edu/rjensen/XBRLandOLAP.htm
The following is the latest sharing of Richard Sansing on the AAA Commons ---
http://commons.aaahq.org/posts/b7d135929d
Richard says this is a preliminary draft of his scheduled presentation at the
forthcoming ATA mid-year meeting
in Denver
title:
Financial Accounting Measures of Tax Reporting Aggressiveness
author or authors:
Anja De Waegenaere, Tilburg University
Richard Sansing, Tuck
School of Business at Dartmouth and CentER, Tilburg University
Jacco Wielhouwer, VU University Amsterdam
date:
February 20, 2010
from 1:30pm - 3:00pm
abstract:
This study examines a
setting in which a tax reporting decision can be
delegated to a firm's
tax manager. The use of financial accounting measures of tax
expense arises
endogenously as an efficient way of providing contemporaneous
incentives to the
manager when the consequences of the tax reporting decision will
occur in the future.
The study also examines the relations between the firm's tax
aggressiveness, its
book income tax expense and its unrecognized tax benefits. It finds
an ambiguous relation
between aggressiveness and a reduction in tax expense for
financial reporting
purposes, but finds a monotone relation between a firm's
unrecognized tax
benefit (UTB) and the probability that the firm is aggressive.
The Financial Accounting Standards Board and the
International Accounting Standards Board tentatively decided to define fair
value as an exit price during a three-day joint meeting this week.
Web CPA. January 20, 2010 ---
http://www.webcpa.com/news/Accounting-Boards-Define-Fair-Value-53050-1.html
The Financial Accounting Standards Board and the
International Accounting Standards Board tentatively decided to define fair
value as an exit price during a three-day joint meeting this week.
Fair value measurement is one of the thornier
issues the two standards-setters are trying to come to an agreement on as
they seek to converge U.S. GAAP with International Financial Reporting
Standards by June 2011. Fair value, or mark-to-market, accounting has been
blamed in some quarters for helping exacerbate the financial crisis.
Standard-setters have come under pressure to revise the standards to give
financial institutions more flexibility in valuing assets such as
mortgage-backed securities that became difficult to trade during the crisis.
The two boards have decided to meet on a monthly basis, both in person and
by video conference, to resolve outstanding issues in areas such as fair
value, revenue recognition, leases and consolidation.
When markets become less active, the two boards
tentatively decided that an entity should consider observable transaction
prices unless there is evidence that the transaction is not orderly. If an
entity does not have enough information to determine whether the transaction
is orderly, it should perform further analysis to measure the fair value.
The boards also tentatively decided that the
transaction price might not represent the fair value of an asset or
liability at initial recognition if, for example, the transaction is between
related parties, the transaction takes place under duress or the seller is
forced to accept the price in the transaction, the unit of account
represented by the transaction is different from the unit of account for the
asset or liability measured at fair value, or the market in which the
transaction takes place is different from the market in which the entity
would sell the asset or transfer the liability.
The boards also tentatively decided to confirm that
a fair value measurement is market based and reflects the assumptions that
market participants would use in pricing the asset or liability. Market
participants should be assumed to have a reasonable understanding about the
asset or liability and the transaction based on all the available
information, including information that might be obtained through due
diligence efforts that are usual and customary. A price in a related-party
transaction may be used as an input to a fair value measurement if the
transaction was entered into at market terms.
Jensen Comment
Of course the debate will center on the details. To what degree must buyers and
sellers be under pressures to sell such as in forced liquidations? To what
extend can interactions (covariances, value in use) be ignored? Interactions are
usually less of a problem when valuing financial items than non-financial items
where value is use often varies greatly from piecemeal liquidation value. The
FASB, of course, has considered the exit value hierarchy stumbling blocks such
as broken markets in FAS 157 and FSP 157 (4).
A huge problem is earnings volatility created by unrealized value changes on
earnings, particularly value changes on held-to-maturity items like fixed rate
debt instruments that management may not even have the option of liquidating
before maturity. There also is a huge problem that changes in credit ratings may
have misleading impacts on earnings when debt is revalued. What do you do with
the unrealized gains caused by lowered credit rating scores on your debt or
unrealized losses from increased credit ratings on your debt?
These complications are discussed in greater detail at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
February 4, 2010 message frin David A E Raggay
[david.raggay@IFRS-CONSULTANTS.COM]
Hi All,
I hope that all are well. I’m still under the gun
and only have time for a quick post.
The IASC Foundation (IASCF), which is the umbrella
organisation to which the International Accounting Standards Board (IASB)
belongs, has recently issued the first batch of training material pertaining
to IFRS for SMEs. The standard itself was issued in July, 2009. These
materials include comparisons with full IFRS as well as multiple choice
questions and case studies. The materials can be freely downloaded by
clicking on the following link:
http://www.iasb.org/IFRS+for+SMEs/Training+material.htm
If you are unable to click on the link, copy
it and paste it in your browser address window.
David
With Kind Regards,
David Raggay David Raggay Managing Principal IFRS
Consultants Office: 2A Alexandra Street, St. Clair, Port of Spain, Trinidad,
W.I.
Phone/Fax: (868)-622-2217 Mobile: (868)-739-9500
Email:
david@ifrs-consultants.com
Website:
http://www.ifrs-consultants.com
Bob Jensen's threads on IFRS learning resources are a t
http://www.trinity.edu/rjensen/theory01.htm#IFRSlearning
Some early lessons to be learned in advance when U.S. GAAP is replaced
with international IFRS standards:
"Shortcomings in IFRS transition disclosures in Canada," Canada's Ontario
Securities Commission, February 7, 2010 ---
http://www.iasplus.com/ca/1002oscifrsreview.pdf
Recently staff of the Ontario
Securities Commission conducted a review to assess the extent and quality of
International Financial Reporting Standards (IFRS) transition disclosures
made by issuers in light of the disclosure guidance provided in CSA Staff
Notice 52-320
Disclosure of Expected
Changes in Accounting Policies Relating to Changeover to International
Financial Reporting Standards
(SN 52-320).
SN 52-320 provides guidance on the
requirement in Form 51-102F1
Management’s
Discussion & Analysis
(MD&A) for an issuer’s disclosure of the expected
changes in accounting policies related to IFRS changeover for the three-year
period prior to financial years beginning on or after January 1, 2011 (the
changeover date). This disclosure is important to assist investors in
assessing the readiness of an issuer’s transition to IFRS and the impact the
adoption of IFRS may have on the issuer.
Our review focused on reporting
issuers’ IFRS transition disclosure provided in 2008 annual and 2009 interim
MD&A. We used a risk-based approach to select issuers, supplemented by a
random selection of issuers across various industries. Generally, the
criteria used in our selection process was designed to identify issuers
whose disclosure was likely to be materially improved relative to the
guidance set out in SN 52-320.
In 2008 MD&A, we expected issuers to
have discussed the status of the key elements and timing of their IFRS
changeover plan. As explained in SN 52-320, developing and implementing an
IFRS conversion plan is not just an accounting exercise, since IFRS adoption
will affect a wide variety of an issuer’s business activities. SN 52-320
directs issuers to consider how the transition to IFRS will affect all
business functions that rely on financial information and to communicate
this to investors.
We also expected issuers to have
provided a status update in their 2009 interim MD&A against previously
disclosed timelines so that readers of the MD&A could have assessed an
issuer’s transition progress.
Of the 106 reporting issuers reviewed,
60% discussed an IFRS changeover plan, while the remaining 40% did not
provide any IFRS transition disclosure. Overall, our findings suggest that
reporting issuers are not adequately discussing, in MD&A, the key elements
of their IFRS changeover plan or their progress towards achieving this plan.
We did not request, however, that issuers re-file MD&A to improve the
quality of historical IFRS transition disclosure because the focus of this
particular review was to raise awareness about the IFRS changeover and to
educate
, . .
In
2008 MD&A, we expected issuers to have
discussed the status of the key elements and
timing of their IFRS changeover plan....
Overall,
we found that issuers are not adequately
disclosing information related to their IFRS
transition efforts. A summary of our
findings is as follows:
- 40% of issuers
received a letter from staff questioning
whether a changeover plan was in place
as it was not evident from reading their
MD&A disclosure. Given the short time
remaining before the changeover date
this raises concerns that issuers may
not be able to comply with future filing
obligations.
- Of the 60% of
issuers that discussed an IFRS
changeover plan in their 2008 annual
MD&A, approximately half simply provided
a generic description of the plan
without any direct application to their
own circumstances. The most valuable
information for investors is IFRS
transition disclosure that is specific
to the issuer.
- 80% of issuers
that discussed an IFRS changeover plan
failed to describe significant
milestones and anticipated timelines
associated with each of the key elements
of the plan. It is important that
issuers discuss the timing associated
with key elements so that investors can
readily assess whether the project is
progressing in accordance with the
changeover plan.
- 48% of issuers
that discussed IFRS transition in 2008
annual MD&A failed to provide quarterly
updates in 2009 interim MD&A on the
progress related to their changeover
plan. Investors need progress updates to
assist them in assessing the likelihood
that the issuer will be able to complete
its IFRS conversion on time.
|
|
|
|
Continued in report
Bob Jensen's threads on the transition mess and uncertainty in the United
States ---
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Andersen Partners in the Aftermath of Enron: Protiviti and Huron in
Particular
Some Andersen partners stayed on at the Andersen firm (that is no longer an
auditing firm) and some continued to make their living at Andersen's training
facility in St. Charles, Illinois. In 2005, the U.S. Supreme Court overturned
Andersen's conviction for obstruction of justice ---
http://en.wikipedia.org/wiki/Arthur_Andersen_LLP_v._United_States
The U.S. Supreme Court overturned the conviction of the Arthur Andersen
accounting firm for destroying documents related to its Enron account before the
energy giant's collapse. The ruling is not based upon guilt or innocence. It is
based only on a technicality in the judge's instructions to the jury. The ruling
will not lead to a revival of this once great firm that in the years preceding
its collapse became known for some terrible audits of firms like Waste
Management, Enron, Worldcom and other clients. For details see
http://news.bbc.co.uk/2/hi/business/4596949.stm
Also see
http://accounting.smartpros.com/x48441.xml
Former Andersen partners who formed two consulting firms are not fairing
so well at the moment. But the things at Protivii are a bit more rosy than
things at Huron.
First there's the huge book cooking (creative accounting) scandal at Huron
Consulting that has now sucked in PwC as well ---
Huron Consulting Group was formed in May of
2003 in Chicago with a core set of 213 following the implosion of huge Arthur
Andersen headquartered in Chicago. The timing is much more than mere coincidence
since a lot of Andersen professionals were floating about looking for a new home
in Chicago. In the past I've used the Huron Consulting Group published studies
and statistics about financial statement revisions of other companies. I never
anticipated that Huron Consulting itself would become one of those statistics. I
guess Huron will now have more war stories to tell clients ---
http://www.trinity.edu/rjensen/fraud001.htm#Cooking
Protiviti was formed largely of Andersen's former internal auditing
consultants and has a history outlined below.
"Protiviti Responds to Tough Financial Crisis, Now More Bullish," The
Big Four Blog, February 8, 2010 ---
http://www.bigfouralumni.blogspot.com/
Protiviti, as many will recall, was principally
Andersen’s internal audit service line, and these professionals joined the
multi-billion dollar organization Robert Half International ($RHI) in 2002
to form their own division, separate from the staffing units for which RHI
is better known for – Accountemps, Office Team and Management Resources.
Starting with just over 700 employees in 25 locations, Protiviti has
certainly grown in size and scope, and now is a global business consulting
and internal audit firm providing risk, advisory, and transaction services;
with 2,500 professionals in 62 locations in 17 countries worldwide. The
Protiviti division accounts for 13% of total parent company RHI revenues;
and within Protiviti itself, international operations were 30% of total
Protiviti revenues.
All the senior management at Protiviti continue to be Andersen alumni:
Joseph A. Tarantino, President and Chief Executive
Officer, ex-head of Arthur Andersen’s Financial Services Assurance practice
for metropolitan New York
Carol M. Beaumier, Executive Vice President, Global Industry Programs,
ex-partner in Arthur Andersen’s Regulatory Risk Services practice
Robert B. Hirth Jr., Executive Vice President, Global Internal Audit,
ex-partner with Arthur Andersen
James Pajakowski, Executive Vice President, Global Risk Solutions,
ex-partner with Arthur Andersen
Gary Peterson, Executive Vice President, International Operations,
ex-partner at Arthur Andersen
We haven’t focused on Protiviti for the longest
time, but our attention was brought back after seeing RHI’s full year 2009
results. We were quite surprised to see that despite its size, Protiviti had
a full year 2009 loss. Yes, a loss of $30 million for the entire year on
revenues of $384 million.
To dig deeper into this situation, we had to go
back all the way to 2007, analyze a whole series of quarterly earnings and
read through multiple earnings transcripts (courtesy: SeekingAlpha.com).
An interesting picture emerges from our analysis,
vividly demonstrating the intensity and rapidity of the global slowdown, and
consequent management efforts to cope with business shrinkage.
In 2007, Protiviti had revenues of $552 million,
gross margin of $175 million (32% of revenues), and operating income of $21
million (4% of revenues). In 2008, revenues held reasonably flat at $547
million, but gross margin had decreased by $20 million to $155 million (28%
of revenues), and operating income fell by $14 million, a full 66% to $7
million (1% of revenues). In 2009, the situation had rapidly deteriorated,
with revenues falling 30% to $384 million, gross margin plunging by $75
million to $80 million (21% of revenues), and operating income declining
precipitously by $38 million to a net loss figure of $(31) million (negative
8% of revenues). In a matter of just 24 months, Protiviti’s top line had
eroded by 30% and its operations had gone from a healthy profit to a huge
loss.
A deeper look at the quarterly earnings for two
full years, 2008 and 2009, reveals the full extent of the situation.
In 2007, Protiviti had good operating results, with
3,300 employees, up a whopping 16% from 2006, as management hired talent in
sync with increased demand for its services.
From Q1-2008 to Q3-2008, in the first three
quarters of 2008, revenues continued at the 2007 quarterly run-rate of about
$140 million, but total costs, principally direct compensation costs from
all the increased staff levels were up 4%, increasing from 68% of revenues
in 2007 to 72% of revenues in the first three quarters of 2008. Things were
still on a decent footing at that time, operating income was a few million
dollars profit on the average each quarter, not at 2007 levels, but
certainly not at losses either. The expected increase in 2008 revenues had
not been seen, and the increased cost line continued to pressure Protiviti’s
profits. A review of the Q3-2008 quarterly earnings call shows that
management was cautiously optimistic about Protiviti’s performance and
prospects, and there were initial efforts to bring costs in line with flat
revenues. Given that RHI had not ever managed Protiviti through a downturn,
senior management could not provide decent guidance on revenues for the
upcoming fourth quarter.
Then, with the collapse of Lehman Brothers in
September 2008, the financial crisis became really severe in Q4-2008.
In Q4-2008, Protiviti’s revenues fell to $125
million, $15 million below the run rate seen in the last three quarters, but
Protiviti had already started moving to reducing its cost base. Both direct
costs and SG&A costs were quickly reined in, and the cost base in Q4-2008
was reduced by $12 million in comparison to Q3-2008, to almost offset the
$15 million loss in revenue. Overall, operating income for Q4-2008 decreased
to $1 million from $4 million in Q3-2009.
At the end of 2008, Protiviti had seen flat
revenues to 2007, but a sharp drop in profits. The firm had 3,200 employees,
100 lower than the 3,300 at the end of 2007, through some initial layoffs.
Its likely no-one imagined how 2009 would turn out.
In Q1-2009, Protiviti’s revenue fell to $100
million, $25 million below Q4-2008 (some of this was attributed to
seasonally slow first quarters), but this is when Protiviti really started
to manage its employee base. It took an $8 million extraordinary charge in
the quarter for severance costs, with an intent to manage its employee
compensation costs in line with falling revenues. There was also a
contemporaneous reduction in SG&A, but the quarter still ended with a $11
million operating loss, as total costs in the quarter could not come down
far enough with the rapid decline in revenue.
In Q2-2009, quarterly revenues had fallen another
$10 million to $90 million, however, the cost base also fell by $10 million
from the previous quarter and the operating loss position of $11 million
held steady from the prior quarter. Protiviti took an additional $2 million
employee severance restructuring charge in the quarter. By this time,
management had recognized the severity of the issue and were taking active
steps to manage costs in line with declining revenues. Management said that
US operations had better profitability than international operations, which
were being scrutinized in detail. Also, the division was taking steps to
diversify away purely from Internal Audit and Sarbox type work into IT audit
and co-sourcing to create a larger set of non-correlated service lines.
By Q3-2009, the positive cost impact of the
reductions in staff were showing on the bottom line. Q3-2009 revenues were
$96 million, a good $6 million better than the $90 million in Q2-2009 in
terms of revenue, with the third quarter being sequentially generally better
than the second quarter. Costs in Q3-2009 were also $7 million better than
Q2-2009, with the net result that operating profit increased by $12 million
from Q2-2009 to Q3-2009. Q3-2009 turned in a small operating income of $1
million. Q3-2009 gross margin% matched what were historical levels in the
first half of 2008.
In Q4-2009, the operating situation was quite
similar to Q3-2009, as revenues and costs generally held steady and flat.
Revenue was $96 million, staff utilization improved and operating income was
essentially zero.
Protiviti ended 2009 with $384 million in revenue,
30% lower than 2008, and with an operating loss of $21 million (net of
restructuring charges) compared with $7 million of operating profit in 2008.
The big change in 2009 was the employee base, the year ended with 2,500
employees, 700 employees lower than the end of the previous year. This was a
gut-wrenching 22% reduction in staff, in that 1 out of every 5 professionals
with Protiviti who was working at the end of 2008 was no longer at the firm
in 2009.
As we turn into 2010, management appears much more
bullish about Protiviti’s 2010 prospects and indicated generally that the
division will aim to generate positive operating profit for this year. The
problem seems to lie in Protiviti’s operations outside the US, which are
offsetting a higher level of US profitability, and there seems to be serious
effort to turn that around. It indicates that operating costs levels have
now been sized to a $400 million revenue business; and anecdotal evidence at
Protiviti consultants indicates there is growing confidence that there will
higher levels of business in this year.
Anyone who has passed through this crisis will
recall with clarity how difficult the last quarter of 2008 and the first
half of 2009 really was. This is a case study on Protiviti, but likely
representative of all consulting and accounting firms, who faced and
continue to face a crisis unprecedented in modern times. The decline in
Protiviti (a Big 4 firm spin off) is in line with the decreases in Advisory
service lines at the Big Four firms, however the magnitude of the fall is
much higher at Protiviti, much to its smaller size and smaller footprint in
higher-growth emerging countries of the world.
While we have been able only to tell the story from
the public financials, we do recognize there is a deep human cost, in terms
of lost jobs, continued unemployment, potentially poor morale, and tough
disengagement and working conditions. We invite Protiviti alumni to join the
Big4 LinkedIn group, which has a robust discussion and job board to extend
their network and keep abreast of developments. And if any of our readers
have first-hand or deeper knowledge of this situation, we welcome your
comments.
First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James
Edwards) for unearthing this issue and pursuing it fearlessly to its terrible
end at Huron Consulting.
From The Wall Street Journal Weekly Accounting Review on August 6, 2009
Huron Takes Big Hit as Accounting Falls Short
by Gregory Zuckerman
Aug 05, 2009
Click here to view the full article on WSJ.com
TOPICS: Accounting
Changes and Error Corrections, Advanced Financial Accounting, Mergers and
Acquisitions
SUMMARY: Huron
Consulting Group, Inc., was formed in May 2002 by partners from the now-defunct
Arthur Andersen LLP. "Today, fewer than 10% of the company's employees came
directly from Arthur Andersen." The firm provides "...financial and legal
consulting services, including forensic-style investigative work...." The firm
announced restatement of earnings for fiscal years 2006, 2007, and 2008 and the
first quarter of 2009 due to inappropriate accounting for payments made to
acquire four businesses between 2005 and 2007. The payments were made after the
acquisitions for earn-outs: additional amounts of cash payments or stock
issuances based on earning specific financial performance targets over a number
of years following the business combinations. However, portions of these
earn-out payments were redistributed to employees remaining with Huron after the
acquisitions based on specific performance measures by these employees rather
than being based on their relative ownership interests in the firms prior to
acquisition by Huron. Consequently, those payments are deemed to be compensation
expense. The amounts restated thus reduce net income for the periods of
restatement and reduce future income amounts, but do not affect cash flows of
the firm. Negative shareholder reaction to this announcement by a firm which
provides consulting services in this area certainly is not surprising.
CLASSROOM APPLICATION: Accounting
for allocation of a purchase price in a business combination is covered in this
article.
QUESTIONS:
1. (Introductory) In general, how do we account for assets acquired in
business combinations? How are cash payments and stock issued to selling
shareholders accounted for?
2. (Introductory) What are contingent payments in a business combination?
What are the two main types of contingent payments and what are their accounting
implications?
3. (Introductory) Which of the above 2 types of contingent payments were
employed in the Huron acquisition agreements for businesses it acquired over the
years 2005 to 2008?
4. (Advanced) Obtain the SEC 8_k filing by Huron for the restatement
announcement, dated July 31, 2009, and the filing answering subsequent questions
and answers as posted on its web site, dated August 3, 2009 available at
http://www.sec.gov/Archives/edgar/data/1289848/000119312509160844/d8k.htm
and
http://www.sec.gov/Archives/edgar/data/1289848/000128984809000017/exh99-1.htm
respectively. What was the problem which made the original acquisition
accounting improper? What accounting standard establishes requirements for
handling corrections of errors such as this? In your answer, explain why the
company discloses that investors must not rely on the previously released
financial statements.
5. (Advanced) Refer specifically to the August 3, 2009, filing obtained
above. What were the ultimate journal entries made to correct these errors?
Explain the components of these entries.
6. (Advanced) The author of this article writes that this error in
reporting and subsequently required restatement "...suggests [that] a closer
alliance between consulting and accounting isn't such a bad idea." What is the
SEC requirement that divides consulting and accounting? Do you think this
problem with reporting would have arisen had the firm been allowed to perform
both auditing, accounting, and consulting services to its clients? Support your
answer.
Reviewed By: Judy Beckman, University of Rhode Island
"Huron Takes Big Hit as Accounting Falls Short," by Gregory Zuckerman, The
Wall Street Journal, August 5, 2009 ---
http://online.wsj.com/article/SB124943146672806361.html?mod=djem_jiewr_AC
Financial downturns often expose accounting problems at companies, but scandals
have been noticeably absent in the recent turmoil. Not so anymore.
Late Friday, Huron Consulting Group Inc. said it would restate the last three
years of financial results, withdraw its 2009 earnings guidance and lower its
outlook for 2009 revenue. The accounting snafu, which has decimated the
company's shares, was all the more surprising because Huron traces its roots to
Arthur Andersen LLP, the accounting firm at the heart of the last wave of
scandals.
A dose of added irony is that Huron makes its money providing financial and
legal consulting services, including forensic-style investigative work, and
tries to help clients avoid these types of mistakes.
"One of their businesses is forensic accounting -- they're experts in this,"
says Sean Jackson, an analyst at Avondale Partners in Nashville, Tenn., who
dropped his rating to the equivalent of "hold" from "buy." "Investors are
saying, 'These guys had to know what happened with the accounting, or they
should have known.'"
Investors fear the accounting issues, which will reduce net income by $57
million for the periods in question, might damage the firm's credibility.
Huron's shares fell 70% on Monday, well below the price of its initial public
offering in 2004. On Tuesday, Huron shares rose four cents to $13.73.
Huron, based in Chicago, was started in May 2002 by refugees from Arthur
Andersen who fled the firm after it was indicted for its role in the collapse of
Enron Corp. At the time, the group said that it would specialize in bankruptcy
and litigation work, as well as education and health-care consulting, and that
it would work with more than 70 former clients of Arthur Andersen. Arthur
Andersen's guilty verdict was later overturned, but it was too late to save the
firm, which was dismantled. Today, fewer than 10% of the company's employees
came directly from Andersen, according to a Huron spokeswoman.
Huron on Friday also announced preliminary second-quarter revenue that was shy
of analyst expectations, along with the resignation of Gary Holdren, its board
chairman and chief executive, along with the resignations of finance chief Gary
Burge and chief accounting officer Wayne Lipski. "No severance expenses are
expected to be incurred by the company as a result of these management changes,"
Huron's regulatory filing said.
After its founding by 25 Andersen partners and more than 200 employees, Huron
grew rapidly. It soon had 600 employees and counted firms like Pfizer,
International Business Machines and General Motors as clients. Growing scrutiny
of accounting firms that also did consulting made Huron's consulting-only
business look promising, and shares soared from below $20 five years ago to
nearly $44 before the news on Friday.
That is when Huron dropped its bombshell -- one that suggests a closer alliance
between consulting and accounting isn't always such a bad idea. Huron is
restating financial statements to correct how it accounted for certain
acquisition-related payments to employees of four businesses that Huron
purchased since 2005.
Huron said the employees shared "earn-outs," or financial rewards based on the
performance of acquired units after the transaction was completed, with junior
employees at the units who weren't involved in the original sale. They also
distributed some of the proceeds based on performance of employees who remained
at Huron, not based on the ownership interests of those employees in the
businesses that were sold.
The payments were legal. The problem was how Huron accounted for these payouts.
The compensation should have been booked as a noncash operating expense of the
company. Huron said the payments "were not kickbacks" to Huron management, but
rather went to employees of the acquired businesses.
The method the company used to book the payments served to increase its profit.
The adjustments reduced the company's net income, earnings per share and other
measures, though it didn't affect its cash flow, assets or liabilities.
Part of investors' concern is that they aren't entirely sure what happened at
Huron. The company's executives aren't speaking with analysts, some said on
Tuesday.
Employees and big producers now might bolt from Huron, Avondale Partners' Mr.
Jackson says.
"It's still unclear what happened, but it's almost irrelevant at this point,"
says Tim McHugh, an analyst at William Blair & Co., who has the equivalent of a
"hold" on the stock, down from a "buy" last week. "The company's brand has been
impaired and turnover of key employees is a significant risk."
December 3, 2009
reply from Francine McKenna
[retheauditors@GMAIL.COM]
I,
of course, blame Huron mostly on PwC. That's my schtick.
http://retheauditors.com/2009/08/10/pwc-and-huron-consulting-goodwill-too-good-to-be-true/
But
a little bit on the AA legacy.
http://retheauditors.com/2009/08/04/huron-consulting-go-on-take-the-money-and-run/
Francine
Bob Jensen's threads on the Huron scandal are at
http://www.trinity.edu/rjensen/fraud001.htm#Cooking
Bob Jensen's threads on Andersen, Enron, and Worldcom are at
http://www.trinity.edu/rjensen/FraudEnron.htm
Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/fraud001.htm
"Take the Passionate Accountant Quiz: Can your clients tell if you
are faking it?" by Rick Telberg, CPA Trendlines, February 25, 2010 ---
Click Here
http://cpatrendlines.com/2010/02/25/can-your-clients-tell-if-you-are-faking-it/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+cpatrendlines%2FtPxN+%28CPA+Trendlines%29
From Harvard University: Accounting and Finance History of Lehman
Brothers Deal Books
Lehman Brothers Collection ---
http://www.library.hbs.edu/hc/lehman/
This guide provides information about the resources
available within the Lehman Brothers Collection, including both the deal
book collection and the business records.
Company pages in this guide give a summary of each
deal as well as a company history. Researchers can browse the Lehman
Brothers deal book collection via three access points: the date of the deal,
the company name at the time of the deal, or industry type.
Jensen Comment
For accounting history scholars there are various research opportunities
presented by this open sharing Harvard collection.
Ancient Finance from Harvard Business School
From Jim Mahar's blog on May 17, 2006 ---
http://financeprofessorblog.blogspot.com/
The
HBS Working Knowledge site has an interesting
article by William Goetzmann on
financial instruments back in the time of the Romans and Greeks.
For instance on checks:
...bankers'
checks written in Greek on papyri appeared in ancient Egypt as far
back as 250 B.C. Papyri preserved well in Egypt thanks to its arid
climate, but Goetzmann thinks it's safe to say such checks changed
hands throughout the Mediterranean world . . . So the whole
tradition of bank checks predates the current era and has its roots
at least in Hellenistic Greek times," he says.
Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory
"Out
with "Presented Fairly" and In With "Adhered to the Rules,"
by Tom Selling,
The Accounting Onion,
February 14, 2010 ---
Click Here
Far too often
(like
here),
I have been compelled to point out that "presented fairly" is much
more sizzle than steak. I, myself, am sizzled over the fact that
convergence with IFRS seems to be pushing financial reporting
further from "fair," and more toward "arbitrary." Witness the
ludicrous methodology for loan measurement that the IASB proposes in
place of fair value; or the simplistic procedures the Boards have
proposed for measuring leased assets and the related obligations; or
the lame approach taken to revenue recognition.
Thus, I take a great deal of pleasure in telling you
that, for whatever reason, the FASB did consciously pass on adopting
"present fairly" when it took responsibility for the GAAP hierarchy
from the AICPA. I'll describe how that happened in a moment. But
first, you should know that my primary motivation for this post is
the PCAOB's plan to consider re-writing the standard audit report.
Reportedly, the PCAOB staff is preparing a report on that
topic, which it plans to present to the Standards Advisory Group
(SAG) in early April. This post is my two cents.
FASB Throws "Present Fairly" Under the Bus
Let's first talk about what the FASB did to "present
fairly." SFAS 168 established the FASB's Accounting Standards
Codification as the principle source of authoritative GAAP; and
essentially compressed the "GAAP hierarchy" into a dichotomy:
"authoritative" (to which SEC literature is added for public
companies) and everything else -- although in rare circumstances,
one might apply a "grandfathered" accounting standard not included
in the Codification.
In tandem with the Codification going live, the AICPA excised AU
Section 411,
The Meaning of "Present Fairly in Accordance with
Generally Accepted Accounting Principles"
from its own codification of auditing standards (which the PCAOB
took into its own home, so to speak).
So, the situation we now have is this: while the phrase "presented
fairly" survives in the standard auditor's report language (see AU
Section 508), there is nothing to tell auditors, much less users,
what it is supposed to mean.
Weird, but true.
Also quite wierd is the Codificaton's guidance for
determining an accounting treatment when, as is very often the case,
no authoritative GAAP exists that is directly on point:
"If the guidance for a transaction or event is not specified within
a source of authoritative GAAP for that entity, an entity shall
first consider accounting principles for similar transactions or
events within a source of GAAP for that entity and then consider
nonauthoritative guidance from other sources. …
The appropriateness of other sources of accounting
guidance depends on its relevance to particular circumstances, the
specificity of the guidance, the general recognition of the issuer
or author as an authority, and the extent of its use in practice."
[ASC 105-10-05-2,3 - italics supplied]
In other words, the Codification deals with
when
it would be appropriate to employ analogy to other guidance (or to
use non-authoritative guidance), but not
how
to do it, merely stating that any accounting treatment is legit so
long as it emanates from an "appropriate" source. I smile to myself
every time I read that an appropriate source could even include
"practice" -- that classic safety-in-numbers ploy. If there were a
role for the concept of fair presentation in GAAP, it would be in
determining the
most
appropriate guidance.
But, if the FASB wants to throw fair presentation
under the bus, then the PCAOB should follow suit by taking the term
out of the auditor's report.
An Audit Report that Actually Provides Useful
Information
The content of an auditor's report is, quite
obviously, a function of that which is being reported upon. So, as
you continue reading, kindly remember that I am holding everything
else except for the auditor's report constant (and also holding my
nose). I also want to note before proceeding that the Section 302 of
Sarbanes-Oxley requires the CEO and CFO to certify that the
information contained in the entire SEC filing is fairly presented.
Although S-OX 302 may or may not require some rethinking, I'm not
proposing here that we need to change that.
With that, here is a stab at "opinion" language that
could actually provide useful information to investors:
The financial statements were prepared in accordance with the
specifications of the Financial Accounting Standards Board as set
forth in its Accounting Standards Codification, [name any
grandfathered pronouncements that were applicable], and the
applicable rules and regulations of the Securities and Exchange
Commission,
with the following exceptions:
….[here,
auditors should list transactions not specifically provided for in
the Codification,
and
how the accounting treatment elected was determined to be
appropriate: i.e., analogy to other guidance in the ASC and/or
reference to non-authoritative sources – and perhaps even whether
the SEC staff was consulted].
As an investor, this is precisely what I would want
the auditors to tell me: "these were the rules followed, and when
there were no specific rules to follow, this is what we did, and why
we did it." Instead of vacuous platitudes, we can actually provide
investors with useful statements regarding the quality of earnings.
Changing the Auditor's Report Changes Their Attitude
In addition, to providing information about the
quality of earnings, precisely citing the rules followed in the
auditor's report could also induce more effective audits. As an
example of how well this could work, let's take the revenue
recognition practices of the Apollo Group, which the SEC is now
investigating. As I stated in an earlier post, there appears to be
no specific rule that allows for revenue recognition before cash
realization if the probability of collection from the customer were
as high as 30%.
Now, imagine if Apollo's auditors were required to state that they
were aware that Apollo determined its accounting for tuition
revenues by, say, analogizing to the accounting for warranty costs.
To my way of thinking, it's a tenuous analogy, which the auditor
might have a lot less tolerance for if they had to explicitly
associate themselves with it. It's one thing for an auditor to put
a note in a working paper that may never see the light of day and
quite another to publish those same words for all to see.
Weird, but true.
Throwing "Appears Reasonable" Under the Bus with
"Present Fairly"
As they say on the infomercials,
"But wait, there's more! For the same price plus
shipping and handling, we'll take the bias out of management's
estimates!"
If we can finally acknowledge that fair presentation
has become a bogus criteria for financial statements, we can
re-state the auditor's role in financial reporting more robustly:
to provide a high level of assurance that the rules were applied
"impartially" or in an unbiased manner.
In other words, no more squishy "fair" can mean no
more squishy "reasonable." For example, auditors can easily test
for bias, or lack of impartiality much more effectively than, for
example, taking a pass on management's estimation of the allowance
for bad debts because it "appears reasonable."
Here is some preliminary thinking as to how an
auditor could test for impartiality:
Let's say that the auditor identified 'overstatement
of current period's earnings' to be a significant audit risk, and
that the auditor further identified 21 key estimates such that if
they were not made impartially, net income could be materially
overstated.
The auditor independently replicates the 21 estimates
made by management; and let's assume the auditor finds that for 17
of them, the its estimate was more conservative than management's.
The chances of that happening at random is slightly
less than one in 250
(here's a
link
to the spreadsheet with the calculation); therefore, the auditor
would have to conclude that, for whatever reason, the estimates were
not made impartially.
As I stated, this is a first stab, but the point is
that taking "presented fairly" out of the auditors report and
inserting a focus on adherence to the rules, could change the focus
of the audit itself to information investors are entitled to
expect.
Under the Bus with Rule 203
Finally, there is this annoying and never-used rule
in the audit literature, the gist of which states that if the
auditor finds that strictly following the rules of GAAP would make
the financial statements misleading, the auditor has permission to
bless financial statements that do not comply with GAAP. That would
be Rule 203 of the Code of Professional Conduct.
But, if the audit report were focused solely on
whether the client followed the rules, then we can throw Rule 203
under the bus with "fairly present." If the financial statements
actually were misleading Exchange Act Rule 12b-20 places
responsibility on the issuer to provide information somewhere in the
filing to cure the problem. Thus, the focus need not be on the
auditor.
Requiem æternam dona eis
If you are interested in how "presented fairly" was birthed and
interpreted in the past, I highly recommend an
article
by accounting historian Stephen Zeff, entitled
The Primacy of "Present Fairly" in the Auditor's
Report.
My own reading of Steve's article indicates he believes that
accounting alternatives ultimately selected from nonauthoritative
sources should not be a free choice, but should be constrained by
fair presentation. Accordingly, Steve's proposal for changing the
audit report would also focus on whether the rules of GAAP were
followed; but, in addition, he would have the auditor provide a
separate opinion as to whether the financial statements were
presented fairly.
As for me, I would say, 'eternal rest
grant unto "presented fairly,"' to what has utlimately come to be,
at best, a noble sentiment. If there ever was a practical use for
the term, it's ancient history by now.
Bob Jensen's threads on
accounting theory are at
http://www.trinity.edu/rjensen/theory.htm |
"'Melting' Drywall Keeps Rooms Cool Developers think these phase-change
materials could reduce the need for air-conditioning," by Katherine Bourzac,
MIT's Technology Review, February 4, 2010 ---
http://www.technologyreview.com/energy/24476/?nlid=2719
Building materials that absorb heat during the day
and release it at night, eliminating the need for air-conditioning in some
climates, will soon be on the market in the United States. The North
Carolina company National Gypsum is testing drywall sheets--the plaster
panels that make up the walls in most new buildings--containing capsules
that absorb heat to passively cool a building. The capsules, made by global
chemical giant BASF, can be incorporated into a range of construction
materials and are already found in some products in Europe.
The "phase-change" materials inside the BASF
capsules keep a room cool in much the same way that ice cubes chill a drink:
by absorbing heat as they melt. Each polymer capsule contains paraffin waxes
that melt at around room temperature, enabling them to keep the temperature
of a room constant throughout the day. The waxes work best in climates that
cool down at night, allowing the materials inside the capsules to solidify
and release the heat they've stored during the day.
In some southern European climates, for example,
the materials absorb enough heat during the day to save 20 percent of the
electricity needed for air-conditioning. In northern Europe, where nighttime
temperatures are cooler, a building incorporating the materials may not need
an air conditioner at all, says Peter Schossig, an engineer at the
Fraunhofer Institute in Munich, Germany, whose research group worked with
BASF to develop the capsules.
The work is part of a push in the construction
industry toward greener building materials that help maintain comfortable
temperatures without using electricity. According to the U.S. Energy
Information Administration, buildings consume more than 70 percent of the
electricity generated in America, and about 8 percent of that is used for
air-conditioning in homes and offices. Widely used lightweight construction
materials including wooden framing and drywall enable contractors to put up
buildings rapidly, but they don't store much heat, so temperatures inside
fluctuate throughout the day.
Phase-change materials offer a way to add thermal
mass to lightweight building materials, says Leon Glicksman, professor of
building technology and mechanical engineering at MIT. Since the 1950s,
several companies have tried to develop passive cooling systems that take
advantage of phase-change materials. But they had limited success because
it's difficult to incorporate these new materials into existing building
substances.
BASF makes the microcapsules by rapidly beating
melted wax into hot water. Since wax and water repel one another, the wax
forms small droplets. When the researchers add acrylic precursors to the
mix, the repulsion between wax and water drives them to coat the droplets'
surface. Finally, they add a catalyst to form an acrylic polymer shell
around the wax. The resulting wet mixture can then be added to the powder
that's used to make drywall or dried out and incorporated into other
construction materials, including concrete and plasters.
Jensen Comment
In this era, college professors are on the lookout for "green projects" to
assign for course projects such as team projects in cost accounting courses. It
seems cost analysis of the benefits and costs of phase-changing a particular
building might be a possible projects. Increasingly there are Web sites and
other references that provide information on this new energy saving phase-change
technology.
It would be really neat if a case could be developed on an actual
construction project being undertaken for materials testing purposes.
"How Hard Should the First Test Be?" by Joe Hoyle, Teaching
Financial Accounting Blog, February 15, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/02/how-hard-should-first-test-be.html
February 15, 2010 reply from Patricia Doherty
[pdoherty@BU.EDU]
Very thought-provoking. I agree with his philosophy
on a first test (I give two mid-terms and a final exam in Managerial). I
also, however, have to design it so that (1) I do not have to curve DOWN - a
sure way to kill your course evaluations and (2) with the schools grade %
guidelines in the back of my mind, so that by the end of the term, once
again, we can achieve the guidelines without having to curve down, and
without having to radically change the grades from what they average out to
be based on exams.
p
Today a peacock. Tomorrow a feather duster.
Robert Gates
Patricia A. Doherty
Department of Accounting
Boston University School of Management
595 Commonwealth Avenue Boston, MA 02215
February 15, 2010 reply from Bob Jensen
Hi Pat,
In the early part of my career I often gave a killer first
examination to get the rotten apples out of the barrel early on before the
drop period ended.
Later in my career I still gave a pretty stiff examination more
as a warning to devote serious time to the rest of the course.
First examinations can make it more difficult to compare final
grade distributions between different faculty, If Teacher A gives a killer
first exam that forces the D and F students to drop the course early on, and
Teacher B gives easy examinations until after the course dropping deadline,
it becomes more difficult to compare the final grade distributions of A
versus B since B kept a higher proportion of the ultimate D and F students.
Bob Jensen
"Should You Teach Debits and Credits?" by Joe Hoyle, Teaching
Financial Accounting Blog, February 2, 2010 ---
http://joehoyle-teaching.blogspot.com/
Just a Reminder: If you want to review our new
(free, online) Financial Accounting textbook, you can go to
http://www.flatworldknowledge.com/pub/1.0/financial-accounting --
check out how a textbook can be written entirely in
the Socratic Method (and watch my videos).
**
I started discussing debits and credits yesterday with my students. I hope
to complete the coverage tomorrow.
I know some great teachers who believe that double-entry bookkeeping should
not be taught in a financial accounting class. They feel that the focus
needs to be solely on understanding the information that is reported. I know
other equally great teachers who believe that no person can claim to have
taken a basic financial accounting course without some understanding of
debits and credits.
When an author sets out to write any textbook, a lot of critical decisions
have to be made. For financial accounting, one of the first is: should
bookkeeping with its debits, credits, journal entries, and T-accounts be
covered? You cannot have it both ways—the topic is either there or it is
not. The construction of the rest of the book hinges on how you answer that
question.
From my own experience, I believe the use of journal entries (with their
ancient system of debits and credits) is an effective way to visualize the
impact of a transaction. I readily acknowledge that a person can teach the
course successfully without any mention of mechanical record-keeping.
However, there are so many times in my own classes where I will say “let’s
see if we can figure out what is happening in this case by constructing a
journal entry.” And, I find myself saying that most often when the students
get stuck trying to understand the event. They don’t need a journal entry to
help them understand what accounts change when a receivable is collected.
But the exchange of vehicles, for example, or the write off of an
uncollectible account appear easier for them “to see” if a journal entry can
be set up in debit and credit form.
Publishers often market books as being preparer-based or user-focused. Okay,
that is often a type of code for how much time and energy the book spends on
the mechanical aspects of accounting. But I think that is the entirely wrong
argument. A financial accounting course should be about understanding
financial information that is created using US GAAP (or IFRS). If that
understanding can be enhanced by some coverage of debits and credits, that
is fine by me. I am only interested in aiding my students to understand what
the reported numbers mean and how they were derived. For many of them, a few
debits and credits can prove helpful.
I can be a perfectly good car owner and not know a thing about how a 6
cylinder engine works. However, I can probably be a better car owner if I do
have some knowledge of pistons, plugs, valves, and the other mechanical
stuff. An accounting course should not be about debits and credits (I
completely agree to that) but they can, I believe, help students understand
the effect created by a financial transaction.
What do you think? I'd be interesting in knowing.
Jhoyle@richmond.edu
February 3, 2010 reply from Tom Selling [tom.selling@GROVESITE.COM]
I spent 25 years teaching accounting to MBA
students (i.e., ‘users’) utilizing cases in approximately 80% of my class
sessions. Nonetheless, all of the analysis we did was thoroughly grounded in
the logic of double entry accounting. T-accounts were always a big part of
that.
My impression is that debits and credits is like
juggling: those who don’t know how to do it wish they did. Moreover, those
that do take the time to learn either one are often surprised at how easy
and painless it was to learn. (If you want to get an infant to laugh
hysterically and love you instantly, be the first one to juggle for them.)
As to textbooks, my two top criteria were: (1)
whether debits and credits were used, and (2) if the chapter on basic
preparation of the statement of cash flows was early (as opposed to one of
the last).
Best,
Tom
February 6, 2010 reply from Jerry L. Turner
[jturner1@MEMPHIS.EDU]
I've posted this before, but
debits and credits are like an In and Out burger. Debits are just a name for
what we receive in a transaction (In) and credits are a name what we have to
give up in return (out). Works for every transaction, every time.
(Mentioning the In and Out burger makes it easy for students to remember.).
Accruals are just transactions
that haven't been recorded. Works for them also.
Valuations and allocations are
just modifying the original transaction entry to comply with GAAP (e.g.,
allowance for bad debts, depreciation.)
To record a transaction, we
write down what we receive first (the debits).
Then we indent a little and
write down what we gave up (the credits). I can look at any transaction
entry and immediately tell you what we got and what we gave up.
This concept is especially
valuable when teaching auditing because we audit what we got (the debits)
differently than what we gave up (the credits). The credit side generally is
harder to audit (e.g. revenue, unrecorded liabilities) because it represents
something the client gave up (goods, services, promises.)
Students find this to be easy
to grasp and can make correct transaction journal entries the first week of
introductory financial. It also eliminates the memory work of "hmmm, a debit
increases assets, but decreases liabilities..." It focuses their attention
on the substance of the transaction-what was exchanged. Debits and credits
just relate to how we write them down.
By the way, it works for every
account, including revenue and stockholders' equity. It also makes
explaining T-accounts easy.
Anyway, that's my approach
that's always been successful for me in all types and levels of courses
(even non-accounting majors catch on easily.)
Jerry Turner
The University of Memphis
February 5, 2010 reply from Steve Markoff
[smarkoff@KIMSTARR.ORG]
While I teach mainly
managerial, I teach one section of financial intro
- I find it helpful to tell
the the story of Luca Pacioli and how he represented simple transactions in
terms of obligations. I want the students to understand the ENTITY PRINCIPLE
and how the whole company can be described in terms of obligations, and
where the words debit and credit came from, and how, for instance, an
increase in a company's ability to meet obligations is always
counter-balanced by a corresponding decrease or, an increase in their actual
obligations.
I then describe the whole
class being partners in a business and utilize a pile of post-its to put
little notes about various types of transactions in which our company is
engaged, and wait for _THEM TO TELL ME_ that this ain't gonna work and that
we need some type of SYSTEM or take all these post-its and organize them
into a way that keeps the accounting equation always in balance and allows
us to present these numbers on financials. Then, the system of recording
makes sense as a system, and knowing that we have that, we can then move on.
Steve Markoff
February 5, 2010 reply from Paul Williams
[Paul_Williams@NCSU.EDU]
Steve,
Thank you for this gem. One
must teach debits and credits to understand (what you obviously do) what
accounting is at its root.
As an information system it is
woefully inefficient (for that purpose a sample of transactions would
suffice). What has been nearly completely lost in this time of accounting
scholars drunk on the intoxicating delusions of modern finance theory is
that the act of writing down (the debits and the credits) is an enactment of
"legitimate" behavior, not simply the addition of another number to a pile
of other numbers to act as "information useful for assessing the timing and
amount of uncertainty." With my students I use the example from the movie
"The Ten Commandments" when Yul Bryner as Pharoah has his scribe write down
his dicta which he validates with his imprimatur (the seal on his ring).
"Thus it is written, so it shall be." Journalizing is an act of bringing
into existence of a particular moral and social order. Ijiri's famous
example: If I want to know
how much cash I have, all I have to do is count it. I don't have to record
every transaction in order to know!
That is not what accounting is
for. It is to comsummate accountability relationships, which are not
chiseled in stone. Your little exercise illustrates that very well.
Thanks.
PFW
"You Can Teach Old Dogs New Tricks," by Joe Hoyle, Teaching
Financial Accounting Blog, February 4, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/02/you-can-teach-old-dogs-new-tricks.html
Beside of my computer, I keep a magazine article
from the October 30, 2006, edition of Fortune. The article is titled “What
It Takes to Be Great.” I have one small part of that article circled and I
read it frequently: “In virtually every field of endeavor, most people learn
quickly at first, then more slowly, and then stop developing completely. Yet
a few do improve for years and even decades.”
I want very much to be in that second group and not
in the first. I want to be the type of teacher who never stops developing. I
know plenty of teachers who continue to teach exactly as they did 5, 10, 15
years ago. I have taught now for 39 years, I want to keep improving. My
guess is that you would not be reading this blog if you didn’t share my goal
of getting better.
One of the neatest things I learned about teaching
happened a mere 3 years ago. Did not occur to me for 36 years and then,
suddenly, I came up with an idea that has helped my students.
Every day I give my students assignments for the
next class. I try to make those assignments reasonable but I also want the
questions to stretch the thinking of my students. Why ask them who is buried
in Grant’s Tomb? What good does that do them?
Moreover, I want them to walk into class with those
questions on their minds. I want some real thinking done before class. I
want the students to be ready to discuss the points immediately.
So, about three years ago, I started urging all of
my students (who could) to meet outside of the classroom about 15-30 minutes
before class to discuss the questions for the day. Now, about 20 minutes
before every class, there is a small roar as about 2/3 of my students sit
clustered together trying to come up with the answers for the questions we
are going to discuss.
There are so many things I like about this and,
other than suggesting and encouraging them to do it, I don’t do anything.
Here are just four things I like especially:
1-The students actually enjoy sitting there
chatting with each other about their accounting assignments. Who could not
like an idea that helps the students find the material more enjoyable? 2-The
students walk into class with all of the material fresh on their mind; I
don’t have to take 10 minutes to remind them of what we are doing. 3-The
students form a community; they learn from each other and they learn to help
each other. I think that is something all classes should strive to create.
They actually become a team. 4-The students don’t want to feel stupid in
front of their peers so they actually seem to prepare more before these
sessions.
Okay, but the questions do have to challenge them
to think or there is no benefit from the meeting. That is the real key.
For example, on Monday, I want to spend a little
time talking about the role and purpose of the SEC. I don’t want to spend
much time but I do think (especially in these current economic times) that
every person who has had an accounting class should understand something
about the SEC. But that can be a deadly dull topic in an accounting class.
So, here is the question that I will pose for them to consider. After they
sit and talk about this question before class, I doubt there will be much
left for me to do. I think they will hash it out for themselves and I’ll
just make sure they get all the points that I want them to have.
(Question 10) – Read Section One of Chapter Six of
our Financial Accounting textbook. Assume you have a roommate who has never
been inside of the business school. The roommate looks at you one day and
says “I keep hearing all about the Securities and Exchange Commission on the
news. What the heck does the SEC do and why is always in the news and why
should I even care?” What would be your response?
And, I came up with this idea after I was
officially an old dog. Posted by Professor Joe Hoyle at 5:01 PM
Socratic Method According to Hoyle (proudly one of our best and open
sharing accounting teachers)
"An Epiphany," by Joe Hoyle, Teaching Financial Accounting Blog,
February 10, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/02/epiphany.html
By now, everyone who reads this blog probably
understands that I teach by means of the Socratic Method. I give a list of
3-8 questions one day which serve as “conversation starters” for the next
class. In addition, our brand new Financial Accounting textbook (published
by FlatWorldKnowledge) is written entirely in a Socratic Method fashion. A
question is posed followed by an answer followed by the next logical
question and so on.
When this process works perfectly, it is because of
the questions. You must ask the proper question in order to create an
environment for discovery. How do you develop those questions? Don’t the
questions have to be something more than “when did Columbus discover
America?” or “who won the Civil War?”
I had never thought much about the creation of
questions until a few years ago. Then, I had an epiphany. I was reading the
wonderful book “What the Best College Teachers Do” by Dr. Ken Bain. Dr. Bain
and his team selected a group of outstanding college teachers from around
the country and shadowed them for a period of time to discover their
secrets. I was reading along and came to page 40 where I found this
marvelous passage: “One professor explained it this way: ‘It’s sort of
Socratic . . . You begin with a puzzle—you get somebody puzzled, and tied in
knots, and mixed up.’ Those puzzles and knots generate questions for
students, he went on to say, and then you begin to help them untie the
knots.”
You get somebody puzzled, and tied in knots, and
those puzzles and knots generate questions for students and then you begin
to help them untie the knots.
I cannot think of a better description of what I
think a teacher should strive to do. Puzzle students, tie their thinking
into knots, and then help them untie the knots.
College teachers often view themselves as conveyors
of knowledge/information. If that is the case, then a pure lecture works
fine. You convey knowledge; students try to catch it as it flies by.
However, if you want understanding, curiosity, interest, and enthusiasm, you
have to go beyond that. And, I think the “secret” to working on a higher
level is in the idea of puzzling the students, tying their thinking into
knots, and then helping them to solve those puzzles.
Let me give you an example. Next week, in my
Financial Accounting class, I will start talking about accounts receivable.
As far as I can tell, most accounting teachers tell their students to read
the chapter and assign one or more problems to work. The students then
search (often desperately) through the chapter for a reasonable facsimile
and try to duplicate that process to solve the homework assignment. In
class, the problem is worked and the students make corrections. How do you
rate the learning that occurs? Is it much different than learning to change
the oil in your car? Ask yourself: does that process generate understanding,
curiosity, interest, and enthusiasm?
Here’s how I might go about starting a discussion
about reporting accounts receivable. (My quick answers are included in
parenthesis. I obviously don’t give the answers to the students.)
1 – Your company sells 1,000 toasters near the end
of December 2009, for $60 each. All $60,000 of these sales are made on
account and collection will be in three or four months. A balance sheet is
produced on December 31, 2009. What do outside decision makes really want to
know about those accounts receivable? (The amount of cash the company will
collect.) 2 – What is the problem with what the decision makers want to know
in the above question? (Uncertainty—the accountant can only guess at the
amount of cash that will be collected.) 3 – Accountants are known for being
obsessively accurate. Will the reported number be accurate? (It is only an
estimate; no one expects an estimate to be accurate. Things like exactness
fly out the window when you start making guesses.) 4 – If the number is not
accurate, what is it? (A fair representation according to US GAAP. In other
words, the reporting follows the rules.) 5 – If there are $60,000 in
accounts receivable, how can you report any other number on the balance
sheet? Doesn’t it have to be $60,000? (The company sets up an allowance
account to reduce the asset by the amount that is anticipated as being
uncollectible.) 6 – Assume you know that $2,000 of the $60,000 will prove to
be uncollectible in 2010. Two customers will die, leave town, go bankrupt,
or the like. That is an expense for the company. Should the $2,000 expense
be recognized in 2009 or 2010? (In 2009. Expenses are recognized according
to the matching principle. Revenues from the sale of toasters are recognized
in 2009 so any related expenses [such as the bad debts] must also be
recognized in 2009.
Okay, I could go on and on but you probably get the
idea. Here is my challenge to you on a very cold and snowy Wednesday: are
you puzzling your students enough and tying their thinking into knots? Are
you helping them solve those puzzles and untie those knots? If not, you
might want to consider that strategy as a way to increase their
understanding, curiosity, interest, and enthusiasm.
Students warn not to take Joe Hoyle's accounting classes "for fun"
RateMyProfessor ---
http://www.ratemyprofessors.com/ShowRatings.jsp?tid=380444
Student 1
I am confident that taking this class is the most valuable
academic experience I will ever have. By far the best professor
at Richmond. Go see him after class, become his friend. Try not
to get frustrated, you may study 15 hours for a test and get a
C. Attendance policy: If you don't go, you're screwed.
|
Student 2
As everyone has said, Great Professor and forces you to learn
the material. I worked by far the hardest for this guy but also
learned the most. He loves to send out emails about life lessons
but some are interesting. Be ready for LOTS of work but lots of
learning too.
|
Student 3
Professor Hoyle is indeed the best professor in the business
school. His tests are challenging but very fair. If you have any
interest in accounting or business in general, then you must
take this class. The curve is extremely helpful so making an A
is reasonable while getting below a C is almost impossible.
|
Student 4
Attendance is not mandatory, but this class is one that will
kill you if you don't come to it. It is an extremely difficult
course, but interesting and worth the time. Hoyle is one of
those profs you either love or hate, and is also one of those
profs that you will remember your entire life. |
Joe's free basic accounting textbook (updated)
Free
accounting textbook from a generous accounting professor
---
http://www.ibtimes.com/prnews/20081218/ny-flat-world-knowldg.htm
Also see
http://www.flatworldknowledge.com/Joe-Hoyle-Podcast
--Each chapter opens
with a video to explain the importance of the
material and get the student interested in reading
the chapter before they even start.
--The material (all
17 chapters) is written in a question and answer
(Socratic) format to engage and guide the students
through each area. The subjects are broken down
into a manageable and logical size. Faculty often
complain that students do not read the textbooks. I
think this format can change that trend.
--Embedded
multiple-choice questions are included on virtually
every page to provide immediate feedback for the
students. CJ and I wrote the multiple choice
questions ourselves as we wrote the manuscript to
ensure that they would tie together logically.
--Each chapter ends
with a review video where we challenge the students
to pick the five most important areas from the
chapter. I firmly believe that students need to
learn to evaluate what they are reading. We then
provide our own “Top Five” list so that they can see
where we agree and where we disagree.
Yes,
professors do get hard copy versions.
Joe is also
behind the free CPA Review course that was once
commercial but then became a freebie to the world.
Free CPA Review Course ---
http://cpareviewforfree.com/ |
|
You = Accounting Student
Assume you are desperately looking for a summer job. A
local business calls you in and says that the person who monitors their accounts
receivable is going to be on leave over the summer and they need someone to take
care of those accounts for a couple of months until that person gets back. They
want to make sure that the accounts are appropriate because they have an August
31 year-end and need to have everything ready at that time so financial
statements can be prepared.
Answers
"What Do You Need to Know?" by Joe Hoyle, Teaching Financial
Accounting Blog, February 25, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/02/what-do-you-need-to-know.html
Bob Jensen's threads on careers ---
http://www.trinity.edu/rjensen/bookbob1.htm#careers
Accounting Greats George Oliver May and William Andrew Paton
were two of the first scholars admitted into the Accounting Hall of Fame (in
1950) ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/george-oliver-may/
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/william-a.-paton/
May believed that accounting is not
logical; it is fundamentally conventional and utilitarian.
1
The test of good accounting lies in
whether it is useful, not to one particular group, but to society as a whole. He
viewed corporation accounting as just one aspect of the corporate form of
organization, which he considered to have been created to serve a useful social
purpose.2
In a 1928
memorandum concerned with the question of the usefulness of corporate financial
statements to investors and others interested in corporation securities, he
cautioned that one must recognize the limitations on their significance. He
often stated that the individual items in financial statements are not
statements of fact, but expressions of opinion after the application of judgment
and accounting methods to the relevant facts. May believed that there was room
for considerable improvement in the presentation of financial information of
corporations. He reasoned that the primary purpose should be to satisfy the
investor’s need for knowledge, rather than the accountant’ssense of form
Henry Francis Stabler and Norman X. Dressel,. "MAY AND PATON: TWO
GIANTS REVISITED," Accounting Historians Journal, Fall 1981 ---
http://umiss.lib.olemiss.edu:82/articles/1000260.334/1.PDF
Income Determination
May believed that the emphasis placed on a single figure of net income was
regrettable. The effort to simplify the information had resulted in the
concealment of essential information and tended to deceive investors;
therefore, it was necessary to educate the public as to the inadequacy of
the information on which it based its conclusions.
Paton saw accounting from the point of
view of two parties: owners and management. His theoretical development of
the entity concept in relation to accounting is well known. He saw the
business as an economic entity and knowledge about the return on the entire
fund of capital employed was essential for managerial decisions.
As contrasted with Paton’s position,
May believed that it was not the function of accounting to measure earning
power. He took exception to the definition of “income” as stated in
Accounting Terminology Bulletin No. 2, which he interpreted as including
capital gains and losses. The use of the term “earnings,” as synonymous to
“net income,” was considered confusing because net income may be more, or
less, than net earnings. The proper use of the term “net earnings” was a
description of the balance remaining after deducting from gross earnings
the cost of securing them.
11
He believed that it was
impossible to establish any universal rule as to whether capital gains and
losses should enter into the computation of net income.12
In the opinion of May, the
value of a business enterprise was dependent, in the main, on its earning
capacity. The primary use of the income statement was to determine the
capital value of the investment by applying a multiplier to the earnings
shown. It was extremely important that this multiplier be applied only to
the earnings produced in the ordinary course of business.
May believed that a major need was to
formulate a broad concept of business income.
14
He considered business income
to be a rather indefinite concept which had not been clearly defined by
anyone outside the accounting profession.15
Paton’s views were somewhat
similar to those of May. He defined income over the entire life of the
business without periodic matching of revenues and cost and expense, and
also saw income as the return on capital after periodic cost of recovery of
such capital costs. However, he accepted the view of the practicing
accountant, that is, periodic matching of revenues and revenue deductions.16
In the opinion of May, there was no accounting method for
determination of income of a complex business organization for a year which
could properly be considered valid. The financial statements were based on
conventions and were correct only in the sense that they conformed to some
particular standard. He often said that “annual accounts . . . would be
indefensible if they were not indispensable.”
For
the accountant, the job of income determination is a complex one. As
considered by both May and Paton, the source of such income depends not only
on one’s definition of income, but also on one’s approach to valuation.
Since many cost items are related to asset expiration, the valuation basis
used in the financial statements is crucial.
. . .
Valuation
Many accounting
theorists have expressed distrust for the historical basis. Few have been
bold enough to agitate aggressively for alternatives. Both May and Paton
came forth with sound denunciations of the accepted basis of historical
cost. They were both vocal on this score from the beginning of their
writings.
Departures from unadjusted historical
cost are primarily twofold. First, “replacement cost” considers the
current input equivalent cost rather than the actual cost assumed at
acquisition. This method considers, then, the current cost of specifically
identifiable items of assets. “Price level adjustment” accounting, on the
other hand, is not related directly to specific items. Instead, the
historical cost of the investment in assets (current nonmonetary, as well as
plant and equipment items) is updated by price level indexes in order to
reflect the price level changes. May and Paton were both very vocal in these
two areas. Probably this innovation in the “stream of accounting thought”
has identified both of them as “renegades” in the pre-1950 era. Thereafter,
the tide slowly, but steadily, changed. Today they are both highly respected
for their positivepositions on the subject.
Paton was a staunch defender of both
“replacement cost” and “price level adjustment” accounting. He saw the
advantages and limitations of replacement cost clearly. Current economic
value, he believed, influences the decision process more strongly than past
recorded costs. However, in connection with plant and equipment accounting,
he thought the method would be somewhat inexpedient to apply.
In addition,
.
. . the price system is not uniformly sensitive throughout, and that for
considerable periods selling prices may not move in harmony with
changing costs of production. Selling prices, moreover, are not fixed by
costs to the particular concern—whatever the basis on which such cost
may be computed.
Since replacement cost bases are of
major importance to business management, they should be considered in making
decisions.
May had reservations about the
replacement cost basis. Instead, he believed the monetary unit unsuitable
for the purpose of serving as the accounting symbol; however he considered
it to be virtually the only available one. He believed that, as a result of
governmental policy directed at changes in the value of the monetary unit,
rather than at maintaining its stability, its adaptability was impaired.
20
With regard to asset valuation, Paton
alluded to severe price movements and pleaded for consideration of economic
values in his 1922 book mentioned earlier. To him this meant “current
value.”
21
He believed that
the changing value of the monetary unit was a serious limitation to
accounting data presented in financial statements. To him, the real basis of
accounting is value.
Furthermore, “costs are important only because they are the most dependable
measures of initial values of goods and services flowing into the enterprise
through ordinary market transactions.”
He indicates that assets which
pass through the entity in a relatively short time span may be represented
by original cost. But, in the case of assets possessing long lives, strict
adherence to historical cost may result in “unreliable or even misleading”23
information for management.
Obviously, results of operation based on such distortion of values would
misstate both the value of the entity and its earning power. He considers
cost as an amount of economic sacrifice incurred, or “economic force
expended or committed.”
May believed that changes in the value
of the dollar had created problems for the accounting profession and had
left it with two alternatives. The first was to adhere to established
conventions and admit that financial statements had lost some of their
former significance. The second was to seek to establish new principles
which would make the reported amounts more significant. It was his opinion
that the second alternative was followed, for example, in the case of
inventories when the last-in, first-out method of valuation was employed.
The first alternative was followed in respect to capital assets since
charges for depreciation did not recognize changes in the price level. It
was an inconsistency, and the profession faced the task of rectifying it.
25
He
reasoned that two objectives should be kept in mind when considering this
problem. These were:
1. Expressing revenues and charges
against revenues as nearly as possible in units of equal purchasing
power;
2. Placing the burden of decline
in the value of the monetary unit as equally as possible on investments
in monetary claims and investments in tangible capital assets.
May regarded the LIFO inventory idea
as being a compromise between accounting theory, accounting practicability,
and convenience. Its significance lay in the recognition of the objective of
relating cost to revenue more nearly on the same price level, rather than in
the extent or manner of achievement of that objective.”
Paton, on
the other hand, had severe reservations regarding LIFO. He challenges the
procedure in the following manner:
The adoption of last-in, first-out
is sometimes defended by reference to the view that in determining true
profit the revenues of the period should be charged with costs measured
by the level of prices obtaining at the end of the period. Is there any
substantial merit in this line of argument?
Answer in the negative seems to be
called for. In the first place not very much of a case can be made for
measuring profit in the manner indicated. In the revenues of the period
are represented the prices of product in effect from day to day, and the
costs to be charged to such revenues are the actual costs which have
been incurred throughout the period and earlier which are reasonably
assignable to the various batches of product sold. . . .
In the second place the use of
last-in, first-out does not result in charging revenues with costs based
on year-end prices.
. . . where there is a continuous
pricing of goods issued under last-in, first-out procedure the total
cost of issues for the period may not coincide with the cost of the most
recent acquisitions in corresponding quantity. In the third place it may
be urged that for managerial purposes it is more useful to apply the
relatively recent costs to the goods on hand than to goods sold.
Completed sales and the related costs are “water under the bridge,”
closed transactions. Utilization of the inventory, on the other hand,
lies in the future and in planning such utilization the current level of
costs is especially significant.
May believed that whether a change in
procedure should be made to bring the cost for depreciation into account at
approximately the same price level as revenues depended in part on the
importance of the amounts involved. He considered the problem to be of
sufficient magnitude to warrant further study.
. . .
This continuing emphasis on valuation
clearly demonstrates the farsightedness of these two accounting pioneer
giants, George Oliver May and William Andrew Paton, who were well ahead of
their time in this aspect of accounting. Their influence will continue to be
felt for generations.
Jensen Comment
I think that both of these pioneers underestimated the exploding role the bottom
line net income would have in security analysis and financial contracting and
labor contracting.
"Replacement Cost: Member of the Family, Welcome Guest, or Intruder," by
Stephen A. Zeff, The Accounting Review, October 1962. Steve was an
Assistant Professor of Accounting at Tulane at the time he wrote this paper.
Stable URL:
http://www.jstor.org/stable/242348
Bob Jensen's threads on
accounting history ---
http://www.trinity.edu/rjensen/theory01.htm
Bob Jensen's threads on
valuation alternatives ---
http://www.trinity.edu/rjensen/theory01.htm#BasesAccounting
Humor for February 1-28, 2010
Snopes Humor
---
http://www.snopes.com/humor/humor.asp
Forwarded by Maureen
Little Melissa comes home from 1st grade & tells her father that they learned
about the history of Valentine's Day.
'Since Valentine's Day is for a Christian saint, and we're Jewish,' she asks,
'Will God get mad at me for giving someone a valentine?
Melissa's father thinks a bit, then says: 'No, I don't think God would get
mad... Whom do you want to give a Valentine to?'
'Osama Bin Laden,' she says.
'Why Osama Bin Laden?' her father asks in shock.
'Well,' she says, 'I thought that if a little American Jewish girl could have
enough love to give Osama a Valentine, he might start to think that maybe we're
not all bad, and maybe start loving people a little bit.
And if other kids saw what I did and sent Valentines to Osama, he'd love
everyone a lot. And then he'd start going all over the place to tell everyone
how much he loved them, and how he didn't hate anyone anymore.'
Her father's heart swells and he looks at his daughter with new found pride.
'Melissa, that's the most wonderful thing I have ever heard..'
'I know, ' Melissa says, 'and once that gets him out in the open, the Marines
could shoot the fucker.'
Forwarded by Dr. Wolff
Subject: SCAM TARGETING OLDER MEN - WATCH OUT
Scam targeting older men...
Clever Scam - taking advantage of middle-aged and older men.
Women often receive warnings about protecting themselves at the mall and in
dark parking lots, etc. This is the first warning I have seen for men. I wanted
to pass it on in case you haven't heard about it.
A special 'heads up' for those men who may be regular Lowe's or Home Depot
customers. This one caught me by surprise.
Over the last month I became a victim of a clever scam while out shopping.
Simply going out to get supplies has turned out to be quite traumatic. Don't be
naive enough to think it couldn't happen to you or your friends.
Here's how the scam works:
Two seriously good-looking 20-something girls come over to your car as you
are packing your shopping into the trunk. They both start wiping your windshield
with a rag and Windex, with their breasts almost falling out of their skimpy
T-shirts. It is impossible not to look. When you thank them and offer them a
tip, they say 'No' and instead ask you for a ride to McDonalds.
You agree and they get into the back seat. On the way, they start undressing.
Then one of them climbs over into the front seat and starts crawling all over
you, while the other one steals your wallet. I had my wallet stolen October 4th,
9th, 10th, twice on the 15th, 17th, 20th, 24th, & 29th. Also November 1st & 4th,
twice on the 8th, 16th, 23rd, 26th & 28th, three times last Monday and very
likely again this upcoming weekend.
So tell your friends to be careful. What a horrible way to take advantage of
older men. Warn your friends to be vigilant.
WalMart has wallets on sale for $2.99 each. I found cheaper ones for $1.99 at
K-Mart and bought them out. Also, you never will get to eat at McDonalds. I've
already lost 11 pounds just running back and forth between Lowe's and Home
Depot.
Forwarded by Auntie Bev
The Philosophy of Ambiguity
FOR THOSE WHO LOVE THE PHILOSOPHY OF AMBIGUITY, AS WELL AS THE
IDIOSYNCRASIES OF ENGLISH:
Please enjoy and understand the following
1. DON'T SWEAT THE PETTY THINGS AND DON'T PET THE SWEATY THINGS.
2. ONE TEQUILA, TWO TEQUILA, THREE TEQUILA, FLOOR.
3. ATHEISM IS A NON-PROPHET ORGANIZATION.
4. IF MAN EVOLVED FROM MONKEYS AND APES, WHY DO WE STILL HAVE
MONKEYS AND APES?
5. THE MAIN REASON THAT SANTA IS SO JOLLY IS BECAUSE HE KNOWS
WHERE ALL THE BAD GIRLS LIVE.
6. I WENT TO A BOOKSTORE AND ASKED THE SALESWOMAN, "WHERE'S THE
SELF- HELP SECTION?" SHE SAID IF SHE TOLD ME, IT WOULD DEFEAT THE PURPOSE.
7. WHAT IF THERE WERE NO HYPOTHETICAL QUESTIONS?
8. IF A DEAF CHILD SIGNS SWEAR WORDS, DOES HIS MOTHER WASH HIS
HANDS WITH SOAP?
9. IF SOMEONE WITH MULTIPLE PERSONALITIES THREATENS TO KILL
HIMSELF, IS IT CONSIDERED A HOSTAGE SITUATION?
10. IS THERE ANOTHER WORD FOR SYNONYM?
11. WHAT DO YOU DO WHEN YOU SEE AN ENDANGERED ANIMAL EATING AN
ENDANGERED PLANT?
12. IF A PARSLEY FARMER IS SUED, CAN THEY GARNISH HIS WAGES?
13. WOULD A FLY WITHOUT WINGS BE CALLED A WALK?
14. WHY DO THEY LOCK PETROL STATION BATHROOMS? ARE THEY AFRAID
SOMEONE WILL CLEAN THEM?
15. IF A TURTLE DOESN'T HAVE A SHELL, IS HE HOMELESS OR NAKED?
16. CAN VEGETARIANS EAT ANIMAL CRACKERS?
17. IF THE POLICE ARREST A MIME, DO THEY TELL HIM HE HAS THE
RIGHT TO REMAIN SILENT?
18. WHY DO THEY PUT BRAILLE ON THE DRIVE-THROUGH BANK MACHINES?
19. HOW DO THEY GET DEER TO CROSS THE ROAD ONLY AT THOSE YELLOW
ROAD SIGNS?
20. WHAT WAS THE BEST THING BEFORE SLICED BREAD?
21. ONE NICE THING ABOUT EGOTISTS: THEY DON'T TALK ABOUT OTHER
PEOPLE.
22. DOES THE LITTLE MERMAID WEAR AN ALGEBRA?
23. DO INFANTS ENJOY INFANCY AS MUCH AS ADULTS ENJOY ADULTERY?
24. HOW IS IT POSSIBLE TO HAVE A CIVIL WAR?
25. IF ONE SYNCHRONIZED SWIMMER DROWNS, DO THE REST DROWN TOO?
26. IF YOU ATE BOTH PASTA AND ANTIPASTO, WOULD YOU STILL BE
HUNGRY?
27. IF YOU TRY TO FAIL, AND SUCCEED, WHICH HAVE YOU DONE?
28. WHOSE CRUEL IDEA WAS IT FOR THE WORD 'LISP' TO HAVE 'S' IN
IT?
29. WHY ARE HEMORRHOIDS CALLED "HEMORRHOIDS" INSTEAD OF "ASSTEROIDS"?
30. WHY IS IT CALLED TOURIST SEASON IF WE CAN'T SHOOT AT THEM?
31. WHY IS THERE AN EXPIRATION DATE ON SOUR CREAM?
32. IF YOU SPIN AN ORIENTAL PERSON IN A CIRCLE THREE TIMES,
DO THEY BECOME DISORIENTED?
33. CAN AN ATHEIST GET INSURANCE AGAINST ACTS OF GOD?
"The Ten Geekiest Ways to Hide Your Age," Wired News, February
25, 2010 ---
http://www.wired.com/geekdad/2010/02/the-10-geekiest-ways-to-hide-your-age/
Here, then — inspired
by the recent birthday of GeekDad’s fearless leader,
Ken — are the geekiest ways to hide your age:
10. Tell the
truth… in a geeky invented language. For
instance, I’m wejmaH jav (Klingon) years
old, though nearly Odog-Nelchaen (Sindarin).
9. Point out
that, if you were a Vulcan, you’d be the equivalent
of a teenager. If someone should point out
that you’re not a Vulcan, simply say “To the best of
your knowledge, that is correct,” and turn away
indifferently.
8. Express
your age in POSIX (Unix) time. That is,
tell people the number of seconds old you are, by
subtracting the
POSIX time of your birth from the current POSIX
time. Really, how many people are going to take the
time to convert the number into years?
7. Tell
people the chemical element whose atomic number
corresponds to your age. It has to be
better to be zirconium than 40, right? This only
really works until you’re 112 (copernicium), of
course, but if you get that far you’ll probably be
more than willing to tell people your age, right?
6. Invoke
your right as a geek to stop incrementing your age
once you hit 42. I mean, really, this seems
like a basic perq of being a geek, doesn’t it? If
anyone should express their confusion when you’ve
been 42 for, say, 23 years in a row, simply hold
your ground, being sure to act offended at the
temerity of the person for questioning the
privilege.
5. Express your
birth date as a Star Trek-style stardate.
Technically, stardates aren’t supposed to
be applied retroactively (according
to Memory Alpha, anyway). But don’t let that
stop you. The beauty of this is that you can pretty
much pick a number out of thin air without fear of
being proved a liar. Just be sure to remember the
stardate you pick, because, if your friends are
geeks, too, the odds are they’ll catch you if you
should change it.
4. Create a
puzzle, with your age as the solution. Make
it as easy or difficult as you feel like, but do
make sure your age is the only correct solution, or
anyone who goes to the trouble to solve it is going
to be justifiably annoyed.
3. Tell
people your correct age… expressed in Martian years.
See, a year on Mars is 687 Earth days long. So, for
example, I’m not quite 20 Martian years old. You
could reduce your age further by using one of the
more distant planets, naturally, but using Mars
keeps your age at least sounding somewhat realistic.
2. Repeat,
over and over, “The birthday cake is a lie.”
1. Convert
your age to hexadecimal. Really, base 10 is
so… mundane: so we have ten fingers and ten toes —
so what? Any geek will tell you that powers of two
make much more useful bases, and in this case
hexadecimal is especially handy. Sure, it might
sound a bit odd if you’re 2C years old, but it’d
still be better than 44, right?
Forwarded by Auntie Bev
The next
time you feel like GOD can't use YOU, just remember... |
Noah
was a drunk
Abraham was too old
Isaac was a daydreamer
Jacob was a liar
Leah was ugly
Joseph was abused
Moses had a stuttering problem
Gideon was afraid
Sampson had long hair and was a womanizer
Rahab was a prostitute
Jeremiah and Timothy were too young
David had an affair and was a murderer
Elijah was suicidal
Isaiah preached naked
Jonah ran from God
Naomi was a widow
Job went bankrupt
John the Baptist ate bugs
Peter denied Christ
The Disciples fell asleep while praying
Martha worried about everything
The Samaritan woman was divorced, more than once
Zaccheus was too small
Paul was too religious
Timothy had an ulcer....
AND Lazarus was dead!
Forwarded by Auntie Bev
And God created dog
The Story of Adam & Eve's Pets
Adam and Eve said, 'Lord, when we were in the garden, you walked with us
every day. Now we do not see you any more. We are lonesome here, and it is
difficult for us to remember how much you love us.'
And God said, 'I will create a companion for you that will be with you and
who will be a reflection of my love for you, so that you will love me even when
you cannot see me. Regardless of how selfish or childish or unlovable you may
be, this new companion will accept you as you are and will love you as I do, in
spite of yourselves.'
And God created a new animal to be a companion for Adam and Eve. And it was a
good animal. And God was pleased.
And the new animal was pleased to be with Adam and Eve and he wagged his tail
And Adam said, 'Lord, I have already named all the animals in the Kingdom and
I cannot think of a name for this new animal.'
And God said, 'I have created this new animal to be a reflection of my love
for you, his name will be a reflection of my own name, and you will call him
DOG.'
And Dog lived with Adam and Eve and was a companion to them and loved them.
And they were comforted
And God was pleased.
And Dog was content and wagged his tail.
After a while, it came to pass that an angel came to the Lord and said,
'Lord, Adam and Eve have become filled with pride. They strut and preen like
peacocks and they believe they are worthy of adoration. Dog has indeed taught
them that they are loved, but perhaps too well.'
And God said, 'I will create for them a companion who will be with them and
who will see them as they are. The companion will remind them of their
limitations, so they will know that they are not always worthy of adoration.'
And God created CAT to be a companion to Adam and Eve.
And Cat would not obey them. And when Adam and Eve gazed into Cat's eyes,
they were reminded that they were not the supreme beings.
And Adam and Eve learned humility.
And they were greatly improved.
And God was pleased . . .
And Dog was happy. . .
And Cat didn't give a shit one way or the other...
Forwarded by Bob Every (Supposedly a true story)
HOW TO CALL THE POLICE WHEN YOU'RE OLD AND DON'T MOVE FAST ANYMORE..
George Phillips , an elderly man, from Meridian, Mississippi, was going up to
bed, when his wife told him that he'd left the light on in the garden shed,
which she could see from the bedroom window. George opened the back door to go
turn off the light, but saw that there were people in the shed stealing things.
He phoned the police, who asked "Is someone in your house?" He said "No," but
some people are breaking into my garden shed and stealing from me.
Then the police dispatcher said "All patrols are busy. You should lock your
doors and an officer will be along when one is available."
George said, "Okay."
He hung up the phone and counted to 30. Then he phoned the police again.
"Hello, I just called you a few seconds ago because there were people
stealing things from my shed. Well, you don't have to worry about them now
because I just shot them." and he hung up..
Within five minutes, six Police Cars, a SWAT Team, a Helicopter, two Fire
Trucks, a Paramedic, and an Ambulance showed up at the Phillips' residence, and
caught the burglars red-handed.
One of the Policemen said to George, "I thought you said that you'd shot
them!" George said, "I thought you said there was nobody available!"
Forwarded by Auntie Bev
The MULE- and the mind of a
politician
Curtis &Leroy saw an ad in the Starkville Daily News Newspaper in
Starkville , MS. and bought a mule for $100.
The farmer agreed to deliver the mule the next day..
The next morning the farmer drove up and said, "Sorry, fellows, I have
some bad news, the mule died last night."
Curtis & Leroy replied, "Well, then just give us our money back."
The farmer said, "Can't do that. I went and spent it already."
They said, "OK then, just bring us the dead mule."
The farmer asked, "What in the world ya'll gonna do with a dead mule?"
Curtis said, "We gonna raffle him off."
The farmer said, "You can't raffle off a dead mule!"
Leroy said, "We shore can! Heck, we don't hafta tell nobody he's dead!"
A couple of weeks later, the farmer ran into Curtis & Leroy at the Piggly
Wiggly grocery store and asked.
"What'd you fellers ever do with that dead mule?"
They said,
"We raffled him off like we said we wuz gonna do."
Leroy said,
"Shucks, we sold 500 tickets fer two dollars apiece and made a
profit of $898."
The farmer said,
"My Lord, didn't anyone complain?"
Curtis said, "Well, the feller who won got upset. So we gave him his two
dollars back."
Curtis and Leroy now work for the government.
They're overseeing the Bailout Program.
Forwarded by Maureen
BOSTON FACTS:
The geographical center of Boston is in Roxbury. Due north of
the center we find the South End. This is not to be confused
with South Boston which lies directly east from the South End.
North of the South End is East Boston and southwest of East
Boston is the North End.
Harvard Bridge
The bridge connecting Boston and Cambridge via Massachusetts
Avenue is commonly know as the Harvard Bridge . When it was
built, the state offered to name the bridge for the Cambridge
school that could present the best claim for the honor. Harvard
submitted an essay detailing its contributions to education in
America, concluding that it deserved the honor of having a
bridge leading into Cambridge named for the institution. MIT did
a structural analysis of the bridge and found it so full of
defects that they agreed that it should be named for Harvard.
This is all true
Information on Boston and the Surrounding Areas:
There is no school on School Street , no court on Court
Street, no dock on Dock Square , and no water on Water
Street . Back Bay Boston streets are in alphabetical
oddah: Arlington , Berkeley, Clarendon, Dartmouth, etc
So are South Boston streets: A, B, C, D, etc. If the
streets are named after trees (e.g. Walnut, Chestnut,
Cedar), you are on Beacon Hill . If they are named after
poets, you are in Wellesley .
Massachusetts Avenue is Mass Ave. Commonwealth Avenue is
Comm Ave. South Boston is Southie. The South End is the
South End. East Boston is Eastie. The North End is east
of the former West End . The West End and Scully Square
are no more; a guy named Rappaport got rid of them one
night. Roxbury is The Burree, Jamaica Plain is J.P.
How to say these Massachusetts city names correctly (Say
it wrong and be shunned).
Worcester : Wuhsta (or Wistah)
Gloucester : Glawsta
Leicester Lesta
Woburn : Woobun
Dedham : Dead-um
Revere : Re -vee-ah
Quincy : Quinzee
Tewksbury : Tooks berry
Leominster : Le-min-sta
Peabody : Pee-ba-dee
Waltham : Walth-ham
Chatham : Chaddum
Samoset: Sam-oh-set or Sum-aw-set, but nevah Summerset!
Definitions:
Frappes are made with ice cream; milkshakes are not.
If it is carbonated and flavored, it is tonic.
Soda means CLUB SODA.
Pop refers to DAD.
When we want Tonic WATER, we will ask for TONIC WATER.
The smallest beer is a pint.
Scrod is whatever they tell you it is, usually fish. If
you paid more than $7/pound, you got scrod.
It is not a water fountain; it is a bubblah.
It is not a trashcan; it is a barrel.
It is not a spucky, a hero, or a grinder; it is a sub.
It is not a shopping caht; it is a carriage.
It is not a purse; it is a pockabook.
They are not franks; they are haht dahgs; franks are
money used Switzahland.
Police do not drive patrol units or black and whites;
they drive a crewza. If you take the bus, your on the
looza crooza. It is not a rubber band; it is an elastic.
It is not a traffic circle, it is a rotary. "Going to
the islands" means going to Martha's Vineyard or
Nantucket ..
The Sox = The Red Sox
The Cs = The Celtics
The Bs = The Bruins
The Pats =The Patriots
Things not to do:
Do not pahk your cah in Hahvid Yahd. They will tow it to
Meffa ( Medford ) or Summahville (Somerville) .
Do not sleep on the Common. ( Boston Common)
Do not wear orange in Southie on St. Patrick's Day.
Things you should know:
There are two State Houses, two City Halls, two
courthouses, and two Hancock buildings
(one is very old; one is relatively new).
The colored lights on top the old Hancock tell the
weatha:
"Solid blue, clear view."
"Flashing blue, clouds due."
"Solid red, rain ahead."
"Flashing red, snow instead." (except in summer,
flashing red means the Red Sox game was rained out! Most
people live here all their life and still do not know
what the hell is going on with this one.
Route 128 South is I-95 south. It is also I-93 north.
The underground train is not a subway. It is the T, and
it does not run all night (fah chrysakes, this ain't Noo
Yawk).
Order the cold tea in China Town after 2:00 am; you will
get a kettle full of beer.
Bostonians: think that it is their God-given right to
cut off someone in traffic.
Bostonians: think that there are only 25 letters in the
alphabet (no Rs, except in idear.
Bostonians: think that three straight days of 90+
temperatures is a heat wave.
Bostonians: refer to six inches of snow as a dusting.
Bostonians: always bang a left as soon as the light
turns green, and oncoming traffic always expects it.
Bostonians: believe that using your turn signal is a
sign of weakness.
Bostonians:.think that 63 degree ocean water is warm.
Bostonians: think Rhode Island accents are annoying.
Send this to your friends who do not live in Boston (and
also the ones who do!) |
|
|
Forwarded by Paula
During a recent PASSWORD
AUDIT at the Bank of Ireland it was found that Paddy O'Toole was using the
following password: MickeyMinniePlutoHueyLouieDeweyDonaldGoofyDublin
When Paddy was asked why he had such a long
password: he replied ''Bejazus! are yez feckin' stupid? Shore and Oi was told me
password had to be at least 8 characters long and include one capital!
Forwarded by Paula
A group of 45-year-old guys discusses where they should meet for dinner.
Finally, they agree to meet at the Kelley's Restaurant because the waitresses
have low-cut blouses and nice breasts.
10 years later, at age 55, the group agrees to meet at Kelley's because the
food is good and the wine selection is excellent.
10 years later, at age 65, the group agrees to meet at Kelley's because they
can eat there in peace and quiet and the restaurant is smoke free.
10 years later, at age 75, the group agrees to meet at Kelley's because the
restaurant is wheel chair accessible and they have an elevator.
10 years later, at age 85, the group agrees to meet at Kelley's because they
have never been there before.
Forwarded by Auntie
Bev
STORY OF A CHALLENGED
SENIOR -
The last paragraph
is priceless!
At a certain age, everyone will understand this
poor guy...
I thought about the 30 year business I ran with
1800 employees, all without a Blackberry that played music, took videos,
pictures and communicated with Facebook and Twitter.
I signed up under duress for Twitter and
Facebook, so my seven kids, their spouses, 13 grandkids and 2 great grand kids
could communicate with me in the modern way. I figured I could handle something
as simple as Twitter with only 140 characters of space.
That was before one of my grandkids hooked me
up for Tweeter, Tweetree, Twhirl, Twitterfon, Tweetie and Twittererific
Tweetdeck, Twitpix and something that sends every message to my cell phone and
every other program within the texting world.
My phone was beeping every three minutes with
the details of everything except the bowel movements of the entire next
generation. I am not ready to live like this. I keep my cell phone in the garage
in my golf bag..
The kids bought me a GPS for my last birthday
because they say I get lost every now and then going over to the grocery store
or library. I keep that in a box under my tool bench with the Blue tooth [it's
red] phone I am supposed to use when I drive. I wore it once and was standing in
line at Barnes and Noble talking to my wife as everyone in the nearest 50
yards was glaring at me. Seems I have to take my hearing aid out to use it and
I got a little loud.
I mean the GPS looked pretty smart on my dash
board, but the lady inside was the most annoying, rudest person I had run into
in a long time. Every 10 minutes, she would sarcastically say, "Re-calc-ul-ating"
You would think that she could be nicer. It was like she could barely tolerate
me. She would let go with a deep sigh and then tell me to make a U-turn at the
next light. Then when I would make a right turn instead, it was not good.
When I get really lost now, I call my wife and
tell her the name of the cross streets and while she is starting to develop the
same tone as Gypsy, the GSP lady, at least she loves me.
To be perfectly frank, I am still trying to
learn how to use the cordless phones in our house. We have had them for 4 years,
but I still haven't figured out how I can lose three phones all at once and have
run around digging under chair cushions and checking bathrooms and the dirty
laundry baskets when the phone rings. (sounds familiar, please let it keep
ringing until I find it. . . don't laugh, I am serious)
The world is just getting too complex for me.
They even mess me up every time I go to the grocery store. You would think they
could settle on something themselves but this sudden "Paper or Plastic?" every
time I check out just knocks me for a loop.
I bought some of those cloth reusable bags to
avoid looking confused but I never remember to take them in with me.
Now I toss it back to them. When they ask me,
"Paper or Plastic?" I just say, "Doesn't matter to me. I am bi-sacksual.." Then
it's their turn to stare at me with a blank look.
Humor Between February 1 and February 28, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor022810
Humor Between January 1 and January 31, 2010
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013110
And that's the way it was on February 28, 2010 with
a little help from my friends.
Bob Jensen's gateway to millions of
other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
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
Bob Jensen's past
presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Concerns That Academic Accounting Research is Out of Touch
With Realit
I think leading academic
researchers avoid applied research for the profession because making
seminal and creative discoveries that practitioners have not already
discovered is enormously difficult.
Accounting academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic) From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence
increasingly developed out of the internal dynamics of esoteric
disciplines rather than within the context of shared perceptions
of public needs,” writes Bender. “This is not to say that
professionalized disciplines or the modern service professions
that imitated them became socially irresponsible. But their
contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative –
as there always tends to be in accounts
of the
shift from Gemeinschaft to Gesellschaft.
Yet it
is also clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter
and procedures,” Bender concedes, “at a time when both were
greatly confused. The new professionalism also promised
guarantees of competence — certification — in an era when
criteria of intellectual authority were vague and professional
performance was unreliable.”
But in the epilogue
to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The
risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and
scholasticism (of three types: tedium, high tech, and radical
chic).
The agenda for the next decade, at least as I see it, ought to
be the opening up of the disciplines, the ventilating of
professional communities that have come to share too much and
that have become too self-referential.”
What went wrong in
accounting/accountics research?
How did academic accounting
research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's Personal History in Pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
January
31, 2010
Bob Jensen's New Bookmarks on
January 31, 2010
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 Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at
http://www.searchedu.com/
Bob Jensen's Blogs ---
http://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
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
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.
How to author books and other materials for
online delivery
http://www.trinity.edu/rjensen/000aaa/thetools.htm
How Web Pages Work ---
http://computer.howstuffworks.com/web-page.htm
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
The Master List of Free
Online College Courses ---
http://universitiesandcolleges.org/
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
The Master List of Free
Online College Courses ---
http://universitiesandcolleges.org/
Bob Jensen's threads for online worldwide education and training
alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm
"U. of Manitoba
Researchers Publish Open-Source Handbook on Educational Technology,"
by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---
http://chronicle.com/wiredcampus/index.php?id=3671&utm_source=wc&utm_medium=en
Social Networking for Education: The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses
of Twitter)
Updates will be at
http://www.trinity.edu/rjensen/ListservRoles.htm
Humor Between January 1 and January 31, 2010
---
http://www.trinity.edu/rjensen/book10q1.htm#Humor013110
Fraud Updates have been posted up to December 31, 2009 ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Also see
http://www.trinity.edu/rjensen/Fraud.htm
In the practitioner literature readers have to be a little careful on the
definition of "analytics." Practitioners often define analytics in terms of
micro-level use of data for decisions such as decisions to adopt a new product
or launch a promotion campaign..
See
Analytics at Work: Smarter Decisions, Better Results, by Tom
Davenport (Babson College) --- ISBN-13: 9781422177693, February
2010
Listen to Tom Davenport being interviewed about his book ---
http://blogs.hbr.org/ideacast/2010/01/better-decisions-through-analy.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
The book does not in general find a niche for analytics for huge decisions
such as mergers, but the above book does review an application by Chevron.
The problem with "big decisions" is that the analytical models generally
cannot mathematically model or get good data on some of the most relevant
variables. In academe, professors often simply assume the real world away and
derive elegant solutions to fantasy-land problems in Plato's Cave. This is all
well and good, but these academic researchers generally ignore validity tests of
their harvests inside Plato's Cave.
574 Shields Against Validity Challenges in
Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
- With a Rejoinder from the 2010 Senior Editor of The Accounting
Review (TAR), Steven J. Kachelmeier
- With Replies in Appendix 4 to Professor Kachemeier by Professors
Jagdish Gangolly and Paul Williams
- With Added Conjectures in Appendix 1 as to Why the Profession of
Accountancy Ignores TAR
- With Suggestions in Appendix 2 for Incorporating Accounting Research
into Undergraduate Accounting Courses
Shielding Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
By Bob Jensen
Table of Contents
- Tom Lehrer on Mathematical Models and Statistics
- TAR versus AMR
- Introduction to Replication Commentaries
- TAR Versus JEC
- Accounting Research Versus Social Science Research
- Mathematical Analytics in Plato's Cave TAR Researchers Playing by
Themselves in an Isolated Dark Cave That the Sunlight Cannot Reach
- High Hopes Dashed for a Change in Policy of TAR Regarding Commentaries
on Previously Published Research
- Rejoinder from the Current Senior Editor of TAR, Steven J. Kachelmeier
- Conclusion and Recommendation for a Journal Named Supplemental
Commentaries and Replication Abstracts
- Appendix 1: Business Firms and Business School Teachers Largely Ignore
TAR Research Articles
- Appendix 2: Integrating Academic Research Into Undergraduate Accounting
Courses
- Appendix 3: Audit Pricing in the Real World
- Appendix 4: Replies from Jagdish Gangolly and Paul Williams
What went wrong in
accounting/accountics research? ---
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
The Sad State of Accountancy Doctoral
Programs That Do Not Appeal to Most Accountants ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
AN ANALYSIS OF THE EVOLUTION OF RESEARCH
CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1
Bob Jensen's threads on accounting theory
---
http://www.trinity.edu/rjensen/theory01.htm
Tom Lehrer on Mathematical Models and
Statistics ---
http://www.youtube.com/watch?v=gfZWyUXn3So
Systemic
problems of accountancy (especially the vegetable nutrition paradox) that
probably will never be solved ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews
Summary of FASB Standards Issued in 2009 ---
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1175801890297
Find the latitude and longitude of a point on a map ---
http://www.getlatlon.com/
Jensen Cottage --- Latitude, Longitude:
44.2494733, -71.7752079
Paula also recommends
http://blog.eogn.com/eastmans_online_genealogy/2009/12/convert-an-address-to-latitude-and-longitude.html
AIS, MIS, and Computer Science Scholars May Be Interested in This Link
Google's Kevin McCurley on the Mathematics of Online Search [iTunes]---
http://maa.org/news/120309mccurley.html
To illustrate the complexities of search, McCurley
showed the results of a Google search on "mathematics." He noted the two
success criteria for information retrieval: precision, returning documents
relevant to the original query, and recall, presenting all documents
relevant to the query. Of the two, precision is the more important
criterion, he said. With the glut of information available online, providing
a user with hundreds of thousands of documents to search through is not
helpful.
Google and other search engines are successful if
researchers can develop and continually improve algorithms that quickly
pinpoint relevant material and eliminate irrelevant skewing factors. Indeed,
a variety of mathematical procedures, going well beyond Google’s original
PageRank algorithm, go into “Google’s secret sauce,” McCurley said.
Bob Jensen's search helpers are at
http://www.trinity.edu/rjensen/searchh.htm
"All Big Four Firms Are Best Companies To Work For In 2009," Big
Four Blog, January 22, 2010 ---
http://bigfouralumni.blogspot.com/2010/01/all-big-four-firms-are-best-companies.html
All the Big Four firms recently made Fortune’s 2009
“100 Best Companies to Work For” list, though not at the very top as we have
become very accustomed to seeing in BusinessWeek or Diversity or Working
Mothers magazine. Nonetheless a very creditable performance against a tough
crowd of equally impressive and quality peers. 2009 sported tougher
competition as three of the five firms dropped rank from the 2008 listing.
In addition, we are seeing a varied picture with firms actively cutting
positions to some minor increases at Deloitte and PwC from 2008 to 2009, in
line with the general decrease in business for these firms in the Americas.
Check out our January 2009 blog post on the 2008 rankings
However, tough external conditions appear to have created some welcome
bonuses for employees, either through additional holidays, a sabbatical
program or less travel.
Fortune has a rigorous process to select these top companies, and with a
large chunk of the selection process based on true employee responses, its
hard to game this list, so makes the results reliable. It conducts the most
extensive employee survey in corporate America with 347 companies in the
overall pool. Two-thirds of a company's score is based on the results of
survey sent to a random sample of employees from each company with questions
on attitudes management's credibility, job satisfaction, and camaraderie.
The other third of the scoring is based on the company's responses on pay
and benefit programs, hiring, communication, and diversity.
Continued in article
One of the huge attractions to change to an
accounting major is the opportunity to internship and receive training from a
top accounting firm or business corporation.
-
-
- 2009 Best Places to Start/Intern
According to Bloomberg/Business Week ---
Click Here
Also see the Internship and Table links at
http://www.businessweek.com/careers/special_reports/20091211best_places_for_interns.htm
The Top five rankings contain all Big Four accountancy firms.
Somehow Proctor and Gamble slipped into Rank 4 above PwC
The accountancy firms of Grant Thornton and RMS McGladrey make the
top 40 at ranks 32 and 33 respectively.
Best Places to Intern ---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
I'm waiting for Francine to throw cold water on the "ever
before" claim
Especially note the KPMG Experience Abroad module below
"Best Places to Intern: Bloomberg BusinessWeek's 2009 list shows
employers are hiring more interns to fill entry-level positions than
ever before," by Lindsey Gerdes, Business Week, December 10,
2009 ---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/BookBob1.htm#careers
Bogus Checks
"Scammers Attack PricewaterhouseCoopers and Deloitte," The Big Four
Blog, January 26, 2010 ---
http://bigfouralumni.blogspot.com/2010/01/scammers-attack-pricewaterhousecoopers.html
At this time, we see that PricewaterhouseCoopers
and Deloitte are the victims of two publicly known attacks.
On their website, PricewaterhouseCoopers reports a
scam where folks got bogus checks dated December 21, 2009 embossed with the
PwC logo with a letter which advises “the recipients that they had been
selected to be "secret shoppers." The letters guided the potential scam
victims to cash the checks at specific banks, then wire the funds to another
address for use by a second "secret shopper."
PwC is now working with law enforcement agencies
and the Postal Service to close out this illegal effort. PwC wants anyone
who has received one of the solicitations to contact Doug Smith, Postal
Inspector at (813) 281-5228, or fax a check copy and instructions to
813-375-8047. The firm has put all its people on notice, in case they see or
hear anything.
"Since the first batch of checks went out in
December, we suspect those recipients have either reported the issue or
thrown out the materials," said Rose Littlejohn head of PwC US Security.
"But right now there is nothing to prevent the scammers from making another
attempt"
So, beware of any checks that sound too good to be
true or ask you to do something that doesn’t feel quite right, despite
looking quite legitimate. Though we don’t have direct knowledge of anyone
affected, its possible enough numbers have received this check to have made
it to PwC’s website.
The situation is quite different with Deloitte,
which has been the victim of another hoax. The Charleston, West Virginia
observer reports that Robert M. "Robe" Otiso, 36, of Elk River, MN was
arrested in November 2009 and charged with mail fraud, wire fraud and
conspiracy to launder money. Prosecutors believe that Otiso and his alleged
co-conspirators in the U.S. and in Kenya tricked state governments into
diverting large payments into accounts bearing names that closely resembled
those of actual vendors.
In December 2009, the paper reports that Angela
Chegge-Kraszeski, a Kenyan woman living in North Carolina, admitted that she
followed instructions e-mailed from Kenya to incorporate companies such as "Deloite"
Consulting Corp. and "Unisyss" Corp., deliberate misspellings of real
companies Deloitte Consulting LLC and Unisys Corp. She then mailed forms
that instructed state governments to direct payments to the fake firms
instead of the real ones, she said. Money from those accounts was later
wired to Kenya.
According to the November indictment, before
officials caught on, the scheme netted $919,916 from West Virginia, with an
additional $1,288,037 stolen from Massachusetts, $869,546 from Kansas and
$301,571 from Ohio.
Nothing of this has made it to the Deloitte website
yet, as the firm is an indirect victim, along with other well known
companies, of a well orchestrated effort, causing the matter to be under the
purview of US law agencies. As with PwC, we hope there is a quick indictment
of the true perpetrators of this scam.
Read the full article here....
http://www.wvgazette.com/News/201001220581
Theft and misuse of logos, well-known names and top
reputations is likely more prevalent now in this internet age. Folks that
have received the “You are the sole recipient of $64 million” know enough to
delete, but as crooks get more sophisticated, they are now getting to catch
unsuspecting people in newer ways. It pays to be careful, and as the old
adage goes, Caveat Emptor.
If you are aware of such checks or any new
developments on the Deloitte case, do comment.
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
PCAOB Academic Fellowship Program ---
http://www.pcaobus.org/Careers/fellowship.aspx
Employers Expect Uptick in Hiring in the New Year ---
http://accounting.smartpros.com/x68423.xml
These are bad, but thinking them up keeps Dave off the streets of Moorehead
on a late and frigid Saturday nights!
These limericks have various authors.
"Saturday Night Accounting Limericks," by David Albrecht, The Summa,
January 19, 2010 ---
http://profalbrecht.wordpress.com/2010/01/17/saturday-night-accounting-limericks/
Bob Jensen's threads on accounting humor are at
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor
There is also a general humor section in each new edition of my New
Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
"Critical Points in the Learning Process," by Joe Hoyle, Teaching
Financial Accounting Blog, January 21, 2010 ---
http://joehoyle-teaching.blogspot.com/
Author’s Note: Before I get started today, I wanted to mention a note
that I received from Professor David Albrecht. I am always pleased to pass
along information that might help in better teaching.
From David: I've been blogging for a while. My blog is
at
http://profalbrecht.wordpress.com
On my blog, a have a page of links
http://profalbrecht.wordpress/com/links/
for all other accounting professors that blog. You
might be interested.
http://profalbrecht.wordpress.com/2008/12/30/ace-your-accounting-classes-12-hints-to-maximize-your-potential/
**
I have long believed that there are three critical
points in the learning process: (1) what students do prior to class to
prepare themselves to learn, (2) what takes place during class, and (3) what
happens immediately after class to help the students solidify the material
that they have just heard and discussed. If I were to guess, I would think
that teachers spend about 10 percent of their time and energy on helping
guide step (1), 89 percent of their time setting up step (2), and 1 percent
of their time and energy guiding step (3). Personally, I think a 33.3, 33.3,
33.3 allocation might make for a much better educational experience.
Students leave class and if they are not careful any and all understanding
leaks away very quickly. Subsequently, when test time arrives, they find it
necessary to cram all that understanding back into their brains in almost a
panic. Not surprisingly, they will then complain that they “knew it all
until they got to the test.” What they really mean is that they had a vague
understanding leaving class but never solidified the knowledge so that it
went from a general appreciation of the material to an actual and deep
understanding.
Therefore, I encourage my students to organize, review, practice, or
whatever it takes within a few hours after each class. I stress that this
might well be the most important work they do in my class. I do not feel
that I can over-emphasize taking the material that we have gone over in
class and bringing it into their actual knowledge base.
Unfortunately, students seem to have little training as to how to do this.
Ask your students some day “what have you done since the last class to make
sure that you understood that material we covered?” You may well get some
truly bewildered stares. You have introduced a foreign concept.
I try to help guide my students AFTER material has been presented. As I have
said before in these postings, I use email a lot. One of my favorites uses
is a quick email right after class to say “okay, here is what we covered
today and here is what you should do next to get that material under
control.”
For example, on Wednesday of this week, we had our opening discussion on
transactions and transaction analysis. Within 10 minutes of leaving class, I
sent them the following email to alert them to exactly what I needed for
them to do next. Plus, I introduced my concept of “three-second knowledge,”
the stuff they should know so well that they really don’t need to think
about it. I believe every course has a significant amount of three-second
knowledge. If the students can get that learned, they will have an excellent
base of understanding on which to build more complicated concepts.
Email to students after Wednesday’s class:
“--We ended class looking at the financial ramifications of seven
transactions. I need for you to go back over those seven until you know them
backwards and forwards. These are not hard (and there are not many) but you
cannot have soft knowledge on this. You need to have this down absolutely
solid. If I walk into class Friday and ask you about one of those seven, I
need for you to have this at what I call the "three-second level of
knowledge." In other words, if I call on you with one of those seven, you
should be able to count to three and tell me the answer. Not look it up in
your notes or the book but count to three and tell me the answer. If you
start coughing and sputtering, then, by definition, you are not at the level
that I want. Notice, that this is just for the seven transactions that we
specifically covered yesterday.”
How can you help your students take their soft knowledge and turn it into an
understanding that is absolutely solid?
January 23, 2010 reply from Australia's James Richards
[jdrozwa@IINET.NET.AU]
Hi, It is a couple of years (end of 2006) since I
retired from teaching but I still remember having real difficulty getting
students to complete steps 1 and 3.
For step 1 very few did the required reading for a
class. In Australia we use the lecture/tutorial/workshop system rather than
the smaller group approach in the USA. All students (in theory) attended the
lectures but a large portion decide that the PowerPoint slides and other
materials I created were enough and did not both to attend. The following
week they had a workshop where they had been assigned questions/ problems
and then come along to discuss them. A small percentage may have read prior
to the lecture and a significant proportion would come to the workshop
without having attempted the questions/problems. They came along to get the
answers rather than participate in any discussions unless called upon to do
so. Every week there would be someone who was asked to answer/discuss and
the response was that they had not prepared an answer, but had also not been
to see me during consultation hours for assistance.
For step 3 (review after class) the major problem
was that students would try and get as many classes in a row (almost running
from one side of campus to the other) so that all of their classes were on
the minimum possible days. This meant that review immediately after class –
a step recommended in the course guide – was not possible.
To try and give them some incentive to undertake
step 3 as soon as possible I used to display the retention graph from Tony
Buzan’s “Mind Maps” book where it shows retention rate without review and
retention rates with regular reviews.
When my class time was cut by an hour I used
Camtasia to replace all the problems I previously worked through in
lectures. The students were given copies of the question/problem and answer
template as part of their course notes for each week of the semester. The
Camtasia movies were available as Flash movies through the course WebCT
site. I recall one student who came to me in Week 10 of a 13 week semester
to tell me that he had not been able to get the Flash movies to work. I am
not quite sure how he managed to prepare for the workshops that followed
each lecture.
If students did not have decent internet access
available at home I was more than happy to burn the Flash movies to a CD for
them to use at home.
The process I gave my students was: Read prior to
lecture Attend the lecture Review lecture immediately after the class in the
library Work through the Flash movie problems Prepare for the workshop
Attend the workshop Review the workshop immediately after the class in the
library
I suspect that a very small percentage did all of
the above each week or any week.
Jim Richards Phone (Home): (08) 9249 6874 Phone
(Mobile): 0419-172-100
Jensen Comment
Jim is a leading expert on XBRL
Joe Hoyle is one of our most sharing accounting professors.
Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
AccountingWeb's Tax Software Review for Professionals, November 2009
Featured Tax
Software
Software Advice (not just tax) ---
http://www.softwareadvice.com/
Bob Jensen's accounting software helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware
Bob Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
2009 Best Places to Start/Intern According to
Bloomberg/Business Week ---
Click Here
Also see the Internship and Table links at
http://www.businessweek.com/careers/special_reports/20091211best_places_for_interns.htm
The Top five rankings contain all Big Four accountancy firms.
Somehow Proctor and Gamble slipped into Rank 4 above PwC
The accountancy firms of Grant Thornton and RMS McGladrey make the top 40 at
ranks 32 and 33 respectively.
Best Places to Intern ---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
I'm waiting for Francine to throw cold water on the "ever
before" claim
Especially note the KPMG Experience Abroad module below
"Best Places to Intern: Bloomberg BusinessWeek's 2009 list shows employers
are hiring more interns to fill entry-level positions than
ever before," by Lindsey Gerdes, Business Week, December 10, 2009
---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
How valuable is a summer internship in a recession?
Consider
Goldman Sachs, the leading choice for students
interested in a career on Wall Street. This year, the investment bank hired
600 fewer entry-level employees. That's not surprising given the stunted
economy and the government bailout of banks. What is noteworthy is nearly
90% of Goldman's new hires were former interns. The previous year, Goldman
wasn't as concerned about hiring a high percentage of students it had
already invested time and money to trainonly 58% of entry-level hires had
spent a summer at the company.
The same is true for other employers.
KPMG, a Big Four accounting firm that finds itself
in tight competition with
Deloitte,
Ernst & Young, and
PricewaterhouseCoopers, hired nearly 900 fewer
entry-level employees this year. But 91% of those full-time hires were
former interns, whereas only 71% of new hires in 2008 were interns.
Internships have long been seen as a primary
recruiting tool at many top employers—a 10-week job tryout to see who would
be the best fit for full-time employment. But with full-time hiring down,
even the largest employers are trying to maximize the investment they've
made in interns by hiring a larger percentage to fill entry-level position
than ever before. "It's true for all years, but I think it's even more so in
years like this," says Sandra Hurse, a senior executive at Goldman who
handles campus recruiting.
Evaluating Employers
With
this ranking, Bloomberg BusinessWeek
has put together its third annual guide to the best internships, providing
information on the number of interns each company recruits, how many are
offered full-time jobs, the number of interns expected to be hired next
year, even the salaries students receive.To compile our list, we judged
employers based on survey data from 60 career services directors around the
country and a separate survey completed by each employer.We also consider
how each employer fared in the annual
Best Places to Launch a Career, our ranking
of top U.S. entry-level employers released in September of each year.
Our ranking of
the best U.S.companies for undergraduate internships
highlights employers who have put together an
outstanding experience for students.Accounting firm Deloitte tops our list,
followed by rivals KPMG (No.2) and Ernst & Young (No.3).The last of the Big
Four accounting companies, PricewaterhouseCoopers, comes in at No.5, right
behind consumer goods giant
Procter & Gamble.
The employers on our list understand that an
outstanding internship experience is their most effective recruiting tool to
snap up the top entry-level job candidates. That's why some companies have
invested a considerable amount of money in their programs.
Microsoft, for example, estimates it spends on
average $30,000 per intern, when you factor in pay and benefits. Considering
the company hired 542 undergraduate interns in 2009, that's roughly a $16
million investment.
Experience Abroad
Two years ago KPMG realized it had to make a
substantial investment in its internship program if it hoped to woo top
students from larger consulting and accounting firms. So the company decided
to offer interns an opportunity to gain valuable overseas experience. KPMG
lets student interns spend four weeks in the U.S. and four weeks abroad.
"It's extremely competitive [to recruit top students], and this is a
differentiator," says Blane Ruschak, executive director of campus recruiting
at KPMG.
A chance to work overseas is precisely what
appealed to Andrew Fedele, 21, an accounting and economics double major at
Pennsylvania State University. "I was sold pretty much when I first read
about [KPMG's] global internship program." He spent four weeks in Chicago
and four weeks in Johannesburg, South Africa. "South Africa has just such an
interesting history. To go there and live with the locals and work with them
was really exciting."
What did KPMG get in return? Exactly what it hoped:
Fedele accepted a full-time job almost immediately after KPMG made its offer
at the end of the summer.
Gerdes
is a staff editor for BusinessWeek in New
York.
January 8, 2010 message from David Albrecht
[albrecht@PROFALBRECHT.COM]
A really, really good blog is CPA Trendlines (
http://cpatrendlines.com). I find it so useful, it is one of four from
whom I'm grateful to receive tweets (retheauditors, feiblog, compliance
week are the others). BTW, thanks to a hint from Francine, I was made
aware of TweetDeck and it is much easier to track tweets.
Anyway, Rick Telberg has published some really
useful stats from BLS.
http://cpatrendlines.com/2010/01/08/accounting-loses-2600-jobs-in-december/comment-page-1/#comment-546857
He summarizes in the article that accounting is
down 44,000 jobs from the start of this recession. Ouch! There are numerous
stories of how many are needing to make what they perceive as permanent
adjustments to their lifestyle. Ouch!
Dave Albrecht
January 8, 2010 reply from Bob Jensen
Hi David,
Firstly, in recession a dip/rise of 2,600 in any one month out of over
900,000 is not substantively significant. The loss of 42,200 over the entire
recession is more disturbing, but this has been an extremely severe
recession with many clients going out of business or going private. Also
many of these losses are bookkeepers being replaced by some of the newer
technology such as Webledgers and ever-improving bookkeeping software.
Some of the losses of hospital accountants, nurses, and staff arose
because of the really severe budget cuts in states having enormous revenue
shortfalls in this recession. For example, in some states nurses are having
a terrible time finding new nursing jobs. This was almost unheard of before
the start of this recession.
As far as the Big Four firms go, the rate of growth declined about 2% in
the recession, but hiring is still in a growth mode worldwide.
The Big Four firms cumulatively employ more than 600,000 professionals
all over the world, including partners, audit, tax and advisory
professionals and administrative staff. This staggering number has been
consistently on the rise since 2004, when cumulative employment was around
435,000 professionals. "THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS," Big
Four Blog, January 2010 ---
http://www.big4.com/media_kit/big4_media_kit.pdf
I think you can judge accounting employment decline in a recession only
by comparing it with what is happening in job categories that employ over
500,000 nationwide. I’ve not researched this, but my priors are that
accounting is holding up very well to many other big, big losers in this
terrible recession.
I am worried about some of the enormous pending Big Four lawsuits (like
WaMu), but these will drag on for years before we know the outcomes.
Bob Jensen
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/BookBob1.htm#careers
"Barnes & Noble Announces Textbook Rental Service," by Jill Laster,
Chronicle of Higher Education, January 11, 2010 ---
http://chronicle.com/blogPost/Barnes-Noble-Announces/20432/?sid=wc&utm_source=wc&utm_medium=en
Barnes & Noble's college-bookstore division has entered the growing
field of textbook rental for college students, the bookseller
announced Monday. After testing the waters with a
pilot program, the service has expanded. It will allow students to rent
textbooks through campus-bookstore Web sites at 25 college campuses or
through the Barnes & Noble stores on those campuses. Students can pay for
the service in several different ways, including financial aid and campus
debit cards
Jensen Comment
Students should carefully make comparisons between renting versus buying used
and possibly reselling. Campus bookstores will usually buy back books they sold
to students, and there are online buyers of used books.
This is an
early Jensen tidbit on renting.
We Rent Movies, So Why Not Textbooks?,"
by Miguel Helft, The New York Times, July 4, 2009 ---
http://www.nytimes.com/2009/07/05/business/05ping.html?hpw
Cengage Learning
said Thursday
that it would become the first higher education publisher to let students rent
as well as buy print textbooks directly from the source. Cengage said it would
transform its existing online platform, known as
iChapters, into
a broader site that would allow students to rent print textbooks at 40 to 70
percent off retail as well as purchase print and digital texts and other
materials. Publishers have been exploring a range of ways to enter the
burgeoning market
for renting textbooks.
Inside Higher Ed, August 14, 2009 ---
http://www.insidehighered.com/news/2009/08/14/qt#205700
Jensen
Test:
Rent Textbooks from Chegg ---
http://www.chegg.com/
Rental prices are about half the so-called purchase price of a new book.
Buying a used book is probably a better idea since it, in turn, can be sold back
into the used market.
Intermediate Accounting ISBN 0470374942 by Kieso et al.
New (Chegg claims the new price is $209
but the price of hardcover is $177 at Barnes & Noble
)
The Amazon Price of a new hardcover is $168 ---
Click Here
Bigwords.com (international edition that differs somewhat in chapter orderings)
lists a price of $53.98
Used prices start at Amazon for about $159 (but watch carefully for the edition
number)
Rent from Chegg ($96.53) ---
http://www.chegg.com/details/intermediate-accounting/0470374942/
Jensen
Comment
To get value for my money, I prefer used houses, cars, and books.
Of course, both Amazon and Google are now selling electronic versions of
textbooks. For Amazon you must have a Kindle reader. For Google, all you have to
have is a computer, although to date Amazon has a wider selection of textbooks
available.
Bob Jensen's threads on electronic books are at
http://www.trinity.edu/rjensen/ebooks.htm
"Government posting wealth of data to Internet," by Pete Yost, The
Washington Post, January 22, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/22/AR2010012200768.html?wpisrc=nl_pmtech
The Obama administration on Friday is posting to
the Internet a wealth of government data from all Cabinet-level departments,
on topics ranging from child car seats to Medicare services.
The mountain of newly available information comes a
year and a day after President Barack Obama promised on his first full day
on the job an open, transparent government.
Under a Dec. 8 White House directive, each
department must post online at least three collections of "high-value"
government data that never have been previously disclosed.
The Transportation Department will post ratings for
2,400 lines of tires for consumer safety based on tire tread wear, traction
performance and temperature resistance. The Labor Department will release
the names of 80,000 workplaces where injuries and illness have occurred over
the past 10 years.
The Medicare database has previously been available
for a fee of $100 on CD ROM. Under the Obama initiative, it can be
downloaded free, providing detailed breakdowns of payments for Medicare
services. The Medicare data will be sortable by the type of medical service
provided.
A National Highway Traffic Safety Administration
database rates car seats for ease of use, evaluating the simplicity of
instruction sheets, labels, vehicle installation features and securing the
child.
"We're democratizing data," White House Chief
Information Officer Vivek Kundra said Thursday in an interview.
Open government groups are supportive.
"There's recognition that public equals online,"
said Ellen Miller, executive director at Sunlight Foundation, a nonprofit
group focusing on the use of technology for greater government transparency.
Miller said the effort represents "a sea change in
government's attitude," with newfound support for the idea that government
data belongs in the hands of citizens instead of locked away in the basement
of a federal agency.
All the new data collections will be added to the
government's Web site, data.gov.
Required to release the three new data sets are the
departments of State, Treasury, Defense, Justice, Interior, Agriculture,
Commerce, Labor, Health and Human Services, Housing and Urban Development,
Transportation, Energy, Education, Veterans Affairs, Homeland Security and
the Environmental Protection Agency, the offices of the U.S. Trade
Representative and the U.S. ambassador to the United Nations and the Council
of Economic Advisers.
---
The directive --- :http://www.whitehouse.gov/omb/assets/memoranda-2010/m10-06.pdf
Government's Web site --- :http://www.data.gov/
Data Sets ---
http://www.data.gov/ogd
This included some data sets from the SEC
Jensen Comment
I think that many of our courses do not adequately train students to use
government Web sites in general. The U.S. Government has done a magnificent job
for many years providing a wealth of data. How many business school graduates
know how to use the Department of Commerce Website? The IRS tremendous Website,
the SEC enormous Website (beyond EDGAR), etc?
When searching, how often do we click for Google or Wikipedia when the best
place to start might be a Government Website or the UN Website?
Bob Jensen's threads on economic statistics ---
http://www.trinity.edu/rjensen/BookBob1.htm#EconStatistics
Allegedly, Goldman Sachs sold (to suckers) securities
backed by risky home loans while it simultaneously bet that those bonds would
lose value
January 27, 2010 message from my friend Larry (who prefers
to remain anonymous)
WASHINGTON — One of Congress' premier watchdog
panels is investigating Goldman Sachs' role in the subprime mortgage
meltdown, including how the firm sold securities backed by risky home loans
while it simultaneously bet that those bonds would lose value, people
familiar with the inquiry said Friday.
The investigation is part of a broader examination
by the Senate Permanent Subcommittee on Investigations into the roots of the
economic crisis and whether financial institutions behaved improperly, said
the individuals, who insisted upon anonymity because the matter is
sensitive.....
Federal auditors found that Goldman placed $22
billion of its swap bets against subprime securities, including many it had
issued, with the giant insurer American International Group. In late 2008,
when the government bailed out AIG, Goldman received $13.9 billion....
http://www.mcclatchydc.com/251/story/82899.html
"Goldman under investigation for its securities dealings,"
by Greg Gordon, McClatchy Newspapers, January 22, 2010 ---
http://www.mcclatchydc.com/251/story/82899.html
WASHINGTON — One of Congress' premier watchdog
panels is investigating Goldman Sachs' role in the subprime mortgage
meltdown, including how the firm sold securities backed by risky home loans
while it simultaneously bet that those bonds would lose value, people
familiar with the inquiry said Friday.
The investigation is part of a broader examination
by the Senate Permanent Subcommittee on Investigations into the roots of the
economic crisis and whether financial institutions behaved improperly, said
the individuals, who insisted upon anonymity because the matter is
sensitive.
Disclosure of the investigation comes amid a
darkening mood at the White House, in Congress and among the American public
over the long-term economic impact of the subprime crisis, prompting demands
to hold the culprits accountable.
It marks at least the third federal inquiry
touching on Goldman's dealings related to securities backed by risky home
mortgages.
The separate, congressionally appointed Financial
Crisis Inquiry Commission, which was created to investigate causes of the
crisis, began holding hearings Jan. 13 and took sworn testimony from
Goldman's top officer. In addition, the Securities and Exchange Commission,
which polices Wall Street, is investigating Goldman's exotic bets against
the housing market, using insurance-like contracts known as credit-default
swaps, in offshore deals, knowledgeable people have told McClatchy.
Goldman, the world's most prestigious investment
bank, has denied any improprieties and said that the use of "hedges," or
contrary bets, is a "cornerstone of prudent risk management."
Asked about the Senate inquiry late Friday, Goldman
spokesman Michael DuVally said only: "As a matter of policy, Goldman Sachs
does not comment on legal or regulatory matters."
A spokeswoman for the Senate subcommittee declined
to comment on the investigation, which was spawned by a four-part McClatchy
series published in November that detailed the Wall Street firm's role in
the debacle, which stemmed from subprime loans to millions of marginally
qualified borrowers.
The subcommittee, part of the Homeland Security and
Governmental Affairs Committee, is led by veteran Democratic Sen. Carl Levin
of Michigan, who said last year that his panel was "looking into some of the
causes and consequences of the financial crisis."
The panel has a history of conducting formal,
highly secretive investigations in which it typically issues subpoenas for
documents and witnesses, produces extensive reports and sometimes refers
evidence to the Justice Department for possible criminal prosecution.
It couldn't immediately be learned whether the
panel has subpoenaed Goldman executives or company records. However, the
subcommittee has issued at least one major subpoena seeking records related
to Seattle-based Washington Mutual, which collapsed in September 2008 after
being swamped by losses from its subprime lending. J.P. Morgan Chase then
purchased WaMu's banking assets.
Goldman was the only major Wall Street firm to
safely exit the subprime mortgage market. McClatchy reported, however, that
Goldman sold off more than $40 billion in securities backed by over 200,000
risky home loans in 2006 and 2007 without telling investors of its secret
bets on a sharp housing downturn, prompting some experts to question whether
it had crossed legal lines.
McClatchy also has reported that Goldman peddled
unregulated securities to foreign investors through the Cayman Islands, a
Caribbean tax haven, in some cases exaggerating the soundness of the
underlying home mortgages. In numerous deals, records indicate, the company
required investors to pay Goldman massive sums if bundles of risky mortgages
defaulted. Goldman has said its investors were fully informed of the risks.
Federal auditors found that Goldman placed $22
billion of its swap bets against subprime securities, including many it had
issued, with the giant insurer American International Group. In late 2008,
when the government bailed out AIG, Goldman received $13.9 billion.
Goldman's chairman and chief executive, Lloyd
Blankfein, appeared to acknowledge last week that the firm behaved
inappropriately when he was asked about the secret bets in sworn testimony
to the Financial Crisis Inquiry Commission.
Blankfein first said that the firm's contrary
trades were "the practice of a market maker," then added: "But the answer is
I do think that the behavior is improper, and we regret the result — the
consequence that people have lost money in it."
A day later, Goldman issued a statement denying
that Blankfein had admitted improper company behavior and said that his
ensuing answer stressed that the firm's conduct was "entirely appropriate."
Senate investigators were described as having pored
over Goldman's SEC filings in recent weeks.
Underscoring the breadth of the Senate
investigation is the disclosure by federal banking regulators in a recent
filing in the WaMu bankruptcy case.
In it, the Federal Deposit Insurance Corp. revealed
that the Senate subcommittee had served the agency with "a comprehensive
subpoena" for documents relating to WaMu, whose primary regulator was the
Office of Thrift Supervision.
The subcommittee's jurisdiction is "wide-ranging,"
the FDIC's lawyers wrote. "It covers, among other things, the study or
investigation of the compliance or noncompliance of corporations, companies,
or individual or other entities with the rules, regulations and laws
governing the various governmental agencies and their relationships with the
public." The subpoena, they said, "is correspondingly broad."
The Puget Sound Business Journal first reported on
the FDIC's disclosure.
Goldman's former chairman, Henry Paulson, served as
Treasury secretary during the bailouts that benefitted the firm and while
other Wall Street investment banks foundered because of their subprime
market exposure, its profits have soared.
In reporting a $13.4 billion profit for 2009 on
Thursday, the bank sought to quell a furor over its taxpayer-aided success
by scaling back employee bonuses. It also has limited bonuses for its 30
most senior executives to restricted stock that can't be sold for five years.
MORE FROM MCCLATCHY
Goldman Sachs: Low Road to High Finance
Justice Department eyes possible fraud on Wall Street
Goldman admits 'improper' actions in sales of securities
Goldman: Blankfein didn't say firm's practices were 'improper'
Facing frustrated voters, more senators oppose Bernanke
Obama moves to restrict banks, take on Wall Street
Check
out McClatchy's politics blog: Planet Washington
Bob Jensen's threads on subprime sleaze are at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Bob Jensen's threads on banking fraud are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Members of the AAA probably received the message below.
But it may not have reached everybody on the AECM, particularly
students on the AECM who may want a voice in this effort.
I remind you that there’s a great deal of prior work and
references to learning experiments and accounting education change ---
http://aaahq.org/AECC/changegrant/cover.htm
There are many references here to Ernest Boyer (especially the Kansas State
University experiment) ---
http://en.wikipedia.org/wiki/Ernest_Boyer
Here are some other AAA publications to review ---
http://aaahq.org/market/display.cfm?catID=7
Also don't forget the inventory of AAA Awards, some of which
touch on the first year of basic accounting ---
http://aaahq.org/awards/InventoryofAwards08.pdf
In particular search among the Innovations in Accounting
Education Awards ---
http://aaahq.org/awards/awrd6win.htm
I hope that the grand efforts of BAM are not ignored here even
though accounting educators really find it difficult not to teach and force
students to learn on their own with more blood, sweat, and tears ---
http://www.trinity.edu/rjensen/265wp.htm
BAM is a lot like tough love and still earns my vote among the
“best practices” for students who might in turn take out their frustrations on
teaching evaluations. It takes tough teachers to BAM their students.
In my opinion, however, BAM is probably not suited for the first
year of basic accounting. BAM requires a somewhat higher level of maturity among
students and a foundation of accounting and research skills. However, my opinion
here is based upon full BAM. Creative educators might find ways of modifying BAM
for basic students in their first year of accounting.
Robert E. (Bob) Jensen
Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
Tel. 603-823-8482
www.trinity.edu/rjensen
From:
Bill Pasewark [mailto:w.pasewark@ttu.edu]
Sent: Tuesday, January 19, 2010 6:56 PM
To: Jensen, Robert
Subject: Issues in Accounting Education--Call for Special Issue
Dear
Robert Jensen,
Bill
Pasewark, Editor of Issues in Accounting Education, is pleased to
announce a special edition of Issues in Accounting Education devoted to
the pedagogy and content of the introductory accounting course. The edition
will be published in February 2011, and Professor Jack E. Wilkerson, Jr. will
serve as Guest Editor.
The
American Accounting Association requests submissions that may take the form of
research, instructional best practices, or instructional resources. For more
specific information please see the call for papers
HERE
Submissions should be made via the PXP interface
HERE,
and the cover letter should specify consideration for the special edition
relating to introductory accounting.
The
submission deadline is December 31, 2010.
Bill
Pasewark
Editor of Issues in Accounting Education
There may be projects here for cost accounting students. In addition to
comparisons of fixed and variable installation costs, students could conduct
simulations of estimating the present values of energy cost savings into the
future.
"Solar Shingles See the Light of Day: Dow Chemical readies
easy-to-install solar roofs," by Phil McKenna, MIT's Technology Review,
January 20, 2010 ---
http://www.technologyreview.com/business/24383/?nlid=2678
Dow Chemical is moving full speed ahead to develop
roof shingles embedded with photovoltaic cells. To facilitate the move, the
U.S. Department of Energy has backed Dow's efforts with a $17.8 million tax
credit that will help the company launch an initial market test of the
product later this year.
In October 2009, the chemical giant unveiled its
product, which can be nailed to a roof like ordinary shingles by roofers
without the help of specially trained solar installers or electricians. The
solar shingles will cost 30 to 40 percent less than other solar-embedded
building materials and 10 percent less than the combined costs of
conventional roofing materials and rack-mounted solar panels, according to
company officials.
Dow isn't the first company to incorporate solar
cells into building materials. In recent years, a number of leading solar
manufacturers have launched small lines of solar shingles, tiles, and window
glazes. But as Dow looks to bring its shingles mainstream, other solar
manufacturers are backing away from the products. Suntech Power, the Chinese
solar maker, and the largest crystalline silicon photovoltaic manufacturer
in the world, has several integrated solar systems on the market, but with
the recent downturn in new housing construction, the company has focused
instead on ramping up conventional photovoltaic panel output, says Jeffrey
Shubert, Suntech Power marketing director for North and South America.
According to analyst Johanna Schmidtke of
Boston-based Lux Research, building integrated solar installations are,
despite manufacturers' claims, still significantly more expensive than
conventional rack-mounted solar arrays due to increased costs associated
with manufacturing and installation. The devices currently occupy niche
markets for those willing to pay a premium for the aesthetic value of the
less-obtrusive integrated systems.
Companies looking to develop solar shingles and
other solar-integrated building materials have also had to overcome
significant design and materials challenges. "Putting solar panels directly
into the roof or skin of a building requires a product that has structural
integrity, weathering ability, and electrical integrity," says Mark Farber a
senior consultant with Photon Consulting in Boston. "It has to be a good
building material and a good power generator, and achieving both is hard to
do."
To address cost and performance challenges, Dow
partnered with solar cell producer Global Solar Energy, one of the early
developers of copper, indium, gallium, and selenium (CIGS) thin films. CIGS
thin-film semiconductors are less expensive than conventional crystalline
silicon solar panels and offer some of the highest conversion efficiencies
of emerging thin films.
For each of Dow's shingles, Global Solar will
manufacture strings of five interconnected solar cells. Dow will then
encapsulate each string with glass and polymers and embed it into a shingle
with electrical plugs at each end that link the individual shingle into a
larger array.
Dow is leveraging its ties within the building
materials and construction industries to develop, test, and distribute its
shingles. Installations can be completed in half the time of conventional
solar installations, and an electrician is only needed to make the final
connection to the building's electrical system, according to David Parrillo,
senior research and development director of Dow Solar Solutions.
The DOE also awarded United Solar Ovonic of
Rochester Hills, MI, $13.3 million in tax credits to ramp up production and
increase the efficiency of its building integrated photovoltaic materials.
Unlike Dow, the company produces amorphous silicon thin films that are
encapsulated entirely in polymers. Amorphous silicon offers lower
efficiencies--currently 6.5 to 7 percent at the array level--than the CIGS
shingles that Dow is developing. Silicon, however, is a less expensive
material than CIGS and is less susceptible to moisture. As a result, the
integrated solar cells built by United Solar Ovonic don't require glass
covers like Dow's shingles, allowing them greater flexibility.
Audit Pricing in the Real World
"Defending Koss And Their Auditors: Just Loopy Distorted Feedback," by
Francine McKenna, re: TheAuditors, January 16, 2010 ---
http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/
My objective in writing this story was to handily
contradict Grant Thornton’s self-serving
defense to the Koss fraud.
The defense supported
by some commentators:
Audits are not designed to uncover fraud and
Koss did not pay for a separate opinion on internal controls because they
are exempt from that Sarbanes-Oxley requirement.
But punching holes in that Swiss-cheese defense is
like shooting fish in a barrel. Leading that horse to water is like feeding
him candy taken from a baby. The reasons why someone other than American
Express should have caught this sooner are as numerous as the
acorns you can steal from a blind pig…
Ok, you get the gist.
Listing standards for the NYSE require an internal
audit function. NASDAQ, where Koss was listed, does not. Back in 2003, the
Institute of Internal Auditors (IIA) made recommendations
post- Sarbanes-Oxley that were adopted for the most
part by NYSE, but not completely by NASDAQ. And both the NYSE and NASD left
a few key recommendations hanging.
In addition, the IIA has never mandated, under its
own standards for the internal audit profession, a
direct reporting of the internal audit function to
the independent Audit Committee. The
SEC did not adopt this requirement in their
final rules, either.
However, Generally Accepted Auditing Standards (GAAS),
the standards an external auditor such as Grant Thornton operates under when
preparing an opinion on a company’s financial statements – whether a public
company or not, listed on NYSE or NASDAQ, whether exempt or not from
Sarbanes-Oxley – do require the assessment of the internal audit function
when planning an audit.
Grant Thornton was required to adjust their
substantive testing given the number of
risk factors
presented by Koss, based on
SAS 109 (AU 314), Understanding the Entity and
Its Environment and Assessing the Risks of
Material Misstatement. If they had understood the entity and assessed the
risk of material misstatement fully, they would have been all over those
transactions like _______. (Fill in the blank)
If they had performed a proper
SAS 99 review (AU 316), Consideration of Fraud
in a Financial Statement Audit, it would have hit’em smack in the face
like a _______ . (Fill in the blank.) Management oversight of the financial
reporting process is severely limited by Mr. Koss Jr.’s lack of interest,
aptitude, and appreciation for accounting and finance. Koss Jr., the CEO and
son of the founder,
held the titles
of COO and CFO, also. Ms. Sachdeva, the Vice
President of Finance and Corporate Secretary who is accused of the fraud,
has been in the
same job since 1992
and during one ten year period
worked remotely from Houston!
When they finished their review according to
SAS 65 (AU 322), The Auditor’s Consideration
of the Internal Audit Function in an Audit of Financial Statements, it
should have dawned on them: There is no internal audit function and the
flunky-filled Audit Committee is a sham. I can see it now. The Grant
Thornton Milwaukee OMP smacks head with open palm in a “I could have had a
V-8,” moment but more like, “Holy cheesehead, we’re indigestible
gristle-laden, greasy bratwurst here! We’ll never be able issue an opinion
on these financial statements unless we take these journal entries apart,
one-by-one, and re-verify every stinkin’ last number.”
But I dug in and did some additional research – at
first I was just working the “no internal auditors” line – and I found a few
more interesting things. And now I have no sympathy for Koss management
and, therefore, its largest shareholder, the Koss family. Granted there is
plenty of basis, in my opinion, for any and all enforcement actions against
Grant Thornton and its audit partners. And depending on how far back the
acts of deliciously deceptive defalcation go, PricewaterhouseCoopers may
also be dragged through the mud.
Yes.
I can not make this stuff up and have it come out
more music to my ears. PricewaterhouseCoopers was Koss’s auditor prior to
Grant Thornton. In March of 2004, the
Milwaukee Business Journal reported, “Koss
Corp. has fired the certified
public accounting firm of PricewaterhouseCoopers L.L.P. as its independent
auditors March 15 and retained Grant Thornton L.L.P. in its place.”
The article was short with the standard disclaimer of no disputes about
accounting policies and practices. But it pointedly pointed out that PwC’s
fees for the audit had increased by almost 50% from 2001 to 2003, to $90,000
and the selection of the new auditor was made after a competitive bidding
process.
PwC had been Koss’s auditor since 1992!
The focus on audit fees by Koss’s CEO should have
been no surprise to PwC. Post-Sarbanes-Oxley, Michael J. Koss the son of
the founder, was quoted extensively as part of the very vocal cadre of CEOs
who complained vociferously about paying their auditors one more red cent.
Koss Jr. minced no words regarding PwC in the
Wall Street Journal in August 2002, a month after
the law was passed:
“…Sure, analysts had predicted a modest fee
increase from the smaller pool of accounting firms left after Arthur
Andersen LLP’s collapse following its June conviction on a
criminal-obstruction charge. But a range of other factors are helping to
drive auditing fees higher — to as much as 25% — with smaller companies
bearing the brunt of the rise.
“The auditors are making money hand
over fist,” says Koss Corp. Chief Executive Officer Michael Koss. “It’s
going to cost shareholders in the long run.”
He should know. Auditing fees are up nearly
10% in the past two years at his Milwaukee-based maker of headphones.
The increase has come primarily from auditors spending more time combing
over financial statements as part of compliance with new disclosure
requirements by the Securities and Exchange Commission. Koss’s
accounting firm, PricewaterhouseCoopers LLP, now shows up at corporate
offices for “mini audits” every quarter, rather than just once at
year-end.”
A year later, still irate, Mr. Koss Jr. was quoted
in
USA Today:
“Jeffrey Sonnenfeld, associate dean of the
Yale School of Management, said he recently spoke to six CEO conferences
over 10 days. When he asked for a show of hands, 80% said they thought
the law was bad for the U.S. economy.
When pressed individually, CEOs don’t
object to the law or its intentions, such as forcing executives to
refund ill-gotten gains. But confusion over what the law requires has
left companies vulnerable to experts and consultants, who “frighten
boards and managers” into spending unnecessarily, Sonnenfeld says.
Michael Koss, CEO of stereo
headphones maker Koss, says it’s all but impossible to know what the law
requires, so it has become a black hole where frightened companies throw
endless amounts of money.
Companies are spending way too much to
comply, but the cost is due to “bad advice,
not a bad law,” Sonnenfeld says.”
It’s interesting that Koss Jr. has such
minimal appreciation for the work of the external auditor or an internal
audit function. By virtue, I suppose, of his esteemed status as CEO, COO and
CFO of Koss and notwithstanding an undergraduate
degree in anthropology, according to
Business Week, Mr. Koss Jr. has twice served other
Boards as their “financial expert” and Chairman of their Audit Committees.
At
Genius Products,
founded by the Baby Genius DVDs creator, Mr. Koss served in this capacity
from 2004 to 2005. Mr. Koss Jr. has also been a Director, Chairman of Audit
Committee, Member of Compensation Committee and Member of Nominating &
Corporate Governance Committee at
Strattec Security Corp. since 1995.
If I were the SEC, I might take a look at those two
companies…Because
I warned you about the CEOs and CFOs who are
pushing back on Sarbanes-Oxley and every other regulation intended to shine
a light on them as public company executives.
No good will come of this.
I don’t want you to shed crocodile tears or pity
poor PwC for their long-term, close relationship with
another blockbuster Indian fraudster. Nor should
you pat them on the back for not being the auditor now. PwC never really
left Koss after they were “fired” as auditor in 2004. They continued until
today to be the trusted “Tax and All Other” advisor,
making good money filing Koss’s now totally bogus
tax returns.
Continued in article
Bob Jensen's threads on Grant Thornton litigation ---
http://www.trinity.edu/rjensen/fraud001.htm#GrantThornton
Bob Jensen's threads on PwC and other large auditing firms
http://www.trinity.edu/rjensen/fraud001.htm
Jensen Comment
You may want to compare Francine's above discussion of audit fees with the
following analytical research study:
In most instances the defense of underlying assumptions is based upon
assumptions passed down from previous analytical studies rather than empirical
or even case study evidence. An example is the following conclusion:
We find that audit quality and audit fees both
increase with the auditor’s expected litigation losses from audit failures.
However, when considering the auditor’s acceptance decision, we show that it
is important to carefully identify the component of the litigation
environment that is being investigated. We decompose the liability
environment into three components: (1) the strictness of the legal regime,
defined as the probability that the auditor is sued and found liable in case
of an audit failure, (2) potential damage payments from the auditor to
investors and (3) other litigation costs incurred by the auditor, labeled
litigation frictions, such as attorneys’ fees or loss of reputation. We show
that, in equilibrium, an increase in the potential damage payment actually
leads to a reduction in the client rejection rate. This effect arises
because the resulting higher audit quality increases the value of the
entrepreneur’s investment opportunity, which makes it optimal for the
entrepreneur to increase the audit fee by an amount that is larger than the
increase in the auditor’s expected damage payment. However, for this result
to hold, it is crucial that damage payments be fully recovered by the
investors. We show that an increase in litigation frictions leads to the
opposite result—client rejection rates increase. Finally, since a shift in
the strength of the legal regime affects both the expected damage payments
to investors as well as litigation frictions, the relationship between the
legal regime and rejection rates is nonmonotonic. Specifically, we show that
the relationship is U-shaped, which implies that for both weak and strong
legal liability regimes, rejection rates are higher than those
characterizing more moderate legal liability regimes.
Volker Laux and D. Paul Newman, "Auditor Liability and Client Acceptance
Decisions," The Accounting Review, Vol. 85, No. 1, 2010 pp. 261–285
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics
January 18, 2010 reply from Francine McKenna
[retheauditors@GMAIL.COM]
Bob,
I think the auditors were
justified, to some extent initially, in increasing fees substantially
post-Sarbanes-Oxley for two reasons:
1) Uncertainty about what work
was required under the law. Given their new externally regulated status,
they were nervous about interpretation of the vague, poorly drafted law.
They had no way to estimate level of effort necessary to satisfy regulators
(PCAOB) and so over compensated with testing and other procedures and
charged dearly for that.
When are professional service
firms justified in charging premium fees?
-When resources are scarce
-When there is a non-negotiable
deadline
-When the task requires new or
specialized expertise that may temporarily be in short supply
SOX had all that.
2) Fears of substantial
litigation exposure if they did not meet regulators requirements and
external legally defensible quality expectations in what they feared would
be inevitable lawsuits.
However, as is their habit, they
took it too far, took advantage. Now, with the excuse of the recession (and
some help from Auditing Standard 5), the clients have the upper hand and are
squeezing the auditors back again on fees.
Interestingly enough, as my
friend Jim Peterson has pointed out, we have yet to see any significant
number of lawsuits using Sarbanes-Oxley as a basis. Jim says only the first
one is now on the docket related to WaMu. Auditor litigation has increased
but still comes from traditional sources - simple malpractice claims in
subprime crisis and Madoff and other frauds such as Satyam.
http://www.jamesrpeterson.com/home/2009/11/whats-in-store-for--reporting-on-internal-controls-under-the-sarbanesoxley-law-the-most-import.html
fm
"Taxpayers to Pay for Fannie, Freddie Aid: Treasury Removed Caps on
Assistance," SmartPros, January 13, 2010 ---
http://accounting.smartpros.com/x68543.xml
A recent move by the Treasury Department to remove
$200 billion caps on assistance to Fannie Mae and Freddie Mac eliminates any
doubt that taxpayers will pay for all their losses for the next three years
and appears to be a major step toward formally nationalizing the housing
enterprises, analysts say.
The government took control of the companies, and
effectively much of the U.S. mortgage market, in September 2008 and started
purchasing all their mortgage-backed securities. But the Treasury previously
used the $200 billion caps on aiding each company to try to limit taxpayer
exposure to their mounting losses.
Republicans charge that Treasury has given the
Depression-era companies a "blank check" to pay for burgeoning losses on
defaulting loans.
The two housing enterprises last year guaranteed
and secured nearly 70 percent of new mortgages, primarily made to "prime"
borrowers with the best credit ratings, while the Federal Housing
Administration insured most loans to subprime borrowers, leaving only a tiny
share of the mortgage market in private hands.
In its Christmas Eve statement announcing the
little-noticed changes, the Treasury insisted that it wants to preserve "an
environment where the private market is able to provide a larger source of
mortgage finance."
But analysts say Treasury's move may push off any
return to a normal mortgage market for years -- possibly forever. Treasury
removed the liability caps for three years and loosened restrictions on
Fannie's and Freddie's purchases of their own mortgage securities --
enabling them to maintain their dominant share of the mortgage market.
"These actions would preserve and strengthen the
governments involvement and control over the countrys housing finance system
and make it harder to reintroduce substantial private-sector involvement
later on," said Edward Pinto, a housing consultant and former chief credit
officer at Fannie Mae.
When combined with a separate move by regulators
not to provide common stock as part of executive compensation at Fannie and
Freddie, the administration's recent actions suggest that it is moving to
nationalize the companies, Mr. Pinto said.
Nationalization, or total government control and
ownership of the companies, would wipe out the value of Fannie and Freddie
stock, making it worthless as a way to pay executives. The value of the
stock has plummeted to between $1 and $2 a share in the wake of the
government's takeover.
Treasury spokesman Andrew Williams declined to
elaborate on the Treasury's actions, but denied that nationalization was the
goal.
The administration is preparing to present its
proposals for governing Fannie and Freddie in the future -- a major question
not addressed in financial reform legislation pending in Congress -- when it
presents its budget in February. Options range from fully nationalizing the
enterprises to reprivatizing them or turning them into public "utilities"
like the closely regulated gas and electric companies.
Sen. Bob Corker, Tennessee Republican, questioned
whether the administration was moving toward nationalization in a letter to
Treasury Secretary Timothy F. Geithner this week, urging the Treasury to
incorporate fully in its February budget the cost of any additional Fannie
and Freddie liabilities the government is acquiring.
"Due to the level of support that this
administration and the previous one have created for Fannie Mae and Freddie
Mac, would you not consider your latest move an effective nationalization?"
asked Mr. Corker, a member of the Senate Banking, Housing and Urban Affairs
Committee. "If so, then the liabilities of these two firms should absolutely
be reflected on the balance sheet of the U.S. Treasury."
Fully nationalizing the enterprises would
permanently increase costs for taxpayers and would bloat the government's
balance sheets. Fannie and Freddie currently guarantee about $5.5 trillion
of outstanding mortgages and debts -- nearly as much as the Treasury's own
public debt. If the companies were fully nationalized, the government's
books would have to reflect both the revenues and losses from those
obligations.
But even if the administration and Congress stop
short of formally incorporating the enterprises into the federal government,
the removal of the caps at least for now has eliminated any doubt that the
government stands behind all Fannie and Freddie obligations and will cover
their losses for the next three years.
Treasury reportedly told Mr. Corker that the move
was needed to calm markets.
Apparently, it deemed the certainty of government
backing to be critical at a time when the Federal Reserve has announced that
it will end its program of purchasing $1.25 trillion in Fannie and Freddie
mortgage bonds in March. The Fed's program -- another unprecedented federal
intervention in the mortgage market -- provided most of the funding to
finance prime mortgages in the past year.
Many housing analysts and economists worry that the
Fed's withdrawal from the mortgage market will cause a sharp rise in 30-year
mortgage rates of as much as one percentage point from 5 percent to 6
percent as private investors demand higher yields to compensate for the
increased likelihood of defaults on mortgages.
Nearly one in eight mortgages is in default, with
prime mortgages guaranteed by Fannie and Freddie having taken over subprime
last year as the principal source of delinquencies.
Rapidly rising delinquencies have prompted some
analysts to predict a collapse in the mortgage market once the Fed stops
buying most of Fannie and Freddie's debt. The Treasury's move appears
designed to reassure investors and prevent that from happening.
"When you have someone as big as the Fed was in
2009 walking away cold turkey, there have to be bumps along the road," said
Ajay Rahadyaksha, managing director at Barclays Capital. But he expects
investors to be enticed back into the mortgage market because they have
"massive amounts of cash" to invest.
While full nationalization of the enterprises would
be controversial, and likely provoke overwhelming Republican opposition,
most parties agree that after the massive efforts to prop up the mortgage
market in the past two years it would be difficult for the government to
entirely extricate itself in the future.
Former Treasury Secretary Henry M. Paulson Jr. said
he intended to keep the government's options open when he designed the plan
to take 79.9 percent control of Fannie and Freddie and put them under
government conservatorship.
But he said they should not be returned to their
previous ambiguous structure, where they were owned by private stockholders
even as they carried out a government mission. He said the best structure in
the future might be to turn them into public utilities that funnel the
government's guarantee on mortgage-backed securities for a fee.
The Mortgage Bankers Association and other private
groups have endorsed a permanent federal role in guaranteeing pools of prime
mortgages, perhaps through a revamped Fannie and Freddie.
One reason heavy government involvement is likely
to continue is that Fannie and Freddie -- unlike many banks that received
bailouts from the Treasury -- likely will never be able to fully repay the
nearly $100 billion in assistance they have received so far from taxpayers,
analysts say.
Their losses are growing by the day, and many of
them now are incurred as a result of new mandates from the Treasury and
Congress to spearhead the government's efforts to alleviate the home
foreclosure crisis and make credit available as widely as possible.
For example, Fannie recently said it may liberalize
its rules for mortgages used to buy condominiums in Florida -- an area that
has been plagued with high rates of default and foreclosure, while it is
giving preference to homeowners over investors when it sells foreclosed
properties, even if investors offer a better deal.
Many analysts expect the administration to soon
increase the subsidies the enterprises are providing to homeowners and banks
that renegotiate mortgages to try to avoid foreclosure, and some suspect it
already is using Fannie and Freddie to make loans available to riskier
borrowers.
Mr. Corker said the proliferation of government
mandates for the enterprises has essentially turned them into "a direct
extension of the Treasury Department."
How Fannie Mae creatively managed earnings and cooked the books to give
then CEO Franklin Raines millions and then had to fire Franklin and issued
restated financial statements ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
The Zero-Tuition Online University of the People (now working on gaining
accreditation) ---
http://en.wikipedia.org/wiki/University_of_the_People
"Tuition-Free University Gains a Following: A year since its formation, the
online University of the People has attracted several hundred students, a team
of top academic advisers, and growing support worldwide," by Alison Damast,
Business Week, January 21, 2010 ---
http://www.businessweek.com/bschools/content/jan2010/bs20100121_194827.htm?link_position=link1
One of the higher
education world's boldest experiments began in September when 180 students from
nearly 50 countries around the world logged on to their computers for their
first day of school at the University of the People. At first glance, the school
has many of the trappings of a modern university: a provost, department heads,
even an admissions committee. Yet there are glaring differences—namely, a the
lack of a campus or physical classroom and just a handful of paid staff—that set
it apart from its bricks-and-mortar counterparts.
Those are shortcomings
the students, most of them from developing countries and without the means to
pay for college, are willing to overlook, says Shai Reshef, an Israeli
entrepreneur and founder of the school, the world's first global tuition-free
online university.
"Education has become so
expensive that not that many people can afford it, and in some parts of the
world it just doesn't exist or there isn't a big enough supply," says Reshef,
who has more than two decades' experience with Internet-based educational
ventures and is chairman of Cramster.com, an online study community. "This is
exactly why the Internet was invented. I thought: What can be done better with
the Internet than helping people get an online education for free?"
Backed by the U.N. It was
just about a year ago that Reshef made headlines in the distance learning
community with his announcement that he intended to start an online college
program using open-source software that would be free to students all over the
world, one of just a handful of tuition-free universities. The nonprofit
venture, which he named University of the People, attracted attention not only
because of its tuition-free mission but also because it had the backing of the
U.N., a leadership team made up of academics from top educational institutions
like Columbia University and New York University, and an innovative approach to
distance education, with an emphasis on peer-to-peer learning.
Today, the online
university is fully operational, with 300 students, a growing array of course
offerings, and even a recently announced research partnership with Yale
University. The school is tapping into a growing market: Nonprofit institutions
account for 68% of the more the more than 2 million students enrolled in online
education, according to the latest estimates from Eduventures, a higher
education consulting firm.
There are still many
trials ahead for the fledgling university, which is struggling to make inroads
in the competitive online global education market. To stay afloat, the school
will need to raise several million dollars in startup costs this year and
introduce new admission and application testing fees, which could pose
difficulties for students from developing countries. But perhaps its greatest
challenge—and the one its success will hinge on—will be gaining accreditation, a
step toward the school's goal of conferring bachelor's degrees to students. This
would also allow the school to carve out a niche as a major player in a space
that has so far been primarily dominated by schools like the for-profit Apollo
Group's (APOL) University of Phoenix and Washington Post Co.'s (WPO) Kaplan
University, both of which have broad online degree offerings, says Roger C.
Schonfeld, the manager of research at ITHAKA S+R, a higher education strategy
and research organization.
Business and Computer
Science "What the University of the People is offering to do is make education
time- and space-neutral. They have a lot of ingredients there to be successful,
and they certainly have quite a few superstars on their advisory board,"
Schonfeld says. Among them: a former dean at INSEAD and the current U.S.
Ambassador to Bangladesh. "I think that their success from a business
perspective may turn on their ability to become accredited," Schonfeld notes.
"With accreditation, they have a good chance of an innovative model that might
see some success."
For now, the school's
academic offerings are limited. Students can pursue an associate's-degree or
bachelor's-degree track in business or a bachelor's track in computer science.
Those subject areas were chosen because they are professions that "are in high
demand and areas where students will most likely be able to find a job," Reshef
says. (A notice on the school's Web site reads: "These programs may in the
future lead towards undergraduate degrees. However, no degrees will be granted
until the university obtains proper authorization from relevant authorities.")
Obtaining accreditation
is a top priority for the school, says Reshef, noting that the school is
incorporated in Pasadena, Calif., making it easier for the school to work with
American accreditation agencies. "We intend to apply for accreditation as soon
as we can," Reshef says, though he declined to specify which accreditation body
the school planned to work with.
The school's unaccredited
status does not appear to be a stumbling block for students like Deema Sultan,
27, who lives in Syria and was among the first cohort of students to matriculate
at the University of the People this fall. She came across the school through a
news story run on a Syrian Web site last summer and immediately became
intrigued. "I thought, "Oh, this is a great idea, but I doubt it is true,"" says
Sultan.
Her doubts were assuaged
when she found the school's Web site and saw that she met the eligibility
requirements. Now in her second semester, she is pursuing a business
administration track. When not in school, she helps run her family's textile
business. She hopes her education will help the business grow and help her
become a more astute entrepreneur.
"This is a great
opportunity for me because, even though I'm working, I could not afford to study
in Syria or the U.S.," says Sultan, who takes classes from a computer in her
parent's home or at Internet cafés, when the family's connection is down. "I'm
very impressed by it so far and the level of education they are offering. I've
been telling my friends all about it."
The University of the
People has not launched an official marketing campaign, but word appears to be
spreading quickly. In its first two semesters, the school received 3,000
applications from all over the world, the school says. Students enrolled in the
current class range in age from 18 to 63; the vast majority have opted for the
business program. To gain admission, students have to submit a high school
diploma, have Internet access, be proficient in English, and be able to pass two
mandatory courses in English and computer skills. The school has so far
attracted students from 70 countries, including Afghanistan, Thailand, Sudan,
Saudi Arabia, and Zambia, and expects to enroll several hundred more students
when its third semester begins in February, Reshef says.
Peer-to-Peer Learning
Admitted students are placed in a class of 15 to 20 of their peers and given
access to free online materials and social networking tools. There are five
semesters throughout the school year, each lasting 10 weeks. The school is using
Moodle, an open sourceware e-learning software platform, to deliver lectures,
reading material, homework assignments, and tests to students, who work together
in groups.
Every class is overseen
by an instructor, but the school's educational model is based on peer-to-peer
learning, meaning that students are expected to learn by interacting with their
peers, posting and responding to questions on lessons and reading in their
online classrooms. If students can't find the answer to a question through their
classmates, they can reach out for help to an online volunteer community of
university professors, graduate students, retired academics, and computer
specialists.
The model appears to be
working, the school says. A survey of students conducted in November by the
school indicated that 90% of the class was satisfied with the classroom
experience and would definitely or likely recommend the school to peers and
family.
Continued in article
University of the People ---
http://www.uopeople.org/
Course Catalogs ---
http://www.uopeople.org/ACADEMICS/CourseCatalog/tabid/197/Default.aspx
-
Business Administration Course Catalog
-
Principles of Business Management
-
Basic Accounting
-
Microeconomics
-
Macroeconomics
-
Principles of Marketing
-
E-Commerce for Business Administration
-
Principles of Finance 1
-
Personal Finance
-
Financial Accounting
-
Consumer Behavior
-
Entrepreneurship 1
-
Managerial Accounting
-
Business Law 1
-
Business & Society
-
Multinational Management
-
Entrepreneurship 2
-
Organizational Behavior
-
Business Policy & Strategy
-
Computer Science Course Catalog
-
General Studies Course Catalog
Bob Jensen's threads on online training and education alternatives ---
http://www.uopeople.org/ACADEMICS/tabid/194/Default.aspx
"Which Performance Measures do Investors Value the Most - and Why?" by
Jan Barton Emory University, Thomas Bowe Hansen University of New Hampshire -
Whittemore School of Business and Economics, and Grace Pownall Emory University
- Department of Accounting, SRNN, January 23, 2009 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1230562
Abstract:
We examine the value relevance of a comprehensive set of summary performance
measures including sales, earnings, comprehensive income, and operating cash
flows. We find that, while value relevance peaks for measures "above the line,"
no single measure dominates for firms across the world. Instead, we find a
performance measure more relevant when it captures in a more direct and timely
fashion information about firms' cash flows. Specifically, for each performance
measure by country, we estimate eight attributes commonly used by accounting
researchers to assess earnings quality. We find these attributes highly
correlated-most of their variance can be explained by only two principal
factors. A factor capturing nearness to cash flows is positively associated with
a performance measure's value relevance; a factor reflecting the measure's
persistence, predictability, smoothness and conservatism is negatively
associated. Together, our results suggest that, when it comes to equity
valuation, accounting researchers and standard setters should focus not on what
performance measure is "best" at one point in time, but on the underlying
attributes that investors find most relevant.
Keywords: summary
performance measure, earnings attributes, value relevance, international
accounting standard setting
Jensen Comment
This paper doesn't do much in support of fair value accounting.
It is, however, an empirical research study worthy of replicating ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Bob Jensen's threads on cash
flow versus accrual reporting ---
http://www.trinity.edu/rjensen/theory01.htm#CashVsAccrualAcctg
January 24, 2010 reply from David
Albrecht [albrecht@PROFALBRECHT.COM]
our
results suggest that, when it comes to equity valuation, accounting
researchers and standard setters should focus on the underlying
attributes that investors find most relevant.
Isn't this a ":duh" moment?
But then, those at SEC and FASB seem not to know this.
David Albrecht
Shielding Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
- With a Rejoinder from the 2010 Senior Editor of The Accounting
Review (TAR), Steven J. Kachelmeier
- With Replies in Appendix 4 to Professor Kachemeier by Professors
Jagdish Gangolly and Paul Williams
- With Added Conjectures in Appendix 1 as to Why the Profession of
Accountancy Ignores TAR
- With Suggestions in Appendix 2 for Incorporating Accounting Research
into Undergraduate Accounting Courses
"Should Colleges Pay for Housework?" by Scott Jaschik,
Inside Higher Ed, January 19, 2009 ---
http://www.insidehighered.com/news/2010/01/19/housework
When Carol W. Greider of
Johns Hopkins University learned that she won the 2009 Nobel Prize in
Medicine,
she was doing laundry.
That fact is cited in a new
analysis of academic scientists and housework -- being published today by
the American Association of University Professors and calling for colleges
to create an option for faculty members and others to have financial
assistance for housework as an employee benefit. The study finds that even
among dual career scientist couples, the time gap spent on housework is
hindering the advancement of women.
The study found that female
scientists with male partners perform 54 percent of their family housework
(cooking, cleaning and laundry) in their households, while male scientists
with female partners perform 28 percent of their family housework. While
there are other tasks on which the male scientists contribute a majority of
time (yard, house and car care), those tasks take much less time a week than
those that women are more likely to perform. It adds up to a 10-hour drain
on the time of female scientists, the study finds.
The study was conducted by
Londa Schiebinger, the John L. Hinds Professor of History of Science and
director of the Clayman Institute for Gender Research at Stanford
University, and Shannon Gilmartin, a quantitative analyst and the institute.
The data come from a large research project at the institute,
"Dual Career Academic Couples: What Universities Need to Know."
Schiebinger and Gilmartin used data collected for that
report from 1,222 tenured and tenure-track faculty members in the natural
sciences at leading universities. Those studied were all partnered with
someone of the opposite sex. (Data were also collected from same-sex
couples, but the totals were too small to draw conclusions on them.)
Among the other findings:
- Male scientists with stay-at-home partners do
the least household work, relying on their female partners to do 76
percent of such work.
- While very few women in the survey (13) have
stay-at-home male partners, they do more housework than their male
counterparts.
- The men and women in the study reported nearly
identical hours a week at work -- mean of 56.4 hours for men and 56.3
hours for women.
- Men and women who employ others to do
housework are more productive than those who don't employ others.
(Productivity is measured by number of published articles.)
Based on these findings,
the authors suggest that colleges recognize that housework is "an academic
issue" and revise benefits packages accordingly. They suggest that
institutions offer flexible packages of benefits, in which financial
assistance for housework would be one possible benefit. They write that some
employees might not want the benefit and would prefer, based on their
personal or family situations, other benefits. But the option should be
included, they write.
"One appealing aspect of
this benefit proposal is its inclusivity -- one need not be partnered or
have children to gain access," they write.
Schiebinger and Gilmartin
acknowledge that, given the economic downturn, this may not be "the right
time" to propose a major expansion of benefits. But they say that over the
long run, this is an issue that should be addressed.
"Providing benefits to
support housework continues dominant social trends of the past 40 years,"
they write. "U.S. institutions have stepped into the domestic sphere to
support aspects of private life, from health-care benefits to child-care
supplements. Institutions now need to step in to support housework."
Cathy A. Trower, research
director and co-principal Investigator of the Collaborative On Academic
Careers in Higher Education, at Harvard University, said she wasn't
surprised by the findings on housework. But she said she feared that this
may not be the issue that most needs reform.
"I'm all for more benefits
for faculty and household help would be great for everyone -- singles and
marrieds and men and women. Bravo," she said.
But the larger question is
whether such changes would actually help many women (and men). COACHE's
surveys of young faculty members have found significant frustrations with
work/family balance in higher education, but the surveys have also found
many young scholars who don't just want more help, but want different
models, with more time for family or non-academic pursuits.
Too much attention to
issues like housework may shift attention away from broader reforms, Trower
said. She has written about the need for different models for faculty
careers -- long-term renewable contracts, tenure expectations that may not
require 60 hours a week in the lab and so forth -- as the best way to create
more options. Focusing on benefits -- such as how many times you can stop
the tenure clock or whether you should be paid for hiring household help --
doesn't address the question of whether the system is one to bolster or
needs real reform.
"What I am against is the
lack of flexibility and the seeming inability to confront openly the issues
at play," she said.
Jensen Comment
Some years ago there was such a dire shortage of nurses that hospitals provided
nurses with meal vouchers, day care services, and free home cleaning/shopping
services. Many hospitals have cut back on all but day care due to recent budget
cuts and the glut of nurses in some parts of the country. Perhaps the word
"glut" is a bit strong, but up here in northern New England a nursing school
could not find a full-time job with fringe benefits for a single graduate last
spring.
What caused this sudden increase in the supply of nurses? Partly it was the
ease of finding jobs in a world where other types of job opportunities were
shrinking. It was also due to the rise in men attracted to what had previously
been a career dominated by women. And partly it was due to lower turnover.
Nursing tended to have relatively high turnover in times of prosperity due to
women electing to devote full time to families, including starting new families.
Now nurses with families often have spouses who are unemployed or underemployed
such that resigning a high full-time job is no longer an option in these
difficult economic times.
But there's still a shortage of faculty in some disciplines. New PhDs in
accounting are running about 130 per year to meet a demand of upwards of 1,500
per year give or take for tougher budgetary times in colleges and the explosion
in the use of adjunct accounting teachers.
But since the rise in the number of undergraduate accounting majors keeps
rising across the country, there's still substantial room for a newly minted PhD
to negotiate when applying for a new job. Starting salaries in major
universities are over $160,000 plus summer research stipends and private expense
budgets and fringe benefits.
Accounting Doctoral Information ---
http://www.jrhasselback.com/AtgDoctInfo.html
Accounting Doctoral Programs ---
http://www.jrhasselback.com/AtgDoct/AtgDoctProg.html
Although I've not heard of any college offering free meal vouchers and home
services for accounting faculty, it may well be cheaper than having to make
$200,000 salary deals for top graduates. And if the science departments are
offering their faculty home services, there's a precedent being set according to
the above article.
Accountancy in general does not have the same gender problem as science.
Currently there are more female than male undergraduate accounting majors, and
the gender gap in among accounting professors has been closing much faster in
accountancy than in science.
Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/BookBob1.htm#careers
Bob Jensen's threads on why practicing accountants are not rushing into
accounting doctoral programs ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
From CPA Trendlines on January 17, 2010
Followed by “Top seven growth areas.” Big 4 Slammed by Global Recession
http://ow.ly/V66B Top Seven Growth Areas for CPAs
http://ow.ly/16lrJB Seven reasons clients leave their CPAs
http://ow.ly/16jvpL Five Secrets to Dealing with Unhappy Clients
http://ow.ly/V64e Layoff Watch ‘10: Grant Thornton January Edition
http://ow.ly/16lIt9 How Costly Loans Drive the Tax Prep Industry
http://ow.ly/V67e More Than a Numbers Game, Accounting Firms Diversify
Services
http://ow.ly/16jyGC Accounting [...]
"THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS," Big Four Blog,
January 2010 ---
http://www.big4.com/media_kit/big4_media_kit.pdf
EXECUTIVE SUMMARY
2009 was a difficult year overall for the Big Four accounting firms:
Deloitte, Ernst & Young (E&Y), KPMG and PricewaterhouseCoopers (PwC), as
their financial performance was affected by tough external conditions, slow
global economic growth, cost-conscious clients and sluggish merger and
acquisition activity.
After an extraordinary period of continuous revenue growth from the early
2000s to 2008, combined revenue for the four firms in fiscal 2009 did fall
by 7% from fiscal 2008 in US dollar terms. Revenue decreases in US dollar
percentage terms ranged from negative 5% for Deloitte to negative 7% each
for Ernst & Young and PricewaterhouseCoopers to negative 11% for KPMG.
The large fall in US dollar terms was also driven by the appreciating US
dollar during the period. Despite this, the combined revenues of the Big
Four firms was an astonishing $94 billion, with PwC retaining its leadership
position as the largest accounting firm on the planet by narrowly beating
Deloitte.
The Americas region represents about 40% of global revenues for the Big Four
firms, but its share has been falling over the years, due to the
preponderance of mature markets. Contrary perhaps to common belief, Europe,
Middle East and Africa has the highest percentage of total revenues for the
Big Four firms at 45%. Asia Pacific, while being the smallest region at 15%
of revenues, has posted the highest growth rates, owing to the strong
upswing in many emerging Asian economies.
The Audit service line accounts for almost 50% of total revenues and has
been generally holding at this level across the years. Tax services
experienced strong growth in 2006 to 2008, in sync with global merger and
acquisition transactions activity. Advisory services has been the fastest
growing service line as the firms extend their services into risk management
and business consulting.
The Big Four firms cumulatively employ more than 600,000 professionals
globally, with a total of 34,000 partners overseeing a steep pyramid of
about 470,000 professionals.
Despite the world’s worst financial crisis for over 70 years, the Big Four
firms turned in quite a creditable performance, with revenues falling only
by a small percentage in local currency terms. For 2010 and beyond, we will
likely see a return back to revenue growth, though it is debatable whether a
string of double-digit growth over multiple years will be seen for the next
few years. 2010 will also be an interesting year to watch for any changes in
Big Four rankings, with a close race between Deloitte and
PricewaterhouseCoopers for the leadership position.
________________________________________
REVENUE PERFORMANCE
2009 Reverses Multi-year Revenue Growth Trend
2009 was a difficult year overall for the Big Four accounting firms:
Deloitte, Ernst & Young (E&Y), KPMG and PricewaterhouseCoopers (PwC), as
their financial performance was affected by tough external conditions, slow
global economic growth, cost-conscious clients and sluggish merger and
acquisition activity. After an extraordinary period of continuous revenue
growth from the early 2000s to 2008, mostly at a double-digit percentage
rate, combined revenue for the four firms in fiscal 2009 did fall by 7% from
fiscal 2008 in US dollar terms.
Quite apart from operating considerations, the large fall in US dollar terms
was also driven by the appreciating US dollar during the period. The
decrease in local currency terms was at a much lower level, ranging from
negative 3% to positive 1%.
Despite the decrease in revenues, these large accounting firms posted some
big numbers in 2009, their combined revenues was an eye-popping $94 billion,
dropping from an all-time record level of over a $100 billion in 2008.
Revenue decreases in US dollar percentage terms also differed across firms,
ranging from negative 5% for Deloitte to negative 7% each for Ernst & Young
and PricewaterhouseCoopers to negative 11% for KPMG. In local currency
terms, revenue decreases were more modest, from positive 1.0% for Deloitte,
0.2% for PricewaterhouseCoopers to negative 0.2% for Ernst & Young and
negative 2.6% for KPMG.
The difference across firms was driven by the intrinsic nature of the firm
itself and varying compositions of service lines and geographies and a small
effect due to fiscal years which spanned different calendar months.
Deloitte’s fiscal 2009 ended on May 31, 2009, E&Y and PwC’s fiscal 2009
ended on June 30, 2009 and KPMG was the last to close out the fiscal year on
September 30, 2009. In 2009, this small difference in fiscal year-ends would
have had a relatively higher impact, for example, KPMG’s fiscal year 2009
coincided exactly with meltdown in financial markets as Lehman Brother
collapsed in September 2008. Other Big Four firms had three to five fewer
months of this negative impact.
Fluctuations in the US dollar also contributed to the higher level of
percentage drops. The US dollar appreciated strongly from mid-2008 to
mid-2009 against a basket of foreign currencies, after staying weak in the
prior twelve months. This had an unfavorable effect, as depreciating local
currencies, where the firms earned revenue, were converted into US dollars,
in which the firms reported their annual results. In general, decreases
expressed in US dollar terms were about 7% lower than decreases expressed in
local currency terms.
PricewaterhouseCoopers retained its first place as the largest accounting
firm on the planet with revenues of $26.2 billion, narrowly beating
Deloitte, a very close second with revenues of $26.1 billion. Ernst & Young
took the third spot at $21.4 billion, and KPMG maintained its position as
the smallest of the Big Four firms at $20.1 billion of revenues. Deloitte
proved to the most resilient firm to the tough economy, with its revenue
falling only 4.9% in US dollar terms, while close rival
PricewaterhouseCoopers’ revenues decreased 7.1%. This enabled Deloitte to
close the gap against PwC in 2008 to be at almost at par in 2009. In 2010,
it will be interesting to see who will gain the leadership spot, as a
relatively stronger performance by Deloitte could well edge it past PwC.
The Big Four firms have had an astonishing run up in total revenues over the
last six years. In 2004, combined firm revenues were only $60 billion, but
by 2008, this had moved up at a compounded annual growth rate of 14% to
exceed $100 billion. Some of this gain was from the collapse of Andersen, as
Andersen’s $10 billion or so of revenues in 2002 was generally redistributed
over the remaining four firms. Beyond this, the global financial boom in the
middle of the decade, combined with assertive penetration into emerging
economies provided the engine for revenue increases.
This positive trend rapidly reversed in 2009, the first time in six years,
as economies all over the world came to an abrupt halt in mid-2008, with
many countries going into recessions, and ultimately affecting the seemingly
unstoppable growth in Big Four firm revenues. Even with this drop in 2009,
the six year compounded annual growth rate from 2004 to 2009 was 9%, a
remarkable achievement, given that these multi-billion dollar enterprises
had to grow their size by nearly 60% from a high starting point by either
finding new revenue opportunities or penetrating current clients.
Despite being auditors for the world’s public companies who are required to
report extensive details on their financials, the Big Four firms provide
only very high level financial information with minimum commentary, with
consequent impact on the depth of possible analysis in our study.
________________________________________
2009 FIRM PERFORMANCE
We blogged on each firm’s 2009 financial performance as they sequentially
reported on The Big Four Blog, and we encourage our readers to read those
analyses to obtain a flavor of the timing and our immediate response.
Ernst & Young was the first to report its 2009 financials, and with Deloitte
following (on a much delayed schedule) it became clear that the year was
turning out to be quite challenging on the revenue line. PwC followed suit,
showing flat revenue growth on a local currency basis. KPMG was the last to
report in December 2009, and its revenues fell the most among all the four
firms. Additional data points from the UK member firms, where the Big Four
firms have to provide more detailed information, proved that the pressure on
the top line was also leading to lower bottom lines and decreased profits
per partner.
In 2009, while revenues fell drastically in developed markets, all firms
generally noted that emerging markets were more resilient against slowdowns,
and revenues rose in many developing countries. The appreciating US dollar
caused the percentage drop in US dollars to exceed the more modest drops in
local currency. In general the firms’ results met our expectations, though
KPMG’s sharp fall was quite surprising. In addition, Ernst & Young changed
their method of reporting in 2009, choosing to report combined, rather than
consolidated revenues, which led to a lower level of reported revenues.
PricewaterhouseCoopers’s FY 2009 global revenues for the year ending June
30, 2009 was US$26.2 billion, a 7.1% decline from the US$28.2 billion in FY
2008 in US dollar terms. However, on local currency terms FY 2009 revenues
were actually higher than FY 2008 by a modest 0.2%. This performance enabled
PwC to remain the largest accounting firm on the planet.
In terms of service lines, Assurance grew 2.0% in local currency terms to
$13.1 billion, but in terms of US dollars, revenues actually fell by 4.8%
from $13.8 billion in 2008. PwC attributed this to market-leading strength
of the business and its continued focus on improved customer service and
very competitive pricing. Tax services fell by 0.3% in local currency terms
to $6.9 billion, but fell 7.5% in US dollar terms from $7.5 billion in 2008.
Tax was impacted by the worldwide decline in corporate deals and
restructuring work. Advisory services fell by 2.9% in local currency terms
to $6.1 billion, but fell 11.4% in US dollar terms from $6.9 billion in
2008. This service line was the hardest hit by the global slowdown, as M&A
and IPOs dried up and private equity firms slowed, while bankruptcy and
restructuring work provided some offset.
In terms of geographies, Asia revenues rose about 4% to $3.7 billion in
local currency terms but falling about 5% in US dollar terms from $4.0
billion in 2008. Revenues in the smaller regions of Middle East & Africa (up
9.1%) and South & Central America (up 13.3%) also rose strongly in local
currency terms, showing strong growth in emerging markets. In the developed
world, revenues in both Europe and North America declined, and since these
account for 85% of total PwC revenues, they essentially drove the results
for the firm. Revenue growth was high in a number of PwC member firms around
the world, with particularly good results in Japan, Russia, Spain, Sweden
and Canada.
________________________________________
Deloitte Touche Tohmatsu, the global firm, reported fiscal 2009 revenues for
the year ending May 31, 2009 of US$26.1 billion, an increase in local
currency terms of 1%, but a drop of 4.9% in US dollar terms from 2008.
By service line, Consulting (Advisory) was the fastest grower at 7.3% in
local currency terms; and in US dollar terms, revenue increased 2% from $6.3
billion in 2008 to $6.5 billion in 2009. Audit was relatively flat against
2008 in local currency terms; in US dollar terms, Audit shrank by 6.4% from
$12.7 billion to $11.9 billion. Tax was also relatively flat against 2008 in
local currency terms; in US dollar terms, Tax revenues decreased by 5.5%
from $6.0 billion to $5.7 billion. Financial Advisory Services revenue fell
6.1% in local currency terms, but in US dollar terms, fell by 13.8% from
$2.4 billion in 2008 to $2.0 billion in 2009.
In terms of geography, Americas dropped 1.3% in local currency terms and
3.7% in US dollar terms from $12.9 billion in 2008 to $12.5 billion in 2009.
Europe, Middle East and Africa rose 2% in local currency terms but dropped
9.0% in US dollar terms from $11.3 billion in 2008 to $10.2 billion in 2009.
Asia Pacific grew 4.7% in US dollar terms from $3.2 billion in 2008 to $3.4
billion in 2009. The Asia Pacific region had local currency growth of 7.6%
and was the fastest-growing region for the fifth consecutive year. India’s
revenues grew 29.9%, Australia grew 11.5% and Japan grew 11.3% in local
currency terms.
Africa, the Middle East, and Latin America and the Caribbean posted high
growth rates of 21.3%, 15.6% and 13.7% respectively, in local currency.
Despite this remarkable performance, Deloitte was unable to beat PwC to be
the largest Big Four firm in the world. Its 2009 revenues of $26.1 billion
were behind PwC’s 2009 revenues of $26.2 billion by only $100 million or
0.4%. We had indicated in our earlier analysis that a 4.5% decrease in
Deloitte’s revenues in US dollar terms would make it the largest among the
Big Four firms. However, Deloitte’s overall revenues actually dropped by
4.9% from 2008 to 2009, narrowing, but not completely closing the gap
against PwC. By showing remarkable performance in 2009, arguably one of the
toughest environments in recent memory, Deloitte has shown that it is a
strong contender for the leadership position.
________________________________________
Ernst & Young’s combined worldwide 2009 revenues for the year ending 30 June
2009 were US$21.4 billion, decreasing a modest 0.2% in local currency terms
from the comparable period in FY 2008 of US$23.0 billion in global revenues.
In US dollar terms, the revenue actually declined 6.8% from 2008 to 2009.
Assurance Services with FY 2009 revenues of $10.1 billion offset price
pressure with market-share gains, and revenues declined only 0.7% in local
currency terms, but 6.3% in US dollar terms. Global Tax Services with FY
2009 revenues of $5.8 billion was up 1.8% in local currency terms due to
increased tax enforcement, but dropped 5.2% in US dollar terms. Advisory
Services with FY 2009 revenues of $3.6 billion was up 1.5% in local currency
terms due to sustained demand for risk management and performance
improvement, but dropped 6.0% from $3.8 billion in 2008 in US dollar terms.
Transaction Advisory Services with FY 2009 revenues of $1.9 billion, had a
6.9% decrease in local currency terms due to fall in M&A volumes, but
revenues decreased a large 14.8% in US dollar terms from $2.2 billion in
2008.
Across E&Y’s five geographic areas, Japan grew at 7.5% in local currency
terms, due to the acquisition of 1,000 professionals from accountancy firm
Misuzu; and revenues increased 20% in US dollar terms. The Europe, Middle
East, India and Africa (EMEIA) area grew 1.8% in local currency terms, but
declined 9.7% in US dollar terms. Oceania decreased 0.4% in local currency
terms, but declined a dramatic 15.9% in US dollar terms. The Far East
decreased 2.7% in local currency terms and 5.9% in US dollar terms. The
Americas area decreased 3.2% in local currency terms, but 5.5% in US dollar
terms.
There were some bright spots however, with many of the emerging markets
achieving strong revenue growth, including the Middle East at 18.6%, India
at 13.1% and Brazil at 8.0%.
Ernst & Young made a key change to their reporting of revenues in 2009,
electing to show combined, not consolidated revenues by eliminating
intra-firm billings. E&Y restated its 2008 revenues down from $24.5 billion
as originally reported to $23.0 billion reported as restated in 2009. The
reason provided for this change was, “In line with our globalization efforts
to harmonize policies across member firms, revenues for 2009 and 2008
related to member firm billings to other member firms have been eliminated
from the financial information presented here. This financial information
represents combined not consolidated revenues, and includes expenses billed
to clients.”
________________________________________
KPMG reported 2009 combined revenues for the fiscal year ending 30 September
2009 of US$20.1 billion versus US$22.7 billion for the prior 2008 fiscal
year. This was an 11.4% decline in US dollars terms and a 2.6% decline in
local currency terms, which was the highest drop among all Big Four firms.
By service line, Audit 2009 revenues were $10.0 billion versus $10.7 billion
in 2008, down 6.9% in US dollar terms but a 0.5% increase in local currency
terms. In the global financial services industry, Audit services' revenues
actually grew 7%.
Tax services revenues in 2009 were $4.1 billion versus $4.7 billion in 2008,
a 13.4% decrease in US dollar terms and a 4.3% decrease in local currency
terms. But certain practices within Tax did very well: Transfer Pricing grew
5.3%, Indirect Tax grew 8% and International Executive Services grew 7.8%,
all in local currency terms.
Advisory services revenues of $6.1 billion in 2009 decreased versus $7.3
billion in 2008, by a large 16.6% in US dollars terms and 6.6% decline in
local currency terms. However, Advisory in China and the Middle East posted
double-digit growth.
By geography, Americas Region had 2009 revenue of US$6.3 billion versus
US$7.2 billion in 2008, decreasing 12% in US dollar terms and 8.6% in local
currency terms. Bright spots included Brazil with 5% revenue growth, Mexico
with 8.2% growth, Venezuela grew 22.9% and Chile's revenues rose 22.7%, all
in local currency terms.
In Europe, Middle East and Africa, combined KPMG member firm 2009 revenues
were $10.7 billion versus $12.4 billion in 2008, dropping 13.5% in U.S.
dollars terms and 0.6% in local currency terms. Middle East and South Asia
was the fastest growing sub-region in Europe; and KPMG in Africa had a 9.3%
growth in local currency terms.
In Asia Pacific, combined 2009 revenues of $3.1 billion decreased 1.1% in US
dollars terms but grew a substantial 3.9% in local currency terms. Some
countries posted spectacular results: Korea had 19.4% growth, Vietnam and
Cambodia each had 17.5% growth, and Japan had 7.2% growth, all in local
currency terms. KPMG said that Asia Pacific member firms are beginning to
see an increasing number of M&A transactions especially in China and Korea.
Revenues in the BRIC countries as a group grew 4.3%. Middle East and South
Asia was the fastest growing practice with a 25% growth rate. KPMG’s BRIC
headcount increased by 11.5% this year, with BRIC headcount nearly
quadrupling in the past ten years.
________________________________________
REVENUE BY GEOGRAPHY
The distribution of revenues by geography shows some very interesting
insights. Contrary perhaps to common belief, Europe (including generally
Europe, Middle East and Africa), rather than the Americas region (including
Canada, the US and South America), has the highest percentage of total
revenues for the Big Four firms, averaging 45% of total worldwide revenues.
Americas average about 40% and the Asia Pacific countries (including India,
South Asia, China, North Asia and Australia) have the remaining 15% of the
revenue share.
The Americas
The Americas represent about 40% of global revenues, but its share has been
falling over the years. From 2004 to 2009, there has been a noticeable drop
of about 3% in the Americas region’s share of the total revenue for all the
firms. In 2005, 43% of combined firm revenues were reported from the
Americas region, whereas in 2009, it had dropped to only 40% of total firm
revenues.
There also appears to be large variation across firms in the amount of
revenue from this geographic region as a percentage of their global
revenues. For example, Deloitte at the high end, sources 48% of its revenues
from the Americas and KPMG at the low end has only 31% of its revenues from
the Americas. Ernst & Young and PwC each have about 40% of their total
revenues from the Americas, in line with the total firm average.
While Latin America, and particularly Brazil and Mexico have provided good
growth opportunities for growth in recent years, the predominance of the
mature markets of USA and Canada with slower growth has generally limited
the expansion of Big Four firms in the Americas region. The 3% revenue share
loss has generally gone to Asia Pacific, where emerging markets such as
China, India, Korea and Vietnam have grown at disproportionately higher
rates.
Europe
Europe, surprisingly, is the largest region by revenue for all Big Four
firms. The Big Four firms typically combine Europe, comprising the developed
countries of Western Europe, the up and coming markets of Eastern Europe
with Middle Eastern and African nations for a giant EMEA region. Europe
represents about 45% of global revenues, and as we see across the years,
this total percentage has remained remarkably flat from 2004 to 2009. In
2004, 46% of combined firm revenues were reported from the Europe region,
and in 2009, the same percentage 46% of total firm revenues came from
Europe.
________________________________________
As in Americas, each firm has a different percentage of European revenues as
a share of the total revenues. KPMG at the high end sources 53% of its
revenues from Europe (KPMG Europe being a key contributor) while Deloitte at
the low end has only 40% of its revenues from Europe, this situation being a
total polar opposite of the Americas. Ernst & Young and PwC each have 45% of
their total revenues from Europe, in line with the total firm average.
This diverse European region comprises both of mature markets such as the
United Kingdom, France, Italy and Germany, as well as fast growing Eastern
European nations - Poland, Russia, Czech Republic, Hungary and Romania. The
Big Four firms have had spectacular growth in Eastern Europe as these high
growth economies have matured into capitalistic markets, requiring
sophisticated audit, tax and transaction services.
The Big Four firms have had tremendous growth in Russia in particular as
part of their BRIC initiatives. Europe also comprises the rapidly rising
countries of the Middle East – including Dubai, Abu Dhabi, Kuwait, Saudi
Arabia and Israel; as also the larger economies of the African continent –
South Africa, Egypt and Nigeria for example. In the Middle East and Africa,
the Big Four firms have capitalized on their historical small presence and
posted very high annual growth numbers for the last few years, albeit from a
smaller base.
Asia Pacific
Asia Pacific, while being the smallest region, has posted the highest growth
rates of all regions. This diverse region comprises a few mature markets
such as Japan and Australia, but mainly covers fast growth emerging markets
such as China, India, Vietnam, Korea and Singapore. The Asia Pacific region
has been in an economic boom for most of this decade, and their demand for
Big Four firm professional services have multiplied. All the firms have
grown at exceedingly high rates each year since 2004, with the result that
combined revenues have doubled from $7 billion in 2004 to $14 billion in
2009.
Asia represents about 15% of global revenues for all the firms, and as we
see across the years, this total percentage has increased steadily from 2004
to 2009. In 2004, 12% of combined firm revenues were reported from Asia, and
in 2009, it had sharply increased to 15% of total firm revenues. This share
gain came at the expense of the Americas region, which correspondingly lost
its share of the pie.
________________________________________
BRIC
The BRIC countries – Brazil, Russia, India and China – have been
unquestionably the shining stars in the growth story in recent years. Though
the firms do not report individual country revenues, there is typically some
commentary on the annual report on the spectacular increases in these
countries.
For example, Ernst & Young reported in 2009 that revenues in India had
increased 13% and in Brazil by 8%; and KPMG said that their headcount in the
BRIC countries had nearly quadrupled in the past ten years.
________________________________________
REVENUE BY SERVICE LINE
The Big Four firms offer a wide variety of professional and financial
services, with newer Advisory services adding to their more traditional and
deep-rooted Audit (Assurance) and Tax Services. Firms vary in their
structure and definition of these broad service lines, typically though
about half the revenues are sourced from Audit, and the balance is shared
between Tax and Advisory Services.
Audit
The audit service line, the largest in all firms, accounts for almost 50% of
total revenues and generally holding this percentage level across the years.
Typically Audit services is a steady business, as publicly traded clients
renew auditor services each year with some increase in annual fees. Most
companies prefer to maintain their auditors for a long time, providing
stability to the auditors’ top line. The Audit service line experienced
sharp growth in total revenues in 2005 to 2007, but this has slowed down
sharply in the 2008-2009 years.
From 2008 to 2009, revenue for the Audit service line for the combined firms
shrank by 6% in US dollar terms, which was better than the negative 7% in
Tax service line and negative 9% in Advisory, which demonstrated the
somewhat anti-recessionary nature of this service line. Audit fees came
under pressure in 2009, but firms maintained their focus on client service
and market share gains to mitigate any losses in revenue.
________________________________________
Tax
The tax service line, forms about a quarter of the Big Four firm revenue and
generally holding this percentage level across the years. Tax revenue are
reasonably steady, as they derive revenue from add-on services provided to
audit clients, in addition to tax services provided for transactions,
complicated tax restructurings and other projects.
Tax had a very strong growth in 2006 to 2008, in line with large scale
global merger and acquisition transactions activity, but had a sharp decline
in 2009.
________________________________________
Advisory
The Advisory service line, forms the last quarter of the Big Four firm
revenue and includes the broader non-Audit and non-Tax services such as
Transaction Advisory, Risk Management, and Business Consulting services; and
demarcations generally vary across the firms. Owing to this catch-all nature
of this category, there are many drivers of top line results, merger and
acquisition activity being a principal factor.
Advisory services have been one of the fastest growers in the Big Four firms
as the firms extend their services beyond assurance and taxation through
penetration into current clients or through referrals from other firms who
may be conflicted out at their clients. Advisory services have generally
increased their share of revenues. In 2004, they had 22% of total revenues
and this had sharply increased to 28% in 2009. Despite this sharp growth,
Advisory services had the sharpest decline of 9% from 2008 to 2009, as
clients slowed down transaction and restructuring activities all over the
world.
________________________________________
FIRM EMPLOYMENT ANALYSIS
The Big Four firms cumulatively employ more than 600,000 professionals all
over the world, including partners, audit, tax and advisory professionals
and administrative staff. This staggering number has been consistently on
the rise since 2004, when cumulative employment was around 435,000
professionals.
Thus in six years, the number of people working at just these four firms has
been around 175,000. Despite the reduction in revenues, net employment grew
by more than 10,000 professionals from 2008 to 2009, with notably Deloitte
and PwC adding to their workforce. The growth rate in employment of people
dropped sharply to 2% in 2009.
Typical annual attrition rate at Big Four firms was running about 15% prior
to 2008, so for example in 2008, the Big Four firms cumulatively would have
made about 140,000 new hires to account for the loss of professionals and
the additional growth. This works out to about 550 hires for each business
day of the year.
Even in 2009, assuming attrition rates had dropped to 10%, new hires in 2009
would be about 70,000 equating to about 275 hires each day. Truly, Big Four
firms are huge seekers of talent with correspondingly very busy recruiters
even in a period of deep recession.
Elevation to partner at a Big Four firm is a tough and long process as every
professional who has ever worked at one knows. Partners form an elite class
within these large partnerships, and only one in about 20 people belongs to
this exclusive club. In 2009, we estimate there were only about 34,000
partners in all the Big Four firms, overseeing a steep pyramid of about
470,000 professionals, thus the typical partner being responsible for about
14 professionals in 2009.
In 2004, the professional to partner ratio was only 11, thus partners are
taking on more responsibilities in terms of professional management and
development over the years.
Another metric that is closely watched is revenue per partner, in 2004, each
partner was holding up $2.1 million in revenue, and this had crept up to
$2.8 million by 2009, after peaking at $3.0 million in 2008. In other words,
each partner was expected to bring in and manage client revenues of nearly
$3 million in recent years to justify his or her position in the highest
levels of the firms. Clearly, making partner is only the beginning of a
series of demanding client development and professional responsibilities
down the road.
________________________________________
ERNST & YOUNG RESTATES REVENUE
Ernst & Young changed their revenue reporting methodology in 2009, by
reporting “…combined not consolidated revenues, and including expenses
billed to clients in line with globalization efforts to harmonize policies
across member firms”. Under the prior consolidation method in 2008, Ernst &
Young’s global revenues were $24.5 billion which were revised down to $23.0
billion under the new combined method of reporting. Ernst & Young restated
only 2008 under this methodology but did not restate prior years, thus our
analysis is affected by this reporting constraint.
________________________________________
CONCLUSION
The 2007 to 2009 recession has been the world’s worst financial crisis for
over 70 years, and despite such turbulence, the Big Four firms turned in
quite a creditable performance, with revenues falling by single digits in
local currency terms from 2008 to 2009. Since March 2009, global financial
markets have seen a marked improvement in equity values, and general
business conditions are decidedly in much better shape in December 2009 than
earlier in the year.
Leading economic indicators in developed nations are on the uptrend and
emerging market countries have posted multiple quarters of positive GDP
growth. Clearly as we stand at the beginning of 2010, there is an optimistic
outlook among leading executives, and all economies are decidedly on a
growth pattern in the coming year. All these are positive indicators favor
Big Four firm revenue growth, as the firms participate in an increasing
level of financial activities pursued by their clients, whether it be tax
restructuring or compliance, transfer pricing, mergers and acquisitions,
strategic growth, risk management, IFRS conversions or audit compliance.
Having likely captured the worst of 2009’s impact in fiscal year 2009, we
believe that fiscal year 2010, staring mid-2009 to mid-2010, will lead to
positive revenue growth due to several key factors:
An inherent improvement in underlying client fundamentals, with greater
emphasis on implementing strategies their own top line growth
Improved equity markets which are potentially poised to do better in 2010
A low revenue base for easy comparison
A depreciating US dollar, which has started sliding against major
currencies in mid-2009
More efficient Big Four firms, which have undergone internal
restructurings and much better positioned to take advantage of growth
prospects
Higher penetration into emerging markets with better growth profiles
We think KPMG in particular will have the strongest fiscal 2010, since its
fiscal 2009 ended in September 2009, and captured much of the crisis; and
further its 2010 revenues will be compared to a much lower base.
The Big Four firms dominate their space and are unlikely to face any
emerging competitors for a long time, and while regulation and audit
litigation do pose operating and financial risks, it is unlikely that any of
these single items will be of sufficient magnitude to generally upset the
status quo.
For 2010 and beyond, we will likely see a return back to revenue growth,
though it is debatable whether a string of double-digit growth over multiple
years will be seen for the next few years. The Big Four firms have
participated extensively in the explosive growth in the emerging markets,
and further it will be harder to grow at high levels from an already huge
revenue baseline, now exceeding $20 billion for each firm.
2010 will also be an interesting year to watch for any changes in Big Four
rankings, with a close race between Deloitte and PricewaterhouseCoopers for
the leadership position.
Bob Jensen's threads on large auditing firm litigation ---
http://www.trinity.edu/rjensen/fraud001.htm
"Video: Mark-to-market accounting – Accounting rules – Post-Crisis Reform
and Fair Value Accounting," by Bob Pozen, ScienceStage.com, December
2009 ---
Click Here
http://sciencestage.com/v/18401/mark-to-market-accounting-accounting-rules-post-crisis-reform-and-fair-value-accounting-bob-pozen.html
From a Harvard Business Review article.
Also see Simoleon Sense, December 30, 2009 ---
http://www.simoleonsense.com/
Bob Jensen's threads about the bull being spread about by bankers and
others (like Steve Forbes) who should know better ---
http://www.trinity.edu/rjensen/2008Bailout.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.
"US fair value rules complicate convergence, warns Lord Turner:
Converging with US standards may compromise international standards, explains
FSA chairman," Wby Mario Christodoulou, AccountinAge, January 28, 2010 ---
http://www.accountancyage.com/accountancyage/news/2256893/fair-value-rules-complicate
The head of the city regulator said
US attempts to adopt international accounting rules could result in
unnecessary complexity.
Adair Turner, chairman of the
Financial Services
Authority, told Accountancy Age that the
International Accounting Standards Board (IASB) risks adding complexity to
its fair value accounting rule, if it continues converging with US st
It is not so much that they are in danger of
compromising (international standards), it is that, in the process of trying
to reconcile them, they make it more complex,” he said.
He went on to say the world didn’t need the US to
adopt international standards.
“We have had a capitalist system without full
convergence in the past, it can be a complete pain in the neck… it hasn’t
stopped the system working,” he said.
The IASB, together with its US counterpart the
Financial Accounting Standards Board (FASB), is working to harmonise US and
international accounting rules. US authorities however have provided no firm
adoption timetable.
Lord Turner’s comments add to growing concern
surrounding the convergence project. In July the Fédération des Experts
Comptables Européens said there were “diminishing returns”, from further
convergence. Two months later Nigel Sleigh-Johnson, head of financial
reporting at the ICAEW, said the process needed to be kept under “close
review”. More recently, Stephen Haddrill, chief executive at the Financial
Reporting Council, said the process should not be about “translating
American standards into an international shape”.
Lord Turner’s concerns centre on the boards’
divergent approaches to fair value. The rule forces companies to value
assets at market price and was blamed for exaggerating the effects of the
downturn.
In the months following the downturn, both boards,
under pressure from world governments, sought to revise their fair value
standards. FASB’s approach would result in all assets valued at fair value.
The IASB exempted banks’ loan books.
The issue has proved a sticking point in
negotiations.
Within the IASB there is little appetite for
steering away from convergence. US adoption is a key reason driving other
nations to adopt international standards. Walking away from convergence
might also embolden Europe, especially German and France, which have
attracted criticism for politicising accounting standards. Haddrill said the
IASB was “walking a tightrope” but had made progress addressing
international concerns. “Because of the politicisation of differences in
view in the continent, people are failing to see just how far the IASB has
moved towards recognising some of the concerns that Europe has had, whilst
at the same time preserving the principles of fair value.”
Also this week Lord Turner delivered a keynote
speech where he said the IASB were trying to address accounting and
regulatory concerns.
“The IASB is again facing that inherit trade off
between what are the divergent, and in a sense, incompatible demands.”
Further reading:
ASB work plan - projected timetable as of 6 November 2009
Bob Jensen's threads on the controversies of replacing US GAAP with IFRS
are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
From Business Week Magazine
"Top Business School Stories of 2009: The global financial crisis
hammered the MBA job market, school endowments, and financial aid. Some
questioned an MBA's value. Bring on 2010," by Alison Damast and Geoff Gloeckler,
Business Week, December 23, 2009 ---
http://www.businessweek.com/bschools/content/dec2009/bs20091223_153201.htm?link_position=link1
To call 2009 an interesting year for management education is perhaps an
understatement bordering on the extreme. With the global financial crisis
taking its toll on everything from the MBA job market and endowments to
financial aid and the reputation of the MBA degree itself, 2009 promises to
go down in history as a year to forget.
For students and graduates of MBA programs, 2009 was the year that jobs
and internship offers became harder to find, even at the top schools; a year
when the scarcity of student loans and visas for international students
threatened to derail even the best-laid B-school plans; and a year when
programs began to rethink the way they teach such subjects as ethics and
corporate responsibility. Business school endowments were hit hard and the
high cost of tuition was at the fore of every prospective student's
thinking.
Of the 10 most popular business school stories on Businessweek.com in
2009, seven directly related to the financial crisis. The others looked at a
new competitor on the B-school admissions test front, a GMAT cheating alert
in China, and three top MBA programs currently without deans. Take some time
to go back over the biggest stories of the year and reminisce. For better or
worse, 2009 will be a year that the B-school world won't soon forget.
1. Job Market: The No. 1 concern this year for current
MBAs, applicants, and recent grads was the job market. Students worried
about finding internships and jobs after graduation, applicants wondered if
joining the ranks of the unemployed to enroll in an MBA program was a good
idea, and newly minted BBAs and MBAs wondered if their post-B-school jobs
would hold up. These fears came out in comments readers left on the stories,
with many weighing the pros and cons of accepting jobs with lower salaries
and fewer responsibilities. Readers who earned MBAs in 2008 and 2007 also
chimed in to voice their concerns, many saying they had yet to land that
"dream job" and didn't expect to find it in the near future.
MBA Job Outlook Dims
MBA Tales: Searching for Work in a Recession
MBAs Confront a Savage Job Market
2. Loan Crisis: International students who planned to
study at U.S. business schools had to scramble to find a student loan
provider in 2009, when many of the loan programs they had used to fund their
education disappeared. For years students had depended on the popular Citi
Assist and Sallie Mae loan programs, which allowed applicants to obtain up
to $150,000 without a co-signer to assume stewardship of the loan should the
borrower default. Due to the credit crisis in the fall of 2008, those
financial lifelines for many international students were pulled and many
schools spent the first six months of 2009 trying to find alternative loan
providers. It was a tense few months for foreign applicants, many of whom
expressed their frustration in more than 250 comments on stories we
published on the topic. For many, the uncertain H-1B visa situation, coupled
with the loan situation, made the prospect of studying in America too big a
risk to take.
By the time spring rolled around, many schools had come up with solutions
for foreign students—often just in time for the deadline deposit to reserve
a seat in next year's class.
Loan Crisis Hits the MBA World
World to U.S.B-Schools: Thanks, but No Thanks
3. MBAs: Public Enemy No. 1? Were B-schools responsible
for the global economic crisis? It's a question that has consumed much of
the B-school world for the better part of a year. In a story we ran in May,
experts from inside and outside MBA programs weighed in on the debate.
Philip Delves Broughton, a Harvard MBA and author of Ahead of the
Curve: Two Years at Harvard Business School (Penguin Group, July
2008), directed blame at B-schools, calling the three-letter acronym, MBA,
"scarlet letters of shame," and suggesting they stand for "Masters of the
Business Apocalypse." Others, such as Richard Cosier, dean of Purdue's
Krannert School of Business (Krannert
Full-Time MBA Profile), defended MBA programs, saying, "It is my opinion
that business schools will continue to produce students who will be part of
the solution, rather than the problem."
Readers, meanwhile, started a rousing debate on the topic via the story's
comments. Some completely blamed business schools for the crisis,
criticizing everything from teaching techniques and the competitive
environment MBA programs seem to foster to the overall value of the degree.
Others defended today's B-schools, saying business schools are about as
responsible for the economic crisis as engineering schools are for global
warming. In the end, the common sentiment seemed to be that business schools
deserved some blame, but not all of it.
MBAs: Public Enemy No.1?
4. GRE vs. GMAT: For years, the Graduate Management
Admission Council (GMAC) had a virtual monopoly over the admission testing
arena at business schools. Its well-known entrance exam, the Graduate
Management Admission Test (GMAT), was the standard test used to get into
business schools in the U.S. and many other schools around the world for
decades. That all changed this year when the Educational Testing Service (ETS)
started to encroach into GMAC territory, courting business schools and
encouraging them to allow students to submit the Graduate Record Examination
(GRE) for admissions. ETS' efforts are starting to pay off. There are now
approximately 285 business schools that allow students to submit the GRE in
lieu of the GMAT exam, including the University of Pennsylvania's
Wharton School(Wharton
Full-Time MBA Profile),
Harvard Business School(Harvard
Full-Time MBA Profile), and New York University's
Stern School of Business(Stern
Full-Time MBA Profile). ETS says that it expects more than 300 schools
to sign on in 2010.
Continued in article
From IAS Plus on January 1, 2009 ---
http://www.iasplus.com/index.htm
1 January 2010: Another record year for IAS Plus
|
In 2009 IAS Plus had 2,210,000 visitors.
Thank you for making us, once again, the #1 source
on the Internet for information about international
financial reporting. We wish you a very happy new
year. Here are a few more statistics about IAS Plus
in 2009:
- Total page views: 6,810,000
- Total website file size: 1,330mb
- Total number of files: 6,619 files,
including
- 775 HTML web pages
- 4,610 downloadable files (4,563 PDF, 30
ZIP, and 17 DOC)
- 1,220 graphics files
|
31 December 2009: New IFRS e-Learning modules in Chinese
|
Two additional IFRS e-Learning modules have now
been translated into Chinese and posted on
Deloitte's
CAS Plus website – bringing the total available
modules to 27:
- IAS 40 Investment Property
- IFRIC 12 Service Concession Arrangements
A complete list of Deloitte's IFRS e-Learning
modules in Chinese is
Here. To download the modules (there is no
charge, but registration is required) click on the
lightbulb icon on the CAS Plus home page or
Click Here. |
31 December 2009: Deloitte resources for 2009 year-ends
|
Presented below are hyperlinks to the 2009
versions of three Deloitte IFRS publications that
will be useful for 2009 year-end financial statement
preparation. All are available for download on
www.iasplus.com in both PDF and Microsoft Word
formats.
- Deloitte's IFRS Illustrative Financial
Statements for 2009. The model financial
statements are intended to illustrate the
presentation and disclosure requirements of
IFRSs. They also contain additional disclosures
that are considered to be best practice,
particularly where such disclosures are included
in illustrative examples provided with a
specific Standard.
- Deloitte's IFRS Presentation and
Disclosure Checklist for 2009. The checklist
is formatted to allow the recording of a review
of financial statements, with a place to
indicate yes/no/not-applicable for each
presentation and disclosure item.
- Deloitte's IFRS Compliance Questionnaire
for 2009. This questionnaire summarises
recognition and measurement requirements in
IFRSs issued on or before 30 June 2009 and may
be used to assist in considering compliance with
those pronouncements. It is not a substitute for
your understanding of such pronouncements and
the exercise of your judgment.
|
|
|
Bob Jensen's threads on free IFRS leaning
resources are at
http://www.trinity.edu/rjensen/theory01.htm#IFRSlearning
"Model IFRS financial statements including IFRS 9," IAS Plus,
January 20, 2010 ---
http://www.iasplus.com/index.htm
Deloitte's IFRS Global Office has published a
version of our illustrative IFRS financial statements for 2009 that
illustrate early adoption of IFRS 9 Financial Instruments, which was
issued in November 2009. IFRS 9 is effective 1 January 2013, but early
adoption is permitted starting in 2009. Click for
Illustrative IFRS Financial Statements Including IFRS 9
Bob Jensen's threads on IFRS are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
It is a interesting to compare the quality control and
independence dialog in the powerful report by Deloitte at
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
With the assertions of Francine Mckenna shown below.
Perhaps this insider trading scandal at Deloitte is one of
the reasons Deloitte has gone to such great lengths to strengthen its ethics and
independence training effort that are discussed at great length at
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
Deloitte is particularly sensitive to issues of audit
independence since it was the only Big Four firm that retained its full
consulting division when the other Big Four firms sold or spun off their
consulting divisions. Of course that issue is a bit moot since the other Big
Three firms have since built up new consulting divisions, particularly financial
consulting divisions.
Deloitte executive partners should be careful what they wish for.
The Flanagan insider trading litigation has forced them
to reveal their woefully inadequate policies and procedures regarding
independence compliance. While trying to placate their clients who were dragged
through the mud on this and exact revenge against their own leadership-level
partner, a pillar of the Chicago social and philanthropic community, they’ve
admitted to allowing Flanagan to breach their standards more than 300 times and
to get away with it.
Francine McKenna, "Deloitte Wins Major Round Re: Alleged Inside Trader
Flanagan," re: The Auditors, January 5, 2010 ---
http://retheauditors.com/2010/01/05/deloitte-wins-major-round-re-alleged-inside-trader-flanagan/
Francis Pileggi
at at the
Delaware Litigation blog reports that Deloitte has
won a partial summary judgment against Thomas Flanagan, the Chicago-based,
ex-Vice Chairman of the firm accused of multiple counts of insider trading.
My original post, describing how I broke the story first on Twitter based on
a confidential tip, is
here.
I spoke to Francis Pileggi who said, “All
that’s left is for the court to decide how much this former partner will be
paying his firm. It may take a while to ascertain this but from the looks
of it, it may be a very big number.”
But Deloitte should be careful what they wish for.
This litigation has forced them to reveal their woefully inadequate
policies and procedures regarding independence compliance. While trying to
placate their clients who were dragged through the mud on this and exact
revenge against their own leadership-level partner, a
pillar of the Chicago social and philanthropic community,
they’ve admitted to allowing Flanagan to breach their standards more than
300 times and to get away with it. If it weren’t for the otherwise widely
maligned SEC’s targeted action on the case, Deloitte would have remained
oblivious.
Deloitte has sustained more than a bloody nose and
a few cuts in this fight, even though they seem to be winning. It’s not over
until the opponent is on the mat, down for the count. Better yet, knocked
out cold, unable to inflict any more damage to the firm. Given the long tail
of matters before the SEC, PCAOB, DOJ, and of private litigation, it may be
a while before all the referees’ final decisions.
There’s been virtual radio silence in the Chicago
media on this case. Crain’s Chicago Business
hasn’t written anything since November of 2008,
despite
my encouragement. I was
quoted in the Chicago Tribune later that
week in November 2008 after several others, including Ryan Blitstein and
Bruce Carton also reported the story.
Here’s what
Emily Chasan at
Reuter’s says today:
“U.S. accounting firm Deloitte & Touche LLP
has won a lawsuit against a former top executive it accused of
improperly trading in stocks and options of the firm’s clients,
including Motorola Inc and Best Buy Co Inc….A Delaware court
sided with Deloitte in the case in an opinion dated December 29, saying
the former executive, Thomas Flanagan, had “obviously” been in
violation of his employers’ independence policies in making certain
trades….the 30-year partner who had risen to vice
chairman of the firm had secretly hidden trades in
shares of Deloitte’s audit clients and lied about it to the firm.
“Because an auditor sells, at base, its
independence and integrity, the firm relies heavily on the
purported honesty and independence of its professionals,” Vice
Chancellor John Noble, of the Delaware Court of Chancery, wrote in his
opinion…Flanagan had made more than 300 trades in
shares of Deloitte’s audit clients, including several clients for which
he was Deloitte’s advisory partner….Dozens of times,
Flanagan entered his holdings in Deloitte’s system, then quickly
“corrected” entries to indicate he had disposed of restricted
securities, but in fact continued to hold them… Deloitte was
unaware of the trades until the U.S. Securities and Exchange Commission
contacted the company [re] the audit for Walgreen Co in 2007…He
was also accused of trading in securities of Deloitte clients Best Buy,
Allstate Corp, Motorola, and other firms, often while working directly
on the companies audits.
Flanagan resigned from Deloitte in 2008
about two months before the lawsuit was filed, … SEC has not
announced any charges against Flanagan…exercised his Fifth Amendment
right against self incrimination…”
Here’s what I said back in
November of 2008:
“I think [Deloitte was] aware
of this guy’s rule-breaking. In my experience, when someone like this
30-year “elder statesman” is flouting the rules so egregiously, they
usually can’t help blustering about it. He may have complained to
others, at all levels, about the “SOB, dumbass, rule-jockey, non-client
service, idiot, loser, dweebs” who were bugging him to respond to their
inquiries about his annual certifications…
I am also surprised that Deloitte doesn’t
appear to have a process in place that most other firms I’m aware of,
including PwC, have. PwC, for example, has a whole team of auditors in
their Jersey City office whose only job is to request tax returns,
brokerage, bank and other investment statements from folks that either
come up for review based on a “random sample” or are high risk like Mr.
Flanagan. They have this process because
their colleagues at Coopers and Lybrand screwed up
on this stuff so badly before
PriceWaterhouse bought them and they were forced to put it in place….
Or maybe Mr. Flanagan did get
audited. Maybe they asked for this info and he blew them off. Or maybe
they were given documents that didn’t match up or were incomplete. Or
maybe he kept putting them off. Or maybe he had been called on flouting
of the rules many times but no one in the partnership was willing to
call him into the Principal’s office and whack his knuckles with a big
ruler once and for all.”
How long will it be until the SEC finishes its
investigation of the case, with regard to Flanagan and/or Deloitte? Six
years like Bally’s?
Will the firm or Flanagan ever get sanctioned by
the PCAOB? I’m assuming Flanagan is “retired”, but will the SEC forbid him
to act as a CPA?
If the PCAOB issues a disciplinary sanction against
Deloitte as a firm, it will be only the second time it has done so against a
Big 4 firm,
both times against Deloitte. How many strikes
does a firm get? If it’s as many as EY seems to be getting, then we are
stuck with seeing outrageous violations of independence indefinitely due to
the profession’s and the regulator’s “too few to fail”
policy.
The SEC must look carefully at the Deloitte
internal compliance function. It failed, and
failed miserably. There are so many things wrong with this picture from an
internal risk and quality management perspective, regardless of the
individual partner’s lapses. What good is a profession, and a partnership
of professionals, if they do not police their own according to their
standards and practices? Suing Flanagan puts money back in the Deloitte
partners’ pockets – and perhaps assuages their clients who received calls
from the SEC because of Flanagan – but does nothing for the clients’ cost of
their investigations or for those shareholders’ confidence in their vendor,
Deloitte their auditor.
Deloitte has abdicated its
public duty.
From the
summary judgment document:
- Deloitte was not aware of Flanagan’s
violations until alerted by the SEC investigation.
- Deloitte seemingly does not have a requirement
for high risk employees and partners to submit physical account
statements that can be audited against system reporting. It seems to be
depending totally on self-reporting and the honor system, even for the
highest risk partners and restricted entities.
- Deloitte seems to have a glitch in its
independence tracking system and early warning exception reporting
system for compliance if their system allows the appearance of reporting
even though entries are immediately backed out. I guess Flanagan’s
secretary knew how to do that too?
- Deloitte seems to have a lack of will to
enforce its policies for tenured, powerful members of its partnership or
to kick them out of the firm when they’ve been found
guilty of sins against the profession and their clients, the
shareholders.
- Deloitte must encourage a culture of blame and
delegation of responsibility for even the most important partner
responsibilities, ones that are critical to its reputation and
integrity. Talk about an embarrassing and completely jerk-face cop out
of leadership responsibility…
“Flanagan suggests that there is no
evidence that he, himself, used the Tracking & Trading System, and
that any failure to correctly input his trades was likely an
error by his secretary.”
The SEC and PCAOB must complete a thorough review
of Deloitte’s Independence Compliance process and systems and implement
sanctions, recommend immediate remediation, and install a monitor to correct
failings. Some areas to look at:
Continued in article
January 24, 2010 message from Francine McKenna
[retheauditors@GMAIL.COM]
With reference to the powerful report by Deloitte at
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency
Report.pdf
This is very interesting in
particular coming from Deloitte. I would suspect that their litigations
costs right now are higher than the other three, if only because they have a
much bigger consulting side which has been sued quite often. They also have
had more significant litigation from the subprime crisis appear first.
http://retheauditors.com/2009/10/12/so-much-auditor-litigation-makes-for-strange-bedfellows/
January 24, 2010 reply from Glen Gray [glen.gray@CSUN.EDU]
Francine,
Is there research that shows “…consulting side
which has been sued quite often.”? In my many years on the consulting side
of 2 Big 8 firms in Los Angeles, I don’t recall any consulting related suits
at either firm. We were threatened with suits. I recall one time that an
irate client wanted to be immediately connected to neither Mr. Cooper or Mr.
Lybrand.
I think it is far easier to recover (and not get
suited) from a consulting project that is off track then it is from an audit
failure. Basically, if the consulting client was mad (whether they
threatened to sue or not), the partner would sit down with the client and
say what can we do to make you happy (make you whole) and all was
forgiven—and a some or a lot of non-billable time was put in getting the
project back on track.
I do know the consulting side does get sued (such
as the DMV debacle in California a few years ago), but it was the “quit
often” in your sentence that caught my eye.
Glen L. Gray, PhD, CPA Dept. of Accounting &
Information Systems College of Business & Economics California State
University, Northridge 18111 Nordhoff ST Northridge, CA 91330-8372
818.677.3948
http://www.csun.edu/~vcact00f
January 24, 2010 reply from Francine McKenna
[retheauditors@GMAIL.COM]
Well, Glen,
I write quite a bit about this issue and so does a
friend of mine, Michael Krigsman, who writes about IT project failures for
ZDNet and quotes me often.
http://blogs.zdnet.com/projectfailures/
Take a look at these recent cases. As far as
research studies, well, that's how I'd like to shore up my writing and why I
enjoy being a part of this listserv. My writing is based on my personal
experience on the consulting side of PwC and KPMG Consulting, then
BearingPoint, both here and abroad, especially in Latin America. Whenever I
can supplement it with studies, white papers, data and academic research, I
am thrilled.
I welcome your feedback and additions to the
stories. Here's a few. There are lots more on my site.
http://retheauditors.com/2009/05/26/how-satyam-supported-pwcs-schizophrenic-strategy-to-reenter-the-systems-integration-business/
http://retheauditors.com/2009/03/24/is-a-big-4-firm-buying-bearingpoint/
http://retheauditors.com/2008/07/21/a-bermuda-triangle-levi-strauss-deloitte-consulting-sap-and-internal-controls/
http://retheauditors.com/2008/02/05/lausd-still-cleaning-up-deloittes-sap-debacle/
http://retheauditors.com/2007/08/16/ibm-pwc-settle-kickback-allegations/
Actually I think it is much more common to get sued
in consulting than audit, but it's the audit suits, if they go to trial that
are more dangerous for the firms. Settlements are almost de riguer on the
audit side for the Big 4. PSLRA made it more difficult to sue auditors and
Stoneridge made it virtually impossible to make it stick. SO, when does move
along the path, and either get settled for hundreds of millions like Tyco or
go to trial, you know it's a really big deal. Settlements, by their nature,
are not well publicized but when they're big we hear about them and there
have been some really big ones since Sarbanes-Oxley.
http://retheauditors.com/2009/07/11/mckenna-on-auditor-litigation-securities-dockets-mid-year-update/
Regards,
fm
312-730-4884
Update on Deloitte University, January 2010, Page 21 ---
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
I’m confident that our continued investment in
the development of our people, including our commitment to create a
‘Deloitte University,’ will help signal our intention to be a magnet for the
best talent to serve the best clients.
Barry Salzberg, CEO, Deloitte
LLP22
The learning programs incorporate a number of
pervasive themes across levels. These themes include audit documentation,
the use of specialists, consultation, detection of potential fraud, the
importance of professional skepticism and professional judgment, and others,
with a foundational theme of achieving audit quality. All client service
professionals of Deloitte & Touche LLP, whether or not they are CPAs, are
required to complete at least 20 hours of CPE in each calendar year and at
least 120 hours for each three-calendar-year period. Professionals who spend
more than 25% of their time on audit or other attest engagements or who have
partner, director, or manager responsibility for any such engagement must
have at least 40% of their required CPE hours in subjects broadly related to
accounting and auditing. An online system monitors each professional’s
individual CPE requirements (which for CPAs may vary depending on the states
in which each individual is licensed) and hours completed for each reporting
period; the system flags any deficiencies for follow-up. Deloitte University
To further enhance the quality and effectiveness of
the learning curriculum for all the Deloitte U.S. Entities, Deloitte LLP
recently acquired a 107-acre property near Dallas, Texas, and has begun
construction of a state-of-the-art facility dedicated to learning and
leadership. This decision represents a significant commitment to and in our
people and to enhancing quality and leadership development. The facility
will employ cutting edge, interactive technology and will offer a curriculum
that includes simulations, case studies, collaborative learning, and
discussion and debate. It is expected to open in 2011. Deloitte University
will provide a powerful catalyst for career-long learning and professional
growth for all our professionals.
Continued in article
Bob Jensen's threads on Deloitte litigation ---
http://www.trinity.edu/rjensen/fraud001.htm
Bob Jensen's threads on auditor professionalism ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
Update on Deloitte University, January 2010, Page 21 ---
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
I’m confident that our continued investment in
the development of our people, including our commitment to create a
‘Deloitte University,’ will help signal our intention to be a magnet for the
best talent to serve the best clients.
Barry Salzberg, CEO, Deloitte
LLP22
The learning programs incorporate a number of
pervasive themes across levels. These themes include audit documentation,
the use of specialists, consultation, detection of potential fraud, the
importance of professional skepticism and professional judgment, and others,
with a foundational theme of achieving audit quality. All client service
professionals of Deloitte & Touche LLP, whether or not they are CPAs, are
required to complete at least 20 hours of CPE in each calendar year and at
least 120 hours for each three-calendar-year period. Professionals who spend
more than 25% of their time on audit or other attest engagements or who have
partner, director, or manager responsibility for any such engagement must
have at least 40% of their required CPE hours in subjects broadly related to
accounting and auditing. An online system monitors each professional’s
individual CPE requirements (which for CPAs may vary depending on the states
in which each individual is licensed) and hours completed for each reporting
period; the system flags any deficiencies for follow-up. Deloitte University
To further enhance the quality and effectiveness of
the learning curriculum for all the Deloitte U.S. Entities, Deloitte LLP
recently acquired a 107-acre property near Dallas, Texas, and has begun
construction of a state-of-the-art facility dedicated to learning and
leadership. This decision represents a significant commitment to and in our
people and to enhancing quality and leadership development. The facility
will employ cutting edge, interactive technology and will offer a curriculum
that includes simulations, case studies, collaborative learning, and
discussion and debate. It is expected to open in 2011. Deloitte University
will provide a powerful catalyst for career-long learning and professional
growth for all our professionals.
Continued in article
"PwC And Satyam: It’s Bigger Than A Blown Audit," by Francine McKenna,
re: The Auditors, July 24, 2009 ---
http://retheauditors.com/2009/07/24/pwc-and-satyam-its-bigger-than-a-blown-audit-mira-el-dedazo/
Brace yourself. Fill your coffee cup. Grab a
bagel or two.
This is going to be a long one.
US and Indian regulators and investigators are
focusing on the wrong thing when investigating the Satyam scandal. It’s not
the spectacular audit failure that’s most important. That’s just the
inevitable unraveling of something bigger. They need to look at the money
flowing between Satyam and PW India. Don’t be surprised if you find that
money going outside of India to PwC entities in the US or UK or shells set
up in offshore locations.
Follow the money. The level of incestuousness
between Satyam, PW India, PwC in other parts of the world, and the Indian
government may be greater than anyone initially suspected. Otherwise, how
could Satyam, an acknowledged second-tier player in the Indian and global
outsourcing arena end up with
185 of the Fortune 500 as clients? Did PW India
facilitate, play tour guide, provide “due diligence” for sole- or limited-
sourced procurement efforts by PwC’s clients all over the world and collect
“referral” and “facilitation” fees, for themselves and on behalf of key
players in the PwC global organization from both Satyam and their own fellow
PwC partners? Was anything paid to Indian government officials implying an
FCPA exposure, too?
We’ve already seen reports of PW partners perhaps
enabling and supporting the inflated staffing numbers and global payrolls
utilized by Satyam to add credibility to their business strategy and to
funnel money out of the company. But did those funds go to only Satyam
management?
Late breaking news last night:
“The Central Bureau of Investigation (CBI)
has established that the Raju brothers were funnelling around Rs12 crore
every month from Satyam through
hawala
(money brokers, often used in money laundering operations.) Satyam sent
the amount as salaries for over 10,000 fictitious employees abroad…
“They were showing on their books the
transfer of Rs12 crore every month as salaries. The transfer for one
year was Rs144 crore. This went on for seven years since 2002," the
CBI official said. Investigators established that in the last seven
years, around Rs1,008 crore may have been transferred abroad.
The money may be parked in the US, England, Mauritius and southeast
Asian countries.”
I contend that the relationship PwC had with
Satyam, its audit client, was not the ideal client relationship under the
professional standards auditors are bound to abide by. As a trusted source
and former partner with a major firm that was active in this arena during
the time in question told me:
“If half of what we think is possible here
is true, then PwC had a “perverse” view of what their professional
responsibilities and obligations were. Instead of putting the client,
the shareholders of their audit client Satyam and other audit clients
involved here, first they put their own self interest as individuals and
as profit making members of a government-sanctioned oligopoly first.
They did not uphold the professional standards shareholders expect of
any audit professional in any country in any part of the world.”
I told you back in May how PricewaterhouseCoopers
used Satyam to jump start the reemergence of their US consulting practice.
PwC highlighted their strategic relationship with Satyam during a meeting
with industry analysts last year. Satyam and their involvement with PwC
client Idearc was featured in one of only two case studies intended to
demonstrate PwC’s resurgent capabilities as a systems integrator. Satyam’s
role as a technical team member and, eventually, as the third-party IT
outsourcer of choice for PwC’s client Idearc allowed PwC serve this client
in areas where they were forbidden to do so under their 2002 non-compete
agreement with IBM.
The relationship between PwC and Satyam, whether
implicit or explicit, was promoted at the July 2008 industry analyst meeting
and documented in
a report of the meeting prepared by Gartner.
Whether backed up by actual contractual and/or project
management relationships that tie Satyam to PwC legally in the project for
Idearc, a Verizon spin off, or not, just the act of using Satyam to market
the consulting practice violates the independence standards audit firms are
bound to uphold.
Why?
Satyam was PwC’s audit client.
And we all know now that a massive fraud has been perpetrated on Satyam
shareholders with the complicity, according to the Indian authorities, of
two PwC partners, if not the whole firm in India, the US and at a global
level.
After the post came out in May there was enormous
interest, in India, in the UK, from my fellow bloggers. But not from the
mainstream US or UK media.
They say things like, “Much as I’d like to devote a
lot of resource to it, I believe my readers have gone a little cold on it
and are worrying about things closer to home…” Or they seem strangely,
curiously, to be avoiding the story completely. A well known US journalist,
one who has been very good on stories of the accounting firms in the past in
my opinion, was quite adamant that the story would take too much “time and
money” to pin down since there was no way he could print it without several
more examples of a similar relationship as PwC seemed to have with Satyam
regarding Idearc.
Conversation with famous journalist ended, “Let me
know if you find any more examples and I’ll think about it.”
Yeah. If I have the sources and put in the effort,
(given my vast and various resources and funding,) I’m going to send them to
you.
Not.
And, so, I do have the sources and, so, I have put
in the effort.
The purpose of describing in detail
- the Satyam clients who also had a”trusted
advisor” relationship with PwC,
- that continued these relationships after the
purchase of PwC Consulting by IBM,
- and often involved long, expensive IT
transformations and SAP implementations,
is to support the consideration of the following
scenario:
1) The strategic importance of Satyam as a systems
integration partner and technical resource caused global PwC leadership to
overlook, look the other way, or not take action on reports of poor quality
or lack of independence by Price Waterhouse India partners.
2) PwC leadership – US, global, and Indian-
enabled and promoted complicity in the fraud called “India’s Enron” for the
sake of the global consulting business strategy, in particular the growth of
their outsourcing practice.
3) Satyam paid PwC for the privilege of being
included in these deals with several multinationals by agreeing to
exorbitant, higher
than market audit fees as has been reported.
4) The PW India Audit partners acted as willing,
but subordinate, actors, nothing more than “bagmen,” in
a much larger plan to collect other incentives for PwC US, PwC UK and the PW
India consulting practice as a result of PwC US and UK steering their
“trusted advisor” clients to Satyam as an IT outsourcing vendor. They
probably even collected actual engagement fees as the Indian outsourcing
“go-to guys” from unknowing PwC partners in the US and UK, acting
as facilitators, tour guides, providers of “due diligence” for sole- or
limited- sourced procurement efforts by PwC’s clients all over the
world. PwC US even planned to send a senior partner, Bob
Lattimore, to India to keep an eye on this
money-train by acting as ”the on site US Partner responsible for working
with PwC India as one of our key providers/partners for Global Strategic
Sourcing activities.”
5)
As late as mid-2008, Satyam, for all the support
and huge clients handed to them as a result of PwC relationships, was still
not one of the top three outsourcers in India. Many of the companies who
did choose Satyam, chose a relatively unknown second-tier Indian firm over
known non-Indian firms
such as Accenture, ACS, EDS, IBM, and SAIC. You have
to wonder how Satyam could have come so far so fast any other way than with
an inside track. A bought and paid for inside track.
6) PwC International Limited and PwC US leadership
have been much more active in lobbying the Indian government in this case
and in working through the Satyam scandal issues personally, on site. This
is quite contrary to their typical approach to stay clear and above it all,
given the standard defense of no “manage and control” regarding
international member firms. PwC US and Global management are definitely in "red
alert" damage control and containment mode. It’s painfully obvious,
wracked with
poor PR and communications examples, and
unfortunately poorly coordinated with the Indian firm’s efforts to save
their own skins first.
7) PwC US, UK, and Global leadership actually want
the PW India audit partners to stay in jail and have been shielding them
from media and any opportunity to share their side of the story. Why?
Because what they know about what happened can incriminate others at a very
high level both in PwC, in Satyam, and in the Indian government. The
potential ripple effects on the Indian and global outsourcing/consulting
business are significant. The Satyam scandal lowered confidence in Indian
corporate governance and management practices. There is a tacit desire on
the part of everyone involved to prevent any more light from shining on the
questionable business practices no one wants to admit to openly.
Continued in article
Bob Jensen's threads on PwC litigation ---
http://www.trinity.edu/rjensen/fraud001.htm
Bob Jensen's threads on auditor professionalism ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
"Mandatory Usury in One Lesson: How Congress dictated a 79.9%
interest rate," The Wall Street Journal, January 2, 2010 ---
http://online.wsj.com/article/SB10001424052748704304504574610822590688140.html#mod=djemEditorialPage
'You might have less-than-perfect credit and we're
OK with that," read an October credit-card solicitation from South
Dakota-based First Premier Bank. The interest rate, however, will strike
some as usurious: 79.9%. That's a more than eightfold increase from the 9.9%
the bank previously collected for a similar card.
Wait, wasn't Congress supposed to have passed
legislation against predatory lending? As a matter of fact, yes. The
whopping rate increase is First Premier's way of complying with the Credit
Card Accountability, Responsibility and Disclosure Act of 2009. Among other
provisions, that law prohibits fees of more than 25% above a card's credit
limit. First Premier has been offering an account with a $250 limit and
annual fees of $256. By law the latter figure must come down to $75. To
compensate for the lost $181 in fees, the bank is raising the rate by 70% of
$250, or $175, a year.
If it sounds like a rotten deal either way, it
is—if you have good credit. But if you don't, the cost may be worth it to
re-establish your rating. Banks that lend money to customers with poor
credit histories have to charge more to cover the extra risk. If Congress
makes this impossible, banks will respond by refusing to lend to such
customers, so that it will be harder for them to re-establish their
creditworthiness.
Banks can't be expected to give money away, even if
Congress is in the habit of doing just that. Unlike lawmakers, banks and
other businesses can collect revenues only by offering something of value in
return.
Jensen Comment
There are no easy answers to this dilemma. Having national FICO credit scoring
made it "nearly impossible" for persons with bad credit scores to borrow money
from anybody other than loan sharks (who sometimes break knee caps to collect).
The one exception was when borrowers and their brokers submitted falsified
credit applications such as in the case of subprime home mortgages where poison
loans were passed on to Fannie Mae and Freddie Mack, but for those exceptions
the mortgage brokers had to lie about borrower income, property values, and
credit history of the borrower.
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer
Protection Act to stem the explosion of what was tantamount to a racket where
some people repeatedly declared bankruptcy in what was tantamount to legalized
theft ---
http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act
And now borrowers with bad FICO scores find themselves in Catch 22 situations
when trying to reestablish higher credit scores. There are all sorts of
unfavorable consequences such as mortgage foreclosures, divorce, sending
children to foster homes, gambling, prostitution, robberies, suicides, seeking
out loan sharks, etc.
The Dirty Secrets of Credit Card Companies ---
http://www.trinity.edu/rjensen/FraudReporting.htm#FICO
Controversial Tax Court Decision on Tuition Deductions
How One Woman Went to Tax Court and Won Deduction
January 11, 2010 message from Davidson, Dee (Dawn)
[dgd@MARSHALL.USC.EDU]
Nurse Outduels IRS Over M.B.A. Tuition
How One Woman Went to Tax Court and Won Deduction
http://online.wsj.com/article/SB10001424052748703535104574646582965101664.html?mod=WSJ_latestheadlines
By LAURA SAUNDERS A Maryland nurse accomplished
two rare feats in her battle with the Internal Revenue Service: She
defended herself against the agency's lawyers and won, and she got a
ruling that could help tens of thousands of students deduct the cost of
an M.B.A. degree on their taxes. The U.S. Tax Court handed Lori
Singleton-Clarke her victory last month, saying the 47-year-old
Bryantown, Md., woman had properly deducted nearly $15,000 in business
school tuition. The Tax Court ruling should make it easier for many
other professionals to deduct the expense of a Master in Business
Administration degree.
dee davidson
Leventhal School of Accounting
Marshall School of Business
University of Southern California
January 11, 2010 reply from Ramsey, Donald
[dramsey@UDC.EDU]
To get to the essence of this concept, you really
need to read the case at
http://www.ustaxcourt.gov/InOpHistoric/SINGLETON-CLARKE.SUM.WPD.pdf
The degree in question was an MBA with a
concentration in Health Care Administration, from the University of Phoenix.
The tax court held that the degree did not qualify her for a new occupation,
but did enhance her skills in her existing job.
An interesting observation was that sometimes an
MBA does qualify one for a new occupation, but not always. The court also
noted that the MBA does not lead to any particular professional license.
I suppose an MBA with a concentration in accounting
might be construed as leading to a professional license, and likely so would
an MAcc. Such graduates, of course, are not all necessarily intending to
seek the CPA, but if they do sit for the CPA exam I suppose that would
likely disqualify the deduction even though the individual might continue
working as an accountant.
Cheers,
DR
(A message from Pod L, 7L13, of the UDC temporary
satellite station in the Intelsat Building) Donald D. Ramsey, CPA,
Department of Accounting, Finance, and Economics, School of Business and
Public Administration, University of the District of Columbia, 4200
Connecticut Ave., N. W., Washington, D. C. 20008. (202) 274-7054.
Bob Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation
Government Bonds ---
http://en.wikipedia.org/wiki/List_of_government_bonds
Note that in high inflation countries like Brazil, virtually all bonds are
inflation adjusted. Inflation adjusted bonds are much less common in the United
States. However, with weakened-dollar hyperinflation looming in the distant
future for the U.S. (nobody knows when), there may be more demand for
inflation-adjusted long-term bonds.
TIPS ---
http://en.wikipedia.org/wiki/Treasury_security#TIPS
Treasury Inflation-Protected Securities (or TIPS)
are the inflation-indexed bonds issued by the U.S. Treasury. The principal
is adjusted to the Consumer Price Index, the commonly used measure of
inflation. The coupon rate is constant, but generates a different amount of
interest when multiplied by the inflation-adjusted principal, thus
protecting the holder against inflation. TIPS are currently offered in
5-year, 10-year and 20-year maturities. Beginning in February 2010, the U.S.
Treasury will once again offer 30-year TIPS bonds.
From The Wall Street Journal Accounting Weekly Review on January 15,
2010
U.S., in Nod To Creditors, Is Adding TIPS Issues
by: Min
Zeng
Jan 11, 2010
Click here to view the full article on WSJ.com
TOPICS: Advanced
Financial Accounting, Bonds, Financial Accounting, Investments
SUMMARY: The
government is set to ramp up the sale of bonds that provide protection
against inflation, with its biggest such offering in five years totaling $10
billion of 10-year notes.
CLASSROOM APPLICATION: Questions
are oriented towards students learning about accounting for investments in
bonds.
QUESTIONS:
1. (Introductory)
Explain the relationship between bond prices and interest rates. How do TIPS
bonds' terms reflect this relationship?
2. (Introductory)
TIPS Bonds' "...value rises along with the increase in consumer prices. The
fixed returns on nominal Treasurys, in contrast, can be eroded over time by
inflations, which especially effects long-term bonds." What then does the
fact that the government is issuing TIPS say about expectations regarding
inflation?
3. (Advanced)
Assume you are the corporate controller for a medium-sized manufacturing
firm. Explain the accounting for an investment in a TIPS bond that your
company expects to hold to maturity.
4. (Advanced)
Now consider the possibility that your company has bought the TIPS bond
knowing it is likely to trade the bond. Does the special feature of the TIPS
bond impact your accounting for this investment? Explain?
5. (Advanced)
What is hedging? Why does the small size of the TIPS market raise "doubts
about how efficient an inflation hedge" it is? In your answer, define market
efficiency as well.
Reviewed By: Judy Beckman, University of Rhode Island
Jensen Comment
Also see Jim Mahar's June 10, 2009 summary at
http://financeprofessorblog.blogspot.com/
In particular this references a study by Arnott that asserts that over the past
40 years the stock market underperformed the bond market. In my opinion, if you
into bonds for the next 40 years they'd better be inflation-indexed bonds such
as Treasury TIPs.
Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/BookBob1.htm#InvestmentHelpers
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/theory01.htm
From The Wall Street Journal Accounting Weekly Review on January 8,
2010
Buffett Hits Kraft on Cadbury
by: Dana
Cimilluca and Jeffrey McCracken
Jan 06, 2010
Click here to view the full article on WSJ.com
TOPICS: Asset
Acquisition, Asset Disposal, Dilution, Mergers and Acquisitions, Stock Price
Effects
SUMMARY: Warren
Buffett's Berkshire Hathaway, Inc., is Kraft's biggest shareholder, owning
9.4% of common shares. Mr. Buffet issued a statement in response to a Kraft
proposal to increase its offer to Cadbury and "...to issue as many as 370
million shares to fund the bid" that has been interpreted as a blow to Kraft
CEO Irene Rosenfeld. "...A shareholder voting 'yes'...is authorizing a huge
transaction without knowing its cost or the means of payment," was the
official statement; Mr. Buffett himself refused to comment further.
"According to a timetable set out by U.K. authorities, Kraft has until Jan.
19 to raise its offer. That means that the company's shareholders will know
what it is offering by the time they vote on the deal Feb. 1. Mr. Buffett
did say that "'if we conclude [after Jan. 19] that the offer does not
destroy value for Kraft shareholders, we will change our vote to 'yes' on
the share-issuance plan."
CLASSROOM APPLICATION: Questions
relate to accounting for and reporting implications of stock issuances as
well as to topics in business combinations. This review continues coverage
of the Kraft/Cadbury takeover offer; the article includes a timeline of
events so no earlier related articles are referenced. They can easily be
found by searching the database of WSJ Accounting Educators' Reviews from
September through December, 2009.
QUESTIONS:
1. (Introductory)
According to the article, what improvement in the offer to Cadbury
shareholders did Kraft make?
2. (Introductory)
Why must shareholders vote on Kraft's request to authorize issuance of
common shares for the Cadbury transaction or any other reason?
3. (Introductory)
What is the concern expressed by Warren Buffett about the latest events in
Kraft's attempt to take over Cadbury, PLC, the iconic British confectioner?
In your answer, specifically explain why the issuance of Kraft's shares is
like writing a blank check to management.
4. (Advanced)
In general, how will the issuance of shares by Kraft, Inc., be accounted
for? You may make your answer in the form of a general journal entry.
5. (Advanced)
If the acquisition is successful, how will Kraft account for the overall
transaction to acquire Cadbury?
6. (Advanced)
How does Kraft's improvement to its Cadbury offer relate to the sale of the
Kraft North American frozen pizza business to Nestlé USA? Note: you may
access the Kraft press release on this transaction that was filed with the
SEC on January 5, 2010, at
http://www.sec.gov/Archives/edgar/data/1103982/000119312510002085/dex991.htm
7. (Introductory)
Define the terms "dilution" and "dilutive."
8. (Introductory)
Why does Greg Estes, a fund manager at Intrepid Capital who holds more than
100,000 Kraft shares, call the Kraft proposals dilutive?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Nestlé Buys U.S. Pizza Lines
by Martin Gelnar
Jan 06, 2010
Page: B3
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/theory01.htm
"Economic Consequences and the Political Nature of Accounting Standard
Setting," by David Albrecht, The Summa Blog, January 6, 2010 ---
http://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/
It is said frequently by politicians, SEC and other
regulators, journalists and special interests that the accounting standard
setting process should and must be insulated from politics. As I explain in
this essay, this runs counter to everything we understand about accounting
theory. For decades it has been taught in every graduate accounting program
in the country that accounting standards have economic consequences. As a
result, I contend it is natural and predictable that competing economic
interest attempt a political solution to proposed accounting standards.
This is an important issue at this time, because
they are proposing major changes in the accounting regulatory landscape that
run counter to this conventional wisdom of the financial reporting and
capital market world.
Recently, current (Mary L. Schapiro) and past
(Roderick M. Hills, Harvey L. Pitt, and David S. Ruder) chairmen of the
Securities and Exchange Commission (SEC) and the current Chairmen of the
FASB (Robert Herz) and the IASB (Sir David Tweedie) have been publicly
remarking that the accounting standard setting process should and must be
insulated from the lobbying of special interest groups and the meddling of
government institutions.
Their concern is understandable, because it has
become known that various accounting enacted standards (i.e., fair value
rules, changing lease rules) have economic consequences that produce adverse
effects for certain identifiable corporate interests, and these parties
don’t like it. These affected parties only have three opportunities to lobby
their positions. They can lobby the FASB (or IASB) during the due process
stage before accounting standards are adopted, hoping to get the rule they
want. After implementation of a new rule, they can lobby their auditors for
favorable treatment when they consider how to account for transactions. If
these two fail to produce favorable results, the affected corporations have
one final alternative. They can continue to complain and seek the assistance
of politicians to get the accounting rule changed. Of course, the FASB and
the IASB wish to maintain their rule making franchise, and so they try to
protect their rules and their responsibilities.
The defense of the SEC/FASB/IASB position (insulate
accounting standard setting from politics) is based on a number of premises,
such as, (1) accounting standards are designed to benefit all users and
interests, (2) there is a best accounting rule for every occasion, (3)
accounting standards are economically neutral, and (4) selecting accounting
standards because of their economic impact is the devil’s work.
A famous Journal of Accountancy article, “The
Politicization of Accounting,” by the late University of Pennsylvania
professor David Solomons (1978) is sometimes cited in defense. As reported
by FASB Chairman Robert Herz, Professor Solomons argued for the information
neutrality of accounting standards. Herz quotes Solomons as saying,
“If it ever became accepted that accounting might
be used to achieve other than purely measurement ends, faith in it would be
destroyed just as faith in speedometers would be destroyed once it were
realized that they were subject to falsification for the purpose of
influencing driving habits.”
Well guess what?
Continued in article
January 8, 2010 reply from Bob Jensen
I wrote a reply to you at I posted a link to your
article above to the AAA Commons ---
http://commons.aaahq.org/posts/2535dfac2a
I also posted a comment (twice) at your blog, but
for some reason your blog won’t post my messages. Most likely there is just
not enough capacity for the likes of me.
My main contribution is to link to an outstanding
1989 article by Denny Beresford on economic consequences. I think this was
written while he was still Chairman of the FASB.
Bob Jensen
"How well does the FASB consider the consequences of its
work?" by Dennis Beresford, All Business, March 1, 1989 ---
http://www.allbusiness.com/accounting/methods-standards/105127-1.html
Neutrality is the quality
that distinguishes technical decision-making from political decision-making.
Neutrality is defined in FASB Concepts Statement 2 as the absence of bias that
is intended to attain a predetermined result. Professor Paul B. W. Miller, who
has held fellowships at both the FASB and the SEC, has written a paper titled:
"Neutrality--The Forgotten Concept in Accounting Standards Setting." It is an
excellent paper, but I take exception to his title. The FASB has not forgotten
neutrality, even though some of its constituents may appear to have. Neutrality
is written into our mission statement as a primary consideration. And the
neutrality concept dominates every Board meeting discussion, every informal
conversation, and every memorandum that is written at the FASB. As I have
indicated, not even those who have a mandate to consider public policy matters
have a firm grasp on the macroeconomic or the social consequences of their
actions. The FASB has no mandate to consider public policy matters. It has said
repeatedly that it is not qualified to adjudicate such matters and therefore
does not seek such a mandate. Decisions on such matters properly reside in the
United States Congress and with public agencies.
The only mandate the FASB
has, or wants, is to formulate unbiased standards that advance the art of
financial reporting for the benefit of investors, creditors, and all other users
of financial information. This means standards that result in information on
which economic decisions can be based with a reasonable degree of confidence.
A fear of information
Unfortunately, there is
sometimes a fear that reliable, relevant financial information may bring about
damaging consequences. But damaging to
whom? Our democracy is based on free dissemination of reliable information. Yes,
at times that kind of information has had temporarily damaging consequences for
certain parties. But on balance, considering all interests, and the future as
well as the present, society has concluded in favor of freedom of information.
Why should we fear it in financial reporting?
Continued in article
Standard Setting and Securities Markets: U.S. Versus Europe
November 29, 2007 message from Pacter, Paul (CN - Hong Kong)
[paupacter@DELOITTE.COM.HK]
Some similarities to Chair of SEC, but some
important differences. SEC has direct regulatory powers over securities markets,
entities that offer securities in those markets, broker/dealers in securities,
auditors, and others. SEC can impose penalties on those it regulates.
In Europe there is no pan-European securities
regulator equivalent to the SEC with direct regulatory powers similar to the
SEC's. Rather, there are 27 securities regulators (one from each member state)
who have that power. Here's a link to the list:
http://www.cesr-eu.org/index.php?page=members_directory&mac=0&id=
There is a coordinating body of European
securities regulators called CESR (the Committee of European Securities
Regulators (http://www.cesr-eu.org/)
but CESR's role is advisory, not regulatory.
When the European Parliament adopts legislation
(such as securitieslegislation) the legislation first has to be transposed
(legally adopted) into the national laws of the Member States. Commissioner
McCreevy's role is to propose policies and propose legislation to adopt those
policies in Europe, oversee implementation of the legislation in the 27 Member
States (plus 3 EEA countries), and (through both persuasion and some legal
authority) try to ensure consistent and coordinated implementation. The
Commissioner also has outreach and liaison responsibilities outside the European
Union. Because there is no pan-European counterpart to the SEC Chairman,
Commissioner McCreevy generally handles top level policy liaison between the SEC
and Europe.
Like the Chair of the SEC, EU Commissioners are
political appointees.
Paul Pacter
Key differences between U.S. and International Standards ---
http://www.trinity.edu/rjensen/Theory01.htm#FASBvsIASB
Jensen Comment
Below is a portion of a module on Neutrality at
In
Concepts Statement No. 2, the FASB
asserts it should not issue a standard for the purpose of achieving some
particular economic behavior. Among other things, this statement implies that
the board should not set accounting standards in an attempt to bolster the
economy or some industry sector. Ideally, scorekeeping should not affect how the
game is played. But this is an impossible ideal since changes in rules for
keeping score almost always change player behavior. Hence, accounting standards
cannot be ideally neutral. The FASB, however, actively attempts not to not take
political sides on changing behavior that favors certain political segments of
society. In other words, the FASB still operates on the basis that fairness and
transparency in the spirit of neutrality override politics. However, there is a
huge gray zone that, in large measure, involves how companies, analysts,
investors, creditors, and even the media react to new accounting rules.
Sometimes they react in ways that are not anticipated by the FASB.
Questions
Is there a problem with how GAAP covers one's Fannie?
Would fair value accounting help in this situation?
"Fannie Execs Defend Accounting Change Friday,"
by Marcy Gordon, Yahoo News, November 16, 2007 ---
http://biz.yahoo.com/ap/071116/fannie_mae_accounting.html
Fannie Mae executives on Friday defended a change in the way the mortgage lender
discloses losses on home loans amid concern from analysts that it could mask the
true impact of the credit crisis on its bottom line.
The chief financial
officer and other executives of the government-sponsored company, which reported
a $1.4 billion third-quarter loss last week, held a conference call with Wall
Street analysts to explain the recent change.
Analysts peppered the
executives with questions in a skeptical tone. The way Fannie discloses its
mortgage losses, addressed in an article published online by Fortune, raises
extra concern among analysts given that Fannie Mae was racked by a $6.3 billion
accounting scandal in 2004 that tarnished its reputation and brought government
sanctions against it.
Moreover, the skepticism
from Wall Street comes as Fannie seeks approval from the government to raise the
cap of its investment portfolio.
The chief financial
officer, Stephen Swad, said in the call that some of the $670 million in
provisions for credit losses on soured home loans that Fannie Mae wrote off in
the third quarter likely would be recovered.
"We book what we book
under (generally accepted accounting principles) and we provide this disclosure
to help you understand it," Swad said.
Shares of Fannie Mae fell
$4.30, or 10 percent, to $38.74 on Friday, following a 10 percent drop the day
before.
"Fannie Shares Continue
Plunge," by Mike Barris, The Wall Street Journal, November 16, 2007 ---
http://online.wsj.com/article/SB119522620923495790.html
Shares of Fannie Mae
skidded further Friday, after falling 10% Thursday amid worries over the way the
mortgage giant reports credit losses and a gloomy outlook for the housing
market.
The latest decline in the
company's share price came as Chief Financial Officer Stephen Swad on Friday
attempted to alleviate investor concerns about the company's credit losses.
In morning trading,
Fannie shares were at $41.30, down $1.75, or 4%. The shares had fallen as much
as 14% early in the day before recovering somewhat. Shares of Fannie's
counterpart, Freddie Mac, also fell, down $1.98, or 4.8%, to $39.91.
Thursday's drop came
after Fortune magazine's Web site reported a change in the method Fannie uses to
report credit losses.
Last week, the nation's
biggest investor in home-mortgage loans reported that its credit losses in the
year's first nine months equaled 0.04% of the company's $2.8 trillion of
mortgages and related securities owned or guaranteed, up from 0.018% a year
earlier. That was in line with the company's forecast.
But the company changed
its method of presenting the figure,
excluding unrealized losses on certain loans that were marked down to reflect
current market conditions. Including those unrealized losses, the rate for this
year's first nine months was 0.075%, up from 0.023% a year before.
Fannie officials said the
change was made to separate realized losses from ones that haven't been realized
and depend on fluctuating market values for loans. A report from J.P. Morgan
Chase & Co. analyst George Sacco said the new method is similar to that used by
Freddie Mac. Fannie officials noted that both the realized and unrealized losses
were reflected in the earnings reported last week.
Fannie's stock had
already been falling for a few weeks amid worries about how hard Fannie would be
hurt by rising mortgage defaults. At an investment conference Thursday in New
York, Wells Fargo & Co.'s chief executive, John Stumpf, predicted more pain for
mortgage lenders in the year ahead as falling home prices cut the value of
collateral, saying the nationwide decline in housing is the worst since the
Great Depression.
Thursday, Fannie shares
dropped $4.78, or 10%, to $43.04.
On Friday, Mr. Swad tried
to explain further how the company was accounting for potential losses.
Last week, Fannie Mae
reported roughly $670 million in credit losses in the third quarter related to
certain charge-offs recorded when delinquent loans were purchased from
mortgage-backed securities trusts. Mr. Swad explained Friday that portions of
the credit losses would likely be recovered.
Though these third
quarter losses were charged off, they are not considered realized losses, Mr.
Swad said, because the loans backing these securities could still be "cured."
Mr. Swad said the company was "required to take a charge when the market
estimate is below our purchase price." The company's experience, he added, "has
shown that the majority of these loans don't result in any realized losses." But
he declined to be more specific about what percentage of the loans would
eventually "cure."
Fannie last week released
earnings for the first three quarters of the year. It reported an additional
unrealized loss of $955 million in the value of private-label securities backed
by subprime and Alt-A mortgages through the end of the third quarter. This was
in addition to $376 million the company had previously accounted as a loss for
these securities this year.
November 16, 2007 reply from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
For the record, there was no "accounting change"
as per this headline. A headline of "Fannie Mae follows GAAP" probably wouldn't
be quite as sexy but it would be 100% accurate. The company's clear explanation
of what it is required to do under GAAP is covered in the conference call that
is available on Fannie Mae's web site for those accounting aficionados who want
to learn more about AICPA Statement of Position 03-03 that requires companies
repurchasing loans to record them at fair value. So the answer to your question
is that fair value accounting apparently only complicated analysts'
understanding in this case.
Denny Beresford
November 17, 2007 reply from Bob Jensen
Hi Denny,
Your comment sheds a lot of light on this apparent gap between analyst
expectations and GAAP rules in this case. The SEC, FASB, and the IASB are
pushing hard and steady toward fair value accounting with FAS 155, 157, and 159
just being intermediary steps along the way. At least in this case, however,
required fair value accounting is allegedly contributing to the plunge in Fannie
Mae’s share values.
This is another example of the unpredictability of the Neutrality Concept in
standard setting. You point out (see below) that FASB seriously considers
neutrality for every new standard and interpretation with the goal of having
scorekeeping not affect how the game is played, but in athletics and business it
is virtually impossible to change how something is scored without affecting
policies and strategies. For example, when long shots in basketball commenced to
earn three points rather than two points it fundamentally changed the game of
basketball.
Perhaps this is all an example of what you, in 1989,
termed "relevant financial information may bring about damaging consequences."
(see a quote from your article below). It would have been interesting if the
media reporters in 2007 had cited your 1989 article in this beating Fannie Mae
is now taking by adhering to GAAP.
Bob Jensen
"How well does the FASB consider the consequences of its
work?" by Dennis Beresford, All Business, March 1, 1989 ---
http://www.allbusiness.com/accounting/methods-standards/105127-1.html
Neutrality is the quality
that distinguishes technical decision-making from political decision-making.
Neutrality is defined in FASB Concepts Statement 2 as the absence of bias that
is intended to attain a predetermined result. Professor Paul B. W. Miller, who
has held fellowships at both the FASB and the SEC, has written a paper titled:
"Neutrality--The Forgotten Concept in Accounting Standards Setting." It is an
excellent paper, but I take exception to his title. The FASB has not forgotten
neutrality, even though some of its constituents may appear to have. Neutrality
is written into our mission statement as a primary consideration. And the
neutrality concept dominates every Board meeting discussion, every informal
conversation, and every memorandum that is written at the FASB. As I have
indicated, not even those who have a mandate to consider public policy matters
have a firm grasp on the macroeconomic or the social consequences of their
actions. The FASB has no mandate to consider public policy matters. It has said
repeatedly that it is not qualified to adjudicate such matters and therefore
does not seek such a mandate. Decisions on such matters properly reside in the
United States Congress and with public agencies.
The only mandate the FASB
has, or wants, is to formulate unbiased standards that advance the art of
financial reporting for the benefit of investors, creditors, and all other users
of financial information. This means standards that result in information on
which economic decisions can be based with a reasonable degree of confidence.
A fear of information
Unfortunately, there is
sometimes a fear that reliable, relevant financial information may bring about
damaging consequences. But damaging to
whom? Our democracy is based on free dissemination of reliable information. Yes,
at times that kind of information has had temporarily damaging consequences for
certain parties. But on balance, considering all interests, and the future as
well as the present, society has concluded in favor of freedom of information.
Why should we fear it in financial reporting?
Continued in article
In particular note the section on Post-Employment Benefits Accounting ---
http://www.trinity.edu/rjensen/theory01.htm#CookieJar
June 29, 2009 reply from Orenstein, Edith
[eorenstein@financialexecutives.org]
Prof. Jensen,
Your post on 'neutrality' is very thought provoking and I am
especially appreciative of the link to Denny Beresford's article published
in 1989 in Financial Executive Magazine, which I had not recalled reading
for some time if ever; it is a great article.
I was fortunate to have Dr. David Solomons as my accounting theory professor
at Penn in 1982, and I have always been fascinated by the accounting
standard-setting process and Con. 2's qualitative characteristics of
financial reporting, in particular neutrality and representational
faithfulness, as well as the subject of accounting standard-setting vis-a-vis
public policy.
One of my favorite quotes from the term paper I wrote in Dr. Solomons' class
on the subject of 'Standard-Setting and Social Choice" was by
Dale
Gerboth, in which Gerboth said:
“The public accounting profession has acquired a unique quasi-legislative
power that, in important respects, is self-conferred. Furthermore, its
accounting ‘legislation’ affects the economic well-being of thousands of
business enterprises and millions of individuals, few of whom had anything
to do with giving the profession its power or have a significant say in its
use. By any standard, that is a remarkable accomplishment.”
[Gerboth, Dale L., "Research, Intuition, and Politics in Accounting Inquiry"
The Accounting Review, Vol. 48, No. 3 (July 1973), pp. 475-482, published by
the American Accounting Association (cite is on pg 481).]
Returning to Denny's 1989 article, I find it significant that he wrote:
"The
only mandate the FASB has, or wants, is to formulate unbiased standards that
advance the art of financial reporting for the benefit of investors,
creditors, and all other users of financial information. This means
standards that result in information on which economic decisions can
be based with a reasonable degree of confidence. ... Unfortunately,
there is sometimes a fear that reliable, relevant financial
information may bring about damaging consequences."
I believe the above statement makes sense, and extending it further, the
point I'd make (let me note now these are my personal views) is that: it's
one thing if people want to 'throw caution to the wind' so to speak by
saying 'ignore public policy (or economic) consequences' - but it's another
thing to say that when the proposed accounting treatment would not
necessarily 'result in information on which economic decisions can be based
with a reasonable degree of confidence" or when 'reliability' has been
overly sacrificed for perceived 'relevance.'
Another consideration should be - 'relevance' for whom and by whom, e.g.
relevance for some who base their own business or consulting service on,
e.g. fire-sale or liquidation prices, vs. e.g. going concern models of
valuation?
Said another way, I think it's one thing to risk economic upheaval for high
quality standards, vs. risk economic upheaval for accounting standards of
questionable relevance, reliability or representational faithfulness.
Maybe the concept of 'first, do no harm' is another way of saying this,
i.e., do not inflict unnecessary harm, particularly without exploring the
reasonableness of alternatives, and exploring motivations of all parties
involved, and the ability for investors to truly 'understand' what's behind
numbers reported in accordance with the accounting standards, and the
reliability of those numbers.
Thank you.
Regards,
Edith Orenstein, Director, Accounting Policy Analysis, FEI
eorenstein@financialexecutives.org web:
www.financialexecutives.org blog:
www.financialexecutives.org/blog
June 30, 2009 reply from Patricia Walters
[patricia@DISCLOSUREANALYTICS.COM]
Bob & Edith:
Rebecca McEnally & I wrote an article on
Neutrality in Financial Statements for the FASB Report in 2003 from the
perspective of the investor/creditor in which we support the concept of
attempting to achieve neutrality rather than conservatism (or prudence) in
financial reporting and why. (Available from me if anyone wants.)
One of the issues I've encountered over the
years is an elevation of "reliability" in financial reporting to a stature I
don't believe is warranted.
What do we really mean by reliable
information? Someone can demonstrate how it is calculated? Most would get
the same answer if asked to measure? Is something reliable when it's easy to
audit?
Every balance sheet item including cash & cash
equivalent has an element of estimation in the measurement, especially in
mult-national companies that have selected functional currencies and
translated them into the presentation currency of the group.
Even with a goal of "neutrality" as one of its
qualitative characteristic, financial reporting will always be subjective.
Lack of "reliable measurement" can be used to do that. Measurements even at
cost require decisions about what's "directly attributable" and what isn't.
Neutrality may not be achievable but let's at
least try.
Regards
Pat Walters
Even though the neutrality-believing FASB is in a state
of denial about the impact of FSB 115-4 on decision making in the real world,
financial analysts and the Director of Corporate Governance at the Harvard Law
School are in no such state of denial,
"The Fall of the Toxic-Assets Plan," The Wall Street Journal, July 9, 2009 ---
http://blogs.wsj.com/economics/2009/07/09/guest-contribution-the-fall-of-the-toxic-assets-plan/
The government
announced plans
to move forward with its
Public-Private Investment Program
yesterday.
Lucian Bebchuk,
professor of law, economics, and finance and director of the corporate
governance program at
Harvard Law School, says
that the program, which has been curtailed significantly, hasn’t made the
problem go away.
The plan for buying troubled assets — which
was earlier announced as the central element of the administration’s
financial stability plan — has been recently curtailed drastically. The
Treasury and the FDIC have attributed this development to banks’ new ability
to raise capital through stock sales without having to sell toxic assets.
But the program’s inability to take off is
in large part due to decisions by banking regulators and accounting
officials to allow banks to pretend that toxic assets haven’t declined in
value as long as they avoid selling them.
The toxic assets clogging banks’ balance
sheets have long been viewed — by both the Bush and the Obama
administrations — as being at the heart of the financial crisis. Secretary
Geithner put forward in March a “public-private investment program” (PPIP)
to provide up to $1 trillion to investment funds run by private managers and
dedicated to purchasing troubled assets. The plan aimed at “cleansing”
banks’ books of toxic assets and producing prices that would enable valuing
toxic assets still remaining on these books.
The program naturally attracted much
attention, and the Treasury and the FDIC have begun implementing it.
Recently, however, one half of the program, focused on buying toxic loans
from banks, was shelved. The other half, focused on buying toxic securities
from both banks and other financial institutions, is expected to begin
operating shortly but on a much more modest scale than initially planned.
What happened? Banks’ balance sheets do remain
clogged with toxic assets, which are still difficult to value. But the
willingness of banks to sell toxic assets to investment funds has been
killed by decisions of accounting authorities and banking regulators.
Earlier in the crisis, banks’ reluctance to
sell toxic assets could have been attributed to inability to get prices
reflecting fair value due to the drying up of liquidity. If the PIPP program
began operating on a large scale, however, that would no longer been the
case.
Armed with ample government funding, the
private managers running funds set under the program would be expected to
offer fair value for banks’ assets. Indeed, because the government’s funding
would come in the form of non-recourse financing, many have expressed
worries that such fund managers would have incentives to pay even more than
fair value for banks’ assets. The problem, however, is that banks now have
strong incentives to avoid selling toxic assets at any price below face
value even when the price fully reflects fair value.
A month after the PPIP program was announced,
under pressure from banks and Congress, the U.S. Financial Accounting
Standards Board watered down accounting rules and made it easier for banks
not to mark down the value of toxic assets. For many toxic assets whose
fundamental value fell below face value, banks may avoid recognizing the
loss as long as they don’t sell the assets.
Even if banks can avoid recognizing economic
losses on many toxic assets, it remained possible that bank regulators will
take such losses into account (as they should) in assessing whether banks
are adequately capitalized. In another blow to banks’ potential willingness
to sell toxic assets, however, bank supervisors conducting stress tests
decided to avoid assessing banks’ economic losses on toxic assets that
mature after 2010.
The stress tests focused on whether, by the
end of 2010, the accounting losses that a bank will have to recognize will
leave it with sufficient capital on its financial statements. The bank
supervisors explicitly didn’t take into account the decline in the economic
value of toxic loans and securities that mature after 2010 and that the
banks won’t have to recognize in financial statements until then.
Together, the policies adopted by accounting
and banking authorities strongly discourage banks from selling any toxic
assets maturing after 2010 at prices that fairly reflect their lowered
value. As long as banks don’t sell, the policies enable them to pretend, and
operate as if, their toxic assets maturing after 2010 haven’t fallen in
value at all.
By contrast, selling would require recognizing
losses and might result in the regulators’ requiring the bank to raise
additional capital; such raising of additional capital would provide
depositors (and the government as their guarantor) with an extra cushion but
would dilute the value of shareholders’ and executives’ equity. Thus, as
long as the above policies are in place, we can expect banks having any
choice in the matter to hold on to toxic assets that mature after 2010 and
avoid selling them at any price, however fair, that falls below face value.
While the market for banks’ toxic assets will
remain largely shut down, we are going to get a sense of their value when
the FDIC auctions off later this summer the toxic assets held by failed
banks taken over by the FDIC. If these auctions produce substantial
discounts to face value, they should ring the alarm bells. In such a case,
authorities should reconsider the policies that allow banks to pretend that
toxic assets haven’t fallen in value. In the meantime, it must be recognized
that the curtailing of the PIPP program doesn’t imply that the toxic assets
problem has largely gone away; it has been merely swept under the carpet.
Bob Jensen's threads on standard setting are at
http://www.trinity.edu/rjensen/Theory01.htm
Bob Jensen's threads on Accrual Accounting and
Estimation are at
http://www.trinity.edu/rjensen/Theory01.htm#AccrualAccounting
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
Bob Jensen's threads on Fannie Mae's enormous problem
(the largest in history that led to the firing of KPMG from the audit and a
multiple-year effort to restate financial statemetns) with applying FAS 133 ---
http://www.trinity.edu/rjensen/caseans/000index.htm#FannieMae
Accounting for "co-operation and commitment" versus "command and control?"
Without having read this book (yet) it would seem that it must overstate the
case. Organization behavior and leadership and financial structures do not
change that quickly without a greater shock than the 2009 recession and efforts
made by governments to save the previous structures. However, our present
managerial accounting systems are built upon the foundation of "command and
control," and may take some new foundational building for whatever is meant by
"co-operation and commitment."
As a rule I avoid what I call these Harvard Business School types of books on
leadership (that often preach more than teach based upon substantive research),
but the book below does have a provocative summary.
Selective reviews of The Death of Modern Management: How to Lead in the
New World Disorder," by Jo Owen (Wiley, 2010, ISBN: 978-0-470-68285-2) ---
http://www.wiley.com/WileyCDA/WileyTitle/productCd-047068285X.html
We are at the start of a new wave
of management. The recent financial crisis highlighted
problems not just in the economic system, but also in
the way that many companies are governed and managed.
Now modern management has reached its end game and we
approach a new era in leadership. Rather than the
certainties of command and control, this new epoch will
be based on co-operation and commitment. There has been
a strategic revolution - instead of following the rules,
we now have to make them. For some this represents great
risk; for others it is an enormous opportunity.
The Death of Modern
Management is a how-to guide for surviving and
thriving amidst the new uncertainties of contemporary
business.
"...a joyride through new
ideas, memorable stories and superb writing." Philip
Kotler
"Jo Owen gives a fascinating
insight into how 21st century management now works. It
is helpful to have someone with his experience,
intellect and vision explain the radical changes in a
way that makes sense and is immediately usable."
Juliet Hope, CEO, Startup
“Jo Owen delivers a robust
and wide-ranging assault on the delusions of management,
strategy, finance and marketing that have created an
aura of justified mistrust around the modern
corporation, but does so with wit, lucidity and lots of
enlivening illustrations. The answers for 21st century
business are helpfully accessible.”
Professor Nigel Nicholson, London Business School,
author of Managing the Human Animal and Family
Wars
"...offers insights that
help encourage different thinking." Director
Magazine
Bob Jensen's threads on the History of Management Theory are at
http://www.trinity.edu/rjensen/theory/00overview/GreatMinds.htm
Also see "Great Minds in Sociology" ---
http://www.sociosite.net/topics/sociologists.php
From The Wall Street Journal Accounting Weekly Review on January 29,
2010
Southwest Airlines Hedges Its Bets
by: Ann
Keeton
Jan 22, 2010
Click here to view the full article on WSJ.com
TOPICS: Advanced
Financial Accounting, Hedging
SUMMARY: "Southwest
Airlines Co. Chairman and Chief Executive Gary Kelly, when asked recently to
name the greatest risk for airlines in 2010 said: 'That's easy. It's energy
prices.'...Southwest, whose fourth-quarter results were helped by
lower-than-expected fuel costs, has cut back on some hedges to save money,
while adding 'catastrophic' coverage to protect against a big price
increase.....In 2008, the airline industry lost billions of dollars as fuel
prices rose to record levels, accounting for one-third of the carriers'
costs, up from an average of about 14%. That led airlines to add more hedges
as they prepared for even more expensive fuel. But fuel prices declined
during the recession, and many airlines...lost millions of
dollars....Despite that loss, Delta plans to keep on hedging...'When
something is that large a piece of your input costs, you can't abdicate the
management of it,' [said chief executive Richard Anderson]."
CLASSROOM APPLICATION: The
article can be used to introduce the purpose of hedging, particularly fuel
cost and commodity hedging, in Advanced Financial Accounting courses.
QUESTIONS:
1. (Introductory)
What does Southwest Airlines executive Gary Kelly see as the greatest risk
facing his company in 2010? What can the company's management due to cope
with that risk?
2. (Introductory)
What were the airlines' experiences with hedging fuel costs in 2008? Why
will they again undertake hedging strategies even after this experience?
3. (Advanced)
Given your understanding of hedging activities, explain how Southwest
determines that it is "40% protected" if oil prices rise to more than $140
per barrel while the company is hedged for 50% of its purchases of oil if
the price rises to $100 per barrel.
4. (Advanced)
Consider the metric of "revenue per available seat mile" quote in the
article. How do you think this ratio is determined? Why do you think this is
"considered the best measure of revenue for airlines"?
Reviewed By: Judy Beckman, University of Rhode Island
Teaching Cases: Hedge Accounting Scenario 1 versus Scenario 2
Two Teaching Cases Involving Southwest Airlines, Hedging, and Hedge
Accounting Controversies ---
http://www.trinity.edu/rjensen/caseans/SouthwestAirlinesQuestions.htm
Professor Blinder, a professor of economics and public affairs at Princeton
University and vice chairman of the Promontory Interfinancial Network, is a
former vice chairman of the Federal Reserve Board ---
http://en.wikipedia.org/wiki/Alan_S._Blinder
"When Greed Is Not Good: Wall Street has quickly rediscovered the
virtues of mammoth paychecks. Why hasn't there been more financial reform?"
by Alan S. Blinder, The Wall Street Journal, January 11, 2010 ---
http://online.wsj.com/article/SB10001424052748703652104574652242436408008.html?mod=djemEditorialPage
I hear Gordon Gekko is making a comeback. So is
greed.
They say markets are alternately ruled by greed and
fear. Well, our panic-stricken financial markets have been ruled by fear for
so long that a little greed might serve as an elixir. But everybody knows
you can overdose on an elixir.
When economists first heard Gekko's now-famous
dictum, "Greed is good," they thought it a crude expression of Adam Smith's
"Invisible Hand"—which is one of history's great ideas. But in Smith's
vision, greed is socially beneficial only when properly harnessed and
channeled. The necessary conditions include, among other things: appropriate
incentives (for risk taking, etc.), effective competition, safeguards
against exploitation of what economists call "asymmetric information" (as
when a deceitful seller unloads junk on an unsuspecting buyer), regulators
to enforce the rules and keep participants honest, and—when
relevant—protection of taxpayers against pilferage or malfeasance by others.
When these conditions fail to hold, greed is not good.
Plainly, they all failed in the financial crisis.
Compensation and other types of incentives for risk taking were badly
skewed. Corporate boards were asleep at the switch. Opacity reduced
effective competition. Financial regulation was shamefully lax. Predators
roamed the financial landscape, looting both legally and illegally. And when
the Treasury and Federal Reserve rushed in to contain the damage, taxpayers
were forced to pay dearly for the mistakes and avarice of others. If you
want to know why the public is enraged, that, in a nutshell, is why.
American democracy is alleged to respond to public
opinion, and incumbents are quaking in their boots. Yet we stand here in
January 2010 with virtually the same legal and regulatory system we had when
the crisis struck in the summer of 2007, with only minor changes in Wall
Street business practices, and with greed returning big time. That's both
amazing and scary. Without major financial reform, "it" can happen again.
It is true that regulators are much more watchful
now, that Bernie Madoff is in jail (where he should have more company), and
that much of "fancy finance" died a violent death in the marketplace. All
good. But history shows that financial markets have a remarkable ability to
forget the past and revert to their bad old ways. And we've made essentially
no progress on lasting financial reform.
View Full Image
Chad Crowe Perhaps reformers just need more
patience. The Treasury made a fine set of proposals that the president's
far-flung agenda left him little time to pursue—so far. The House of
Representatives passed a pretty good financial reform bill late last year.
And while there's been no action in the Senate as yet, at least they are
talking about it. As Yogi Berra famously said, "it ain't over 'til it's
over."
But I'm worried. The financial services industry,
once so frightened that it scurried under the government's protective
skirts, is now rediscovering the virtues of laissez faire and the joys of
mammoth pay checks. Wall Street has mounted ferocious lobbying campaigns
against virtually every meaningful aspect of reform, and their efforts seem
to be paying off. Yes, the House passed a good bill. Yet it would have been
even better but for several changes Financial Services Committee Chairman
Barney Frank (D., Mass.) had to make to get it through the House. Though the
populist political pot was boiling, lobbyists earned their keep.
I expect they'll earn more. Even before Senate
Banking Committee Chairman Christopher Dodd (D., Conn.) announced his
retirement, it appeared likely that any bill that could survive the Senate
would be weaker than the House bill. Then came Mr. Dodd's announcement,
which reshuffled the deck.
There are two diametrically opposed hypotheses
about how his retirement will affect the legislation. Conventional wisdom
holds that it is good news for reformers: Freed from crass political
concerns, Mr. Dodd can now steer his committee more firmly toward a better
bill. Let's hope so. But an opposing view reminds us that lame ducks lose
power rapidly in power-mad Washington. To lead, someone must be willing to
follow.
My fear is that a once-in-a-lifetime opportunity to
build a sturdier and safer financial system is slipping away. Let's remember
what happened to health-care reform (a success story!) as it meandered
toward 60 votes in the Senate. The world's greatest deliberative body turned
into a bizarre bazaar in which senators took turns holding the bill hostage
to their pet cause (or favorite state). With zero Republican support, every
one of the 60 members of the Democratic caucus held an effective veto—and
several used it.
If financial reform receives the same treatment, we
are in deep trouble, both politically and substantively.
To begin with the politics, recent patterns make it
all too easy to imagine a Senate bill being bent toward the will of
Republicans—who want weaker regulation—but then garnering no Republican
votes in the end. We've seen that movie before. If the sequel plays in
Washington, passing a bill will again require the votes of every single
Democrat plus the two independents. With veto power thus handed to each of
60 senators, the bidding war will not be pretty.
On substance, while both health-care and financial
reform are complex, health care at least benefited from broad agreement
within the Democratic caucus on the core elements: expanded but not
universal coverage, subsidies for low-income families, enough new revenue to
pay the bills, insurance exchanges, insurance reform (e.g., no denial of
coverage for pre-existing conditions), and experiments in cost containment
to "bend the curve." The fiercest political fights were over peripheral
issues like the public option, abortion rights (how did that ever get in
there?), and whether Nebraskans should pay like other Americans (don't try
to explain that one to foreigners).
But financial regulatory reform is not like that.
Every major element is contentious: a new resolution authority for ailing
institutions, a systemic risk regulator, a separate consumer protection
agency, whether to clip the Fed's wings or broaden them, restrictions on
executive compensation, regulation of derivatives, limits on proprietary
trading, etc.
The elements are interrelated; you can't just pick
one from column A and two from column B. What's worse, several components
would benefit from international cooperation—for example, consistent
regulation of derivatives across countries. This last point raises the
degree of difficulty substantially. No one worried about international
agreement while Congress was writing a health-care bill.
All and all, enacting sensible, comprehensive
financial reform would be a tall order even if our politics were more civil
and bipartisan than they are. To do so, at least a few senators—Republicans
or Democrats—will have to temper their partisanship, moderate their
parochial instincts, slam the door on the lobbyists, and do what is right
for America. Figure the odds. Gordon Gekko already has.
Bob Jensen's threads on outrageous executive compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
Important information on taxes, audit and attest services
January 8, 2010 message from Scott Bonacker
[lister@BONACKERS.COM]
************************************************************************
AICPA(R) NEWS UPDATE
A Weekly Email Newsletter on Issues & Events
Surrounding the CPA Profession
www.aicpa.org/info/aicpa_news_update.htm
************************************************************************
January 8, 2010 - Volume 13 No. 1
- IRS Issues Regulations, Guidance on Disclosure of
Taxpayer Information
- IRS Announces Tax Return Preparer Registration,
Testing, Education Requirements
- AICPA Supports Legislation Requiring Comptroller
General Be a CPA
- SSARS No. 19 Issued December 30 - Represents
Biggest Changes to SSARSs Since 1978
- Exposure Drafts Released under AICPA Clarity
Project
- AICPA Auditing Standards Board Issues SAS No. 117,
Compliance Audits
- How CPAs Should Handle "Comfort Letter" Requests
from Lenders, Mortgage Brokers
---------------------------------------------------
--- IRS Issues Regulations, Guidance on Disclosure
of Taxpayer Information
Just as tax season is about to begin, the Internal
Revenue Service has amended the rules under IRC Section 7216 on when return
preparers may disclose taxpayers' return information and provided guidance
to preparers on issues that arise in a number of common scenarios, including
informing clients of tax law changes and sending them newsletters. Read
about the amended rules on JournalofAccountancy.com and find coverage of the
guidance.
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfw0E3
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfx0E4
--- IRS Announces Tax Return Preparer Registration,
Testing, Education Requirements
On January 4, the Internal Revenue Service announced
it will implement mandatory registration of all paid, signing tax return
preparers as well as competency testing and continuing professional
education requirements for preparers who are not CPAs, attorneys or enrolled
agents. In addition, Circular 230's ethics rules will be extended to all
return preparers. The AICPA generally supports the IRS's plans. For more
information, read this JournalofAccountancy.com article and the AICPA news
release. Visit the AICPA Tax Center regarding the Institute's advocacy
efforts on this IRS initiative.
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfj0Ep
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfy0E5
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40nul0E5
--- AICPA Supports Legislation Requiring Comptroller
General Be a CPA
The AICPA recently announced its support of
legislation introduced in the U.S. House of Representatives by Reps. Collin
Peterson, D-Minn., and Mike Conaway, R-Texas, to require the U.S.
Comptroller General to be a CPA. Read the AICPA news release.
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pdQ0EO
--- SSARS No. 19 Issued December 30 - Represents
Biggest Changes to SSARSs Since 1978
Statement on Standards for Accounting and Review
Services (SSARS) No.
19, Compilation and Review Engagements, was
officially issued by the AICPA's Accounting and Review Services Committee on
December 30, 2009.
SSARS No. 19 supersedes AR sections 20, Defining
Professional Requirements in Statements on Standards for Accounting and
Review Services; 50, Standards for Accounting and Review Services; and 100,
Compilation and Review of Financial Statements, in AICPA Professional
Standards. The provisions of SSARS No. 19 are effective for compilations and
reviews of financial statements for periods ending on or after December 15,
2010, with one exception. That exception, which may be implemented
immediately, permits an accountant to include a description in the
accountant's compilation report regarding the reason(s) for an independence
impairment. Major new provisions that will be effective on or after December
15, 2010, include introducing the term "review evidence," incorporating a
discussion of materiality in the context of a review engagement and
requiring the CPA to obtain an engagement letter for all SSARS engagements.
For an Executive Summary on the new standard, a white paper on the
compilation reporting option and other related resources, visit
www.aicpa.org/reliability.
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfS0ES
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pOu0Ed
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pVa0EQ
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pVb0ER
--- Exposure Drafts Released under AICPA Clarity
Project
The AICPA Auditing Standards Board has issued the
following proposed statements on auditing standards resulting from its
Clarity Project and convergence with International Standards on Auditing.
Various AU sections are superseded or rescinded in AICPA Professional
Standards.
Comments for the following proposed SASs are due
Apr. 30: Audit Evidence-Specific Considerations for Selected Items; Using
the Work of an Auditor's Specialist; and Communicating Internal Control
Related Matters Identified in an Audit (Redrafted). In addition, proposed
SASs also were issued on: Reports on Application of Requirements of an
Applicable Financial Reporting Framework (comments due May 17) and
Analytical Procedures (Redrafted) (comments due May 3).
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40krH0EO
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40l5f0Es
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfz0E6
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pf10Es
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pf20Et
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pf30Eu
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pf40Ev
--- AICPA Auditing Standards Board Issues SAS No.
117, Compliance Audits
Read a summary of Statement on Auditing Standards
No. 117,Compliance Audits, which the Auditing Standards Board has issued to
supersede SAS No. 74, Compliance Auditing Considerations in Audits of
Governmental Entities and Recipients of Governmental Financial Assistance,
in AU section 801 of AICPA Professional Standards. The provisions of this
SAS are effective for compliance audits for fiscal periods ending on or
after June 15, 2010. Earlier application is permitted.
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40lou0E6
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pfZ0EZ
--- How CPAs Should Handle "Comfort Letter" Requests
from Lenders, Mortgage Brokers
Over the years, members have contacted the AICPA to
clarify their professional ethical obligations when asked for "comfort
letters" by lenders and mortgage brokers. Depending on how practitioners
respond to such requests, they may be at risk for failing to comply with
AICPA professional standards. The letter at issue is usually associated with
stated-income loans, which are mortgages that do not require borrowers to
document their income. To gain more comfort in extending those loans, some
lenders look to the borrowers' CPA for assurance or comfort about certain
information. Read this AICPA article to see how CPAs can protect themselves
against the risks associated with these situations.
http://email.aicpa.org/cgi-bin15/DM/y/efIh0UVCJP0Hi40pf50Ew
Two Teaching Cases: Will auditors finally get serious about banking
clients' bad debt reserves?
From The Wall Street Journal Accounting Weekly Review on January 22,
2010
Loan Troubles Bedevil Banks
by: Dan
Fitzpatrick
Jan 21, 2010
Click here to view the full article on WSJ.com
TOPICS: Allowance
For Doubtful Accounts, Bad Debts, Banking, Earning Announcements, Financial
Accounting, Loan Loss Allowance
SUMMARY: Bank
executives predicted that loan losses have nearly peaked as they reported
fourth-quarter results of Band of America, Wells Fargo, and U.S. Bancorp.
These three banks "hold a combined 24% of all U.S. deposits and operate more
than 15,000 retail branches, making them important barometers of...the
health of the U.S. banking industry." The earnings numbers for Bank of
America are reported with and without costs associated with repaying the
TARP. "Bank of America reported a net loss of $194 million, which excluded
costs tied to the Charlotte, N.C., company's repayment of $45 billion in
U.S. bailout funds....Bank of America's $5.2 billion loss that included
Troubled Asset Relief Program-related costs was steeper than analysts
expected and more than double the company's net loss in 2008's fourth
quarter. Including the TARP costs, the bank swung to a full year 2009 net
loss of $2.2 billion from earnings of $2.6 billion in 2008."
CLASSROOM APPLICATION: The
article can be used to cover loan loss provisions and general metrics of
bank loans' health such as nonperforming loans and loan write-offs. It also
can be used to cover measurement of earnings available for common
shareholders by referring to the 8K filing for the press release of the BofA
4th quarter results.
QUESTIONS:
1. (Introductory)
Define the terms "provision for credit losses," "nonperforming loans," and
"loan write-offs."
2. (Advanced)
Which of the above three terms impacts a bank's current operating
performance? Explain your answer.
3. (Introductory)
Describe the process for estimating bad loans. By referring to this process,
indicate how the points in the article may show "it is possible...that
consumer losses...have peaked..." and that "2010 will clearly be a better
year than 2009."
4. (Introductory)
The article also quotes the Wells Fargo CFO and the Bank of America CEO as
indicating that earnings are not yet "normalized" following the financial
crisis. What does this statement mean?
5. (Advanced)
Refer to the Bank of America 8-K filing with the SEC for the 4th quarter
2009 earnings release dated January 20, 2010. It is available at
http://www.sec.gov/Archives/edgar/data/70858/000119312510008505/0001193125-10-008505-index.htm
Alternatively, click on the live like to Bank of America from the online
article, click on SEC Filings on the left hand side of the page, then scroll
through about 100 form SC 13G/A filings on the same date to find the 8-K.
What points are highlighted at the head of the press release? How are
earnings described--that is, what items are alternatively included in and
excluded from earnings measures? Why do you think the company gives these
alternative measures of income?
6. (Advanced)
What are earnings available for common shareholders? Are they the same as
net income?
7. (Advanced)
Refer again to the earnings reported in the BofA press release for 2009.
What were earnings available to common shareholders for the 4th quarter of
2009 and for the full year 2009? What was net income for each of those time
periods?
Reviewed By: Judy Beckman, University of Rhode Island
From
The Wall Street Journal Accounting Weekly Review on September 12, 2008
---
http://online.wsj.com/article/SB122083722708908863.html?mod=djem_jiewr_AC
No End Yet to the Capital Punishment
by Peter Eavis
The Wall Street Journal
Sep 08, 2008
Page: C10
Click here to view the full article on WSJ.com
---
http://online.wsj.com/article/SB122083722708908863.html?mod=djem_jiewr_AC
TOPICS: Accounting,
Allowance For Doubtful Accounts, Bad Debts, Banking, Financial Analysis,
Financial Statement Analysis, Loan Loss Allowance, Reserves
SUMMARY: "The
chief problem at Fannie and Freddie -- an inadequate capital cushion against
losses -- also bedevils large banks in the U.S. and Europe more than 12 months
into the credit crunch. The broader strains now facing the markets are not as
easily relieved by central banks or governments as the company specific crises
at Fannie and Freddie or Bear Stearns earlier this year. Of course, central
banks could cut interest rates in the face of this threat. The trouble is banks
are being extra cautious, justifiably, about lending as the economy slows. And
while banks are reluctant to lend, many are having problems borrowing to fund
themselves. That is because the market's assessment of their creditworthiness is
darkening."
CLASSROOM APPLICATION: Couching
the continued problems in credit markets in terms of adequacy of loan loss
reserves can help students in accounting classes better understand the credit
market issues--and put a real world example to the academic learning about the
importance of the accrual for bad debts. The article therefore is useful in any
financial or MBA accounting course covering bad debts and the impact of the
accounting for loan losses on capital accounts. Questions also discuss a related
article on the topic of Fannie Mae, Freddie Mac, and banks' preferred stock.
QUESTIONS:
1. (Introductory) Describe the recent events undertaken by the U.S.
government in relation to the Federal National Mortgage Association (nickname
Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). You may
use the related articles to do so. In your answer, describe the roles of these
entities in facilitating mortgage lending and home ownership across the U.S.
2. (Introductory) The article states "the chief problem at Fannie and
Freddie is an inadequate capital cushion against losses." Whether they are
business accounts receivable for a company or mortgage loan receivables on a
bank or mortgage entity's balance sheet, how do we establish an allowance for
losses on receivables? How does this procedure help to properly present a
receivable balance on the balance sheet and an uncollectable accounts expense on
the income statement?
3. (Introductory) What is the impact of recording an allowance for
doubtful accounts on an entity's capital or stockholders' equity?
4. (Advanced) What is the purpose of requirements for banks, Fannie Mae
and Freddie Mac to maintain a "cushion" of capital? How is that "cushion" eroded
when loan losses prove greater than previously anticipated?
5. (Advanced)
How is it possible that Fannie Mae and Freddie Mac have inadequate allowances
for doubtful mortgage loans?
6. (Advanced) Why is it likely that inadequate allowances for losses on
loan and accounts receivable are established in times of significant change in
the product market generating the receivables? Did such a change occur in
mortgage loan markets?
7. (Introductory) One of the related articles discusses the implications
of the government takeover and its suspension of dividends on the value of
Fannie Mae and Freddie Mac preferred stock. How does preferred stock differ from
common stock? How are these types of ownership interests similar in cases of
failure of the entity issuing them?
8. (Advanced) Why do debtholders fare better than common and preferred
shareholders in this case of government takeover or any case of corporate
failure?
9. (Advanced) Why might investors "view preferred stock as debt by
another name"?
Reviewed By: Judy Beckman, University of Rhode Island
"Loan Loss
Reserves," by John R. Walter, Economic Review, July/August 1991, Page 28
Nevertheless, the desire to smooth reported profits, to lower taxes, and to
limit the expenses of estimating future loan losses continues to provide an
incentive for banks to hold reserves at levels that differ from their best
estimates of the losses inherent in their loan portfolios.
Bad debt reserves manipulation is one of the key ways bank managers manage
earnings according to Mark W. Nelson , John A. Elliott , Robin L. Tarpley,
Accounting Horizons Supplement, Vol. 17, 2003.
Mortgage
lender blames KPMG for its failure: Good thing!
FHA and Ginnie Mae are imposing these actions
because TBW failed to submit a required annual financial report and
misrepresented that there were no unresolved issues with its independent auditor
even though the auditor ceased its financial examination after discovering
certain irregular transactions that raised concerns of fraud. FHA's suspension
is also based on TBW's failure to disclose, and its false certifications
concealing, that it was the subject of two examinations into its business
practices in the past year.
"FHA SUSPENDS TAYLOR, BEAN & WHITAKER MORTGAGE CORP. AND PROPOSES TO SANCTION
TWO TOP OFFICIALS: Ginnie Mae Issues Default Notice and Transfers Portfolio,"
by Brian Sullivan, HUD News, August 4, 2009 ---
http://www.hud.gov/news/release.cfm?content=pr09-145.cfm
Jensen
Comment
Most of these "fraud" issues concern misrepresentations in loan approvals,
particularly fraudulent mortgage borrower income and credit worthiness
documentation. If KPMG commenced doing better auditing of loan approval internal
controls, perhaps KPMG learned it's lesson from the pending lawsuits of
shareholders claiming that KPMG was incompetent in a number of former bank
audits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
KPMG
Should Be Tougher on Testing, PCAOB Finds The Big Four
audit firm was cited for not ramping up its tests of
some clients' assumptions and internal controls.
KPMG did not show enough skepticism toward clients last
year, according to the Public Company Accounting
Oversight Board, which cited the Big Four accounting
firm for deficiencies related to audits it performed on
nine companies. The deficiencies were detailed in an
inspection report released this week by the PCAOB that
covered KPMG's 2008 audit season. The shortcomings
focused mostly on a lack of proper evidence provided by
KPMG to support its audit opinions on pension plans and
securities valuations. But in some instances, the firm
was cited for weak testing of internal controls over
financial reporting and the application of generally
accepted accounting principles.
Marie Leone, CFO.com, June 19, 2009 ---
http://www.cfo.com/article.cfm/13888653/c_2984368/?f=archives
In one instance, the audit lacked evidence about whether
the pension plans contained subprime assets. In another
case, the PCAOB noted, the audit firm didn't collect
enough supporting material to gain an understanding of
how the trustee gauged the fair values of the assets
when no quoted market prices were available.
The PCAOB, which inspects the largest public accounting
firms on an annual basis, also found that three other
KPMG audits were shy an appropriate amount of internal
controls testing related to loan-loss allowances,
securities valuations, and financing receivables.
In one audit, KPMG accepted its client's data on
non-performing loans without determining whether the
information was "supportable and appropriate." In
another case, KPMG "failed to perform sufficient audit
procedures" with regard to the valuation of
hard-to-price financial instruments.
In still another case, the PCAOB found that KPMG "failed
to identify" that a client's revised accounting of an
outsourcing deal was not in compliance with GAAP because
some of the deferred costs failed to meet the definition
of an asset - and the costs did not represent a probably
future economic benefit for the client. |
|
"The harder
they fall: Will the Big Four survive the credit crunch?" by Rob Lewis,
AccountingWeb, October 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=106124
A U.S. Justice Department report has already concluded that KPMG either helped
perpetrate the fraud at the mortgager or deliberately ignored it. Class-action
lawsuits are already pending. Only weeks before the report was published the
U.S. Supreme Court's Stone Ridge ruling immunized third party advisers like
accountants and bankers from the disgruntled shareholders of other entities, but
that may be not much of a shield. Of course, New Century might not be KPMG's
biggest problem. That's probably the Federal National Mortgage Association, or
Fannie Mae.
The following is not a bank audit, but it provides an excellent reason why we
had SOX legislation.
AccountingWeb ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=87261&d=815&h=817&f=816&dateformat=%B%20%e,%20%Y
(Requires Subscription)
KPMG Gets Probation For Bungling Orange County
Audit
|
AccountingWEB US - July 29, 2002 -
International accounting firm KPMG has been
slapped with a $1.8 million fine and a year of
probation after being found guilty of gross
negligence and unprofessional conduct for its
handling of the 1992 and 1993 audit and
financial statements of Orange County,
California. The California Board of Accountancy
also ordered three years of probation and 100
hours community service for KPMG partner
Margaret Jean McBride and two years of probation
each for former KPMG accountants Joseph Horton
Parker and Bradley J. Timon. All were found
guilty of gross negligence and unprofessional
conduct.
The county declared bankruptcy in late 1994
after it lost $1.7 billion in its investment
pool. County treasurer Robert L. Citron oversaw
the investment pool. Mr. Citron was convicted of
faking interest earnings and falsifying
accounts. The Board claims that KPMG, attempting
to save money on what turned out to be an
underbid audit, cut corners by allowing junior
staff members to conduct certain areas of the
audit and by not helping the county solve its
problem of a lack of internal controls with
regard to the investment pool. KPMG auditors did
not speak with the county treasurer regarding
the investment pool, nor did they determine the
true market value of the highly leveraged and
speculative investments. KPMG paid a settlement
of $75 million to Orange County in 1998.
KPMG refutes the claims and
says the
accountancy board wasted millions of dollars
with the goal of making KPMG a scapegoat. "The
claims by the board incorrectly challenge how
KPMG reached its conclusions rather than claim
our conclusions were wrong," said KPMG spokesman
George Ledwith.
Continued at the AccountingWeb link shown above. |
|
|
November 26,
reply from Gerald Trites
[gtrites@ZORBA.CA]
My dear Bob,
Of course, auditors have taken a stand in many situations. That's what I have
been trying to say. When they reach the conclusion that they cannot live with
the concerns they have, then they take a stand. That happens all the time.
The financial industry is a special case. The scope of judgement is so wide and
what passes for assets so complex and muddy that traditional audits do not do
the job. The mortgage debacle is a case of financiers gone wild. We need to ask
those questions you're talking about, not just of the auditors, but of everyone
else involved right from the property holders who thought it was sensible to
take 100% mortgages, through to the top Wall Street bankers who think it is
reasonable to declare multi-million bonuses for themselves. The auditors are a
bit player in a widespread systemic failure. We need to get to the root of the
matter and then make the necessary changes. Suing the auditors will not resolve
the problem.
I think one of the areas of change needed is in the financial reporting methods
used for financial institutions. Reporting of complex financial instruments
cannot be achieved through conventional financial statements. Using fair values
is a sham, because nobody knows what the fair values are until the instruments
have gone through their life cycle. Until then, its all guesswork.
Financial and business reporting is moving through a stage where we are placing
less reliance on financial statements and more on reporting of other data items.
Whereas financial statements used to be the major part of the reports to
stakeholders, now they are only a small part. A study released by the CICA last
year identified over 50 types of information reported to stakeholders of which
the financial statements are only one. More data is becoming available through
such vehicles as XBRL and this data can be analyzed electronically. Just as the
SEC did not have enough staff to review the filings coming their way, and called
for the filings to be in XBRL so they could automate the reviews, we may well
find that for financial institutions more raw data needs to be made available in
a form that can be analyzed electronically. If this had been done with the
complex instruments that led to the financial debacle we have been going
through, there is reason to believe that some of the issues that came to light
through defaults would have been identified earlier. I have some references on
this point, but haven't taken the time to dig them out, but can if you wish.
Roger or Glen might have them readily available.
Data reporting through systems like XBRL is a better response than trying to fix
an outmoded financial reporting system that worked well in a simpler world but
is no longer adequate to express the complexities of the modern financial world.
Instead of branding the auditors as incompetent and sleazy, lets address the
real problems.
Your good and faithful colleague,
Jerry
November 27,
2009 reply from Bob Jensen
Hi
Jerry,
I
agree somewhat if you begin to delve into
Black Swan Theory and the
Gaussian Copula Function,
but the real problem for current
shareholders lawsuits against banks and mortgage companies boils down to a much
more basic Auditing 101 negligence question about things that auditors were
required to handle under SOX. Gaussian Copula Functions would've worked just
fine on Wall Street if mortgage contracts had not be poisoned on Maine Street.
Where did the poison in loan portfolios come from in the first place before this
poison later caused problems in CDOs, credit derivatives, and millions of
foreclosures? This is an Auditing 101 problem, and auditors blew it in spite of
the hopes of Zane. The question is whether lending approvals conformed to the
rules of approving loans.
SOX requires that internal control systems be evaluated and test checked by CPA
auditors, including internal controls for banks and mortgage companies for
following the rules of approving loans. Simple test checks of the loan
approval internal control process should’ve uncovered illegal approving of
enormous mortgage loans to borrowers with very negative credit history in
violation of mortgage lending laws and policies (including rules laid down to
mortgage lenders by Fannie and Freddie). Exhibit A in Phoenix is unemployed
Marvene living on welfare who was deep, hopelessly deep in $75,000 debt, when
she managed to pay off her debts and buy an enormous new truck by getting a 2007
$119,000 mortgage on a shack she purchased for $3,200. Lenders never visited her
shack to approve the 2007 loan. They did not even check the tax records.
Neighbors in 2009 bought her property in foreclosure almost nothing and tore her
shack down.
It
doesn’t take a rocket science auditor to know how to test check some of the
loans and compare the value of the collateral with the amount loaned. Even a
simple auditor comparison of tax record valuations should have disclosed that
many new mortgage amounts were in excess of ten or even 100 times the tax record
valuations.
There were all sorts of possible red flags to be checked while auditing under
SOX requirements. At a minimum, credit ratings of borrowers could’ve been
examined along with employment status. Each time I applied for a mortgage (on
four different homes), I was required to send copies of my IRS Form 1040 to the
bank along with copies of my recent credit card billings before my loan was
approved. These telling forms were available to CPA auditors of my banks when
auditors test checked the lending control process.
It
seems to me that you are excusing auditors for lack of sophistication in David
Lee’s Copula Function when in fact there would’ve been no problem with the
Copula Function in the least if auditors had detected the poison in the bank
loans on main street due to the fact that lenders were not following mortgage
approval laws, rules, and policies. This is an Auditing 101 failure under
SOX that requires zero rocket science.
Viewers who never graduated from high school can understand every word of the
CBS video of how the poison was added to the loan portfolios. Why couldn’t
auditors understand at least at that level?
CBS Sixty Minutes featured how bad things became when poison was added to loan
portfolios. The Sixty Minutes Module is entitled "House of Cards" ---
http://www.cbsnews.com/video/watch/?id=3756665n&tag=contentMain;contentBody
It was Auditing 101 failure that let the poison get
into the loan portfolios.
It’s still confusing to me how loan approval laws and rules were violated
millions of times, because CPA testing for loan approval internal controls seems
to me to be one of the easiest SOX conformance audit procedures since so much
customer documentation should be in the files to meet mortgage lending laws,
rules, and policies
When I got my mortgage in 2004 for my present house up here in the mountains I
had to provide the bank with copies of my prior IRS 1040 forms (for the last
five years), recent credit card billing statements for all credit cards, a copy
of the payoff receipt on the mortgage that I had in Texas, etc. I had to provide
certified copies of my TIAA-CREF balances and statements of my lifetime
annuities and other mutual fund account records. And I know for certain that the
bank delved into my entire credit history. All of these supporting documents
were on file for CPA auditors of the bank. The bank insisted on all this backup
material even though I think it almost immediately sold my mortgage to Fannie.
Perhaps because my property is so rural in the boonies, I also had to pay over
50% down in cash
When I refinanced to get a lower rate fixed rate in 2006 I had to provide
updates on all the above information even though I refinanced through the same
regional bank.
Similarly in New Hampshire and in most other states property tax valuation
records are available to the public in general such that CPA auditors could
certainly verify the most recent tax assessor’s valuation of the property that I
was purchasing.
What I’m saying is that, if the bank or mortgage company, conformed to mortgage
laws, rules, and policies, about the easiest audit procedure under SOX rules
should be to test check whether the bank had adequate internal controls for
adhering to laws, rules, and policies. Auditors that did not test check this
conformance had to, in my judgment, negligent under SOX rulings.
The bank also has a statement from my casualty insurance company with respect to
the maximum it will insure my house for, and this is somewhat of a valuation
check since the insurance company made such a detailed onsite visit of the
property before my mortgage was approved.
None of these things apparently took place when Marvene got her fraudulent
mortgage in Phoenix ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Whenever I watch the following wonderful CBS Sixty Minutes video I have to ask
myself:
Where were the CPA auditors investigating internal controls over the loan
approval process?
Viewers who never graduated from high school can understand every word of the
CBS video of how the poison was added to the loan portfolios. Why couldn’t
auditors understand at least at that level?
CBS
Sixty Minutes featured how bad things became when poison was added to loan
portfolios. The Sixty Minutes Module is entitled "House of Cards" ---
http://www.cbsnews.com/video/watch/?id=3756665n&tag=contentMain;contentBody
It
was Auditing 101 failure that let the poison get into the loan portfolios.
At the SEC: Madoff
Déjà vu on
Ignoring Whistleblowers
"At SEC, the system can be deaf to whistleblowing," by Zachary A.
Goldfarb, The Washington Post, January 21, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/20/AR2010012005125.html?wpisrc=nl_pmtech
Eric Kolchinsky was an executive at Moody's, the
credit rating company, when he called a top official at the Securities and
Exchange Commission in September to warn that his firm might be violating
securities law. He reported that Moody's was blessing mortgage-backed
investments that it knew were dangerous, according to a person familiar with
the conversation. The SEC official assured Kolchinsky that someone from the
agency would call him back shortly.
But the call never came, Kolchinsky later told
congressional investigators who were examining how the credit rating
industry's failures contributed to the financial crisis. He had gone to
Congress after losing patience with the SEC.
Kolchinsky is one in a series of whistleblowers who
in recent years tried to tip off the SEC to potential wrongdoing, only to be
ignored, misunderstood or left to wonder whether they were being listened
to. The SEC has no system in place to guide how officials should handle tips
and complaints from outsiders, making it difficult for investigators to take
advantage of an invaluable source of information.
This failure helped to continue two of the most
celebrated frauds of the last decade for several years, potentially costing
unwitting investors millions of dollars. Countless others may have been left
vulnerable to shysters because of warnings that went unheeded.
Since SEC Chairman Mary L. Schapiro took office
last year, she has said that fixing the holes in the process for handling
tips and complaints has been a top priority. But improving the way hundreds
of thousands of tips are analyzed and pursued has proven difficult.
The SEC's enforcement division got back in touch
with Kolchinsky about his allegations only after he told the story publicly
to a congressional committee last fall, according to a person familiar with
the matter.
The SEC said it responded to Kolchinsky's concerns
but declined to provide details or to say how fast it did so. Moody's said
it examined his allegations and found nothing improper.
The SEC has a haphazard, decentralized system for
analyzing outsider information. Tips arrive by phone, mail and e-mail to
officials throughout the agency -- investor education to enforcement
divisions. A study commissioned by the SEC last year and conducted by Mitre,
a nonprofit group that does research for the federal government, found that
the SEC lacks technology to analyze tips and complaints, as well as cohesive
policies for what officials should do when they get information.
Whistleblower complaints are one of the main ways
that investigators should be tipped to wrongdoing, SEC officials say, along
with inconsistencies in financial filings and alerts from financial
exchanges about suspicious trading patterns. But the SEC lags behind some
other federal agencies in handling tips. The Internal Revenue Service, for
instance, pays reward money to whistleblowers who provide credible
information about tax fraud. The Federal Trade Commission has set up a call
center for tips and complaints.
On top of structural problems at the SEC, agency
officials individually made mistakes in handling several recent cases,
sometimes violating agency rules.
Members of Schapiro's management team said they
recognized problems with the system for handling whistleblowers shortly
after taking over.
"There was no uniformity to it. Every division and
office had its own system of recording, tracking or handling tips and
complaints. That system was pretty rudimentary," said Steve Cohen, the
official tasked by Schapiro to overhaul the agency's tips, complaints and
whistleblower program. "We're already working to acquire and deploy
technology that centralizes all of the agency's tips and complaints so they
can be sorted, reviewed, analyzed and tracked."
There are some huge snags in the SOX of whistle blower protection
"First whisteblower unprotected by SOX," AccountingWeb, June
8, 2007 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=103603
June 12, 2007 reply from Randy Kuhn
[jkuhn@BUS.UCF.EDU]
Quite frankly, I would not bank on any
whistleblower protection from SOX. The Act states protection only
lasts until resolution of the issue. Well, what happens to the
whistleblower after that point? One or more “poor” annual
evaluations and the person is walked out the door with farcical
support for termination. As for identifying the whistleblower … in
most cases that is just simply too easy. For example, there are only
so many accounts payable clerks and even fewer controllers.
Executive management can more than likely deduce who issued the
complaint. Unethical management will take advantage of that
knowledge. The examples in Bob’s thread only further illustrate the
point that whistleblower protection, more often than we would like
to believe, is only lip service. Educating and attempting to instill
strong moral business values in future executives is our best hope.
I am glad to see the ever-increasing focus on ethics and forensics
in accounting curriculum. Not much of that was around (that I was
aware of) when I came through undergraduate and graduate school in
the mid 90’s.
Randy
Question
Why has whistleblower protection under the Sarbanes-Oxley Law failed so
miserably?
Sarbox's whistleblower provisions were
intended "to prevent recurrences of the Enron debacle and similar
threats to the nation's financial markets" by protecting those who
report fraudulent activity that could damage innocent investors. That
was the intent, at least. The reality is something else. About 1,000
whistleblowing claims have been filed under Sarbox. Only 17 were
determined after federal investigation to have merit and only six of
this group have kept their wins after full evidentiary hearings before
administrative law judges. Nevertheless, the plaintiffs bar and others
have ready answers for this extremely poor batting average. Critics
assert that the 90-day statute of limitation for filing whistleblower
claims is too short, the burden of proof placed on complaining employees
is too high, that judges are reading the law too narrowly, or even that,
as one law professor testified, the whistleblower provisions have "has
failed to protect the vast majority of employees who file a
Sarbanes-Oxley claim" because they rarely win.
Michael Delikat, "Blowing the Whistle on Sarbox," The Wall Street
Journal, August 23, 2007; Page A10 ---
http://online.wsj.com/article/SB118783189154206113.html
Tax Whistleblower 7623: More Trouble for Ernst & Young Tax
Shelter Clients
The Ferraro Law Firm has submitted the first
known $1 billion Tax Whistleblower submission to the newly created IRS
Whistleblower Office. The IRS specifically created the Whistleblower
Office to assist in identifying and capturing uncollected tax revenue
from individuals and corporations typically assisted by clever law
firms, accounting firms and banks. Tax
whistleblower cases under section 7623 are a new arrow in the
Commissioner's quiver to close the tax gap, which the GAO estimates to
be approximately $345 billion each year.
The submission involves a Fortune 500 company that entered into a series
of transactions to improperly reduce its taxes by over $1 billion. The
company was represented by Ernst & Young LLP, an established law firm
and multiple name-brand banks. The identity of the whistleblower is
strictly confidential to protect the individual and the identities of
the law firm, banks and company are confidential at this stage to aid in
the evaluation of the submission. This submission comes after an E&Y
employee pled guilty to one count of conspiracy to commit tax fraud, and
four E&Y tax partners have been indicted for their role in the sale of
fraudulent tax shelters. "The tax law is not always black and white and
taxpayers are all too often more than willing to use an extreme
interpretation that drastically reduces taxes. There is not necessarily
an element of fraud and people at these companies know the weak spots in
their positions," said founding partner, James L. Ferraro. Given
the recent modifications made to section 7623 of the Internal Revenue
Code, the potential award in this case could exceed $300 million.
Accounting Education, October 25, 2007 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=145675
Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
Bob Jensen's threads on whistle blowing are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
"PricewaterhouseCooopers Gains Top Rating
From Gartner," Big Four Blog, January 20, 2010 ---
http://www.bigfouralumni.blogspot.com/
We see from a recent press
release that PricewaterhouseCoopers has received a “Strong Positive” rating
in Gartner’s Global Finance Management Consulting Services MarketScope
Report, which was published recently on December 21, 2009.
This is the highest possible
rating in the Marketscope, a "Strong Positive" shows a provider who can be
considered "a strong choice for strategic investments" where customers can
continue with planned investments and potential customers can consider this
vendor a strong choice for strategic investments.. The research assesses the
global capabilities of nine leading finance management consulting service
providers on customer experience, market understanding, market
responsiveness, product/service, offering strategy, geographical
capabilities and vertical-industry strategy.
Congratulations to PwC for
this select honor.
Unfortunately, there
is a stiff price to see the contents of this report (US$1,995), so we can’t
say who the other 8 providers are, but very likely some of the Big Four
firms would be on that list, and somewhat curious why PwC should feature
this as a big release on their global website, but other firms are quite
silent on this point.
Jensen Comment
At times it may be difficult for the world's largest auditing firm to also be
rated as the top firm for "Global Finance Management Consulting Services."
Nobody seems to question financial consulting since the Andersen destruction
gave rise to new independence rules, notably Sarbanes-Oxley. In the past decade
the Big Four auditing firms, except for Deloitte, shed themselves of their
consulting divisions and then commenced to selectively build them back up once
again. However, more care is being devoted to the independence bounds of
computer systems and tax consulting.
However, less concern seems
surround newer thrusts into financial consulting by the Big Four.
There have,
however, been occasional losses of clients on the basis of either the reality or
appearance of not having audit firm independence. One of the most noteworthy
examples is when Ernst & Young lost the huge and juicy TIAA/CREF audit.
"Report Finds TIAA-CREF Missteps in
Auditor Controversy," by Doug Lederman, Inside Higher
Ed, May 6, 2005 ---
http://www.insidehighered.com/news/2005/05/06/tiaa
TIAA-CREF’s leaders made “substantial
missteps” in managing conflict of interest charges
involving the relationship between some of its trustees
and its external auditor
(Ernst & Young)
last year, but the company showed no bad faith and
ultimately handled the situation correctly, a
high-profile investigator hired by the company concluded
Thursday.
In a report published on the pension
giant’s Web site, Nicholas deB. Katzenbach, former U.S.
attorney general, also blamed the problems on the
company’s governance structure, which places a board of
overseers over separate boards of directors for TIAA and
CREF. The arrangement creates the “constant risk of
potential and actual conflict,” the report said.
The report also states clearly that the
conflict controversy did not “touch on the quality of
TIAA-CREF’s management of investor funds, or the
integrity of the financial statements it prepared.”
Two trustees — Stephen A. Ross of CREF
and William H. Waltrip of TIAA — resigned last November
after revelations that they had had a joint venture with
Ernst & Young, the company’s auditor, a situation that
violated the Securities and Exchange Commission’s rules
on independent auditors.
Katzenbach’s 53-page report notes that
TIAA-CREF officials, upon learning informally of the
trustees’ relationship with the auditor, underestimated
the gravity of the problem and failed to investigate the
matter sufficiently.
“In sum, TIAA-CREF did not appreciate the
seriousness of the independence issue. While its
personnel recognized that there was a theoretical
possibility of drastic consequences, they saw it as a
technical violation that would almost certainly be
resolved promptly and without difficulty,” Katzenbach
wrote.
Continued in article
To download the report, go to
http://www.tiaa-cref.org/pdf/katzenbach_report_4_29_05.pdf
Two TIAA-CREF trustees quit amid SEC
pressure over a business venture they formed with Ernst
& Young, the firm's auditor Note that one of them a the
famous academic professor in mathematical economics and
finance from MIT. Steve Ross is probably best known for
his writings on Arbitrage Pricing Theory (APT) ---
http://www.trinity.edu/rjensen/149wp/149wp.htm
Also note that, two the firm's credit,
Ernst & Young reported this violation of auditor
independence to TIAA-CREF. My question would be why an
auditing firm would engage in such a venture in the
first place even if there was no conflict of interest
with a client. Ernst and Young was already in a deep
hole with the SEC before this conflict of interest came
to the attention of the SEC.
"Venture Snares TIAA-CREF, Ernst," by
Jonathan Weil and JoAnn S. Lublin, The Wall Street
Journal, December 3, 2004; Page A8 ---
http://online.wsj.com/article/0,,SB110204504468490286,00.html?mod=home_whats_news_us
Two TIAA-CREF trustees have resigned amid
pressure by the Securities and Exchange Commission over
a business venture they formed last year with Ernst &
Young LLP, the investing titan's independent auditor, in
violation of SEC auditor-independence rules.
The nation's largest institutional
investor, which manages $325 billion in assets, plans to
disclose the resignations of William H. Waltrip and
Stephen A. Ross in an SEC filing today, people familiar
with the matter said.
The episode is likely to be a major
embarrassment to TIAA-CREF, among the world's leading
corporate-governance activists, and Ernst. This year the
audit firm was suspended by the SEC from accepting new
publicly held audit clients for six months over a
business partnership it entered during the 1990s with
PeopleSoft Inc., a
former audit client.
According to federal auditor-independence
rules, outside auditors are prohibited from forming
business ventures with audit clients, including their
executives, board members or trustees. According to
people familiar with the matter, the SEC has agreed to
allow Ernst to conclude its audit for this year, but
TIAA-CREF will put its audit out for bidding by other
firms next year and likely will hire a different
accounting firm. Ernst has been TIAA-CREF's auditor for
about seven years.
A board of overseers presides over
TIAA-CREF's structure, which includes two other boards
of trustees, one for the Teachers Insurance & Annuity
Association of America and one for the College
Retirement Equities Fund. Mr. Waltrip was a TIAA
trustee, and Mr. Ross was a CREF trustee.
On Aug. 1, 2003, Ernst entered into an
agreement with a company owned by Messrs. Waltrip and
Ross, called Compensation Valuation Inc. Mr. Ross was
CVI's chief executive and majority owner. Ernst formed
the venture with the two trustees' company to sell
services that help businesses determine the value of
corporate stock options. Ernst paid the company $1.33
million, according to people familiar with the matter.
Ernst notified certain TIAA-CREF
officials and the SEC about the independence violation
Aug. 9, these people said. Aug. 20, the trustees'
company ceased operations. However, the trustees'
company wasn't actually dissolved until Nov. 17, and
members of the TIAA-CREF board of overseers weren't told
about the auditor-independence problem until this week,
angering some of them, people familiar with the matter
said.
Mr. Ross is a finance professor at
Massachusetts Institute of Technology and a director at
Freddie Mac.
Mr. Waltrip is the former chairman of Technology
Solutions Co. Neither man returned phone calls
yesterday. Their resignations took effect Nov. 30. A
TIAA-CREF spokeswoman, Stephanie Cohen-Glass, declined
to comment yesterday. In a statement, Ernst said the
firm had identified the matter itself and confirmed that
it notified TIAA-CREF and the SEC. The Big Four
accounting firm said it is "in the midst of implementing
new independence procedures and identifying any client
issues," but declined to discuss specifics.
Messrs. Waltrip and Ross were powerful
trustees who played important roles in the recruitment
of Herbert M. Allison Jr., the former Merrill Lynch &
Co. president who became the huge fund's chairman,
president and CEO in November 2002. Mr. Waltrip was
chairman of the search committee, of which Mr. Ross was
a member.
Continued in the article
TIAA-CREF Brass Failed to Inform Key
Panel About Improper Deal With Ernst, Its Outside
Auditor
The SEC's chief accountant, Donald
Nicolaisen, last week told TIAA-CREF that Ernst could
complete its 2004 audit, but that he would be very upset
if it rehires Ernst for its 2005 audit, people close to
TIAA-CREF said. The saga marks yet another
embarrassment for Ernst and its chairman and CEO, James
Turley. In April, the SEC suspended the Big Four
accounting firm from accepting new audit clients for six
months because of a 1990s business venture with audit
client PeopleSoft Inc. Under the SEC's
auditor-independence rules, accounting firms aren't
permitted to form business ventures with audit clients,
including their officers, directors or trustees.
"TIAA-CREF Faces Question On Governance," by Jonathan
Weil and Joann S, Lublin, The Wall Street Journal,
December 6, 2004, Page C1 ---
http://online.wsj.com/article/0,,SB110229989626191715,00.html?mod=home_whats_news_us
TIAA-CREF, a longtime standard bearer for
the corporate-governance movement, now has a governance
mess of its own, sparked by two trustees' improper
business deal with outside auditor
Ernst & Young LLP
and a decision by the investing titan's top brass not to
promptly inform the fund's powerful board of overseers
about the problem.
The conflict centers on a contract that
the two TIAA-CREF trustees entered into with Ernst in
August 2003 to jointly sell valuation services for
corporate stock options, in violation of federal
auditor-independence rules. Last week, the two trustees
resigned, amid pressure from the Securities and Exchange
Commission's office of chief accountant. Separately, the
SEC's enforcement division has opened an inquiry into
the events surrounding the violation, people familiar
with it say.
TIAA-CREF Chairman and Chief Executive
Officer Herbert M. Allison Jr. knew about the
independence violation as of Aug. 9, when Ernst first
notified the company and the SEC. However, before late
last week, he had informed only one of his six fellow
members on TIAA-CREF's star-studded board of overseers
about the matter. The panel is one of three boards at
TIAA-CREF that share control of the nation's largest
pension system, which manages $326 billion of assets for
3.2 million people.
TIAA-CREF's general counsel, George
Madison, on Friday said the other two boards' trustees
were told in August and that, under TIAA-CREF's unique
corporate structure, Mr. Allison wasn't obligated until
last week to notify the full board of overseers. Messrs.
Allison and Madison did tell Stanley O. Ikenberry, the
president of the board of overseers, in September. But
Mr. Ikenberry didn't tell the other overseers either,
among them, former SEC Chairman Arthur Levitt.
Instead, Mr. Ikenberry's colleagues were
left in the dark until Thursday, one day before
TIAA-CREF disclosed the violation in SEC filings.
Corporate-governance activists long have pushed for
companies to disclose any significant bad news as early
and widely as possible.
Through a TIAA-CREF spokesman, Mr.
Allison said: "I, along with my management team,
continue to work for the best interests of the
participants and our institutions to strengthen
TIAA-CREF for the competitive challenges we are facing."
He declined to comment further.
The saga marks yet another embarrassment
for Ernst and its chairman and CEO, James Turley. In
April, the SEC suspended the Big Four accounting firm
from accepting new audit clients for six months because
of a 1990s business venture with audit client PeopleSoft
Inc. Under the SEC's auditor-independence rules,
accounting firms aren't permitted to form business
ventures with audit clients, including their officers,
directors or trustees.
The SEC's chief accountant, Donald
Nicolaisen, last week told TIAA-CREF that Ernst could
complete its 2004 audit, but that he would be very upset
if it rehires Ernst for its 2005 audit, people close to
TIAA-CREF said.
Continued in Article
Another Audit Client Dumps Ernst & Young
"Best Buy to Dismiss Auditor Ernst,
Citing Conflict of Interest," by Jonathan Weil, The
Wall Street Journal, December 31, 2004, Page C1 ---
http://online.wsj.com/article/0,,SB110441683676412888,00.html?mod=todays_us_money_and_investing
Best Buy
Co. said it is dropping
Ernst & Young LLP
as its outside auditor next year, citing a conflict of
interest stemming from a business relationship between
the Big Four accounting firm and a former Best Buy
director.
The nation's largest electronics retailer
said its dismissal of Ernst will take effect upon the
completion of its audit for the fiscal year ending Feb.
26, 2005. The Richfield, Minn., company said it will put
work on its fiscal 2006 audit out for bids sometime next
year.
The move by Best Buy is the latest in a
series of recent auditor-independence controversies for
Ernst. In April, the Securities and Exchange Commission
imposed a six-month suspension on the firm, during which
Ernst was barred from accepting new publicly held audit
clients. The SEC case centered on an improper joint
venture with former audit client PeopleSoft Inc. In her
decision imposing the suspension, the SEC's chief
administrative-law judge, Brenda P. Murray, wrote that
Ernst "had no procedures in place that could reasonably
be expected to deter violations and assure compliance
with the rules on auditor independence with respect to
business dealings with audit clients."
Since that decision, under an
SEC-mandated independent review of its dealings with
audit clients, Ernst has notified dozens of clients of
auditor-independence violations, though few have been
deemed serious enough to warrant Ernst's dismissal. The
violations have included improperly taking custody of
clients' cash when performing tax work overseas and
engaging in direct business relationships with audit
clients, among other things.
Generally, SEC rules prohibit direct
business relationships between accounting firms and
their audit clients, including officers, directors and
trustees. The one exception is where a firm is acting as
a consumer in the ordinary course of business.
This month, officials at TIAA-CREF, a
large institutional investor that also is a prominent
corporate-governance activist, said the fund probably
would drop Ernst next year, once its 2004 audit is
because of a business relationship that the accounting
firm entered into last year with two of the fund's
trustees. Both the TIAA-CREF and Best Buy matters remain
the subjects of SEC inquiries.
In an SEC filing yesterday, Best Buy said
its dismissal of Ernst was directly related to the May 4
resignation of Mark C. Thompson from the company's
board. Mr. Thompson, a "leadership development"
consultant and former Charles Schwab Corp. executive,
was a member of Best Buy's audit committee from 2000
through 2003.
In a May 14 SEC filing disclosing Mr.
Thompson's resignation, Best Buy said neither Ernst nor
Mr. Thompson had disclosed their business relationship
to the company until May 4. Ernst paid Mr. Thompson
$377,500 plus expense reimbursements from December 2002
to April 2004, according to Best Buy filings. Ernst's
payments to Mr. Thompson stem from audio interviews he
conducted with leading corporate executives, industry
executives and Ernst's own executives for the accounting
firm's marketing materials. In regulatory disclosures,
Best Buy has said Mr. Thompson had a "personal service
agreement" with Ernst. |
|
January 22, 2010
replies from Bob Jensen and Jim Fuehrmeyer
Hi Jim,
A free link of importance that’s being ignored in college
accounting/auditing courses today.
Art Wyatt admitted:
"ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" ---
http://aaahq.org/AM2003/WyattSpeech.pdf
Bob Jensen
From:
THE Internet Accounting List/Forum for CPAs [mailto:CPAS-L@LISTSERV.LOYOLA.EDU]
On Behalf Of Jim Fuehrmeyer
Sent: Friday, January 22, 2010 10:07 AM
To: CPAS-L@LISTSERV.LOYOLA.EDU
Subject: Re: PricewaterhouseCooopers Gains Top Rating From Gartner
Despite
the SEC/Sarbanes-Oxley rules that severely limit the non-audit services that
auditors can provide to their audit clients, the re-growth of consulting
should still be a concern.
I think Art Wyatt’s
article on the cultural impact of consulting at Arthur Andersen that appears
in the March 2004 Issue of Accounting Horizons sums it up best.
It’s required reading for
all my undergraduate CPAs to be.
Jim Fuehrmeyer
JAMES L. FUEHRMEYER,
JR.
Associate Professional Specialist
Department of Accountancy |
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . |
MENDOZA COLLEGE OF
BUSINESS
UNIVERSITY OF NOTRE DAME
384 Mendoza College of
Business
Notre Dame, IN 46556
office: (574) 631-1752 | fax: (574) 631-5255
e:
jfuehrme@nd.edu | w:
http://business.nd.edu |
Also see David Albrecht's fine blog message that followed the above listserv
messages ---
http://profalbrecht.wordpress.com/2010/01/22/they-still-dont-get-it/
Advancing Quality through Transparency Deloitte LLP Inaugural Report ---
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
Bob Jensen's threads on auditor
professionalism and independence are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
Advancing Quality through Transparency Deloitte LLP Inaugural Report
---
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf
This is a must read!
Ernst & Young pays up to settle audit negligence claim
The liquidator is suing one of the collapsed eyewear company's former
auditors, KPMG, for HK$472 million.
27 January 2010
South China Morning Post
Reported by Naomi Rovnick
Ernst & Young pays up to settle
negligence claim
The Hong Kong branch of accounting
giant Ernst & Young, which in September l paid US$200 million to
creditors of its collapsed former client Akai Holdings, has quietly
settled another audit negligence case involving a failed local
company.
Ernst & Young Hong Kong has paid to
resolve a claim of between HK$250 million and HK$300 million that
the liquidators of Moulin Global Eyecare had threatened to launch
against it.
Moulin, which once claimed to be
Asia's biggest manufacturer of eyewear, was wound up by the High
Court in 2006 amid fraud allegations, owing lenders HK$2.7 billion.
Ernst & Young was Moulin's auditor between 2002 and 2004.
The accounting firm declined to
comment.
The eyewear firm's liquidator,
Ferrier Hodgson, which also declined to comment, has consistently
accused Moulin of fraudulently inflating its revenues.
The liquidator told creditors in
private that one of Moulin's four biggest customers was really a
Chinese restaurant in McCook, a town of 8,000 in Nebraska in the
United States, people who attended the meetings said.
The terms of Ernst & Young's
settlement are confidential. A source with knowledge of the
accounting firm's local operations said it had paid "substantially
less" than Ferrier had threatened to seek.
The case, which was in mediation,
never reached a High Court trial.
"After Akai, Ernst & Young did not
want another public fight over alleged audit negligence involving an
allegedly fraudulent former client," the source said.
In September Akai's liquidator,
Borrelli Walsh, accused Ernst & Young in the High Court of faking
legal evidence to shield itself from a US$1 billion audit negligence
claim.
Akai was the Hong Kong-listed global
electronics empire of disgraced entrepreneur James Ting which
collapsed in 2000 owing lenders US$1.1 billion.
Like Akai, which was a stock market
darling before its fall from grace, Moulin was once a company that
made Hong Kong proud.
Rags-to-riches entrepreneur Ma Bo-kee
moved to Hong Kong from Guangdong in 1960 and began producing
spectacles from a small workshop with just a dozen employees.
Before its demise, Moulin boasted of
an optical business that spanned China, Europe and North America. It
produced more than 15 million frames a year for brands including
Benetton and Nikon.
But after examining its books,
Ferrier Hodgson believed the actual business was much smaller. The
liquidator once wrote to Moulin's lenders claiming the company's
accounts were a "morass of dodginess" that would take 14 years to
unravel. Officer's from the police force's commercial crime bureau
raided Moulin's offices in July 2005.
In February, police charged Ma and
his son Cary Ma Lit-kin, Moulin's former chief executive, with
offences including making false statements and conspiracy to
defraud. The criminal case is yet to come to trial.
In a separate civil action, Moulin's
creditors are suing accountant KPMG for HK$471 million over its role
as Moulin's auditor between 1999 and 2002.
Police are also investigating Ernst
& Young's role in Akai's collapse.
Lawyers for Borrelli Walsh alleged
in court that staff at Ernst & Young had falsified and doctored old
files relating to Akai and that the audit firm used the questionable
documents to support its witness statements and pleadings in the
negligence trial.
In September, police raided Ernst &
Young's offices and arrested a partner who had audited Akai. Edmund
Dang, a junior member of staff when he worked on the Akai account,
was granted bail.
No criminal proceedings have been
launched against Ernst & Young in relation to Moulin.
28 January 2010
South China Morning Post
Reported by Naomi Rovnick
Moulin father and son face trial for
fraud
The father and son who ran Moulin
Global Eyecare, the Hong Kong-based optics empire that collapsed in
2005, owing creditors HK$2.7 billion, will be tried on fraud charges
in September.
Ma Bo-kee, the rags to riches
entrepreneur who started Moulin in a Kowloon workshop, and his son
Cary Ma Lit-kin, who aggressively grew the firm into what he claimed
was the world's third-biggest eyewear business, will be joined by
eight other defendants in a 100-day High Court hearing beginning on
September 14.
Moulin's speedy and spectacular
failure in June 2005, which was triggered by the company's bank
lenders accusing it of false accounting, stunned Hong Kong
investors.
Six months earlier, chief executive
Cary Ma had presided over his firm's mega-buyout of 378-store United
States retail chain Eye Care Centers of America, which helped
Moulin's market capitalisation balloon to HK$2.08 billion.
The details of the criminal
prosecution's case against the Mas and the other defendants, who
include Moulin's former treasurer Lam Yuk-wah, former financial
controller Tang Yiu-leung and other company executives, will not
emerge until the case goes to a pretrial hearing in April.
Moulin's liquidator, Ferrier
Hodgson, which is trying to recover cash for creditors through the
civil courts, has accused the failed eyewear firm of vastly
inflating its revenues by creating phantom customers.
The liquidators discovered one of
Moulin's supposedly largest customers was in fact a Chinese
restaurant in McCook, a small town in the US state of Nebraska,
according to people who attended lenders' meetings.
The liquidators once wrote to the
failed eyewear company's creditors that its accounts were a "morass
of dodginess" that would take 14 years to unravel.
Ma Bo-kee, Moulin's chairman, was
declared bankrupt in November 2006. Cary Ma was declared bankrupt in
April 2007.
In January 2007, Standard Chartered
won a judgment against Cary Ma, forcing him to repay a HK$3.4
million personal overdraft. Moulin's former chief executive argued
in the High Court that the overdraft was a debt facility of his
collapsed company and that he was not responsible for repaying it.
But the judge found that Cary Ma had used the bank account in
question to place telephone bets with the Jockey Club and to buy his
groceries at ParknShop.
Ferrier Hodgson is investigating the
financial affairs of the two Mas but has not launched court actions
against them.
The liquidator is suing one of the
collapsed eyewear company's former auditors, KPMG, for HK$472
million.
The case, in which the Big Four
accountancy firm will fight allegations of audit negligence, is set
for trial in February next year.
Ernst & Young Hong Kong, which was
Moulin's auditor from 2002 to 2004, has just paid to settle a civil
claim of between HK$250 million and HK$300 million Ferrier Hodgson
had threatened to launch against it but which never reached the
court. The exact amount of the settlement is confidential.
A police spokesman confirmed the
details of the criminal trial and the charges.
The Mas could not be reached.
Borrelli Walsh, the Mas' bankruptcy trustee, said it was unable to
release contact details for the pair.
January 30, 2010 reply from Francine McKenna
[retheauditors@GMAIL.COM]
What I wrote
about Ernst & Young and Akai:
http://goingconcern.com/2009/09/ey-doesnt-want-to-be-outdone-by-anyone-so-they-went-to-hong-kong-for-a-scandal/
Other
recent Ernst and Young litigation is documented at
http://www.trinity.edu/rjensen/fraud001.htm
"Will Whopping Goodwill Hits Hurt Deals? The big question for many
investors is whether the backlash from past mergers will cool deal valuations
going forward," by Alix Stewart, CFO.com, July 1, 2009 ---
http://www.cfo.com/article.cfm/13940669/c_2984368/?f=archives
"Goodwill Impairment: I Love a Charade," by Tom Selling, The
Accounting Onion, January 15. 2010 ---
Click Here
http://accountingonion.typepad.com/theaccountingonion/2010/01/goodwill-impairment-i-love-a-charade-reposted.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29
Is IFRS Any Better?
No. It's worse and with no prospects of improvement anywhere close to
being on the horizon. Unless management elects to separately
estimate the "recoverable amount" (higher of net fair value and "value in
use"), then all of the goodwill and customer-related intangibles carrying
amounts are thrown into the CGU bucket. If the CGU's fair value is less than
its total carrying amount, then you will always write down goodwill
before you touch any of the other long-lived assets.
Although in this case the GAAP and IFRS answer would be identical, the
difference is that under GAAP there is at least some chance that
non-goodwill assets would be stated at a more realistic value for them.
Moreover, the SEC has demonstrated its awareness of the anomaly and
willingness to hold a registrant's feet to the fire. For example, here is
one case of an SEC comment letter to a company expressing it's incredulity
that goodwill was written down while miraculously preserving the carrying
amounts of its non-goodwill assets:
Taking into consideration the circumstances that
caused you to recognize an impairment charge on the Birmingham market
goodwill, tell us whether you first tested your long-lived assets … If
you did test your long-lived assets for impairment, explain to us in why
an impairment charge was not recognized. If you have not tested your
long-lived assets for impairment explain to us why not. Please also tell
us how you group your long-lived assets for purposes of testing your
long-lived assets for impairment ….
[Letter from the SEC to Cox Radio, Inc., dated July 17, 2006]
Don't Worry, Be Happy
Small wonder that goodwill and long-lived asset impairment is not on the
rush-rush 2011 convergence agenda, or even anytime thereafter. The financial
crisis has clearly demonstrated, asset impairment accounting is a sacred cow
that may only be approached in circumstances involving extreme unction. Not
very long ago, it was hard enough for the FASB to push through any sort of
consistent impairment standard for long-lived assets. Now, with the EU
already threatening to jump ship on financial instrument impairment, the
only choice the Boards have is to pretend that the shortcomings of
impairment standards are not a high priority, not to mention the gaping
inconsistencies within and between IFRS and GAAP.
I love a charade.
Continued in article
Bob Jensen's threads on accounting standard setting are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Before
reading this module you may want to read about Governmental Accounting at
http://en.wikipedia.org/wiki/Governmental_accounting
"Don't
Like the Numbers? Change 'Em If a CEO issued the kind of distorted figures put
out by politicians and scientists, he'd wind up in prison," by Stanford
Economics Professor Michael J. Boskin, The Wall Street Journal, January
13, 2010 ---
http://online.wsj.com/article/SB10001424052748704586504574654261655183416.html?mod=djemEditorialPage
Politicians and scientists who don't like what their data show lately have
simply taken to changing the numbers. They believe that their end—socialism,
global climate regulation, health-care legislation, repudiating debt
commitments, la gloire française—justifies throwing out even minimum standards
of accuracy. It appears that no numbers are immune: not GDP, not inflation, not
budget, not job or cost estimates, and certainly not temperature. A CEO or CFO
issuing such massaged numbers would land in jail.
The late economist Paul Samuelson called the national income accounts that
measure real GDP and inflation "one of the greatest achievements of the
twentieth century." Yet politicians from Europe to South America are now
clamoring for alternatives that make them look better.
A commission appointed by French President Nicolas Sarkozy suggests heavily
weighting "stability" indicators such as "security" and "equality" when
calculating GDP. And voilà!—France outperforms the U.S., despite the fact that
its per capita income is 30% lower. Nobel laureate Ed Prescott called this
disparity the difference between "prosperity and depression" in a 2002 paper—and
attributed it entirely to France's higher taxes.
With Venezuela in recession by conventional GDP measures, President Hugo Chávez
declared the GDP to be a capitalist plot. He wants a new, socialist-friendly way
to measure the economy. Maybe East Germans were better off than their cousins in
the West when the Berlin Wall fell; starving North Koreans are really better off
than their relatives in South Korea; the 300 million Chinese lifted out of
abject poverty in the last three decades were better off under Mao; and all
those Cubans risking their lives fleeing to Florida on dinky boats are loco.
In Argentina, President Néstor Kirchner didn't like the political and budget
hits from high inflation. After a politicized personnel purge in 2002, he
changed the inflation measures. Conveniently, the new numbers showed lower
inflation and therefore lower interest payments on the government's
inflation-linked bonds. Investor and public confidence in the objectivity of the
inflation statistics evaporated. His wife and successor Cristina Kirchner is now
trying to grab the central bank's reserves to pay for the country's debt.
America has not been immune from this dangerous numbers game. Every president is
guilty of spinning unpleasant statistics. President Richard Nixon even thought
there was a conspiracy against him at the Bureau of Labor Statistics. But
President Barack Obama has taken it to a new level. His laudable attempt at
transparency in counting the number of jobs "created or saved" by the stimulus
bill has degenerated into farce and was just junked this week.
The administration has introduced the new notion of "jobs saved" to take credit
where none was ever taken before. It seems continually to confuse gross and net
numbers. For example, it misses the jobs lost or diverted by the fiscal
stimulus. And along with the congressional leadership it hypes the number of
"green jobs" likely to be created from the explosion of spending, subsidies,
loans and mandates, while ignoring the job losses caused by its taxes, debt,
regulations and diktats.
The president and his advisers—their credibility already reeling from
exaggeration (the stimulus bill will limit unemployment to 8%) and reneged
campaign promises (we'll go through the budget "line-by-line")—consistently
imply that their new proposed regulation is a free lunch. When the radical
attempt to regulate energy and the environment with the deeply flawed
cap-and-trade bill is confronted with economic reality, instead of honestly
debating the trade-offs they confidently pronounce that it boosts the economy.
They refuse to admit that it simply boosts favored sectors and firms at the
expense of everyone else.
Rabid environmentalists have descended into a separate reality where only green
counts. It's gotten so bad that the head of the California Air Resources Board,
Mary Nichols, announced this past fall that costly new carbon regulations would
boost the economy shortly after she was told by eight of the state's most
respected economists that they were certain these new rules would damage the
economy. The next day, her own economic consultant, Harvard's Robert Stavis,
denounced her statement as a blatant distortion.
Scientists are expected to make sure their findings are replicable, to make the
data available, and to encourage the search for new theories and data that may
overturn the current consensus. This is what Galileo, Darwin and Einstein—among
the most celebrated scientists of all time—did. But some climate researchers,
most notably at the University of East Anglia, attempted to hide or delete
temperature data when that data didn't show recent rapid warming. They quietly
suppressed and replaced the numbers, and then attempted to squelch publication
of studies coming to different conclusions.
The Obama administration claims a dubious "Keynesian" multiplier of 1.5 to feed
the Democrats' thirst for big spending. The administration's idea is that
virtually all their spending creates jobs for unemployed people and that
additional rounds of spending create still more—raising income by $1.50 for each
dollar of government spending. Economists differ on such multipliers, with many
leading figures pegging them at well under 1.0 as the government spending in
part replaces private spending and jobs. But all agree that every dollar of
spending requires a present value of a dollar of future taxes, which distorts
decisions to work, save, and invest and raises the cost of the dollar of
spending to well over a dollar. Thus, only spending with large societal benefits
is justified, a criterion unlikely to be met by much current spending (perusing
the projects on recovery.gov doesn't inspire confidence).
Even more blatant is the numbers game being used to justify health-insurance
reform legislation, which claims to greatly expand coverage, decrease
health-insurance costs, and reduce the deficit. That magic flows easily from
counting 10 years of dubious Medicare "savings" and tax hikes, but only six
years of spending; assuming large cuts in doctor reimbursements that later will
be cancelled; and making the states (other than Sen. Ben Nelson's Nebraska) pay
a big share of the cost by expanding Medicaid eligibility. The Medicare
"savings" and payroll tax hikes are counted twice—first to help pay for expanded
coverage, and then to claim to extend the life of Medicare.
One piece of good news: The public isn't believing much of this out-of-control
spin. Large majorities believe the health-care legislation will raise their
insurance costs and increase the budget deficit. Most Americans are highly
skeptical of the claims of climate extremists. And they have a more realistic
reaction to the extraordinary deterioration in our public finances than do the
president and Congress.
As a society and as individuals, we need to make difficult, even wrenching
choices, often with grave consequences. To base those decisions on highly
misleading, biased, and even manufactured numbers is not just wrong, but
dangerous.
Squandering their credibility with these numbers games will only make it more
difficult for our elected leaders to enlist support for difficult decisions from
a public increasingly inclined to disbelieve them.
Mr. Boskin
is a professor of economics at Stanford University and a senior fellow at the
Hoover Institution. He chaired the Council of Economic Advisers under President
George H.W. Bush
Bob
Jensen's threads on The Sad State of Governmental Accounting and Accountability
---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
The Most
Criminal Class is Writing the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
Remember that Total System Backup entails more than merely backing up files
---
http://en.wikipedia.org/wiki/Backup_software
"Windows 7's Built-in Backup," Lincoln Spector,
PC World via The Washington Post,
January 20, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/18/AR2010011802423.html?wpisrc=nl_tech
Robert wants to know if Windows 7's built-in backup
program is worth using.
Microsoft has a history of bundling really bad
backup programs with their operating systems. The company has been accused
of a lot of monopolistic behavior, but their backup programs often seemed
designed to not threaten the market for third-party competitors.
So I wasn't prepared to like Windows 7's Backup and
Restore. But much to my amazement, I kind of do. It does image backups for
system protection and file backups for regular data protection--and does
both for the Home Premium as well as the Business and Ultimate editions. For
file backups, it defaults to backing up exactly what you should be backing
up (libraries, appdata, and a few other important folders), and lets you
tell it to back up any other folders you want to protect.
Backup and Restore can backup files incrementally,
saving only those created and changed since the last backup. And it does
versioning--if several versions of a file have been backed up, you can pick
which you want to restore. It defaults to restoring the most recent backup,
and generally avoids the confusion that versioning causes in some people.
And it's all very easy and direct.
Not that it's perfect. Backup and Restore allows
you to pick which drive you wish to backup to, but won't let you pick a
folder in that drive. It can be pretty picky about restoring an image, to
the point where I wouldn't use it for image backup. You can save to a
network, but not over the Internet. If you're looking for something better,
see
7 Backup Strategies for Your Data, Multimedia, and System Files.
PC World Senior Editor Robert Strohmeyer
(full disclosure: He's my editor) created a
video showing how to
set up a scheduled, automatic backup with Backup and Restore. But since I
don't believe in automatic backups--at least not to local media like an
external hard drive--I'll tell you how to back it up manually.
(What do I have against automatic backups? For them
to work, the backup media must always be available. This is fine if you're
backing up over a network or the Internet, but an external drive that's
connected to your PC 24/7 is vulnerable to the same disasters that could
destroy the data on your internal hard drive. It's best to connect a backup
drive only when you need to.)
To launch the program, simply click Start,
type , and select Backup and Restore. Plug in your external hard
drive and click Set up backup. Make your own decisions in the setup
wizard, but when you get to the last page, click Change schedule.
Uncheck Run backup on a schedule (recommended), and click OK.
You're set up.
To back up your data (and you should do this every
day), plug in the external drive, launch Backup and Restore as described
above, and click Back up now.
You can continue working as you back up.
Bob Jensen's technology bookmarks are at
http://www.trinity.edu/rjensen/Bookbob4.htm
Basic
Accounting: Free Textbooks and Free Chapter-by-Chapter Videos
Thanks for all the open sharing Joe.
Scroll down near the bottom to view Joe’s latest message to accounting teachers
and students
Bob Jensen's threads on free electronic textbooks and
videos are at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
In particular, you might be able to use Joe's new book
with Susan
Sharing Professor of the Year
Susan V. Crosson at Santa Fe College is one of the most sharing professors in
all of accounting education.
Her extensive free videos are tremendous.
She’s operating out an expanded server at
http://dept.sfcollege.edu/business/susan.crosson/
Video: Paddy Hirsh of
American Public Media uses his usual sense of humor to explain interest rates in
2 min. ---
http://vimeo.com/8201490
November 5, 2008 reply from AMY HAAS
[haasfive@MSN.COM]
Check out this website. FINANCIAL MATH
http://math247.pbwiki.com/Financial+Math
This excellent web site has step-by-step instructions for solving financial math
problems. Check it out for help with appendix A: The time value of money. Here's
the link that you can paste into your browser:
http://math247.pbwiki.com/Financial+Math
Amy Haas
-----Original Message-----
From: Hoyle, Joe [mailto:jhoyle@richmond.edu]
Sent: Wednesday, January 20, 2010 8:25 AM
Subject: Teaching Blog
I have a new textbook coming out in the next few weeks
-- Financial Accounting, published by FlatWorldKnowledge and co-authored with
C.J. Skender of UNC.
It is a free (yep, FREE) on-line textbook that is
written entirely in a Socratic Method fashion. As you can see, I did not set
out to write just another traditional textbook.
In connection with its release, I have started a blog
about my teaching of that particular class (Accounting 201) this semester here
at the University of Richmond. It is about teaching first and about teaching
Financial Accounting second. I'm interested in encouraging myself as well as
others to teach better. My goal is always the same as a teacher: to improve
by 5 percent each year.
I have never done anything like writing a teaching blog
before so I'm not sure whether it is a good idea or a bad idea but it is an
idea. And, ideas can help us all get better.
If you know anyone who might be interested in following
the blog, please pass along this message to them. The blog can be followed at
http://JoeHoyle-Teaching.blogspot.com. It would be greatly appreciated.
I hate to talk to no one.
Thanks in advance for any assistance!!!
And you can get more information about the textbook at
http://www.flatworldknowledge.com/printed-book/1638
Hi Amy, Don, and others
contributing to the thread on student activity reporting,
Don’t forget that for at least
a two week span, David Albrecht supplied us with a rather detailed and sometimes
opinionated report of his activities in the first semester in his first year at
Concordia College. Of course David is a 25-year veteran accounting teacher, but
this was his first semester at Concordia. David also discusses other things like
his blogging and opinions on IFRS replacing U.S. GAAP.
My point is that there are bare
bones activity reports and then there are activity reports accompanied with
commentaries. For example, you might want to read about David’s activity of
attending an all-campus faculty meeting ---
http://profalbrecht.wordpress.com/2010/01/08/what-am-i-going-to-do-today-friday-january-8/
Work sampling is worth noting
even though you would never be statistically formalized for student activity
reports:
For over four decades I’ve
tried in vain to get managerial/cost accounting courses and textbooks to
increase the emphasis on work sampling for indirect labor that has varying
duties. For example, when I was conducting my dissertation research at Stanford
University, my new wife worked as a medical lab technician at the huge Veterans
Administration Hospital in Palo Alto. Her duties were quite varied in terms of
the types of medical tests conducted on tissues and liquids such as blood tests,
urine tests, spinal tap fluid tests, etc. In those days there were no big
automated machines where you could put most anything in one end and get
printouts of the tests at the other end. She also, on occasion, had to collect
bloods on the floors of this enormous hospital. By the way, this hospital was
the one featured in the book and movie (Jack Nicholson)
"One Flew Over the Cuckoo's Nest"
In those days most tests had
varied activities running tests on various specialized testing machines. But it
is terribly intrusive to make technicians keep detailed logs of their time spend
on many activities during each day.
She said that one of the
problems for hospital accountants was in computing the costs of each type of
test. That prompted me to think about how her time over each week could be
estimated for each type of test. While working on my dissertation (on another
topic) I developed some statistical inference testing procedures for indirect
labor work sampling.
The idea of work sampling is to
provide a signal (today it might be a small light on a wrist band or a cell
phone vibration) for each worker to report randomly what they are doing at that
instant (including a category for personal time that includes idle gossiping).
PDAs would be great to use these days for work sampling.
Shortly thereafter, while at my
first faculty appointment at Michigan State University where I started out by
teaching doctoral seminars, I persuaded one of my doctoral students and Danish
friend, Carl Thomsen, to help me polish my very rough draft on work sampling
procedures for indirect labor.
Jensen, R. E. and C. T Thomsen. 1968.
Statistical analysis in cost measurement and control. The Accounting Review
(January): 83-93. (JSTOR
link).
I was later fascinated by a
work sampling study done by faculty in the one of the Engineering Departments at
Purdue University. Before the study commenced, researchers asked each faculty
member to self report how much time each week was spent on activities
categorized as research versus teaching versus administrating versus doing
personal things. The initial reports for nearly all faculty members was that
they spend well over half their awake time in research.
The results of the formalized
work study experiments at Purdue found that in reality a low percentage of time
of awake time was spent on research. I can’t recall the exact percentage but it
was an average of something like 10%. A higher percentage of time was in
administrative activities of one type or another as well as in teaching
activities.
Having said this, I am aware
that faculty work time is quite different that lab tech work time. Lab techs
tend to perform routine tests with relatively consistent thinking intensity.
Faculty research time is quite varied in terms of intensity. A half hour of
thinking just before falling asleep for me was always much more intense than
hours spent roaming the library stacks just looking for obscure books and
journal articles (before the days of search engines). Hence, work sampling has
its limits in terms of varying intensities of thinking time.
Video:
Fora.Tv on Institutional Corruption & The Economy Of Influence
---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/
Why single
out capitalism for immorality and ethics misbehavior?
Making capitalism ethical is a tough task – and possibly a hopeless one.
Prem Sikka (see below)
The
global code of conduct of Ernst & Young,
another global accountancy firm, claims that "no client or external relationship
is more important than the ethics, integrity and reputation of Ernst & Young".
Partners and former partners of the firm have also been found
guilty of promoting tax evasion.
Prem Sikka (see below)
Jensen
Comment
Yeah right Prem, as if making the public sector and socialism ethical is an
easier task. The least ethical nations where bribery, crime, and immorality are
the worst are likely to be the more government (dictator) controlled and lower
on the capitalism scale. And in the so-called capitalist nations, the lowest
ethics are more apt to be found in the public sector that works hand in hand
with bribes from large and small businesses.
Rotten
Fraud in General ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
We hang the petty thieves and appoint the great ones to public office.
Aesop
Congress is our only native criminal class.
Mark Twain ---
http://en.wikipedia.org/wiki/Mark_Twain
Why should
members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are
poised to expand the battle for reform: They want to enact legislation that
would prohibit members of Congress and their aides from trading stocks based on
nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to
introduce today a bill that would block trading on such inside information.
Current securities law and congressional ethics rules don't prohibit lawmakers
or their staff members from buying and selling securities based on information
learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides,"
The Wall Street Journal, March 28, 2006; Page A1 ---
http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one
The
Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties: Few if
any are uncorrupted
Committee members have shown no appetite for
taking up all those cases and are considering an amnesty for reporting
violations, although not for serious matters such as accepting a trip from a
lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates
that members of Congress have received more than $18 million in travel from
private organizations in the past five years, with Democrats taking 3,458 trips
and Republicans taking 2,666. . . But of course, there are those who deem the
American People dumb as stones and will approach this bi-partisan scandal
accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points
for her minion, that are sure to come back and bite her .... “House Minority
Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips
she accepted from outside sponsors that were worth $8,580 and occurred as long
as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National
Ledger, January 6, 2006 ---
http://www.nationalledger.com/artman/publish/article_27262498.shtml
And when
they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol
Hill, which created the conditions for this mess last summer with its latest
energy bill. That legislation contained a sop to Midwest corn farmers in the
form of a huge new ethanol mandate that began this year and requires drivers to
consume 7.5 billion gallons a year by 2012. At the same time, Congress refused
to include liability protection for producers of MTBE, a rival oxygen
fuel-additive that has become a tort lawyer target. So MTBE makers are pulling
out, ethanol makers can't make up the difference quickly enough, and gas
supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page
A20 ---
Click Here
Once again, the power of pork to sustain incumbents gets its best demonstration
in the person of John Murtha (D-PA). The acknowledged king of earmarks in the
House gains the attention of the New York Times editorial board today, which
notes the cozy and lucrative relationship between more than two dozen
contractors in Murtha's district and the hundreds of millions of dollars in pork
he provided them. It also highlights what roughly amounts to a commission on the
sale of Murtha's power as an appropriator: Mr. Murtha led all House members this
year, securing $162 million in district favors, according to the watchdog group
Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to
create the National Defense Center for Environmental Excellence in Johnstown to
develop anti-pollution technology for the military. Since then, it has garnered
more than $670 million in contracts and earmarks. Meanwhile it is managed by
another contractor Mr. Murtha helped create, Concurrent Technologies, a research
operation that somehow was allowed to be set up as a tax-exempt charity,
according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed;
the annual salary for its top three executives averages $462,000.
Edward Morrissey, Captain's Quarters, January 14, 2008 ---
http://www.captainsquartersblog.com/mt/archives/016617.php
The motto of Judicial Watch is "Because no one is above the law". To this end,
Judicial Watch uses the open records or freedom of information laws and other
tools to investigate and uncover misconduct by government officials and
litigation to hold to account politicians and public officials who engage in
corrupt activities.
Judicial Watch ---
http://www.judicialwatch.org/
Judicial
Watch Announces List of Washington's
"Ten Most Wanted Corrupt Politicians" for 2009 ---
http://www.judicialwatch.org/news/2009/dec/judicial-watch-announces-list-washington-s-ten-most-wanted-corrupt-politicians-2009
"A Low,
Dishonest Decade: The press and politicians were asleep at the switch.,"
The Wall Street Journal, December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage
Stock-market indices are not much good as yardsticks of social progress, but as
another low, dishonest decade expires let us note that, on 2000s first day of
trading, the Dow Jones Industrial Average closed at 11357 while the Nasdaq
Composite Index stood at 4131, both substantially higher than where they are
today. The Nasdaq went on to hit 5000 before collapsing with the dot-com bubble,
the first great Wall Street disaster of this unhappy decade. The Dow got north
of 14000 before the real-estate bubble imploded.
And it was supposed to have been such an awesome time, too! Back in the late
'90s, in the crescendo of the Internet boom, pundit and publicist alike assured
us that the future was to be a democratized, prosperous place. Hierarchies would
collapse, they told us; the individual was to be empowered; freed-up markets
were to be the common man's best buddy.
Such clever hopes they were. As a reasonable anticipation of what was to come
they meant nothing. But they served to unify the decade's disasters, many of
which came to us festooned with the flags of this bogus idealism.
Before "Enron" became synonymous with shattered 401(k)s and man-made electrical
shortages, the public knew it as a champion of electricity deregulation—a
freedom fighter! It was supposed to be that most exalted of corporate creatures,
a "market maker"; its "capacity for revolution" was hymned by management
theorists; and its TV commercials depicted its operations as an extension of
humanity's quest for emancipation.
Similarly, both Bank of America and Citibank, before being recognized as "too
big to fail," had populist histories of which their admirers made much.
Citibank's long struggle against the Glass-Steagall Act was even supposed to be
evidence of its hostility to banking's aristocratic culture, an amusing image to
recollect when reading about the $100 million pay reportedly pocketed by one
Citi trader in 2008.
The Jack Abramoff lobbying scandal showed us the same dynamics at work in
Washington. Here was an apparent believer in markets, working to keep garment
factories in Saipan humming without federal interference and saluted for it in
an op-ed in the Saipan Tribune as "Our freedom fighter in D.C."
But the preposterous populism is only one part of the equation; just as
important was our failure to see through the ruse, to understand how our country
was being disfigured.
Ensuring that the public failed to get it was the common theme of at least three
of the decade's signature foul-ups: the hyping of various Internet stock issues
by Wall Street analysts, the accounting scandals of 2002, and the triple-A
ratings given to mortgage-backed securities.
The grand, overarching theme of the Bush administration—the big idea that
informed so many of its sordid episodes—was the same anti-supervisory impulse
applied to the public sector: regulators sabotaged and their agencies turned
over to the regulated.
The public was left to read the headlines and ponder the unthinkable: Could our
leaders really have pushed us into an unnecessary war? Is the republic really
dividing itself into an immensely wealthy class of Wall Street bonus-winners and
everybody else? And surely nobody outside of the movies really has the political
clout to write themselves a $700 billion bailout.
What made the oughts so awful, above all, was the failure of our critical
faculties. The problem was not so much that newspapers were dying, to mention
one of the lesser catastrophes of these awful times, but that newspapers failed
to do their job in the first place, to scrutinize the myths of the day in a way
that might have prevented catastrophes like the financial crisis or the Iraq
war.
The folly went beyond the media, though. Recently I came across a 2005 pamphlet
written by historian Rick Perlstein berating the big thinkers of the Democratic
Party for their poll-driven failure to stick to their party's historic theme of
economic populism. I was struck by the evidence Mr. Perlstein adduced in the
course of his argument. As he tells the story, leading Democratic pollsters
found plenty of evidence that the American public distrusts corporate power; and
yet they regularly advised Democrats to steer in the opposite direction, to
distance themselves from what one pollster called "outdated appeals to class
grievances and attacks upon corporate perfidy."
This was not a party that was well-prepared for the job of iconoclasm that has
befallen it. And as the new bunch muddle onward—bailing out the large banks but
(still) not subjecting them to new regulatory oversight, passing a health-care
reform that seems (among other, better things) to guarantee private insurers
eternal profits—one fears they are merely presenting their own ample backsides
to an embittered electorate for kicking.
The sad state of governmental accounting and accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
"Taxpayers to Pay for Fannie, Freddie Aid: Treasury Removed Caps on
Assistance," SmartPros, January 13, 2010 ---
http://accounting.smartpros.com/x68543.xml
A recent move by the Treasury Department to remove
$200 billion caps on assistance to Fannie Mae and Freddie Mac eliminates any
doubt that taxpayers will pay for all their losses for the next three years
and appears to be a major step toward formally nationalizing the housing
enterprises, analysts say.
The government took control of the companies, and
effectively much of the U.S. mortgage market, in September 2008 and started
purchasing all their mortgage-backed securities. But the Treasury previously
used the $200 billion caps on aiding each company to try to limit taxpayer
exposure to their mounting losses.
Republicans charge that Treasury has given the
Depression-era companies a "blank check" to pay for burgeoning losses on
defaulting loans.
The two housing enterprises last year guaranteed
and secured nearly 70 percent of new mortgages, primarily made to "prime"
borrowers with the best credit ratings, while the Federal Housing
Administration insured most loans to subprime borrowers, leaving only a tiny
share of the mortgage market in private hands.
In its Christmas Eve statement announcing the
little-noticed changes, the Treasury insisted that it wants to preserve "an
environment where the private market is able to provide a larger source of
mortgage finance."
But analysts say Treasury's move may push off any
return to a normal mortgage market for years -- possibly forever. Treasury
removed the liability caps for three years and loosened restrictions on
Fannie's and Freddie's purchases of their own mortgage securities --
enabling them to maintain their dominant share of the mortgage market.
"These actions would preserve and strengthen the
governments involvement and control over the countrys housing finance system
and make it harder to reintroduce substantial private-sector involvement
later on," said Edward Pinto, a housing consultant and former chief credit
officer at Fannie Mae.
When combined with a separate move by regulators
not to provide common stock as part of executive compensation at Fannie and
Freddie, the administration's recent actions suggest that it is moving to
nationalize the companies, Mr. Pinto said.
Nationalization, or total government control and
ownership of the companies, would wipe out the value of Fannie and Freddie
stock, making it worthless as a way to pay executives. The value of the
stock has plummeted to between $1 and $2 a share in the wake of the
government's takeover.
Treasury spokesman Andrew Williams declined to
elaborate on the Treasury's actions, but denied that nationalization was the
goal.
The administration is preparing to present its
proposals for governing Fannie and Freddie in the future -- a major question
not addressed in financial reform legislation pending in Congress -- when it
presents its budget in February. Options range from fully nationalizing the
enterprises to reprivatizing them or turning them into public "utilities"
like the closely regulated gas and electric companies.
Sen. Bob Corker, Tennessee Republican, questioned
whether the administration was moving toward nationalization in a letter to
Treasury Secretary Timothy F. Geithner this week, urging the Treasury to
incorporate fully in its February budget the cost of any additional Fannie
and Freddie liabilities the government is acquiring.
"Due to the level of support that this
administration and the previous one have created for Fannie Mae and Freddie
Mac, would you not consider your latest move an effective nationalization?"
asked Mr. Corker, a member of the Senate Banking, Housing and Urban Affairs
Committee. "If so, then the liabilities of these two firms should absolutely
be reflected on the balance sheet of the U.S. Treasury."
Fully nationalizing the enterprises would
permanently increase costs for taxpayers and would bloat the government's
balance sheets. Fannie and Freddie currently guarantee about $5.5 trillion
of outstanding mortgages and debts -- nearly as much as the Treasury's own
public debt. If the companies were fully nationalized, the government's
books would have to reflect both the revenues and losses from those
obligations.
But even if the administration and Congress stop
short of formally incorporating the enterprises into the federal government,
the removal of the caps at least for now has eliminated any doubt that the
government stands behind all Fannie and Freddie obligations and will cover
their losses for the next three years.
Treasury reportedly told Mr. Corker that the move
was needed to calm markets.
Apparently, it deemed the certainty of government
backing to be critical at a time when the Federal Reserve has announced that
it will end its program of purchasing $1.25 trillion in Fannie and Freddie
mortgage bonds in March. The Fed's program -- another unprecedented federal
intervention in the mortgage market -- provided most of the funding to
finance prime mortgages in the past year.
Many housing analysts and economists worry that the
Fed's withdrawal from the mortgage market will cause a sharp rise in 30-year
mortgage rates of as much as one percentage point from 5 percent to 6
percent as private investors demand higher yields to compensate for the
increased likelihood of defaults on mortgages.
Nearly one in eight mortgages is in default, with
prime mortgages guaranteed by Fannie and Freddie having taken over subprime
last year as the principal source of delinquencies.
Rapidly rising delinquencies have prompted some
analysts to predict a collapse in the mortgage market once the Fed stops
buying most of Fannie and Freddie's debt. The Treasury's move appears
designed to reassure investors and prevent that from happening.
"When you have someone as big as the Fed was in
2009 walking away cold turkey, there have to be bumps along the road," said
Ajay Rahadyaksha, managing director at Barclays Capital. But he expects
investors to be enticed back into the mortgage market because they have
"massive amounts of cash" to invest.
While full nationalization of the enterprises would
be controversial, and likely provoke overwhelming Republican opposition,
most parties agree that after the massive efforts to prop up the mortgage
market in the past two years it would be difficult for the government to
entirely extricate itself in the future.
Former Treasury Secretary Henry M. Paulson Jr. said
he intended to keep the government's options open when he designed the plan
to take 79.9 percent control of Fannie and Freddie and put them under
government conservatorship.
But he said they should not be returned to their
previous ambiguous structure, where they were owned by private stockholders
even as they carried out a government mission. He said the best structure in
the future might be to turn them into public utilities that funnel the
government's guarantee on mortgage-backed securities for a fee.
The Mortgage Bankers Association and other private
groups have endorsed a permanent federal role in guaranteeing pools of prime
mortgages, perhaps through a revamped Fannie and Freddie.
One reason heavy government involvement is likely
to continue is that Fannie and Freddie -- unlike many banks that received
bailouts from the Treasury -- likely will never be able to fully repay the
nearly $100 billion in assistance they have received so far from taxpayers,
analysts say.
Their losses are growing by the day, and many of
them now are incurred as a result of new mandates from the Treasury and
Congress to spearhead the government's efforts to alleviate the home
foreclosure crisis and make credit available as widely as possible.
For example, Fannie recently said it may liberalize
its rules for mortgages used to buy condominiums in Florida -- an area that
has been plagued with high rates of default and foreclosure, while it is
giving preference to homeowners over investors when it sells foreclosed
properties, even if investors offer a better deal.
Many analysts expect the administration to soon
increase the subsidies the enterprises are providing to homeowners and banks
that renegotiate mortgages to try to avoid foreclosure, and some suspect it
already is using Fannie and Freddie to make loans available to riskier
borrowers.
Mr. Corker said the proliferation of government
mandates for the enterprises has essentially turned them into "a direct
extension of the Treasury Department."
How Fannie Mae creatively managed earnings and cooked the books to give
then CEO Franklin Raines millions and then had to fire Franklin and issued
restated financial statements ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
"Taxpayers
distrustful of government financial reporting," AccountingWeb,
February 22, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104680
The federal government is failing to meet the financial reporting needs of
taxpayers, falling short of expectations, and creating a problem with trust,
according to survey findings released by the Association of Government
Accountants (AGA). The survey, Public Attitudes to Government Accountability and
Transparency 2008, measured attitudes and opinions towards government financial
management and accountability to taxpayers. The survey established an
expectations gap between what taxpayers expect and what they get, finding that
the public at large overwhelmingly believes that government has the obligation
to report and explain how it generates and spends its money, but that that it is
failing to meet expectations in any area included in the survey.
The survey further found that taxpayers consider governments at the federal,
state, and local levels to be significantly under-delivering in terms of
practicing open, honest spending. Across all levels of government, those
surveyed held "being open and honest in spending practices" vitally important,
but felt that government performance was poor in this area. Those surveyed also
considered government performance to be poor in terms of being "responsible to
the public for its spending." This is compounded by perceived poor performance
in providing understandable and timely financial management information.
The survey shows:
The
American public is most dissatisfied with government financial management
information disseminated by the federal government. Seventy-two percent say that
it is extremely or very important to receive this information from the federal
government, but only 5 percent are extremely or very satisfied with what they
receive.
Seventy-three percent of Americans believe that it is extremely or very
important for the federal government to be open and honest in its spending
practices, yet only 5 percent say they are meeting these expectations.
Seventy-one percent of those who receive financial management information from
the government or believe it is important to receive it, say they would use the
information to influence their vote.
Relmond Van Daniker, Executive Director at AGA, said, "We commissioned this
survey to shed some light on the way the public perceives those issues relating
to government financial accountability and transparency that are important to
our members. Nobody is pretending that the figures are a shock, but we are glad
to have established a benchmark against which we can track progress in years to
come."
He continued, "AGA members working in government at all levels are in the very
forefront of the fight to increase levels of government accountability and
transparency. We believe that the traditional methods of communicating
government financial information -- through reams of audited financial
statements that have little relevance to the taxpayer -- must be supplemented by
government financial reporting that expresses complex financial details in an
understandable form. Our members are committed to taking these concepts
forward."
Justin Greeves, who led the team at Harris Interactive that fielded the survey
for the AGA, said, "The survey results include some extremely stark, unambiguous
findings. Public levels of dissatisfaction and distrust of government spending
practices came through loud and clear, across every geography, demographic
group, and political ideology. Worthy of special note, perhaps, is a 67
percentage point gap between what taxpayers expect from government and what they
receive. These are significant findings that I hope government and the public
find useful."
This survey was conducted online within the United States by Harris Interactive
on behalf of the Association of Government Accountants between January 4 and 8,
2008 among 1,652 adults aged 18 or over. Results were weighted as needed for
age, sex, race/ethnicity, education, region, and household income. Propensity
score weighting was also used to adjust for respondents' propensity to be
online. No estimates of theoretical sampling error can be calculated.
You can
read the
Survey Report, including a full
methodology and associated commentary.
"The
Government Is Wasting Your Tax Dollars! How Uncle Sam spends nearly $1 trillion
of your money each year,"
by Ryan
Grim with Joseph K. Vetter, Readers Digest, January 2008, pp. 86-99 ---
http://www.rd.com/content/the-government-is-wasting-your-tax-dollars/4/
1. Taxes:
Cheating Shows. The Internal Revenue Service estimates that the annual net tax
gap—the difference between what's owed and what's collected—is $290 billion,
more than double the average yearly sum spent on the wars in Iraq and
Afghanistan.
About $59 billion of that figure results from the underreporting and
underpayment of employment taxes. Our broken system of immigration is another
concern, with nearly eight million undocumented workers having a
less-than-stellar relationship with the IRS. Getting more of them on the books
could certainly help narrow that tax gap.
Going after the deadbeats would seem like an obvious move. Unfortunately, the
IRS doesn't have the resources to adequately pursue big offenders and their
high-powered tax attorneys. "The IRS is outgunned," says Walker, "especially
when dealing with multinational corporations with offshore headquarters."
Another group that costs taxpayers billions: hedge fund and private equity
managers. Many of these moguls make vast "incomes" yet pay taxes on a portion of
those earnings at the paltry 15 percent capital gains rate, instead of the
higher income tax rate. By some estimates, this loophole costs taxpayers more
than $2.5 billion a year.
Oil companies are getting a nice deal too. The country hands them more than $2
billion a year in tax breaks. Says Walker, "Some of the sweetheart deals that
were negotiated for drilling rights on public lands don't pass the straight-face
test, especially given current crude oil prices." And Big Oil isn't alone.
Citizens for Tax Justice estimates that corporations reap more than $123 billion
a year in special tax breaks. Cut this in half and we could save about $60
billion.
The Tab* Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion
(undertaxed high rollers) + $60 billion (unwarranted tax breaks) Starting Tab:
$352.5 billion
2. Healthy Fixes.
Medicare and Medicaid, which cover elderly and low-income patients respectively,
eat up a growing portion of the federal budget. Investigations by Sen. Tom
Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and
overpayments between the two programs. And Coburn is likely underestimating the
problem.
The U.S. spends more than $400 per person on health care administration costs
and insurance -- six times more than other industrialized nations.
That's because a 2003 Dartmouth Medical School study found that up to 30 percent
of the $2 trillion spent in this country on medical care each year—including
what's spent on Medicare and Medicaid—is wasted. And with the combined tab for
those programs rising to some $665 billion this year, cutting costs by a
conservative 15 percent could save taxpayers about $100 billion. Yet, rather
than moving to trim fat, the government continues such questionable practices as
paying private insurance companies that offer Medicare Advantage plans an
average of 12 percent more per patient than traditional Medicare
fee-for-service. Congress is trying to close this loophole, and doing so could
save $15 billion per year, on average, according to the Congressional Budget
Office.
Another money-wasting bright idea was to create a giant class of middlemen:
Private bureaucrats who administer the Medicare drug program are monitored by
federal bureaucrats—and the public pays for both. An October report by the House
Committee on Oversight and Government Reform estimated that this setup costs the
government $10 billion per year in unnecessary administrative expenses and
higher drug prices.
The Tab* Wasteful Health Spending: $60 billion (fraud, waste, overpayments) +
$100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12
percent loophole) + $10 billion (unnecessary Medicare administrative and drug
costs) Total $185 billion Running Tab: $352.5 billion +$185 billion = $537.5
billion
3. Military Mad Money.
You'd think it would be hard to simply lose massive amounts of money, but given
the lack of transparency and accountability, it's no wonder that eight of the
Department of Defense's functions, including weapons procurement, have been
deemed high risk by the GAO. That means there's a high probability that
money—"tens of billions," according to Walker—will go missing or be otherwise
wasted.
The DOD routinely hands out no-bid and cost-plus contracts, under which
contractors get reimbursed for their costs plus a certain percentage of the
contract figure. Such deals don't help hold down spending in the annual military
budget of about $500 billion. That sum is roughly equal to the combined defense
spending of the rest of the world's countries. It's also comparable, adjusted
for inflation, with our largest Cold War-era defense budget. Maybe that's why
billions of dollars are still being spent on high-cost weapons designed to
counter Cold War-era threats, even though today's enemy is armed with cell
phones and IEDs. (And that $500 billion doesn't include the billions to be spent
this year in Iraq and Afghanistan. Those funds demand scrutiny, too, according
to Sen. Amy Klobuchar, D-MN, who says, "One in six federal tax dollars sent to
rebuild Iraq has been wasted.")
Meanwhile, the Pentagon admits it simply can't account for more than $1
trillion. Little wonder, since the DOD hasn't been fully audited in years.
Hoping to change that, Brian Riedl of the Heritage Foundation is pushing
Congress to add audit provisions to the next defense budget.
If wasteful spending equaling 10 percent of all spending were rooted out, that
would free up some $50 billion. And if Congress cut spending on unnecessary
weapons and cracked down harder on fraud, we could save tens of billions more.
The Tab* Wasteful military spending: $100 billion (waste, fraud, unnecessary
weapons) Running Tab: $537.5 billion + $100 billion = $637.5 billion
4. Bad Seeds.
The controversial U.S. farm subsidy program, part of which pays farmers not to
grow crops, has become a giant welfare program for the rich, one that cost
taxpayers nearly $20 billion last year.
Two of the best-known offenders: Kenneth Lay, the now-deceased Enron CEO, who
got $23,326 for conservation land in Missouri from 1995 to 2005, and mogul Ted
Turner, who got $590,823 for farms in four states during the same period. A Cato
Institute study found that in 2005, two-thirds of the subsidies went to the
richest 10 percent of recipients, many of whom live in New York City. Not only
do these "farmers" get money straight from the government, they also often get
local tax breaks, since their property is zoned as agricultural land. The
subsidies raise prices for consumers, hurt third world farmers who can't
compete, and are attacked in international courts as unfair trade.
The Tab* Wasteful farm subsidies: $20 billion Running Tab: $637.5 billion + $20
billion = $657.5 billion
5. Capital Waste.
While there's plenty of ongoing annual operating waste, there's also a special
kind of profligacy—call it capital waste—that pops up year after year. This is
shoddy spending on big-ticket items that don't pan out. While what's being
bought changes from year to year, you can be sure there will always be some
costly items that aren't worth what the government pays for them.
Take this recent example: Since September 11, 2001, Congress has spent more than
$4 billion to upgrade the Coast Guard's fleet. Today the service has fewer ships
than it did before that money was spent, what 60 Minutes called "a fiasco that
has set new standards for incompetence." Then there's the Future Imagery
Architecture spy satellite program. As The New York Times recently reported, the
technology flopped and the program was killed—but not before costing $4 billion.
Or consider the FBI's infamous Trilogy computer upgrade: Its final stage was
scrapped after a $170 million investment. Or the almost $1 billion the Federal
Emergency Management Agency has wasted on unusable housing. The list goes on.
The Tab* Wasteful Capital Spending: $30 billion Running Tab: $657.5 billion +
$30 billion = $687.5 billion
6. Fraud and Stupidity.
Sen. Chuck Grassley (R-IA) wants the Social Security Administration to better
monitor the veracity of people drawing disability payments from its $100 billion
pot. By one estimate, roughly $1 billion is wasted each year in overpayments to
people who work and earn more than the program's rules allow.
The federal Food Stamp Program gets ripped off too. Studies have shown that
almost 5 percent, or more than $1 billion, of the payments made to people in the
$30 billion program are in excess of what they should receive.
One person received $105,000 in excess disability payments over seven years.
There are plenty of other examples. Senator Coburn estimates that the feds own
unused properties worth $18 billion and pay out billions more annually to
maintain them. Guess it's simpler for bureaucrats to keep paying for the
property than to go to the trouble of selling it.
The Tab* General Fraud and Stupidity: $2 billion (disability and food stamp
overpayment) Running Tab: $687.5 billion + $2 billion = $689.5 billion
7. Pork Sausage.
Congress doled out $29 billion in so-called earmarks—aka funds for legislators'
pet projects—in 2006, according to Citizens Against Government Waste. That's
three times the amount spent in 1999. Congress loves to deride this kind of
spending, but lawmakers won't hesitate to turn around and drop $500,000 on a
ballpark in Billings, Montana.
The most infamous earmark is surely the "bridge to nowhere"—a span that would
have connected Ketchikan, Alaska, to nearby Gravina Island—at a cost of more
than $220 million. After Hurricane Katrina struck New Orleans, Senator Coburn
tried to redirect that money to repair the city's Twin Span Bridge. He failed
when lawmakers on both sides of the aisle got behind the Alaska pork. (That
money is now going to other projects in Alaska.) Meanwhile, this kind of
spending continues at a time when our country's crumbling infrastructure—the
bursting dams, exploding water pipes and collapsing bridges—could really use
some investment. Cutting two-thirds of the $29 billion would be a good start.
The Tab* Pork Barrel Spending: $20 billion Running Tab: $689.5 billion + $20
billion = $709.5 billion
8. Welfare Kings.
Corporate welfare is an easy thing for politicians to bark at, but it seems it's
hard to bite the hand that feeds you. How else to explain why corporate welfare
is on the rise? A Cato Institute report found that in 2006, corporations
received $92 billion (including some in the form of those farm subsidies) to do
what they do anyway—research, market and develop products. The recipients
included plenty of names from the Fortune 500, among them IBM, GE, Xerox, Dow
Chemical, Ford Motor Company, DuPont and Johnson & Johnson.
The Tab* Corporate Welfare: $50 billion Running Tab: $709.5 billion + $50
billion = $759.5 billion
9. Been There,
Done That. The Rural Electrification Administration, created during the New
Deal, was an example of government at its finest—stepping in to do something the
private sector couldn't. Today, renamed the Rural Utilities Service, it's an
example of a government that doesn't know how to end a program. "We established
an entity to electrify rural America. Mission accomplished. But the entity's
still there," says Walker. "We ought to celebrate success and get out of the
business."
In a 2007 analysis, the Heritage Foundation found that hundreds of programs
overlap to accomplish just a few goals. Ending programs that have met their
goals and eliminating redundant programs could comfortably save taxpayers $30
billion a year.
The Tab* Obsolete, Redundant Programs: $30 billion Running Tab: $759.5 billion +
$30 billion = $789.5 billion
10. Living on Credit.
Here's the capper: Years of wasteful spending have put us in such a deep hole,
we must squander even more to pay the interest on that debt. In 2007, the
federal government carried a debt of $9 trillion and blew $252 billion in
interest. Yes, we understand the federal government needs to carry a small debt
for the Federal Reserve Bank to operate. But "small" isn't how we would describe
three times the nation's annual budget. We need to stop paying so much in
interest (and we think cutting $194 billion is a good target). Instead we're
digging ourselves deeper: Congress had to raise the federal debt limit last
September from $8.965 trillion to almost $10 trillion or the country would have
been at legal risk of default. If that's not a wake-up call to get spending
under control, we don't know what is.
The Tab* Interest on National Debt: $194 billion Final Tab: $789.5 billion +
$194 billion = $983.5 billion
What YOU Can Do Many believe our system is inherently broken. We think it can be
fixed. As citizens and voters, we have to set a new agenda before the
Presidential election. There are three things we need in order to prevent
wasteful spending, according to the GAO's David Walker:
• Incentives for people to do the right thing.
• Transparency so we can tell if they've done the right thing.
• Accountability if they do the wrong thing.
Two out of three won't solve our problems.
So how do we make it happen? Demand it of our elected officials. If they fail to
listen, then we turn them out of office. With its approval rating hovering
around 11 percent in some polls, Congress might just start paying attention.
Start by writing to your Representatives. Talk to your family, friends and
neighbors, and share this article. It's in everybody's interest.
Bob
Jensen's threads on The Sad State of Governmental Accounting and Accountability
---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
The Most
Criminal Class is Writing the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
"How to Guard Against Stimulus Fraud: Based on past experience,
thieves may rip off the taxpayers for $100 billion," by Daniel J. Castleman,
The Wall Street Journal, January 13, 2010 ---
http://online.wsj.com/article/SB10001424052748703948504574648331267709784.html#mod=djemEditorialPage
The Obama administration—and state and local
governments—should brace themselves for fraud on an Olympic scale as
hundreds of billions of taxpayer dollars continue to pour into job creation
efforts.
Where there are government handouts, fraud, waste
and abuse are rarely far behind. The sheer scale of the first and expected
second stimulus packages combined with the multitiered distribution
channel—from Washington to the states to community agencies to contractors
and finally to workers—are simply irresistible catnip to con men and
thieves.
There are already warning signs. The Department of
Energy's inspector general said in a report in December that staffing
shortages and other internal weaknesses all but guarantee that at least some
of the agency's $37 billion economic-stimulus funds will be misused. A
tenfold increase in funding for an obscure federal program that installs
insulation in homes has state attorneys general quietly admitting there is
little hope of keeping track of the money.
While I was in charge of investigations at the
Manhattan District Attorney's office, we brought case after case where
kickbacks, bid-rigging, false invoicing schemes and outright theft routinely
amounted to a tenth of the contract value. This was true in industries as
diverse as the maintenance of luxury co-ops and condos, interior
construction and renovation of office buildings, court construction
projects, dormitory construction projects, even the distribution of copy
paper. In one insurance fraud case, the schemers actually referred to
themselves as the "Ten Percenters."
Based on past experience, the cost of fraud
involving federal government stimulus outlays of more than $850 billion and
climbing could easily reach $100 billion. Who will prevent this? Probably no
one, particularly at the state and local level.
New York, for instance, has an aggressive inspector
general's office, with experienced and dedicated professionals. But, it is
already woefully understaffed—with a head count of only 62 people—to police
the state's already existing agencies and programs. There is simply no way
that office can effectively scrutinize the influx of $31 billion in state
stimulus money.
There is a solution however, which is to set aside
a small percentage of the money distributed to fund fraud prevention and
detection programs. This will ensure that states and municipalities can
protect projects from fraud without tapping already thinly stretched
resources.
Meaningful fraud prevention, detection and
investigation can be funded by setting aside no more than 2% of the stimulus
money received. For example, if a county is to receive $50 million for an
infrastructure project, $1 million should be set aside to fund antifraud
efforts; if it costs less, the remainder can be returned to the project's
budget.
While the most obvious option might be to simply
pump the fraud prevention funds into pre-existing law enforcement agencies,
that would be a mistake. Government agencies take too long to staff up and
rarely staff down.
A better idea is to tap the former government
prosecutors, regulators and detectives with experience in fraud
investigations now working in the private sector. If these resources can be
harnessed, effective watchdog programs can be put in place in a timely
manner. Competition between private-sector bidders will also lower the cost.
Some might object to providing a "windfall" to
private companies. Any such concern is misplaced. One should not look at the
2% spent, but rather the 8% potentially saved. Moreover, consider the
alternative: law enforcement agencies swamped trying to stem the tide of
corruption on a shoestring and a prayer.
There will always be individuals who will rip off
money meant for public projects. In the aftermath of the 9/11 attacks, and
Hurricane Katrina hundreds of people were prosecuted for trying to steal
relief funds. But the stimulus funding represents the kind of payday even
the most ambitious fraudster could never have imagined
To avoid a stimulus fraud Olympics that will be
impossible to clean up, it is better to spend a little now to save a lot
later. The savings could put honest people to work and fraudsters out of
business.
Mr. Castleman, a former chief assistant Manhattan district attorney,
is a managing director at FTI Consulting.
Bob Jensen's Fraud Updates
---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob
Jensen's threads on The Sad State of Governmental Accounting and Accountability
---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting
The Most
Criminal Class is Writing the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
Accompanied by a wimpy Clint Eastwood video
"Are You Gonna Make My Day? The Auditors And SEC Enforcement," by
Francine McKenna, re: TheAuditors, January 14, 2010 ---
http://retheauditors.com/2010/01/14/are-you-gonna-make-my-day-the-auditors-and-sec-enforcement/
I watched the
Financial Crisis Inquiry Commission hearings in
Washington and tweeted quite a bit. One of the Commissioners, Keith
Hennessey solicited questions for the bankers.
I added my suggestions to his site. All in all it
was a very interesting exchange. I’ll write more later.
In the meantime, you can take a look at
Mark Leibovich’s article in the New York Times.
In the afternoon, the
SEC
held a news conference to announce several changes
and initiatives in their Enforcement Division. After a public news
conference, a few select bloggers were invited to a special briefing with
Robert Khuzami, the Director of the Division of Enforcement.
Doug Cornelius documented the participants and
questions
here. Edith
Orenstein,
Bruce Carton, and
Broc Romanek have provided some analysis. My
focus, as always, is on enforcement actions against the audit firms and
their professionals. The Big 4 (and to a lesser extent the next tier firms)
and their partners are still pretty lucky, continuing to dodge any truly
deadly SEC enforcement bullets.
My question:
“We have two high profile cases here in
Chicago:
Deloitte’s lawsuit against their own Vice Chairman Thomas Flanagan
for breach of contract related to inside trader charges and the
SEC’s recent actions against six Ernst & Young partners regarding the
Bally’s fraud. In the Deloitte case, although the
lawsuit against their partner was initiated as a result of SEC inquiries at
their clients, Mr. Flanagan is reported to have made more than 300 trades
over several years. In the Bally’s case, the enforcement actions/settlements
are coming more than six years after the fraud occurred.
These delays mean the firms and the
professionals can use the excuse, “It’s all behind us,” and remedial actions
and disciplinary proceeding lose impact. How will the changes announced
today help make investigations and enforcement actions more timely? ”
Mr. Khuzami answered that I was preaching to the
choir. He said he is very focused on bringing investigations and any related
actions to a close more quickly. In fact, he said, when he took his current
position, he implemented a new rule that required staff to get his personal
permission to extend time lines when filed cases may be approaching their
statute of limitations. In the past it seems it was routine to drag things
out as we saw in
Madoff. Finally, he reminded me that the timeline
is not always in the SEC’s hands when there is a parallel criminal
investigation. Mr. Khuzami’s intention is that organizing the SEC
Enforcement Division around key issues and the expertise needed to
investigate them will accelerate the process and improve it.
It’s a worthy goal…because I know how delays can be
tactics rather than just poor follow-through. I was a member of the “PwC
the Client” internal audit team in 2005-2006. In
retrospect, I realize that some of the frustrating delays in getting reports
out and seeing action on my findings were actually strategic moves to get
rid of difficult, sensitive issues by diluting them with time. During my
tenure at PwC, I led audits of some interesting internal firm areas,
including some legal and regulatory compliance activities. Most of the
reports I wrote were issued. However, one report in particular went around
in circles, being revised, re-revised, back to the first partner’s version,
back to my original version, and eventually issued in a very watered down
form.
Why?
By the time the merry-go-round stopped, I was dizzy
and the partners I had cited for violations had ample time to clean up their
act or remove evidence of violation. I was accused of making it all up.
Oh, and also of being a very bad writer.
In the case of the recent settlement by the SEC
with Ernst and Young, although six partners were cited in the settlement,
three of those partners are now retired. And, of course, EY repeated the
tried and true response to such unpleasantness and the prospect of having a
monitor futzing around making a good show of remediating their faults:
Chicago Tribune: Three Ernst & Young partners
who were charged remain at the firm. They are Randy Fletchall, who was
in charge of its national office in New York, and two based in Chicago,
Mark Sever, Ernst & Young’s national director of area professional
practice, and Kenneth Peterson, the professional practice director.
The other three from the Chicago office are
no longer with the firm. They are Thomas Vogelsinger, the area managing
partner until October 2003, William Carpenter, engagement partner for
the 2003 audit, and John Kiss, the engagement partner for the 2001 and
2002 audits…In a statement [Ernst & Young] said, "These
settlements allow us and several of our partners to put this matter
behind us and resolve issues that arose more than five years ago.”
While we’re at it… A few more comments about the
Ernst & Young/Bally’s enforcement actions.
Jim Peterson over at Re: Balance comes down, I
think, in sympathy with Ernst & Young and what he sees as the make-work
required by the settlements.
What messages are sent to the profession’s
quality and risk functions? Ought they to reduce the exposure of their
senior personnel, by hanging out the line operators to struggle on their
own? And by the way, who would aspire to the headaches of a consultative
role, if only to finish a long career by dangling from the SEC’s noose?
One of E&Y’s undertakings in Bally is to
re-visit, under the scrutiny of an outside examiner, its documentation
of higher-level issue consultations. So, under a sanction that only a
bureaucrat could love, Ballywill impel the Big Four’s national office
boffins to “re-audit” information they receive from the field, and to
build a fortress of memoranda to defend against the assaults of later
second-guessing.
Let’s take a look back at the Ernst & Young risk
and quality process employed in this case by the three partners who remain
at the firm. They are leadership partners whom others look to for advice and
guidance. Rather than being independent, experienced, objective consultants
with a “buck stops here” attitude of upholding firm, professional, and
legal/regulatory standards, these three were portrayed in the
SEC press release of the settlement as conflicted
and self interested. The SEC shames them, and in very damningly specific
terms, because they were clearly seeking to protect not only their
colleagues’ reputations but their own.
Ernst and Young now has
three strikes against them for SEC enforcement
actions, sanctions, and fines related to independence violations. Two of the
three leadership partners held leadership and committee positions in the
AICPA and PCAOB.
Famous Floyd Norris at the
New York Times quotes an anonymous “veteran SEC
official” who says he believes the EY/Bally’s sanctions are the first time
an audit firm’s National Practice Partner was cited by the SEC. This
“official” admits he had not checked the records. Floyd quotes him anyway.
Not true.
Floyd…next time call me.
Mr. Fletchall, who remains with Ernst, was
in charge of resolving technical accounting issues in the United States.
He was censured by the commission.
A veteran S.E.C. official, speaking on
condition he not be named because he had not checked records for the
entire history of the commission, said he knew of no previous
enforcement cases in which a partner of a major firm was cited for his
actions as head of a national office.
Back in
September of 2007 I wrote about KPMG and Xerox and
an
SEC investigation that had been going on since 2003
that also named their National Practice Partner as a defendant. Mr. Conway
had also been a partner on the account. The fraudulent activities had
occurred in 1997-2001. KPMG
finally settled the SEC case in 2005 and the
shareholder litigation in early 2008. The
sanctions against Mr. Conway were more
severe than Mr. Fletchall’s. Is he already back auditing again? Did he
ever leave KPMG? The firms are
so forgiving of bad accountants.
A re: The Auditors reader, commenting on the
Flanagan inside trader case, made the following observation and I responded
as best I could:
Continued in article
Bob Jensen's threads on auditor independence and professionalism are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
Bob Jensen's threads on audit firm litigation are at
http://www.trinity.edu/rjensen/fraud001.htm
If a man's poor and not a bad fellow, he's considered worthless; if he is rich
and a very bad fellow, he's considered a good client.
Titus Maccius Plautus, 255 BC to 185 BC
Business Ethics ---
http://en.wikipedia.org/wiki/Business_ethics
Lots of Good Links
Business
Ethics by Business Week ---
http://bx.businessweek.com/business-ethics/news/
"EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day,"
by Francine McKenna, re: The Auditors, Decenber 17, 2009 ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/
Rueters News Item via Forbes ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/
Ernst & Young has agreed
to pay $8.5 million to settle civil charges that it violated accounting rules in
connection with a fraud at Bally Total Fitness Holding Corp, the
U.S. Securities and Exchange Commission
said Thursday.
The SEC accused the
accounting firm of issuing unqualified audit opinions that said that Bally's
2001 and 2003 financial statements conformed with U.S. accounting rules.
Continued in article
Francine's Commentary ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/
Andersen's
demise didn't solve the broader problem of the cozy collaboration between
auditors and their corporate clients. "This is day-to-day business in accounting
firms and on Wall Street," says former SEC Chief Accountant Lynn Turner. "There
is nothing extraordinary, nothing unusual, with respect to Enron." Will Congress
and the SEC do what's needed to restore trust in the system?
See "More Enrons Ahead" video in the list of Frontline (from PBS) videos on
accounting and finance regulation and scandals ---
http://www.pbs.org/wgbh/pages/frontline/shows/regulation/view/
"Continuing The Conversation: If Auditors Weren’t There, Why Not?" by
Francine McKenna, re: The Auditors, Decmeber 14, 2009 ---
http://retheauditors.com/2009/12/14/continuing-the-conversation-if-auditors-werent-there-why-not/
Bob Jensen's threads on auditor independence and professionalism are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
Bob Jensen's threads on audit firm litigation are at
http://www.trinity.edu/rjensen/fraud001.htm
"The Decade in Management Ideas," by Julia Kirby,
Harvard Business Review Blog, January 1, 2010 ---
Click Here
http://blogs.hbr.org/hbr/hbreditors/2010/01/the_decade_in_management_ideas.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Tis the season for "year's best" lists — and even, this year, for
"decade's best" lists — and who are we to resist the urge? A few of us HBR
editors (Gardiner Morse and Steve Prokesch helped especially) took the
opportunity to look back on the past ten years of management thinking and
are ready to declare our choices for the — well, why not say it — most
influential management ideas of the millennium (so far).
- Shareholder Value as a Strategy. The notion of
producing attractive returns for investors is as old as investing, but
this was a decade when the
pursuit of shareholder value eclipsed too much else.
Increasingly sophisticated tools and metrics for
value-based management pushed the consideration of stock price
effects deep into operational decision-making, and made sure everything
pointed toward bonus day. By 2009, even the man most known for focusing
on value was saying it was a
dumb idea. "Shareholder value is a result, not a strategy," Jack
Welch proclaimed. "Your main constituencies are your employees, your
customers and your products."
- IT as a Utility. The current mania for
cloud computing is the latest step in a long process by which
enterprises have dispensed with their proprietary glass houses and begun
buying computing capabilities as
services. One impetus was the
Y2K scare, which forced attention onto those onerous legacy systems
as the new millennium dawned.
- The Customer Chorus. Through a range of technical
and social developments, customers' voices grew louder (whether
collectively in
ratings systems like Amazon's, or individually through viral
kvetches like Dave Carroll's "United
Breaks Guitars") and companies found ways to listen. It's a true
megatrend: the steps along the way have felt gradual and natural, but
collectively they change everything.
- Enterprise Risk Management. Sounds crazy right now
to say that the last decade was notable for risk management. But
especially after 9/11, companies saw the sense of bringing the many and
various pockets of it under the same umbrella. Newly empowered
chief risk officers looked for trouble spots on a landscape ranging
from financial hedging to pirates on the open sea.
- The Creative Organization. The decade saw a general
revolution in the way many organizations came to view their source of
competitive advantage, and a commitment to finding ways to
produce creative output more reliably. Even before they embraced "design
thinking," managers were encouraging collaboration, drawing on
diverse perspectives, and engaging whole workforces in "ideation."
- Open Source. Purist geeks will be quick to point
out that the term open source and some very substantial achievements
came in the
late 1990s, but here we pay homage to the spread of that model
beyond software code. Was it only in 2001 that Wikipedia was born? And
how many things have been wiki'ed since?
- Going Private. Cheap debt reignited the LBO scene
just as post-Enron reforms created real disincentives to operate as a
public company. As the decade wore on,
private equity's playbook for turning around businesses was
increasingly held up as best-practice management. Now, ideas like, ahem,
leveraging up don't seem so wise, but private equity's devotion to
strategic focus and demanding governance might endure.
- Behavioral Economics. Okay, by now, you're all
shouting "that's definitely older than 10 years" and you're right. But
talk about a
set of ideas whose time has come. In the prior decade, can you
remember when someone with
Steven Levitt's profile had a
breakout bestseller? Or when someone modifying the word economist
with "rogue" (or "rock star") could keep a straight face?
- High Potentials. Consulting firms and other deeply
knowledge-based businesses knew this all along, but in the past decade
the rest of the corporate world woke up to the fact that some managers
are more equal than others.
Formal programs were established to identify, cultivate, and retain
"hi-po's".
Executive coaching, a perk often provided for the anointed,
experienced explosive growth as an industry.
- Competing on Analytics. Decades of investment in
systems capturing transactions and feedback finally yielded a
toolkit for turning all that data into intelligence. Operations
research types, long consigned to engineering realms like manufacturing
scheduling, got involved in marketing decisions. Managers started
learning from experiments that were worthy of the name.
- Reverse Innovation. The bigger story here is the
maturation of the concept of globalization, particularly with regard to
emerging economies. Most big corporations in 2000 saw them primarily as
a source of natural resources and, increasingly, cheap labor. Then, as
rising employment fueled the development of middle classes, cities in
India and China came to represent valuable markets. Now, these non-US
consumers are coming to the foreground. Firms like GE and Microsoft are
doing R&D in emerging markets, optimizing on those preferences and
constraints, and then bringing the results back home.
- Sustainability. More than anything, the first ten
years of the 21st century will be remembered as the decade that
businesses
went green — if only in their marketing to a public highly attuned
to Al Gore's inconvenient truth. We're not cynical on this point,
however. The
efforts we see by companies large and small to reduce their carbon
footprints and other environmental impacts are sincere and effective, as
far as they go. But ten years from now, as we revisit this exercise,
forgive us if we declare 2010-2020 to be the decade of sustainability.
"The idea was in the air before 2010," we can picture ourselves writing.
"But this was the decade when it really took hold."
So there it is: our roundup of the management ideas that shaped the
decade. Now, you tell us: Which ones don't belong on this list? And what did
we miss?
Early respondents sent in the following replies:
You have missed out on a main idea
that developed in the decade - outsourcing. It is much less about cost
arbitration and much more about what CK Prahlad called 'R=g' (Resources are
global) The structuring of outsourcing had undergone a complete change from
merely leasing equipment and contract manufacturing within a limited
geographic space into a strategic option to leverage not only cost, but also
skill, time etc. I wd call that Outsourcing 2.0. But for outsourcing 2.0
many businesses cd have folded up by now.
SRININ
Such a good point. Thank you, Srinin.
Companies' approaches to outsourcing really have evolved quite a bit over
the past ten years, and value chains seem to be getting more modular as a
result. Have you read John Hagel & John Seely Brown on the topic of
"productive friction"? It's an interesting way to think about what you are
calling "Outsourcing 2.0"
Julia Kirby
In my opinion you forget to refer the
to social web and the enterprise 2.0 also. In fact it's not completely
deployed everywhere but in last years it had a great boom and will certainly
be a trend for the next decade. Let's see if business can follow the
evolution of the web and more important, if they can take the advantage of
it! Hope they will!
João Aguiam
I agree that this was the "decade of
sustainabiilty" during which most companies got it -- they realized that
they needed to pay attention to their their carbon footprints and so on if
they wanted to stay in the game. This coming decade, though, will be the
decade of sustainability as offensive strategy. We'll see companies that use
sustainability strategies to trounce competitors, not just to defend
themselves from regulators, energy costs, and bad press.
Gardiner Morse
Jensen Comment
Almost completely overlooked are the innovations (and in some cases disasters)
in financial risk management such as securitizations, CDOs, credit
derivatives, etc. Although many of these contracting ideas originated in the
1990s, innovative and often fraudulent applications were invented in the early
21st Century.
Also overlooked is the explosive growth of management of hedge
funds used to escape government regulations.
The timeline of derivatives financial instruments
applications, frauds, and accounting can be found at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on management theories are at
http://www.trinity.edu/rjensen/theory/00overview/GreatMinds.htm
Before reading this May 4, 2009 article you may want to read some
introductory modules about Overstock.com at
http://en.wikipedia.org/wiki/Overstock.com
"Overstock.com and PricewaterhouseCoopers: Errors in Submissions to
SEC Division of Corporation Finance," White Collar Fraud, May 19,
2008 ---
http://whitecollarfraud.blogspot.com/2008/05/overstockcom-and-pricewaterhousecoopers.html
"To Grant Thornton, New Auditors for Overstock.com," White Collar
Fraud, March 30, 2009 ---
http://whitecollarfraud.blogspot.com/2009/03/to-grant-thornton-new-auditors-for.html
"Overstock.com's First Quarter Financial Performance Aided by GAAP
Violations," White Collar Fraud, May 4, 2009 ---
http://whitecollarfraud.blogspot.com/2009/05/overstockcoms-first-quarter-financial.html
Overstock.com (NASDAQ: OSTK) and its
management team led by its CEO and masquerading stock market
reformer Patrick Byrne (pictured on right) continued its pattern of
false and misleading disclosures and departures from Generally
Accepted Accounting Principles (GAAP) in its latest Q1 2009
financial report.
In Q1 2009, Overstock.com reported a net
loss of $2.1 million compared to $4.7 million in Q1 2008 and claimed
an earnings improvement of $2.6 million. However, the company's
reported $2.6 reduction in net losses was aided by a violation of
GAAP (described in more detail below) that reduced losses by $1.9
million and buybacks of Senior Notes issued in 2004 under false
pretenses that reduced losses by another $1.9 million.
After the issuance of the Senior Notes in
November 2004, Overstock.com has twice restated financial reports
for Q1 2003 to Q3 2004 (the accounting periods immediately preceding
the issuance of such notes) because of reported accounting errors
and material weaknesses in internal controls.
While new CFO Steve Chestnut hyped that
"It's been a great Q1," the reality is that Overstock.com’s reported
losses actually widened by $1.2 million after considering violations
of GAAP ($1.9 million) and buying back notes issued under false
pretenses ($1.9 million).
How Overstock.com improperly reported of an
accounting error and created a “cookie jar reserve” to manage future
earnings by improperly deferring recognition of an income
Before we begin, let’s review certain
events starting in January 2008.
In January 2008, the Securities and
Exchange Commission discovered that Overstock.com's revenue
accounting failed to comply with GAAP and SEC disclosure rules, from
the company's inception. This blog detailed how the company provided
the SEC with a flawed and misleading materiality analysis to
convince them that its revenue accounting error was not material.
The company wanted to avoid a restatement of prior affected
financial reports arising from intentional revenue accounting errors
uncovered by the SEC.
Instead, the company used a one-time
cumulative adjustment in its Q4 2007 financial report, apparently to
hide the material impact of such errors on previous affected
individual financial reports. In Q4 2007, Overstock.com reduced
revenues by $13.7 million and increased net losses by $2.1 million
resulting from the one-time cumulative adjustment to correct its
revenue accounting errors.
Q3 2008
On October 24, 2008, Overstock.com's Q3
2008 press release disclosed new customer refund and credit errors
and the company warned investors that all previous financial reports
issued from 2003 to Q2 2008 “should no longer be relied upon.” This
time, Overstock.com restated all financial reports dating back to
2003. In addition, Overstock.com reversed its one-time cumulative
adjustment in Q4 2007 used to correct its revenue accounting errors
and also restated all financial statements to correct those errors,
as I previously recommended.
The company reported that the combined
amount of revenue accounting errors and customer refund and credit
accounting errors resulted in a cumulative reduction in previously
reported revenues of $12.9 million and an increase in accumulated
losses of $10.3 million.
Q4 2008
On January 30, 2009, Overstock.com reported
a $1 million profit and $.04 earnings per share for Q4 2008, after
15 consecutive quarterly losses and it beat mean analysts’ consensus
expectations of negative $0.04 earnings per share. CEO Patrick Byrne
gloated, "After a tough three years, returning to GAAP profitability
is a relief." However, Overstock.com's press release failed to
disclose that its $1 million reported profit resulted from a
one-time gain of $1.8 million relating to payments received from
fulfillment partners for amounts previously underbilled them.
During the earnings call that followed the
press release, CFO Steve Chesnut finally revealed to investors that:
Gross profit dollars were $43.6 million, a
6% decrease. This included a one-time gain of $1.8 million relating
to payments from partners who were under-billed earlier in the year.
Before Q3 2008, Overstock.com failed to
bill its fulfillment partners for offsetting cost reimbursements and
fees resulting from its customer refund and credit errors. After
discovering foul up, Overstock.com
improperly corrected the billing errors by recognizing income in
future periods when such amounts were recovered or on a cash basis
(non-GAAP).
In a blog post, I explained why Statement
of Financial Accounting Standards No. 154 required Overstock.com to
restate affected prior period financial reports to reflect when the
underbilled cost reimbursements and fees were actually earned by the
company (accrual basis or GAAP). In other words, Overstock.com
should have corrected prior financial reports to accurately reflect
when the income was earned from fulfillment partners who were
previously underbilled for cost reimbursements and fees.
If Overstock.com properly followed
accounting rules, it would have reported an $800,000 loss instead of
a $1 million profit, it would have reported sixteen consecutive
losses instead of 15 consecutive losses, and it would have failed to
meet mean analysts’ consensus expectation for earnings per share
(anyone of three materiality yardsticks under SEC Staff Accounting
Bulletin No. 99 that would have triggered a restatement of prior
year’s effected financial reports).
Patrick Byrne responds on a stock market
chat board
In my next blog post, I described how CEO
Patrick M. Byrne tried to explain away Overstock.com’s treatment of
the “one-time gain” in an unsigned post, using an alias, on an
internet stock market chat board. Byrne’s chat board post was later
removed and re-posted with his name attached to it, after I
complained to the SEC. Here is what Patrick Byrne told readers on
the chat board:
Antar's ramblings are gibberish. Show them
to any accountant and they will confirm. He has no clue what he is
talking about.
For example: when one discovers that one
underpaid some suppliers $1 million and overpaid others $1 million.
For those whom one underpaid, one immediately recognizes a $1
million liability, and cleans it up by paying. For those one
overpaid, one does not immediately book an asset of a $1 million
receivable: instead, one books that as the monies flow in. Simple
conservatism demands this (If we went to book the asset the moment
we found it, how much should we book? The whole $1 million? An
estimate of the portion of it we think we'll be able to collect?)
The result is asymmetric treatment. Yet Antar is screaming his head
off about this, while never once addressing this simple principle.
Of course, if we had booked the found asset the moment we found it,
he would have screamed his head off about that. Behind everything
this guy writes, there is a gross obfuscation like this. His purpose
is just to get as much noise out there as he can.
Note: Bold print and italics added by me.
In other words, Overstock.com improperly
used cash basis accounting (non-GAAP) rather than accrual basis
accounting (GAAP) to correct its accounting error. I criticized
Byrne’s response noting that:
… Overstock.com recognized the "one-time of
$1.8 million" using cash-basis accounting when it "received payments
from partners who were under-billed earlier in the year" instead of
accrual basis accounting, which requires income to be recognized
when earned. A public company is not permitted to correct any
accounting error using cash-basis accounting.
Overstock.com tries to justify improper
cash basis accounting in Q4 2008 to correct an accounting error
Overstock.com needed to justify Patrick
Byrne’s stock chat board ramblings. About two weeks later,
Overstock.com filed its fiscal year 2008 10-K report with the SEC
and the company concocted a new excuse to justify using cash basis
accounting to correct its accounting error and avoid restating prior
affected financial reports:
In addition, during Q4 2008, we reduced
Cost of Goods Sold by $1.8 million for billing recoveries from
partners who were underbilled earlier in the year for certain fees
and charges that they were contractually obligated to pay. When the
underbilling was originally discovered, we determined that the
recovery of such amounts was not assured, and that consequently the
potential recoveries constituted a gain contingency. Accordingly, we
determined that the appropriate accounting treatment for the
potential recoveries was to record their benefit only when such
amounts became realizable (i.e., an agreement had been reached with
the partner and the partner had the wherewithal to pay).
Note: Bold print and italics added by me.
Overstock.com improperly claimed that a
"gain contingency" existed by using the rationale that the
collection of all "underbilled...fees and charges...was not
assured....”
Why Overstock.com's accounting for
underbilled "fees and charges" violated GAAP
Overstock.com already earned those "fees
and charges" and its fulfillment partners were "contractually
obligated to pay" such underbilled amounts. There was no question
that Overstock.com was owed money from its fulfillment partners and
that such income was earned in prior periods.
If there was any question as to the
recovery of any amounts owed the company, management should have
made a reasonable estimate of uncollectible amounts (loss
contingency) and booked an appropriate reserve against amounts due
from fulfillment partners to reduce accrued income (See SFAS No. 5
paragraph 1, 2, 8, 22, and 23). It didn’t. Instead, Overstock.com
claimed that the all amounts due the company from underbilling its
fulfillment partners was "not assured" and improperly called such
potential recoveries a "gain contingency" (SFAS No. 5 paragraph 1,
2, and 17).
The only way that Overstock.com could
recognize income from underbilling its fulfillment partners in
future accounting periods is if there was a “significant uncertainty
as to collection” of all underbilled amounts (See SFAS No. 5
paragraph 23)
As it turns out, a large portion of the
underbilled amounts to fulfillment partners was easily recoverable
within a brief period of time. In fact, within 68 days of announcing
underbilling errors, the company already collected a total of “$1.8
million relating to payments from partners who were underbilled
earlier in the year.” Therefore, Overstock.com cannot claim that
there was a "significant uncertainty as to collection" or that
recovery was "not assured."
No gain contingency existed. Overstock.com
already earned "fees and charges" from underbilled fulfillment
partners in prior periods. Rather, a loss contingency existed for a
reasonably estimated amount of uncollectible "fees and charges."
Overstock.com should have restated prior affected financial reports
to properly reflect income earned from fulfillment partners instead
of reflecting such income when amounts were collected in future
quarters. Management should have made a reasonable estimate for
unrecoverable amounts and booked an appropriate reserve against
"fees and charges" owed to it (See SFAS No. 5 Paragraph 22 and 23).
Therefore, Overstock.com overstated its
customer refund and credit accounting error by failing to accrue
fees and charges due from its fulfillment partners as income in the
appropriate accounting periods, less a reasonable reserve for
unrecoverable amounts. By deferring recognition of income until
underbilled amounts were collected, the company effectively created
a "cookie jar" reserve to increase future earnings.
In addition, Overstock.com failed to
disclose any potential “gain contingency” in its Q3 2008 10-Q
report, when it disclosed that it underbilled its fulfillment
partners (See SFAS No. 5 Paragraph 17b). Apparently, Overstock.com
used a backdated rationale for using cash basis accounting to
correct its accounting error in response to my blog posts (here and
here) detailing its violation of GAAP.
PricewaterhouseCoopers warns against using
"conservatism to manage future earnings"
As I detailed above, Patrick Byrne claimed
on an internet chat board that “conservatism demands" waiting until
"monies flow in" from under-billed fulfillment partners to recognize
income, after such an error is discovered by the company. However, a
document from PricewaterhouseCoopers (Overstock.com’s auditors thru
2008) web site cautions against using “conservatism” to manage
future earnings by deferring gains to future accounting periods:
SFAS No. 5 Technical Notes cautions about
using “conservatism” to manage future earnings by deferring gains to
future accounting periods:
"Conservatism...should no[t] connote
deliberate, consistent understatement of net assets and profits."
Emphasis added] CON 5 describes realization in terms of recognition
criteria for revenues and gains, as:"Revenue and gains generally are
not recognized until realized or realizable... when products (goods
or services), merchandise or other assets are exchanged for cash or
claims to cash...[and] when related assets received or held are
readily convertible to known amounts of cash or claims to
cash....Revenues are not recognized until earned ...when the entity
has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues." Almost invariably, gain
contingencies do not meet these revenue recognition criteria.
Note: Bold print and italics added by me.
Overstock.com "substantially accomplished
what it must do to be entitled to the benefits represented by the
revenues" since the fulfillment partners were "contractually
obligated" to pay underbilled amounts. Those underbilled "fees and
charges" were "realizable" as evidenced by the fact that the company
already collected a total of “$1.8 million relating to payments from
partners who were underbilled earlier in the year" within a mere 68
days of announcing its billing errors.
If we follow guidance by Overstock.com's
fiscal year 2008 auditors, the amounts due from underbilling
fulfillment partners cannot be considered a gain contingency, as
claimed by the company. PricewaterhouseCoopers was subsequently
terminated as Overstock.com's auditors and replaced by Grant
Thornton.
Q1 2009
In Q1 2009, even more amounts from
underbilling fulfillment partners were recovered. In addition, the
company disclosed a new accounting error by failing to book a
“refund due of overbillings by a freight carrier for charges from Q4
2008.” See quote from 10-Q report below:
In the first quarter of 2009, we reduced
total cost of goods sold by $1.9 million for billing recoveries from
partners who were underbilled in 2008 for certain fees and charges
that they were contractually obligated to pay, and a refund due of
overbillings by a freight carrier for charges from the fourth
quarter of 2008. When the underbilling and overbillings were
originally discovered, we determined that the recovery of such
amounts was not assured, and that consequently the potential
recoveries constituted a gain contingency. Accordingly, we
determined that the appropriate accounting treatment for the
potential recoveries was to record their benefit only when such
amounts became realizable (i.e., an agreement had been reached with
the other party and the other party had the wherewithal to pay).
Note: Bold print and italics added by me.
Overstock.com continued to improperly
recognize deferred income from previously underbilling fulfillment
partners. The new auditors, Grant Thornton, would be wise to review
Overstock.com's accounting treatment of billing errors and recommend
that its clients restate affected financial reports to comply with
GAAP. Otherwise, they should not give the company a clean audit
opinion for 2009.
Using accounting errors to previous
quarters to boost profits in future quarters
Lee Webb from Stockwatch sums up
Overstock.com's accounting latest trickery:
… Overstock.com managed to turn a
controversial fourth-quarter profit last year after discovering that
it had underbilled its fulfillment partners to the tune of
$1.8-million earlier in the year. Rather than backing that amount
out into the appropriate periods, Overstock.com reported it as
one-time gain and reduced the cost of goods sold for the quarter by
$1.8-million. That bit of accounting turned what would have been an
$800,000 fourth-quarter loss into a $1-million profit.
As it turns out, Overstock.com managed to
find some more money that it used to reduce the cost of goods sold
for the first quarter of 2009, too.
"In Q1 2009, we reduced total cost of goods
sold by $1.9-million for recoveries from partners who were
underbilled in 2008 for certain fees and charges that they were
contractually obligated to pay and a refund due of overbillings by a
freight carrier for charges from Q4 2008," the company disclosed.
"We just keep squeezing the tube of
toothpaste thinner and thinner and finding new stuff to come out,"
Mr. Byrne remarked during the conference call after chief financial
officer Steve Chesnut said that the underbilling and overbilling had
been found "as part of good corporate diligence and governance."
In addition, Overstock.com managed to
record a $1.9-million gain, reported as part of "other income," by
extinguishing $4.9-million worth of its senior convertible notes,
which it bought back at rather hefty discount. If not for the
fortuitous 2008 underbilling recoveries, fourth-quarter overbillings
refund and the paper gain from extinguishing some of its debt,
Overstock.com would have tallied a first-quarter loss of
$5.9-million or approximately 26 cents per share.
So, while Overstock.com did not manage to
conjure up a first-quarter profit by using the same accounting
abracadabra employed in the fourth quarter, it did succeed in
trimming its net loss to $2.1-million.
Bad corporate diligence and governance
During the Q1 2009 earnings conference
call, CFO Steve Chesnut boasted about finding accounting errors:
So just as part of good corporate diligence
and governance we've found these items.
Note: Bold print and italics added by me.
Actually, it was bad corporate diligence
and governance by CEO Patrick Byrne that caused the accounting
errors to happen by focusing on a vicious retaliatory smear campaign
against critics, while he runs his company into the ground with $267
million in accumulated losses to date and never reporting a
profitable year.
Memo to Grant Thornton (Overstock.com's new
auditors)
Overstock.com is a company that has not
produced a single financial report prior to Q3 2008 in compliance
with Generally Accepted Accounting Principles and Securities and
Exchange Commission disclosure rules from its inception, without
having to later correct them, unless such reports were too old to
correct. Two more financial reports (Q4 2008 and Q1 2009) don't
comply with GAAP and need to be restated, too.
To be continued in part 2.
In the mean time, please read:
William K. Wolfrum: "Sam E. Antar: From
Crazy Eddie to Patrick Byrne's Worst Nightmare."
Gary Weiss: "The Whisper Campaign Against
an Overstock.com Whistleblower"
Written by:
Sam E. Antar (former Crazy Eddie CFO and a
convicted felon)
Blog Update:
Investigative journalist and author Gary
Weiss commented on Overstock.com's history of GAAP violations in his
blog:
There are few certainties in this world:
gravity, the speed of light, and, more obviously every quarter, the
utter unreliability of Overstock.com financial statements.
Acclaimed forensic accountant and author
Tracy Coenen notes in her blog:
Don’t laugh too hard at Patrick Byrne’s
explanation of the repeated accounting errors and improper treatment
of those errors, as reported by Lee Webb of Stockwatch:
“We just keep squeezing the tube of
toothpaste thinner and thinner and finding new stuff to come out,”
Mr. Byrne remarked during the conference call after chief financial
officer Steve Chesnut said that the underbilling and overbilling had
been found “as part of good corporate diligence and governance.”
Good corporate diligence and governance? Is
this guy for real? How about having an accounting system that
prevents errors from occurring every quarter?
Of course, Overstock.com management has to
explain away why Sam Antar is finding all these manipulations and
irregularities in their financial reporting. They can stalk and
harass him all they want, call him a criminal all they want, but
there is no explaining it away. The numbers don’t lie. Overstock.com
just always counted on no one being as thorough as Sam.
"Auditor Merry Go Round at Overstock.com," Big Four Blog,
January 8, 2010 ---
http://www.bigfouralumni.blogspot.com/
We were intrigued by a recent quote from
Overstock.com's President.
On December 29, 2009,we saw, "It is nice to be back
with a Big Four accounting firm," said Jonathan Johnson, President of
Overstock.com. "We are pleased to have the resources and professionalism
that KPMG brings as our auditors. We will work closely with them to timely
file our 2009 Form 10-K. In the meantime, we remain in discussions with the
SEC to answer the staff's questions on the accounting matters that lead to
our filing an unreviewed Form 10-Q for Q3."
As we dug further into this, we found an
interesting situation between client and auditors; and between the opinions
of two different auditors, as you'll see below.
And what makes it curioser is that Overstock.com
has engaged three separate auditors in a space of just nine months.
From 2001 to 2008, PricewaterhouseCoopers were the
statutory auditors to Overstock.com, but this changed when the company
decided to engage a replacement through a RFP process, and Grant Thornton
was selected in March 2009. Subsequently, Overstock.com received a letter
from the SEC in October 2009 questioning the accounting for a "fulfillment
partner overpayment" (which Overstock.com recovered and recognized $785,000
as income in 2009 as it was received). Apparently earlier
PricewaterhouseCoopers had determined that this amount should not be
recognized in fiscal year 2008, but in 2009. However, the new auditor, Grant
Thornton after further investigation on the receipt of the SEC note,
determined that the amount should have been booked in 2008 and not in 2009,
and that Overstock.com should restate its 2008 financials to reflect this as
an asset
This put Overstock.com in a difficult spot, with a
severe disagreement between two audit opinions. In the appropriate words of
Patrick Byrne, the company's Chairman and CEO, "Thus, we are in a quandary:
one auditing firm won't sign-off on our Q3 Form 10-Q unless we restate our
2008 Form 10-K, while our previous auditing firm believes that it is not
proper to restate our 2008 Form 10-K. Unfortunately, Grant Thornton's
decision-making could not have been more ill-timed as we ran into SEC filing
deadlines."
In general, Overstock.com agreed with PwC's
recommendation not to account for the amount in 2008 and not with Grant
Thornton's opinion of booking it in 2008.
While all this was going on, Overstock.com had a
make a choice on its Q3-2009 quarterly financials, which they proceeded to
file without required review by an auditor (in violation of SAS 100). This
unusual filing brought on a censure by NASDAQ, who then finally agreed to
grant the company time till May 2010 to refile the earnings.
Meanwhile, Grant Thornton wrote separately to the
SEC outlining its position, and Overstock.com responded to GT's points in a
letter from the President directly to the shareholders.
Eventually, in November 2009, Overstock.com
dismissed Grant Thornton as its auditor, and Grant Thornton immediately
severed its relationship with the company through a letter to the SEC.
After a search, on December 29, 2009, Overstock.com
finally hired KPMG to review all its financials, accounting procedures and
determine the final disposition of the timing for accounting of this issue.
Other bloggers with more knowledge of the stock and
history, are taking a more aggressive position on Overstock.com's actions,
here's a recent post from SeekingAlpha.com:
http://seekingalpha.com/article/180743-overstock-s-latest-accounting-and-disclosure-inconsistencies?source=yahoo
All this switching around of auditors in such a
short space of time does call into question the company's stance on
alignment with external auditors opinions. Typically, public companies do
try to stay with one acccounting firm over a long period of time and iron
out any differences at a professional level. This kind of merry-go-rounding
seems to suggest that Overstock.com is looking for the auditor who will
agree with the company's stance rather than an independent third party who
will provide an honest perspective in the best interest of investors, whose
interests they do represent as their fiduciary responsibility.
And that's where it apppears to stand today, with
KPMG having the unenviable task of sorting through all this confusion,
settling issues with the SEC and the NASDAQ, and putting Overstock.com back
in compliance and in some sense of settlement with previous auditors. GT and
PwC seem to have washed their hands off this, but that's not to say, that a
shareholder lawsuit may spring from the blue, as we have seen in many cases,
that such messy audits have the potential for long tail litigations.
Meanwhile, on the stock market, Overstock.com ($OSTK)hit
a high of $17.65 on October 20, 2009 and then has been steadily drifting
downwards to $13.24 per share today. At 22.84 million shares outstanding,
this is a loss of market capitalization of $110 million. Other online
retailers have had generally better stock performance during this period, so
clearly the accounting issue is having some level of overhang on stock
performance.
In another very interesting use of philosophy from
the Chairman's letter:
"All things are subject to interpretation;
whichever interpretation prevails at a given time is a function of power and
not truth." - Friedrich Nietzsche
And we hope that in due course, we find the real
truth, and not the interpretation that is biased towards the powerful.
Now, none of this would be apparent to the average
online shopper who is seeking a real retail bargain on the "O, O, O, The Big
Big O, Overstock.com", but there is always more to be had beyond the skin
than is evident on the surface.
Clearly, this is not going away soon, and more news
is sure to emerge as the company files its audited financials, and we'll
blog as we hear of developments.
Bob Jensen's threads on multiple auditing firms ---
http://www.trinity.edu/rjensen/fraud001.htm#BigFirms
"Recommended by HBR Contributors: January/February 2010," by Rasika
Welankiwar, Harvard Business Review Blog, January 8, 2010 ---
http://blogs.hbr.org/recommended/2010/01/recommended-by-hbr-contributor.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
While putting together the January-February issue, we asked some of our
authors and bloggers what they had read — a recent item or an old gem — that
they would recommend to our readers. Here's what they said:
The Enlightened Eye
by Elliot W. Eisner (Prentice Hall, 1991)
A classic book by Stanford education professor Elliot W. Eisner is emerging
as a must-read. He argues that little of value can be learned about the
student experience, or how to improve it, from quantitative research. The
same applies to business customers. Instead, he encourages the development
of an "enlightened eye" to observe and interpret rigorously without being
confined to the narrow strictures of statistically significant quantitative
tests and measures. To Eisner, qualitative research is the only tool for
deeply understanding the complicated world of people in organizations.
–Roger Martin, author of
The Age of Customer Capitalism
Alexander Hamilton
by Ron Chernow (Penguin, 2004)
I'm plowing my way through various biographies of the Founding Fathers. This
started when we were having such a horrible time in 2006, and I needed to be
reminded that bad situations sometimes turn out all right. That the U.S.
came into existence — with a third of George Washington's troops down to
smallpox and going against the greatest power at the time — is one of those
impossible things that now we see was inevitable. I'm a Hamilton person
myself, and Chernow's book on him is great. Hamilton had a lot of downsides.
He wanted a king. But I think he was audacious in the way he went about
things.
–Condoleezza Rice,
interviewed by HBR
Crude World
by Peter Maass (Knopf, 2009)
With this book, New York Times Magazine writer Peter Maass adds his voice to
others predicting severe economic dislocation after global oil production
passes its peak and enters an inevitable decline — a view of the future that
doesn't sit well with the oil industry. Maass, author of a 1996 book about
the Bosnian conflict, writes beautifully about this ugly stuff: "[Oil] is a
commodity that is extracted, refined, shipped and poured into your gas tank
with few people seeing it. It has no voice, body, army or dogma of its own.
It is invisible most of the time, but, like gravity, it influences
everything we do."
–Rob Toker, coauthor (with Alex Rau and Joanne Howard) of
Can Technology Really Save Us from Climate Change?
Love 'Em or Lose 'Em
by Beverly Kaye and Sharon Jordan-Evans (Berrett-Koehler, 1999)
When I was a manager back home in the U.S., I read this book to get ideas
about recognition and reward. Later, as a cross-cultural coach, I bought a
stack of copies for my clients, mainly Europeans managing Americans. They
found it a revelation.
Books on cross-cultural management often don't provide the same level of
psychological insight as when authors write for their own country. Love 'Em
or Lose 'Em reminds the U.S. how extreme its business culture can be, but
also — crucially — helps outsiders to navigate it.
–Erin Meyer, coauthor (with Elisabeth Yi Shen) of
China Myths, China Facts
Revolution in a Bottle
by Tom Szaky (Portfolio, 2009)
Szaky has written the best book on entrepreneurship I've read. This is not
the story of a huge exit, or wow technology, or big money from top-tier VCs.
It's the witty, funny, poignant tale of a young Princeton dropout who finds
himself up to his elbows in worm poop turned fertilizer on the way to
building a pioneering "upcycling" company, TerraCycle. This is how
entrepreneurship happens in the real world: Scrappy, resourceful, hustling,
flexible, idealistic, smart people take on big challenges by thinking
differently, dealing innovatively with crises (bullets whizzing through the
Newark office), and learning as they go.
–Daniel Isenberg,
HBR author and blogger
This blog
posting by Tom Selling is neither “preliminary” nor “tentative.”
Tom’s postings are sometimes preliminary but they are almost never tentative.
Merrily We Roll Along -- Forward and Up
Posted: 30
Jan 2010 03:12 AM PST
It took seven years for the FASB and IASB to publish its "preliminary
views"
exposure draft (ED) on the fundamental issues addressed by Boards'
joint financial statement presentation project. And just recently,
the FASB staff has posted a ten-page tabular
summary
of their "tentative decisions as of December 2009." My own views,
which I have expressed in four previous points,* are neither
"preliminary" nor "tentative." Granted, I am not bound by due
process constraints, but eight years and counting has been far too
long to wait for closure on a project that will have absolutely
nothing to say about recognition or measurement. As my previous
posts will indicate, I have also been extremely frustrated by some
of the puff-pastry notions contained in the DP—and that are still on
the table in some form or another:
First, there is no investor value created from allowing management
to determine how a transaction is classified on the financial
statements.
Yes, every business is different, but there are still only two
principles-based categories of transactions/events in which an
enterprise may engage: 'financial' and 'non-financial.'
Even rudimentary delineation of the non-financial category into
'operating' and 'investing' activities has proven futile, and should
be abandoned. For example, is the acquisition of inventory an
investing or operating activity? Is purchasing one new machine to
replace a worn-out machine on the factory floor containing 1000
machines an investing or an operating decision? At best, even the
operating/investing dichotomy it is too subjective to be audited,
and at bottom, it is a distinction without a substantive difference.
Even allowing that there are some informative ways to further
delineate ongoing operating activities, allowing management the
latitude to make those determinations is a loser before the opening
bell is run. Accounting standards should require a principled
separation of financing from non-financing, but that would challenge
the sacred cow interest cost capitalization—so it ain't gonna
happen.
Second, no investor value can possibly be created simply by
re-arranging the financial statement deck chairs, even in the name
of a newly coined "cohesiveness principle."
Disaggregation is where it's at, and in that regard there does
happen to be a role for a cohesiveness principle; as I am about to
explain, though, it is not the role envisaged by the Boards.
That Promising New Tack
Having gotten that off my chest, I want this latest missive to be
seen in a positive and encouraging light. To wit, there is one new
piece of information, to be found in the very last item of that
ten-page table that knocked my socks off. It's somewhat lengthy, but
worth repeating:
"Replace the proposed reconciliation … [of cash flows to
comprehensive income]
with
an analysis of the changes in balances of all significant asset and
liability line items. Each line item analysis should
distinguish the following components:
a. Changes due to cash inflows and cash outflows
b. Changes resulting from noncash (accrual) transactions that are
repetitive and routine in nature (for example, credit sales, wages,
material purchases)
c. Changes resulting from noncash transactions or events that are
nonroutine or nonrepetitive in nature (for example, acquisition or
disposition of a business)
d. Changes resulting from accounting allocations (for example,
depreciation)
e. Changes resulting from accounting provisions/reserves (for
example, bad debts, obsolete inventory)
f. Changes resulting from remeasurements
Present information about remeasurements in the financial
statements.
• FASB: require disaggregation of remeasurements on the face of the
statement of comprehensive income (SCI) in a columnar format. Those
two columns should be labelled
total comprehensive income and
remeasurements.
• IASB: require presentation of remeasurements in the notes to
financial statements.
Modify the definition of a
remeasurement. The working definition of
remeasurement is: an amount recognised in comprehensive
income that reflects the effects of a change in the carrying amount
of an asset or liability to a current price or value (or to an
estimate of a current price or value). A current price or value
includes the following measurement attributes: fair value, fair
value less costs to sell, value in use and net realisable value.
[bold italics supplied; dates omitted]"
This is pretty big news, AND IT COULD BE HUGE! However, I'm afraid
the devil will be in the implementation details. That's why I'm
going to spell it out for the Boards in simple terms: what is
actually needed, why it's needed, and how to do it.
The What
—
The Boards enunciated in their original exposure draft an objective
that financial statements should be presented in a manner that
"presents a cohesive financial picture of an entity's activities."
I'm not exactly sure what they mean by "cohesive" even after looking
up that term in a few dictionaries. Nonetheless, as a metaphor to
financial reporting, the term resonates as regards the relationship
between financial statement notes and the financial statements
themselves. "Cohesiveness" should mean that the financial statements
hold, in a coherent or cohesive manner, the quantitative information
in the notes.
Stated even more plainly,
every
balance sheet line item should be "rolled forward",
and
each line item in the 'flow financial statements' (e.g., income
statement, statement of cash flows, statement of changes in
shareholders' equity) can be found to be the sum of line items in
those balance sheet item roll forwards. That's what I
mean by HUGE.
The Why —
As I have already stated, disaggregation is where it's at. With XBRL
around the corner, analysts will most certainly be competing with
each other to create the sexiest non-GAAP measures of financial
performance they can by plucking a little tagged something from
here, and combining it with a little tagged something from there. If
you're a sports fan, you are probably aware of all the new and
interesting
baseball
stats created by imaginative analysts—once they were able to get
their hands on the underlying data.
The statistics revolution in financial reporting should make the
baseball stats revolution look like—well, what it is—a mere game. To
pick just two of hundreds of possibilities an analyst should be able
to identify each component of a foreign currency translation
adjustment, and decide whether to accept it as presented, or to make
one's own pro forma adjustments. Or, if you don't like capitalized
interest, an analyst should be able to reverse every stinking dollar
of it.
A more subtle, but equally important reason for comprehensive roll
forwards is that it will be a huge enhancement to
external controls over financial reporting (and along
with that, something for an auditor to really audit). Much has been
said and written about the importance of internal controls over
financial reporting, but a financial regulator's basic
responsibility is not merely to mandate internal controls, but to
impose substantive external controls. Any control expert should tell
you that if you can't roll forward a balance sheet account, you
can't hardly test its accuracy. If everyone should be doing their
roll forwards internally, and they are quite obviously an efficient
form of disclosure, then what is keeping regulators from mandating
them? (The sad answer to this question shall be provided anon.)
The How —
The extract I have provided from that ten-page table leaves a lot of
implementation questions unanswered; and admittedly, it's only a
summary of what the Boards may be thinking. The area of greatest
concern to the Boards appears to be the level of detail to be
provided in the roll forwards.
Once again, that new-fangled "cohesiveness principle" makes the
answer to their dilemma straightforward: the Boards need merely to
specify that the line-item detail of the roll forwards must be
sufficient to allow "roll ups" to each of the lines in the flow
statements. For example, if the FASB wants to separately identify "remeasurements"
(more on that unfortunate term later) on the statement of
comprehensive income, then the remeasurement components in a balance
sheet line item roll forward must perforce be set forth.
I am compelled to add as an aside, though, that if the board is
struggling to define "remeasurement," they should first acknowledge
that the term is already spoken for in another part of GAAP. ASC
830-10-45-1 (within the
Foreign Currency Matters topic) identifies remeasurement
as a process by which the books of record of an entity are converted
to its "functional currency." Contrary to the Boards' proposed new
definition, what is currently regarded as remeasurement does not
necessarily result in "current prices" or "current values." So, if
new terminology is indeed required, which I recognize is likely the
case, I would humbly suggest a couple of terms that convey the
objective more straightforwardly: like "revaluaton" or "valuation
adjustment."
Alas, the "Why Not"
The sad reality is that issuers will balk severely and senselessly
at comprehensive roll forwards. And, who knows whether the
toes-in-water approach now suggested by the Boards will prevail, or
perhaps ultimately drive a wedge between them? I'm betting that the
FASB will insist on something at least close to the sensible
approach that they have finally put forward. Meanwhile, the EU
will threaten to ditch the IASB unless they get back with the
a la
carte chicken-salad-for-issuers program they have
ordered.
As for yours truly, I don't believe issuers who will claim that
balance sheet roll forwards (much less a direct cash flow statement)
are a bridge too far – and neither should any reasonably intelligent
undergraduate accounting major. If consolidated income statements
already articulate to consolidated balance sheets, then why can't
the components of those statements articulate? The simple answer is
that they should – and they must.
Simple can be beautiful; that's why I like accounting. Comprehensive
roll forwards that permit comprehensive roll ups would not solve
every single problem that exists in regard to financial statement
presentation. But, by comparison to every other concept or
objective offered up by the Boards during the past eight years and
counting of this project, everything else is weak tea.
-------------------------------------------------
*Those four
posts are as follows:
The "Preliminary Views" on Financial
Statement Presentation: Seven Years of Deliberation for This?
Financial Statement Presentation: The
Sequel
Making Financial Statement
Presentation Simple: Mandate Account Reconciliations
Financial Statement Presentation:
Will Issuers or Investors Prevail?
|
Bob Jensen's threads on controversies in the setting of accounting standards
are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Adjustable Rate Mortgage ---
http://en.wikipedia.org/wiki/Adjustable_Rate_Mortgage
Video: Strong ARM of Mortgage Bubble is Building to Burst:
"Second Financial Economic Crash Coming - Huge & Soon," CBS Sixty Minutes
---
http://www.youtube.com/watch?v=JKlBJavw_X4
"Dear Bank of America, I'd Like to Schedule a Default," by Austin
Hill, Townhall, January 3, 2009 ---
http://townhall.com/columnists/AustinHill/2010/01/03/dear_bank_of_america,_id_like_to_schedule_a_default
Dear Bank of America;
Hi, it’s me, your customer Austin. I’m writing to
schedule my mortgage default.
That’s right, I’m ready to schedule my mortgage
default. Does that sound strange?
Well, believe me, Bank of America, I had hoped that
our relationship wouldn’t come to this. But after months of trying to do
business with you, I’ve decided that it’s probably in my best interest to
just, you know - “walk away” from my mortgage.
How could it ever be in anyone’s best interest to
default on a mortgage? And why would anyone ever want to default on a
mortgage?
Well, here’s the deal: I have one of those
now-famous “Option ARM” loans on my residence – the interest rate is
adjustable, and the loan provides optional payment plans. And yes, Bank of
America, you inherited my loan when Countrywide Lending went down the tubes
in 2008, and you merged your company with theirs.
And here are some other details about me, Bank of
America: I am fortunate to have a great job with a solid income, and I work
under a long term employment contract. While my full time occupation is
being a daily talk show host, I am also a writer and a public speaker, so I
have multiple streams of income. I own real estate in multiple regions of
the U.S., and I’m a big believer in real estate as a long term investment.
And perhaps most interesting for you, Bank of America, I have a great credit
score, and I’m current on all my debt payments.
During the recent real estate “boom,” I took some
equity out of my home. Now, in the aftermath of the real estate “bust,” my
house is slightly “under water” – not by much, but a little. And the
interest rate on my loan won’t begin to move upward for another two years,
so I’m not in any crisis right now.
The value of my property has actually begun to move
upward a bit in the past few months, but it’s going to be a few years before
the value reaches parity with my debt. And that’s why I was thrilled to get
that little note you sent me in the mail last summer, Bank of America.
Remember? You sent me that nice letter asking if I’d like to have my loan
modified to a 30 year, fixed rate mortgage.
I responded quickly to that letter, Bank of
America. And I’ve called repeatedly for over half a year. But here’s the sad
truth that I’ve discovered about you: you’re not really interested in
working with me, because I’m not behind on my payments
With each and every call, Bank of America, I get
the same treatment. Once your customer service representative checks the
data base and realizes that I’m current on my payments, they “transfer my
call” to “another department” – and from there, I’m left on hold. If another
representative picks up, they want to transfer me again. And if I actually
have a conversation with anybody, I’m treated to a person reading through a
litany of “assessment questions” and surveys and evaluations. And then I’m
transferred again.
After repeatedly being told that there is immediate
help available to Bank of America customers who are delinquent, I finally
started asking, “so will you talk to me about a loan modification if I stop
making payments?” And to that question, I’ve repeatedly heard the same
answer: “I could never advise you to not make your payments Mr. Hill” the
representative will say, “I’m just telling you that if you become delinquent
we have help available…”
I’m not the only person who has this disturbing
kind of relationship with you, Bank of America. I discussed this on my talk
show in Boise, Idaho, and was inundated with calls and email detailing the
same sad story. I even addressed this over the holidays on a radio talk show
where I was guest hosting in Phoenix, Arizona – one of the most tumultuous
real estate markets in the country – and got the same response.
I’ve also talked with lots of personal friends
about this, Bank of America. People from Los Angeles to Chicago to
Washington, D.C., and from all walks of life. People with high school
diplomas and M.D.’s and MBA’s and Ph.D’s and J.D.’s. We’re current on our
payments, have great credit, and want to continue our relationships with
you. But you’re not taking our calls.
It’s sad to realize that as you focus on your
“troubled assets,” and ignore those of us with good credit, you’re likely
creating more troubled assets in the process. But that’s the system you’ve
put in place, Bank of America. It’s a system that rewards people’s bad
behavior, while punishing other people’s good behavior.
So after spending half a year trying to take
advantage of the offer you extended to me in the mail, I now understand what
your actual system entails. And I’ve calculated the risks of working within
the system you’ve put in place.
I’m ready to schedule my default. What would you
like to do next?
Bob Jensen's threads on sleaze in granting mortgages ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
"Questions From A Future Blogger," by David Albrecht, The Summa,
January 14, 2010 ---
http://profalbrecht.wordpress.com/2010/01/14/questions-from-a-future-blogger/
Accounting and/or financial blogs are a big deal.
As the world evolves and becomes faster paced, long-lived jobs will
disappear. We accountants will adapt by piecing together a career from many
project-length opportunities. I believe it will be a matter of professional
life or death for accountants to get on top of evolving current events and
stay there. For there to be life, we all need to make life-long learning a
lifestyle.
The ability to think will separate thrivers from
survivors and hangers-on. We accountants will need to think critically
(buzzword for analyze and understand what is going on), creatively
(inventing solutions) and practically (applying cutting edge skills to
implement solutions).
How will we get learn to think these ways and grow
our thinking? Independent blogs commentaries like The Summa, and re: The
Auditors, and TaxGirl. Blogs provide input to fuel critical thinking, seeds
for creating thinking, and energy for practical thinking.
So, I want to encourage accounting/financial
blogging. Then along came this e-mail. from a Summa reader, asking about my
blogging process. Although I don’t reveal his identity, I’m already aware of
his writing and his unifying message. He has a lot to contribute, and I
think he should blog. So, I wrote this blog piece. His comments/questions
are in emphasized green, answers in normal font.
Continued in article
Bob Jensen's threads on listservs, blog, social networks, tweets, and open
sharing ---
http://www.trinity.edu/rjensen/ListservRoles.htm
In response to David Albrecht's appeal on the AECM
for term paper project ideas in intermediate accounting, an interesting
suggestion was forwarded by Linda V Ruchala
[lruchala@UNLNOTES.UNL.EDU]
David,
Last semester I used a writing assignment in my intermediate cost class that
students found interesting. I had students read Ian Roderick's article
"Developments in the Schumacher Ethos" (Advances in Public Interest
Accounting 2009, Vol 14, pages 15-23. The paper describes EF
Schumacher's environmental ideas from the 1970s and includes mention of the
need to account for externalities in environmental and other social issues.
I asked them to reflect their reaction to Roderick's perspective and the
role that accounting should play in controlling the costs of climate change,
and the responsibility of private firms in this area. After completing this
individual assignment, I had students exchange their papers with others in a
small group setting and had them discuss their papers and develop a group
paper reflecting the degree of agreement or disagreement that was contained
within the group.
I had a number of very thoughtful and fascinating
papers, both group and individual. Students also found that American and
international students had some very different perspectives on this issue.
This assignment required students to examine an area that they found novel
in the management accounting domain.
Hope this helps.
Linda Ruchala, Ph.D., Associate Professor School of
Accountancy 380 CBA University of Nebraska-Lincoln Lincoln, NE 68588-0488
email: lruchala@unl.edu
Office: 402-472-8812 FAX: 402-472-4100
January 4, 2010 reply from Bob Jensen
Great idea Linda,
Students wanting to look up the history of attempts to measure
externalities might want to check out --- Studies in Accounting Research
Monograph 14 at
http://aaahq.org/market/display.cfm?catID=5
If similar projects are assigned in the future, it might be worthwhile in
this instance to assign the Wikipedia module Externalities ---
http://en.wikipedia.org/wiki/Externalities
This is a rather nice and concise discussion of problems to be encountered.
Bob Jensen
January 4, 2010 reply from James R.
Martin/University of South Florida
[jmartin@MAAW.INFO]
A few ideas related to
potential student assignments in cost or management accounting:
I recently developed a page on
MAAW for research papers that I will probably never pursue. Most of these
ideas are not suitable for student papers, but perhaps some of them could be
scaled down for that purpose.
The link for that page is:
http://maaw.info/Ideas.htm
Another MAAW page that might
help generate some ideas for student papers is the controversial issues
course page. Although many of the issues are fairly old, most have never
been resolved. For this page see:
http://maaw.info/GraduateManagementAccountingCourse.htm
In the MAAC class I had
students debate the issues, but that would be difficult for students in an
undergraduate cost class. Another approach is to have students summarize
papers and discuss them in class. I did this for several years and started
placing the student summaries on the web site around 2000. You can find all
of our summaries at:
http://maaw.info/ArticleSummariesMain.htm
If you choose papers with
advocates on several sides of an issue (some are multi-sided, e.g. direct
costing, absorption costing, activity-based costing, and throughput costing)
you get a debate of sorts when they discuss the papers in class.
Some relatively new topics
that add more spice to the some of the issues include:
Change Management
http://maaw.info/ChangeManagementMain.htm
Lean Accounting
http://maaw.info/LeanAccountingMain.htm)
Resource Consumption
Accounting
http://maaw.info/ResourceConsumptionAccountingMain.htm
For other current topics,
find out what CAM-I is working on now. The background for that sort of
paper, or group of papers is at:
http://maaw.info/CAM-IMain.htm
From The Wall Street Journal Accounting Weekly Review on January 4,
2010
"Harley-Davidson Union Makes Concessions," by: Kris Maher, The
Wall Street Journal, January 3, 2010 ---
http://online.wsj.com/article/SB10001424052748703735004574572223566560450.html?mod=djem_jie_360
SUMMARY:
Workers at Harley-Davidson's largest plant agreed to job cuts of nearly 50%,
more flexibility and an unusually long labor deal, in exchange for the
motorcycle maker's commitment to invest $90 million in the plant.
DISCUSSION:
1. Why were the Harley-Davidson employees willing to agree to job
concessions? How does this indicate the employees' highest priorities? What
do they consider to be lesser priorities?
2. What incentives did Pennsylvania offer to the
company in order to retain the job in the state? Why do state and local
governments offer aid to businesses? What is the cost-per-job in this
particular case? Why would the state think this is a good deal?
3. What might this deal mean for labor unions in
other industries or areas of the country? How could this trend impact
employees who are not in a union? How would the negotiation process be
different for union vs. nonunion employees?
TEXT
Employees at Harley-Davidson Inc.'s largest
factory agreed Wednesday to job cuts of nearly 50%, more work-rule
flexibility and an unusually long labor deal, in exchange for the motorcycle
maker's commitment to invest $90 million in the plant.
The unusual seven-year pact at the company's
massive York, Pa., plant represents an acknowledgment by the plant's work
force of the vulnerability of well-paid U.S. manufacturing jobs. Harley had
threatened to move the jobs from York to a new plant in Kentucky if the
union rejected the contract.
The state of Pennsylvania also offered its own
sweeteners: job training, low-interest loans and $15 million for upgrades.
The contract, approved by members of the
International Association of Machinists and Aerospace Workers, paves the way
for Harley to meet a previously stated goal of cutting almost half of the
2,000 nonmanagerial jobs at the plant.
The contract institutes a new category of "casual"
worker to be used on an as-needed basis and who will earn about 30% less
than first-tier production workers. The company eventually expects to employ
about 250 casual and 750 full-time production workers.
The union also agreed to slash the number of job
classifications to five from more than 60 and allow for much greater
flexibility in moving workers from one task to another.
"The agreement is designed to allow York to resize
and become more flexible and more cost-competitive and efficient, all of
which is key to a sustainable future" there, Harley spokesman Bob Klein said
Wednesday.
Keith Wandell, chief executive of Milwaukee-based
Harley-Davidson, told analysts in October that restructuring the York plant
would help the company reach a goal of $120 million to $150 million in
productivity savings.
The new contract signals that job security—even if
it covers fewer jobs—is a top priority for organized labor. It is rare for a
union to agree to both deep job cuts and wage and benefit concessions,
especially given the contract's length, said Gary Chaison, a professor of
industrial relations at Clark University in Worcester, Mass.
"This is tying the hands of the union for a long
time," he said.
Union officials couldn't be reached to comment.
Analysts said the contract reflects the
difficulties facing companies across the economy as well as their unionized
workforces. Harley, which had an 84% skid in third-quarter profits, had
"unprecedented retail sales declines" during the recent downturn, said
Sharon Zackfia, a partner at investment bank William Blair & Co. in Chicago.
"These were changes that had to be made to keep the company viable," she
said.
Even with the concessions, the contract provides
workers pay and benefits that are "among the best in the area," Harley said.
The lowest-paid production technicians in the first
wage tier will earn $24.10 an hour as of February, when the contract takes
effect, while a comparable new hire would earn $19.28 an hour, and a casual
worker would earn $16.75 an hour.
Local business officials in York said they were
relieved that the plant would continue to provide well-paying jobs that feed
into the region's economy, despite the steep job losses.
"It's never good news when a plant has to cut 50%
of its work force," said Bob Jensenius, executive vice president of the York
County Chamber of Commerce. "It is good news that they're going to stay and
will keep 700 employees." The company's plan to invest $90 million in the
plant means that "when the economy recovers more work will be sent York's
way," he said.
In August, Pennsylvania Gov. Ed Rendell offered $15
million in "capital assistance" to keep the plant in York. Spokesman Michael
Smith said other money could be tapped through the state's
economic-development or labor and industry departments.
Pump and Dump Fraud
January 3, 2010 message from David Albrecht
[albrecht@PROFALBRECHT.COM]
DHB makes body armor for U.S.troops. Its founder is
accused of securities fraud, and is awaiting trial under house arrest. There
is an interesting twist that makes it relevant to this list:
Dave Albrecht
Important Court Dates for Securities Fraud Case
Set for January
http://www.lawyersandsettlements.com/articles/13375/securities-fraud-stock-6.html
Westbury, NY: A so-called "pump-and-dump" stock
fraud scheme that allegedly helped furnish a luxurious lifestyle for the
former chairman and chief executive of DHB Industries will have another
day in court early in the new year. The securities fraud litigation
alleges that David H. Brooks was involved in fraudulently draining
millions from the business, according to the December 31 issue of
Newsday.
Brooks founded and formerly headed DHB
Industries, a body armor company originally based in the Westbury area
of New York but now headquartered in Florida under the name Point Blank
Solutions Inc. Brooks left the company in 2006 after being charged with
numerous counts of tax, accounting and securities fraud.
According to Newsday, Brooks earned $185
million in 2004 by knowingly making false claims about the company in an
assumed effort to pump up the value of its stock. Brooks reportedly
pleaded not guilty to the charges and, according to Newsday, is
currently under house arrest in his Manhattan apartment.
He is scheduled to go on trial for criminal
charges in late January. Another court dated related to the case is set
for January 15.
Last August, shareholders settled another class
action lawsuit against the company and Brooks for $35 million. However,
US District Judge Joanna Seybert made the order of payment against DHB
Industries, not Brooks, the alleged perpetrator of the securities fraud.
As a result, an appeal has been launched with the intent of holding
Brooks liable for the $35 million settlement. A federal appeals court in
Manhattan will hear the appeal prior to the start of Brooks' criminal
trial.
A lawyer involved in the case told Newsday that
the appeal would be a worthy test of the Sarbanes-Oxley Act, which
dictates a higher accountability from company executives. DHB had
indemnified Brooks from having to make the payment. Sarbanes-Oxley
requires chief executives and chief financial officers to forgo their
stock market profits earned during periods when certified financial
statements have been falsified, as prosecutors allege.
continued in article.
The independent auditor
(Grant Thornton) for body-armor maker DHB
Industries Inc. of Carle Place resigned after notifying the company of
"deficiencies" in DHB's accounting and finance staffing levels and its "failure
to disclose" certain related-party transactions, according to an SEC filing.
Mark Harrington, "Independent Auditor for Body-Armor Maker DHB Industries
Resigns," AccessMyLibrary, August 29, 2003 ---
http://www.accessmylibrary.com/coms2/summary_0286-7540495_ITM
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Why Most CEOs Are Bad at Strategy," by Roger Martin, Harvard Business
Review Blog, January 6,m 2010 ---
http://blogs.hbr.org/cs/2010/01/why_most_ceos_are_bad_at_strat.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Buy it now » There is a lot of strategy in the
world, produced by all types of CEOs, corporate heads of strategy, and
strategy consultants. Yet very little of this strategy is any good. There
are undoubtedly many possible explanations for why this is the case, but
here is my own pet theory, which I offer up to elicit your reactions and
surface alternatives:
A good strategy is the product of the creative
combination of two disparate logics — rather than a single linear analytical
logic flow — but CEOs and "strategists" are seldom conditioned to become
skilled at the requisite creative combination.
The two most fundamental strategic choices are
deciding where to play and how to win. These two decisions — in what areas
will the company compete, and on what basis will it do so — are the critical
one-two punch to generate strategic advantage. However, they can't be
considered independently or sequentially. In a great strategy, your
where-to-play and how-to-win choices fit together and reinforce one another.
For example, operating only in your home country
market may seem to be a perfectly fine where-to-play choice and winning on
the basis of technological superiority a perfectly fine how-to-win choice,
but their combination almost always produces a bad strategy — because of
global economies of scale in R&D, some competitor will globalize and blow
out the geographically narrow national player. These choices don't fit or
reinforce.
In contrast, Apple wins because its where-to-play
choice — broad participation across a number of high-involvement consumer
electronics categories (computers, music, phones) — is matched wonderfully
with its how-to-win choice — competing on user experience design and
eco-system orchestration. It leverages the winning capabilities it has built
in these two areas across the domains in which it has chosen to play to
produce its winning Macs, iPods, and iPhones.
The trouble is, CEOs don't usually get to the top
by integrating different logics in that way. More often they rise by pushing
a single logic. They like to analyze a problem and come up with a single,
sufficient answer, like how to globalize or get costs under control or
introduce a new product, rather than trying to look for answers to two
questions that fit together elegantly.
As a consequence, many of them come to think of
strategy as either where-to-play or how-to-win. For example, in the global
pharma industry today, it appears that most CEOs define their strategies as
simply playing in the historically lucrative pharma industry and doing
whatever the rest of their competitors do. This is silent on how-to-win and
the resultant set of me-too strategies is one reason why performance in the
industry is going downhill fast.
Or alternatively, for many high-tech CEOs, the
dominant choice is to win with a proprietary technology. This is silent on
where-to-play and that has led many technology companies astray because it
really matters where exactly that technology is used — as we see with Nortel
Networks, which is now in the bankruptcy court despite its treasure trove of
technology patents.
Meanwhile, corporate strategists and strategy
consultants get ahead by demonstrating mastery of all sorts of conceptual
tools for analyzing where-to-play (five forces, profit maps, etc.) or
how-to-win (experience curve, value chain, VIRO, etc.). However, there as
yet is no analytical tool for combining a given where-to-play choice with a
congenial how-to-win choice or vice versa. That takes creative insight. But
the majority of people who seek to become corporate strategists or strategy
consultants do so because they are much more comfortable with analysis than
what they perceive as guesswork. So they tend to become expert at strategic
analyses, not strategy.
That, I submit, is why CEOs and "strategists" so
seldom produce good strategies. Strategy is a creative act and the way to
produce good strategy is go beyond basic analysis to creatively integrate
your choices concerning where you play and how you propose to win.
Roger Martin is the Dean of the Rotman School of Management at the
University of Toronto in Canada and the author of The Design of Business:
Why Design Thinking is the Next Competitive Advantage (Harvard Business
Press, 2009).
AACSB Data at a Glance ---
http://www.aacsb.edu/dataandresearch/dataglance.asp
Faculty may have to contact a AACSB Member-Dean of the College of Business for
access to much of this data.
If the data have not been updated for 2009, the data may be misleading since
2009 had such an impact on college budgets.
Note that there is a database for AACSB-accredited online business programs.
Also note that the AACSB does not accredit doctoral programs. There are no
online accredited doctoral programs to my knowledge ---
http://www.trinity.edu/rjensen/crossborder.htm
The data includes:
Global Business School Characteristics
- Average operating budgets
- Teaching, intellectual contributions, and service priorities
- AACSB member institutions by country
Global Business School Student Data
- Percent of MBA graduates by gender
- School (masters-level) admissions profiles
- Undergraduate enrollment percentages by citizenship
Global Business School Faculty and Administration Data
- Percent of academically qualified and professionally qualified
faculty
- Percent of deans by gender
- Average faculty salaries in the US
- Percent of tenured faculty
Global Business School Programs
- Doctoral programs by discipline
- Degree program levels offered
- AACSB-accredited schools with online MBA
programs
AACSB Examines Graduate Enrollment by Discipline at Member Schools,
January 2010 ---
http://www.aacsb.edu/publications/enewsline/datadirect.asp
Business School Faculty Trends—Changes by Discipline, January 2010 ---
http://www.aacsb.edu/publications/enewsline/faculty-trends.asp
The economic crisis in 2009 may have changed some of the data reported here,
especially the number of faculty in finance where student employment
opportunities took a huge hit in 2009.
Talk About Moral Hazard
"A Novel Idea to Keep Students in College: Failure Insurance," by David
Glenn, Chronicle of Higher Education, January 10, 2010 ---
http://chronicle.com/article/A-Novel-Idea-to-Keep-Students/63493/
Jensen Comment
This is a little like flood insurance in that only people in high risk flood
zones want to purchase flood insurance such that the only deep pockets insurer
that takes on flood insurance is the government. College failure insurance will
most likely have to be underwritten by government.
I agree with most of the comments at the end of the above article.
Proposed Changes in Humanities Doctoral Programs as Tenure Track Openings
Decline
"No Entry," by Scott Jaschik, Inside Higher Ed, January 10, 2010 ---
http://www.insidehighered.com/news/2010/01/04/nojobs
"Ph.D. Supply and Demand," by Scott Jaschik, Inside Higher Ed, January
11, 2010 ---
http://www.insidehighered.com/news/2010/01/11/grad
"Best of 2009: Accounting The year was dominated by hot debates over
fair-value accounting and a potential move to IFRS. Still simmering are new
ideas about revenue recognition, lease accounting, and contingent liabilities,"
CFO.com, December 24,
2009 ---
http://www.cfo.com/article.cfm/14464184?f=home_featured
The
year was dominated by hot debates over fair-value accounting and a potential
move to IFRS. Still simmering are new ideas about revenue recognition, lease
accounting, and contingent liabilities.
At this time next year we may be bidding a fond
farewell to U.S. generally accepted accounting principles — or we may not.
Regulators are still undecided about whether to require U.S. companies to
abandon U.S. GAAP in favor of international financial reporting standards.
But advocates and opponents of the switch came up with forceful arguments
for their positions in 2009, as reported in several of the accounting
stories listed below.
Meanwhile, a rancorous debate continued over
fair-value accounting rules, with standard-setters eventually delivering new
guidance and new rules to settle a scorching issue. There were important
developments in other areas, too, including revenue recognition, lease
accounting, financial-statement presentation, auditing, and a big "dirty"
secret about contingent liabilities. All of these developments and more were
covered in our best accounting and auditing stories of 2009, presented here.
Accounting
Herz: U.S. Convergence Ball Is in SEC's Court
The decision about whether the nation's corporations should report under
international accounting standards has foundered amid a change of Presidents
and a corresponding change of leadership at the Securities and Exchange
Commission.
IFRS: Jekyll or Hyde?
U.S. adoption of global accounting standards would be intended to create a
level global playing field, but within U.S. borders, its benefits would
differ dramatically from company to company.
Private Companies Get IFRS Made Easy
At a mere 230 pages, a new version of the international accounting standards
for nonpublic entities may win a big following, sooner or later.
Goodbye GAAP
It's time to start preparing for the arrival of international accounting
standards.
Dirty Secrets
Companies may be burying billions more in environmental liabilities than
their financial statements show.
Critics Pan New Financial Statements
A long-planned overhaul of financial statements gets a rough reception from
preparers at its initial unveiling, particularly from banks. Meanwhile, a
survey says a large majority of CFOs don't even know about the proposal.
When Is a Lease a Lease?
The answer will prove pivotal to companies' balance sheets when a new lease
accounting standard comes out.
Revenue Recognition: Will a Single Model Fly?
Elements unique to long-term contracts pose a challenge for FASB and IASB in
their bid to create one standard covering all customer relationships.
FASB Kills the "Q," Stiffens Off-Balance-Sheet Reporting
The accounting standards-setter approves rules aimed at unveiling attempts
to hide losses.
Bridging the Gap on Booking Bank Loans
The U.S. and international accounting standards boards mull the divide
between them on how banks should recognize changes in a loan's fair value.
The Fair-Value Deadbeat Debate Returns
On hiatus while other fair-value questions were debated, the hotly-contested
issue of why companies can book a gain when their credit rating sinks has
returned to center stage.
Rule Change Lets Banks Reinvent the Past
Without directly changing fair-value rules, a new FASB rule allows banks to
"roll forward" noncredit losses and avoid a hit to earnings.
Ball of Confusion: FASB Affirms Fair-Value Principles
Okaying a proposal on how to gauge the price of financial instruments in
illiquid markets, the board says that preparers should use their judgment.
Why Didn't FASB Just Say So?
In a "plain English" summary of its recent actions on fair value, the FASB
proves that it can, in fact, speak plain English.
A Fair Value Antidote Is Rushed by FASB
In newly proposed guidance, board encourages companies to use more judgment
— and do more work — when assessing the current value of assets stuck in an
inactive market.
Bob Jensen's threads on
accounting theory ---
http://www.trinity.edu/rjensen/theory01.htm
"Best of 2009: Technology:
The CFO editors pick the year's top stories on software, spreadsheets, IT
spending, and more," CFO.com, January 11, 2010 ---
http://www.cfo.com/article.cfm/14459465/c_14467129?f=home_todayinfinance
"Best of 2009: Regulation:
As regulators spent the year operating in flux, we kept tabs on their top
corporate-finance concerns," CFO.com, January 4, 2010 --- .
http://www.cfo.com/article.cfm/14462801/c_14467129?f=home_todayinfinance
100 Inspirational, Entrepreneurial Videos on YouTube ---
http://www.careeroverview.com/blog/2010/100-inspirational-entrepreneurial-talks-on-youtube/
Some of these are terrific if you just cannot fall asleep. Others will help keep
you awake.
Finance and
Investing
"10 Classic Books of the 'Naughties'," Seeking Alpha, December 30,
2009 ---
http://seekingalpha.com/article/180263-10-classic-books-of-the-naughties
As we say goodbye to the
“Naughties” I thought it may be interesting to step back and reflect on some
of the significant books of the last decade that really did change the way
we thought about private sector development and its contribution to overall
development. Given the “decade” theme, I’ve limited the selection to ten,
although the books don’t map to each year of the decade. Obviously such an
exercise is pretty subjective so please feedback any glaring
omissions/personal prejudices. So, in order of publication date, rather than
magnitude of contribution we have:
- De
Soto, Hernando (2000) The Mystery of Capital: Why Capitalism
Triumphs in the West and Fails Everywhere Else. The
central idea that the poor in developing countries with weak systems of
property rights and stifling bureaucracies are unable to leverage the
value of their (informal) assets has been a big influence on donor PSD
programmes.
-
Easterly, William (2002) The Elusive Quest for Growth:
Economists’ Adventures and Misadventures in the Tropics.
Here at the
World Bank, the battle between “planners” and “searchers” shows no
sign of abating.
- Yunus,
M. (2003) Banker to the Poor: Micro-Lending and the Battle
Against World Poverty. The nobel prize winner who made
micro-finance mainstream. I was tempted to include the more recent
Portfolios of the Poor for its more hard edged analysis of how the
poor spend their money. Yunus’s more recent work focuses on
the concept of social entrepreneurship.
- Kay,
John (2004) The Truth about Markets: Why Some Countries are
Rich and Others Remain Poor. Everything you need to know
about incentive compatability, disciplined pluralism and embedded
markets.
- Wolf,
Martin (2005), Why Globalisation Works. Some
might question whether it actually does after the last couple of years.
But setting out the merits of global integration is an intensely
competitive space occupied also by Stigtitz (2005) “Fair Trade for All”
and Bhagwati (2004) “In Defense of Globalisation” amongst others.
-
Prahalad C.K (2005) The Fortune at the Bottom of the Pyramid.
Although many have questioned whether there really is a fortune there or
not, this book shows how the poor can be treated as a serious market
players making rational economic decisions, rather than being passive
aid beneficiaries. I think much more PSD work can usefully be done in
relation to wealth creation at the base of the pyramid (BoP). Stuart
Hart’s “Capitalism at the Crossroads: Aligning Business, Earth, and
Humanity” is also a close contender in the BoP space, as is Al Hammond’s
“Bottom Four Billion”.
- Levitt
and Dubner (2006) Freakonomics: A Rogue Economist Explains
the Hidden Side of Everything. The original
thought-provoking book that put Pop Economics on the map and spawned
lots of imitators including this blog’s own
Undercover Economist (Tim Harford) as well as the
Armchair Economist (Landsberg); and the
Economic Naturalist (Frank).
-
Collier, Paul (2007) The Bottom Billion: Why the Poorest
Countries are Failing and What Can Be Done About It. The
four traps that show how development for the world’s poorest means more
than just more aid.
- Stern,
Nicholas (2007), The Economics of Climate Change: The Stern
Review. Depicting climate change as the “greatest and
widest-ranging market failure ever seen” was a huge conceptual step
forward. This perspective makes it much easier to devise and justify PSD
or market based contributions to low-carbon growth. However, recent
events in Copenhagen show we’re still some way away from establishing a
clear global price for carbon.
- Tett,
Gillian (2009), Fool’s Gold: how unrestrained greed
corrupted a dream, shattered global markets and unleashed a catastrophe.
Do you still need to know what this book is about?
Humor for January 1-31, 2009
Snopes Humor
---
http://www.snopes.com/humor/humor.asp
Forwarded by Bill Mister
The Diary of a Snow Shoveler
December 8 6:00 PM. It started to snow. The first snow of the season, and the
wife and I took our cocktails and sat for hours by the window watching the huge
soft flakes drift down from heaven. It looked like a Grandma Moses print. So
romantic we felt like newlyweds again. I love snow!
December 9 We woke to a beautiful blanket of crystal white snow covering
every inch of the landscape. What a fantastic sight! Can there be a more lovely
place in the whole world? Moving here was the best thing I've ever done.
Shoveled for the first time in years and felt like a boy again. I did both our
driveway and the sidewalks. This afternoon the snowplow came along and covered
up the sidewalks and closed in the driveway, so I got to shovel again. What a
perfect life.
December 12 The sun has melted all our lovely snow. Such a disappointment. My
neighbor tells me not to worry, we'll definitely have a white Christmas. No snow
on Christmas would be awful! Bob says we'll have so much snow by the end of
winter, that I'll never want to see snow again. I don't think that's possible.
Bob is such a nice man, I'm glad he's our neighbor.
December 14 Snow lovely snow! 8" last night. The temperature dropped to -20.
The cold makes everything sparkle so. The wind took my breath away, but I warmed
up by shoveling the driveway and sidewalks. This is the life! The snowplow came
back this afternoon and buried everything again. I didn't realize I would have
to do quite this much shoveling, but I'll certainly get back in shape this way.
December 15 20 inches forecast. Sold my van and bought a 4x4 Blazer. Bought
snow tires for the wife's car and 2 extra shovels. Stocked the freezer. The wife
wants a wood stove in case the electricity goes out. I think that's silly. We
aren't in the Yukon, after all.
December 16 Ice storm this morning. Fell on my butt on the ice in the
driveway putting down salt. Hurt like heck. The wife laughed for one hour, which
I think was very cruel.
December 17 Still way below freezing. Roads are too icy to go anywhere.
Electricity was off for 5 hours. I had to pile the blankets on to stay warm.
Nothing to do but stare at the wife and try not to irritate her. Guess I
should've bought a wood stove, but won't admit it to her. God I hate it when
she's right. I can't believe I'm freezing to death in my own living room.
December 20 Electricity's back on, but had another 14" of the damn stuff last
night. More shoveling. Took all day. Darn snowplow came by twice. Tried to find
a neighbor kid to shovel, but they said they're too busy playing hockey. I think
they're lying. Called the only hardware store around to see about buying a snow
blower and they're out. Might have another shipment in March. I think they're
lying. Bob says I have to shovel or the city will have it done and bill me. I
think he's lying.
December 22 Bob was right about a white Christmas because 13 more inches of
the white crap fell today, and it's so cold it probably won't melt till August.
Took me 45 minutes to get all dressed up to go out to shovel and then I had to
poop. By the time I got undressed, pooped and dressed again, I was too tired to
shovel. Tried to hire Bob who has a plow on his truck for the rest of the
winter; but he says he's too busy. I think the jerk is lying.
December 23 Only 2" of snow today. And it warmed up to 0. The wife wanted me
to decorate the front of the house this morning. What is she nuts!!! Why didn't
she tell me to do that a month ago? She says she did but I think she's lying.
December 24 6". Snow packed so hard by snowplow, I broke the shovel. Thought
I was having a heart attack. If I ever catch the man who drives that snowplow
I'll drag him through the snow by his nose and beat him to death with my broken
shovel. I know he hides around the corner and waits for me to finish shoveling
and then he comes down the street at 100 miles an hour and throws snow all over
where I've just been! Tonight the wife wanted me to sing Christmas carols with
her and open our presents, but I was too busy watching for the snowplow.
December 25 Merry freakin' Christmas! 20 more inches of the slop tonight.
Snowed in. The idea of shoveling makes my blood boil. I hate the snow! Then the
snowplow driver came by asking for a donation and I hit him over the head with
my shovel. The wife says I have a bad attitude. I think she's a frickin' idiot.
If I have to watch "It's A Wonderful Life" one more time, I'm going to stuff her
into the microwave.
December 26 Still snowed in. Why the heck did I ever move here? It was all
HER idea. She's really getting on my nerves.
December 27 Temperature dropped to -30 and the pipes froze. Plumber came
after 14 hours of waiting for him. He only charged me $1400 to replace all my
pipes.
December 28 Warmed up to above -20. Still snowed in. THE WITCH is driving me
crazy!!!
December 29 10 more inches. Bob says I have to shovel the roof or it could
cave in. That's the silliest thing I ever heard. How dumb does he think I am?
December 30 Roof caved in. I beat up the snow plow driver. He is now suing me
for a million dollars - not only for the beating I gave him but also for trying
to shove the broken snow shovel down his throat. The wife went home to her
mother. 9" predicted.
December 31 I set fire to what's left of the house. No more shoveling.
January 8 Feel so good. I just love those little white pills they keep giving
me. Why am I tied to the bed?
Jensen
Comment
I just noticed --- they've started me up on white pills.
Forwarded by David Albrecht
A public school teacher was arrested today at John F. Kennedy International
Airport as he attempted to board a flight while in possession of a ruler, a
protractor, a compass, a slide-rule and a calculator. At a morning press
conference, the Attorney General said he believes the man is a member of the
notorious Al-Gebra movement.
He did not identify the man, who has been charged by the FBI with carrying
weapons of math instruction.
'Al-Gebra is a problem for us', the Attorney General said. 'They derive
solutions by means and extremes, and sometimes go off on tangents in search of
absolute values.' They use secret code names like 'X' and 'Y' and refer to
themselves as 'unknowns', but we have determined that they belong to a common
denominator of the axis of medieval with coordinates in every country.
As the Greek philanderer Isosceles used to say, 'There are 3 sides to every
triangle'.
When asked to comment on the arrest, President Obama said, 'If God had wanted
us to have better weapons of math instruction, he would have given us more
fingers and toes.' White House aides told reporters they could not recall a
more intelligent or profound statement by the President. It is believed that the
Nobel Prize for Physics will follow----
Forwarded by Paula
You're a Real Musician
When....
When
you realize that the cheers from the audience after a particularly difficult
passage are for a football match on the big screen TV over the bar, and that in
fact, no one is listening to you.
When
the gig you drove 200 miles for to make $100, and had to pay for a hotel room,
is later referred to as your "summer tour".
When
your most sincere, heartfelt comments are made by people that are drunk and who
won't remember you in the morning.
When
you are repeatedly told that the lead singer who can't read, never practices and
has been singing for only six months is "The strongest part of the band",
primarily because she has big wazoombas..
When
you are pleased that the pay for the gig, when looked at hourly from the time
you leave your house to when you return meets minimum wage.
When
you get to the gig to
find out that nothing is contracted, and you're charged $10 to park.
When
someone seeks you out to complement your playing as the "best sax player they
have ever heard", and you're the trumpet player.
When
you realize that a small piece of equipment- such as a wireless mike you need-
will take months of weekly gigs to pay for.
When
you have to add $30 or $40 out of your pocket to find a sub, cause no one will
cover you for what you are paid.
When
you aren't offended
when all of the young wedding guests leave after the second set to dance to the
DJ at a club down the street.
When
you are told that you must play until the very end of when you were contracted
for, when your only audience is the bartender, and you're being paid 40 or 50
quid for the night.
When
the guy collecting money at the door for the band's performance makes twice over
the course of the evening what you do as one of the band members.
When
you know that other musicians who routinely claim they don't work for less than
$100 a night only work a few times a year.
When
people who are drunk tell you that what you are doing is absolutely great and
the best thing they
have ever seen or heard, but refuse to pay more than $5 at the door.
When
someone calling the cops for noise is a good thing. You get to go home early and
you still get paid.
When
you realize that asking women out that you meet on gigs doesn't work, for now
they know you're a musician.
When
you have, for several years, been paid the same amount for a gig, but are afraid
to say anything about it for fear that you might lose the gig.
When
you spend more on the bar tab than you get paid for the gig.
Forwarded by Paula
Forwarded by
Paula
Here’s what Jeff Foxworthy has to say
about folks from Texas...
If someone in a Lowe's store offers you assistance and they don't work there,
you may live in Texas ;
If you've worn shorts and a parka at the same time, you may live in Texas ;
If you've had a lengthy telephone conversation with someone who dialed a wrong
number, you may live in Texas ;
If 'Vacation' means going anywhere south of Dallas for the weekend, you may live
in Texas;
If you measure distance in hours, you may live in Texas;
If you know several people who have hit a deer more than once, you may live in
Texas ;
If you install security lights on your house and garage, but leave both
unlocked, you may live in Texas ;
If you carry jumper cables in your car and your wife knows how to use them, you
may live in Texas ;
If the speed limit on the highway is 55 mph -- you're going 80 and everybody's
passing you, you may live in Texas ;
If you find 60 degrees 'a little chilly,' you may live in Texas ;
If you actually understand these jokes, and share them with all your Texas
friends, you definitely live in Texas .
Need to be cheered up?
Happy, Texas 79042
Pep , Texas 79353
Smiley, Texas 78159
Paradise , Texas 76073
Rainbow , Texas 76077
Sweet Home , Texas 77987
Comfort, Texas 78013
Friendship, Texas 76530
Love the Sun?
Sun City , Texas 78628
Sunrise , Texas 76661
Sunset, Texas 76270
Sundown, Texas 79372
Sunray , Texas 79086
Sunny Side , Texas 77423
Want something to eat?
Bacon , Texas 76301
Noodle , Texas 79536
Oatmeal , Texas 78605
Turkey , Texas 79261
Trout, Te xas 75789
Sugar Land , Texas 77479
Salty, Texas 76567
Rice , Texas 75155
Sweetwater, Texas 79556
Why travel to other cities? Texas has them all!
Detroit , Texas 75436
Colorado City, Texas 79512
Cleveland , Texas 77327
Dayton, Texas 77535
Denver City , Texas 79323
Klondike , Texas 75448
Nevada , Texas 75173
Memphis , Texas 79245
Miami, Texas 79059
Boston , Texas 75570
Santa Fe , Texas 77517
Tennessee Colony, Texas 75861
Reno , Texas 75462
Feel like traveling outside the country? Don't bother buying a plane ticket!
Athens , Texas 75751
Canadian, Texas 79014
China , Texas 77613
Egypt , Texas 77436
Ireland , Texas 76538
Turkey , Texas 79261
London , Texas 76854
New London , Texas 75682
Paris, Texas 75460
No need to travel to Washington D.C.
Whitehouse , Texas 75791
We even have a city named after our planet!
Earth , Texas 79031
And a city named after our State!
Texas City , Texas 77590
Exhausted?
Energy , Texas 76452
Cold?
Blanket , Texas 76432
Winters, Texas
Like to read about History?
Santa Anna , Texas
Goliad , Texas
Alamo , Texas
Gun Barrel City, Texas
Robert lee, Texas
Need Office Supplies?
Staples, Texas 78670
Men are from Mars, women are from Venus , Texas 76084
You guessed it..it's on the state line..
Texline , Texas 79087
For the kids...
Kermit , Texas 79745
Elmo , Texas 75118
Nemo , Texas 76070
Tarzan , Texas 79783
Winnie , Texas 77665
Sylvester, Texas 79560
Other city names in Texas , to make you smile.....
Frognot, Texas 75424
Bigfoot , Texas 78005
Hogeye, Texas 75423
Cactus , Texas 79013
Notrees , Texas 79759
Best, Texas 76932
Veribest , Texas 76886
Kickapoo, Texas 75763
Dime Box , Texas 77853
Old Dime Box , Texas 77853
Telephone, Texas 75488
Telegraph , Texas 76883
Whiteface , Texas 79379
Twitty, Texas 79079
And last but not least, the Anti-Al Gore City
Kilgore , Texas 75662
And our favorites...
Cut n Shoot, Texas
Gun Barrell City , Texas
Hoop And Holler, Texas
Ding Dong, Texas and, of course,
Muleshoe , Texas
Here are some little known, very interesting facts about Texas .
1. Beaumont to El Paso : 742 miles
2. Beaumont to Chicago : 770 miles
3. El Paso is closer to California than to Dallas
4. World's first rodeo was in Pecos , July 4, 1883.
5. The Flagship Hotel in Galveston is the only hotel in North America
built over water.
6. The Heisman Trophy ws named after John William Heisman who was the first
full-time coach at Rice University in Houston.
7. Brazoria County has more species of birds than any other area in North
America .
8. Aransas Wildlife Refuge is the winter home of North America 's only remaining
flock of whooping cranes.
9. Jalapeno jelly originated in Lake Jackson in 1978.
10. The worst natural disaster in U.S . history was in 1900, caused by a
hurricane, in which over 8,000 lives were lost on Galveston Island .
11. The first word spoken from the moon, July 20, 1969, was ' Houston .'
12. King Ranch in South Texas is larger than Rhode Island .
13. Tropical Storm Claudette brought a U.S. rainfall record of 43' in 24
hours in and around Alvin in July of 1979.
14. Texas is the only state to enter the U.S. by TREATY, (known as the
Constitution of 1845 by the Republic of Texas to enter the Union ) instead of by
annexation. This allows the Texas Flag to fly at the same height as the U.S.
Flag, and may divide into 5 states.
15. A Live Oak tree near Fulton is estimated to be 1500 years old.
16. Caddo Lake is the only natural lake in the state.
17. Dr Pepper was invented in Waco in 1885. There is no period in Dr Pepper.
18. Texas has had six capital cities: Washington -on- the Brazos, Harrisburg ,
Galveston , Velasco, West Columbia and Austin .
19. The Capitol Dome in Austin is the only dome in the U.S. which is taller than
the Capitol Building in Washington DC (by 7 feet).
20. The name ' Texas ' comes from the Hasini Indian word 'tejas' meaning
friends. Tejas is not Spanish for Texas .
21. The State Mascot is the Armadillo (an interesting bit of trivia about the
armadillo is they always have four babies. They have one egg, which splits into
four, and they either have four males or four females.).
22. The first domed stadium in the U.S. was the Astrodome in Houston .
Cowboy's Ten Commandments posted on the wall at Cross Trails Church in Fairlie ,
Texas :
(1) Just one God.
(2) Honor yer Ma & Pa.
(3) No telling tales or gossipin'.
(4) Git yourself to Sunday meeting.
(5) Put nothin' before God.
(6) No foolin' around with another fellow's gal.
(7) No killin'.
(8) Watch yer mouth.
(9) Don't take what ain't yers.
(10) Don't be hankerin' for yer buddy's stuff
Forwarded by Auntie Bev
Random Thoughts For The Day......
1. I think part of a best friend's job should be to immediately clear your
computer history if you die.
2. Nothing sucks more than that moment during an argument when you realize
you're wrong.
3. I totally take back all those times I didn't want to nap when I was
younger.
4. There is great need for a sarcasm font.
5. How the hell are you supposed to fold a fitted sheet?
6. Was learning cursive really necessary?
7. Map Quest really needs to start their directions on #5. I'm pretty sure I
know how to get out of my neighborhood.
8. Obituaries would be a lot more interesting if they told you how the person
died.
9. I can't remember the last time I wasn't at least kind of tired.
10. Bad decisions make good stories.
11. You never know when it will strike, but there comes a moment at work when
you know that you just aren't going to do anything productive for the rest of
the day.
12. Can we all just agree to ignore whatever comes after Blue Ray? I don't
want to have to restart my collection...again.
13. I'm always slightly terrified when I exit out of Word and it asks me if I
want to save any changes to my ten-page research paper that I swear I did not
make any changes to.
14. "Do not machine wash or tumble dry" means I will never wash this--ever.
15. I hate when I just miss a call by the last ring, but when I immediately
call back, it goes to voice mail. What'd you do after I didn't answer? Drop the
phone and run away?
16. I hate leaving my house confident and looking good and then not seeing
anyone of importance the entire day. What a waste.
17. I keep some people's phone numbers in my phone just so I know not to
answer when they call.
18. My 4-year old son asked me in the car the other day, "Dad what would
happen if you ran over a ninja?" How do I respond to that?
19. I think the freezer deserves a light as well.
20. I disagree with Kay Jewelers. I would bet on any given Friday or Saturday
night more kisses begin with BUDWEISER than Kay
Forwarded by Cindy
Here's
a prime example of "Men Are From Mars, Women Are From Venus" offered
by an English professor from the University of
Colorado for a class assignment:
The professor told his class one day: "Today we will experiment with a new
form called the tandem story. The process is simple. Each person will pair
off with the person sitting to his or her immediate right.
As homework tonight, one of you will write the first paragraph of a short
story. You will e-mail your partner that paragraph and send another copy to
me. The partner will read the first paragraph and then add another paragraph
to the story and send it back, also sending another copy to me. The first
person will then add a third paragraph, and so on back-and-forth.
Remember to re-read what has been written each time in order to keep the
story coherent. There is to be absolutely NO talking outside of the e-mails
and anything you wish to say must be written in the e-mail. The story is
over when both agree a conclusion has been reached."
The following was actually turned in by two of his English students:
Rebecca (PINK)
Bill
(BLUE).
THE STORY:
(first paragraph by Rebecca)
At first, Laurie couldn't decide which kind of tea she wanted. The
chamomile, which used to be her favorite for lazy evenings at home, now
reminded her too much of Carl, who once said, in happier times, that he
liked chamomile. But she felt she must now, at all costs, keep her mind off
Carl. His possessiveness was suffocating, and if she thought about him too
much her asthma started acting up again. So chamomile was out of the
question.
(second paragraph by
Bill )
Meanwhile, Advance Sergeant Carl Harris, leader of the attack squadron now
in orbit over Skylon 4, had more important things to think about than the
neuroses of an air-headed asthmatic bimbo named Laurie with whom he had
spent one sweaty night over a year ago. "A.S. Harris to Geostation 17," he
said into his transgalactic communicator. " Polar orbit established. No sign
of resistance so far..." But before he could sign off a bluish particle beam
flashed out of nowhere and blasted a hole through his ship's cargo bay. The
jolt from the direct hit sent him flying out of his seat and across the
cockpit.
(Rebecca)
He bumped his head and died almost immediately, but not before he felt one
last pang of regret for psychically brutalizing the one woman who had ever
had feelings for him. Soon afterwards, Earth stopped its pointless
hostilities towards the peaceful farmers of Skylon 4. "Congress Passes Law
Permanently Abolishing War and Space Travel," Laurie read in her newspaper
one morning. The news simultaneously excited her and bored her. She stared
out the window, dreaming of her youth, when the days had passed unhurriedly
and carefree, with no newspaper to read, no television to distract her from
her sense of innocent wonder at all the beautiful things around her. "Why
must one lose one's innocence to become a woman?" she pondered wistfully.
( Bill
)
Little did she know, but she had less than 10 seconds to live. Thousands of
miles above the city, the Anu'udrian mothership launched the first of its
lithium fusion missiles. The dimwitted wimpy peaceniks who pushed the
Unilateral Aerospace disarmament Treaty through the congress had left Earth
a defenseless target for the hostile alien empires who were determined to
destroy the human race. Within two hours after the passage of the treaty the
Anu'udrian ships were on course for Earth, carrying enough firepower to
pulverize the entire planet. With no one to stop them, they swiftly
initiated their diabolical plan. The lithium fusion missile entered the
atmosphere unimpeded. The President, in his top-secret mobile submarine
headquarters on the ocean floor off the coast of Guam , felt the
inconceivably massive explosion, which vaporized poor, stupid Laurie.
(Rebecca)
This is absurd. I refuse to continue this mockery of literature. My writing
partner is a violent, chauvinistic semi-literate adolescent.
( Bill
)
Yeah? Well, my writing partner is a self-centered tedious neurotic whose
attempts at writing are the literary equivalent of Valium. " Oh, shall I
have chamomile tea? Or shall I have some other sort of F--KING TEA??? Oh no,
what am I to do? I'm such an air headed bimbo who reads too many Danielle
Steele novels!"
(Rebecca)
A$$h@le.
( Bill
)
B*tch!
(Rebecca)
F*** YOU - YOU NEANDERTHAL!!
( Bill
)
In your dreams, Ho. Go drink some tea.
(TEACHER)
A+ - I really liked this one.
Jensen Comment
I did not verify that this is a true story from the University of Colorado
A Poem Forwarded by Auntie Bev
Another year has passed And we're all a little older.
Last summer felt hotter And winter seems much colder.
There was a time not long ago When life was quite a
blast. Now I fully understand About 'Living in the Past'
We used to go to weddings, Football games and lunches.
Now we go to funeral homes, And after-funeral brunches.
We used to have hangovers, From parties that were gay.
Now we suffer body aches And wile the night away.
We used to go out dining, And couldn't get our fill.
Now we ask for doggie bags, Come home and take a pill.
We used to often travel To places near and far. Now we
get sore bottoms From riding in the car.
We used to go to nightclubs And drink a little booze.
Now we stay home at night And watch the evening news.
That, my friend is how life is, And now my tale is
told. So, enjoy each day and live it up... Before you're too darned old!
Forwarded by Ed Scribner
Ole & Sven
Ole and Sven die in a snowmobiling accident, drunker than
skunks, and go to Hell.
The Devil observes that they are really enjoying themselves.
He says to them, 'Doesn't the heat and smoke bother you?
Ole replies, 'Vell, ya know, ve're from nordern Minnesooota,
da land of snow an ice, an ve're yust happy fer a chance ta varm up a little
bit, ya know.'
The devil decides that these two aren't miserable enough and
turns up the heat even more.
When he returns to the room of the two guys from Minnesota,
the devil finds them in light jackets and hats, grilling walleye and drinking
beer.
The devil is astonished and exclaims, 'Everyone down here is
in abject misery, and you two seem to be enjoying yourselves?'
Sven replies, 'Vell, ya know, ve don't git too much varm
veather up dere at da Falls, so ve've yust got ta haff a fish fry vhen da
veather's dis nice.'
The devil is absolutely furious. He can hardly see straight.
Finally he comes up with the answer. The two guys love the heat because they
have been cold all their lives. The devil decides to turn all the heat off in
Hell. The next morning, the temperature is 60 below zero, icicles are hanging
everywhere, and people are shivering so bad that they are unable to wail, moan
or gnash their teeth. The devil smiles and heads for the room with Ole and
Sven. He gets there and finds them back in their parkas, bomber hats, and
mittens. They are jumping up and down, cheering, yelling and screaming like mad
men.
The devil is dumbfounded, 'I don't understand, when I turn
up the heat you're happy. Now its freezing cold and you're still happy. What is
wrong with you two?'
They both look at the devil in
surprise and say, 'Vell, don't ya know, if hell is froze over, dat must mean da
Vikings von da Super Bowl!'
From Grumpy Old Maxine
I was in the restaurant yesterday when I suddenly realized I desperately
needed to pass gas. The music was really, really loud, so I timed my gas with
the beat of the music.
After a couple of songs, I started to feel better. I finished my coffee, and
noticed that everybody was staring at me....
Then I suddenly remembered that I was listening to my iPod.
...and how was your day?
Forwarded by Auntie Bev
Here is the Washington Post's Mensa Invitational - which once again 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. Cashtration (n.): The act of buying a house, which renders the subject
financially impotent for an indefinite period of time..
2. Ignoranus (n.): A person who's both stupid and an asshole.
3. Intaxication (n.): Euphoria at getting a tax refund, which lasts until you
realize it was your money to start with.
4. Reintarnation (n.): Coming back to life as a hillbilly.
5. 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.
6. Foreploy (n.): Any misrepresentation about yourself for the purpose of
getting laid.
7. Giraffiti (n.): Vandalism spray-painted very,very high.
8. Sarchasm (n.): The gulf between the author of sarcastic wit and the Person
who doesn't get it.
9. Inoculatte (v.): To take coffee intravenously when you are running late.
10. Osteopornosis (n.): A degenerate disease. (This one got extra credit.)
11. 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.
12. Decafalon (n.): The gruelling event of getting through the day consuming
only things that are good for you.
13. Glibido (n.): All talk and no action.
14. Dopeler effect (n.): The tendency of stupid ideas to seem smarter when
they come at you rapidly.
15. Arachnoleptic fit (n.): The frantic dance performed just after you've
accidentally walked through a spider web.
16. Beelzebug (n.): Satan in the form of a mosquito, that gets into your
bedroom at two or three in the morning and cannot be cast out.
17. Caterpallor (n.): The color you turn after finding half a worm in the
fruit you're eating.
Second Batch
The Washington Post has also published the winning submissions to its yearly
contest, in which readers are asked to supply alternate meanings for common
words.. And the winners are:
1. Coffee, n. The person upon whom one coughs.
2. Flabbergasted, adj. Appalled by discovering how much weight one has
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. Absentmindedly answering the door when wearing only a
nightgown..
7. Lymph, v. To walk with a lisp.
8. Gargoyle, n. Olive oil-flavored mouthwash.
9. Flatulence, n. Emergency vehicle that picks up someone who has been 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, after death, the 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.
Forwarded by Gene and Joan
CREATIVE PUNS FOR "EDUCATED MINDS"
1. The roundest knight at King Arthur's round table was Sir Cumference. He
acquired his size from too much pi.
2. I thought I saw an eye doctor on an Alaskan island, but it turned out to be
an optical Aleutian .
3. She was only a whiskey maker, but he loved her still.
4. A rubber band pistol was confiscated from algebra class because it was a
weapon of math disruption.
5. The butcher backed into the meat grinder and got a little behind in his
work.
6. No matter how much you push the envelope, it'll still be stationery.
7. A dog gave birth to puppies near the road and was cited for littering.
8. A grenade thrown into a kitchen in France would result in Linoleum Blownapart.
9. Two silk worms had a race. They ended up in a tie.
10. Time flies like an arrow. Fruit flies like a banana.
11.. A hole has been found in the nudist camp wall. The police are looking into
it.
12. Atheism is a non-prophet organization.
13. Two hats were hanging on a hat rack in the hallway. One hat said to the
other, 'You stay here; I'll go on a head.'
14. I wondered why the baseball kept getting bigger. Then it hit me.
15. A sign on the lawn at a drug rehab center said: 'Keep off the Grass.'
16. A small boy swallowed some coins and was taken to a hospital. When his
grandmother telephoned to ask how he was, a nurse said,
'No
change yet.'
17. A chicken crossing the road is poultry in motion.
19. The short fortune-teller who escaped from prison was a small medium at
large.
20. The man who survived mustard gas and pepper spray is now a seasoned
veteran.
21. A backward poet writes inverse.
22. In democracy it's your vote that counts. In feudalism it's your count that
votes.
23. When cannibals ate a missionary, they got a taste of religion.
24. Don't join dangerous cults: Practice safe sects
Auntie Bev forwarded her lovemaking trips (at her
age)
1. Wear your glasses to make sure your partner is actually in the bed.
2. Set timer for 3 minutes, in case you doze off in the middle.
3 Set the mood with lighting. (Turn them ALL OFF!)
4. Make
sure you put 911 on your speed dial before you begin.
5. Write partner's name on your hand in case you can't remember.
6. Use extra polygrip so your teeth don't end up under the bed.
7. Have Tylenol ready in case you actually complete the act..
8. Make all the noise you want...the neighbors are deaf, too.
9. If it works, call everyone you know with the good news!!
10. Don't even think about trying it twice.
..
. . . . . . . . . . . . . . . . .. . . . . .. . . ... . . . . . . . . . . ..
'OLD' IS WHEN...
Your sweetie says, 'Let's go upstairs and make love,' and you answer, 'Pick one;
I can't do both!'
'OLD' IS WHEN...
Your friends compliment you on your new alligator shoes and you're barefoot.
'OLD' IS WHEN...
Going bra-less pulls all the wrinkles out of your face.
'OLD' IS WHEN....
You don't care where your spouse goes, just as long as you don't have to go
along.
'OLD' IS WHEN...
You are cautioned to slow down by the
doctor instead of by the police .
'OLD' IS WHEN..
'Getting a little action' means you don't need to take any fiber today.
'OLD' IS WHEN....
'Getting lucky' means you find your car in the parking lot.
'OLD' IS WHEN....
An
'all nighter' means not getting up to use the bathroom.
'OLD' IS WHEN...
You're not sure if these are facts or jokes.
And that's the way it was on January 31, 2010 with
a little help from my friends.
Bob Jensen's gateway to millions of
other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
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
Bob Jensen's past
presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Concerns That Academic Accounting Research is Out of Touch
With Realit
I think leading academic
researchers avoid applied research for the profession because making
seminal and creative discoveries that practitioners have not already
discovered is enormously difficult.
Accounting academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic) From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence
increasingly developed out of the internal dynamics of esoteric
disciplines rather than within the context of shared perceptions
of public needs,” writes Bender. “This is not to say that
professionalized disciplines or the modern service professions
that imitated them became socially irresponsible. But their
contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative –
as there always tends to be in accounts
of the
shift from Gemeinschaft to Gesellschaft.
Yet it
is also clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter
and procedures,” Bender concedes, “at a time when both were
greatly confused. The new professionalism also promised
guarantees of competence — certification — in an era when
criteria of intellectual authority were vague and professional
performance was unreliable.”
But in the epilogue
to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The
risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and
scholasticism (of three types: tedium, high tech, and radical
chic).
The agenda for the next decade, at least as I see it, ought to
be the opening up of the disciplines, the ventilating of
professional communities that have come to share too much and
that have become too self-referential.”
What went wrong in
accounting/accountics research?
How did academic accounting
research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Some
Accounting News Sites and Related Links
Bob Jensen at
Trinity University
Accounting and Taxation News Sites ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Fraud News ---
http://www.trinity.edu/rjensen/AccountingNews.htm
XBRL News ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Selected Accounting History Sites ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Some of Bob Jensen's Pictures and Stories
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Free Tutorials, Videos, and Other Helpers
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
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
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private
Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Health
Care News ---
http://www.trinity.edu/rjensen/Health.htm
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
574 Shields Against Validity Challenges in Plato's Cave
---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Bob Jensen's Personal History in Pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/