New Bookmarks
Year 2010 Quarter 2: April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Choose a Date Below for Additions to the Bookmarks File

2010
April 30. 2010

May 31, 2010

June 30, 2010

June 30, 2010

Bob Jensen's New Bookmarks on June 30, 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

Teaching History With Technology --- http://www.thwt.org/
Some these ideas apply to accounting history and accounting education in general

Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm

Bob Jensen's threads on tricks and tools of the trade --- http://www.trinity.edu/rjensen/000aaa/thetools.htm

Bob Jensen's threads on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

"College Groups Share Health Care Worries With White House," Inside Higher Ed, June 3, 2010 ---
http://www.insidehighered.com/news/2010/06/03/qt#229052

Supporters of student health insurance plans who saw provisions of the Patient Protection and Affordable Care Act threatening the plans were reassured Wednesday in a meeting with President Obama’s chief health care deputy. Representatives of the American College Health Association, the National Association of College and University Business Officers, College and University Professional Association for Human Resources and the six presidential higher education associations met Wednesday with Nancy-Ann DeParle, director of the White House Office of Health Reform, to share their concerns. They worry that student plans -- currently defined as "limited duration," a category that exempts the plans from being part of the individual market -- would under the new law become too expensive for colleges and universities to offer.

One person in the room for the meeting, Steven Bloom, assistant director of government and public affairs at the American Council on Education, said that DeParle assured the group that the absence of language making clear that the plans could continue to operate just as they do today was "not intentional." The Obama administration has emphasized that "if you like the insurance you have, you get to keep it," Bloom said, "and they view student insurance as part of that.... It's just fallen through the cracks."

College health advocates first met with Congressional aides last fall to discuss this same concern, but language supporting student health insurance plans never made it into the final bill. Now that the bill has been passed and legislation is all but frozen on Capitol Hill, Bloom and his peers expect that a fix will come through regulations

Bob Jensen's threads on healthcare in the U.S. are at
http://www.trinity.edu/rjensen/Health.htm

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/ (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the United States.

By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions to roll over funding our National Debt.

The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are is important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Here is the original (and somewhat dated video that does not delve into solutions very much)
IOUSA (the most frightening movie in American history) ---
(see a 30-minute version of the documentary at www.iousathemovie.com )

Now the IOUSA Bipartisan Solutions
I suggest that as many people as possible divert their attention from the Tiger Woods at the Masters Tournament today (April 11) to watch bipartisan proposals (‘Solutions”) on how to delay the Fall of the United States Empire. By the way, Bill Bradley was one of the most liberal Democratic senators in the History of the United States Senate.

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
David Walker, President & CEO, Peter G. Peterson Foundation
Sen. Bill Bradley
Maya MacGuineas, President of the Committee for a Responsible Federal Budget
Amy Holmes, political contributor for CNN
Joe Johns, CNN Congressional Correspondent
Diane Lim Rodgers, Chief Economist, Concord Coalition
Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
High Cost of Dying --- http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

No sugar coating from this Wharton professor
"National Retirement Expert: 75 needs to be the new 62," by Carla Fried, CBS Moneywatch, June 2010 ---
http://moneywatch.bnet.com/retirement-planning/blog/retirement-beat/national-retirement-expert-75-needs-to-be-the-new-62/644/

Olivia Mitchell is one of the nation’s foremost retirement experts, having spent an impressive career studying the evolving nature of retirement planning issues for individuals, corporations and government. The short version of Mitchell’s resume is that she is a professor at the Wharton School at the University of Pennsylvania and executive director of the Pension Research Council. I’ll let you peruse Mitchell’s full 23-page CV at your own leisure.

So I was interested to read a recent PRC paper Mitchell penned that digs into some of the most pressing retirement security issues in the wake of the financial crisis.

Sugarcoating is not her way.

My message is straightforward and, I fear, not particularly upbeat: current and future generations of managers and employees will not be able to use the ‘old fashioned’ model of provisioning for retirement. Instead, the 21st century economy will require an entirely new perspective on retirement risk management.

From there Mitchell ticks off the big risks weighing on the current model: We’re not saving enough, we don’t have a clue how to deal with longevity risk — in fact, we don’t have a clue about basic financial concepts — traditional pensions are in major trouble, the PBGC is not exactly rock solid, and then there’s the little issue of Social Security, a topic near and dear to her heart, having served on the 2001 bipartisan presidential Commission to Strengthen Social Security

The Retirement Fix

Mitchell concludes the report with a perfectly serviceable call to action:

Part of the task is to enhance financial literacy and political responsibility. We will also need to save more, invest smarter, and insure better against longevity. Another task will be to develop new products which can be used to hedge longevity and better protect against very long term risks including inflation.

What struck me in her report was this final thought:

But when all is said and done, most of us will simply have to work longer to preserve some flexibility against shocks in the long run.

And there it is: one of the nation’s foremost retirement thinkers concludes that at the end of the day, it’s working longer that is going to be our ticket out of any shortfalls and “shocks.”

Retire Early….at 75

Mitchell points out that working two to four more years can go a long way to closing a retirement funding gap. But that’s directed at Baby Boomers. Given ever-expanding longevity forecasts for younger generations she has this bit of advice for Gen X and Gen Y:

For the younger generation, age 75 might be a good target for early retirement, and later if possible!

Confirmation, from one of the country’s leading retirement thinkers, that 75 may indeed be the new 55.

Jensen Comment
At the moment we're between a rock and a hard place apart from each person's private problem concerning retirement. The global problem is that extending retirement age to 75 contributes significantly to decline of employment opportunities for younger people versus the need to extend retirement age to 75 to save the U.S. Social Security and Medicare entitlement programs.

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/ (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Humor Between June 1 and June 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor063010

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

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

Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

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

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

"Amazing Disgrace," by Scott McLemee, Inside Higher Ed, May 19, 2010 ---
http://www.insidehighered.com/views/mclemee/mclemee290

"The Absence of Dissent," by Joni J. Young, Accounting and the Public Interest 9 (1), 1 (2009); doi: 10.2308/api.2009.9.1.1 ---
Click Here

ABSTRACT:
The persistent malaise in accounting research continues to resist remedy. Hopwood (2007) argues that revitalizing academic accounting cannot be accomplished by simply working more diligently within current paradigms. Based on an analysis of articles published in Auditing: A Journal of Practice & Theory, I show that this paradigm block is not confined to financial accounting research but extends beyond the work appearing in the so-called premier U.S. journals. Based on this demonstration I argue that accounting academics must tolerate (and even encourage) dissent for accounting to enjoy a vital research academy. ©2009 American Accounting Association

June 15, 2010 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Bob,
Thank you advertising the availability of this paper in API, the on line journal of the AAA Public Interest Section (which I just stepped down from editing after my 3+ years stint). Joni is one of the most (incisively) thoughtful people in our discipline (her paper in AOS, "Making Up Users" is a must read). The absence of dissent is evident from even casual perusal of the so-called premier journals. Every paper is erected on the same premises -- assumptions about human decision making (i.e., rational decision theory), "free markets," economic naturalism, etc. There is a metronomic repetition of the same meta-narrative about the "way the world is" buttressed by exercises in statistical causal analysis (the method of agricultural research, but without any of the controls). There is a growing body of evidence that these premises are myths -- the so-called rigorous research valorized in the "top" journals is built on an ideological foundation of sand.

Paul Williams paul_williams@ncsu.edu
(919)515-4436

Gaming for Tenure as an Accounting Professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)

"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

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

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

"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

Bad Role Models for Our Children
"How Many Times Did Sen. Levin Say 'Sh**ty Deal'? by Cindy Perman, CNBC, April 28. 2010 ---
How Many Times Did Sen. Levin Say 'Sh**ty Deal'?

No matter how you feel about Goldman's behavior, use of uncouth and filthy language by government leaders and our media sets a low bar for decency. Goldman's defender, Warren Buffet, thinks the Goldman deal does not even smell. Boo to Warren on this one! Personally I don't think that Goldman's swap construction on this one passes the smell test.

Bob Jensen's threads on the latest Goldman scandal are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Malware Detection, Removal, and Protection

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of AMY HAAS
Sent: Saturday, June 26, 2010 4:08 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Help my computer has a security alert virus

How do I get rid of this one? A danger symbol appears in my task bar and I keep getting pop-ups warning me about virus. A program called defense center now appears in my program list and I can't seem to delete it using the remove software in the control panel. My symantec program has not eliminated it!

Amy Haas

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Sunday, June 27, 2010 6:48 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Help my computer has a security alert virus

Hi Amy,

You might first get a free scan from Microsoft --- http://onecare.live.com/site/en-US/center/howsafe.htm?s_cid=mscom_msrt

We should thank John (below) for this testimony as a user of Stopzilla --- http://www.stopzilla.com/products/stopzilla/home.do

Stopzilla is outstanding spyware/adware software but probably should not be used in place of a hardware firewall or more general cyber attack software like Symantec. Good spyware/adware software alternatives might work better than Symantec for spyware and adware, but they are not as broad based as Symantec and Norton Anti-virus --- http://www.pcmag.com/category2/0,2806,4796,00.asp
There is no single best alternative, and you cannot always trust the media that is dependent upon advertising revenues.

There are of course arguments about what is the best spyware/adware protection --- http://www.pctools.com/

Microsoft is in the game with what I think is a very good malware protection alternative --- http://www.microsoft.com/security/malwareremove/default.aspx

Most of these alternatives offer free and fee alternatives. The typical free version is a bit of a come on in that it will scan your computer for infections and possibly quarantine the culprits, but for removal you must buy the removal software. And there is always the possibility that code for removing the newer infections has not yet been written by anybody other than the criminals that created the infections.

I still think the best general advice I can give is to communicate with the Help Desk of your college.

Bob Jensen

Bob Jensen’s threads on computer and networking security are at
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of John Anderson
Sent: Sunday, June 27, 2010 1:55 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Help my computer has a security alert virus

Amy,

Stopzilla is an anti-spyware and anti-adware defense program which has always been the top rated such product since people have started surfing the web. It essentially gives you real-time control of your computer and will fight anything that tries to take away this control and download without your permission!

McAfee used to have a product called “Stinger” or “Striker,” but hard to believe they just gave it away. For some reason most of the commercial products out there are all focused on virus profiles only. They will do an excellent job of telling you what has got you … and how bad it is … but I prefer preventative medicine … not an autopsy! iS3 created Stopzilla. They are out of Palm Beach County Florida and will provide a support window for you on the phone for probably 15 hours a day.

http://www.is3.com/home.do

I now have lifetime licensing on all machines we own.

If the machine is badly compromised it may take Stopzilla a week to stabilize the situation, but it will do this by preventing rogue processes and websites from downloading to your machine without your permission or writing to your computer’s registry without permission. (It is quite surprising to look at the logging of the stuff it stops! You would never know!)

I also still run anti-virus, but it picks up very little after-the-fact … and nothing serious!

I can’t recommend Stopzilla enough!

Best Regards!

John

John Anderson, CPA, CISA, CISM, CGEIT, CITP

Financial & IT Business Consultant

14 Tanglewood Road

Boxford, MA 01921

jcanderson27@comcast.net

978-887-0623   Office

978-837-0092   Cell

Bob Jensen’s threads on computer and networking security are at
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

How will IFRS affect the 2011 CPA Examinations?
If I Pass CPA Exam Parts in 2010, Will I Have to Pass Them Again in 2011?
Click Here
http://goingconcern.com/2010/06/if-i-pass-cpa-exam-parts-in-2010-will-i-have-to-pass-them-again-in-2011/#more-12870

Bob Jensen's threads on the CPA examination are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

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

My Life Beyond the Numbers by James Don Edwards

On June 14, 2010 (today) I opened an unexpected package from James Don Edwards that totally surprised me.
The book inside the package was entitled My Life Beyond the Numbers (ISBN 978-0-615-36164-2, March 2010)

James Don is the best "boss" I ever had --- while I was a newly minted assistant professor at Michigan State University. In spite of my youth and inexperience he gave me two doctoral seminars to teach, possibly because I was an accountics researcher in those days when accountics research was being revived after over 60 years of dormancy. James Don was never an accountics professor, but he anticipated how accountics would become dominant in academic accountancy henceforth and perhaps forever more ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

You can read the Hall of Fame entry for James Don Edwards at Click Here
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/james-don-edwards/

His many honors and awards include an honorary doctorate from the University of Paris.

In 1998, he was invited to the Georgia House of Representatives to hear a resolution honoring him and recognizing his contributions to the field of accounting and the State of Georgia. The University of Georgia Foundation recently established a Chair of Corporate Accounting Policy in his honor ---
http://www.legis.state.ga.us/legis/1997_98/fulltext/hr738.htm

One of his areas of expertise is the history of the accounting profession in the United States.

I've not yet read his latest book I just received, but I'm looking forward to chapters like "Oxford and Sir Edward Heath."
Don was on a first name basis with some of the most powerful people in the world.
He also served tirelessly for the American Accounting Association, including serving as its President 1970-71.

During a period when the University of Michigan (in the shadows of Bill Paton) totally dominated Michigan State University in doctoral programs and faculty research in accountancy, James Don raised the money and recruited some the outstanding doctoral students in our history. To name a few who joined the Academy at MSU we have Roger Hermanson, Gene Comiskey, Paul Pacter, Bill Kinney, Bob May, Jim McKeown, Barry Cushing, and others too numerous to mention here. And there were of course other outstanding faculty and doctoral students he recruited for the University of Georgia.

I am proud to consider James Don Edwards one of my very best friends. I wish he and Clara an long and happy life, and I especially wish Clara a total successful recovery from her new total hip. Her lovely picture is on the cover of the book alongside her partner in life. Clara is an original Iron Magnolia.

June 15, Message from Bob Jensen

HI David,

The publisher is listed in the book as Terrill Publishing, but I cannot find this company’s Web page. Don owns the copyright. The name Terrill appears in his genealogy, which makes me suspicious.

I’ve contacted Don for more details. This is a very, very personal book (in most ways a scrap book) that he might’ve paid to have published with only a very limited number of copies for friends. I really do not know at this point and will wait for his reply.

The book has quite a bit about Don’s international travels from going to China as a Marine in WW II to visiting scholar lecturing sabbaticals in Italy and Oxford plus shorter stints all over the world. Don had a bold way of working his way into private and public sector executive suites, including a major stint on Andersen’s Board that oversaw the acrimonious split of Andersen into Andersen Consulting and Andersen’s mainline accounting division.

Don is a powerful man with an equally powerful ego. He’s a wealthy man who invested well and enjoyed dining in world palaces yet has always lived in humble houses well below what he could afford. He dominates conversations and yet remembers every word you squeeze into the conversation. He has a dominant presence whenever he’s interacting with people. If he’d been a literature professor he would’ve become a university president.

Don is neither a typical scholar nor researcher, but he’s worked very well in joint projects (books and papers and services) with people who respected the skills he brought to the table, especially leadership skills and fund raising skills.

One thing I always admired about Don and Clara is that their friends were and still are always welcome at their home and at their table. When I first started working at MSU, we often made random and unannounced visits to their home and felt genuinely welcome on each and every visit. They’re the type of people who will beg you to stay for dinner.

Don is one of those people who, when the time comes for his funeral, hundreds upon hundreds of former students, former colleagues, former working partners, and many, many friends will show up from all over the world.

Fortunately Don and Clara are still in very good health and will probably attend many more AAA annual meetings for years to come, I don’t think he and Clara have ever missed one AAA annual meeting in over five decades.

Don himself really reads like the personal scrapbook he’s written. He was a born leader who perhaps missed his calling to be a university president. But he succeeded greatly in promoting accountancy in the world’s Academy.

He’s also a religious man who prefers ice cream to the demon rum. Generally you can’t take the Baptist upbringing out of the boy or man. In his book Don relates about the exceptional wines offered in the home (palace) of Baron Edmund Rothschild in Switzerland. But you know that down deep James Don Edwards and Clara would’ve preferred being offered homemade ice cream from a Louisiana bayou.

Don is still active in a golf foursome that still includes Accounting Hall of Famers Herb Miller and Denny Beresford, both of whom became affiliated with the University of Georgia because of abiding friendships with their leader Don Edwards.

Bob Jensen

June 15, Reply from Bob Jensen

Hi David,

Don Edwards just telephoned me and told me a bit about the history of this book. It was a book that his grandchildren begged him to write. He privately published enough copies to send to some friends and family.

But in this telephone call I persuaded him to contact a Web specialist at the University of Georgia (where he still goes into the office three times a week). I suggested that the book be saved in as a PDF file and then served up by the University of Georgia.

Don is now thinking about having the book served up on a Web site. He’s taking time to think about it since it was not meant to be available to anybody other than friends and family. However, knowing Don like I do, I think he will follow up on my suggestion.

I, of course, will broadcast the link to the world once there is a link, because I respect Don both as a friend and as a leader of our craft.

Bob Jensen

Amazing Disgrace
I have written repeatedly about the virtual lack of validity checking of research published in the academy's leading accounting research journals --- http://www.trinity.edu/rjensen/TheoryTAR.htm

Validity checking is probably highest for articles published in physical science research journals and is improving for social science research journals. There also is aggressive validity checking in some areas of humanities, notably history.

"Amazing Disgrace," by Scott McLemee, Inside Higher Ed, May 19, 2010 ---
http://www.insidehighered.com/views/mclemee/mclemee290

Publish Poop or Perish
"We Must Stop the Avalanche of Low-Quality Research," by Mark Bauerlein, Mohamed Gad-el-Hak, Wayne Grody, Bill McKelvey, and Stanley W. Trimble, Chronicle of Higher Education, June 13, 2010 ---
http://chronicle.com/article/We-Must-Stop-the-Avalanche-of/65890/

Everybody agrees that scientific research is indispensable to the nation's health, prosperity, and security. In the many discussions of the value of research, however, one rarely hears any mention of how much publication of the results is best. Indeed, for all the regrets one hears in these hard times of research suffering from financing problems, we shouldn't forget the fact that the last few decades have seen astounding growth in the sheer output of research findings and conclusions. Just consider the raw increase in the number of journals. Using Ulrich's Periodicals Directory, Michael Mabe shows that the number of "refereed academic/scholarly" publications grows at a rate of 3.26 percent per year (i.e., doubles about every 20 years). The main cause: the growth in the number of researchers.

Many people regard this upsurge as a sign of health. They emphasize the remarkable discoveries and breakthroughs of scientific research over the years; they note that in the Times Higher Education's ranking of research universities around the world, campuses in the United States fill six of the top 10 spots. More published output means more discovery, more knowledge, ever-improving enterprise.

If only that were true.

While brilliant and progressive research continues apace here and there, the amount of redundant, inconsequential, and outright poor research has swelled in recent decades, filling countless pages in journals and monographs. Consider this tally from Science two decades ago: Only 45 percent of the articles published in the 4,500 top scientific journals were cited within the first five years after publication. In recent years, the figure seems to have dropped further. In a 2009 article in Online Information Review, Péter Jacsó found that 40.6 percent of the articles published in the top science and social-science journals (the figures do not include the humanities) were cited in the period 2002 to 2006.

As a result, instead of contributing to knowledge in various disciplines, the increasing number of low-cited publications only adds to the bulk of words and numbers to be reviewed. Even if read, many articles that are not cited by anyone would seem to contain little useful information. The avalanche of ignored research has a profoundly damaging effect on the enterprise as a whole. Not only does the uncited work itself require years of field and library or laboratory research. It also requires colleagues to read it and provide feedback, as well as reviewers to evaluate it formally for publication. Then, once it is published, it joins the multitudes of other, related publications that researchers must read and evaluate for relevance to their own work. Reviewer time and energy requirements multiply by the year. The impact strikes at the heart of academe.

Among the primary effects:

Too much publication raises the refereeing load on leading practitioners—often beyond their capacity to cope. Recognized figures are besieged by journal and press editors who need authoritative judgments to take to their editorial boards. Foundations and government agencies need more and more people to serve on panels to review grant applications whose cumulative page counts keep rising. Departments need distinguished figures in a field to evaluate candidates for promotion whose research files have likewise swelled.

The productivity climate raises the demand on younger researchers. Once one graduate student in the sciences publishes three first-author papers before filing a dissertation, the bar rises for all the other graduate students.

The pace of publication accelerates, encouraging projects that don't require extensive, time-consuming inquiry and evidence gathering. For example, instead of efficiently combining multiple results into one paper, professors often put all their students' names on multiple papers, each of which contains part of the findings of just one of the students. One famous physicist has some 450 articles using such a strategy.

In addition, as more and more journals are initiated, especially the many new "international" journals created to serve the rapidly increasing number of English-language articles produced by academics in China, India, and Eastern Europe, libraries struggle to pay the notoriously high subscription costs. The financial strain has reached a critical point. From 1978 to 2001, libraries at the University of California at Los Angeles, for example, saw their subscription costs alone climb by 1,300 percent.

The amount of material one must read to conduct a reasonable review of a topic keeps growing. Younger scholars can't ignore any of it—they never know when a reviewer or an interviewer might have written something disregarded—and so they waste precious months reviewing a pool of articles that may lead nowhere.

Finally, the output of hard copy, not only print journals but also articles in electronic format downloaded and printed, requires enormous amounts of paper, energy, and space to produce, transport, handle, and store—an environmentally irresponsible practice.

Let us go on.

Experts asked to evaluate manuscripts, results, and promotion files give them less-careful scrutiny or pass the burden along to other, less-competent peers. We all know busy professors who ask Ph.D. students to do their reviewing for them. Questionable work finds its way more easily through the review process and enters into the domain of knowledge. Because of the accelerated pace, the impression spreads that anything more than a few years old is obsolete. Older literature isn't properly appreciated, or is needlessly rehashed in a newer, publishable version. Aspiring researchers are turned into publish-or-perish entrepreneurs, often becoming more or less cynical about the higher ideals of the pursuit of knowledge. They fashion pathways to speedier publication, cutting corners on methodology and turning to politicking and fawning strategies for acceptance.

Such outcomes run squarely against the goals of scientific inquiry. The surest guarantee of integrity, peer review, falls under a debilitating crush of findings, for peer review can handle only so much material without breaking down. More isn't better. At some point, quality gives way to quantity.

Academic publication has passed that point in most, if not all, disciplines—in some fields by a long shot. For example, Physica A publishes some 3,000 pages each year. Why? Senior physics professors have well-financed labs with five to 10 Ph.D.-student researchers. Since the latter increasingly need more publications to compete for academic jobs, the number of published pages keeps climbing. While publication rates are going up throughout academe, with unfortunate consequences, the productivity mandate hits especially hard in the sciences.

Only if the system of rewards is changed will the avalanche stop. We need policy makers and grant makers to focus not on money for current levels of publication, but rather on finding ways to increase high-quality work and curtail publication of low-quality work. If only some forward-looking university administrators initiated changes in hiring and promotion criteria and ordered their libraries to stop paying for low-cited journals, they would perform a national service. We need to get rid of administrators who reward faculty members on printed pages and downloads alone, deans and provosts "who can't read but can count," as the saying goes. Most of all, we need to understand that there is such a thing as overpublication, and that pushing thousands of researchers to issue mediocre, forgettable arguments and findings is a terrible misuse of human, as well as fiscal, capital.

Several fixes come to mind:

First, limit the number of papers to the best three, four, or five that a job or promotion candidate can submit. That would encourage more comprehensive and focused publishing.

Second, make more use of citation and journal "impact factors," from Thomson ISI. The scores measure the citation visibility of established journals and of researchers who publish in them. By that index, Nature and Science score about 30. Most major disciplinary journals, though, score 1 to 2, the vast majority score below 1, and some are hardly visible at all. If we add those scores to a researcher's publication record, the publications on a CV might look considerably different than a mere list does.

Third, change the length of papers published in print: Limit manuscripts to five to six journal-length pages, as Nature and Science do, and put a longer version up on a journal's Web site. The two versions would work as a package. That approach could be enhanced if university and other research libraries formed buying consortia, which would pressure publishers of journals more quickly and aggressively to pursue this third route. Some are already beginning to do so, but a nationally coordinated effort is needed.

Continued in article

Gaming for Tenure as an Accounting Professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm

What went wrong in accounting/accountics research?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

How to Learn Accounting On Your Own

June 19, 2010 message from Tom Hood [tom@MACPA.ORG]

Greetings Colleagues,

I have two sons home for the summer asking if I know of any great resources to help them get ahead of Intermediate Accounting as they approach the fall semester. I figured I would go to the best source I know of to help them out – these two listservs.

So can you direct me to any on-line and other resources that may get them studying for Intermediate Accounting I and Intermediate Accounting II?

Also, what advice would you give them on how to approach these courses (one is in I and the older in II)?

I will also be sharing this on our student site…

On another note – we are working in an International Pavilion on CPA Island in Second Life and our Accounting Eductaion Pavilion (see details at www.cpaisland.com and www.slacpa.org ). We continue to offer free kiosks with links to your colleges and universities and free areas to meet as classes. We have an interne working this summer who can give you a demo and show you around – just send an e-mail to my attention ad mention the CPA Island.

Thanks,

Warmest regards,

Tom

Tom Hood, CPA.CITP CEO & Executive Director Maryland Association of CPAs Business Learning Institute
www.macpa.org
www.bizlearning.net

June 20, 2010 reply from Bob Jensen

Hi Tom,

First of all consider video alternatives. More than 100 universities have set up channels on YouTube ---
http://www.youtube.com/education?b=400

Next take a topic list from a typical intermediate accounting textbook, some of which are free (not necessarily completely up to date for rapidly changing standards) at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

Then search for the term "accounting" at http://www.youtube.com/education?b=400
Scroll down to find videos that might be relevant to intermediate accounting topics. Some of these videos are more up to date than even the latest textbooks.
Some of these videos are from the top teachers or top CPA firm leaders (like Jim Turley's videos) in the world.
Also note that if you search out the instructor (usually found at her/his university) you will often find more course materials available for downloading. Also email messages to these instructors may result in more shared learning materials.

But more importantly, Tom, consider the goals of your two sons in studying for intermediate accounting. The overriding goal of an intermediate accounting student is to eventually pass the CPA examination. For studying intermediate accounting I would have your sons dig directly into a CPA examination review course and focus on the answers to CPA examination questions in the topical areas identified above in intermediate accounting textbooks. They have to pick and chose topics found in an intermediate accounting textbook, because many CPA examination questions come from other courses such as advanced accounting and governmental accounting and tax accounting and managerial accounting.

A free CPA examination review package, complete with practice questions, answers, and examinations, is available at
http://cpareviewforfree.com/
If you want more video review modules for the CPA examination, then a commercial package is probably better ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

There are some topics that are probably not totally up to date in even the latest available intermediate accounting textbooks. One is IFRS although, unless your sons will be taking intermediate accounting from an IFRS nut, I would probably not worry too much about technical IFRS problems on the CPA examination in the near future. However, great free materials for learning IFRS are available at
http://www.trinity.edu/rjensen/Theory01.htm#IFRSlearning

In a typical intermediate accounting two semester sequence, much of the first semester is spent reviewing basic accounting (especially in universities that receive a large number of community college transfer students). If your sons need video reviews of basic accounting, I highly recommend Susan Crosson's video lectures. The links are at the bottom of the page at http://www.youtube.com/SusanCrosson
Look for "Financial Videos Organized by Topic."

Members of the American Accounting Association, including student members, can find some instructional helper materials at the AAA Commons ---
http://commons.aaahq.org/pages/home
Click on the menu choice "Teaching" and then "Browse resources."

Implied in all the above recommendations is a learning pedagogy that pretty much entails memory aiding and abetting in a traditional manner (study the problems and then study the textbook answers). At the other extreme there is better and longer-lasting metacognitive learning such as the award-winning BAM pedagogy (for an intermediate accounting two-course sequence) invented by Catanach, Croll, and Grinacker --- http://www.trinity.edu/rjensen/265wp.htm
This pedagogy is more like the real world where your supervisor gives you a problem to solve and you go out and solve it any way you can. You can study BAM's problems, but there are no answers provided to study. Students have to teach themselves by seeking out the answers from anywhere in the world.

Although the BAM pedagogy would be much more time consuming for your sons, you can probably get the Hydromate Case and some of the instructional support materials from Tony Catanach --- anthony.catanach@villanova.edu
If Tony is not available, Noah Barsky can help --- noah.barsky@villanova.edu

By the way, at the University of Virginia, where the BAM pedagogy was born, the passage rate on the CPA examination rose dramatically after switching to the BAM pedagogy in intermediate accounting, This is not surprising since you remember best those things you had to learn on your own. Of course many students looking for an easy way out hate the BAM pedagogy.

Bob Jensen

June 20, 2010 reply from AECM@LISTSERV.LOYOLA.EDU

I don't teach Intermediate (have done, but my involvement now is in managerial). However, I am the advisor for our accounting concentrators, and have quite a lot of contact with faculty who DO teach Intermediate, and the students who are taking it. I think that the primary problem I see (and hear from students) is the fact that most take Intermediate after a "hiatus" from the first Financial Accounting (or Principles) course. Typically of students, they've forgotten a lot of what they learned. Although Intermediate does some "reviewing" it really expects preparation and "remembering" from the students. The pace is pretty fast, and the demands are heavy. It is not for the faint of heart. I tell the students that in my opinion the two Intermediate courses are the hardest AC courses they'll take. After those, I found Advanced, or Audit, to be far less demanding.

I suggest two resources to them to "brush up" on the basics. First is the ALEKS software. Our students buy it for the Financial course to review the accounting cycle and basic concepts. So they have it already. They can dig it out of the back of that drawer and use it to review for Intermediate (or buy it again - it isn't that expensive). Another resource I recommend (and I have been using this in various courses for probably more than 20 years) is the latest edition of Anthony & Breitner "Essentials of Accounting." In this electronic age, I still recommend the luddite's favorite "programmed textbook" version. It's a workbook - actually pretty thin, less than half an inch, not like one of these massive CPA review "workbooks" - where the students read a few lines, answer a question, check their answer, go back if they missed it, move forward if they got it. I believe it is designed so that they can go thru the entire thing in something like 25 hours. It reviews everything through the Statement of Cash Flows - basic cycle, sales and receivables, inventory, debt, etc. If they go thru the entire workbook they'll be up to speed to handle the Intermediate work. They can carry it with them on the train or bus when they're going to work during the summer and study in half-hour bits.

It's the catch-up that really staggers a lot of students at the beginning. They'll talk about feeling overwhelmed at the mountain of material they're covering - like the two-year-old trotting along at top speed trying to keep up with a hurrying adult at the shopping mall. "Hey, wait for me!"

p The essence of wisdom ... is to avoid acting rashly, in the belief that you are running out of time. You are not. David Ignatius, "The Increment"

Patricia A. Doherty
Department of Accounting
Boston University School of Management
595 Commonwealth Avenue Boston, MA 02215

Bob Jensen's threads on online training and education alternatives are at
http://www.trinity.edu/rjensen/Crossborder.htm

Requiring four "A-Level" accountics journal publications for tenure puts a small college well ahead of the the leading research universities, virtually none of whom require four such hits at the A-Level (see Table 1 below).

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1]
You can read about how "accountics" was dormant between 1887 and 1958. A perfect storm revived accountics to where it quickly came to dominate the leading academic accounting research journals, doctoral programs, and publication requirements for promotion, performance evaluation, and tenure after 1958 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm (Accounting Historians Journal)

Question that I posed on the AECM Listserv of international accounting educators and researchers:
Do you really, really want to become a non-tenured accounting professor?

Others on the AECM might be interested in your answers to the two questions stated below.

But if you prefer, please send your answers to me privately. I will respect the confidential nature of your reply unless you give me permission to share the name of your college or university in terms of these tenure criteria for accounting programs --- rjensen@trinity.edu

A College President Changes the Tenure Rules of the Road
Tenure Decisions: Does your college have a minimum quota for publication in the Top Ten Academic research journals?

There are various published rankings of academic accounting research journals, most of which are "accountics" journals that require accepted articles to be rooted in mathematics and statistics. Some rankings and references to rankings are provided at
http://www.trinity.edu/rjensen/theory01.htm#JournalRankings

David Wood and his BYU colleagues also rank accounting research programs based upon publication records of those programs in leading accounting research journals --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755
This study makes novel contributions to ranking accounting research programs constructed from publication counts in top journals ("AOS, Auditing, BRIA, CAR, JAE, JAR, JATA, JIS, JMAR, RAST, and TAR").
Other research publications in such journals as the Accounting Historians Journal, case research journals, Critical Perspectives in Accounting, Journal of Accountancy, Management Accounting, Issues in Accounting Education, are excluded in the BYU study and hence did not impact of the BYU rankings of top accounting research programs in the academy.

A College President Changes the Tenure Rules of the Road
In the above context I received the following (slightly edited) disturbing message from a good friend at a college that has a very small accounting education program (less than 25 masters program graduates in accounting annually). The college is not in the Top 50 business schools as ranked by US News or Business Week or the WSJ. Nor does the program have a doctoral program and is not even mentioned as having a an accounting research program ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755

The message reads as follows (slightly edited):

Bob,

Our College's President just contacted our non-tenured accounting faculty. He gave them a short list of “Accountics” journals that they have to publish in order to get tenure. The list consists of the usual (A-Level) suspects – JAR, TAR, JAE, AOS, JATA, CAR, Auditing – A Journal of Practice and Theory, and a handful more. He categorically told them that they need to have at least 4 articles in those journals to be successful in getting tenure.

Just thought you should know!

I hope you and Erika are doing well. I always look forward to you Tidbits and photos that accompany them. Of course, I also follow you on the AECM listserve.

Best Regards
XXXXX

Jensen Comment
I would not classify AOS as an accountics journal, although its future is a bit uncertain following the recent death of its founder and long-time editor Anthony Hopwood. I would classify it more as a societal/philosophical journal for accountancy research as very broadly defined. However, the other "usual suspects" are A"A-Level" accountics journals that virtually require sophisticated mathematics and statistics applications in accounting research for publication acceptance. On average these journals reject 80%-90% of the submissions.

Be that as it may, a follow up conversation with Professor XXXXX reveals that this "four top accountics journal requirement" is an abrupt change in tenure criteria at the college in question. Publication has been required up to now, but there was no minimum number like four and publications that counted could all be in journals like accounting history journals, case research journals, applied research journals like Management Accounting/Journal of Accountancy, and education research journals like Issues in Accounting Education.

Question 1
I'm interested in first of all finding out if your college has a minimum number, for tenure, of "accounting research" publications even though it might not require that these be the "Top 10" accountics research journals plus AOS?

It seems to be that a fixed minimum number is absurd. It encourages an accounting researcher to split a really good research paper artificially into parts for no purpose other than to increase the publication count. It also discourages major research studies in favor of quickies. It also seems to me that even the "Top 10" accounting research universities would be better served with quality rather than quantity research work. For example, suppose Eric Lie was a non-tenured research professor at the University of Iowa. Eric wrote an award-winning research paper published in Management Science (2005) that resulted in the 2007 American Accounting Association Contribution to the Accounting Literature Award. It also landed him among the 100 Most Influential People of the World Award by Time Magazine. It would seem that this one research paper on options backdating is far more significant than any four accountics research papers published in the same year (2005). I doubt that any other accounting, finance, or business administration professor in history has received this award from Time Magazine.

The policy also ignores how non-tenured faculty can game the system by finding 12 or more co-authors who separately take charge of one of the 12 studies. Then if four of the 12 studies make it into "Top 10" accountics research journals, all 12 partners have better chances of obtaining tenure in their respective universities. This is gaming the system if the purpose of the partnering is only to increase the chances of getting at least four of the "co-authored" papers into top accountics journals. This has been popular among co-workers pooling lottery tickets, but it has dubious ethics for research publication.

It would be funny if one of the 12 "co-authors" was a family Chihuahua, Labrador or Golden Retriever.

Question 2
I am interested in secondly in finding out if your college allows, for tenure, an unspecified number of "accounting research" publications other than the "Top 10" accountics research journal publications plus AOS? Or could a non-tenured accounting professor get tenure with only a "significant number" of research publications in such journals as the Accounting Historians Journal, case research journals, Critical Perspectives in Accounting, Journal of Accountancy, Management Accounting, Issues in Accounting Education, etc.?

Others on the AECM might be interested in your answers to the above two questions.

Thanks in advance

PS
In general I oppose using the AECM for formal survey studies, because this type of thing can get out of hand. However, this is a highly informal inquiry that should be of interest to virtually all subscribers to the AECM. I encourage subscribers to reply directly to the AECM.

June 2, 2010 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

Bob, For another paper with lots of advice for Ph.D. students and new faculty see Beyer, B., D. Herrmann, G. K. Meek and E. T. Rapley. 2010. What it means to be an accounting professor: A concise career guide for doctoral students in accounting. Issues In Accounting Education (May): 227-244.

Jensen Comment
Here are some key quotations from the article

"What It Means to be an Accounting Professor:: A Concise Career Guide for Doctoral Students in Accounting," by Brooke Beyer, Don Herrmann, Gary K. Meek, and Eric T. Rapley, Issues in Accounting Education, May 2010 ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=IAEXXX000025000002000227000001&idtype=cvips&prog=normal

ABSTRACT:
The purpose of this paper is to provide a concise career guide for current and potential doctoral students in accounting and, in the process, help them gain a greater awareness of what it means to be an accounting professor. The guide can also be used by accounting faculty in doctoral programs as a starting point in mentoring their doctoral students. We begin with foundational guidance to help doctoral students better understand the “big picture” surrounding the academic accounting environment. We then provide specific research guidance and publishing guidance to help improve the probability of publication success. Actions are suggested that doctoral students and new faculty can take to help jump-start their academic careers. We finish with guidance regarding some important acronyms of special interest to doctoral students in accounting.

TABLE 1

Teaching and Research Expectations of Faculty

Adopted from Butler and Crack (2005)
Butler, A. W., and T. F. Crack. 2005. The academic job market in finance: A rookie’s guide. Financial Decisions 17 2: 1–17.

RESEARCH GUIDANCE

Research is the currency of academics. It is research, not teaching, that drives the rewards for faculty at most universities Hermanson 2008. This is the case not only for universities with doctoral accounting programs, but also for many universities focusing solely on undergraduate or master’s degrees in accounting. Hermanson 2008 provides several reasons why this is the case including the scarcity of research talent in comparison to teaching and that research is peer reviewed, providing a better measure of quality. Regardless of the reasons, doctoral students need to be aware of the importance of research and place special emphasis in this area throughout their careers. In the following section, we provide a summary of research advice commonly provided to doctoral students through the mentoring process.

. . .

GMAT
GMAT scores are likely the single most important admission criteria used by doctoral programs in selecting doctoral candidates for admission. While selection committees carefully consider other evidence including the applicant’s statement, work experience, schools where the undergraduate and master’s degrees were received, grade point average, and reference letters, the GMAT score provides a consistent benchmark that many programs use as a starting point in their decision process. Over half of the U.S. doctoral programs in accounting have a stated minimum GMAT score of 650 or more. A score in the range of 700 or more (top 10 percent) is desirable to receive strong consideration at many programs. The average GMAT score of the ADS Scholars selected to begin their doctoral program in 2009 was 718 and all of the candidates selected had a minimum GMAT score of 650. Furthermore, some programs require a minimum quantitative score of 45 or more (top 25 percent). Without strong quantitative skills, students can struggle in graduate-level statistics and econometrics courses. While the GMAT score is an important minimum benchmark in making initial admissions decisions, it is less important as an indicator of overall student success in a doctoral program. Doctoral program directors can provide numerous examples of students with very high GMAT scores who failed to complete the program. Likewise, some students with average GMAT scores have gone on to be highly successful accounting researchers. Similar to SAT/ACT scores for admission to college, the GMAT score is important for admission into a doctoral accounting program, but becomes progressively less important over one’s academic career.

Jensen Comment

Opposition to Validity Questioning of Accountics Research ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Bob Jensen's threads on the sad state of accountancy doctoral programs in North America ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

June 2, 2010 reply from Linda A Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

Back to your original questions, Bob, our department has no set minimum number of hits in particular journals, but rather a system of weighting journals. For example, the top tier journals (the usual suspects) are worth more than sectional and other high quality journals, which in turn are worth more than other journals and presentations. The list and weightings were developed in a collaborative process using various sources for rankings as well as our department mission as guides. To be eligible for tenure, a candidate must have accrued a certain number of points, so higher quality requires less quantity, though we have to remind untenured faculty that hanging all their hopes on top tier articles that may take 2 years to get accepted, if at all, is not likely to do it alone if they have no lower tier articles to fill out their vitae. They also can't earn it on low-quality alone: there must be at least some high quality content. It's an imperfect system, but I think it strikes a good balance between quality and quantity, doesn't set unrealistic expectations, and allows those who don't do accountics research ample opportunity for their work to be respected. Finally, it also helps at the college T&P level, where we are the only non-doctoral department, and other departments need some help seeing the role of practitioner articles in an accounting vita.

June 21, 2010 message from accounting doctoral student Bergner, Jason M [jason.bergner@uky.edu]

Bob,

I’ve just been turned on to your web site about accounting, accountics, and teaching. I will continue to read but am very interested so far. I recently had a piece published in Journal of Accountancy on entering Ph.D. programs. I didn’t know if you knew of it and/or would consider adding it to your site.

http://www.journalofaccountancy.com/Web/PursuingaPhDinAccounting

I just returned from the Tahoe conference where I was besieged with “accountics” work and the pressure to get published in the top journals. I’ve always been curious about the “other side” of this story. I think your site is beginning to shed some light on this.

Thanks.

Jason

Jason Bergner
Doctoral Candidate
Office 355 MM
Douglas J. Von Allmen School of Accountancy
Gatton School of Business & Economics
University of Kentucky

June 21, 2010 reply from Bob Jensen

Hi Jason,

Since the Journal of Accountancy article is free to the world, I don’t see a need to copy parts of it into my Website. However, I will publish a link to your fine work (somewhat of a tribute to Dan Stone as well) and recommend that they carefully read the article at http://www.journalofaccountancy.com/Web/PursuingaPhDinAccounting

The fact that you were a mathematics teacher probably gave you a leg up in an accountics doctoral program.

Bob Jensen

Bob Jensen's threads on accountancy doctoral programs are at
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Accounting Program Rankings in Academe

The top ranked accounting programs do not set a four-hit minimum number of A-Level publications for tenure. In fact the rankings below indicate that some things are more important to program quality, especially in the eyes of firms that hire graduates, than research and publication records of the faculty.

"While the World Implodes, Let’s Bicker About Accounting Program Rankings," by Caleb Newquist, Going Concern, May 6, 2010 ---
http://goingconcern.com/2010/05/while-the-world-implodes-lets-bicker-about-accounting-program-rankings/

Despite your 401k taking a deuce and the entire continent of Europe about to sink into the Atlantic, the Bloomberg Businessweek Business School undergraduate speciality rankings are out and the accounting rankings are, shall we say, interesting. Maybe no one is that worried about it but if sports play any part in your like/dislike of a particular school, then there should be a few words:

1 University of Notre Dame (Mendoza)
2 Brigham Young University (Marriott)
3 Emory University (Goizueta)
4 University of North Carolina – Chapel Hill (Kenan-Flagler)
5 Wake Forest University
6 Lehigh University
7 Boston College (Carroll)
8 University of California – Berkeley (Haas)
9 University of San Diego
10 Southern Methodist University (Cox)

11 Babson College
12 University of Washington (Foster)
13 University of Richmond (Robins)
14 Villanova University
15 Case Western Reserve University (Weatherhead)
16 University of Texas – Austin (McCombs)
17 University of Virginia (McIntire)
18 Cornell University
19 College of William & Mary (Mason)
20 New York University (Stern)
21 University of Southern California (Marshall)
22 Tulane University (Freeman)
23 Fordham University
24 Georgia Institute of Technology
25 Loyola University – Chicago
26 University of Illinois – Urbana Champaign
27 Ohio University
27 University of Denver (Daniels)
29 University of Texas – Dallas
30 University of South Carolina (Moore)
31 University of Connecticut
32 Boston University
33 Santa Clara University
34 University of Maryland (Smith)
35 Indiana University (Kelley)
36 Syracuse University (Whitman)
37 Washington University – St. Louis (Olin)
38 Binghamton University
39 University of Pennsylvania (Wharton)
40 Texas Christian University (Neeley)
41 University of Miami
42 University of Missouri – Columbia (Trulaske)
43 University of Michigan (Ross)
44 North Carolina State University
45 University of Wisconsin – Madison
46 Texas A&M University (Mays)
47 The College of New Jersey
48 University of Minnesota (Carlson)
49 Miami University (Farmer)
50 University of Georgia (Terry)
51 Massachusetts Institute of Technology (Sloan)
52 University of Delaware (Lerner)
53 Ohio Northern University (Dicke)
54 Seattle University (Albers)
55 Northern Illinois University
56 Michigan State University (Broad)
57 Georgetown University (McDonough)
58 California Polytechnic State University (Orfalea)
59 Loyola College in Maryland (Sellinger)
60 University at Buffalo
61 Bentley University
62 DePaul University
63 University of Iowa (Tippie)
64 Drexel University (LeBow)
65 Northeastern University
66 Marquette University
67 St. Joseph’s University (Haub)
68 University of Pittsburgh
69 University of Utah (Eccles)
70 University of Oregon (Lundquist)
71 Seton Hall University (Stillman)
72 Bowling Green State University
73 Kansas State University
74 Colorado State University
75 Louisiana State University (Ourso)
76 Baylor University (Hankamer)
77 University of Oklahoma (Price)
78 University of Colorado – Boulder (Leeds)
79 University of Massachusetts – Amherst (Isenberg)
80 James Madison University
81 George Washington University
82 University of Tennessee – Chattanooga
83 University of Houston (Bauer)
84 Xavier University (Williams)
85 Florida State University
86 John Carroll University (Boler)
87 University of Hawaii (Shidler)
88 Arizona State University (Carey)
89 Florida International University
90 University of Louisville
91 Bryant University
92 Rensselaer Polytechnic Institute (Lally)
93 Purdue University (Krannert)
94 Illinois State University
95 University of Arizona (Eller)
96 Texas Tech University (Rawls)
97 Hofstra University (Zarb)
98 Ohio State University (Fisher)
99 Clemson University
100 University of Florida (Warrington)
101 University of Akron
102 University of Arkansas – Fayetteville (Walton)
103 Butler University
104 University of Nebraska – Lincoln
105 University of Illinois – Chicago
106 University of Central Florida
107 Virginia Polytechnic Institute and State University (Pamplin)
108 Carnegie Mellon University (Tepper)
109 Temple University (Fox)
110 Pennsylvania State University (Smeal)
111 Clarkson University

Jensen Comment
Although virtually all of the above universities have AACSB-accredited business programs, many do not have the specialty AACSB-accredited accounting programs --- https://www.aacsb.net/eweb/DynamicPage.aspx?Site=AACSB&WebKey=4BA8CA9A-7CE1-4E7A-9863-2F3D02F27D23
I've always had doubts whether AACSB accounting program accreditation benefits exceed the costs.

"'U.S. News' May Shift Rankings Methodology," Inside Higher Ed, June 7, 2010 --- http://www.insidehighered.com/news/2010/06/07/qt#229379

U.S. News & World Report is considering several changes in the methodology for its college rankings. Robert Morse, who directs the rankings, discussed the possible changes and invited comment on them a blog post. . He said that the magazine may combine a ranking by high school counselors with the peer ranking currently done by college presidents -- one of the most controversial parts of the rankings. He also wrote that the magazine may add yield -- the percentage of accepted applicants who enroll -- to its formula, and may give more weight to "predicted graduation rate," which gives credit to colleges that exceed their expected rates.

Jensen Comment
Find a College
College Atlas --- http://www.collegeatlas.org/
Among other things the above site provides acceptance rate percentages
Online Distance Education Training and Education --- http://www.trinity.edu/rjensen/Crossborder.htm
For-Profit Universities Operating in the Gray Zone of Fraud (College, Inc.) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Bob Jensen's threads on ranking controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

Video: Why Accountants Don't Run Startups ---
http://www.justin.tv/startuplessonslearned/b/262670582#r=zWvHyWU~&s=li

Seven-Course Certificate in Leadership Studies from the University of Iowa
"Teaching a Leader," by Jennifer Epstein, Inside Higher Ed, June 15, 2010

Career-minded college students (or their concerned and hovering parents) are always in search of surefire ways to make their résumés and transcripts stand out as they try to elbow out classmates for full-time jobs after graduation.

Beyond the grades, internships, student organizations, majors and minors that give employers a sense of what students have learned and what they might be able to do, the University of Iowa will this fall add a seven-course certificate in leadership studies, aimed at making students more attractive to hiring managers in a down

“Leadership is one of the top skills employers say they are looking for looking for,” said Kelley C. Ashby, director of the Career Leadership Academy in the university’s Pomerantz Career Center, which already offers four classes on leadership. “We want students to have the academic component -- various theories of leadership -- and we also want students to have practical experience to apply what we’re teaching them.”

Though the university and its College of Business had for years offered courses on leadership to undergraduates, students and parents seemed to want more, “to know that classes and experiences could translate into something tangible on their transcript,” said David Baumgartner, assistant dean and director of the career center.

Other institutions, including Northwestern University and the University of Wisconsin at Madison, have in the last decade or so introduced leadership certificates open to undergraduates in more than just their business schools.

At Iowa, the certificate will consist of 21 credits -- the equivalent of seven standard Iowa courses. All students will be required to take a core course, “Perspectives on Leadership: Principles and Practices,” developed by faculty in the university’s business, communication studies, education, political science and philosophy departments, as well as by Ashby and a representative of the university’s Office of Student Life. They will also have to choose one pre-approved course from each of the following areas: self leadership, group leadership, communication, cultural competency, and ethics and integrity.

After a student has taken at least three courses, he or she can take on three credits of “experiential course work” -- an internship, on-campus leadership position, or service-learning course. The hope is that the theories of leadership that students learn in the courses will be put into immediate use in leadership positions.

While students generally dive into internships, resident assistant positions or student group presidencies without any specific knowledge on leadership, Ashby said, “we want there to be more intention about why they do what they do when they’re in those positions.”

Ashby said she anticipates that about 50 students will sign up for the core course this fall, but expects that, within a few years, as many as 300 undergraduates might be pursuing the certificate at any one time. So far, she added, there’s no clear pattern of who’s expressing the most interest -- no glut of liberal arts majors hoping to make themselves more employable, and no onslaught of hypercompetitive business majors.

“It’s for students where it’s difficult to see, ‘Where’s my first job?’ and not just for the management majors,” she said. “It’s for the nursing major trying to connect the dots, the student interested in nonprofit management.” The program is being housed in University College, which she described as Iowa’s “kind of miscellaneous college,” rather than being pigeonholed into the College of Business, where the career center is based.

Debra Humphreys, vice president for communications and public affairs at the Association of American Colleges and Universities, said that while “a lot of employers aren’t going to know what this leadership certificate means, a student’s ability to describe or demonstrate what they’ve learned and done could be useful.” At the same time, she added, the certificate could “help the student convey to the employer what they can do.”

But leadership isn’t employers’ top priority in hiring recent graduates, said Ed Koc, director of strategic and foundation research at the National Association of Colleges and Employers. In his group’s latest survey of employers, leadership skills ranked “about 10th on the list -- there are other things employers find more important.”

While the certificate could be “a good idea to the extent that employers looking for leadership would point to the certificate on your resume to say that you ‘have it,’ ” Koc said, “it doesn’t give you a big leg up unless it’s something you’re able to leverage in your interview, if you get one.”

Jensen Comment One of the main complaints we hear from CPA firms and business corporations that hire accounting graduates is that we're producing graduates with little leadership aptitude and skills.

What future leaders need is increased communication skill and confidence in relating with people. The old joke is that an extroverted accountant is one who looks at your shoe laces rather than only his/her own shoe laces.

Bob Jensen's threads on higher education controversies and innovations are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Bill Pasewark asks and answers his own questions as the incoming editor of the AAA's Issues in Accounting Education --- Click Here
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=IAEXXX000025000002000187000001&idtype=cvips&prog=normal&bypassSSO=1

Accounting Jobs Information (free site) --- http://www.accountingjobshelp.com/
Thank you Kim Eaves for the heads up.

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

What's new on MAAW?
Multiple Choice Questions for Management Accounting
James Martin added a summary page of links to multiple choice questions for 14 management accounting topics at http://maaw.info/ManagementAccountingMCQuestions.htm

"Rekindling the Debate: What’s Right and What’sWrong with Masters of Accountancy Programs: The StaffAuditor’s Perspective," by Thomas J. Frecka and Philip M. J. Reckers, Issues in Accounting Education , Vol. 25, 2010 pp. 215–226
Not available free

ABSTRACT:
Global commerce has undergone massive changes over the last two decades. No less so has the worldwide public accounting profession. We have seen two market crashes in the span of eight years, a host of financial reporting fiascoes, and the demise of Arthur Andersen. Historical cost-based accounting is giving way to fairvalue accounting, and International Financial Reporting Standards are replacing national rules and regulations. And, yet, not since the Accounting Education Change Commission 20 years ago has there been a significant nationwide dialog regarding changing societal needs and the adequacy of our collegiate accounting programs to meet those needs. With this void in mind, the Education Committee of the American Accounting Association launched in 2008 an initiative to ignite a nationwide dialog of practitioners, academics, and other prominent stakeholders to assess the quality and level of satisfaction with current Master’s of Accountancy programs, the relevance of current coursework, and to identify and prioritize future curriculum initiatives. The first phase of that initiative was a survey conducted in the late spring of 2009 of more than 500 recent graduates of Master’s of Accountancy programs (auditors with two to six years experience ); this article reports the findings of that survey. In a nutshell, these young auditors were asked what was right and what was wrong with Master’s of Accountancy programs from their perspective. This is a first step in a larger effort to help give direction to program revisions that would best serve the interests of students, the profession, and society. The purpose of the survey is not to definitively resolve outstanding controversies but rather to encourage further necessary debate. Various interpretations of the findings of the survey are inevitable, invited, and welcome. To that end, it is the authors’ intent to raise as many questions in the following pages as those resolved. Over the last decade academics have witnessed an endless litany of suggestions for curriculum changes from individuals, committees, associations, and firms. Unfortunately, those many recommendations have often been conflicting and provide limited, if any, prioritization of what to add to existing curricula and what to withdraw. Furthermore, we acknowledge that while this article does not provide a substantive discussion of the necessarily complimentary roles of university education, continuing professional education, and on-the-job training, such issues must be included in future dialogs.

Thomas J. Frecka is a Professor at the University of Notre Dame, and Philip M. J. Reckers is a Professor at Arizona State University.

Bob Jensen's threads on accounting theory and education are at
http://www.trinity.edu/rjensen/Theory01.htm
Especially note
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

Congratulations to G. Peter Wilson
Pete Wilson of accounting at the Carroll School of Management at Boston College is the 2010 recipient of the Distinguished Achievement in Accounting Education Award from the AICPA --- http://www.webcpa.com/news/Wilson-Earns-AICPA-Accounting-Education-Award-54319-1.html

Wilson received the award for his innovative teaching practices, which have encouraged his students to pursue careers in accounting. He is in the process of creating text and software targeted to those new to accounting. When complete, the text/software will integrate financial, managerial and tax reporting research, teaching and practice; procedural and conceptual skills; and the interplay between a reporting entity’s business and accounting decisions and decisions by users of its accounting reports.

Tips about teaching, technology, and productivity

"You Can't Be Trusted If You're Trusted with Too Much," by Jason B. Jones, Chronicle of Higher Education, June 2, 2010 ---
http://chronicle.com/blogPost/You-Cant-Be-Trusted-If-Youre/24463/

The title of this post emerged at home a couple of weeks ago: the seven-year-old [YouTube] barked it at his mother as she tried to juggle, simultaneously, helping him with a convoluted craft/project and improving a policy that had been held up by the senate. He complained that she was taking too long answering an e-mail; she responded that he should trust that she was coming back; and he flipped the script: "Mom, you can't be trusted if you're trusted with too much."

There's a tricky moment in any career: When you're starting out, you want to be appreciated for your abilities, and are often frustrated that you're not being asked to do certain things that you think are within your skill set. Over time, you start to earn more respect from your colleagues, and are given more responsibilities . . . until there comes a time when you wake up in a panic every day about what you need to accomplish vs. what can plausibly be done in the time that you have. (As my wife said to my mother a few weeks ago: "I think there was a moment, back when he was 4, when we got a little overconfident about what we could plausibly do.")

I'm the last person in the world to dispense advice about this--I have a shameful list of "stuff I should've finished more quickly"--but I will risk three observations:

An e-mail that says, "hey--I haven't forgotten about X. Here's where things stand, and here's what I'm waiting on. Is that ok?" is useful, especially for service/shared governance tasks. Keeps people in the loop. (Obviously, you wouldn't want to overdo this, either.)

George wrote two posts about using your calendar to stay on top of things: "Have a life, with help from your calendar" and "Hit your deadlines, with help from your calendar". Although they're pitched to the start of the year, the summer is an excellent time to make sure your calendar accurately reflects the actual commitments you've made.

Donald E. Hall's The Academic Self: An Owner's Manual has a wealth of practical advice about how to translate academic commitments--teaching, research, and service--into step-by-step projects that can be captured on a calendar.

Nobody likes to say "no," especially to genuinely cool things. But it's generally better to say no in advance, rather than to say no by defaulting on things you care about.

How do you make decisions about choosing projects?

"Lessons for New Professors," by Elizabeth Parfitt, Inside Higher Ed, May 28, 2010 ---
http://www.insidehighered.com/advice/2010/05/28/parfitt

Bob Jensen's Somewhat Dated Advice for New Faculty ---
http://www.trinity.edu/rjensen/000aaa/newfaculty.htm

Higher Education Controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

"High-Profile Trader's Harsh Critique of For-Profit Colleges," Inside Higher Ed, May 27, 2010 ---
http://www.insidehighered.com/news/2010/05/27/qt#228602

Steven Eisman, the Wall Street trader who was mythologized in Michael Lewis's The Big Short as that rare person who saw the subprime mortgage crisis coming and made a killing as a result, thinks he has seen the next big explosive and exploitative financial industry -- for-profit higher education -- and he's making sure as many people as possible know it. In a speech Wednesday at the Ira Sohn Investment Research Conference, an exclusive gathering at which financial analysts who rarely share their insights publicly are encouraged to dish their "best investment ideas," Eisman started off with a broadside against Wall Street's college companies.

"Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry," said Eisman, of FrontPoint Financial Services Fund. "I was wrong. The For-Profit Education Industry has proven equal to the task." Eisman's speech lays out his analysis of the sector's enormous profitability and its questionable quality, then argues that the colleges' business model is about to be radically transformed by the Obama administration's plan to hold the institutions accountable for the student-debt-to-income ratio of their graduates. "Under gainful employment, most of the companies still have high operating margins relative to other industries," Eisman said. "They are just less profitable and significantly overvalued. Downside risk could be as high as 50 percent. And let me add that I hope that gainful employment is just the beginning. Hopefully, the DOE will be looking into ways of improving accreditation and of ways to tighten rules on defaults." Stocks of the companies appeared to fall briefly in the last hour of trading Wednesday, after news of Eisman's speech made the rounds.

"Subprime goes to college: The new mortgage crisis — how students at for-profit universities could default on $275 billion in taxpayer-backed student loans," by Steven Eusnan, The New York Post, June 6, 2010 ---
http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.
The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP#ixzz0q6iq9jsm

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.
The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP#ixzz0q6iq9jsm

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.

The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

A student prepares for an online quiz at home for the Universtity of Phoenix. In the past 10 years, the for-profit education industry has grown 5-10 times the historical rate of traditional post secondary education. As of 2009, the industry had almost 10% of enrolled students but claimed nearly 25% of the $89 billion of federal Title IV student loans and grant disbursements. At the current pace of growth, for-profit schools will draw 40% of all Title IV aid in 10 years.

How has this been allowed to happen?

The simple answer is that they’ve hired every lobbyist in Washington, DC. There has been a revolving door between the people who work for this industry and the halls of government. One example is Sally Stroup. In 2001-2002, she was the head lobbyist for the Apollo Group — the company behind the University of Phoenix and the largest for-profit educator. But from 2002-2006 she became assistant secretary of post-secondary education for the Department of Education under President Bush. In other words, she was directly in charge of regulating the industry she had previously lobbied for.

From 1987 through 2000, the amount of total Title IV dollars received by students of for-profit schools fluctuated between $2 billion and $4 billion per annum. But when the Bush administration took over, the DOE gutted many of the rules that governed the conduct of this industry. Once the floodgates were opened, the industry embarked on 10 years of unrestricted massive growth. Federal dollars flowing to the industry exploded to over $21 billion, a 450% increase.

At many major-for profit institutions, federal Title IV loan and grant dollars now comprise close to 90% of total revenues. And this growth has resulted in spectacular profits and executive salaries. For example, ITT Educational Services, or ESI, has a roughly 40% operating margin vs. the 7%-12% margins of other companies that receive major government contracts. ESI is more profitable on a margin basis than even Apple.

This growth is purely a function of government largesse, as Title IV has accounted for more than 100% of revenue growth.

Here is one of the more upsetting statistics. In fiscal 2009, Apollo increased total revenues by $833 million. Of that amount, $1.1 billion came from Title IV federally funded student loans and grants. More than 100% of the revenue growth came from the federal government. But of this incremental $1.1 billion in federal loan and grant dollars, the company only spent an incremental $99 million on faculty compensation and instructional costs — that’s 9 cents on every dollar received from the government going toward actual education. The rest went to marketing and paying executives.

Leaving politics aside for a moment, the other major reason why the industry has taken an ever increasing share of government dollars is that it has turned the typical education model on its head. And here is where the subprime analogy becomes very clear.

There is a traditional relationship between matching means and cost in education. Typically, families of lesser financial means seek lower cost colleges in order to maximize the available Title IV loans and grants — thereby getting the most out of every dollar and minimizing debt burdens.

The for-profit model seeks to recruit those with the greatest financial need and put them in high cost institutions. This formula maximizes the amount of Title IV loans and grants that these students receive.

With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters (and I mean that literally), the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable of society.

If the industry in fact educated its students and got them good jobs that enabled them to receive higher incomes and to pay off their student loans, everything I’ve just said would be irrelevant.

So the key question to ask is — what do these students get for their education? In many cases, NOT much, not much at all.

At one Corinthian Colleges-owned Everest College campus in California, students paid $16,000 for an eight-month course in medical assisting. Upon nearing completion, the students learned that not only would their credits not transfer to any community or four-year college, but also that their degree is not recognized by the American Association for Medical Assistants. Hospitals refuse to even interview graduates.

And look at drop-out rates. Companies don’t fully disclose graduation rates, but using both DOE data and company-provided information, I calculate drop out rates of most schools are 50%-plus per year.

Default rates on student loans are already starting to skyrocket. It’s just like subprime — which grew at any cost and kept weakening its underwriting standards to grow.

The bottom line is that as long as the government continues to flood the for-profit education industry with loan dollars and the risk for these loans is borne solely by the students and the government, then the industry has every incentive to grow at all costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics — all to maintain access to the government’s money.

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP#ixzz0q6hwLIst

June 6, 2010 reply from dgsearfoss@comcast.net

Hi Bob,

Equally as bad, if not worse, are the companies that provide on-line courses to the military. They price their tuition at exactly the amount that will be covered by the military, set horribly low levels of expectation as reflected by the “testing” and “grading”, and virtually none of the “credits” are transferrable to an accredited higher education institution.

It is a scandal that should be dealt with harshly by Congress.

Jerry

On May 4, 2010, PBS Frontline broadcast an hour-long video called College Inc. --- a sobering analysis of for-profit onsite and online colleges and universities.
For a time you can watch the video free online --- Click Here
http://www.pbs.org/wgbh/pages/frontline/collegeinc/view/?utm_campaign=viewpage&utm_medium=toparea&utm_source=toparea

Bob Jensen's threads on many of the for-profit universities are at
http://www.trinity.edu/rjensen/Crossborder.htm

Although there is a gray zone, for-profit colleges should not be confused with diploma mills ---
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill

Brainstorm on What For-Profit Colleges are Doing Right as Well as Wrong

"'College, Inc.'," by Kevin Carey, Chronicle of Higher Education, May 10, 2010 ---
http://chronicle.com/blogPost/College-Inc/23850/?sid=at&utm_source=at&utm_medium=en

PBS broadcast a documentary on for-profit higher education last week, titled College, Inc. It begins with the slightly ridiculous figure of Michael Clifford, a former cocaine abuser turned born-again Christian who never went to college, yet makes a living padding around the lawn of his oceanside home wearing sandals and loose-fitting print shirts, buying up distressed non-profit colleges and turning them into for-profit money machines.

Improbably, Clifford emerges from the documentary looking OK. When asked what he brings to the deals he brokers, he cites nothing educational. Instead, it's the "Three M's: Money, Management, and Marketing." And hey, there's nothing wrong with that. A college may have deep traditions and dedicated faculty, but if it's bankrupt, anonymous, and incompetently run, it won't do students much good. "Nonprofit" colleges that pay their leaders executive salaries and run multi-billion dollar sports franchises have long since ceded the moral high ground when it comes to chasing the bottom line.

The problem with for-profit higher education, as the documentary ably shows, is that people like Clifford are applying private sector principles to an industry with a number of distinct characteristics. Four stand out. First, it's heavily subsidized. Corporate giants like the University of Phoenix are now pulling in hundreds of millions of dollars per year from the taxpayers, through federal grants and student loans. Second, it's awkwardly regulated. Regional accreditors may protest that their imprimatur isn't like a taxicab medallion to be bought and sold on the open market. But as the documentary makes clear, that's precisely the way it works now. (Clifford puts the value at $10-million.)

Third, it's hard for consumers to know what they're getting at the point of purchase. College is an experiential good; reputations and brochures can only tell you so much. Fourth—and I don't think this is given proper weight when people think about the dynamics of the higher-education market—college is generally something you only buy a couple of times, early in your adult life.

All of which creates the potential—arguably, the inevitability—for sad situations like the three nursing students in the documentary who were comprehensively ripped off by a for-profit school that sent them to a daycare center for their "pediatric rotation" and left them with no job prospects and tens of thousands of dollars in debt. The government subsidies create huge incentives for for-profit colleges to enroll anyone they can find. The awkward regulation offers little in the way of effective oversight. The opaque nature of the higher-education experience makes it hard for consumers to sniff out fraudsters up-front. And the fact that people don't continually purchase higher education throughout their lives limits the downside for bad actors. A restaurant or automobile manufacturer that continually screws its customers will eventually go out of business. For colleges, there's always another batch of high-school graduates to enroll.

The Obama administration has made waves in recent months by proposing to tackle some of these problems by implementing "gainful employment" rules that would essentially require for-profits to show that students will be able to make enough money with their degrees to pay back their loans. It's a good idea, but it also raises an interesting question: Why apply this policy only to for-profits? Corporate higher education may be the fastest growing segment of the market, but it still educates a small minority of students and will for a long time to come. There are plenty of traditional colleges out there that are mainly in the business of preparing students for jobs, and that charge a lot of money for degrees of questionable value. What would happen if the gainful employment standard were applied to a mediocre private university that happily allows undergraduates to take out six-figure loans in exchange for a plain-vanilla business B.A.?

The gainful employment standard highlights some of my biggest concerns about the Obama administration's approach to higher-education policy. To its lasting credit, the administration has taken on powerful moneyed interests and succeeded. Taking down the FFEL program was a historic victory for low-income students and reining in the abuses of for-profit higher education is a needed and important step.

Continued in article

Jensen Comment
The biggest question remains concerning the value of "education" at the micro level (the student) and the macro level (society). It would seem that students in training programs should have prospects of paying back the cost of the training if "industry" is not willing to fully subsidize that particular type of training.

Education is another question entirely, and we're still trying to resolve issues of how education should be financed. I'm not in favor of "gainful employment rules" for state universities, although I think such rules should be imposed on for-profit colleges and universities.

What is currently happening is that training and education programs are in most cases promising more than they can deliver in terms of gainful employment. Naive students think a certificate or degree is "the" ticket to career success, and many of them borrow tens of thousands of dollars to a point where they are in debtor's prisons with their meager laboring wages garnished (take a debtor's wages on legal orders) to pay for their business, science, and humanities degrees that did not pay off in terms of career opportunities.

But that does not mean that their education did not pay off in terms of life's fuller meaning. The question is who should pay for "life's fuller meaning?" Among our 50 states, California had the best plan for universal education. But fiscal mismanagement, especially very generous unfunded state-worker unfunded pension plans, has now brought California to the brink of bankruptcy. Increasing taxes in California is difficult because it already has the highest state taxes in the nation.

Student borrowing to pay for pricey certificates and degrees is not a good answer in my opinion, but if students borrow I think the best alternative is to choose a lower-priced accredited state university. It will be a long, long time before the United States will be able to fund "universal education" because of existing unfunded entitlements for Social Security and other pension obligations, Medicare, Medicaid, military retirements, etc.

I think it's time for our best state universities to reach out with more distance education and training that prevent many of the rip-offs taking place in the for-profit training and education sector. The training and education may not be free, but state universities have the best chance of keeping costs down and quality up.

"Wal-Mart Employees Get New College Program—Online," by Marc Parry, Chronicle of Higher Education, June 3, 2010 ---
http://chronicle.com/blogPost/Wal-Mart-Employees-Get-New/24504/?sid=at&utm_source=at&utm_medium=en

The American Public University System has been described as a higher-education version of Wal-Mart: a publicly traded corporation that mass-markets moderately priced degrees in many fields.

Now it's more than an analogy. Under a deal announced today, the for-profit online university will offer Wal-Mart workers discounted tuition and credit for job experience.

Such alliances are nothing new; see these materials from Strayer and Capella for other examples. But Wal-Mart is the country's largest retailer. And the company is pledging to spend $50-million over three years to help employees cover the cost of tuition and books beyond the discounted rate, according to the Associated Press.

"What's most significant about this is that, given that APU is very small, this is a deal that has the potential to drive enrollments that are above what investors are already expecting from them," Trace A. Urdan, an analyst with Signal Hill Capital Group, told Wired Campus. "Which is why the stock is up."

Wal-Mart workers will be able to receive credit—without having to pay for it—for job training in subjects like ethics and retail inventory management, according to the AP.

Wal-Mart employs 1.4 million people in the U.S. Roughly half of them have a high-school diploma but no college degree, according to The New York Times. A department-level manager would end up paying about $7,900 for an associate degree, factoring in the work credits and tuition discount, the newspaper reported.

“If 10 to 15 percent of employees take advantage of this, that’s like graduating three Ohio State Universities,” Sara Martinez Tucker, a former under secretary of education who is now on Wal-Mart’s external advisory council, told the Times.

"News Analysis: Is 'Wal-Mart U.' a Good Bargain for Students?" by Marc Parry, Chronicle of Higher Education, June 13, 2010 ---
http://chronicle.com/article/Is-Wal-Mart-U-a-Good/65933/?sid=at&utm_source=at&utm_medium=en

There might have been a Wal-Mart University.

As the world's largest retailer weighed its options for making a big splash in education, executives told one potential academic partner that Wal-Mart Stores was considering buying a university or starting its own.

"Wal-Mart U." never happened. Instead, the retailer chose a third option: a landmark alliance that will make a little-known for-profit institution, American Public University, the favored online-education provider to Wal-Mart's 1.4 million workers in the United States.

A closer look at the deal announced this month shows how American Public slashed its prices and adapted its curriculum to snare a corporate client that could transform its business. It also raises one basic question: Is this a good bargain for students?

Adult-learning leaders praise Wal-Mart, the nation's largest private employer, for investing in education. But some of those same experts wonder how low-paid workers will be able to afford the cost of a degree from the private Web-based university the company selected as a partner, and why Wal-Mart chose American Public when community-college options might be cheaper. They also question how easily workers will be able to transfer APU credits to other colleges, given that the university plans to count significant amounts of Wal-Mart job training and experience as academic credit toward its degrees.

For example, cashiers with one year's experience could get six credits for an American Public class called "Customer Relations," provided they received an "on target" or "above target" on their last performance evaluation, said Deisha Galberth, a Wal-Mart spokeswoman. A department manager's training and experience could be worth 24 credit hours toward courses like retail ethics, organizational fundamentals, or human-resource fundamentals, she said.

Altogether, employees could earn up to 45 percent of the credit for an associate or bachelor's degree at APU "based on what they have learned in their career at Wal-Mart," according to the retailer's Web site.

Janet K. Poley, president of the American Distance Education Consortium, points out that this arrangement could saddle Wal-Mart employees with a "nontransferable coupon," as one blogger has described it.

"I now see where the 'trick' is—if a person gets credit for Wal-Mart courses and Wal-Mart work, they aren't likely to be able to transfer those to much of anyplace else," Ms. Poley wrote in an e-mail to The Chronicle. Transferability could be important, given the high turnover rate in the retail industry.

Inside the Deal Wal-Mart screened 81 colleges before signing its deal with American Public University. One that talked extensively with the retailer was University of Maryland University College, a 94,000-student state institution that is a national leader in online education. According to University College's president, Susan C. Aldridge, it was during early discussions that Wal-Mart executives told her the company was considering whether it should buy a college or create its own college.

When asked to confirm that, Ms. Galberth said only that Wal-Mart "brainstormed every possible option for providing our associates with a convenient and affordable way to attend college while working at Wal-Mart and Sam's Club," which is also owned by Wal-Mart Stores. "We chose to partner with APU to reach this goal. We have no plans to purchase a brick-and-mortar university or enter the online education business," she said.

The Wal-Mart deal was something of a coming-out party for American Public University. The institution is part of a 70,000-student system that also includes American Military University and that largely enrolls active-duty military personnel. As American Public turned its attention to luring the retail behemoth, it was apparently able to be more flexible than other colleges and willing to "go the extra mile" to accommodate Wal-Mart, said Jeffrey M. Silber, a stock analyst and managing director of BMO Capital Markets. That flexibility included customizing programs. APU has a management degree with courses in retail, and its deans worked with Wal-Mart to add more courses to build a retail concentration, said Wallace E. Boston, the system's president and chief executive.

It also enticed Wal-Mart with a stable technology platform; tuition prices that don't vary across state lines, as they do for public colleges; and online degrees in fields that would be attractive to workers, like transportation logistics.

Unlike American Public, Maryland's University College would not put a deep discount on the table.

Credit for Wal-Mart work was also an issue, Ms. Aldridge said.

"We feel very strongly that any university academic credit that's given for training needs to be training or experience at the university level," Ms. Aldridge said. "And we have some very set standards in that regard. And I'm not certain that we would have been able to offer a significant amount of university credit for some of the on-the-job training that was provided there."

Awarding credit for college-level learning gained outside the classroom is a long-standing practice, one embraced by about 60 percent of higher-education institutions, according to the most recent survey by the Council for Adult And Experiential Learning. A student might translate any number of experiences into credit: job training, military service, hobbies, volunteer service, travel, civic activities.

Pamela J. Tate, president and chief executive of the council, said what's important isn't the percentage of credits students get from prior learning—a number that can vary widely. What's important, she said, is that students can demonstrate knowledge. Workers might know how they keep the books at a company, she explained. But that doesn't automatically mean they've learned the material of a college accounting course.

Karan Powell, senior vice president and academic dean at American Public University system, said credit evaluation at her institution "is a serious, rigorous, and conservative process." But will the credits transfer? "Every college or university establishes its own transfer-credit policies as they apply to experiential learning as well as credit from other institutions," she said in an e-mail. "Therefore, it would depend on the school to which a Wal-Mart employee wanted to transfer."

Affordable on $12 an Hour? Then there's the question of whether low-wage workers will be able to afford the degrees. One of the key features of this deal is the discount that Wal-Mart negotiated with American Public.

"Wal-Mart is bringing the same procurement policies to education that it brings to toothpaste," said John F. Ebersole, president of Excelsior College, a distance-learning institution based in New York.

American Public University's tuition was already cheap by for-profit standards and competitive with other nonprofit college options. It agreed to go even cheaper for Wal-Mart, offering grants equal to 15 percent of tuition for the company's workers. Those employees will pay about $11,700 for an associate degree and $24,000 for a bachelor's degree.

But several experts pointed out that public colleges might provide a more affordable option.

The Western Association of Food Chains, for example, has a partnership with 135 community colleges in the western United States to offer an associate degree in retail management completely online, Ms. Tate said. Many of the colleges also grant credit for prior learning. Though the tuition varies by state, the average tuition cost to earn the degree is about $4,500, she said. By contrast, she said, the American Public degree is "really expensive" for a front-line worker who might make $12 an hour.

"What I couldn't figure out is how they would be able to afford it unless Wal-Mart was going to pay a substantial part of the tuition," she said. "If not, then what you've got is this program that looks really good, but the actual cost to the person is a whole lot more than if they were going to go to community college and get their prior learning credits assessed there."

How the retailer might subsidize its employees' education is an open question. In announcing the program, Wal-Mart pledged to spend up to $50-million over the next three years "to provide tuition assistance and other tools to help associates prepare for college-level work and complete their degrees."

Alicia Ledlie, the senior director at Wal-Mart who has been shepherding this effort, told The Chronicle in an e-mail that the company is "right now working through the design of those programs and how they will benefit associates," with more details to be released later this summer.

One thing is clear: The deal has a big financial impact on American Public. Wal-Mart estimates that about 700,000 of its 1.4 million American employees lack a college degree.

Sara Martinez Tucker, a former under secretary of education who is now on Wal-Mart's external advisory council, suggests 10 or 15 percent of Wal-Mart associates could sign up.

"That's 140,000 college degrees," she told The Chronicle. "Imagine three Ohio State Universities' worth of graduates, which is huge in American higher education."

Jensen Comment
This Wal-Mart Fringe Benefit Should Be Carefully Investigated by Employees
It does not sit well with me!

If Wal-Mart would pay the same amount of benefit for online state university degrees (e.g., the University of Wisconsin has over 100,000 online students) as the for-profit American Public University that charges higher tuition even at a Wal-Mart discount, why would a student choose the less prestigious and relatively unknown American Public University? Possibly American Public wins out because it's easier to get A & B grades with less academic ability and less work.
"Want a Higher G.P.A.? Go to a Private College: A 50-year rise in grade-point averages is being fueled by private institutions, a recent study finds," by Catherine Rampell. The New York Times, April 19, 2010 ---
http://finance.yahoo.com/college-education/article/109339/want-a-higher-gpa-go-to-a-private-college?mod=edu-collegeprep

I certainly hope that the Wal-Mart contributions toward tuition can be extended to state-supported colleges and universities having more respected credits. For example, online degrees from the University of Wisconsin or the University of Maryland are are likely much more respected for job mobility and for acceptance into graduate schools.

Giving credit for "job experience" is an absolute turn off for me. Most adults have some form of "job experience." This is just not equivalent to course credit experience in college where students face examinations and academic projects. Weaker colleges generally use credit for "job experience" ploy as a come on to attract applicants. But the credits awarded for job experience are not likely to be transferrable to traditional colleges and universities.

The "discounted tuition" in this for-profit online program is likely to be higher than the in-state tuition from state-supported colleges and universities.

I'm dubious about the standards for admission in for-profit colleges as well as the rigor of the courses. Watch the Frontline video served up by PBS.

On May 4, 2010, PBS Frontline broadcast an hour-long video called College Inc. --- a sobering analysis of for-profit onsite and online colleges and universities.
For a time you can watch the video free online --- Click Here
http://www.pbs.org/wgbh/pages/frontline/collegeinc/view/?utm_campaign=viewpage&utm_medium=toparea&utm_source=toparea

The American Public University System is accredited by the North Central Association accrediting agency that is now under investigation for weakened standards for college credits.

"Inspector General Keeps the Pressure on a Regional Accreditor," by Eric Kelderman, Chronicle of Higher Education, May 27, 2010 ---
http://chronicle.com/article/Inspector-General-Keeps-the/65691/?sid=at&utm_source=at&utm_medium=en

The inspector general of the U.S. Department of Education has reaffirmed a recommendation that the department should consider sanctions for the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations. In a report this week, the Office of Inspector General issued its final recommendations stemming from a 2009 examination of the commission's standards for measuring credit hours and program length, and affirmed its earlier critique that the commission had been too lax in its standards for determining the amount of credit a student receives for course work.

The Higher Learning Commission accredits more than 1,000 institutions in 19 states. The Office of Inspector General completed similar reports for two other regional accreditors late last year but did not suggest any sanctions for those organizations.

Possible sanctions against an accreditor include limiting, suspending, or terminating its recognition by the secretary of education as a reliable authority for determining the quality of education at the institutions it accredits. Colleges need accreditation from a federally recognized agency in order to be eligible to participate in the federal student-aid programs.

In its examination of the Higher Learning Commission, the office looked at the commission's reaccreditation of six member institutions: Baker College, DePaul University, Kaplan University, Ohio State University, the University of Minnesota-Twin Cities, and the University of Phoenix. The office chose those institutions—two public, two private, and two proprietary institutions—as those that received the highest amounts of federal funds under Title IV, the section of the Higher Education Act that governs the federal student-aid programs.

It also reviewed the accreditation status of American InterContinental University and the Art Institute of Colorado, two institutions that had sought initial accreditation from the commission during the period the office studied.

The review found that the Higher Learning Commission "does not have an established definition of a credit hour or minimum requirements for program length and the assignment of credit hours," the report says. "The lack of a credit-hour definition and minimum requirements could result in inflated credit hours, the improper designation of full-time student status, and the over-awarding of Title IV funds," the office concluded in its letter to the commission's president, Sylvia Manning.

More important, the office reported that the commission had allowed American InterContinental University to become accredited in 2009 despite having an "egregious" credit policy.

In a letter responding to the commission, Ms. Manning wrote that the inspector general had ignored the limitations the accreditor had placed on American InterContinental to ensure that the institution improved its standards, an effort that had achieved the intended results, she said. "These restrictions were intended to force change at the institution and force it quickly."

Continued in article

Jensen Comment
The most successful for-profit universities advertise heavily about credibility due to being "regionally accredited." In some cases this accreditation was initially bought rather than achieved such as by buying up a small, albeit still accredited, bankrupt not-for-profit private college that's washed up on the beach. This begs the question about how some for-profit universities maintain the spirit of accreditation acquired in this manner.

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

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Government Aid Will Still Flow to For-Profit College Programs of Dubious Quality
"Education Dept. Will Release Stricter Rules for For-Profits but Delays One on 'Gainful Employment'," by Kelly Fields and Jennifer Gonzalez, Chronicle of Higher Education, June 15, 2010 --- http://chronicle.com/article/Education-Dept-Will-Release/65958/

After an intense lobbying effort by for-profit colleges, the Education Department announced Tuesday that it will postpone the release of a rule that proprietary institutions said would shutter thousands of their programs.

The rule, which would cut off federal student aid to programs whose graduates carry high student-loan debt relative to their incomes, is one of 14 that the department and college stakeholders have been negotiating over the past eight months. The other regulations, including one that would tighten a ban on incentive compensation for college recruiters, will be made public Friday.

In a call with reporters Tuesday, an Education Department official said the agency still plans to hold for-profits accountable for preparing their graduates for "gainful employment," but needs more time to develop an appropriate measure of that outcome. The official said the proposal will be released later this summer, and will most likely be included in a package of final rules due out in November.

"We have many areas of agreement where we can move forward," Arne Duncan, the U.S. secretary of education, said in a statement. "But some key issues around gainful employment are complicated, and we want to get it right, so we will be coming back with that shortly."

The delay gives for-profit colleges more time to fight the department's proposal to bar aid for programs in which a majority of students' loan payments would exceed 8 percent of the lowest quarter of graduates' expected earnings, based on a 10-year repayment plan. The colleges have already spent hundreds of thousands of dollars pushing an alternative that would require programs to provide prospective students with more information about their graduates' debt levels and salaries.

Their lobbying and public-relations blitz has met with mixed success. While the department has not yet abandoned plans to measure graduates' debt-to-income ratios, the rules that will be released Friday would require programs to disclose their graduation and job-placement rates and median debt levels—the approach favored by for-profits.

A Welcome Delay Trace A. Urdan, an analyst with Signal Hill Capital Group, said the delay in releasing the rest of the rule suggested that "the department has heard the message from industry and Congress, and that there was some overreaching."

"Clearly, trying to gather more data before proceeding is being responsible," he added.

For-profit colleges have complained that the department has refused to release the data it used to justify drafting the rule, and have questioned whether they even exist.

The fight over gainful employment comes amid increased federal scrutiny of the for-profit sector, which educates a growing share of students and is highly dependent on federal student aid. On Thursday, the education committee of the U.S. House of Representatives will hold a hearing to examine whether accrediting agencies are doing enough to ensure that students studying online are getting an adequate amount of instruction for the degrees they earn. The hearing will focus on a recent report by the Education Department's Office of Inspector General that questioned the decision of the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations, to approve accreditation of American InterContinental University, a for-profit college owned by the Career Education Corporation. The Senate education committee follows with a hearing next week focused on the growth of the for-profit sector and the risks that may pose to taxpayers.

In a statement issued Tuesday, the chairman of the Senate committee praised the proposed rules. "The federal government must ensure that the more than $20-billion in student aid that these schools receive is being well spent and students are being well informed and well served," said Sen. Tom Harkin, Democrat of Iowa. "For-profit colleges must work for students and taxpayers, not just shareholders."

Meanwhile, a top Republican on the panel, Sen. Lamar Alexander, of Tennessee, called the disclosures that would be required by the rules that will be released on Friday "much better than the first approach on gainful employment." Mr. Alexander, a former secretary of education, had threatened to offer an amendment to withhold the funds needed to put the rule into effect if the department followed through with its original proposal.

"Secretary Duncan is focusing on a real problem," he said. "Some students are borrowing too much and not getting enough value for what they are paying."

Tougher Stance on Recruitment But if the department is showing signs that it may soften its stance on gainful employment, it has dug in its heels on another controversial issue: recruiter compensation. During negotiations over the rules, the department proposed striking a dozen "safe harbors" from a ban on compensating recruiters based on student enrollment. It followed through with that proposal in the rules due out Friday, while promising to provide guidance on what is—and isn't—allowed under the ban.

Continued in article

Bob Jensen's threads on for-profit colleges operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

"Ed Tech Trends to Watch in 2010," by Converge Staff, Converge Magazine, June 14, 2010 ---
http://www.convergemag.com/classtech/2010-Ed-Tech-Trends.html
Bob Jensen's education technology threads
http://www.trinity.edu/rjensen/000aaa/0000start.htm

"Special Education Students Beat the Odds With Technology," by Converge Staff, Converge Magazine, June 16, 2010 ---
http://www.convergemag.com/classtech/Special-Education-Students-Beat-the-Odds-With-Technology.html
Bob Jensen's threads on technology aids for handicapped learners are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped

"Want a Higher G.P.A.? Go to a Private College: A 50-year rise in grade-point averages is being fueled by private institutions, a recent study finds," by Catherine Rampell. The New York Times, April 19, 2010 ---
http://finance.yahoo.com/college-education/article/109339/want-a-higher-gpa-go-to-a-private-college?mod=edu-collegeprep

Over the last 50 years, college grade-point averages have risen about 0.1 points per decade, with private schools fueling the most grade inflation, a recent study finds.

The study, by Stuart Rojstaczer and Christopher Healy, uses historical data from 80 four-year colleges and universities. It finds that G.P.A.'s have risen from a national average of 2.52 in the 1950s to about 3.11 by the middle of the last decade.

For the first half of the 20th century, grading at private schools and public schools rose more or less in tandem. But starting in the 1950s, grading at public and private schools began to diverge. Students at private schools started receiving significantly higher grades than those received by their equally-qualified peers -- based on SAT scores and other measures -- at public schools.

In other words, both categories of schools inflated their grades, but private schools inflated their grades more.

Based on contemporary grading data the authors collected from 160 schools, the average G.P.A. at private colleges and universities today is 3.3. At public schools, it is 3.0.

The authors suggest that these laxer grading standards may help explain why private school students are over-represented in top medical, business and law schools and certain Ph.D. programs: Admissions officers are fooled by private school students' especially inflated grades.

Additionally, the study found, science departments today grade on average 0.4 points lower than humanities departments, and 0.2 points lower than social science departments. Such harsher grading for the sciences appears to have existed for at least 40 years, and perhaps much longer.

Relatively lower grades in the sciences discourage American students from studying such disciplines, the authors argue.

"Partly because of our current ad hoc grading system, it is not surprising that the U.S. has to rely heavily upon foreign-born graduate students for technical fields of research and upon foreign-born employees in its technology firms," they write.

These overall trends, if not the specific numbers, are no surprise to anyone who has followed the debates about grade inflation. But so long as schools believe that granting higher grades advantages their alumni, there will be little or no incentive to impose stricter grading standards unilaterally.

Buying grades is also common in some foreign universities ---
http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=vincent_johnson

“Gaming for GPA” by Bob Jensen
So your goal in education is a gpa
That’s as close as possible to an average of A;
First you enroll in an almost unknown and easy private college
Where your transcript records accumulated knowledge.

But take the hardest courses in prestigious schools
Where you accumulate transfer credit pools;
Then transfer the A credits to your transcript cool
And bury the other credits where you were a fool.

And when the Great Scorer comes to write against your name
It’s not a question of whether you won or went lame;
You always win if you know how to play the game
And for a lifetime there’s no transcript record of your shame.

Bob Jensen's threads on grade inflation ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation
And http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor

"CEO Interviews on CNBC," by Felix Meschke and Andy (Young Han) Kim Nanyang, SSRN, June 20, 2010 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1627683
Thanks to Jim Mahar for this link.

Abstract:
This paper investigates whether media attention systematically affects stock prices by analyzing price and volume reactions to 6,937 CEO interviews that were broadcast on CNBC between 1997 and 2006. We document a significant positive abnormal return of 162 basis points accompanied by abnormally high trading volume over the [-2, 0] trading day window. After the interviews, prices exhibit strong mean reversion; over the following ten trading days, the cumulative abnormal return is negative 108 basis points. The pattern is robust even after controlling for the announcements of major corporate events and surrounding news articles. We also find that one standard deviation larger abnormal viewership is associated with a 0.5% higher event day abnormal return and 0.5% larger post-event reversals. Furthermore, we find evidence that enthusiastic individual investors are more likely to trade purely based on CNBC interviews not confounded by any events or news articles. These price and volume dynamics suggest that the financial news media is able to generate transitory buying pressure by catching the attention of enthusiastic individual investors.

Jensen Comment
I suspect it is safe to extrapolate (somewhat at least) these results to CEO comments in other similar and widely watched media services on stock picking in such places as the WSJ, NYT, Yahoo Finance, Motley Fools, etc.

Bob Jensen's threads on the Efficient Market Hypothesis (EMH) are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH

Somebody asked me how to find the cost of corporate fraud

From: XXXXX
Sent: Wednesday, June 23, 2010 2:40 PM
To: Jensen, Robert
Subject: Cost of corporate frauds

Hi Bob,

I was tooling around your web site, and there’s a lot of good stuff there… but I was wondering if you know where I might find some stats on the cost of corporate fraud – how much is lost on market cap, jobs lost, value of 401Ks, amount of debt left unpaid, or the like.

If you can point me in the right direction I would be most appreciative.

Regards,
XXXXX

From: Jensen, Robert [mailto:rjensen@trinity.edu]
Sent: Wednesday, June 23, 2010 6:05 PM
To: XXXXX
Subject: RE: Cost of corporate frauds

If you are seeking a dollar number I don’t think anything is available. In fact, I’m not certain how to even define “cost of corporate fraud” in a measurable way when you consider the higher order costs such as lost income of unemployed or under employed victims., lost of business from suppliers, litigation costs, media reporting costs, and thousands of other factors that are interactive and not additive.

If you find someone who claims to know the cost of corporate fraud I would be immediately suspicious. Press reports often say the number is in the billions, but that could be anywhere from $1 billion to $1 trillion.

Furthermore we only know about corporate frauds that have been detected. The cost of undetected corporate fraud is a complete unknown.

Bob Jensen

From: XXXXX
Sent: Wednesday, June 23, 2010 6:07 PM
To: Jensen, Robert
Subject: RE: Cost of corporate frauds

Thanks for your response. I wasn’t finding any info, so I was beginning to think it didn’t exist.

Do you know, though, if there is anything on a particular fraud, e.g., Enron and Worldcom)?

June 25, 2010 reply from Bob Jensen

Hi XXXXX,

I was afraid you would never ask!

Try the following links:

Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

http://www.trinity.edu/rjensen/FraudEnron.htm

http://www.trinity.edu/rjensen/FraudRotten.htm

http://www.trinity.edu/rjensen/Fraud001.htm

http://www.trinity.edu/rjensen/FraudConclusion.htm

http://www.trinity.edu/rjensen/FraudReporting.htm

"Video: Ted Talk – Sweat The Small Stuff: Hilarious examples of Behavioral Economics," Simoleon Sense, June 9, 2010 ---
http://www.simoleonsense.com/video-ted-talk-sweat-the-small-stuff-hilarious-examples-of-behavioral-economics/

Bob Jensen's not-so-hilarious threads on EMH controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Women to CPA Firms: I Quit!" by Joanne Cleaver, BNET, June 14, 2010 ---
http://blogs.bnet.com/management/?p=1594&tag=content;col1
Thank you Roger Collins for the Heads Up!

I’m no number cruncher, but even I can see that something’s out of line here:

Women earn 51 percent of accounting undergrad degrees

Women are 51 percent of employees at public accounting firms

Women are 17.4 percent of accounting firm partners

Organizations like Catalyst and the American Institute of Certified Public Accountants have long lamented that women aren’t making partner. They’ve trotted out the predictable bromides: flexible work schedules, more mentoring, and more female role models. But none of that actually targets the crux of the problem: At what point, exactly, do women quit? Why do they leave? And what can firms and women do about it?

Recently, the two associations for women in accounting — the American Society of Women Accountants and the American Women’s Society of CPA’s — teamed up with my research firm to find out. We released the first Accounting MOVE Report on April 15 (for a little tax-accountant humor). Our top-line recommendation: With one program, firms can retain women to partnership and immediately gain clients and revenue.

Really? More money now and more women in the long run?

Yes. Here’s how: concentrate business development training at the level where women are most likely to quit. For most firms, that’s at the senior-manager level — the step right before partner. Our study of 20 firms found that women are 50 percent of all managers but 40 percent of senior managers. At firms with directors, women accounted for 33 percent. And from there, it was a dizzying drop to 17.4 percent of partners. (By the way, that 17.4 percent is in line with previous research.)

Here’s what we found at that crucial senior level: Women promoted to senior manager suddenly realize that to make that final big step to partner, they must bring in clients. But guess what? They didn’t get into accounting to be salespeople — at least, that’s what dozens of women told us. But partners must make rain. And senior managers must learn to seed the clouds. This is such an unsettling prospect to many female senior managers that they’d rather defect to the corporate world where, they believe, they won’t be under the gun to bring in business.

Three years ago New Jersey CPA firm Rothstein Kass realized that this was a killer dynamic. Now RK has a constellation of training tools for senior women poised for partnership. “Rainmakers Roundtable” first coaches each woman to articulate her own approach to drawing in new clients. When you hear yourself say it, you own it. Then, the program alternates between three sales-skills workshops and three networking events. Each networking event puts into play the newly learned skills. By the last event, the RK women are networking with senior women at law firms and investment firms.

RK principal Rosalie Mandel has been the poster girl for many of the firm’s initiatives to advance women. A decade ago, when she had her first child she forged a part-time, principal-track schedule. It worked out so well that the managing partners asked her to lead the firm’s innovations in work-life and advancing women. She was named principal partly on her successes in those arenas.

Mandel says that because intense career advancement typically overlaps with intense family responsibilities, it’s incumbent on firms to clear the internal path so that rising women can tackle career-derailing issues. “Men have that natural camaraderie,” she says. “You see that the men who golf with the big guys get pulled forward a little faster. Women don’t have that. Who has time? You come in to work, and you work hard so you can get home.”

The Rainmakers Roundtable helps make up for time spent at school plays rather than after-dinner drinks. Women learn exactly how to ask for a high-level referral. They forge alliances with similarly situated women in law and investment banking firms, with the shared goal of recruiting new clients together, for all. They polish their personal elevator pitches.

Partly due to the Roundtable, fully half of Rothstein Kass directors are women. That should translate to a healthy lift in women partners — now an unimpressive 10 percent — with the next round of promotions.

New clients = more revenue. Rainmaking women = qualified potential partners. And that’s how to move the numbers at accounting firms.

What parallel dilemmas challenge women in your industry? Could the Rainmakers Roundtable be adapted to the particular challenges facing upper-middle management women in your company?

Women Partners in the Big 4 Accounting Firms
For the tenth consecutive year, Deloitte & Touche USA LLP tops the Big Four accounting firms in percentage of women partners, principals and directors, according to Public Accounting Report's 2006 Survey of Women in Public Accounting. The survey revealed that Deloitte's percentage of women partners, principals and directors is currently 19.3 percent, surpassing that of KPMG (16.8 percent), Pricewaterhouse Coopers (15.8 percent) and Ernst & Young (13.5 percent). Deloitte has held this lead every year since the inception of the survey in 1997, according to Jonathan Hamilton, editor, Public Accounting Report.
SmartPros, December 26, 2006 --- http://accounting.smartpros.com/x55948.xml

Women now make up more than 60 percent of all accountants and auditors in the United States, according to the Clarion-Ledger. That is an estimated 843,000 women in the accounting and auditing work force.
AccountingWeb, "Number of Female Accountants Increasing," June 2, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102218

Jensen Comment
Nearly 20 years ago, Deloitte embarked on a "Women's Initiative" to help female employees break the glass ceiling --- http://www.deloitte.com/dtt/section_node/0,1042,sid=2261,00.htm

The AAA Commons has a hive on Diversity ---
http://commons.aaahq.org/pages/home

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

"European Business Schools Set Sights on U.S.: Seeking U.S. students and a bigger global footprint, schools from Spain, France, and the U.K. are rushing to set up outposts on American soil," by Alison Damast, Business Week, June 17, 2010 ---
http://www.businessweek.com/bschools/content/jun2010/bs20100617_473655.htm?link_position=link1

Over the past decade or so, European business schools have been aggressive about reaching out to the American market, doing everything from forming alliances with U.S. schools to launching student- and faculty-exchange programs. Now a handful of elite European schools are taking this a step further, trying to create a more substantial presence in the U.S. by opening up traditional brick-and-mortar campuses.

In the past few months, schools from France to the U.K. have announced plans to build campuses in the coming year in the U.S., including one planned outpost announced just last week. It's a strategic move by these institutions to increase their stature and influence in the American market, says Robert Bruner, dean of the University of Virginia's Darden School of Business (Darden Full-Time MBA Profile).

"The U.S. is where the MBA was invented and, to some extent to establish a footprint in this market, is an additional means of legitimizing a school's brand and stature globally," says Bruner, who also chairs the Globalization of Management Education Task Force of the Association to Advance Collegiate Schools of Business, one of the leading business school accreditation agencies.

Eye on the Hot Spots

That's a viewpoint that these European B-schools are taking as they cautiously attempt to entrench themselves in the U.S. A number of the schools that have announced plans to build campuses are well-regarded universities in Europe, but not as well-known by students outside their home countries. By starting degree programs in such hot spots as Miami and New York, they say they will be able to enhance their global reputation in both the academic and business community in the U.S. as well as expand and enhance the degree programs they offer students. Another underlying motivation is the opportunity for them to recruit more American students to their campuses. At most European business schools, Americans make up just a handful of the students in the degree programs, making it hard for them to build up a strong alumni base in the U.S., deans at these schools say.

Many European business schools will be watching closely to see whether these business schools will be successful at branding themselves in the U.S., says Dave Wilson, president and chief executive of the Graduate Management Admission Council, which administers the Graduate Management Admission Test (GMAT). Of U.S. GMAT test takers, the vast majority, or about 98 percent, send their test scores to U.S. schools, leaving just a handful of American students who consider non-U.S schools. The European schools will have to work hard to attract these students to their U.S. outposts, Wilson says.

"These are sort of pioneers who are breaking new ground, and it will be a challenge to get U.S. students," Wilson says. "I think most European schools are going to sit back and watch, because this is really a brand new bet for them."

Manhattan Opening

Just this May, Spain's IESE Business School (IESE Full-Time MBA Profile) opened the doors of its New York campus on West 57th Street, a six-story building with two classrooms, breakout rooms, and office space. The school had been planning its U.S. campus for three years and has spent close to $20 million refurbishing the building, says Eric Weber, an associate dean of IESE and director of the school's New York office. Says Weber: "We're pretty bullish about the U.S."

The school will not be offering an MBA program at the New York office, but it has ambitious plans for the site, which include promotion of its custom programs for executives, establishing a research center on global business, and setting up activities for alumni and corporate sponsors. Professors from the school's Barcelona campus will take students to New York for several weeks, where they will study business in the context of New York City, Weber says.

Continued in article

Jensen Comment
One competitive advantage that foreign schools will bring to the table is to play on the wanderlust of the typical four-year college graduate. Before becoming tied down with a spouse and children, the lure of Europe is especially appealing to some graduates. Graduates recall hearing in class about all the world adventures of many of their professors, especially professors in humanities who often focus their own research on romantic European history, language, and literature. Students may see a European business school degree as having greater opportunity for job offers in Europe --- which may be a myth in many instances. Of course other students may lean toward Asian-school degrees for the same reasons. For a while Russia was popular until living in Russia became so dangerous and Russian universities became more corrupt.

Ketz Me If You Can
"Grade Inflation Op/Ed," by: J. Edward Ketz, SmartPros, June 2010 ---
http://accounting.smartpros.com/x69779.xml

I was interviewed recently about grade inflation, which motivated me to return to this familiar topic. While I have little new to offer, that does not mean that nothing can be done about the problem. If accounting faculty members have the will, they can reduce the amount of grade inflation in the system.

I remember when grade inflation began. I was an undergraduate at Virginia Tech during the Vietnam War. In 1969 Congress passed legislation, signed by President Johnson, that stopped students from staying in school indefinitely to avoid the draft, limiting the deferment to four years. The act required students to have at least a C average, else they could be drafted. (It also created the draft lottery. I even remember my draft lottery number—187.)

The public turned from supporting the war to opposing the war around this time. A number of university professors opposed the war; other faculty members who did not oppose the war did not want the blood of young men on their conscience. So, many of them refused to give less than a C grade to any student. The only significant exception was the engineering college, which apparently thought that ignorant engineers could be dangerous to society. Overall, there was an immediate and statistically significant upward shift in the university’s GPA the next quarter.

As everybody knows, the other major impact on grades is student evaluations. Universities, striving to objectivize the assessment of instructor performance, have turned to students. Universities used to employ evaluations by other faculty members—and a few still do—but faculty members are loathe to cut the throats of those who may return the favor.

There are many problems with student evaluations, but I’ll mention only one here. Instructors can manipulate the system by playing the game and patronizing the students. I learned this early in my career when I was a member of the Promotion and Tenure Committee two years in a row. The first year we had a person who regularly attained about 1.5-2.0 on a seven point scale, one being low and seven being high. When the committee castigated his teaching one year, he came back the following year with 6.5s in all his sections. The committee learned that he achieved this feat by giving students the exam questions a few days before the exam and offering coffee and donuts during the exams.

Today there is no draft, so the consequences of a bad grade does not carry the weight of yesteryear. Perhaps it will lead to a lower self-esteem, but self-esteem is overrated. It only leads to inflated egos.

I have sympathy toward untenured faculty who need to avoid giving promotion and tenure committee members reasons to deny tenure. But, tenured faculty have no such excuses. They can and should tell administrators to quit satisfying students’ demands when they involve a decline in educational quality.

This past semester a colleague and I team-taught Introductory Accounting to about 700 students (the number at the beginning of the term). About 200 students dropped the course. Of those who stayed, the class achieved a course GPA of 2.2; in other words, the median grade in the class was C+.

We think we avoided grade inflation. Our teaching evaluations will take a hit, but so what? The class deserved the grades they obtained and no higher.

Surely other instructors hold the line as well, but some others do not. We need as many faculty as possible to quit giving grades out merely because somebody paid tuition. The way to stop grade inflation is simple—just do it.

Grade Inflation is the Number One Disgrace of Higher Education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation

June 8, 2010 message from Zabihollah Rezaee (zrezaee) [zrezaee@MEMPHIS.EDU]

I have developed and taught a "Corporate Governance, Ethics and Business Sustainability" course. All MBA students are required to take this course at the University of Memphis. I am attaching the course syllabus and will gladly share my PPT slides and other teaching materials.

Best,

Zabi

Zabihollah "Zabi" Rezaee, PhD, CPA, CMA, CIA, CGFM, CFE, CSOXP, CGRCP, CGOVP
Thompson-Hill Chair of Excellence/
Professor of Accountancy Fogelman College of Business and Economics 300 Fogelman College Administration Bldg.
The University of Memphis
Memphis, TN 38152-3120
901.678.4652 (phone)
901.678.0717 (fax)
zrezaee@memphis.edu (e-mail)
https://umdrive.memphis.edu/zrezaee/www/

June 8, 2010 reply from Bob Jensen

Thank you for sharing Zabi,

In addition to your attachment, I found the links at https://umdrive.memphis.edu/zrezaee/www/

You might find some helpful references at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance
Includes a Harvard University Guidance Link

Bob Jensen

June 9, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

I scanned both sets of lecture notes and note that they both concentrate on the role of the auditor and therefore put the matter of ethics and fraud into the context of large scale enterprises. At the risk of appearing, to Americans at least, even more crazy than I appear already, it might be useful if I widen the potential net in regard to ethics in business and in accounting.

As I continue my research into the origins of accounting I try to delve into the commercial practices of Arab culture, the origin of the elements that make up double entry bookkeeping. And for those of you who read what I write you would know that I ascribe a significant role to double entry in the development of the modern economic system that we now operate. Double entry is not essential to commercial practice per se - but it certainly is in the operation of the large combines (big corporate and banks) that characterizes modern commerce.

There is little, in the secondary sources at least, on actual medieval Arab accounting practice. To compensate for this I have begun to look into Arab, and more broadly, Islamic law to discern what I believe are the accounting issues presented to the people of those times. This has led me to a study of Sharia law. Many in the West would perceive this law as being a caricature of limb removal and stoning and that is there for sure. But the Qu'ran, supported by the traditions, to a significant degree embodies a commercial code of practice that translates into law or at least the Muslim version of law.

This is not surprising, perhaps, as Muhammad was, prior to his epiphanies, a merchant. This is forced on him to a substantial degree as the place where he was born, Mecca, had little else for him to do. He clearly had an innate sense of what was fair. He played the role of an arbitrator at various times. Something he saw in the merchant dominated society in which he lived sickened him. It might be related to usury (originally meaning only the lending at interest). Though it is difficult to determine as the notion of interest in his time had the taint of the ungodly.

In any event Sharia commercial conduct was based on the idea of personal responsibility, underpinned of course by divine ordination. This results in conduct anathema to our culture. For example, profit had to be fair. This tends to suggest that there is significant transparency in trade - in principle this must mean that the purchaser has some sort of right to examine profits to ensure that the profit is justified. I suppose that this cannot be done without a sophisticated book-keeping system. Contracts are not enforceable as such. One party can walk away if the contract is oppressive. We have this in our legal system to a degree. The principles of the law of equity were derived to modify the worst excesses of contract law, but the contract still has primacy nonetheless. Pooling of resources basically has to be carried out in partnerships as befits a system based on personal responsibility. Trust amongst merchants and financiers is central. That is why a bill (yes the Arabs used bills of exchange and may have invented them) drawn by one person will be honoured by another many thousands of miles away.

For some reason the concepts central to Islamic commerce - trust, fairness, personal responsibility - are lacking in the modern Western way of doing business. Equally the Islamic concepts of business would militate against the development of the large corporate or the large bank. Having said that, there is a growing trend in Britain for non-Muslims to subject themselves in commercial dispute to Sharia consideration. As the driving is to find fairness and does not rely on the corrosive effect of the adversarial system, the result is likely to be quicker, cheaper and fairer.

Whilst I stray from my mission to find the roots of accounting as I become fascinated by Muhammad and his doctrines, I wish that some elements of the impulse behind Sharia could inform our system. As a fervent atheist and possible nihilist, as befits the Nietzshean that I am, I cannot believe in the lynchpin that holds it together being God. Nonetheless I cannot escape the sense of sickness that I have when I see and experience the way commerce is conducted in our society and the excesses that ensue. I see it in the never ending series of stories that Bob digs out. I see it in my own practice of insolvency. Each fraud I see is worse than the last. I don't believe that our system can be sustained if the attitudes that cause this prevail. As I have also taken to studying Marx to understand the formation of capital in 19th century Britain, I might be seen to fall prey to the Marxist fallacy of the inevitability of the destruction of the capitalist system. I don't need this to see the potential for economic catastrophe. After all the potential is plain to see in our very recent economic and financial history. Our solution is to make ever more complicated regulation when we cannot deal with complexity that already existed.

I even begin to lose faith in accounting itself. I have always justified my faith by assuming that accounting is a force for good. However, it becomes more and more apparent to me that accounting is only necessary to sustain the huge economic combines to which we can trace many of the travails we now suffer - BP being only the last in a long line of corporate dishonor. And for those of you who do not know BP has its origins in a company named the Anglo-Persian Oil company, a company at the centre of the removal by coup of the elected Iranian leader Mossadegh with all the problems that has engendered in the last 60 years.

I don't know the solution but I sure can see the problem. Is it too much to ask that we cast aside our ethnocentrism and look at other cultures and their commercial practice?

Robert B Walker

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

-----Original Message-----
From: Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]
Sent: Friday, June 11, 2010 7:21 AM
Subject: History of Insolvency

Might I then continue by telling you of the central significance of the National Bankruptcy Act of 1898. As I said it was the culmination of 100 years of law from the time of the grant of Constitutional authority to Congress to make bankruptcy law. The law making process would be reactivated each time there was an economic convulsion. These laws had either sunset clauses or were repealed. Near the end of the century a St Louis lawyer was commissioned to prepare an Act that he would have had as debtor friendly. This was not acceptable to Congress because it preferred rehabilitation to realization. Here lies the foundation for Chapter 11.

Of more significance to the accountant is the profound change to the definition of solvency. Hitherto it had been simply 'to be able to pay debts as they fall due', a rather more elusive idea than might first appear.

In any event the definition was changed to one of a comparison between property (assets in accountant's terms) and liabilities. There was a clause relating to the exclusion of property fraudulently conveyed, but that is not significant in this context. This definition has prevailed to this day in the 1978 albeit modified in a crucial way in that it created an ambiguity tested in the TWA case in about 1996.

I have summarized the above from J Adriance Bush in an introduction the Act published in 1899. I got it from Cornell University's website. Anyway Mr Bush comments that the radically new solvency test would test the judiciary in years to come. That has been so. It has culminated somewhat finally in the TWA case. It was resolved that assets should be at fair value and the liabilities at face value. This was because one side wanted the market price internalized into the debt of TWA and another side didn't. And that some might be happy with that. However, it does beg an important question:

what if there is a liability but it has no face value? These are Bob's beloved financial instruments. They can only be recognized by reference to a current interest rate as the liabilities they absolutely are. If such liabilities are to be so recognized, why would you apply a different rate to other liabilities? That would mean more conventional liabilities - being say a bond issued - should be measured at current rate to be consistent within the balance sheet. It may sound strange at first, but it is the position adopted by FASB in concept statement 7. It irritated me to begin with but I have now accepted it as the right answer.

So we have a clash between what accounting rules say and what lawyers say.

I think you American accountants have abandoned the field. If the accountant is not the arbiter of what is and what is not solvent, then what is he or she?

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

Bookkeeping in the Ancient Arab Culture and Commerce

Hi Robert,

Thank you very much for this great historical information.

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

-----Original Message-----
From: Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]
Sent: Thursday, June 10, 2010 5:01 PM

Professor ten Have in his book History of Accountancy states:

"In this Arabic culture, bookkeeping had already reached a high level of development. The administration of the customs, some fragments of which have been preserved, included already a general ledger, general journal and cash book; the system of monthly and annual closing was known. In the State budget of 918, which is available, a distinction is made between current and extraordinary expenditure. In Palermo, Sicily, a well developed bookkeeping system has been found dating back to 1135; this shows Arab influence. There is available an Arab manual dealing with the merchandise trade at the end of the 12th century. This book was printed in 1318.

Accordingly, an assumption is that the Arabs influenced the development of bookkeeping in Italy has a very strong foundation; however, it has not been validated to this day" (page 31)

He then cites some European writer (Dr S Elzinga) writing other than in English which rather cuts off a monolingual persons such a myself. I have other material, some of which you have sent me, which suggest that double entry was present in the Nile to the Oxus region for more than 1000 years. There is a suggestion that it actually comes from India - this is consistent with the origins of the Arabic numeral (the positional number system) and of algebra itself, both of which seem to come from India. The Arabs as the great medieval traders had links to India - Muhammad himself apparently went there on a trading mission.

The trouble with double entry is that it is always present as a concept whether the person preparing the record knew it or not. I think it evolved gradually and imperceptibly. But my contention is that Arab commerce would not have been possible without it.

The best general description of the foundations of Islamic culture that I have found is that by Professor Hodgson, previously a professor of history at Chicago (now long dead), in his 3 volume The Venture of Islam. The work is absolutely breath taking in its scope but doesn't give too much about the commercial culture prior to the life of Muhammad. However, he does describe why Mecca was sited where it was. It did not have a lot going for it as it did not have much of an oasis. What it did have was a defensible position and reasonably proximity to a port. For this reason it became an important trade link between India, SE Asia and China beyond that and Constantinople and other European destinations. These trade routes were well established in the 7th century. In short Mecca, whilst it did have a shrine prior to Islam, was really dependent upon commerce at the time of Muhammad. The area from the Nile to the Oxus (Professor Hodgon's substitute for the Middle East) must be seen as the crucible of the mechanics of modern commerce. It was the cross road between the West and the East.

As may be apparent from what I say I am writing my version of the history of accounting. I am doing so in accordance with my version of the Nietzschean genealogical method. Which means of course that I can write pretty much what I want for Nietzsche says that history is better understood as myth rather than by the traditional archival methods. So perhaps I am writing a myth of accounting. At the risk of appearing pompous, it is as much the philosophy of accounting as anything else. I hope by my trawl through history and thought to inform the current day problems of accounting by tracing their genealogy as it were.

I am not writing in sequence. I have started with the Italians then back to the Arabs which I am working on - and having to fill large gaps in my knowledge for I too have been educated in an ethnocentric manner. I am writing the major piece which ends the book - that is a discussion of solvency. For this I am researching American bankruptcy law - the National Bankruptcy Act 0f 1898 being the pivot for this particular piece. What is so peculiar about the US is that the law on solvency (or otherwise) is entirely a legal pursuit, not informed by accounting in any way. That is the reason the case law never solves the problem. There are two strands in the US - one law, one accounting - both groping their way towards solving the most important accounting issue - that of solvency determination. Yet neither of them intersects. We in New Zealand 20 years ago discarded our British model for company law and took the American solvency approach by way of Canada. Whether from some conscious plan or not solvency determination in NZ was expressly linked to GAAP. Our law is now filtering into Europe.

As an aside, it is worth noting that national bankruptcy law in the US is sanctioned by the Constitution itself. The history of the development of the law through the 19th century is a fascinating subject unto itself and which has led to the absurdly debtor friendly Chapter 11. But there is a limit to what I can do.

Robert Bruce Walker
New Zealand

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

Book Review by Robert Sack, The Accounting Review, May 2010, pp. 1122-1125
DAVID MOSSO, Early Warning and Quick Response: Accounting in the Twenty-First Century (Bingley, U.K.: Emerald Group/JAI Press, 2009, ISBN 978-1-84855-644-7, pp. viii, 86).

This is an engaging book with compelling arguments for a complete overhaul of our current set of accounting standards and of the process by which they are set.1 David Mosso is well qualified to comment on both, having served as a member of the Financial Accounting Standards Board FASB from 1978 to 1987, as Vice Chair of the Board from 1986 to 1987, and as the FASB’s Assistant Director of Research from 1987 to 1996. He came to the Board with extensive experience in governmental accounting and, after his work with the FASB, served as Chair of the Federal Accounting Standards Advisory Board from 1997 to 2006. He is quick to acknowledge his role in the development of our current Generally Accepted Accounting Principles (GAAP) and to express his regret for their failings.

In essence, Mosso argues that we must replace our current mixed-attribute GAAP with full fair value accounting. His proposal, which he calls the Wealth Measurement Model, would recognize all assets and liabilities, as he defines them, at their current fair value, as defined by SFAS No. 157. That fair value balance sheet would measure the entity’s wealth at that date. Changes in the entity’s wealth from one period to the next would act as an early warning of potential trouble to all of the entity’s constituents. As to the standard-setting process, Mosso argues that the standard setter should outline the principles of the Wealth Measurement Model and then observe practice, being alert for aberrations in the way those principles are applied. New standards would mostly be interpretations of the basic principles and so could be issued quickly with a minimum of due process.

The primary line of thought in Mosso’s book is a proposal to radically revise our current accounting model. On pages 11–12, he proposes six principles for his Wealth Measurement Model, quoted as follows:

• The objective of accounting is to measure an entity’s economic wealth net worth and income earnings for the purpose of diagnosing the entity’s financial health.

• All measurable assets and liabilities of an entity must be recognized on the entity’s balance sheet, along with the owners’ equity in those assets and liabilities.

• All balance sheet assets and liabilities, and changes in them, must be measured at fair value

• All issues and redemptions of owners’ equity shares must be measured at fair value with gain or loss recognition in earnings for any difference between the fair value of the shares and the fair value of things received or given in exchange.

• All major nonmeasureable assets, liabilities, commitments, and contingencies of an entity must be disclosed in notes to the financial statements.

• The primary financial statements … must be segmented and supplemented in a manner to facilitate the diagnosis of an entity’s financial health and future prospects.

Mosso argues that these principles must be mandatory and applicable to every entity. He observes that issuing the FASB’s Concept Statements as nonauthoritative guidance was a mistake, leading them to be seen as a basis for debate rather than as a basis for decision-making.

. . .

In Chapters 9 and 10, Mosso redefines assets, liabilities, and equity in the context of his six wealth measurement principles. An asset is an economic resource that is controlled by an entity (p. 46). That definition clarifies the FASB’s current definition in that it leaves out the criteria “probable” and “future economic benefit,” both of which he argues have been confusing in practice. A liability is an unfulfilled binding promise made by an entity to transfer specified economic benefits in determinable amounts at determinable times or on demand p. 47.That definition differs from the current FASB definition in that it uses a broader “promise” criterion in lieu of the difficult-to-apply idea of a “probable future sacrifice.” Interestingly, Mosso argues that, by using these definitions, receivables and payables will be reciprocal—there will be a mutual understanding of the claim between the two parties to the transaction. That understanding will be established by a triggering act as, for example, the performance of an earnings event. We have not insisted on mutuality in our current accounting for assets and liabilities, allowing for different assessments of “probability” by the holder of the asset and the obligor.

. . .

Following on Mosso’s challenge, and the FAF’s door-opening, the academic community ought to seize on the opportunity for a larger place at the table, where we can bring our unbiased skills to bear—even beyond the work of the individual academic Board member and the contributions of the AAA Financial Accounting and Reporting Section’s Financial Reporting Policy Committee. That challenge is perhaps the key message from this thoughtprovoking book.

Jensen Comment
Financial assets and liabilities tend to be sufficiently independent such that the sum of the exit values of the parts is the sum of the value of the whole baring blockage discounts and issues of subsidiary control interactions.

But I take issue with valuation of non-financial assets where an asset's exit value is the worst possible use of the asset. Value in use entails looking at assets in interactive combination and their possibly huge covariance components of value. Furthermore they co-vary with many intangible assets and liabilities that cannot be valued even in Mosso's formulation of change. Covariance components can be defined in hypothetical models, but their measurement in reality is next to impossible --- http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Fair Value Re-measurement Problems in a Nutshell: (1) Covariances and (2) Hypothetical Transactions and (3) Estimation Cost
It's All Phantasmagoric Accounting in Terms of Value in Use

In an excellent plenary session presentation in Anaheim on August 5, 2008 Zoe-Vanna Palmrose mentioned how advocates of fair value accounting for both financial and non-financial assets and liabilities should heed the cautions of George O. May about how fair value accounting contributed to the great stock market crash of 1929 and the ensuing Great Depression. Afterwards Don Edwards and I lamented that accounting doctoral students and younger accounting faculty today have little interest in and knowledge of accounting history and the great accounting scholars of the past like George O. May --- http://en.wikipedia.org/wiki/George_O._May
Don mentioned how the works of George O. May should be revisited in light of the present movement by standard setters to shift from historical cost allocation accounting to fair value re-measurement (some say fantasy land or phantasmagoric) accounting --- http://www.trinity.edu/rjensen/theory01.htm#FairValue
The point is that if fair value re-measurement is required in the main financial statements, the impact upon investors and the economy is not neutral. It may be very real like it was in the Roaring 1920s.

In the 21st Century, accounting standard setters such as the FASB in the U.S. and the IASB internationally are dead set on replacing traditional historical cost accounting for both financial (e.g., stocks and bonds) and non-financial (e.g., patents, goodwill, real estate, vehicles, and equipment) with fair values. Whereas historical costs are transactions based and additive across all assets and liabilities, fair value adjustments are not transactions based, are almost impossible to estimate, and are not likely to be additive.

If Asset A is purchased for $100 and Asset B is purchased for $200 and have depreciated book values of $50 and $80 on a given date, the book values may be added to a sum of $130. This is a basis adjusted cost allocation valuation that has well-known limitations in terms of information needed for investment and operating decisions.

If Asset A now has an exit (disposal) value of $20 and Asset B has an exit value of $90, the exit values can be added to a sum of $110 that has meaning only if each asset will be liquidated piecemeal. Exit value accounting is required for personal estates and for companies deemed by auditors to be non-going concerns that are likely to be liquidated piecemeal after debts are paid off.

But accounting standard setters are moving toward standards that suggest that neither historical cost valuation nor exit value re-measurement are acceptable for going concerns such as viable and growing companies. Historical cost valuation is in reality a cost allocation process that provides misleading surrogates for "value in use." Exit values violate rules that re-measured fair values should be estimated in terms of the "best possible use" of the items in question. Exit values are generally the "worst possible uses" of the items in a going concern. For example, a printing press having a book value of $1 million and an exit value of $100,000 are likely to both differ greatly from "value in use."

The "value in use" theoretically is the present value of all discounted cash flows attributed to the printing press. But this entails wild estimates of future cash flows, discount rates, and terminal salvage values that no two valuation experts are likely to agree upon. Furthermore, it is generally impossible to isolate the future cash flows of a printing press from the interactive cash flows of other assets such as a company's copyrights, patents, human capital, and goodwill.

What standard setters really want is re-measurement of assets and liabilities in terms of "value in use." Suppose that on a given date the "value in use" is estimated as $180 for Asset A and $300 for Asset B. The problem is that we cannot ipso facto add these two values to $480 for a combined "value in use" of Asset A plus Asset B. Dangling off in phantasmagoria fantasy land is the covariance of the values in use:

Value in Use of Assets A+B = $180 + $300 + Covariance of Assets A and B

For example is Asset A is a high speed printing press and Asset B is a high speed envelope stuffing machine, the covariance term may be very high when computing value in use in a firm that advertises by mailing out a thousands of letters per day. Without both machines operating simultaneously, the value in use of any one machine is greatly reduced.

I once observed high speed printing presses and envelope stuffing machines in action in Reverend Billy Graham's "factory" in Minneapolis. Suppose to printing presses and envelope stuffing machines we add other assets such as the value of the Billy Graham name/logo that might be termed Asset C. Now we have a more complicated covariance system:

Value in Use of Assets A+B+C = (Values of A+B+C) + (Higher Order Covariances of A+B+C)

And when hundreds of assets and liabilities are combined, the two-variate, three-variate, and n-variate higher order covariances for combined ""value in use" becomes truly phantasmagoric accounting. Any simplistic surrogate such as those suggested in the FAS 157 framework are absurdly simplistic and misleading as estimates of the values of Assets A, B, C, D, etc.

Furthermore, if the "value of the firm" is somehow estimated, it is virtually impossible to disaggregate that value down to "values in use" of the various component assets and liabilities that are not truly independent of one another in a going concern. Financial analysts are interested in operations details and components of value and would be disappointed if all that a firm reported is a single estimate of its total value every quarter.

Of course there are exceptions where a given asset or liability is independent of other assets and liabilities. Covariances in such instances are zero. For example, passive investments in financial assets generally can be estimated at exit values in the spirit of FAS 157. An investment in 1,000 shares of Microsoft Corporation is independent of ownership of 5,000 shares of Exxon. A strong case can be made for exit value accounting of these passive investments. Similarly a strong case can be made for exit value accounting of such derivative financial instruments as interest rate swaps and forward contracts since the historical cost in most instances is zero at the inception of many derivative contracts.
The problem with fair value re-measurement of passive investments in financial assets lies in the computation of earnings in relation to cash flows. If the value of 1,000 shares of Microsoft decreases by -$40,000 and the value of 5000 shares of Exxon increases by +$140,000, the combined change in earnings is $100,000 assuming zero covariance. But if the Microsoft shares were sold and the Exxon shares were held, we've combined a realized loss with an unrealized gain as if they were equivalents. This gives rise to the "hypothetical transaction" problem of fair value re-measurements. If the Exxon shares are held for a very long time, fair value accounting may give rise to years and years of "fiction" in terms of variations in value that are never realized. Companies hate earnings volatility caused by fair value "fictions" that are never realized in cash over decades of time.
Continued at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Mosso's vague about measuring fair value of non-financial assets. Presumably entry value might be used instead of exit value, but entry value is not really valuation. It is a re-definition of historical cost and is subject to all the arbitrariness of historical cost such as depreciation and amortization assumptions.

Fair value might be discounted cash flows for some assets and liabilities, but if the asset in question is a single particle amidst an entire conglomeration of heterogeneous particles, how do we allocate the present value into the whole down to its myriad of particles?

Although there are many flaws in the present mixed attributes conglomeration of valuations of assets and liabilities, I just do not see that valuation of non-financial assets at their worst possible usages makes any sense. Especially troublesome are fixed assets that have high values in use and low exit values. For example, ERP information systems, factory robots, computers, etc. may lose most of their exit value the moment they are put to use even though their expected lives may be ten or more years. Maybe I'm just an old has been who clings to admiration of the Payton and Littleton matching concept.

Furthermore, re-valuation can be a very costly process such as paying to re-value a hotel chain's hundreds of pieces of real estate scattered about the world ---
http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Bob Sack concludes his book review by asserting that the "academic community ought to seize on the opportunity for a larger place at the table." Be that as it may, the academic community has be debating these issues since the days of MacNeal, Canning, Payton, Scott, Chambers, Sterling, Edwards, Bell, and on and on through tens of thousands of pages of books, journal articles, and transcripts of speeches and course notes. Woodrow Wilson was correct when he said that moving a professors is harder than moving a cemetery.

Standard setters have already commenced the Mosso express train.

Let me off as it approaches the "Non-Financial Asset Depot."

June 13, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

I must confess that the writings of Mr Mosso are not particularly interesting to me – the ideas are not new and simply reflect a distillation of current debates. Far more significant is the writing of RA Bryer, the latest iteration of which I stumbled upon as a draft on Bob’s website (Ideology and reality in accounting: a Marxist history of US accounting theory debate from the late 19th century to FASB’s conceptual framework).

This essay works at two levels. At the first level is a brilliant narrative showing the evolution of corporate accounting and the debate about historic cost versus fair value. This was happening in the first part of the 20th century. It shows, if nothing else, that nothing is new.

The second level is, as the title suggests, an ideological analysis. Bryer suggests that one of the prime considerations in corporate accounting emerged from the fight to the death between labour and capital such as prevailed in the early 20th century in America. This fight was indeed vicious, culminating in what we would call terrorism. For example, there was a bombing at a newspaper premises in LA. Clarence Darrow no less was the defending attorney for the workers and was caught, or very close to it, in the process of jury tampering. He did, and it is almost certain he did, this because he knew that a capitalist finger was on the judicial scales. It might even be the case that the capitalist (whose name escapes me) may have been the author of the bombing himself!

In any event Bryer uses the Marxist labour theory of value (LTV) and its related theories of money and exchange to show the weird parallels between it and historic cost accounting (HCA). He seems to suggest that the notion of future value (present value) accounting is an ideological attempt to deny the validity of LTV. Conversely HCA is an affirmation of LTV, based as it is on past exchange rather than the prospect of exchange.

It is well worth looking at Marx’s analysis because it does shed light on the enterprise that is accounting – the role of commodities, the pricing mechanism and the idea of purely monetary exchange. Yet I cannot believe that there is this ideological element to accounting. I believe the impulse to HCA is an impulse concerned with the centrality and integrity of double entry bookkeeping. Bryer turns my long held view on its head.

I know he is wrong but I have to summon all my knowledge, experience and cogitation powers to prove it. All accountants academic or otherwise, especially American accountants, should read what he writes. It is one of the most important things that has ever been written about the subject of accounting.

"Of geeks and goalies," The Economist Magazine's Babbage Blog, June 26, 2010 ---
http://www.economist.com/blogs/babbage?fsrc=nlw|pub|03_30_2010|publishers_newsletter

. . .

Subsequent analysis revealed 15 previously unknown indicators of where the ball might go (he also tested 12 indicators which had already been studied in sports literature). Three patterns of coordinated "distributed movements" turned out to be telltales. As Mr Diaz explains in a press release:

"When a goalkeeper is in a penalty situation, they can't wait until the ball is in the air before choosing whether to jump left or right--a well-placed penalty kick will get past them. As a consequence, you see goalkeepers jumping before the foot hits the ball. My question is: Are they making a choice better than chance (50/50), and if so, what kind of information might they be using to make their choice?"

"When, for example, you shift the angle of your planted foot, perhaps in an attempt to hide the direction of the kick, you're changing your base of support. In order to maintain stability, maybe you have to do something else like move your arm. And it just happens naturally. If this happens over and over again, over time your motor system may learn to move the arm at the same time as the foot. In this way the movement becomes one single distributed movement, rather than several sequential movements. A synergy is developed."

The next step was to see how good 31 novices were at predicting the trajectory when shown an animation of the motion capture data which blacked out at the point of contact between the foot and the ball. Although fifteen were no better than chance, the remaining 16 were. One observed difference between the two groups was the response time, longer for the successful predictors. (Responses which took more than half a second following the blackout went unrecorded.) Whether this would ultimately translate into better performance remains moot. England's keeper may well hope so. Its strikers probably don't.

PS To be fair, this time England are approaching possible penalties very methodically, even enlisting the help of statisticians.

PPS The following anecdote is entirely extraneous to the topic at hand but it cries out for a mention. In the 2006 shoot-out against Argentina Germany's then goalkeeper, Jens Lehmann, notoriously carried a list of where the rival strikers put their penalties tucked in his sock. He actually went in the right direction--clearly a prerequisite for success--every time, saving two Argentine attempts. As Esteban Cambiasso steadied himself for the decisive shot, the German goalie conspicuously consulted a crumpled piece of paper pulled out from under his shin pad. Discomfited, the striker sent the orb to the right, directly into the hands of the lunging Lehmann. Adding insult to injury, it later transpired that he wasn't even on the list.

This is only the ending part of the article

Related items from Jensen's archives:

Goal Tenders versus Movers and Shakers
Skate to where the puck is going, not to where it is.
Wayne Gretsky (as quoted for many years by Jerry Trites at http://www.zorba.ca/ )

Jensen Comment
This may be true for most hockey players and other movers and shakers, but for goal tenders the eyes should be focused on where the puck is at every moment --- not where it's going. The question is whether an accountant is a goal tender (stewardship responsibilities) or a mover and shaker (part of the managerial decision making team). This is also the essence of the debate of historical accounting versus pro forma accounting.

Graduate student Derek Panchuk and professor Joan Vickers, who discovered the Quiet Eye phenomenon, have just completed the most comprehensive, on-ice hockey study to determine where elite goalies focus their eyes in order to make a save. Simply put, they found that goalies should keep their eyes on the puck. In an article to be published in the journal Human Movement Science, Panchuk and Vickers discovered that the best goaltenders rest their gaze directly on the puck and shooter's stick almost a full second before the shot is released. When they do that they make the save over 75 per cent of the time.
"Keep your eyes on the puck," PhysOrg, October 26, 2006 --- http://physorg.com/news81068530.html

A Different Set of Heroes, Ethics, Morals, and Rules
"Bernie Madoff, Free at Last In prison he doesn’t have to hide his lack of conscience. In fact, he’s a hero for it," Steve Fishman, New York Magazine, June 6, 2010 --- http://nymag.com/news/crimelaw/66468/

Last August, shortly after his arrival at the federal correctional complex in Butner, North Carolina, Bernard L. Madoff was waiting on the evening pill line for his blood-pressure medication when he heard another inmate call his name. Madoff, then 71, author of the most devastating Ponzi scheme in history, was dressed like every other prisoner, in one of his three pairs of standard-issue khakis, his name and inmate number glued over the shirt pocket. Rec time, the best part of a prisoner’s day, was drawing to a close, and Madoff, who liked to walk the gravel track, sometimes with Carmine Persico, the former mob boss, or Jonathan Pollard, the spy, had hurried to the infirmary, passing the solitary housing unit—the hole—ducking through the gym and the twelve-foot-high fence and turning in the direction of Maryland, the unit where child molesters are confined after they’ve served their sentences. As usual, the med line was long and moved slowly. There were a hundred prisoners, some standing outside in the heat, waiting for one nurse.

Madoff was accustomed to hearing other inmates call his name. From July 14, the day he arrived, he’d been an object of fascination. Prisoners had assiduously followed his criminal career on the prison TVs. “Hey, Bernie,” an inmate would yell to him admiringly while he was at his job sweeping up the cafeteria, “I seen you on TV.” In return, Madoff nodded and waved, smiling that sphinxlike half-smile. “What did he say?” Madoff sometimes asked.

But that evening an inmate badgered Madoff about the victims of his $65 billion scheme, and kept at it. According to K. C. White, a bank robber and prison artist who escorted a sick friend that evening, Madoff stopped smiling and got angry. “Fuck my victims,” he said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”

For Bernie Madoff, living a lie had once been a full-time job, which carried with it a constant, nagging anxiety. “It was a nightmare for me,” he told investigators, using the word over and over, as if he were the real victim. “I wish they caught me six years ago, eight years ago,” he said in a little-noticed interview with them.

And so prison offered Madoff a measure of relief. Even his first stop, the hellhole of Metropolitan Correctional Center (MCC), where he was locked down 23 hours a day, was a kind of asylum. He no longer had to fear the knock on the door that would signal “the jig was up,” as he put it. And he no longer had to express what he didn’t feel. Bernie could be himself. Pollard’s former cellmate John Bowler recalls a conversation between Pollard and Madoff: “Bernie was telling a story about an old lady. She was bugging him for her money, so he said to her, ‘Here’s your money,’ and gave her a check. When she saw the amount she says, ‘That’s unbelievable,’ and she says, ‘Take it back.’ And urged her friends [to invest].”

Pollard thought that taking advantage of old ladies was “kind of fucked up.”

“Well, that’s what I did,” Madoff said matter-of-factly.

“You are going to pay with God,” Pollard warned.

Madoff was unmoved. He was past apologizing. In prison, he crafted his own version of events. From MCC, Madoff explained the trap he was in. “People just kept throwing money at me,” Madoff related to a prison consultant who advised him on how to endure prison life. “Some guy wanted to invest, and if I said no, the guy said, ‘What, I’m not good enough?’ ” One day, Shannon Hay, a drug dealer who lived in the same unit in Butner as Madoff, asked about his crimes. “He told me his side. He took money off of people who were rich and greedy and wanted more,” says Hay, who was released in December. People, in other words, who deserved it.

There is, as it happens, honor among thieves, a fact that worked mostly to Madoff’s benefit. In the context of prison, he isn’t a cancer on society; he’s a success, admired for his vast accomplishments. “A hero,” wrote Robert Rosso, a lifer, on a website he managed to found called convictinc .com. “He’s arguably the greatest con of all time.”

From the day Bernard Lawrence Madoff, prisoner No. 61727-054, arrived at the softer of Butner’s two medium-security facilities in handcuffs and shackles, his over-the-collar hair shorn close, his rich man’s paunch diminished, he was a celebrity, even if his admirers were now murderers and sex offenders. The Butner correctional complex, which includes four prisons and a medical center, already has its share of crime kings. Pollard, the Israel cause célèbre who spied for the Jewish homeland, lived in Madoff’s housing unit, Clemson (the dorms are named after Atlantic Coast Conference colleges). Persico, the former Colombo-family godfather, lives in nearby Georgia Tech. Omar Ahmad-Rahman, the blind sheikh who helped engineer the 1993 World Trade Center bombing, is in Butner. The Rigases from Pennsylvania, the father and son who bankrupted Adelphia Communications Corporation, are there—they wear crisp, pressed uniforms, which inmates assume they pay others to maintain.

Yet even in this crowd, Madoff stands out. Every inmate remembers the day he arrived. “It was like the president was visiting,” a visitor to Butner that day told me. News helicopters buzzed overhead, and the administration locked down part of the prison, confining some inmates to their units, while an aging con man with high blood pressure shuffled through processing, where other inmates fitted him for a uniform and offered a brief orientation: “Man, chill out and go with the flow, ” was the advice of one former drug dealer.

Quickly, the flow came to Madoff. From the moment he alighted, he had “groupies,” according to several inmates. Prisoners trailed him as he took his exercise around the track. (Persico had also attracted a throng when he arrived, but was disgusted and quickly put an end to it.) “They buttered him up,” one former inmate told me. “Everybody was trying to kiss his ass,” says Shawn Evans, who spent 28 months in Butner. They even clamored for his autograph.

And Madoff was usually more than happy to respond. “He enjoyed being a celebrity,” says Nancy Fineman, an attorney to whom Madoff granted an interview shortly after his arrival at Butner. (Fineman represents victims who are suing some of Madoff’s “aiders and abettors,” as she calls them.) Madoff seemed surprised and tickled by the lavish treatment, though he steadfastly refused to sign anything. Even in prison, he wasn’t going to dilute the brand. “He was sure they would sell it on eBay,” Fineman told me. “He still did have a big ego.”

Remarkably, that ego appears to have survived intact. H. David Kotz, the Security and Exchange Commission’s inspector general, investigated his agency’s failure to uncover Madoff’s Ponzi scheme, and Madoff volunteered to speak to him—he is, no doubt, the world’s expert on the subject. He quickly reminded Kotz of his stature—“I wrote a good portion of the rules when it comes to trading,” Madoff said. He insisted that he’d been “a good trader” with a solid strategy, explaining that he’d stumbled into trouble because of his success. Hedge funds—“just marketers,” he said with evident disgust—pushed cash on him. He overcommitted, got behind, and generated a few imaginary trades, figuring he’d make it up—and never did. Whatever his own missteps, Madoff saved his scorn for the SEC. He did impressions of its agents, leaning back with his hands behind his head just as one self-serious agent did—“a guy who comes on like he’s Columbo,” but who was “an idiot,” Madoff said, as recorded in the extraordinary exhibit 104, a twelve-page account of the interview that is part of Kotz’s report. Madoff is no ironist. His disdain for the SEC is professional, even if the agency’s incompetence saved his skin for years—all Columbo had to do was make one phone call. “[It’s] accounting 101,” Madoff told Kotz, still amazed.

Madoff’s ego was on display in prison, too. “Bernie walked around prison confident,” says ex-con Keith Mack, adding, with a trace of resentment, “he acted like he beat the world.” And to most inmates he had. Many—and I communicated with more than two dozen current and recent Butner inmates (though not Madoff)—can recount stories of his conquests, a good number of them related by Madoff himself. “He said something to me one day,” recalls an ex–drug trafficker, released in February. “He could spin the globe and stop it anywhere with his finger, and chances are he had a house there or he’d been there. I was pretty blown away.” One evening, Bowler, a drug trafficker (“I’m not a con man, I’m a businessman,” he wrote to me), sat next to Madoff watching a 60 Minutes segment about him. Prison authorities keep the volume off, and inmates wear headphones and tune in to the radio signal that broadcasts the sound. Bowler removed one earpiece. “ ‘Bernie, you got ’em for millions,’ I said to him. ‘No, billions,’ he told me.” Another evening, one former inmate was watching a TV news report on the auction of Madoff’s much-chronicled watch collection—he owned more than 40, from Rolexes to a Piaget. The watch featured that evening fetched just $900, and Madoff, whose only watch now is a Timex Ironman that he bought at the commissary for $41.65 and is likely engraved with his inmate number, called out, “They told me that watch was worth $200,000.” The inmates laughed along with him. They didn’t see any reason for Madoff to regret his past. “If I’d lived that well for 70 years, I wouldn’t care that I ended up in prison,” Evans says.

Inmates were impressed by the sheer scale of Madoff’s operation and turned to him for guidance in getting their own ambitions on track. Madoff had always enjoyed being counselor to the wealthy and powerful. That had been part of the scheme’s seduction: Bernie, the scrappy kid from Queens, depended on by rich businessmen. “He wants to be remembered as a titan of Wall Street,” says Fineman, and one who subsidized the private schools and fancy vacations of his wealthy friends, even if it was with the funds of other investors. And to inmates he still was a titan.

Continued in article

Bob Jensen's threads on Madoff and Ponzi frauds in general ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

Question
Can any of you identify the mystery "Fraud Girl" who will be writing a weekly (Sunday) column for Simoleon Sense?

Hint
She seems to have a Chicago connection and seems very well informed about the blog posts of Francine McKenna.
http://retheauditors.com/
But I really do know know who is the mystery "Fraud Girl."

"Guest Post: Fraud Girl Says, “Regulators, Ignore the Masses — It’s Your Responsibility!!”
(A New SimoleonSense Series on Fraud, Forensic Accounting, and Ethics)
Simoleon Sense, April 25, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-says-regulators-ignore-the-masses-it%e2%80%99s-your-responsibility-must-follow-series-on-fraud-forensic-accounting-and-ethics/

I’m exceptionally proud to introduce you to Fraud Girl, our new Sunday columnist. She will write about all things corp governance, fraud, accounting, and business ethics. To give you some background (and although I can not reveal her identity). Fraud girl recently visited me in Chicago for the Harry Markopolos presentation to the local CFA. We were incredibly lucky to meet with Mr. Markopolos and enjoyed 3 hours of drinks and accounting talk. Needless to say Fraud Girl was leading the conversation and I was trying to keep up. After a brainstorm session I persuaded her to write for us and teach us about wall street screw-ups.

So watch out, shes smart, witty, and passionate about making the world a better place. I think Sundays just got a lot better…

Miguel Barbosa
Founder of SimoleonSense

P.S. For Questions or Comments: Reach fraud girl at: FraudGirl@simoleonsense.com

Regulators, Ignore the Masses — It’s Your Responsibility

Men in general judge more by the sense of sight than by the sense of touch, because everyone can see but only a few can test feeling. Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion, supported by the majesty of the government. In the actions of all men, and especially of princes who are not subject to a court of appeal, we must always look to the end. Let a prince, therefore, win victories and uphold his state; his methods will always be considered worthy, and everyone will praise them, because the masses are always impressed by the superficial appearance of things, and by the outcome of an enterprise. And the world consists of nothing but the masses; the few have no influence when the many feel secure.

-Niccolo Machiavelli, The Prince

Why are Machiavelli’s words so astonishingly prophetic? How does a 500 year old quote explain contagion, bubbles, and Ponzi schemes? Do financial decision makers consciously overlook reality or do they merely postpone due diligence? That is the purpose of this series — to analyze financial fraud(s) and question business ethics.

Recent accounting scandals i.e. Worldcom, Enron, Madoff, reveal a variety of methods for boosting short term performance at the expense of long run shareholder value. WorldCom recorded bogus revenue, Enron boosted their operating income through improper classifications, and Madoff ran the largest Ponzi scheme in history. Sure these scandals were unethical, deceived the public, and made a ton of money. But what is the most striking similarity? Each of these companies was seen as the golden goose egg; an indestructible force that could never fail. Of course, the key word is “seen”, regulators, attorneys, financial analysts, and auditors failed to see reality. But why?

Fiduciaries are entrusted with protecting the public and shareholders from crooks like Skilling, Pavlo, and Schrushy. An average shareholder lacks the knowledge and expertise of a prominent regulator, right? Shareholders don’t perform the company’s annual audit, review all legal documentation, or communicate with top executives. No, shareholders base their decisions off information that is “accurate” and “meticulously examined”.

Unfortunately in each of these instances regulators failed to take a stand against consensus and became another ignorant face in the crowd. “Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion”. Who are the few that really know who these companies are? The answer should be evident. What isn’t clear is why these cowardly few are in charge of overseeing our financial markets.

When Auditors Look The Other Way

A week ago, I came across this article: Ernst & Young defends its Lehman work in letter to clients. I chuckled as I was reading it, remembering Roxie Hart from the play Chicago shouting the words “Not Guilty” to anyone who would listen. Like Roxie, the audit team pleaded that the media was inaccurate. In recording Lehman’s Repo 105 transactions, they claimed compliance with GAAP and believed the financial statements were ‘fairly represented’. But, fair reporting is more than complying with GAAP. Often auditors are “compliant” while cooking the books (a mystery that still eludes me). In this case, the auditors blatantly covered their eyes and closed their ears to what they must have known was deliberate misrepresentation of Lehman Brother’s financial statements.

We will explore the Lehman Brothers fiasco in next week’s post…but here’s the condensed version. Days prior to quarter end, Lehman Brothers used “Repo 105” transactions, which allowed them to lend assets to others in exchange for short-term cash. They borrowed around $50 Billion; none of which appeared on their balance sheet. Lehman instead reported the debt as sales. They used the borrowed cash to pay down other debt. This reduced both their total liabilities and total assets, thereby lowering their leverage ratio.

This was allegedly in compliance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities that allowed Lehman to move the $50 Billion of assets from its balance sheet. As long as they followed the rules, auditors could stamp [the] financial statements with a “Fairly Represented” approval and issue an unqualified opinion.

Clearly in this case complying was unethical and probably illegal. Howard Schilit, the author of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, once said, “You [the auditor] work for the investor, even though you are paid by someone else”. He insists that auditors should look beyond the checklists and guidelines and should instead question everything. Auditors are the first line of defense against fraud and the shareholders are dependent upon the quality of their services. So I ask again, with respect to Lehman Brothers, were the auditors working for the investors or where they in the pockets of senior management?

What can we do?

An admired value investor believes in a similar tactic for confirming the honesty of companies. It’s known as “killing the company”, where in his words, “we think of all the ways the company can die, whether it’s stupid management or overleveraged balance sheets. If we can’t figure out a way to kill the company, then you have the beginning of a good investment”. Auditors must think like this, they must kill the company, and question everything. If you can’t kill a company, then (and only then) are the financial statements truly a fair representation of the firms operations.

There was no “killing” going on when the lead auditing partner said that his team did not approve Lehman’s Accounting Policy regarding Repo 105s but was in some way comfortable enough with them to audit their financial statements. This engagement team failed in looking beyond SFAS 140 and should have realized what every law firm (aside from one firm in London) was stating; that the accounting methods Lehman Brothers used to record Repo 105s were a deliberate attempt to defraud the public.

So I repeat: Ignoring reality is not an option. Ignoring the crowd, however, is an obligation.

See you next week….

-Fraud Girl

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

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

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

"Guest Post – Fraud Girl: “Fraud by Hindsight”- How Wall Street Firms [Legally] Get Away With Fraudulent Behavior!," Fraud Girl, Simoleon Sense, June 6, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-%e2%80%9cfraud-by-hindsight%e2%80%9d-how-wall-street-firms-legally-get-away-with-fraudulent-behavior/

Last week we discussed the credit rating agencies and their roles the financial crisis. These agencies provided false ratings on credit they knew was faulty prior to the crisis. In defense, these agencies (as well as Warren Buffet) said that they did not foresee the crisis to be as severe as it was and therefore could not be blamed for making mistakes in their predictions. This week’s post focuses on foreseeability and the extent to which firms are liable for incorrect predictions.

Like credit agencies, Wall Street firms have been accused of knowing the dangers in the market prior to its collapse. I came across this post (Black Swans*, Fraud by hindsight, and Mortgage-Backed Securities) via the Wall Street Law Blog that discusses how firms could assert that they can’t be blamed for events they couldn’t foresee. It’s a doctrine known as Fraud by Hindsight (“FBH”) where defendants claim “that there is no fraud if the alleged deceit can only be discerned after the fact”. This claim has been used in numerous securities fraud lawsuits and surprisingly it has worked in the defendant’s favor on most occasions.

Many Wall Street firms say they “could not foresee the collapse of the housing market, and therefore any allegations of fraud are merely impermissible claims of fraud by hindsight”. Was Wall Street able to foresee the housing market crash prior to its collapse? According to the writers at WSL Blog, they did foresee it saying, “From 1895 through 1996 home price appreciation very closely corresponded to the rate of inflation (roughly 3% per year). From 1995 through 2006 alone – even after adjusting for inflation – housing prices rose by more than 70%”. Wall Street must (or should) have foreseen a drastic change in the market when rises in housing costs were so abnormal. By claiming FBH, however, firms can inevitably “get away with murder”.

What exactly is FBH and how is it used in court? The case below from Northwestern University Law Review details the psychology and legalities behind FBH while attempting to show how the FBH doctrine is being used as a means to dismiss cases rather than to control the influence of Wall Street’s foreseeability claims.

Link Provided to Download "Fraud by Hindsight" (Registration Required)

I’ve broken down the case into two parts. The first part provides two theories on hindsight in securities litigation: The Debiasing Hypothesis & The Case Management Hypothesis. The Debiasing Hypothesis provides that FBH is being used in court as a way to control the influence of ‘hindsight bias’. This bias says that people “overstate the predictability of outcomes” and “tend to view what has happened as having been inevitable but also view it as having appeared ‘relatively inevitable’ before it happened”. The Debiasing Hypothesis tries to prove that FBH aids judges in “weeding out” the biases so that they can focus on the allegations at hand.

The Case Management Hypothesis states that FBH is a claim used by judges to easily dismiss cases that they deem too complicated or confusing. According to the analysis, “…academics have complained that these [securities fraud] suits settle without regard to merit and do little to deter real fraud, operating instead as a needless tax on capital raising. Federal judges, faced with overwhelming caseloads, must allocate their limited resources. Securities lawsuits that are often complex, lengthy, and perceived to be extortionate are unlikely to be a high priority. Judges might thus embrace any doctrine [i.e. FBH doctrine] that allows them to dispose of these cases quickly” (782-783). The case attempts to prove that FBH is primarily used for case management purposes rather than for controlling hindsight bias.

The psychological aspects behind hindsight bias are discussed thoroughly in this case. Here are a few excerpts from the case regarding this bias:

(1)“Studies show that judges are vulnerable to the bias, and that mere awareness of the phenomenon does not ameliorate its influence on judgment. The failure to develop a doctrine that addresses the underlying problem of judging in hindsight means that the adverse consequences of the hindsight bias remain a part of securities litigation. Judges are not accurately sorting fraud from mistake, thereby undermining the system, even as they seek to improve it” (777).

(2) “Judges assert that a company’s announcement of bad results, by itself, does not mean that a prior optimistic statement was fraudulent. This seems to be an effort to divert attention away from the bad outcome and toward the circumstances that gave rise to that outcome, which is exactly the problem that hindsight bias raises. That is, if people overweigh the fact of a bad outcome in hindsight, then the cure is to reconstruct the situation as people saw it beforehand. Thus, the development of the FBH doctrine suggests a judicial understanding of the biasing effect of judging in hindsight and of a means to address the problem” (781).

(3) “Once a bad event occurs, the evaluation of a warning that was given earlier will be biased. In terms of evaluating a decision-maker’s failure to heed a warning, knowledge that the warned-of outcome occurred will increase the salience of the warning in the evaluator’s mind and bias her in the direction of finding fault with the failure to heed the warning. In effect, the hindsight bias becomes an ‘I-told-you-so’ bias.” (793).

(4) “In foresight, managers might reasonably believe that the contingency as too unlikely to merit disclosure, whereas in hindsight it seems obvious a reasonable investor would have wanted to know it. Likewise, as to warning a company actually made, in foresight most investors might reasonably ignore them, whereas in hindsight they seem profoundly important. If defendants are allowed to defend themselves by arguing that a reasonable investor would have attended closely to these warnings, then the hindsight bias might benefit defendants” (794).

Next week we’ll explore the second part of the case and discuss the importance of utilizing FBH as a means of deterring the hindsight bias. We’ll see how the case proves that FBH is not being used for this purpose and is instead used as a mechanism to dismiss cases that simply do not want to be heard.

See you next week…
-Fraud Girl

Bob Jensen's Rotten to the Core threads on credit rating agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bob Jensen's Rotten to the Core threads on banks and brokerages ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's Fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

June 8, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

The link below is a book review of Michael Lewis’s latest book ‘The Big Short’. The book is clearly based on an article that Bob uncovered about 9 months ago. The mechanism underpinning the ‘short’ is better explained in the NYRB essay and, presumably, in the book itself. It seems that the ‘mezzanine’ tranches (BBB rated) of a series of MBS were packaged, rated AAA and then issued in another MBS. Dubious this might be, but fraud it will not be. It lacks the central element of mens rea. In the face of an accusation of fraud the accused will generally resort to the defence of incompetence or inadequacy – a dangerous thing when facing civil action as well – but better than being seen to have acted ‘knowingly’. No-one knew the property markets would collapse. Many people, including me*, thought that it was inevitable – but we did not know it.

http://www.nybooks.com/articles/archives/2010/jun/10/heart-crash/?pagination=false

*When I was first told of the ‘low doc’ loan concept by an investment manager, I could hardly believe it. He, on the other hand, described the packager of such products as very clever. The investor in question failed badly due to an over-exposure to MBS. Funny that.

"Guest Post – Fraud Girl: “Fraud by Hindsight”- How Wall Street Firms [Legally] Get Away With Fraudulent Behavior! Part 2," by Fraud Girl, Simoleon Post, June 13, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-%e2%80%9cfraud-by-hindsight%e2%80%9d-how-wall-street-firms-legally-get-away-with-fraudulent-behavior-part-2/

Last week we discussed the first part of the “Fraud by Hindsight” study. As we learned, the FBH doctrine is utilized in securities litigation cases. In learning about the FBH doctrine we reviewed the Debiasing Hypothesis and the Case Management Hypothesis. According to the Debiasing Hypothesis, FBH is used as a tool to “weed out” hindsight bias in order to focus on legal issues at hand. The Case Management Hypothesis, on the other hand declares that FBH is used to dismiss securities fraud cases in order to facilitate judicial control over them. This week we will strive to analyze how Fraud By Hindsight has evolved, meaning, how the courts apply the doctrine (in real life), which differs markedly from the doctrine’s theoretical meaning.

History

The first mention of FBH was in 1978 with Judge Friendly in the case Denny v. Barber. The plaintiff in this case claimed that the bank had “engaged in unsound lending practices, maintained insufficient loan loss reserves, delayed writing off bad loans, and undertook speculative investments” (796). Sound familiar? Anyway — the plaintiff plead that the bank failed to disclose these problems in earlier reports and instead issued reports with optimistic projections. Judge Friendly claimed FBH stating that there were a number of “intervening events” during that period (i.e. increasing prices in petroleum and the City of New York’s financial crisis) that were outside the control of managers and it was therefore insufficient to claim that the defendant should have known better when out-of-the-ordinary incidents have occurred. The end result of the case provided that “hindsight alone might not constitute a sufficient demonstration that the defendants made some predictive decision with knowledge of its falsity or something close to it” (797). Friendly established that FBH is possible, but that in this case the underlying circumstances did not justify a judgment against the bank.

The second relevant mention of FBH was in 1990 with Judge Easterbrook in the case DiLeo v. Ernst & Young. Like the prior case, DiLeo involved problems with loans where the plaintiff plead that the bank and E&Y had known but failed to disclose that a substantial portion of the bank’s loans were uncollectible. This case was different, in that there were no “intervening events” that could have blind sighted managers from issuing more accurate future projections. Still, Easterbrook claimed FBH and said, “the fact that the loans turned out badly does not mean that the defendant knew (or should have known) that this was going to happen” (799-800). Easterbrook believed that the plaintiff must be able to separate the true fraud from the underlying hindsight evidence in order to prove their case.

Easterbrook’s articulation of the FBH doctrine set the stage for all future securities class action cases. As the authors state, the phrase was cited only about twice per year before DiLeo but it increased to an average of twenty-seven times per year afterwards. Unfortunately, the courts found Easterbrook’s perception of the phrase to be more compelling. Instead of providing that the hindsight might play a role determining if fraud has occurred, Easterbrook claimed that there simply is no “fraud by hindsight”. This allows the courts to adjudicate cases solely on complaint, therefore supporting the Case Management Hypothesis.

The results of many tests provided in this case proved that courts were using the doctrine as a means to dismiss cases. Of all the tests, I found one to be most interesting: The Stage of the Proceedings. The results of the test shows that “over 90 percent of FBH applications involve judgments on the pleadings” (814) stage rather than at summary judgment. In the preliminary (pleading) stages, the knowledge of information is not provided, meaning that it is less likely that hindsight bias will affect their decisions. The more the judge delves into the case, the more they are susceptible to the hindsight bias. If the judge is utilizing the FBH doctrine mostly during the pleading stages where hindsight bias is “weak”, then the Debiasing Hypothesis is not valid.

The authors point out the problems with utilizing the FBH doctrine in this way:

“The problem, however, is that the remedy is applied at the pleadings stage, not the summary judgment stage. At the pleadings stage, a bad outcome truly is relevant to the likelihood of fraud. At this stage, the Federal Rules do not ask the courts to make a judgment on the merits, and hence the remedy of foreclosing further litigation is inappropriate. By foreclosing further proceedings, courts are not saying that they do not trust their own judgment, but that they do not trust the process of civil discovery to identity whether fraud occurred” (815).

Because cases are being dismissed so early in the litigation process, courts are not allowing for the discovery of fraud that may be apparent even though hindsight is a factor in the case.

By gathering this and other evidence, the case concludes that judges utilize FBH as a case management tool. They cited that the development of the FBH doctrine could be described as “naïve cynicism”. Though judges understand that hindsight bias must be taken into consideration, they express the belief that the problem does not affect their own judgment. The courts are relying on their own intuitions and gathering the necessary facts to prove fraud by hindsight. The authors note a paradox here saying, “Judges simultaneously claim that human judgment cannot be trusted, and yet they rely on their own judgment”.

The problem is that the naively cynical (FBH) approach has led to securities fraud cases to be governed by moods. The authors say that “In the 1980s and 1990s, as concern with frivolous securities litigation rose, courts and Congress simply made it more difficult for plaintiffs to file suit. In the post-Enron era, this skepticism about private enforcement of securities fraud might have abated somewhat, leading to lesser pleading requirements” (825).

Recap & Implications

Overall the case proves that the courts have not yet been able to establish a sensible mechanism for sorting fraud from mistake. It therefore allows cases that really involve fraud to potentially be dismissed. In cases since DiLeo, the win rate for defendants in FBH cases is 70 percent, as compared with 47 percent in those cases that did not mention it. The mere declaration of “Fraud by Hindsight” gives the defendant an automatic advantage over the plaintiff. Now, the defendant may in fact be innocent – but the current processes are not able to determine who is or isn’t guilty. Remember, judges spend much of their time in these cases separating the hindsight bias from the fraud. This task can become very complex and time consuming.

In sum, the increasing use of FBH has been beneficial for (1) judges because they don’t have to listen to these complicated cases and (2) defendant’s because they are likely to win the case by using the doctrine. The only ones who don’t benefit from doctrine are the plaintiff’s who may truly have been victims of fraud. It is crucial that the judiciary revise the way the FBH is interpreted in order to protect the innocent and convict the guilty.

Have any ideas on how to fix the FBH problem? Send me an email at fraudgirl @ simoleonsense.com.

See you next week.

- Fraud Girl

Click Here To Access The Original Fraud by Hindsight Case – Part II ---
http://www.scribd.com/doc/32994403/Fraud-by-Hindsight-Part-II

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

“What A Tangled Web We Weave: AIG’s Cassano Says He Told PwC Everything,” by Francine McKenna, re:TheAuditors, June 30, 2010 ---
http://retheauditors.com/2010/06/30/going-concern-what-a-tangled-web-we-weave-aigs-cassano-says-he-told-pwc-everything/

My new column is up @Going Concern:

Joseph Cassano, the former head of AIG’s Financial Products Group, testifies today for the Financial Crisis Inquiry Commission, a bipartisan commission with a critical non-partisan mission — to examine the causes of the financial crisis.

[...]

The Department of Justice cleared Mr. Cassano in May. No criminal charges will be filed. U.K.’s Serious Fraud Office dropped probes last month, and the U.S. Securities and Exchange Commission also closed their investigations too…the investigations went south when, “prosecutors found evidence Mr. Cassano did make key disclosures. They obtained notes written by a PwC auditor suggesting Mr. Cassano informed the auditor and senior AIG executives about the adjustment…[and] told AIG shareholders in November 2007 that AIG would have “more mark downs,” meaning it would lower the value of its swaps.”

So who’s telling the truth? Was PwC duped by AIG? Who is looking out for AIG shareholders and the US taxpayer in this mess?

Based on my reading of the Audit Committee minutes, I believe that PwC was aware of weaknesses in internal controls over the AIGFP super senior credit default portfolio throughout 2007 and prior. Why were they pussy-footing around still on January 15, 2008 as to whether these control weaknesses were a significant deficiency (which would not have to have been disclosed) or a material weakness (which eventually was)?

Read the rest here.
http://goingconcern.com/2010/06/what-a-tangled-web-we-weave-aig’s-cassano-says-he-told-pwc-everything/

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

"PwC May Have Overlooked Billions in Illegal JP Morgan Transactions. Oopsie," by Adrenne Gonzalez, Going Concern, June 10, 2010 ---
http://goingconcern.com/2010/06/pwc-may-have-overlooked-billions-in-illegal-jp-morgan-transactions-oopsie/

Now £15.7 billion may not seem like much to you if you are, say, Bill Gates or Ben Bernanke but for PwC UK, it may be the magic number that gets them into a whole steaming shitpile of trouble.

UK regulators allege that from 2002 – 2009, PwC client JP Morgan shuffled client money from its futures and options business into its own accounts, which is obviously illegal. Whether or not JP Morgan played with client money illegally is not the issue here, the issue is: will PwC be liable for signing off on JPM’s activities and failing to catch such significant shenanigans in a timely manner?

PwC did not simply audit the firm, they were hired to provide annual client reports that certified client money was safe in the event of a problem with the bank. Obviously that wasn’t the case.

The Financial Reporting Council and the Institute of Chartered Accountants of England are investigating the matter, and the Financial Services Authority has already fined P-dubs £33.3 million for co-mingling client money and bank money. That’s $48.8 million in Dirty Fed Notes if you are playing along at home.

Good luck with that, PwC. We genuinely mean that.

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

Where Were the Auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Bob Jensen's Rotten to the Core threads on banks and brokerages ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Are the Canadian critics being too kind and gentle on themselves?
"Have Canadian Law Schools Become 'Psychotic Kindergartens'?" Inside Higher Ed, June 7, 2010 ---
http://www.insidehighered.com/news/2010/06/07/qt#229422

Canadian bloggers have been buzzing in the last week about a harsh critique of the country's law schools, which are compared to "psychotic kindergartens" in a journal article published by Robert Martin, a retired law professor at the University of Western Ontario. The article was published last year in the journal Interchange, but has only recently been the topic of debate. The article portrays law schools as politically correct and focused on obscure issues. Martin closes his piece by suggesting that Canada's law schools all be shut down and turned over to the homeless as a place to live -- thus in Martin's view solving multiple social problems at the same time. The article is available only to subscribers of the journal, and while its focus is law schools, it isn't much more kind to the rest of the country's universities. "Each fall, a horde of illiterate, ignorant cretins enters Canada's universities. A few years later, they all move on, just as illiterate, just as ignorant and rather more cretinous, but now armed with bits of paper, which most of them are probably not able to read, called degrees," he writes. The Canadian legal blog SLAW features a defense of legal education in the country and criticism of Martin's views.

Our Compassless Colleges: What Are Students Really Not Learning" ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Berkowitz

Questions
What is driving tuition increases in law schools?
Are these same cost drivers impacting on some business schools and accountancy programs for the same reasons?
Why are minority enrollments increasing with the exception of African American law students?

Jensen Comment
Before reading the argument below, it should be noted that court decisions have been adverse to affirmative action admissions and financial aid, most notably the famous case that shook the foundations of the University of Michigan ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#AcademicStandards

"Law-School Cost Is Pushed Up by Quest for Prestige, Not Accreditation, GAO Survey Finds," by Eric Kelderman, Chronicle of Higher Education, October 26, 2009 ---
http://chronicle.com/article/Competition-Not/48940/?sid=at&utm_source=at&utm_medium=en

Critics have sometimes blamed the accreditation standards of the American Bar Association for driving up the cost of law school and making it more difficult for students of color to be admitted to those programs.

But a report released on Monday by the Government Accountability Office says that most law schools surveyed instead blamed competition for better rankings and a more hands-on approach to educating students for the increased price of a law degree. In addition, the federal watchdog agency reported that, over all, minorities are making up a larger share of law-school enrollments than in the past, although the percentage of African-American students in those programs is shrinking. The GAO attributed that decrease to lower undergraduate grade-point averages and scores on law-school admissions tests.

Law-school accreditation is technically voluntary but practically important: 19 states now require candidates to have a degree from an institution approved by the bar association to be eligible to take the bar examination. And a degree from an ABA-accredited institution makes a student eligible to take the bar exam in any state.

The costs of getting a law degree, however, have increased at a faster rate than the costs of comparable professional programs, says the report, "Higher Education: Issues Related to Law School Cost and Access." In-state tuition and fees at public law schools averaged $14,461 in the 2007-8 academic year, 7.2 percent higher than the cost 12 years earlier. In comparison, the cost of a medical degree from a public institution increased 5.3 percent over the same period, to $22,048 annually.

Law-school costs for nonresidents and at private institutions also increased at a slower rate over that period, but now total about twice as much or more in dollars compared with residents' costs at public institutions.

The reasons for the fast-rising costs are that law schools are providing courses and student-support programs that require more staff and faculty, the federal survey found. In addition, law schools spent more on faculty salaries and library resources, among other things, to boost their standing in the U.S. News & World Report annual rankings, law-school officials told the GAO.

Those findings stand in contrast to some criticisms that the accreditation standards for faculty and facilities are a major factor in the cost of law schools. "Officials from more than half of the ABA-accredited schools we spoke with stated they would meet or exceed some ABA accreditation standards even if they were not required," the report says.

Law-school officials also cited recent declines in state appropriations as a reason for rising tuition, federal researchers reported.

Accreditation standards also were not widely blamed for the declining share of African-American law students, most of those surveyed said. Between the 1994-95 and 2006-7 academic years, the percentage of black students has shrunk from 7.5 percent of law school students to 6.5 percent, even as the number of blacks earning bachelor's degrees has grown by two percentage points.

"Most law-school officials, students, and minority-student-group representatives we interviewed focused on issues such as differences in LSAT scores, academic preparation, and professional contacts, rather than accreditation standards, to explain minority access issues," the report says.

But the report also noted that some officials blamed not only accreditation, but also rankings by U.S. News & World Report for lower or static enrollment rates of minorities: "Schools are reluctant to admit applicants with lower LSAT scores because the median LSAT score is a key factor in the U.S. News & World Report rankings."

The study was a requirement of the Higher Education Opportunity Act, passed in 2008, and was meant to compare the costs and level of minority enrollment at law schools to similar professional-degree programs, including medical, dental, and veterinary colleges. Federal researchers surveyed officials at 22 institutions, including three that are not accredited by the ABA, and students in two law programs, one of which did not have the ABA's stamp of approval.

Bob Jensen's threads on accreditation are at
http://www.trinity.edu/rjensen/assess.htm#AccreditationIssues

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

You can search video and start the video when a particular word crops up
YouTube's Interactive Transcripts --- http://googlesystem.blogspot.com/2010/06/youtubes-interactive-transcripts.html

YouTube added a cool feature for videos with closed captions: you can now click on the "transcript" button to expand the entire listing. If you click on a line, YouTube will show the excerpt from the video corresponding to the text. If you use your browser's find feature, you can even search inside the video. Here's an an example of video that includes a transcript.

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

Evolution from Education to Training and Back to Education
"As Doctoral Education in Europe Evolves, Educators Meet to Chart Its Progress," by Aisha Labi, Chronicle of Higher Education, June 6, 2010 ---
http://chronicle.com/article/As-Doctoral-Education-in/65799/

Doctoral education across Europe is evolving quickly and, even as universities shift their focus from traditional training based largely on individual relationships to structured programs, in-depth research must remain at the core of Ph.D. work, educators from across Europe agreed at a two-day conference here on the future of doctoral education in Europe.

The conference, the third annual meeting of the European University Association's Council for Doctoral Education, came five years after European educators, meeting in Salzburg, Austria, agreed to a set of 10 core principles for for doctoral education.

European higher education has undergone profound changes since the Salzburg meeting, with nearly 50 countries across Europe making huge strides in the past decade toward harmonizing their university systems as part of the Bologna Process, which culminated earlier this year in the official creation of the European Higher Education Area.

The initial focus of many of the Bologna reforms was on what are referred to as the first- and second-degree cycles, resulting in bachelor's and master's degrees. Unlike the first two cycles, the doctoral cycle is not tied to earning a set number of credits, nor should it be, participants at the Berlin meeting agreed, although a working declaration agreed to at the meeting's conclusion noted that "thinking in credits could be a useful common ground for joint programs or moving between programs."

In a period of "breathtaking transformation," American Ph.D. programs have served as a "loose model" for many of the new doctoral schools that are quickly becoming the norm in European doctoral education, noted Giuseppe Silvestri, a former rector of the University of Palermo and a member of the steering committee of the Council for Doctoral Education. But the advent of structured programs in Europe does not mean that doctoral education is becoming uniform, he emphasized, and indeed the sheer diversity of programs, including those that span institutions in several countries or pilot programs for a selected number of candidates at a single institution, is striking.

The American model for graduate education is also evolving, in many cases as a result of some of the same changes that are affecting Europe, Karen P. DePauw, a former chair of the Council of Graduate Schools and vice president and dean for graduate education at Virginia Tech, told the conference. As in Europe, graduate education in American universities is taking place in an increasingly internationalized context, with faculty members and graduate students collaborating more with international colleagues, and with formal degree programs involving international partner universities on the rise. The spread of the Bologna Process has created new challenges as well, she noted, including increased competition among programs with high numbers of international students. Research remains at the core of the American doctorate, but is also increasingly being incorporated much more into master's and even undergraduate programs, she said.

Internationalization is an essential component of quality doctoral education, Juan José Moreno Navarro, director general for university policy at the Spanish Ministry of Education, emphasized, because "quality research is international." The working conclusions produced by the conference emphasized the central role of internationalization as "a means to research capacity," and noted that institutions need to have in place both top-down strategies to organize international engagements but also bottom-up support from research staffs for such collaborations.

In the United States, a Commission on the Future of Graduate Education in the United States, organized by two education groups, recently issued a set of recommendations for improving graduate education, including a call for increased government financing for graduate studies. Higher education in Europe is still largely paid for by public subsidies, and European graduates do not struggle with the same kinds of educational-debt burdens that their American counterparts often face. But sustained financing for graduate studies also faces constraints.

Seeking Professional Status Izabela Stanislawiszyn, president of Eurodoc, an association of European doctoral students, spoke about concerns of doctoral candidates, who want to be seen not as students but as early-stage professionals. The distinction is more than semantic. In most European countries, being an employee carries benefits, such as access to pensions and career security, that students do not enjoy. "We prefer to be treated as professionals, not as students," she said.

Europe's 680,000 doctoral candidates represent a "real engine of growth," Ms. Stanislawiszyn said, and much of the conference discussion touched on their future trajectories and how doctoral education can better prepare them for careers in academe and beyond.

In Germany, especially, which counts for a fourth of all European doctorates, many Ph.D. holders end up working in industry. For many employers, graduates who have shown that they are capable of doing the kind of intellectual "deep dig" that comes from doctoral research are especially attractive job candidates, said Wilhelm Krull, secretary general of Germany's Volkswagen Foundation, Germany's largest nongovernmental backer of scientific research.

Jean Chambaz, vice president for research at the University of Paris VI (Pierre et Marie Curie), chairs the steering committee for the Council for Doctoral Education. He warned against a "false dichotomy" between careers in academe and industry. "I don't think that we remain an academic when we go from the Ph.D. to the postdoc to an academic career," he said. "You enter an academic career, and the Ph.D. should be considered the first step of a career, when you're trained through the practice of research, whatever you do later in your career."

Still, especially in a climate of increased pressure from the governments that still provide most of the financing for higher education to demonstrate the relevance and values of the degrees that are being produced, focusing on the doctorate's essential academic, research-oriented dimension is crucial, Geoffrey Boulton, a professor of geosciences at the University of Edinburgh, emphasized. "The ivory tower is important," he said. "It is where professors and others are able to patrol the boundaries of what we know with a microscope. It may seem irrelevant to others, but don't deride the ivory tower; we have to defend it."

The conference produced a series of draft recommendations for the progress of doctoral education in Europe that will be distributed among member institutions for their input.

Bob Jensen's threads on the sorry state of accounting doctoral programs in North America ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

UCLA Award Finalist: Congratulations to Francine McKenna --- http://www.anderson.ucla.edu/x32584.xml
As reported by Going Concern, May 25, 2010

2010 Gerald Loeb Award Finalists Announced by UCLA Anderson School of Management [UCLA]
Congratulations are due to our own Francine McKenna (look for her column later today) who was named as a finalist for a Gerald Loeb Award for Distinguished Business and Financial Journalism in the “Online Commentary and Blogging Category” for her work at re:The Auditors.

Other nominees include Adrian Wooldridge, Steven N. Kaplan, Nell Minow, Patrick Lane, Brad DeLong, Luigi Zingales, Saugato Datta, Thomas Picketty and Chris Edwards for “Online Debates” for The Economist; David Pogue for “Pogue’s Posts” for The New York Times; Jim Prevor for “Business, Finances and Public Policy” for The Weekly Standard.

Jensen Comment
Francine puts in more investigative research into her blog and Twitter feeds than most any blogger I can think of at the moment. In addition to investigating the literature, she often goes directly to sources seeking interviews.

The competition for the Gerald Loeb Award is intense. Among the other competitors is one of my favorites, David Pogue.

"Florida Appeals Court Turns Down Heat, For Now, On BDO Seidman," by Francine McKenna, re: theAuditors, June 24, 2010 ---
http://retheauditors.com/2010/06/24/florida-appeals-court-turns-down-heat-for-now-on-bdo-seidman/

I was surprised by the news that the record verdict against BDO Seidman in the Bankest fraud had been reversed. I was stunned not because the verdict had been reversed on appeal but by the reasons why. Everyone has to prepare for a new trial because a judge erred in the setup of the proceedings.

That’s not supposed to happen.

It was a screwy sequence of events, for sure. Every time I wrote about the case I had to carefully consider how to present all the twists and turns, ins and outs and complex machinations the court forced both sides to endure.

The 20-page opinion was written by Judge Vance E. Salter. Judges Gerald B. Cope and Linda Ann Wells concurred. Salter said Rodriguez’s trial-planning decision was based on good intentions for efficiency purposes.

“These objectives are much harder to achieve, however, in a complex case,” Salter said.

Rodriguez ordered the first phase of the trial to determine whether BDO Seidman had committed gross negligence, but Salter noted that was two months before the jury considered issues of causation, reliance and comparative fault.

One potential negative for the plaintiffs in the retrial is the likely judge. Miami-Dade Circuit Judge John Schlesinger, the judge who rendered the verdict for the defense in the BDO International phase of the case, has taken over Judge Jose Rodriguez’s civil division and will hear the retrial. I was not impressed with Judge Schlesinger’s level of interest or aptitude during the BDO International trial for this “complex case brought by plaintiffs not in privity with the accounting firm/defendant.”

From Leagle’s posting of the opinion: The salutary objectives of judicial economy (no phase II damages trial is required if the jury returns a defense verdict in phase I), and the reduction of a longer case into more digestible “phases,” often support bifurcation and the exercise of that discretion. These objectives are much harder to achieve, however, in a complex case brought by plaintiffs not in privity with the accounting firm/defendant. In such a case, liability ultimately turns on specific demonstrations of knowledge, intent, and reliance. The evidence pertaining to those issues is inextricably intertwined with the claims and affirmative defenses on issues of comparative fault, causation, and gross negligence.

Bankest’s attorney Steven Thomas is optimistic about a retrial. Me? Not so much. This isn’t because I doubt Mr. Thomas’ ability to kick tail as he did in the original trial. This isn’t because the case doesn’t have sufficient merit.

From Michael Rapoport at DJ/Wall Street Journal: Steven Thomas, an attorney for Espirito Santo, said he was looking forward to a retrial. “The evidence of BDO Seidman’s failures of even the most basic auditing procedures is so overwhelming that we expect a new jury will reach the same conclusion as the original jury,” he said in a statement.

My doubts about the efficacy of a new trial are based on the disappointing, frustrating and completely unsatisfying way the court and the judges in this case have proceeded. Some of the additional comments raised by the Appeals Court do not bode well for this plaintiff’s chances next time around. This is in spite of the fact they made a point of saying they would stop at the prejudice imposed by the trifurcation issue and say no more that would prejudice a new trial.

Because of the prejudice inherent in the premature, first-phase gross negligence finding, we do not address in detail other aspects of the trial. Our conclusion regarding the “trifurcation” issue renders moot or pretermits our consideration of most of the other parts of the jury’s verdicts and the remaining points on appeal and cross-appeal.

There are two other issues raised by the Appeals Court that may prove problematic to the plaintiffs in a retrial.

Continued in article

Here's Jim Peterson’s review of the court outcome --- Click Here
http://www.jamesrpeterson.com/home/2010/06/seidman-gets-a-new-trial-in-bankest-and-how-does-winning-feel-.html
In particular, Jim thinks BDO Seidman is headed down the tubes in spite of this “win” on appeal.

Bob Jensen's threads on BDO Seidman, are at
http://www.trinity.edu/rjensen/Fraud001.htm

"Koss Sues Grant Thornton, Blames Firm’s Assignment of Newbie Auditors," by Caleb Newquist , Going Concern, June 25, 2010 ---
http://goingconcern.com/2010/06/koss-sues-grant-thornton-blames-firms-assignment-of-newbie-auditors/

Koss hired one of the best accounting firms in the world, Grant Thornton, and should have been able to rely on Thornton’s audits to uncover wrongdoing, Avenatti said. The suit against the auditing firm says auditors assigned to Koss were not properly trained.

The lawsuit lists hundreds of checks that Sachdeva ordered drawn on company accounts to pay for her personal expenses. She disguised the recipients — upscale retailers such as Neiman Marcus, Saks Fifth Avenue and Marshall Fields — by using just the initials. But the suit says Grant Thornton could have ascertained the true identity of the recipients by inspecting the reverse side of the checks, which showed the full name.

Continued in article

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

"Will Auditors Ever Answer To Investors For Aiding And Abetting?," by Francine McKenna, re: TheAuditors, June 16, 2010 ---
http://retheauditors.com/2010/06/16/will-auditors-ever-answer-to-investors-for-aiding-and-abetting/

The House – Senate Wall Street Reform and Consumer Protection Act Conference reconvened on Tuesday, June 15 and Compliance Week says a version of the Specter Bill – to repeal the Supreme Court’s Stoneridge decision – will not be included in whatever comes out of the process.

Bruce Carton in Compliance Week: As this process gets underway, auditors, lawyers, bankers and other advisers to public companies are quietly breathing a sigh of relief that one of the items no longer on the table is an amendment proposed by Sen. Arlen Specter that would have overturned the U.S. Supreme Court’s 2008 ruling in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., thereby permitting “aiding and abetting” liability for a company’s auditors and others. The final version of the financial reform bill that passed the Senate did not include the Specter amendment.

However, a coalition of state regulators, public pension funds, professors, consumers and investors and the attorneys who advise them, are still working to put something back in the bill as an amendment to restore the right of investors to defend themselves and hold white collar criminals accountable.

Their email to me states:

The amendment brought by Senators Arlen Specter (D-PA), Jack Reed (D-RI), Dick Durbin (D-IL) and many other senior Democrats would have enacted one simple change in current anti-investor law – law that was “legislated” by a conservative Supreme Court rather than the U.S. Congress. The reform would have restored the right of pension funds and other investors to hold accountable in courts those who knowingly aid and abet securities fraud.

This legal right of investors, which for fifty years helped white collar crime victims recover their losses while also deterring future fraud enablers, was stripped from shareholders and bondholders by the radical Stoneridge Supreme Court decision of 2008, which expanded upon an earlier misguided Court decision in order to throw out thousands of remaining meritorious fraud claims brought by retirement funds and individual investors against investment banks and others who helped design the Enron fraud – the largest financial crime in U.S. history.

Earlier this Spring, a Federal appeals court cited the “Supremes” and threw out the legitimate claims of ripped-off shareholders and bondholders in the billion dollar Refco, Inc. derivatives fraud. In Refco, a now criminally convicted corporate lawyer had worked with Refco’s senior execs to execute fake transactions as a paper trail leading to falsified financial statements that were issued to investors and the public.

Both Congressman Barney Frank and Senator Ted Kaufman responded to questions about the Specter amendment during my visit to Washington DC for Compliance Week’s Annual Conference. House Financial Services Committee Chairman Frank said at the conference that he was in favor of bringing the amendment back in the bill. Senator Kaufman, although a co-sponsor of the original amendment, is in favor but does not think it’s likely.

I’ve written quite a bit about the impact of third party liability on the auditors in fraud claims and the Stoneridge decision.

In February of 2008 , I wrote about Treasury’s attempt to address the nagging issues of viability and sustainability of the accounting profession.

They punted.

I have consistently disagreed with the Big 4’s claim that auditor liability caps are necessary to avoid losing one of the remaning firms to catastrophic litigation. I have lamented the fact that the auditors don’t get sued often enough for my tastes and, when they do, they often settle. I’ve also said that they don’t deserve our pity, as they are less than transparent regarding their true financial capacity to address ongoing litigation…

“The Treasury Department established the Advisory Committee on the Auditing Profession to examine the sustainability of a strong and vibrant auditing profession.”

John P. Coffey, the Co-Managing Partner of Bernstein Litowitz Berger & Grossmann LLP… agrees with what I have been saying on this blog all last year.

It is with this perspective that I address one of the questions the Committee is considering, namely, whether there ought to be a cap on auditor liability. I respectfully submit that the case for such a cap has not been made…

…the fact that, in today’s environment, auditors are rarely named as defendants in these actions. In a three-year period immediately before the PSLRA was enacted – April 1992 through April 1995 – auditors were named as defendants in 81 of 446 private securities class actions filed, for an average of 27 suits per year, or 18% of all private securities class actions. As the reforms of the PSLRA and the concomitant jurisprudence took hold, that number dropped precipitously. Auditors were named as defendants in only five suits in 2005, and only two cases in each of 2006 and 2007.

The number for 2007 is especially telling because approximately one out of every eleven companies with U.S.-listed securities – almost 1200 companies in all – filed financial restatements in 2007 to correct material accounting errors. Further, an analysis of securities actions filed in 2006 and 2007 demonstrates a significant decline in the number of cases alleging GAAP violations, appearing to suggest “a movement away from the focus in recent years on the validity of financial results and accounting treatment.”

Well, that’s changed post-financial crisis. In addition to the big frauds like Satyam, Glitnir, the Madoff feeder funds and garden variety accounting malpractice claims, the auditors are named in high profile subprime cases where fraud is alleged such as New Century and Lehman.

It’s still not a deluge, since the PSLRA makes it damn difficult to draw the auditors in without a smoking gun or, actually, a rogue mechanical pencil. Even with a top notch bankruptcy examiner’s report – I’m talking Refco here – it’s not easy.

July 11, 2007, Bloomberg

Refco Inc.’s tax accountant, Ernst & Young, and a company law firm may have helped the defunct futures trader defraud investors, according to an examiner’s report unsealed today.

Ernst & Young, the second-biggest U.S. accounting firm, and Mayer Brown Rowe & Maw, a Chicago-based law firm, might face claims by Refco for aiding and abetting the fraud, examiner Joshua Hochberg said in a report filed in U.S. Bankruptcy Court in New York. Grant Thornton, the sixth biggest U.S. accounting firm, might face claims of professional negligence for work it did before Refco’s bankruptcy, Hochberg said.

Contrast that seemingly slam-dunk assessment with this report on August 22, 2009:

Two accounting firms and a law firm won dismissal of a lawsuit on behalf of former Refco Inc currency trading customers who lost more than $500 million when the defunct futures and commodities broker went bankrupt.

U.S. District Judge Gerard Lynch on Tuesday said Marc Kirschner, a trustee representing the customers, failed to show that Ernst & Young LLP [ERNY.UL], Grant Thornton LLP and the law firm Mayer Brown LLP knew of or substantially assisted in the fraudulent diversion of assets that led to Refco’s demise.

The Manhattan federal judge, however, gave permission for Kirschner to file a new complaint. Citing the trustee’s access to a “substantial trove” of Refco documents, Lynch said: “It is far from clear that repleading would be futile.”

In his 35-page opinion, Lynch said Grant Thornton’s work gave it “a complete picture of how Refco and the Refco fraud, functioned.”

He also said Mayer Brown “actively participated in carrying out Refco’s fraudulent misstatement of its financial position,” while Ernst performed to work for Refco “despite apprehending the scope of the fraud.”

Judges, even while granting motions to dismiss, have more than once bemoaned the fact that the law does not allow them to act differently. In case after case, the judges are forced to let culpable third-party actors in these frauds off the hook.

Continued in article

Bob Jensen's threads on auditing firm litigation woes ---
http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on professionalism and independence in auditing --- a
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

"A Missed Opportunity on Financial Reform: How could Fannie Mae and Freddie Mac have escaped Congress's attention?" by Walter Levitt, The Wall Street Journal, June 24, 2010 ---
http://online.wsj.com/article/SB10001424052748704853404575322491510468572.html#mod=djemEditorialPage_t

As a lifelong Democrat and public servant to four presidents, I had hoped the financial reform bill would be the best example of my party's long-standing reputation for standing on the side of individual investors.

It's not. The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors.

Ironically, the authors of this bill are the same Democrats who normally would have opposed many of its features if they were in the minority. Now in the majority, these politicians are investor advocates in their press releases alone.

The Democrats had the chance to do this bill the right way. They should have been motivated by Congress's previous failure to adopt meaningful reform, which left investors unprepared for the crisis. And they had the input of talented leaders and experts who attempted to help lawmakers deal with systemic risk and gaps in basic investor protections.

Whatever these positive contributions, Congress more than overwhelmed them with sins of commission and sins of omission. One of many bad ideas that made it into the bill: Public companies will now have a wider loophole to avoid doing internal audits investors can trust. This requirement was the most important pro-investor reform of the last decade, and it worked. Of the 522 U.S. financial restatements in 2009, 374 were at small firms not subject to auditor reviews.

But the reform bill about to be passed expands the number of small companies exempt from Sarbanes-Oxley audit requirements. When fraud is happening at a public company, small or large, investors care. Now, thanks to Democratic leadership, investors are less likely to know.

There are many missed opportunities in this bill, but these are the biggest:

First, Democratic leaders in Congress failed to revoke the 1975 law that prevents municipal bond issuers from facing the kind of regulation and scrutiny of the corporate bond market. If the municipal bond market melts down in the next few years, we'll know who to blame.

Second, they failed to pass a meaningful majority-vote or proxy access rule for corporate ballots. Instead, thanks to Sen. Chris Dodd (D., Conn.), the Senate passed a proxy access rule that is comically useless: You need 5% of shares to get on the proxy. Very rarely do investors assemble such large stakes in any company.

Third, New York Sen. Chuck Schumer's wise idea to let the Securities and Exchange Commission (SEC) become a self-funded agency will likely be killed by appropriators who are unwilling to give up the power of the purse.

Fourth, Democratic leaders left in place the confusing dual regulatory structure of the SEC and the Commodity Futures Trading Commission. A merger was necessary to eliminate regulatory arbitrage and corrosive bureaucratic turf battles, yet it didn't happen.

Fifth, Senate Democrats failed to support Rep. Barney Frank's (D., Mass.) effort to pass a new law to overcome the legal precedent of the 2008 Supreme Court's Stoneridge decision, which allows third-party consultants, accountants and other abettors of fraud to avoid liability. Again, another sellout of investor interests.

Sixth, Congress didn't deal with the massive problems of Fannie Mae and Freddie Mac. It's one thing to fail to see trouble before it happens. Now, there's no excuse. The central role played by these two organizations in the financial crisis is indisputable. Congress had a chance to fully restrict these agencies from anything but the most basic market-making activities, and it didn't.

Finally, Democrats could have proposed a law obligating investment advisers to serve their clients' interests above all others. That was in the House version of the bill, but the Senate punted the idea, and it's is likely to end up kicked down the road even further.

The sad reality is that we may not have a chance to enact these kinds of reforms until after the next major financial crisis. For those of us who champion the rights of investors, that's too long to wait—especially since until very recently we didn't think we would have to.

Mr. Levitt, chairman of the Securities and Exchange Commission from 1993 to 2001, now serves as an adviser to the Carlyle Group and Goldman Sachs.

Bob Jensen's threads on Freddie and Fannie are at
http://www.trinity.edu/rjensen/2008Bailout.htm

"They Left Fannie Mae, but We Got the Legal Bills," by Grechen Morgenson, The New York Times, September 5, 2009 ---
http://www.nytimes.com/2009/09/06/business/economy/06gret.html?_r=1&scp=2&sq=gretchen morgensen&st=cse

I Saw Maxine Kissing Franklin Raines --- http://www.youtube.com/watch?v=vbZnLxdCWkA
Before Franklin Raines resigned as CEO of Fannie Mae and paid over a million dollar fine for accounting fraud to pad his bonus, he was the darling of the liberal members of Congress. Frank Raines was creatively managing earnings to the penny just enough to get his enormous bonus. The auditing firm of KPMG was accordingly fired from its biggest corporate client in history --- http://www.trinity.edu/rjensen/Theory01.htm#Manipulation

Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4

The Largest Earnings Management Fraud in History and Congressional Efforts to Cover it Up

Without trying to place the blame on Democrats or Republicans, here are some of the facts that led to the eventual fining of Fannie Mae executives for accounting fraud and the firing of KPMG as the auditor on one of the largest and most lucrative audit clients in the history of KPMG. The restated earnings purportedly took upwards of a million journal entries, many of which were re-valuations of derivatives being manipulated by Fannie Mae accountants and auditors (Deloitte was charged with overseeing the financial statement revisions.

Fannie Mae may have conducted the largest earnings management scheme in the history of accounting.

You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

. . . flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie's executives -- whose bonus plan is linked to earnings-per-share -- to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull's-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

That same year Fannie installed software that allowed management to produce multiple scenarios under different assumptions that, according to a Fannie executive, "strengthens the earnings management that is necessary when dealing with a volatile book of business." Over the years, Fannie designed and added software that allowed it to assess the impact of recognizing income or expense on securities and loans. This practice fits with a Fannie corporate culture that the report says considered volatility "artificial" and measures of precision "spurious."

This disturbing culture was apparent in Fannie's manipulation of its derivative accounting. Fannie runs a giant derivative book in an attempt to hedge its massive exposure to interest-rate risk. Derivatives must be marked-to-market, carried on the balance sheet at fair value. The problem is that changes in fair-value can cause some nasty volatility in earnings.

So, Fannie decided to classify a huge amount of its derivatives as hedging transactions, thereby avoiding any impact on earnings. (And we mean huge: In December 2003, Fan's derivatives had a notional value of $1.04 trillion of which only a notional $43 million was not classified in hedging relationships.) This misapplication continued when Fannie closed out positions. The company did not record the fair-value changes in earnings, but only in Accumulated Other Comprehensive Income (AOCI) where losses can be amortized over a long period.

Fannie had some $12.2 billion in deferred losses in the AOCI balance at year-end 2003. If this amount must be reclassified into retained earnings, it might punish Fannie's earnings for various periods over the past three years, leaving its capital well below what is required by regulators.

In all, the Ofheo report notes, "The misapplications of GAAP are not limited occurrences, but appear to be pervasive . . . [and] raise serious doubts as to the validity of previously reported financial results, as well as adequacy of regulatory capital, management supervision and overall safety and soundness. . . ." In an agreement reached with Ofheo last week, Fannie promised to change the methods involved in both the cookie-jar and derivative accounting and to change its compensation "to avoid any inappropriate incentives."

But we don't think this goes nearly far enough for a company whose executives have for years derided anyone who raised a doubt about either its accounting or its growing risk profile. At a minimum these executives are not the sort anyone would want running the U.S. Treasury under John Kerry. With the Justice Department already starting a criminal probe, we find it hard to comprehend that the Fannie board still believes that investors can trust its management team.

Fannie Mae isn't an ordinary company and this isn't a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie's implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That's quite a confidence game -- and it's time to call it.

**********************************

:"Sometimes the Wrong 'Notion': Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio," by Michael MacKenzie, The Wall Street Journal, October 5, 2004, Page C3

Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio

What exactly did Fannie Mae do wrong?

Much has been made of the accounting improprieties alleged by Fannie's regulator, the Office of Federal Housing Enterprise Oversight.

Some investors may even be aware the matter centers on the mortgage giant's $1 trillion "notional" portfolio of derivatives -- notional being the Wall Street way of saying that that is how much those options and other derivatives are worth on paper.

But understanding exactly what is supposed to be wrong with Fannie's handling of these instruments takes some doing. Herewith, an effort to touch on what's what -- a notion of the problems with that notional amount, if you will.

Ofheo alleges that, in order to keep its earnings steady, Fannie used the wrong accounting standards for these derivatives, classifying them under complex (to put it mildly) requirements laid out by the Financial Accounting Standards Board's rule 133, or FAS 133.

For most companies using derivatives, FAS 133 has clear advantages, helping to smooth out reported income. However, accounting experts say FAS 133 works best for companies that follow relatively simple hedging programs, whereas Fannie Mae's huge cash needs and giant portfolio requires constant fine-tuning as market rates change.

A Fannie spokesman last week declined to comment on the issue of hedge accounting for derivatives, but Fannie Mae has maintained that it uses derivatives to manage its balance sheet of debt and mortgage assets and doesn't take outright speculative positions. It also uses swaps -- derivatives that generally are agreements to exchange fixed- and floating-rate payments -- to protect its mortgage assets against large swings in rates.

Under FAS 133, if a swap is being used to hedge risk against another item on the balance sheet, special hedge accounting is applied to any gains and losses that result from the use of the swap. Within the application of this accounting there are two separate classifications: fair-value hedges and cash-flow hedges.

Fannie's fair-value hedges generally aim to get fixed-rate payments by agreeing to pay a counterparty floating interest rates, the idea being to offset the risk of homeowners refinancing their mortgages for lower rates. Any gain or loss, along with that of the asset or liability being hedged, is supposed to go straight into earnings as income. In other words, if the swap loses money but is being applied against a mortgage that has risen in value, the gain and loss cancel each other out, which actually smoothes the company's income.

Cash-flow hedges, on the other hand, generally involve Fannie entering an agreement to pay fixed rates in order to get floating-rates. The profit or loss on these hedges don't immediately flow to earnings. Instead, they go into the balance sheet under a line called accumulated other comprehensive income, or AOCI, and are allocated into earnings over time, a process known as amortization.

Ofheo claims that instead of terminating swaps and amortizing gains and losses over the life of the original asset or liability that the swap was used to hedge, Fannie Mae had been entering swap transactions that offset each other and keeping both the swaps under the hedge classifications. That was a no-go, the regulator says.

"The major risk facing Fannie is that by tainting a certain portion of the portfolio with redesignations and improper documentation, it may well lose hedge accounting for the whole derivatives portfolio," said Gerald Lucas, a bond strategist at Banc of America Securities in New York.

The bottom line is that both the FASB and the IASB must someday soon take another look at how the real world hedges portfolios rather than individual securities. The problem is complex, but the problem has come to roost in Fannie Mae's $1 trillion in hedging contracts. How the SEC acts may well override the FASB. How the SEC acts may be a vindication or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie violate the rules of IAS 133.

Question
How many of you recall the infamous Footnote 16 testimony of C.E. Andrews in the Senate hearings when Andersen was near but not quite over the cliff?

"McGladrey Reorganizes, Celebrates New Logo With Monster Cake," by Susan Black, Big Four Blog, June 24, 2010 ---
http://bigfouralumni.blogspot.com/2010/06/mcgladrey-reorganizes-celebrates-new.html

RSM McGladrey (tax and consulting) and partner firm McGladrey & Pullen (assurance) recently decided to go to market under the "McGladrey" brand. Combined, the firms are fifth-largest U.S. firm with revenues of $1.5 billion, 7,000 professionals in nearly 90 offices. Also, the firms recently realigned to focus on national lines of business and industry. Both firms are members of RSM International, the sixth largest global network in the world, and operate as separate legal entities in an alternative practice structure

We wonder if this is the influence of C.E. Andrews, who took over last year 2009 as president and chief operating officer of RSM McGladrey. C.E. Andrews was almost 30 years at Andersen; most recently as head of Audit. And Andersen did shorten its prior name of Arthur Andersen and changed its logo from the double doors to the orange sun.

Continued in article

When C.E. Andrews Fumbled a Footnote
Flashback to Year 2002 --- http://www.trinity.edu/rjensen/FraudEnron.htm#Senator

A Senator Complains to C.E. Andrews, the Head of Auditing at Andersen, About Enron's Related Party Disclosure in Enron's Year 2000 Annual Report

SEN. DORGAN: Should it raise a red flag for an auditor if the chief financial officer of a company is personally involved in complex financial transactions in their own firm? This was the case with Mr. Fastow who had a personal stake, as I understand it, in the success of these SPEs and was compensated in that matter. Should that concern an auditor and did it concern Andersen?

MR. ANDREWS: Senator, as it pertains to related party transactions, again, the accounting and disclosure rules require that related party transactions be reviewed and disclosed where there would be material on financial statements and, in this case, that related party transaction was disclosed in the footnotes to the Enron financial statements.

SEN. DORGAN: Do you have those footnotes with you?

MR. ANDREWS: Chairman, I do not.

SEN. DORGAN: The reason I ask is I've read some of those footnotes and I think it would have been impossible for even the most experienced analyst to understand what those footnotes meant, and that is of concern.

The exchange above is quoted from http://www.c-span.org/enron/scomm_1218.asp#open

The footnote being referred to above is Footnote 16 from the Year 2000 Annual Report that can be downloaded from http://www.enron.com/corp/investors/annuals/2000/ar2000.pdf

I have reproduced Footnote 16 below. Who do you think is correct with respect to the related-party disclosure adequacy in the disputed Footnote 16 --- C.E. Andrews or Senator Dorgan?

Do the related party disclosures in the footnote below add value to you when analyzing risk? Does this tell you that Enron's CFO made over $30 million from his limited partnership that entered into derivatives for Enron?

Footnote 16 from the Year 2000 Enron Annual Report
http://www.enron.com/corp/investors/annuals/2000/ar2000.pdf
16. RELATED PARTY TRANSACTIONS In 2000 and 1999, Enron entered into transactions with limited partnerships (the Related Party) whose general partner's managing member is a senior office of Enron. The limited partners of the Related Party are unrelated to Enron. Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties. In 2000, Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets. As part of the transactions, Enron (i) contributed to newly-formed entities (the Entities) assets valued at approximately $1.2 billion, including $150 million in Enron notes payable, 3.7 million restricted shares of outstanding Enron common stock and the right to receive up to 18.0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions) and (ii) transferred to the Entities assets valued at approximately $309 million, including a $50 million note payable and an investment in an entity that indirectly holds warrants convertible into common stock of an Enron equity method investee. In return, Enron received economic interests in the Entities, $309 million in notes receivable, of which $259 million is recorded at Enron's carryover basis of zero, and a special distribution from the Entities in the form of $1.2 billion in notes receivable, subject to changes in the principal for amounts payable by Enron in connection with the execution of additional derivative instruments. Cash in these Entities of $172.6 million is invested in Enron demand notes. In addition, Enron paid $123 million to purchase share-settled options from the Entities on 21.7 million shares of Enron common stock. The Entities paid Enron $10.7 million to terminate the share-settled options on 14.6 million shares of Enron common stock outstanding. In late 2000, Enron entered into share-settled collar arrangements with the Entities on 15.4 million shares of Enron common stock. Such arrangements will be accounted for as equity transactions when settled. In 2000, Enron entered in derivative transactions with the Entities with a combined notional amount of approximately $2.1 billion to hedge certain merchant investments and other assets. Enron's notes receivable balance was reduced by $36 million as a result of premiums owed on derivative transactions. Enron recognized revenues of approximately $500 million related to the subsequent change in the market value of these derivatives, which offset market value changes of certain merchant investments and price risk management activities. In addition, Enron recognized $44.5 million and $14.1 million of interest income and interest expense, respectively, on the notes receivable from and payable to the Entities. In 1999, Enron entered into a series of transactions involving a third party and the Related Party. The effect of the transactions was (i) Enron and the third party amended certain forward contracts to purchase shares of Enron common stock, resulting in Enron having forward contracts to purchase Enron common shares at the market price on that day, (ii) the Related Party received 6.8 million shares of Enron common stock subject to certain restrictions and (iii) Enron received a note receivable, which was repaid in December 1999, and certain financial instruments hedging an investment held by Enron. Enron recorded the assets received and equity issued at estimated fair value. In connection with the transactions, the Related Party agreed that the senior officer of Enron would have no pecuniary interest in such Enron common shares and would be restricted from voting on matters related to such shares. In 2000, Enron and the Related Party entered into an agreement to terminate certain financial instruments that had been entered into during 1999. In connection with this agreement, Enron received approximately 3.1 million shares of Enron common stock held by the Related Party. A put option, which was originally entered into in the first quarter of 2000 and gave the Related Party the right to sell shares of Enron common stock to Enron at a strike price of $71.31 per share, was terminated under this agreement. In return, Enron paid approximately $26.8 million to the Related Party. In 2000, Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale. In 2000, the Related Party acquired, through securitizations, approximately $35 million of merchant investments from Enron. In addition, Enron and the Related Party formed partnerships in which Enron contributed cash and assets and the Related Party contributed $17.5 million in cash. Subsequently, Enron sold a portion of its interest in the partnership through securitizations. See Note 3. Also Enron contributed a put option to a trust in which the Related Party and Whitewing hold equity and debt interests. At December 31, 2000, the fair value of the put option was a $36 million loss to Enron. In 1999, the Related Party acquired approximately $371 million of merchant assets and investments and other assets from Enron. Enron recognized pre-tax gains of approximately $16 million related to these transactions. The Related Party also entered into an agreement to acquire Enron's interests in an unconsolidated equity affiliate for approximately $34 million.

Footnote 16 Analysis by Frank Partnoy
Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm Part C of the Testimony C. Using Derivatives to Inflate the Value of Troubled Businesses A third example is even more troubling. It appears that Enron inflated the value of certain assets it held by selling a small portion of those assets to a special purpose entity at an inflated price, and then revaluing the lion’s share of those assets it still held at that higher price. Consider the following sentence disclosed from the infamous footnote 16 of Enron’s 2000 annual report, on page 49: “In 2000, Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale.” What does this sentence mean? It is possible to understand the sentence today, but only after reading a January 7, 2002, article about the sale by Daniel Fisher of Forbes magazine, together with an August 2001 memorandum describing the transaction (and others) from one Enron employee, Sherron Watkins, to Enron Chairman Kenneth Lay. Here is my best understanding of what this sentence means: First, the “Related Party” is LJM2, an Enron partnership run by Enron’s Chief Financial Officer, Andrew Fastow. (Fastow reportedly received $30 million from the LJM1 and LJM2 partnerships pursuant to compensation arrangements Enron’s board of directors approved.) Second, “dark fiber” refers to a type of bandwidth Enron traded as part of its broadband business. In this business, Enron traded the right to transmit data through various fiber-optic cables, more than 40 million miles of which various Internet-related companies had installed in the United States. Only a small percentage of these cables were “lit” – meaning they could transmit the light waves required to carry Internet data; the vast majority of cables were still awaiting upgrades and were “dark.” The rights associated with those “dark” cables were called “dark fiber.” As one might expect, the rights to transmit over “dark fiber” are very difficult to value. Third, Enron sold “dark fiber” it apparently valued at only $33 million for triple that value: $100 million in all – $30 million in cash plus $70 million in a note receivable. It appears that this sale was at an inflated price, thereby enabling Enron to record a $67 million profit on that trade. LJM2 apparently obtained cash from investors by issuing securities and used some of these proceeds to repay the note receivable issued to Enron. What the sentence in footnote 16 does not make plain is that the investor in LJM2 was persuaded to pay what appears to be an inflated price, because Enron entered into a “make whole” derivatives contract with LJM2 (of the same type it used with Raptor). Essentially, the investor was buying Enron’s debt. The investor was willing to buy securities in LJM2, because if the “dark fiber” declined in price – as it almost certainly would, from its inflated value – Enron would make the investor whole. In these transactions, Enron retained the economic risk associated with the “dark fiber.” Yet as the value of “dark fiber” plunged during 2000, Enron nevertheless was able to record a gain on its sale, and avoid recognizing any losses on assets held by LJM2, which was an unconsolidated affiliate of Enron, just like JEDI. As if all of this were not complicated enough, Enron’s sale of “dark fiber” to LJM2 also magically generated an inflated price, which Enron then could use in valuing any remaining “dark fiber” it held. The third-party investor in LJM2 had, in a sense, “validated” the value of the “dark fiber” at the higher price, and Enron then arguably could use that inflated price in valuing other “dark fiber” assets it held. I do not have any direct knowledge of this, although public reports and Sherron Watkins’s letter indicate that this is precisely what happened. For example, suppose Enron started with ten units of “dark fiber,” worth $100, and sold one to a special purpose entity for $20 – double its actual value – using the above scheme. Now, Enron had an argument that each of its remaining nine units of “dark fiber” also were worth $20 each, for a total of $180. Enron then could revalue its remaining nine units of “dark fiber” at a total of $180. If the assets used in the transaction were difficult to value – as “dark fiber” clearly was – Enron’s inflated valuation might not generate much suspicion, at least initially. But ultimately the valuations would be indefensible, and Enron would need to recognize the associated losses. It is an open question for this Committee and others whether this transaction was unique, or whether Enron engaged in other, similar deals. It seems likely that the “dark fiber” deal was not the only one of its kind. There are many sentences in footnote 16.

Bob Jensen's threads on the fall of Andersen, Enron, and WorldCom ---
http://www.trinity.edu/rjensen/FraudEnron.htm

"Auditors Under Fire. In The UK. That Is All," by Francine McKenna, re: TheAuditors, June 7, 2010 ---
http://retheauditors.com/2010/06/07/auditors-under-fire-in-the-uk-that-is-all/

It seems as if the British are paying attention more closely to the audit industry and their complicity in the financial crisis and other failures than the media, legislators and regulators in the US.

Well… there was that blip of interest when the Lehman Bankruptcy Examiner called out Ernst & Young for their malpractice in that colossal failure.

But the stories mentioning Ernst & Young have mostly stopped for now. There were a few floating into my inbox the last few days mentioning EY’s request for a motion to dismiss in some Lehman litigation. Let’s hope there’s no judge in New York who wants to be known as the one who let EY or anyone else involved in that mess off the hook too early and too easily.

It’s not surprising to me that the dialogue about auditor failure along with others in the crisis is loudest in the UK. It was the British – Prem Sikka, Richard Murphy and Dennis Howlett – who first took notice of what I was writing here, three years ago, before anyone else. They were so surprised to find someone in the US who was free to write so so critically.

“In a separate statement, the [Accountant's Joint Disciplinary Scheme] said the case also gave rise to concerns about the dominance of the Big Four accountancy firms.

The JDS said it had found it difficult to get any expert evidence for its investigation because specialists were confined “almost exclusively” to the Big Four, and because of conflicts of interest, these were unable to comment.”

It is a dialogue. The audit firm leadership in the UK actually talk back and speak their mind. In their own voice, it seems. Sometimes to comic effect.

There are so many corks popping the UK, hitting them in the eyes, audit firm leadership is actually trying to preempt. They’re shaking in their £1000 bespoke leather slip-ons.

Well, not really.

Maybe their bottom lips are quivering a bit in quiet indignation.

Mr Powell, 54, also has plans to continue to grow the business, in particular to double the revenues of the [PwC] consultancy practice against a backdrop of scything cuts in UK and European government spending.

The response of the affable and youthful-looking Mr Powell to this mounting in-tray is softly spoken and mostly diplomatic, although there are flashes of steel, as perhaps expected from the boss of a firm which counts 90 per cent of the FTSE 100 as its clients in one capacity or another across audit, tax and consulting.

He tells the Financial Times in an interview in his offices overlooking the River Thames that it is “time to turn up the heat in the organisation”.

However, on regulatory inquiries he wants a debate. First with Vince Cable, the business secretary, about changing “ground rules” for auditors and then with investors and regulators about the desire for more subjectivity in the audit report.

In what context were the “affable and youthful-looking” Mr. Powell’s comments made, whilst sipping tea in his “offices overlooking the River Thames” ? PwC is being skewered in the UK press over its complete and utter lack of competence in the JP Morgan “billions in client funds in the wrong accounts” debacle.

Didn’t hear about it? It’s a British thing.

Mr Powell’s comments come as PwC’s audit practice may face a separate inquiry by the Financial Reporting Council, which oversees auditors, after the Financial Services Authority last week revealed the firm had failed over a seven-year period to spot that JPMorgan had accidentally placed as much as $23bn (£16bn) of client funds into the wrong bank accounts. PwC has declined to comment.

His comments also follow government plans to cut public sector spending on consulting services, an area that contributes up to 40 per cent of PwC’s £450m consulting and advisory business. PwC aims to at least double revenues and staff in its consulting business in the next five years, and has seen “well into double-digit” growth in its UK consulting practice in the past 11 months, Mr Powell said.

Big Four efforts to aggressively expand their consulting practices have attracted some controversy, as they had scaled them back after the Enron crisis amid concerns it could affect the independence of their audit reports.

Indeed. I must say old chap… Getting a little squidgy for you?

Remember, PwC is not only long time auditor for JP Morgan Chase but also Bank of America, AIG, Freddie Mac, Northern Rock, Goldman Sachs and several Madoff feeder funds. And don’t ever forget Glitnir and Satyam.

How’s that for an all-star lineup of litigation?

Ernst and Young, for its part, had a long, protracted and quite embarrassing run with the Equitable Life litigation. But as that immortal Brit once said, “All’s well that ends well.”

Ernst & Young’s statement about the official disciplinary investigation into its role in the Equitable Life affair may well lead the casual reader to think it had come away triumphant…It was still fined £500,000 with costs of £2.4m. But it now crows that the most serious allegations – that it lacked objectivity and independence – have been thrown out. The firm also comments that the appeal tribunal took the view that Equitable and E&Y were right to think it “very unlikely” the insurer would lose the court case, and that there was no requirement to disclose a “remote contingency”…It is true that the disaster at Equitable was primarily the doing of its former executives, and that auditors cannot be expected to discover all management folly and incompetence. But shouldn’t any audit firm worth its salt be embarrassed by failing to spot a scandal of this magnitude?

Ernst & Young apologized to the policy holders. Apologized. It’s all behind us now. The audit partner in question has since retired. Just like Bally’s.

Ease of abdication of responsibility by the firms is the lamentable downside of proceedings that take forever and a day to conclude.

In a statement, Ernst & Young said: “Any lessons from our audit of Equitable have long been learned and embedded in our audit systems and procedures. We extend our sympathies to the policyholders of Equitable Life, who have been impacted by the near-collapse of the society, following events which lay well outside of our control and the remit of our role as auditor.”

This fine was handy pocket change for EY and nothing compared to what they face potentially in the Lehman litigation. It’s only unfortunate for EY it lasted so long and cost them so much in solicitor fees.

So why hasn’t the same contained outrage over the auditors role in the crisis and other failures crossed lips like spittle in the US? Why hasn’t Congress demanded EY or one of the others testify over their role in the crisis? Why hasn’t mainstream media stayed on the story and written about the pile of steaming lawsuits suffocating each and every one of the Big 4 audit firms in the US?

Will the media, regulators and legislators wait until the New Century v. KPMG case finally comes to trial? I’d better brace myself for the calls from newbie journalists all over again.

Or maybe we’ll putter along with updates as Satyam, Glitnir, Lehman, Anglo Irish and others play out in the New York courts.

The Deloitte SAP case in Marin County is pretty sexy. Michael Krigsman rightly calls it a game changer for systems integrators. Who dares to call a spade and spade and accuse a Big 4 of fraud for the bait and switch which is putting junior folks on a big SAP engagement when you promised experienced ones?

Municipalities hungry for cash, that’s who.

Continued at http://retheauditors.com/2010/06/07/auditors-under-fire-in-the-uk-that-is-all/

June 7, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

Here is Accountancy’s report on the JP Morgan client accounting fiasco. You will see that PwC was actually engaged to provide some sort of specific certification in that respect. Whilst trust account auditing can be tricky, you don’t need to be an audit ‘expert’ to track GBP 16 billion. A few simple tracing tests ought to do it.

"PwC in potential inquiry over client money breach: FSA fines JP Morgan record £33m," by Pat Sweet

PricewaterhouseCoopers could face an inquiry by accounting regulators over its repeated certification that JP Morgan Securities Ltd (JPMSL) kept clients' funds separate from its own - a certification which is now in contention after the bank was discovered to have breached the rules.

The role of PwC - also the bank's auditors - in the certification of how the investment bank handled client funds is now under scrutiny, following a record £33.3m fine on the bank by the Financial Services Authority, which discovered that JPMSL had mixed its own funds with those of clients.

Under the FSA’s client money rules, firms are required to keep client money separate from the firm's money in segregated accounts with trust status. This helps to protect client money in the event of the firm's insolvency.

The FSA fined JPMSL after it found to have mixed client funds with its own cash over a seven year period. Up to £16bn of clients’ money went into the wrong bank accounts.

The FSA plans to pass on the details of its investigation to both the Financial Reporting Council and the ICAEW, which will then determine whether any further action is necessary, according to the Times.

In addition to serving as principal auditor, PwC was retained by JP Morgan Securities Limited to produce an annual client asset returns report, to confirm that customers’ funds were being effectively ring-fenced and therefore protected in the event of the bank’s collapse.

However, PwC signed off the client report even though JP Morgan was in breach of the rules.

The money at risk in this case consisted of funds held by customers of JPMSL's futures and options business — a sum that varied from £1.3bn to £15.7bn between 2002 and July 2009, when the breach came to light.

PwC has declined to comment.

Jensen Comment
One of the most consistent advocates of the “insurance” alternative is Josh Ronen at NYU --- http://pages.stern.nyu.edu/~jronen/

Financial Statements Insurance ---
http://pages.stern.nyu.edu/~jronen/articles/December_final_Version.pdf

A proposed corporate governance reform: Financial statements insurance ---
http://pages.stern.nyu.edu/~jronen/articles/Journal_of_Engineering.pdf

Financial Statements Insurance Enhances Corporate Governance in a Sarbanes-Oxley Environment ---
http://pages.stern.nyu.edu/~jronen/articles/FSI_enhances_int.pdf

Financial Statements Insurance ---
http://pages.stern.nyu.edu/~jronen/articles/Forensic_Accounting.pdf

Other papers listed at
http://pages.stern.nyu.edu/~jronen/

"Video: Ernst & Young Fined Over Equitable Life," by Emma Hunt, Accountancy Age, June 11, 2010 --- http://www.accountancyage.com/accountancyage/video/2264616/video-ernst-young-fined

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

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

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

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

From: The Summa [mailto:no-reply@wordpress.com]
Sent: Saturday, June 26, 2010 1:14 AM
To: Jensen, Robert
Subject: [New comment] Economic Consequences and the Political Nature of Accounting Standard Setting

Tammy Buck added a new comment to the post Economic Consequences and the Political Nature of Accounting Standard Setting.
http://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/comment-page-3/

Tammy Buck said on Economic Consequences and the Political Nature of Accounting Standard Setting June 3, 2010 at 5:19 pm Prof Albrecht – Thanks for the thought provoking article! I would like to point out that your statement – “First, financial statements are intended to provide information to investors for making investment decisions.” – is itself a value judgment of what accounting standards/financial statements are & ought to do. If this is “true” (or rather, more desirable), then certain accounting standards ought to be chosen over others. But if isn’t desirable (maybe financial statements have another purpose?), then conservatively biased standards might not be appropriate. Who decides this focus? Investors, professors, the SEC, FASB, Fortune 500 firms? Maybe it’s the open process of democratic process. So of course accounting standards aren’t pure theoretical truth. But shouldn’t some independence be desirable? Should (there I go with a value judgment!) the FASB be independent from both the Big 4 & the big public companies? Do you really want Goldman Sachs having a significant influence over GAAP (for instance)? Just some questions. Maybe I just think accounting standard setter independence sounds theoretically better, but my position is naive.

thanks,
Tammy Buck

Jensen Comment
I think independence is a goal we should strive for in standard setting, and I think that making FASB members sever their previous financial ties with employers is probably a good but overrated idea. One cannot so easily sever relationships with former employers, colleagues, and friends. I was more disturbed by the reduction of the FASB’s numbers of members such that biased board members have much more clout. There’s a certain amount of democratic strength in numbers on the IASB. If the FASB was not self destructing I would work much harder to plug for a larger FASB.

Having said this, I will now give you my subjective opinion on the number one cause of new or revised standards/interpretations that add great complexity to accounting rules. The number one cause is the creative effort that clients use to circumvent the spirit and intent of accounting “rules” and “guidelines.”

One needs only to look carefully at the contracts being written to find clues about efforts to deceive. When companies (like Avis, Safeway, and all the airlines) were forming unconsolidated lease holding subsidiaries to hide enormous amounts of capital lease debt from their consolidated balance sheets, the FASB rewrote the consolidation rules. In the 1980s when companies were keeping increasing amounts (trillions) of derivative financial instruments debt off the books (interest rate swaps were not even disclosed let alone booked), the FASB was forced to write FAS 119, 133, and all the ensuing amending standards and complicated DIG interpretations. When Andy Fastow, with the help of Andersen consultants, invented ways to keep over a billion dollars worth of debt off Enron’s books using over 3,000 SPEs, the FASB rewrote more complicated rules for SPEs.

More recently Lehman Bros. took advantage of a loophole in the spirit of FAS 140 that allowed Lehman to mask debt with repo sales rules that have always been inane in my viewpoint. Belatedly, Lehman’s debt masking is leading to new rules about repo accounting “sales” that are deceptive and not really sales at all.

And, like Francine, I don’t trust the dependency of auditors on the CEOs and CFOs of their largest clients. Just as Andersen auditors caved in to Enron’s proposed deceptions, I think E&Y auditors caved in to Lehman’s proposed deceptions. As Tom Selling stated, “the audit (financing) model is broken.” However, unlike Francine, I firmly believe that public sector auditing would exacerbate the problem. Hence I view the “independence problem” as being much more critical with audit firms than with standard setters.

For audit firms, the long-run answer might be the replacement of assurance with insurance, although there are many unresolved questions about insurance in this context.

For standard setters, the long-run answer might be more research funding, larger boards, faster turnover of board members, and more serious lobbying rules.

Hence my conclusion is that the never-ending efforts of some clients to deceive investors is the primary instigator of complicated new standards and interpretations. Perhaps that’s as it should be. I’m not in favor of watering down complicated standards on the naïve assumption that auditors will one day get tougher, on “principle,” with the hosts that feed them. And I think that today’s database technology is up to the task of auditing with complicated standards and interpretations.

Perhaps the DIG should be expanded to a SIG for helping auditors and clients with questions about any standard in problematic circumstances. One thing that really continues to bother me, however, is how Ken Lay manipulated the SEC into a ruling that officially allowed Enron to embark on some of Enron’s most deceptive accounting. Can a DIG or a SIG be similarly manipulated by big corporations?

The FASB and IASB processes of setting standards are far from perfect, but perhaps you’re too young to remember the really bad old days of the ARB, APB, and IASC --- historic standard setters that ducked controversial issues opposed by audit clients and issued rulings only about milk toast issues.

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

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

"KPMG chief calls for audit reform," by Mario Christodoulou, Accountancy Age, June 18, 2010 ---
|http://www.financialdirector.co.uk/accountancyage/news/2264982/kpmg-chief-calls-audit-reform
Thank you to David Albrecht for the heads up.

KPMG’s senior partner has added his voice to growing calls for reform to audit in the wake of the crisis.

In a speech at the ICAEW on Wednesday John Griffith-Jones he said it is was time for “really bold thinking” about the future of audit.

He suggested auditors might work “collaboratively” with regulators and rating agencies, along with boards and management to discuss risk.

“What is the point, they and others ask, of doing extensive and increasingly elaborate audits of the financial accounts of our banks, when audits failed to identify the huge and systemic risks which led to the near collapse of the Global banking system in the Autumn of 2008?” he said.

“It is a straightforward question; It deserves a straightforward answer.”

It followed an earlier call from PwC senior partner Ian Powell to reform the audit model.

“The overall model is long overdue some serious market-wide discussion. For me, the fundamental questions revolve around the scope of the audit; should this be extended and the nature of audit reporting extended with it,” he said in an April speech to ICAS members.

Also in April, Graham Clayworth, audit partner at BDO, said the profession needed to consider providing assurance around a company’s business model and risks, typically, “front of the book” disclosures.

“We have to ask what comfort the auditor can give in terms of the information that is in the front… “The concession that the profession will have to make for additional liability limits will be to extend work that the auditor does at the front of the book,” said.

Why must we worry about the hiring-away pipeline?

Credit Rating Agencies ---- http://en.wikipedia.org/wiki/Credit_rating_agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2008 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Dun & Bradstreet

China Credit Information Service (China)

Fitch Ratings (U.S.)

Japan Credit Rating Agency (Japan)

Moody's Investors Service (U.S.)

Standard & Poor's (U.S.)

Rating Agency Malaysia (Malaysia)

Egan-Jones Rating Company (U.S.)

Brickwork Rating (India)

The Pakistan Credit Rating Agency Limited (Pakistan)

How to Get AAA Ratings on Junk Bonds

Pay cash under the table to credit rating agencies
Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
Hire away top-level credit rating agency employees with insider information and great networks inside the credit rating agencies

By now it is widely known that the big credit rating agencies (like Moody's, Standard & Poor's, and Fitch) that rate bonds as AAA to BBB to Junk were unethically selling AAA ratings to CDO mortgage-sliced bonds that should've been rated Junk. Up to now I thought the credit rating agencies were merely selling out for cash or to maintain "goodwill" with their best customers to giant Wall Street banks and investment banks like Lehman Bros., AIG., Merrill Lynch, Bear Stearns, Goldman Sachs, etc. ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
But it turns out that the credit rating agencies were also in that "hiring-away" pipeline.

Wall Street banks and nvestment banks were employing a questionable tactic used by large clients of auditing firms. It is common for large clients to hire away the lead auditors of their CPA auditing firms. This is a questionable practice, although the intent in most instances (we hope) is to obtain accounting experts rather than to influence the rigor of the audits themselves. The tactic is much more common and much more sinister when corporations hire away top-level government employees of regulating agencies like the FDA, FAA, FPC, EPA, etc. This is a tactic used by industry to gain more control and influence over its regulating agency. Current regulating government employees who get too tough on industry will, thereby, be cutting off their chances of getting future high compensation offers from the companies they now regulate.

The investigations of credit rating agencies by the New York Attorney General and current Senate hearings, however, are revealing that the hiring-away tactic was employed by Wall Street Banks for more sinister purposes in order to get AAA ratings on junk bonds. Top-level employees of the credit rating agencies were lured away with enormous salary offers if they could use their insider networks in the credit rating agencies so that higher credit ratings could be stamped on junk bonds.

"Rating Agency Data Aided Wall Street in Deals," The New York Times, April 24, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/24/rating-agency-data-aided-wall-street-in-deals/#more-214847

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good, The New York Times’s Gretchen Morgenson and Louise Story report. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. Read More »

"Credit rating agencies should not be dupes," Reuters, May 13, 2010 ---
http://www.reuters.com/article/idUSTRE64C4W320100513

THE PROFIT INCENTIVE

In fact, rating agencies sometimes discouraged analysts from asking too many questions, critics have said.

In testimony last month before a Senate subcommittee, Eric Kolchinsky, a former Moody's ratings analyst, claimed that he was fired by the rating agency for being too harsh on a series of deals and costing the company market share.

Rating agencies spent too much time looking for profit and market share, instead of monitoring credit quality, said David Reiss, a professor at Brooklyn Law School who has done extensive work on subprime mortgage lending.

"It was incestuous -- banks and rating agencies had a mutual profit motive, and if the agency didn't go along with a bank, it would be punished."

The Senate amendment passed on Thursday aims to prevent that dynamic in the future, by having a government clearinghouse that assigns issuers to rating agencies instead of allowing issuers to choose which agencies to work with.

For investigators to portray rating agencies as victims is "far fetched," and what needs to be fixed runs deeper than banks fooling ratings analysts, said Daniel Alpert, a banker at Westwood Capital.

"It's a structural problem," Alpert said.

Continued in article

Also see http://blogs.reuters.com/reuters-dealzone/

Jensen Comment
CPA auditing firms have much to worry about these investigations and pending new regulations of credit rating agencies.

Firstly, auditing firms are at the higher end of the tort lawyer food chain. If credit rating agencies lose class action lawsuits by investors, the credit rating agencies themselves will sue the bank auditors who certified highly misleading financial statements that greatly underestimated load losses. In fact, top level analysts are now claiming that certified Wall Street Bank financial statement were pure fiction:

"Calpers Sues Over Ratings of Securities," by Leslie Wayne, The New York Times, July 14, 2009 --- http://www.nytimes.com/2009/07/15/business/15calpers.html

Secondly, the CPA profession must begin to question the ethics of allowing lead CPA auditors to become high-level executives of clients such as when a lead Ernst & Young audit partner jumped ship to become the CFO of Lehman Bros. and as CFO devised the questionable Repo 105 contracts that were then audited/reviewed by Ernst & Yound auditors. Above you read that: "In fact, rating agencies sometimes discouraged analysts from asking too many questions, critics have said." We must also worry that former auditors sometimes discourage current auditors from asking too many questions.
http://retheauditors.com/2010/03/15/liberte-egalite-fraternite-lehman-brothers-troubles-for-ernst-young-threaten-the-big-4-fraternity/

Credit rating of CDO mortgage-sliced bonds turned into fiction writing by hired away raters!
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!

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to (credit agency) workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

In some cases, once these (former credit agency) workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

"Prosecutors Ask if 8 Banks Duped Rating Agencies," by Loise Story, The New York Times, May 12, 2010 ---
http://www.nytimes.com/2010/05/13/business/13street.html

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office notifying the banks of his investigation, representatives for Morgan Stanley, Credit Suisse, UBS and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment. A Fitch spokesman said Thursday that the firm would cooperate with Mr. Cuomo’s inquiry.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

. . .

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Bob Jensen's Rotten to the Core threads on banks and investment banks ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's Rotten to the Core threads on credit rating agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bob Jensen's threads on credit rating agency scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

"Blackboard's 'Next Generation' Software Gets Mixed Reviews," by Sophia Li, Chronicle of Higher Education, June 4, 2010 ---
http://chronicle.com/blogPost/Blackboards-Next-Generation/24539/?sid=wc&utm_source=wc&utm_medium=en

Bob Jensen's threads on Blackboard ---
http://www.trinity.edu/rjensen/Blackboard.htm

Bob Jensen's threads on the history of course management systems ---
http://www.trinity.edu/rjensen/290wp/290wp.htm

"Volcker and Derivatives: The end game for financial reform," The Wall Street Journal, June 24, 2010 ---
http://online.wsj.com/article/SB10001424052748704853404575323032606552688.html

Financial reform in the hands of a Democratic Congress is looking eerily similar to health-care reform: Public skepticism is proving to be no brake on the liberal ambitions, and substance is increasingly divorced from the problems Washington claims to be solving.

The bill emerging from House-Senate conference seems less concerned with preventing future bank bailouts than with preventing future bank profits. And if some Main Street companies suffer collateral damage in the drive to reduce Wall Street's over-the-counter derivatives trading, Democrats appear to view them as acceptable casualties.

As early as today, House and Senate negotiators may agree on a Volcker Rule, limiting the risks big banks can take in trading for their own account, as well as a separate set of rules regulating the derivatives trades banks can do on behalf of clients. America doesn't need both.

A Volcker Rule won't be easy to implement but it makes policy sense: limit the opportunities for banks to speculate with federally insured deposits. Combined with high capital standards, this won't lead to perfect outcomes—we're talking about regulation, after all—but it would once again draw a risk-taking line that was crossed too often in 2008.

The other new rules, however, could harm taxpayers and commercial customers more than banks. For taxpayers, the danger comes from Senate plans to force much of the derivatives market through too-big-to-fail clearinghouses. Lead Senate negotiator Chris Dodd has backed a plan to explicitly give these clearinghouses taxpayer assistance in the event they face a liquidity crisis.

The other dangerous idea is to force commercial companies to post additional margin even if they do not speculate but are simply using derivatives to hedge legitimate risks. A recent Business Roundtable survey finds that 90% of large corporations use derivatives and that the average firm would have to tie up 15% of the cash on its balance sheet if subjected to the new margin requirements.

To take one example, Caterpillar might pay a bank to assume the risk of currency fluctuations in foreign markets so that it can focus on making bulldozers. It's possible that, depending on the movements of the dollar against foreign currencies, such a contract will ultimately require Caterpillar to pay more to the bank. Forcing banks to demand more cash up front from such companies is like saying regulators should approve every loan a bank makes, and review every single decision to extend credit.

The theory that derivatives caused the financial crisis also continues to take a beating, most recently from regulation cheerleader Elizabeth Warren. The Troubled Asset Relief Program's Congressional overseer recently put out a report on the government's 2008 seizure of AIG. While the report has its flaws, Ms. Warren explodes the myth that the entire problem at AIG was caused by its credit-default-swap contracts. She explains that it was the housing bets, many of which were made without using CDS, that brought AIG to the brink of collapse.

The message to Congress is to take Volcker but pass on punishing derivatives. Which means we'll probably get the opposite.

Jensen Comment
I personally don't agree with the above editorial position of regulation of derivatives. I think derivatives markets should be regulated along the lines recommended by my hero Frank Partnoy ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

GLOBAL DERIVATIVE DEBACLES: From Theory to Malpractice --- 
http://www.worldscibooks.com/economics/7141.html 
by Laurent L Jacque (Tufts University, USA & HEC School of Management, France) 
World Scientific Books, ISBN: 978-981-283-770-7, 628pp 
978-981-281-853-9: US$54 / £36   US$40.50 / £27 
Table of Contents (44k) --- http://www.worldscibooks.com/etextbook/7141/7141_toc.pdf 
Preface (27k)--- http://www.worldscibooks.com/etextbook/7141/7141_preface.pdf  
Chapter 1: Derivatives and the Wealth of Nations (133k) --- 
http://www.worldscibooks.com/etextbook/7141/7141_preface.pdf

Contents:

Derivatives and the Wealth of Nations --- http://www.worldscibooks.com/etextbook/7141/7141_preface.pdf

Forwards:

Showa Shell Sekiyu K K

Citibank's Forex Losses

Bank Negara Malaysia

Futures:

Amaranth Advisors LLC

Metallgesellschaft

Sumitomo

Options:

Allied Lyons

Allied Irish Banks

Barings

Société Générale

Swaps:

Procter and Gamble

Gibson Greeting Cards

Orange County

Long-Term Capital Management

AIG

From Theory to Malpractice: Lessons Learned

Jensen Comment
This book is weak on derivatives accounting but stronger on economics, finance, and law.
Chapter 1 has a short summary of ancient history.

Bob Jensen's threads and timeline on the history of derivatives instruments scandals and frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

One of my heroes in life is Frank Partnoy
I quote him scores of times at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

"Living Like It's 1931: Law professor Frank Partnoy questions whether the regulatory reform bill under debate in Congress will be enough to move the economy toward prosperity," by Sarah Johnson, CFO.com, June 17, 2010 ---
http://www.cfo.com/article.cfm/14505447/c_14505581?f=home_todayinfinance

The calendar says 2010, but Frank Partnoy believes that in certain respects, we're living like it's 1931. That was a transitional year between the 1929 stock market crash and the passing of two transformative securities laws, in 1933 and 1934, that established a regulatory body for public companies, mandated widespread financial reporting, and created antifraud remedies.

Seven decades later, optimists would like to believe that the regulatory reform bill in Congress will mark the beginning of better days for the U.S. economy. But Partnoy, a University of San Diego law and finance professor and longtime follower of regulatory reforms, thinks 2010 will likewise be considered a transitional time. "We're still in the middle of the ball game in terms of regulatory response," he told CFO in a recent interview.

In Partnoy's view, the regulatory response to the financial crisis thus far has been "muddled." Congress is plodding through more than 1,500 pages of reforms that will affect various areas of the U.S. financial system. The reforms include a new government authority to prevent financial institutions from becoming too big to fail, a consumer protection agency, regulations for the derivatives market, and even some measures that could be deemed antiregulation (such as a provision that would exempt the smallest U.S. publicly traded companies from getting an audit opinion on their internal controls).

The bill is expected to be finalized at the end of this month. Around the same time, Partnoy will speak about the new regulatory reforms and their resemblance to past reforms at the upcoming CFO Core Concerns Conference, to be held June 27-29 in Baltimore. An edited version of CFO's recent interview with Partnoy follows.

How can we assess whether the new legislation will be successful? The only way we'll know is to wait and hope. If we could go back in time a few years with these proposed rules, would the crisis have been prevented? The answer is no. Congress is considering more than 1,500 pages of reform, but most of that is not directed at problems that would have prevented the crisis.

What piece of the legislation do you most hope will survive the process? The most crucial part is the removal of regulatory references to credit ratings. I have my fingers crossed that it will pass. Participants in the financial markets need to stop relying on Moody's and S&P.

Why isn't a similar proposal by the Securities and Exchange Commission to end the practice good enough? The SEC doesn't have the power to change a statute; Congress does. And many of these references extend beyond the securities area, outside the purview of the SEC. In addition, it's important for Congress to fire a shot across the bow of all regulators to let them know that it's not appropriate to rely on ratings. It's the kind of reform that needs to come from the top, and that means Congress.

In a joint paper with former SEC chief accountant Lynn Turner, you called on Congress to "clarify that financial statements have primacy over footnotes, not the other way around." Why do you think our financial-reporting system has evolved to become, in your view, not as transparent as it should be? It's been a slow evolution that has been driven by lobbying, in particular by major financial institutions. This started in the 1980s, when accounting standard-setters were trying to figure out whether swaps should be accounted for on the balance sheet. Once that argument was lost — once we went down the road of saying that swaps were different — it was a very slippery slope. There's a focused group of market participants who benefit from off-balance-sheet treatment but only a few who represent investor interests. Analysts are in an interesting position because on the one hand, they would be able to do a better job if they had more information about exposures and liabilities. But if everything is off-balance-sheet, they have a comparative advantage in finding out what's buried on page 246 of Form 10-K.

Do you see any signs that this issue will be addressed in the legislation? Congress, Wall Street, and large institutional investors all seem to have united against putting these financial instruments on the balance sheet. It seems unlikely that there will be any kind of substantive change.

What's your view on proposed reforms for derivatives? What I regard as the most important reform has met with mixed reactions. That would be simply for banks to more accurately report their exposure to derivatives and give better information about worst-case scenarios. Those initiatives have taken a back seat to the push for requiring that derivatives be traded on exchanges, and then for trying to move derivatives outside of the banking sector. Keep in mind, the transactions that generated the crisis were not transactions that would ever find a home on an exchange. They're private, custom-tailored deals that fall outside of the legislation. Paradoxically, we might end up with a law that will hurt useful markets in plain-vanilla derivatives, yet will not resolve problems.

Another one of my heroes is former Coopers partner and SEC Chief Accountant Lynn Turner. My two heroes, Turner and Partnoy, write about how bank financial statements should be classified under "Fiction."

Frank Partnoy and Lynn Turner contend that 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 great video!

Great Speeches About the State of Accountancy
"20th Century Myths," by Lynn Turner when he was still Chief Accountant at the SEC in 1999 --- http://www.sec.gov/news/speech/speecharchive/1999/spch323.htm

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

Bob Jensen's timeline of derivative financial instruments frauds can be found at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Oil and Water Must Read: Economists versus Criminologists
:"Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy," by "James K. Galbraith, Big Picture, June 2, 2010 ---
http://www.ritholtz.com/blog/2010/06/james-k-galbraith-why-the-experts-failed-to-see-how-financial-fraud-collapsed-the-economy/

The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original PDF text is here.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud.

There are exceptions. A famous 1993 article entitled “Looting: Bankruptcy for Profit,” by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.” The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a “license to steal.” In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found “fraud, abuse or missing documentation in virtually every file.” An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.

When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.

A third element in the toxic brew was a simulacrum of “insurance,” provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.

Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

Thank you.

~~~

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, and of a new preface to The Great Crash, 1929, by John Kenneth Galbraith. He teaches at The University of Texas at Austin

June 9, 2010 reply from Thompson, Shari [shari.thompson@PVPL.COM]

Bob, that is an awesome article! I can only hope that the system listens!

Bob Jensen's threads on the subprime sleaze is at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

History of Fraud in America --- http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Lecture Notes for a Forensic Accounting Course

June 2, 2010 message from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Two years ago I taught a Forensic Investigations course. I had prepared extensive lecturenotes, etc.

All materials are available at the following addresses:

Course outline:
http://www.albany.edu/acc/courses/acc551fall2008/acc551fall2008.pdf

Lecture notes:
http://www.albany.edu/acc/courses/acc551fall2008/acc551fall2008lecturenotes.pdf

I also gave group assignments, etc. that I can send if there is a need.

Jagdish

I filed this under "Things That Wrankle Tax Professor Amy Dunbar at the University of Connecticut"
"Supreme Court Declines to Hear Textron Work Product Privilege Case," Journal of Accountancy, June 2006 ---
http://www.journalofaccountancy.com/Web/20102952.htm

June 1, 2010 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

Here’s my two cents worth on Textron. The Supreme Court’s denial of cert implies that the IRS and perhaps other claimants do not have to worry about work product privilege with respect to workpapers created in the ordinary course of doing business. I find that case troubling because it may mean that any reserve workpapers could now be open to litigants in general. I don’t have any trouble with IRS having access to the workpapers because I am not convinced that the tax assessment process should be considered an adversarial process, which is what the work product privilege was meant to protect. However, “FAS 5” contingencies, now fondly known as ASC Topic 450 contingencies, are typically adversarial, and should be protected under work product privilege. If anyone can tell me why my concern is misplace I would love to hear your reasoning.

The court noted: “ In some instances the spreadsheet entries estimated the probability of IRS success at 100 percent.” A 100% reserve???? How common is this? I think the IRS should find out. The proposed Form 1120 Schedule UTB won’t help with this because the actual reserves do not have to be disclosed, only the maximum liability associated with the tax position.

I love the following quote:

“Textron apparently thinks it is "unfair" for the government to have access to its spreadsheets, but tax collection is not a game. Underpaying taxes threatens the essential public interest in revenue collection. If a blueprint to Textron's possible improper deductions can be found in Textron's files, it is properly available to the government unless privileged. Virtually all discovery against a party aims at securing information that may assist an opponent in uncovering the truth. Unprivileged IRS information is equally subject to discovery.”

Obviously the tax division of the auditing firm didn’t recommend these transactions because PCAOB Rule 3522 requires recommended tax products to have a more likely than not probability of success.

“A registered public accounting firm is not independent of its audit client if the firm, or any affiliate of the firm, during the audit and professional engagement period, provides any non-audit service to the audit client related to marketing, planning, or opining in favor of the tax treatment of, …

a transaction that was initially recommended, directly or indirectly, by the registered public accounting firm and a significant purpose of which is tax avoidance, unless the proposed tax treatment is at least more likely than not to be allowable under applicable tax laws.”

I doubt the tax division signed the return either in view of preparer penalties, but I think that the very large corporations typically file their own returns, so preparer penalties are not a deterrent, but I may be wrong about my assumption.

A 100% reserve for a position will exist any time a position doesn’t meet the more-likely-than not test under FIN 48, but Textron was pre-FIN 48.

Amy Dunbar
UConn

June 1, 2010 reply from Francine McKenna [retheauditors@GMAIL.COM]

Here's what I've written about Textron.
http://retheauditors.com/2009/01/28/round-and-round-she-goes-where-she-stops-nobody-knows/

"...In other news on Thursday, Ernst and Young was also watching, I’m sure, while one of the defendants in their very own tax shelter case plead guilty. Although the four former EY partners charged have not yet been tried, a guilty plea by a former investment advisor who helped market the tax shelters is certainly a damaging development.

And in a win of sorts for now for EY, their client Textron won a ruling that allows them to withhold their tax accrual workpapers from the IRS. The ruling is important because it speaks to the protection of attorney-client privilege when the work product in question has been shown to a company’s external auditors. From the blog, ataxingmatter, a short explanation of why the court’s decision was wrong:

“During an audit of the company covering its 1998-2001 tax years, the IRS requested Textron’s tax accrual workpapers, but the company refused to provide them, claiming that they are protected by various privileges, including the work-product privilege, even though they were at the least “dual purpose documents”. The First Circuit upheld the privilege, and even concluded that the company had not waived the protection by showing the internal workpapers to its outside auditor, Ernst & Young, calling the auditor-client relationship a “cooperative not adversarial relationship” that was unlikely to lead to litigation.

Even so, the court acknowledged that E&Y’s own workpapers, which likely incorporate and even reveal Textron’s analyses, may be discoverable on remand, under the Arthur Young Supreme Court opinion. The court’s determination that the company’s internal tax accrual workpapers may not be summonsed is manifestly inconsistent with the court’s conclusion that the outside auditor’s workpapers incorporating the same analysis may be.”

Auditors, in the course of performing their audit, require free and open access to documents and to executives in order to do a complete, thorough, and professional job. We have seen similar issues raised when discussing changes and additional disclosures under FAS 5. Auditors understand the delicate balance and, although fully understanding of their responsibilities to push for full disclosure, are not willing to push when they believe more disclosure is contrary to their client’s (read corporate executives’) best interest even if additional disclosure may be in the best interest of investors and shareholders.

So, a ruling here that allows attorney-client privilege for their clients while still allowing the auditors to have access to the information is good for the auditors. Their clients can not use the excuse of losing this protection to keep important information from them.

So, here’s the conundrum:

1) Audit workpapers are not protected.

2) Clients will remain skittish about sharing information with auditors that they want to remain protected under work-product doctrine or the broader attorney-client privilege.

3)Auditors themselves are not comfortable with broader, more detailed legal contingency disclosures, for example, and have said so with regard to expanded disclosure under FAS 5.

Result:

Auditors will see less and less of what is relevant to audit “in accordance with applicable auditing standards and supported by appropriate audit evidence.”

Regards,
Francine

Bob Jensen's threads on Ernst & Young litigation are at
http://www.trinity.edu/rjensen/Fraud001.htm

Question
Has Francine gone a "bridge too far?"
As I write this, Kenny Rogers is singing "You've got to know when to hold 'em and when to fold 'em"
http://www.youtube.com/watch?v=D8o6Os0xQf8

"Bigger, Stronger, Faster: The PCAOB After The Supreme Court Ruling," by Francine McKenna, re: TheAuditors, June 9, 2010 ---
http://retheauditors.com/2010/06/09/bigger-stronger-faster-the-pcaob-after-the-supreme-court-ruling/

Jensen Comment
Although I love the intensity and investigative effort that Francine pours into her blog, she does have a tendency to make conjectures that are unsupported hypotheses that she considers "truth." These hardly satisfy this old academic.

Example of an unsupported conjecture in the above blog post:

This is not the way to treat a regulator. Although the inspection process is intense, time consuming and very expensive for the audit firms to comply with, they are clearly paying it only lip service. They view it as a necessary evil rather than a constructive or a deterrent force. This must change if the PCAOB is ever going to be an effective tool for protecting the investor public

She has not convinced me that the inspections are failures to a degree that she repeatedly alleges in her posts. We need much more intensive research into how the audit firms are reacting to the inspection process before inspections take place and after inspection reports are released to the public ---
http://pcaobus.org/Inspections/Pages/default.aspx

From: Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]
Sent: Tuesday, March 23, 2010 9:21 AM
To: Jensen, Robert
Subject: FW: Deloitte

Bob,

I was the “Professional Practice Director”, that’s the audit quality control guy, for Deloitte’s Chicago office for the six years prior to my retirement in May 2007. I got to experience first-hand everything from the absorption of AA’s people in Chicago to the advent of the PCAOB and its annual inspection process the first few years. I don’t think most folks have any appreciation for the very real impact the PCAOB has had on the profession. The quality of documentation, the increased amount of partner involvement, the added quality control processes, the expansion of detail testing – the PCAOB has had a huge impact. Most folks also don’t have an appreciation for the impact of 404 not only on the audit process but on corporate cultures as well. As you pointed out a few messages ago, we do see all the failings in the press, but what we don’t see is all the positives and all the improvements.

Hope your wife is doing OK.

Jim

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

"Bigger, Stronger, Faster: The PCAOB After The Supreme Court Ruling." by Francine McKenna, re:TheAuditors, June 29. 2010 ---
http://retheauditors.com/2010/06/26/bigger-stronger-faster-the-pcaob-after-the-supreme-court-ruling/

. . .

It’s been apparent to me that the audit firms don’t take the inspection results seriously, and don’t significantly change their processes as a result. In some cases they publicly embarrassed the PCAOB by openly disagreeing with them.

This is not the way to treat a regulator. Although the inspection process is intense, time consuming and very expensive for the audit firms to comply with, they are clearly paying it only lip service. They view it as a necessary evil rather than a constructive or a deterrent force. This must change if the PCAOB is ever going to be an effective tool for protecting the investor public.

Continued in articl

Once again Francine makes a weak case with anecdotal evidence that CPA auditors do not take the PCAOB inspections seriously. This is counter to what researchers and CPA firm executives claim to be more serious auditing efforts because of the entire Sarbanes legislation.

For a counter argument that Sarbanes and the PCAOB were not so irrelevant see Professor Mark Nelson's counter conclusions drawn from an FEI study--- .

Here are some research studies you may have overlooked. I have not studied all of them in detail, but it appears they have differing degrees of relevance on your negative opinions about the PCAOB and SOX. Some are supportive of your audit firm “lip service only” conjecture, while others contradict your conjecture. There are also differing conclusions regarding the need for small firm relief from Section 404.

Here’s a nice review and analysis of an FEI Study (of clients expected to hate SOX)
Mark Nelson has a nice summary of why SOX happened and how it is impacting corporations --- Click Here
http://citebm.business.illinois.edu/TWC%20Class/Project_reports_Fall2008/Sarbanes-Oxley/Mark%20Nelson/Mark%20Nelson%20BADM%20458%20Final%20Paperx.pdf

SEC Research Study (More varied set of respondents)
http://www.sec.gov/news/studies/2009/sox-404_study.pdf

This report also presents the general findings of in-depth phone interviews of external users and auditors of financial statements, conducted by the Office of the Chief Accountant. The results of the interviews were generally consistent with the findings of the Web survey, although these parties were less knowledgeable about the costs of complying with Section 404. External users tended to put a heavy premium on having high quality financial statements that are in compliance with generally accepted accounting principles, and these users felt that companies need effective ICFR to ensure this is the case.

In sum, the evidence from the survey response data shows that the cost of Section 404 compliance decreased following the Commission’s reforms introduced in 2007 and is expected to decrease further based on respondents’ estimates for the fiscal year in progress at the time of the survey. Moreover, the survey participants perceive the reforms to have been a significant catalyst for these changes. This evidence may prove useful in understanding the effects of the 2007 reforms as well as guiding any subsequent regulatory efforts.

Internal Controls After Sarbanes-Oxley: Revisiting Corporate Law's Duty of Care as Responsibility for Systems
http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=1130&context=facpub

Sarbanes-Oxley section 404 compliance: Recent changes in US-traded foreign firms' internal control reporting
Click Here
http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=45A42C9C311A9743DCD3645988CF123E?contentType=Article&hdAction=lnkpdf&contentId=1795163

The Case Against Exempting Smaller Reporting Companies from Sarbanes-Oxley Section 404: Why Market-Based Solutions are Likely to Harm Ordinary Investors
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421844

Also see
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983772

http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=paul_arnold

More on the Costs and Benefits of Section 404 of Sarbanes-Oxley
http://reneejones.wordpress.com/2007/07/02/more-on-the-costs-and-benefits-of-section-404-of-sarbanes-oxley/
Also see
http://cardozolawreview.com/PastIssues/29.2_prentice.pdf

Also see http://www.nysscpa.org/cpajournal/2008/808/perspectives/p13.htm

http://www.cluteinstitute-onlinejournals.com/PDFs/1228.pdf

Sarbanes-Oxley 404 material weaknesses and discretionary accruals
Click Here
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B7GWN-4VB55BW-1&_user=10&_coverDate=06%2F30%2F2010&_rdoc=1&_fmt=high&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1366747316&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=7d0a63a66e7ec311aff0d298f1f3cde5

Ed Swanson
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=547922

Has SOX Made New York Less Competitive in Global Markets?
http://blogs.law.harvard.edu/corpgov/2007/07/18/has-sox-made-new-york-less-competitive-in-global-markets/

A Canadian Perspective
http://www.luc.edu/law/activities/publications/lljdocs/vol39_no3/ben_ishai.pdf

This is just a sampling.
There are many more such impact research studies.

June 12, 2010 reply from Francine McKenna

Dear Bob,

Thanks so much. There are many, many studies on the costs and benefits of SOx but I take those with a grain of salt. I do not believe that fundamental internal controls over financial reporting are a "cost-benefit" kind of decision. Identifying your controls over financial reporting (and making sure they are designed effectively), documenting them in policies and procedures for your staff to follow and testing their operating effectiveness are the minimum for running a good accounting department. SOx did not mandate anything other than what companies should have been doing all along.

I have written about all of the various studies by Treasury and SEC CIFR on "simplifying financial reporting". Look where they got us.
http://retheauditors.com/2008/06/06/day-1-the-rest-of-the-gang-robert-pozen/

You'd be surprised by how often I cite academic studies. In fact, here's an interesting one I found on the way to something else that you may like.
http://www.antitrustinstitute.org/archives/files/AAI%20Working%20Paper%20No.%2008-03_091820081520.pdf

The American Antitrust Institute

AAI Working Paper No. 08-03

ABSTRACT

Title: THE AUDIT INDUSTRY: WORLD’S WEAKEST OLIGOPOLY?

Author: Bernard Ascher, Research Fellow, American Antitrust Institute

When I encourage more studies, I mean the kind you lament all the time are not done often enough because of the focus on accountics - non-accountics studies about strategy, business model and inner workings of the audit firms and the impact of regulation and the external economic environment on the firms. I see those are done by a group of professors at Harvard Business School that focus on professional services. They develop case studies for teaching that are very helpful to me even if I do not always agree with their conclusions.

I attended this program in 2003 while I was a Regional Vice President at Jefferson Wells/Manpower. I wish I could go every year.
http://www.exed.hbs.edu/programs/lpsf/

Francine

June 12 reply from Bob Jensen

Hi Francine,

Below your wrote: “If I hear positive stories (about the Big Four) I expect them to show up somewhere else.”

Although I also greatly admire and quote Prim Sikka’s writings, I think both you and he have similar expectations.

I guess that’s another version of cherry picking what testimonials you write up, which I guess is all right as long as you’ve owned up to cherry picking the negatives. And you’ve just owned up to this in your remarks below.

But thank you Francine for what you do with great skill. You and Prim brought a beacons of light into the academic world even if they only shine in one direction.

What’s interesting to me, however, is where admittedly biased analysts occasionally gain credibility by taking opposite sides now and then. I sometimes, certainly not always, find this in academia when researchers fairly present both sides on a contentious issue. It also happens when honest researchers report research outcomes inconsistent with their hopes and anticipations. I continually strive for such academic balance myself which is why I obviously frustrate my good friends Paul Williams, Amy Dunbar, Denny Beresford, and Francine McKenna now and then.

In the media world, this is one of the reasons I like the extremely biased Jon Stewart on Comedy Central. On occasion Jon pleases me when he does something totally out of character like ridicule MSNBC’s Keith Olbermann. Conversely you would never see Keith Olbermann invite David Walker to his show even though no one strives harder than David Walker to be bipartisan. Keith only invites his choir members as guests on Countdown as if he’s afraid of dealing head on in an argument. “Truth tellers” like Keith only like to hear their own versions of truth.

http://www.youtube.com/watch?v=0ZylQXm-vis

Saturday Night Live did a balancing act when it belittled President Obama for zero important accomplishments and portrayed Sarah Palin as a simpleton who can analyze Russia’s foreign policy by looking out from her front porch.

http://www.youtube.com/watch?v=D_Jf9s23uF0

http://www.youtube.com/watch?v=eXVIwo5fLYs

Thank you Francine for what you do with great skill. You and Prim brought a beacons of light into the academic world even if they only shine in one direction.

One point upon which we greatly differ, however, is that the main problem with CPA auditing is that it’s in the private sector. Professionalism in government agencies just has too many contradictions to give me a warm and fuzzy feeling that government can do a better job auditing the Fortune 500. Government auditors just don’t cut it any better as a rule than private sector CPA firms in compliance auditing of any type. The big difference, however, is that you can’t sue the government for incompetence and fraud unless it grants permission to be sued. Also hell almost freezes over before a government bureaucrat can be fired even with adverse media attention. This is often not so when there’s adverse media attention in the private sector.

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Francine McKenna re: The Auditors Blog
Sent: Friday, June 11, 2010 11:54 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Has Francine gone a "bridge too far?"

Half of my contacts are still working for the firms. Is that an endorsement of glass half full or a capitulation? My site is a critical look at the firms. If I hear positive stories I expect them to show up somewhere else. Like on the firms' own web sites. I am not the place to look for them. That focus and that bias is clearly and repeatedly disclosed.

From: "Jensen, Robert" <rjensen@TRINITY.EDU>
Date: Fri, 11 Jun 2010 10:49:04 -0500
To: <AECM@LISTSERV.LOYOLA.EDU>
Subject: Re: Has Francine gone a "bridge too far?"

But do your contacts ever say anything good about the professionalism of their employers?

It seems like you only report the negatives.

My own contacts seem much more upbeat about the Big Four.
Guess we have a different set of contacts.

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Francine McKenna re: The Auditors Blog
Sent: Friday, June 11, 2010 10:28 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Has Francine gone a "bridge too far?"

Bob, you misunderstand me. I am very pro-SOx for all the reasons you mention and all the ones I have. I am critical of the Big 4 audit firm model and how leadership must focus on profit to the detriment of the investor.

I do not depend on a "few disgruntled partners." My sample size is quite large including many who hold or have held leadership roles.

From: "Jensen, Robert" <rjensen@TRINITY.EDU>
Date: Fri, 11 Jun 2010 09:03:18 -0500
To: <AECM@LISTSERV.LOYOLA.EDU>
Subject: Re: Has Francine gone a "bridge too far?"

I especially recommend Mark Nelson’s paper and his conclusion (Mark is actually one of our leading accountics researchers).

Click Here
http://citebm.business.illinois.edu/TWC%20Class/Project_reports_Fall2008/Sarbanes-Oxley/Mark%20Nelson/Mark%20Nelson%20BADM%20458%20Final%20Paperx.pdf

If companies, as you state, “did what they needed to be doing all along” then we would never have had all those enormous pre-SOX scandals that threatened the very survival of equity markets in the United States (as aptly pointed out by Mark).

Especially note Mark’s conclusion that SOX worked pretty much as intended --- much to the amazement of many audit clients going into SOX compliance with enormous skepticism. The SEC study seems to confirm that SOX and the PCAOB are really preventing much, certainly not all, the fraud that arose like the mushroom cloud prior to the desparation SOX legislation.

The WSJ editors are consistently, like you, enormous skeptics of SOX and Big Four auditing firms in general, but then WSJ editors, unlike you, will defend some big-time felons to the end (e.g., Mike Milken and the big time options back dating executives).

I think Abe Brilloff for many years repeatedly, at an enormous personal cost, demonstrated how relying upon the assumed professionalism and ethics among “professionals” just is not enough to protect society from the greed of professionals that seems to germinate from unfettered opportunity.

I sometimes think that you overly rely upon interviews with a few disgruntled insiders in the Big Four. A random sampling might point sometimes to different conclusions about how insiders in general feel about the Big Four and professionalism that is strived for in audits and Section 404 investigations.

By the way, are systems engineers and IT auditors really so distinct professionally? I assumed that an IT auditor had to have a great deal of systems engineering skills.

Bob Jensen

"The Big 4 Audit Report: Should the Public Perceive It as a Label of Quality?" by Ross D. Fuerman,," Accounting and the Public Interest 9 (1), 148 (2009) ---
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=APIXXX000009000001000148000001&idtype=cvips&gifs=Yes&ref=no

ABSTRACT:
There has been little research comparing the relative performance of the Big 4 CPA firms. Users of audited financial statements often practically have no other CPA firms to choose from for auditing services in the large public company auditing services market and thus desire more of this information. In 1,017 financial reporting lawsuits against Big 5 auditees filed from 1999 through 2004, the auditor litigation outcomes are used to proxy for the likelihood of audit failure and thus for audit quality. Control variables significant in prior empirical work were used in polytomous regression and in logistic regression. Ernst & Young has comparatively better auditor litigation outcomes, which proxy for a lower likelihood of audit failure and a stronger level of audit quality. The Ernst & Young results are robust; they are insensitive to the use of ten different model specifications. There is also evidence suggesting that PricewaterhouseCoopers may be a comparatively high quality auditor, but these latter results are sensitive to the model specification. Clearly, the null hypothesis of consistency in audit quality among the Big 4 CPA firms is rejected. ©2009 American Accounting Association

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

Bob Jensen's threads on auditing firm litigation ---
http://www.trinity.edu/rjensen/Fraud001.htm

"What Will Audit Firms Do On Their PCAOB Annual Reports?" Big Four Blog, June 18, 2010 ---
http://www.bigfouralumni.blogspot.com/

Jensen Question
Is there a reason the wording is “do on” instead of “put on?”

Bob Jensen's threads on auditing professionalism ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

"Today in Auditor Musical Chairs: KPMG and Deloitte Both Get the Boot (from troublesome clients)," Caleb Newquist, Going Concern, June 29, 2010 --- http://goingconcern.com/2010/06/today-in-auditor-musical-chairs-kpmg-and-deloitte-both-get-the-boot/

Jensen Comment
Note in particular that KPMG was concerned about poor internal controls.

Cloud Computing --- http://en.wikipedia.org/wiki/Cloud_computing

"How Cloud Computing Can Transform Business," by Bernard Golden, Harvard Business Review Blog, June 4, 2010 ---
http://blogs.hbr.org/cs/2010/06/business_agility_how_cloud_com.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

You're in a meeting. You and your team identify a great new business opportunity. If you can launch in 60 days, a rich new market segment will be open for your product or service. The action plan is developed. Everything's a go.
And then you come down to earth. You need new computer equipment, which takes weeks, or months, to install. You also need new software, which adds more weeks or months. There's no way to meet the timeframe required by the market opening. You are stymied by your organization's lack of IT agility.

Or, you could have the experience the New York Times had when it needed to convert a large number of digital files to a format suitable to serve up over the web. After the inevitable "it will take a lot of time and money to do this project," one of their engineers went to the Amazon Web Services cloud, created 20 compute instances (essentially, virtual servers), uploaded the files, and converted them all over the course of one weekend.

Total cost? $240.
This example provides a sense of why cloud computing is transforming the face of IT, with the potential to deliver real business value. The rapid availability of compute resources in a cloud computing environment enables business agility — the dexterity for businesses to quickly respond to changing business conditions with IT-enabled offerings.

Notwithstanding the fact that IT seems to always have the latest, greatest thing on its mind, cloud computing has the entire IT industry excited, with companies such as IBM, Microsoft, Amazon, Google and others investing billions of dollars in this new form of computing. And in terms of IT users, Gartner recently named cloud computing as the second most important technology focus area for 2010.

But what is cloud computing exactly? Why is it different than what went before? And why should you care? While there are many definitions of cloud computing, I look to the definition of cloud computing from the National Institute of Standards and Testing (NIST), part of the US Department of Commerce. In its cloud computing definition, NIST identifies five characteristics of cloud computing, which include:

on-demand self service, which allows business units to get the computing resources they need without having to go through IT for equipment .

broad network access, which enables applications to be built in ways that align with how businesses operate today - mobile, multi-device, etc.

resource pooling, which allows for pooling of computing resources are to serve multiple consumers

rapid elasticity, which allow for quick scalability or downsizing of resources depending on demand

and measured service, which means that business units only pay for the compute resources they use. Translation: IT costs match business success.

To offer a concrete example of how cloud computing agility enables organizations to respond to business opportunity, let me share the experience of one of our clients, the Silicon Valley Education Foundation. Its Lessonopoly application allows 13,000 teachers throughout Silicon Valley to collaborate on lesson plans. NBC approached SVEF just before this year's Winter Olympics with science-focused lesson plans centered around the science behind the experience of Olympic athletes (e.g., the loads placed on a skier's legs as she swerves around a slalom gate).
One concern SVEF had was whether or not Lessonopoly could handle the likely application load increase. There were only a few days before the start of the Olympics, which would initiate heavy use of these lesson plans. The group had migrated the application to Amazon Web Services a few months earlier, and they were able to quickly shut down the small machine Lessonopoly was running on and bring it back up on a larger instance with three times the computing capacity of the original.

It's a cliché to say that business is changing at an ever-increasing pace, but one of the facts about clichés is they often contain truth. The deliberate pace of traditional IT is just not suited for today's hectic business environment. Cloud computing's agility is a much better match for constantly mutating business conditions. To evaluate whether your business opportunities could be well-served by leveraging the agility of cloud computing, download the HyperStratus Cloud Computing Agility Checklist, which outlines ten conditions that indicate a business case for taking advantage of the agility of cloud computing.

Bernard Golden is CEO of HyperStratus, a Silicon Valley-based cloud computing consultancy that works with clients in the US and throughout the world. Contact him at bernard.golden@hyperstratus.com

Winner: "Heads in the Cloud" from Anseo.net
This post shows how one school uses cloud computing through Google Apps as a communication tool for the staff and board of management.

Bob Jensen's threads on Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

Ten Highest and Ten Lowest States in Terms of Taxpayer Liability
A Lot of Taxpayers in the South Pay Zero Taxes (Non-Payers) Due to Credits, Deductions, and Poverty

Source: Scott A. Hodge, Tax Foundation, May 24, 2010 ---
http://www.taxfoundation.org/publications/show/26336.html
According to the latest IRS figures for 2008, a record 52 million filers—36 percent of the 143 million who filed a
tax return—had no tax liability because their credits and deductions reduced their liability to zero.
Indeed, tax credits such as the child tax credit and earned income tax credit have become so generous
that a family of four earning up to about $52,000 can expect to have their income tax liability erased entirely.

Jerry Trites pointed me to this interesting paper from Accenture on ERP
"A Smart Start to Strong Enterprise Resource Planning Requests for Proposals"

Summary --- Click Here
http://www.accenture.com/Global/Services/By_Industry/Government_and_Public_Service/PS_Global/R_and_I/Smart-Proposals.htm

Full Paper --- Click Here
http://www.accenture.com/NR/rdonlyres/839885D0-A344-4139-A26E-0393B463095B/0/ACC_SmartStartWP.pdf

Bob Jensen's sadly neglected threads on ERP ---
http://www.trinity.edu/rjensen/245glosap.htm

Citing a Study at the University of Washingon
"E-Book Readers Bomb on College Campuses," by Allison Damast, Business Week, June 10, 2010 ---
http://www.businessweek.com/bschools/content/jun2010/bs20100610_200335.htm?link_position=link1

June 17, 2010 reply from Les Livingstone [jlivingstone@UMUC.EDU]

Bob Jensen correctly points out that E-Book readers so far are a flop. But this does not mean that E-Books are a flop.

In our MBA accounting/economics/finance course all 3 of our required textbooks are E-Books - which do not use E-Book readers.

These 3 E-Books can be purchased in these formats: 1. Online versions with ads to read online: Free. 2. Online versions without ads to read online: Under $7 each. 3. Downloadable and printable pdf files: Under $10 each. 4. Hard copy paperbacks: Under $20 each for two and under $30 for the largest book. So their combined cost varies between a low of zero to a high of $70, and no E-Book readers are needed. Any computer will do. The range of $0 to $70 for 3 textbooks is great in these days of hardcover textbooks at prices of $100-$200 each.

Lest anyone thinks that these E-Books are of inferior quality, let me note that one is in its 5th edition, one is in its 2nd edition, and the third is presently being readied for its 2nd edition. Since most textbooks do not ever reach a 2nd edition, this is an indicator of good quality.

Student evaluations frequently express joy and happiness at the quality and low cost of these 3 textbooks.

Best wishes, Les Livingstone
http://leslivingstone.com/

June 17, 2010 reply from Bob Jensen

Thank you Les,

I hope you won’t mind if I post your reply in various documents on my Website.

Keep in mind that, because I drive a Subaru, does not mean that I prefer it to a Mercedes. Hard copy, in some ways, is priced like luxury cars relative to Subaru models. However, unlike automobiles, inexpensive e-Books have some advantages over the luxury (higher priced hard copy) versions, including such things as text search, free book replacement for lost readers, portability (think of trying to get 100 printed books into a backpack), etc.

Many of us luddites still board airplanes with paperback books in our carry-on luggage. And I was one of the early adopters with my Rocket eBook that I now cannot even find ---
http://www.trinity.edu/rjensen/ebooks.htm
I did find this technology useful on a couple of trips to China and long flights to other parts of the world. But it just did not stick with me. Perhaps when iPad eventually sells a version with a USB/firewire port I will change my mind.

Bob Jensen

Bob Jensen's threads on electronic book readers ---
http://www.trinity.edu/rjensen/ebooks.htm

"The Auditors And Financial Regulatory Reform: That Dog Don’t Hunt," by Francine McKenna, re: The Auditors, May 31, 2010 ---
http://retheauditors.com/2010/05/31/the-auditors-and-financial-regulatory-reform-that-dog-dont-hunt/

It’s not every day that a regular girl from Chicago has a chance to talk with a sitting US Senator about the subject most important to her.

No… I’m not talking about Rosie, my Rottweiler.

I’m talking about the auditors’ role in the financial crisis and their place in the regulatory reform bills now being considered. Through a series of wonderful and kind acts, namely the efforts of one particular journalist, I was invited to talk with Delaware Senator Ted Kaufman (D) and his staff about accounting industry reform.

The conversation was wide ranging and opinions expressed off-the-record. The meeting happened on the same day as Representative Barney Frank’s speech to the Compliance Week conference and we talked about his remarks. I expressed my disappointment with several things especially Rep. Frank’s capitulation on a Sarbanes-Oxley exception for smaller companies and his rambling response to the question about a Department of Justice implied “too few to fail” policy.

The Kaufman team is led with mucho gusto by the Senator. It was great to have a chance to meet them, but I realize it’s probably too late to get anything that addresses audit industry reform in this bill. There’s a lot of compromise going on with what’s already there.

Health care reform took some of the fight out of more than a few on both sides of the aisle and in both legislative bodies. Rep. Frank mentioned it a few times during his speech. He described advantages and disadvantages from a legislative perspective of the pure focus on financial regulatory reform now that health care is “a done deal.” It makes it both easier for media to spotlight an individual politician’s positions without the clutter of other major legislation and harder for that politician to hide behind multiple major initiatives when it comes to supporting or voting for controversial or dramatic change.

I came to the meeting with a few points to make. I think I did that but, as usual, a discussion of the issues facing the audit industry can get a little depressing, even for me.

However, this meeting, as well as the ones at the PCAOB, made me realize the time has come to make proposals and suggestions for industry change instead of just pointing out the issues, problems and need for change.

Most regulators and legislators avoid talking about wholesale change to the structure of the accounting/audit industry. It seems too big a task and untenable. The refrain I hear most often both when attending conferences and events and on this site is, “We can’t get rid of the audit opinion. It’s required.” I’ve also written about the strong and steady political contributions the accounting industry makes, party-agnostic, dictated primarily by the politician’s position and influence over the audit firms’ interests.

Lack of vision and loads of cash. These are the fundamental obstacles to serving investors and other stakeholders with financial reporting that can be trusted.

But it’s also true that Big Oil has spent years deluding itself and others into thinking that this kind of spill was impossible and that preparing for one wasn’t necessary. Indeed, BP once called a blowout disaster “inconceivable.” Certainly, if you can’t conceive of a disaster, you’ll become more and more lax, more and more reckless, until one happens. You’ll cut corners on backup systems and testing. And you certainly won’t pre-build and pre-position any relevant equipment for staunching the flow. Since a disaster can’t happen, you and your allies in Congress will block all serious safeguards and demagogue all efforts to oversee the industry as “Big Government interference in the marketplace that will raise the price of gasoline for average Americans.”

This quote comes from Salon and refers to the oil spill disaster. But it could have just as easily been said about the litigation threats against the largest global accounting firms and doubts about their viability and credibility post-financial crisis. If legislators and regulators can’t imagine a world without the audit firms and the audit report in their current form, then they can’t work towards something better for investors and the capitalist system.

The firms are broken and their basic product is worthless. The auditors were completely impotent to warn investors of over-leverage and risky business models, to prevent erroneous and potentially fraudulent financial reporting and to mitigate the impact on everyone of these errors, misstatements, obfuscations and subterfuge by executives of the failed, bailed out and nationalized financial institutions.

It wasn’t such an intellectual leap for media, regulators and legislators to see the inherent conflicts in the ratings agencies’ business model post-crisis and to essentially, with the stroke of a pen, destroy that business model.

New York Times, The Caucus Blog,
May 13, 2010: One amendment, sponsored by Senators George LeMieux, Republican of Florida and Maria Cantwell, Democrat of Washington, would remove references to the credit agencies in major financial services laws, including the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Federal Deposit Insurance Act. It was approved by a vote of 61 to 38.

Additional reform legislation sponsored by Senator Al Franken – I kid you not – puts the government in the middle between ratings agencies and the securities issuers. The ideas is to take the “pleaser” part out of how the credit raters make their living.

The Atlantic,
May 13, 2010: “The new legislation calls for every new ABS bond issue to have a rating by one agency assigned by a new board, instead of being chosen by the investment bank creating the security. The board will consist of mostly investors along with a few other industry participants. Although the underwriter can solicit additional ratings, it cannot escape the verdict of the assigned agency, so it cannot shop around for whichever agency has the most favorable view.”

Wouldn’t it be funny if the audit firms took advantage of the credit ratings agencies’ weakness and swooped in to do that business? After all, the auditors have the trust and integrity thing down pat. But there’s no way the audit firms would have the nerve to even float that idea post-EY/Lehman…

Nobody disagrees when I remind them that audit firms have the same inherent conflict of interest as ratings agencies. The audit firms have a business relationship with Audit Committees who are selected by the corporations’ executives. Audit partners are “pleasers.” The audit fees for the largest financial institutions are in the $100,000,000 annually range but it’s been a challenge to grow that business in the current economic environment. The Sarbanes-Oxley gravy train has pretty much derailed.

Is it such a stretch to think about taking the control over appointment and renewal of auditors away from the corporations – the corporate executives are the true corrupting influence on the poor, innocent auditors – and give it to the SEC or PCAOB? Corporations could be required to pay the auditor regardless of the audit opinion or how many exceptions are found or hard the auditor has to push back on aggressive accounting. All this can happen under the watchful eye of their regulator who can put the firms on a “good list” and can effect limited or general “debarment” type actions if an audit firm or audit partner rolls over and plays dead too often.

Continued in article

Bob Jensen's threads on the survival threats of large auditing firms ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Here's a question for our FIN 48 expert, Amy Dunbar
"FIN 48 - Did Anyone Consider Compliance Costs for the Average Client?" AccountingWeb, June 13. 2010 ---
http://www.accountingweb.com/blogs/ann-callari/tax-chick/fin-48-did-anyone-consider-compliance-costs-average-client

"What is the XBRL Cloud Report?" Rivet Blog, No Date ---
http://blog.rivetsoftware.com/2010/03/03/xbrl-cloud-report/

The Cloud Report is a validation tool created by a third party to assist with the XBRL filing process. In fact, some printers use this tool as their validation tool for their XBRL clients. Rivet currently uses its own proprietary tool to perform this function and does not rely on a third party for its validation. In addition, Rivet’s validation rules are based on official SEC guidelines, as are documented in the EDGAR manual. We work very closely with the SEC to ensure our interpretation of the SEC guidelines adhere to the EDGAR manual appropriately.
It is important to note that all filings submitted to the SEC pass EDGAR validations otherwise they would not have been accepted by the SEC. The Cloud is a third party’s interpretation of the SEC guidelines as are all the validation tools on the market. It is not an official validation tool of the SEC. When the Cloud was first created, there were concerns that the terminology used, specifically error, was interpreted as not being accepted by the SEC for filing. This was not the case. The Cloud’s term error includes both SEC Rule violations and SEC Warnings. For example, the Cloud lists Error LC3. This Cloud error is actually an SEC warning related to the fact that no numbers can be listed in the element name label. Yet the SEC Rule requires that the element name label exactly match the financial statement label including the numbers. The filer must meet the SEC Rule as they will not be able to submit through Edgar without following it. Yet because the filer is following the SEC Rule, they will get a SEC warning because the label includes numbers and therefore, an error LC3 in the Cloud.

The Cloud has always meant to be used as a collaborative tool to help vendors and filers interpret the SEC EDGAR Rules. If you have ever looked at these rules, you will agree that it is very difficult for a non-technical person to interpret. We have worked with the Cloud’s founder to offer guidance on how we interpret the rules and he has provided us with valuable feedback in our interpretation. This has led to conversations with the SEC and has helped everyone in interpreting the SEC Rules more accurately.

In summary,

The Cloud Report is not an SEC endorsed tool. It is a third party interpretation of the guidelines.

All filings run through the Cloud Report were successfully filed with the SEC. The Cloud errors do not mean SEC errors.

The Cloud Report was meant to be used as a validation tool, not to evaluate XBRL vendors.

The Cloud should not be used as a tool to rank XBRL vendors for several reasons:

First, all filers have passed the SEC Rules during the filing process otherwise they would not have been able to file. The errors listed on the Cloud Report are SEC warnings.

Second, XBRL vendors cannot necessarily control what the filer decides to do with regard to the SEC warnings. For example, if Rivet is providing our full service solution to a client, we change the terse element label to reflect the element name so that there is no SEC warning produced. If our client has taken the filing process in house, we cannot control if they make this change or not. Either way is accepted by the SEC, but without updating the terse element label, a warning is produced and on the Cloud, an error is produced. Since this has no bearing on their filing, they usually pass on performing this step.

Third, the Cloud was meant to be a collaborative tool to be used in the filing process to ensure accuracy. All XBRL vendors have Cloud errors. The Cloud is an interpretation of the SEC guidelines and is not an official SEC validation tool.

If you find that this tactic is being used by a XBRL vendor vying for your business, you may want to ask the following:

Please show me your percentage of overall errors compared to the other XBRL vendors for all filings to date. All vendors have some Cloud errors because Cloud errors are the same as SEC warnings and are accepted by the SEC for filing.

Drilldown into a particular filing and have the XBRL vendor show you the actual Cloud error and have them explain in detail how this error impacted the filing.

Please let me know if I can be of any assistance during your evaluation phase. I would be more than happy to work with you in evaluating your XBRL needs.

Bob Jensen's badly neglected threads on XBRL are at
http://www.trinity.edu/rjensen/XBRLandOLAP.htm
This site is better on history than current updates.

A good site for current XBRL updates --- http://www.computercpa.com/

June 3, 2010 message from Ira Kawaller [kawaller@kawaller.com]

I've just posted an article that was just published in the May issue of the AFP Exchange. It deals with cross hedging -- i.e., hedging in the face of basis risk. This is an issue that is nearly universal for those with commodity exposures, but it may also arise from time to time with financial hedges, as well.

The thrust of the article is that these imperfections may work to the benefit of the hedging entity, and anticipating when these imperfections are likely to be beneficial can help contribute to the bottom line.

Please feel free to contact me if you have any questions or care to discuss.

Ira Kawaller

View the Article

Kawaller & Co. Services

the Kawaller Fund

"Institutional Research Roundup," by Doug Lederman, Inside Higher Ed, June 1, 2010 ---
http://www.insidehighered.com/news/2010/06/01/air

Institutional researchers are higher education's version of a utility infielder. That doesn't mean they lack expertise: They specialize in bringing data to bear on issues and problems, and explaining and interpreting those data to campus constituents who often come at the information from widely varying viewpoints. Their versatility comes, though, in the wide range of subjects they touch and of decisions over which they have some influence.

Given that eclectic role, the annual forum of the Association for Institutional Research typically covers a plethora of topics, and this year's meeting, the organization's 50th, is no exception. But it is also true that examining the forum's agenda usually offers a sense of which issues are keeping institutional leaders up at night, since those are often the topics that presidents and provosts and other campus officials have asked their data gurus to dive into.

Not surprisingly, given the emphasis that policy makers are placing on college completion and the fiscal realities that make every lost student a liability, retention and student success were all over the AIR agenda. Roughly a third of the 375 sessions related to institutional efforts to measure or improve students’ academic progress in higher education.

In one such session, Roger Mourad, director of institutional research at Michigan’s Washtenaw Community College, compared the characteristics of students who transferred from his institution and then graduated from a four-year college to those who transferred and did not earn a bachelor’s degree.

The study would help to shed light, Mourad said, on what he said remains a “very viable debate nowadays”: “Whether community colleges are democratic institutions operating as gateways to four-year institutions, or do they end up diverting students away from four-year bachelor’s institutions?”

Mourad’s study, which examined students who entered Washtenaw for the first time in 2000 and followed for eight years those who transferred to a four-year institution, found that about 44 percent of all transferring students graduated (with significantly higher proportions of transfers graduating from the University of Michigan than from Eastern Michigan University and other institutions).

Students were more likely to complete their bachelor’s degrees if they earned more credits and had higher grade point averages at the two-year college before transferring, as one might expect, Mourad said. But every additional semester they spent at Washtenaw actually reduced their odds of earning a bachelor’s degree, he said. “Students who were more immersed academically at the community college over a shorter period of time were better prepared to succeed at four-year institutions,” he said.

Why might staying longer at the community college actually reduce their likelihood of completion at the four-year institution? Mourad and the audience offered several theories, including that students “become too comfortable with the small class size, the easier access to faculty members,” and other nurturing elements of the two-year environment, or that they get used to the “less competitive” environment (marked by “easier grading”) that they may find at two-year institutions. “When they hit the four-year institutions, do they have transfer shock?” he wondered.

Diane Dean, an assistant professor of higher education policy at Illinois State University, came at the question of bachelor’s degree completion from another angle.

Amid growing interest among state policy makers in trying to limit fast-rising tuition rates, she examined whether state guaranteed tuition programs affected retention and completion rates.

Looking at comparable students and institutions in Illinois (which has a guaranteed tuition program) and those in surrounding Great Lakes states, which do not, Dean found that Illinois’s program had had insignificant effects on the success of its students at public universities. That may be, she speculated, because guaranteeing students a tuition rate may improve predictability of what students pay, but it doesn’t, by itself, make college more affordable for those students.

A Search for a Better Way

Many if not most sessions at the institutional researchers’ meeting involved campus IR officials presenting the results of studies they’ve conducted, with the goal of shedding light on local issues or problems.

One session Monday had a very different purpose: providing a forum for a group of college officials grappling with a common problem: the failure of the federal graduation rate to capture what’s happening on campuses filled with adult students.

Chris Davis, vice provost of institutional effectiveness at Chicago’s National-Louis University, said that many campuses like his were trying to find their own alternatives to the federal rate, which by focusing exclusively on full-time, first-time students captures a tiny fraction of the students at many adult-serving institutions. National-Louis has begun contemplating a series of indicators to measure its own students' success, such as looking separately at the graduation rates of students who transfer into the university with 15 or more credits and those who enter the university with 45 or more credits.

Continued in article

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

From The Wall Street Journal Accounting Weekly Review on June 4, 2010

ECB Warns Write-Downs Could Reach $239 Billion
by: David Enrich and Stephen Fidler
Jun 02, 2010
Click here to view the full article on WSJ.com

TOPICS: Bad Debts, Banking, Treasury Department

SUMMARY: "...The European Central Bank warned late Monday that euro-zone banks face ?195 billion ($239.26 billion) in write-downs this year and the next due to an economic outlook that remained 'clouded by uncertainty.' ...The ECB in May launched a series of initiatives to help banks, including the purchases of government debt from banks and the renewal of a program to give cheap six-month loans to banks....The moves helped provide some stability to the banks, but Europe's intertwined banking system remains stressed." Factors leading to this predicament stem from heavy exposure for real estate loans in Spain, Portugal, and Greece. Another contributing point is the fact that Europe did not replenish their banks' capital in 2008 and 2009 as did the U.S. and U.K., partly with taxpayer funds.

CLASSROOM APPLICATION: The article is useful in discussing bank balance sheets and loan losses as they relate to an overall economy.

QUESTIONS:
1. (Introductory) What is the underlying problem that began leading to concerns about the overall health of European banks?

2. (Introductory) What bank write-downs may reach ?195 billion ($239.26 billion) this year and next? How does an economic slow down lead to this situation?

3. (Advanced) Explain why "some European banks have less capital and more leverage than their U.S. counterparts"? In your answer, define the terms capital and leverage. Comment on the formula for leverage used in the chart entitled "In Deeper" sourced from the Organization for Economic Cooperation and Development (OECD).

4. (Advanced) What is the European banks' "stress test" that was begun in 2009 and is now being prepared for the second time?

5. (Introductory) Describe factors on both sides of the argument as to whether to disclose these stress test results that were not disclosed last year and that the European Central Bank (ECB) may not disclose this year as well.

Reviewed By: Judy Beckman, University of Rhode Island

"ECB Warns Write-Downs Could Reach $239 Billion," by David Enrich and Stephen Fidler, The Wall Street Journal, June 1. 2010 ---
http://online.wsj.com/article/SB10001424052748703406604575278620471963334.html?mod=djem_jiewr_AC_domainid

In the latest indication that European banks are in ill health, the European Central Bank warned late Monday that euro-zone banks face €195 billion ($239.26 billion) in write-downs this year and the next due to an economic outlook that remained "clouded by uncertainty."

The ECB news, part of its semiannual financial-stability report, comes on the heels of a campaign by governments and central banks to ease sovereign-debt problems in southern Europe. The efforts have failed to calm worries that a banking crisis may be forming on the Continent. That has led to escalating pressure on regulators and governments to do more.

European governments already have cobbled together a €110 billion bailout for Greece and a €750 billion rescue for other weak economies of the euro zone. The ECB in May launched a series of initiatives to help banks, including the purchases of government debt from banks and the renewal of a program to give cheap six-month loans to banks, while the U.S. Federal Reserve reactivated a swap line to provide European banks with dollars.

The moves helped provide some stability to the banks, but Europe's intertwined banking system remains stressed. Investors have hammered the sector, banks are stashing near-record amounts of deposits at the ECB—€305 billion as of Friday—instead of lending the funds to other institutions, risk-wary U.S. financial institutions are reducing their exposure to euro-zone banks, and U.S. government officials are pushing their case for Europe to disclose publicly the results of stress tests for euro-zone banks.

ECB Vice President Lucas Papademos defended the central bank's response to the banking crisis and said results of European Union-wide stress tests of banks should be completed in July, providing further details on the capacity of the region's banks to withstand shocks. The results of stress tests last year of individual banks weren't released publicly. Some European countries are opposed to the public release of results.

. . .

Like the financial crisis two years ago that was sparked by the unraveling of the U.S. subprime-mortgage industry, Europe's banking problems originated in a tiny patch of the global economy: Greece.

But the problems run deeper than the highly publicized fiscal woes facing Greece, prompting similar concerns about Portugal, Ireland and Spain. Credit-ratings firms have reduced these countries' rankings and have warned about possible future downgrades, with Fitch reducing Spain's triple-A rating by one notch on Friday.

All told, more than €2 trillion of public and private debt from Greece, Spain and Portugal is sitting on the balance sheets of financial institutions outside the three countries, according to a Royal Bank of Scotland report last week. Investors, bankers and government officials are worried that as that debt loses value, banks across Europe could be saddled with losses.

"Make no mistake: This is big," said Jacques Cailloux, RBS's chief European economist and the report's author. "We're talking about systemic risk [and] the potential for contagion."

Concerns also are mounting about how European banks will finance themselves in coming years. The banks have hundreds of billions of euros in debt maturing by 2012, analysts and bankers say. Replacing those funds could be difficult and costly, given fierce competition for deposits and skittishness among bond investors. The situation has alarmed bankers and government officials, and it helped fuel last week's selloff in bank stocks.

With funding scarce, some banks are becoming more dependent on the ECB. The central bank has doled out more than €800 billion in loans to banks, nearing its all-time high, according to UBS analysts. The ECB warned Monday that the "continued reliance" of some midsize banks on credit from the central bank remains "a cause for concern."

The U.S. and U.K. moved aggressively in 2008 and 2009 to replenish their banks' capital buffers, sometimes with taxpayer funds.

Most of Europe didn't follow suit, because their banking systems were largely spared the carnage of their Anglo-American counterparts. But as a result, most European banks today have thinner capital cushions and heavier debt loads than their U.S. and U.K. rivals, leaving them vulnerable to an economic slowdown.

"Some European banks have less capital and more leverage than their U.S. counterparts and…the crisis in Europe seems to have lagged behind that in the U.S. in both the writing off of losses and in the speed of raising more capital," said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, in a speech in May.

OECD figures show that a selection of major U.S. banks are operating with leverage ratios—the ratio of assets to common equity—of between 12 and 17. By comparison, the same ratio for a group of major European banks ranged from 21 to 49, according to the OECD.

European policy makers have been trying to address that disparity by working on a global overhaul of banking regulations, to be enacted in 2012, that would require banks to hold more capital and liquidity. "But the regulatory fixes aren't going to solve the problem right now," said Michael Ben-Gad, an economics professor at City University London.

European governments and central bankers had hoped bailing out Greece and launching a liquidity program would relieve immediate pressure on other governments and the banking sector. But that hasn't happened, and new pressures could arise soon. The ECB last summer doled out €442 billion in one-year loans to euro-zone banks. Those loans come due June 30, potentially causing banks to scramble for a fresh source of cash this month.

European officials face calls from the banking industry, the investment community and foreign government leaders, including U.S. Treasury Secretary Timothy Geithner, to redouble efforts to stabilize the banking system through new initiatives.

RBS's Mr. Cailloux argues that the ECB should expand its recently launched program to buy government bonds and should broaden the effort to include private-sector debt as well.

That could ease concerns that banks will suffer heavy losses, potentially blowing holes in their balance sheets, on their portfolios of sovereign and corporate bonds tied to some European economies. But such a move also could expose the central bank to potential losses.

Citigroup Inc. last week circulated a paper calling on the ECB to launch a sort of insurance program to allow holders of government bonds—a group largely consisting of European banks—to sell the securities to the ECB in case of default. "Time is now of the essence and the authorities should continue to be bold and innovative in working to accelerate the impact of the available lines of support," Nazareth Festekjian, a Citigroup managing director, wrote in the paper.

The ECB had no comment on calls to increase the size of the bond-buying program or on the Citigroup recommendations.

Others want local European bank regulators to play a more proactive role monitoring their banks' exposures to troubled countries.

In the U.K., the Financial Services Authority has been conducting repeated stress tests of major British banks' exposures to southern Europe. Similarly intense efforts don't appear to be under way elsewhere in Europe, said Pat Newberry, chairman of the U.K. financial-services regulatory practice at PricewaterhouseCoopers LLP.

Mr. Newberry said conducting such tests would help European governments and banks get a better handle on their individual and collective vulnerabilities and to understand "how a series of unfortunate events can aggregate to turn a problem into a catastrophe."

U.S. authorities believe that stress tests can help restore market confidence. The tests the U.S. conducted last year helped inject greater transparency and confidence in the banking system, U.S. officials have said.

Banks are notorious for underestimating loan loss reserves and auditors are notorious for letting them get away with it ---
http://www.trinity.edu/rjensen/2008bailout.htm#AuditFirms

On May 26, 2010 the FASB issued an exposure draft that would make it more difficult to enormously underestimate load losses. International standards are expected to be changed accordingly.

On May 26, 2010, the FASB issued a proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, setting out its proposed comprehensive approach to financial instrument classification and measurement, and impairment, and revisions to hedge accounting. Also, extensive new presentation and disclosure requirements are proposed.

Here’s a “brief” from PwC on the new May 26 ED from the FASB --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=THUG-85UVWW&SecNavCode=MSRA-84YH44&ContentType=Content

PwC points out some of the major differences between these proposed FASB revisions versus the IASB provisions.

Click Here to download the ED http://snipurl.com/fasb5-26-2010

June 1, 2010 message from Orenstein, Edith [eorenstein@FINANCIALEXECUTIVES.ORG]

AECM - I thought you would find this of interest, and thank you to Gary Previts & Teri Yohn for supporting this expanded outreach by Financial Executives International (FEI) to academics. Regards, Edith Orenstein, FEI FEI Expands Outreach To Academics

http://www.financialexecutives.org/eweb/upload/FEI/academicpromoMay2010.pdf

June 1, 2010 reply from Bob Jensen

I was a long-time academic member of FEI and even served as the President of the South Texas Chapter.

Although I benefitted from the various publications of the FEI, what I found most rewarding was the monthly meetings and other outings where I had face-to-face encounters with top financial officers in the South Texas Chapter (that included the headquarters of AT&T, Valero, USAA, and a number of other very large corporations). Among other things, local contacts might provide your students with internships. There were also free CPE opportunities that were presented by the Big Four.

What is not clear in Edith’s message are the local chapter dues policies. These cover such things as receptions and meals. Although the South Texas Chapter charged regular members for all meals and receptions whether or not they attended each meeting, an exception was made for academic members who only had to pay for events that they attended. I suspect this policy varies among local chapters.

Thanks Edith!

Bob Jensen

"A Place to See and Be Seen (and Learn a Little, Too): $109-million renovation of Ohio State's library reinforces its role in connecting the campus," by Scott Carlson, Chronicle of Higher Education, May 30, 2010 ---
http://chronicle.com/article/Do-Libraries-Still-Matter-/65708/?sid=wb&utm_source=wb&utm_medium=en

The Shocking Future of Higher Education and Education Technology ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm

"Preventing Plagiarism," by Amy Cavender, Chronicle of Higher Education, June 11, 2010 ---
http://chronicle.com/blogPost/Preventing-Plagiarism/24695/?sid=wc&utm_source=wc&utm_medium=en

In the ideal world, none of us would ever have to write a note on a student's paper like the one in this photo. Since this isn't the ideal world, we're likely to have to deal with plagiarism every now and again. Dealing with instances of plagiarism will be the topic of my post for next week.

This week, I'd like to float a few ideas on preventing plagiarism.

The way we approach writing assignments can certainly make a difference. Most faculty are well aware that reusing the same essay prompts from one year to another is a bad idea, and asking students to submit longer papers in stages is useful for catching potential problems before they get a student into real trouble. (Incremental due dates may also reduce the temptation for students to plagiarize, since they force students to get started earlier.)

There are some good suggestions for instructors at pages maintained by the The University of Texas and The University of Alberta Libraries.

Further, I'm convinced that a lot (certainly not all) of the plagiarism committed by undergraduates is less than fully intentional, and that much of it stems from poor information-management practices.

That conviction has persuaded me that I need to change my approach to teaching students how to use Zotero. Some time ago, I wrote a post on teaching tech in Political Science. In that post, I mentioned introducing students to Zotero in order to emphasize the collaborative nature of scholarship and to make it easy for students to format their citations properly.

But Zotero is also a marvelous information-management system, and is therefore well-suited to avoiding the accidental plagiarism that results from not keeping good track of one's sources. If students get into the habit of keeping both their sources and their notes in Zotero, they're much less likely to inadvertently neglect to cite a source, or to accidentally cite something as a paraphrase or summary when it's really a direct quote.

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

June 12, 2010 message from Keith Weidkamp

From: Keith Weidkamp [mailto:weidkamp@surewest.net]
Sent: Saturday, June 12, 2010 7:26 PM
To: Jensen, Robert
Subject:

Hello Professor Jensen

I have followed ACEM and the many daily contributions for over two years. On two occasions I have commented back to individual professors. My name is Keith Weidkamp and I am a retired Professor of Accounting at Sierra College in Rocklin California. For over 20 years I have worked with Professor Leland Mansuetti, and for the past five years also with Professor Perry Edwards, developing, testing, and also publishing web-based practice sets, homework problems, study and review packets for Principles, Financial, Managerial, and Intermediate Accounting. We have with limited advertising and a few conference presentations added many schools to our adoption list. Texas A & M, Clemson, Trinity, Chicago, Mary Harden Baylor, Wisconsin, Minnesota, and many other smaller colleges and universities currently use one or more of our software products

As recently as yesterday and quite often over the last few months there have been comments and information regarding cheating and plagiarism. Over the past two years we have been working on and have developed and tested two web-based systems for Accounting practice sets and for Accounting homework that virtually eliminates the copying of work, and answers to questions and project examinations.   In our first presentation a month ago at the National TACTYC Convention in Phoenix, as the word got out regarding our new algorithmic products and software, we had over 50 Four-year and Two-year schools, from across the country ask for more information and an on-line demonstration.

Our new web-based software has added new opportunity to control a problem that has been an unfortunate issue to deal with for many years. While realizing that AECM is not a place to advertise, since the focus of AECM is Accounting Education and Multi-Media, I am asking you what you would recommend I do to get this information out to our large group professors as an informational item.

Attached you will find two information documents that outline our two new Algorithmic products. We have now two algorithmic practice sets and a full set of algorithmic topical problems (25 topics). Both of these products have the same key features.

On all practice sets each student starts with a different set of beginning balances. A unique set of check figures is available for each student user. Answers to key questions at the mid-point and at the end of the project, are different for each student.    With a single click an Instructor can view the work file of any student. With two clicks an instructor can print a copy of the student's graded examination showing their answers and the correct answers for that student.

On the Accounting Coach homework and/or study software, there are 25 topics for a student to choose from. Students are provided unlimited practice and Teacher Help screens for every topic and sub-topic. Every homework assignment ends with a short 5-8 minute algorithmic examination. This exam is scored and the grade automatically entered into the instructor grade book.   A well-prepared student can complete a topic assignment in 15-20 minutes. A student needing more assistance can continue the algorithmic practice and retake the algorithmic examination as many times as necessary to achieve a satisfactory score.

Special Features of this Software:

1. Cheating and copying others work is eliminated.

2. All student work is automatically graded and the score recorded into the instructor

    grade book.

3. Each practice set and problem has unlimited opportunity for practice, assistance,

      reinforcement and learning.

4. Student clerical time as well as homework and practice time is significantly

     reduced.

5. Instructor grading and recording time is almost completely eliminated.

6. Direct on-line support is provided from the Professor Authors!

The three authors of this software have a combined classroom experience of over 75 years. They use this software daily in their classes. Over 500 students use this software each semester at their school.

The new web-based software, with all of the special improvements not possible in a CD version, has eliminated all publishing, shipping, and markup costs.   All products can be purchased via PayPal for just $19.95 per student copy.

June 13, 2010 reply from Bob Jensen

Hi Keith,

I am forwarding your message to the AECM, because I think what you’ve accomplished is probably valuable to some instructors although not to the extent that I buy into your claim that “cheating and copying others’ work is eliminated.”

Your pedagogy is very limited in that it does not allow for creative solutions that differ from your templates. This is why some instructors assign term papers rather than practice sets. But term papers both increases and decreases opportunities to cheat.

And you’ve not eliminated advanced forms of cheating.

For one thing, students have very clever ways of communicating with one another and with answer files ---
http://www.trinity.edu/rjensen/Plagiarism.htm#NewKindOfCheating

In very large classes, it is often possible for surrogate students to pretend to be somebody else.

Adopters of Your Practice Sets May Have a False Sense of Security
You’re assuming that clever students (possibly advanced students) will not write answer templates such as Excel workbooks that are archived (e.g., in a fraternity’s database). Those templates may be just as efficient in finding solutions as your own answer templates that you use for grading purposes.

It has long been a practice of case-method teachers to recycle cases with changed numbers and sometimes even changed contexts and assumptions. However, students still find value added in having archives of the solutions answers of former versions of a case. This is one of the things that makes case method teaching very frustrating. It’s almost imperative to continually use new cases rather than recycled cases.

Seeking Creative Solutions Both Increase and Decrease Opportunities to Cheat
I defy anybody or any software from detecting all forms of plagiarism. Out of trillions upon trillions of pages of writings in history, a student can simply type in a sentence or a paragraph or an entire page of writing that has a 99% probability of being detected.

Unless somebody, like Tournitin, archives student term papers and problem solutions, plagiarism detection has more than a 99% chance of failing. For example, if a student writes an unpublished essay at Florida International that is never archived anywhere except in one professor’s brain, I defy you to detect its plagiarism in unpublished term papers elsewhere in the world.

Turnitin and other plagiarism services attempt to archive unpublished writings so that such works are not so easily plagiarized ---
http://www.trinity.edu/rjensen/Plagiarism.htm#Detection

Even Turnitin cannot archive more than a miniscule fraction of writings that have never been digitized.

The Best Way to Prevent Cheating
The real trick for professors is to assign unique projects where finding works or people to plagiarize will be an education in and of itself. For example, if I assign a project on accounting for contango swaps in Iceland I’ve eliminated 99.99999999999% of writings that can be safely plagiarized in a student term project at the University of Southern California. And I defy you to find a term paper writing service that will take this project on at reasonable prices. Of course there is an epsilon chance of finding something or somebody to plagiarize, but like I said doing this may be an education in and of itself. And I think cheating on this project will be more difficult than writing an Excel workbook for solution templates to your practice cses.

Bob Jensen

Bob Jensen's threads on cheating ---
http://www.trinity.edu/rjensen/Plagiarism.htm

IASB-FASB Convergence Efforts Hit IFRS Roadblocks and Delays

"IASB and FASB issue statement on their convergence work," IASB, June 2. 2010 --- Click Here
http://www.iasb.org/News/Announcements+and+Speeches/IASB+and+FASB+issue+statement+on+their+convergence+work.htm

The IASB and the FASB today announced their intention to prioritise the major convergence projects to permit a sharper focus on issues and projects that they believe will bring about significant improvement and convergence between IFRSs and US GAAP. Their joint statement is as follows:

In our November 2009 joint statement, we, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) again reaffirmed our commitment to improving International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) and achieving their convergence. That Statement affirmed June 2011 as the target date for completing the major projects in the 2006 Memorandum of Understanding (MoU), as updated in 2008, described project-specific milestone targets, and acknowledged the need to intensify our standards-setting efforts to meet those targets.

We committed to providing transparency and accountability regarding those plans by reporting periodically on our progress. Our first report, dated 31 March 2010, described the progress we had made to date, explained some of the challenges we face in improving and converging our standards in certain areas, and reported changes made to certain project-specific milestone targets.

As noted in our March 2010 progress report, we recognise the challenges that arise from seeking effective global stakeholder engagement on a large number of projects. Since publishing the March progress report, stakeholders have voiced concerns about their ability to provide high-quality input on the large number of major Exposure Drafts planned for publication in the second quarter of this year.

The IASB and the FASB are in the process of developing a modified strategy to take account of these concerns that would:

prioritise the major projects in the MoU to permit a sharper focus on issues and projects that we believe will bring about significant improvement and convergence between IFRS and US GAAP. stagger the publication of Exposure Drafts and related consultations (such as public round table meetings) to enable the broad-based and effective stakeholder participation in due process that is critically important to the quality of their standards. We are limiting to four the number of significant or complex Exposure Drafts issued in any one quarter. issue a separate consultation document seeking stakeholder input about effective dates and transition methods. The modified strategy retains the target completion date of June 2011 for many of the projects identified by the original MoU, including those projects, as well as other issues not in the MoU, where a converged solution is urgently required. The target completion dates for a few projects have extended into the second half of 2011. The nature of the comments received on the Exposure Drafts will determine the extent of the redeliberations necessary and the timeline required to arrive at high quality, converged standards.

The IASB and the FASB have begun discussions on this proposed strategy with their respective oversight bodies and regulators, including members of the IASC Foundation Monitoring Board.

It is expected that this action by the FASB and IASB will not negatively impact the Securities and Exchange Commission’s work plan, announced in February, to consider in 2011 whether and how to incorporate IFRS into the US financial system.

The boards expect to publish shortly a progress report that includes a revised work plan.

Bob Jensen's threads on accounting standards setting controversies are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

"Failed Convergence of R&D Accounting:: Only Politicians and Opportunists Would Have Downplayed the Implications," by Tom Selling, The Accounting Onion, June 5, 2010 --- Click Here
http://accountingonion.typepad.com/theaccountingonion/2010/06/failed-convergence-of-rd-accounting-only-politicians-and-opportunists-would-have-downplayed-the-implications.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

Bob Jensen's threads on R&D accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#FAS02

Bob Jensen's threads on IASB-FASB standards convergence ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

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

3. (Advanced) Focusing on accounting issues, state why cutting R&D operations quickly impact any company's financial performance in a current accounting period. In you answer, first address the question considering U.S. accounting standards.

4. (Advanced) Does your answer to the question above change when considering reporting practices under IFRS?

Pfizer Shuts Six R&D Sites After Takeover
by Jonathan D. Rockoff
Nov 10, 2009
Click here to view the full article on WSJ.com

TOPICS: Consolidation, GAAP, International Accounting, Mergers and Acquisitions, Research & Development

SUMMARY: "Pfizer Inc., digesting its $68 billion takeover of rival Wyeth last month, said Monday it will close six of its 20 research sites, in the latest round of cost cutting by retrenching drug makers....Pfizer executives wanted to cut costs quickly so the integration didn't stall research....'When we acquired Warner-Lambert, it took us almost two years to get into the position we will be in 30 to 60 days' after closing the Wyeth deal, Martin Mackay, one of Pfizer's two R&D chiefs, said in an interview."

CLASSROOM APPLICATION: Questions relate to understanding the immediate implications of reducing R&D expenditures for current period profit under both U.S. GAAP and IFRS as well as to understanding pharmaceutical industry consolidation and restructuring.

QUESTIONS:
1. (Introductory) What are the business issues within the pharmaceuticals industry in particular that are driving the need to reduce costs rapidly? In your answer, comment on industry consolidations and restructuring, including definitions of each of these terms.

2. (Introductory) What business reasons specific to Pfizer did their executives offer as reasons to cut R&D costs quickly?

3. (Advanced) Focusing on accounting issues, state why cutting R&D operations quickly impact any company's financial performance in a current accounting period. In you answer, first address the question considering U.S. accounting standards.

4. (Advanced) Does your answer to the question above change when considering reporting practices under IFRS?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Pfizer to Pay $68 Billion for Wyeth
by Matthew Karnitschnig
Jan 26, 2009
Page: A1

The Wall Street Journal, November 10, 2009 ---
http://online.wsj.com/article/SB10001424052748703808904574525644154101608.html?mod=djem_jiewr_AC

Pfizer Inc., digesting its $68 billion takeover of rival Wyeth last month, said Monday it will close six of its 20 research sites, in the latest round of cost cutting by retrenching drug makers.

Pfizer was expected to cut costs as part of its consolidation with Wyeth, and research and development was considered a prime target because the two companies' combined R&D budgets totaled $11 billion. In announcing the laboratory shutdowns Monday, Pfizer didn't say how many R&D jobs it would cut or how much it hoped to save from the shutdowns.

For much of this decade, pharmaceutical companies have been closing labs, laying off researchers and outsourcing more work from their once-sacrosanct R&D units. Pfizer previously closed several labs, including the Ann Arbor, Mich., facility where its blockbuster cholesterol fighter Lipitor was developed. In January, before the Wyeth deal was announced, Pfizer said it would lay off as many as 800 researchers.

But analysts say Pfizer Chief Executive Jeffrey Kindler and other industry leaders haven't done enough. A major reason for the industry consolidation this year is the opportunity to slash spending further.

Pfizer previously said it expects $4 billion in savings from its combination with Wyeth. It plans to eliminate about 19,500 jobs, or 15% of the combined company's total.

Merck & Co., which completed its $41.1 billion acquisition of Schering-Plough last week, is expected to cut 15,930 jobs, or about 15% of its work force. In September, Eli Lilly & Co. said it will eliminate 5,500 jobs, or nearly 14% of its total. Johnson & Johnson said last week that it will pare as many as 8,200 jobs, or 7%.

Drug makers are restructuring in anticipation of losing tens of billions of dollars in revenues as blockbuster products, such as Lipitor, start facing competition from generic versions. Setbacks developing new treatments have made the need to reduce spending all the more urgent, analysts say, and have reduced resistance to closing labs. The economic slump has only worsened the pharmaceutical industry's plight, pressuring sales.

The sites Pfizer is set to close include Wyeth's facility in Princeton, N.J., which has been working on promising therapies for Alzheimer's disease, including one called bapineuzumab under development by several companies. The Alzheimer's work will move to Pfizer's lab in Groton, Conn., which will be the combined company's largest site. The consolidation of Alzheimer's work "allows us to fully focus on that, rather than have to coordinate activities," said Mikael Dolsten, a former Wyeth official and one of two R&D chiefs at the combined company.

Besides Princeton, Pfizer said research also is scheduled to end at R&D sites in Chazy, Rouses Point and Plattsburgh, N.Y.; Gosport, Slough and Taplow in the U.K.; and Sanford and Research Triangle Park, N.C. Pfizer is counting as a single site labs close to each other, such as the facilities in Rouses Point and Plattsburgh, Slough and Taplow, and Sanford and Research Triangle Park. Along with the Princeton facility, those in Chazy, Rouses Point and Sanford had belonged to Wyeth.

The company is also planning to move work from its Collegeville, Pa.; Pearl River, N.Y., and St. Louis sites to other locations.

Pfizer executives wanted to cut costs quickly after the Wyeth deal's completion so the integration doesn't stall research. That was a problem with Pfizer's acquisition of Warner-Lambert in 2000 and its merger with Pharmacia in 2003. As a result, critics say the deals destroyed billions of dollars in shareholder value. Pfizer says it has learned from its past acquisitions.

"When we acquired Warner-Lambert, it took us almost two years to get into the position we will be in 30 to 60 days" after closing the Wyeth deal, Martin Mackay, one of Pfizer's two R&D chiefs, said in an interview. Up next, he said, the newly combined company will prioritize its R&D work and decide which potential therapies to abandon.

Differences between FASB and IASB standards ---
http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf

"Countrywide (now part of Bank of America) Pays $108 Million to Settle Fees Complaint." by Edward Wyatt, The New York Times, June 7, 2010 ---
http://www.nytimes.com/2010/06/08/business/08ftc.html?hp

The Federal Trade Commission announced Monday that two Countrywide mortgage servicing companies had agreed to pay $108 million to settle charges that they collected excessive fees from financially troubled homeowners.

The $108 million payment is one of the largest overall judgments in the commission’s history and resolves its largest mortgage servicing case. The money will go to more than 200,000 homeowners whose loans were serviced by Countrywide before July 2008, when it was acquired by Bank of America.

Jon Leibowitz, the chairman of the Federal Trade Commission, said that Countrywide’s loan servicing operation charged excessive fees to homeowners who were behind on their mortgage payments, in some cases asserting that customers were in default when they were not.

The fees, which were billed as the cost of services like property inspections and lawn mowing, were grossly inflated after Countrywide created subsidiaries to hire vendors to supply the services, increasing the cost several-fold in the process, the commission said.

In addition, the commission said that Countrywide at times imposed a new round of fees on homeowners who had recently emerged from bankruptcy protection, sometimes threatening the consumers with a new foreclosure.

“Countrywide profited from making risky loans to homeowners during the boom years, and then profited again when the loans failed,” Mr. Leibowitz said.

The $108 million settlement represents the agency’s estimate of consumer losses, but does not include a penalty, which the commission is not allowed to impose.

Clifford J. White III, the director of the executive office for the United States Trustees Program, which enforces bankruptcy laws for the Department of Justice, said that the commission’s settlement “will help prevent future harm to homeowners in dire financial straits who legitimately seek bankruptcy protection.”

The settlement bars Countrywide from making false representations about amounts owed by homeowners, from charging fees for services that are not authorized by loan agreements, and from charging unreasonable amounts for work.

In addition, the settlement requires Countrywide to establish internal procedures and an independent third party to verify that bills and claims filed in bankruptcy court are valid.

“Now more than ever, companies that service consumers’ mortgages need to do so in an honest and fair way,” Mr. Leibowitz said.

The F.T.C. has not yet established how much will be paid to each consumer, in part, Mr. Leibowitz said, because Countrywide’s record keeping was “abysmal.” About $35 million of the $108 million total was charged to homeowners already in bankruptcy proceedings, with the remainder charged to customers whom Countrywide said were in default on their mortgages.

Jensen Comment
I think Countrywide got off too easy. The evil Countrywide brokered mortgages to borrowers that had no hope of paying back the debt and then charged they excessive fees when they got behind in their payments.

Bob Jensen's threads on the sleaze of Countrywide are at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

Won't Pledge to "Do No Evil"

"MBA Oath Loses Traction at Yale," Business Week, May 26, 2010 --- http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2010/05/mba_oath_loses_traction_at_yale.html

It looks like the MBA Oath, a controversial attempt to give the business world its own version of the Hippocratic Oath, may be suffering its first major defeat. The Community Blog at the Yale School of Management (Yale Full-Time MBA Profile) is reporting that an SOM Town Hall meeting ended without an endorsement of the oath. According to the post, “We didn’t reach a consensus, so we won’t join, nor formally oppose the Business Oath. Future classes may decide to take a stance, but for now, the conversation has begun, and individuals can sign or not sign as they see fit.” Bottom line: an oath that has been enthusiastically embraced by virtually every top b-school is getting a noncommittal shrug from Yale.

Key takeaways from Sornette's forecasting method which he calls the Financial Bubble Experiment

There are good reasons to think that stock markets are fundamentally unpredictable. Many econophysicists believe for example, that the data from these markets bear a startling resemblance to other data from seemingly unconnected phenomena, such as the size of earthquakes, forest fires and avalanches, which defy all efforts of prediction.
Sornette says there are two parts to his forecasting method. First, he says bubbles are markets experiencing greater-then-exponential growth. That makes them straightforward to spot, something that surprisingly hasn't been possible before.

Second, he says these bubble markets display the tell signs of the human behaviour that drives them. In particular, people tend to follow each other and this result in a kind of herding behaviour that causes prices to fluctuate in a periodic fashion.
That's when Sornette announced an brave way of test his forecasting method which he calls the Financial Bubble Experiment. His idea is to make a forecast but keep it secret. He posts it in encrypted form to the arXiv which time stamps it and ensures that no changes can be made.
Then, six months later, he reveals the forecast and analyses how successful it has been. Today, we can finally see the analysis of his first set of predictions made 6 months ago.
It's tempting to imagine that this extra information would have a calming effect on otherwise volatile markets. But the real worry is that it could have exactly the opposite effect: that predictions of the imminent collapse whether accurate or not would lead to violent corrections. That will have big implications for econophysics and those who practice it.

"Econophysicist Accurately Forecasts Gold Price Collapse: The first results from the Financial Bubble Experiment will have huge implications for econophysics," MIT's Technology Review, June 2, 2010 ---
http://www.technologyreview.com/blog/arxiv/25269/?nlid=3065

There are good reasons to think that stock markets are fundamentally unpredictable. Many econophysicists believe for example, that the data from these markets bear a startling resemblance to other data from seemingly unconnected phenomena, such as the size of earthquakes, forest fires and avalanches, which defy all efforts of prediction.

Some go as far as to say that these phenomena are governed by the same fundamental laws so that if one is unpredictable, then they all are.

And yet financial markets may be different. Last year, this blog covered an extraordinary forecasts made by Didier Sornette at the Swiss Federal Institute of Technology in Zurich, who declared that the Shanghia Composite Index was a bubble market and that it would collapse within a certain specific period of time.

Much to this blog's surprise, his prediction turned out to be uncannily correct.

Sornette says there are two parts to his forecasting method. First, he says bubbles are markets experiencing greater-then-exponential growth. That makes them straightforward to spot, something that surprisingly hasn't been possible before.

Second, he says these bubble markets display the tell signs of the human behaviour that drives them. In particular, people tend to follow each other and this result in a kind of herding behaviour that causes prices to fluctuate in a periodic fashion.

However, the frequency of these fluctuations increases rapidly as the bubble comes closer to bursting. It's this signal that Sornette uses in predicting a change from superexponential growth to some other regime (which may not necessarily be a collapse).
While Sornette's success last year was remarkable it wasn't entirely convincing as this blog pointed out at the time

"The problem with this kind of forecast is that it is difficult interpret the results. Does it really back Sornette's hypothesis that crashes are predictable? How do we know that he doesn't make these predictions on a regular basis and only publicise the ones that come true? Or perhaps he modifies them as the due date gets closer so that they always seem to be right (as weather forecasters do). It's even possible that his predictions influence the markets: perhaps they trigger crashes Sornette believes he can spot."

That's when Sornette announced an brave way of test his forecasting method which he calls the Financial Bubble Experiment. His idea is to make a forecast but keep it secret. He posts it in encrypted form to the arXiv which time stamps it and ensures that no changes can be made.
Then, six months later, he reveals the forecast and analyses how successful it has been. Today, we can finally see the analysis of his first set of predictions made 6 months ago.

Back then, Sornette and his team identified four markets that seemed to be experiencing superexponential growth and the tell tale signs of an imminent bubble burst.

These were:the IBOVESPA Index of 50 brazillian stocks, a Merrill Lynch Corporate Bond Indexthe spot price of goldcotton futures

These predictions had mixed success. First let's look at the failures. Sornette says that it now turns out that the Merill Lynch Index was in the process of collapse when Sornette made the original prediction six months ago. So that bubble burst long before Sornette said it would. And cotton futures are still climbing in a bubble market that has yet to collapse. So much for those forecasts.

However, Sornette and his team were spot on with their other predictions. Both the IBOVESPA Index and the spot price of gold changed from superexponential growth to some other kind of regime in the time frame that Sornette predicted. That's an impressive result by anybody's standards.
And the team says it can do better. They point out that they learnt a substantial amount during the first six months of the experiment. They have used this experience to develop a tool called a "bubble index" which they can use to determine the probability that a market that looks like a bubble actually is one.

This should help to make future forecasts even more accurate. Had this tool been available six months ago, for example, it would have clearly showed that the Merrill Lynch index had already burst, they say. If Sornette continues with this type of success it's likely that others will want to copy his method. An interesting question is what will happen to the tell tale herding behaviour once large numbers of analysts start looking for and betting on it.
It's tempting to imagine that this extra information would have a calming effect on otherwise volatile markets. But the real worry is that it could have exactly the opposite effect: that predictions of the imminent collapse whether accurate or not would lead to violent corrections. That will have big implications for econophysics and those who practice it.

Either way, Sornette is continuing with the experiment. He has already sealed his set of predictions for the next six months and will reveal them on 1 November. We'll be watching.

Ref: http://arxiv.org/ftp/arxiv/papers/0911/0911.0454.pdf:
The Financial Bubble Experiment: Advanced Diagnostics and Forecasts of Bubble Terminations Volume I

Jensen Comment
If there is anything at all to Sornette's forecasting theory, it most likely cannot be extended to markets where insiders play a key role such as the price bubble of a particular company's common shares. Insiders can, and often do, manipulate markets. But in deep commodities markets such as the price of gold or stock index prices, Sornette may have something that is rooted in his herding behavior theory. The problem of course is in identifying false positives.

Great Nova Video: Can a market of irrational people be a "rational market?"
PBS Nova Videp: "Mind Over Money," http://video.pbs.org/video/1479100777

Jensen Question
This seems to beg the question of how accountants can contribute information to irrational people with an underlying goal of helping their markets themselves be more rational.

Of course many scholars argue that markets themselves are not " rational" ---
http://en.wikipedia.org/wiki/Justin_Fox

Behavioral Economics --- http://en.wikipedia.org/wiki/Behavioral_economics

Bounded Rationality --- http://en.wikipedia.org/wiki/Bounded_rationality

Bob Jensen's threads on the efficient market hypothesis ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Preparing Undergraduates as Business Professionals," Harvard Business Review, June 2, 2010 --- Click Here
http://blogs.hbr.org/imagining-the-future-of-leadership/2010/06/preparing-undergraduates-as-bu.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

Editor's note: This post is part of a six-week blog series on how leadership might look in the future. The conversations generated by these posts will help shape the agenda of a symposium on the topic in June 2010, hosted by HBS's Nitin Nohria, Rakesh Khurana, and Scott Snook. This week's focus: leadership development.)

Don't Get Gored
"For Richer or Poorer: Financial Planning for Newlyweds," Smartpros, May 27, 2010 ---
http://accounting.smartpros.com/x69612.xml

"FDIC Offers Money-Saving Tips in the New World of Credit Cards," Smartpros, May 27, 2010 ---
http://accounting.smartpros.com/x69598.xml

Bob Jensen's helpers for personal financial planning ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

"Are You a Teacher or Are You a Mentor?" by Joe Hoyle, Teaching Financial Accounting Blog, May 30, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/05/are-you-teacher-or-are-you-mentor.html

"How Do You Radically Improve Education?" by Joe Hoyle, Teaching Financial Accounting Blog, May 30, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/05/how-do-you-radically-improve-education.html
Really about what's wrong with textbooks.

The above site provides a link to Joe's updated and free financial accounting textbook.
Joe also makes his examinations free to educators.

Question
Can you detect when Jeff Skilling lied just by studying his face?

"Guest Post: Fraud Girl – Can We Detect Lying From Nonverbal Cues?" Simoleon Sense, June 20, 2010 ---
http://www.simoleonsense.com/guest-post-fraud-girl-can-we-detect-lying-from-nonverbal-cues/
This includes a video of Jeff Skilling's testimony

“The greatest past users of deception…are highly individualistic and competitive; they would not easily fit into a large organization…and tend to work by themselves. They are often convinced of the superiority of their own opinions. They do in some ways fit the supposed character of the lonely, eccentric bohemian artist, only the art they practice is different. This is apparently the only common denominator for great practitioners of deception such as Churchill, Hitler, Dayan, and T.E. Lawrence”

-Michael I. Handel (58)

Welcome Back.

Last week we wrapped up Part II of the Fraud by Hindsight case. We noted that hindsight bias is a major concern in securities litigation & fraud cases. We explained how fraud by hindsight leads judges to misinterpret relevant facts and such let financial criminals off the hook.

This week we will analyze the work of Paul Ekman, a professor at the University of California who has spent approximately 50 years analyzing human emotions and nonverbal communication. Ekman’s work is featured in the television show “Lie to Me”. One of his most popular books, Telling Lies: Clues to Deceit in the Marketplace, Politics, and Marriage, describes “how lies vary in form and how they can differ from other types of misinformation that can reveal untruths”. He claims that although ‘professional lie hunters’ can learn how to recognize a lie, the so-called ‘natural liars’ can still fool them.

So the question is:

Can most financial felons be classified as ‘natural liars’? If so, is it at all possible to catch them via their body language, voice, and facial expressions?

To test this, I examined (a clip from) the February 2002 testimony of former Enron CEO Jeff Skilling to see if I could spot any deception clues. In his testimony, Skilling pleads that his resignation from Enron was solely for personal reasons and that he had no knowledge that Enron was on the brink of collapse. In order to not be misled by Skilling’s words, I watched the testimony without sound and focused solely on his facial expressions and body movements. Ekman noted, “most people pay most attention to the least trustworthy sources – words and facial expressions – and so are easily misled” (81). In trying to be coherent with Ekman’s beliefs, this is what I found on Jeff Skilling:

Video of Jeff Skilling's testimony

Continued in article
http://www.simoleonsense.com/guest-post-fraud-girl-can-we-detect-lying-from-nonverbal-cues/

Other Related Posts From Simoleon Sense:

Related References from Bob Jensen's Archives

Question
What new technology reads emotions in faces?

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

"Happy, sad, angry or astonished?" PhysOrg, July 3, 2007 ---

An advertisement for a new perfume is hanging in the departure lounge of an airport. Thousands of people walk past it every day. Some stop and stare in astonishment, others walk by, clearly amused. And then there are those who seem puzzled when they look at the poster.

With the help of a small video camera, the system automatically localizes the faces of everyone who walks past the advertisement. And nothing escapes its watchful eye: Does the passerby look happy, surprised, sad or even angry?

The system for rapid facial analysis is being developed by researchers at the Fraunhofer Institute for Integrated Circuits IIS in Erlangen. Highly complex algorithms immediately localize human faces in the image, differentiate between men and women and analyze their expressions.

“The special feature of our facial analysis software is that it operates in real time,” says Dr. Christian Küblbeck, project manager at the IIS. “What’s more, it is able to localize and analyze a large number of faces simultaneously.” The most important facial characteristics used by the system are the contours of the face, the eyes, the eyebrows and the nose. First of all, the system has to go through a training phase in which it is presented with huge quantities of data containing images of faces. In normal operation, the computer compares 30,000 facial characteristics with the information that it has previously learned.

“On a standard PC, the calculations are carried out so quickly that mood changes can be tracked live,” explains Küblbeck. However, we do not need to worry about an invasion of our privacy, as the software analyzes the data on a purely statistical basis.

The software package is not only of interest to advertising psychologists; there are numerous potential applications for the system. It can be used, for example, to test the user-friendliness of computer software programs. The system monitors the facial expressions of the user in order to determine which aspects of the program arouse a particularly strong reaction. Alternatively, it can assess the reactions of the users of learning software, in order to establish the extent to which they are put under stress or challenged by the task they are performing. The system could also be used to check the levels of concentration of car drivers.

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

Question
What new technology reads emotions in faces?

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

"Happy, sad, angry or astonished?" PhysOrg, July 3, 2007 ---

An advertisement for a new perfume is hanging in the departure lounge of an airport. Thousands of people walk past it every day. Some stop and stare in astonishment, others walk by, clearly amused. And then there are those who seem puzzled when they look at the poster.

With the help of a small video camera, the system automatically localizes the faces of everyone who walks past the advertisement. And nothing escapes its watchful eye: Does the passerby look happy, surprised, sad or even angry?

The system for rapid facial analysis is being developed by researchers at the Fraunhofer Institute for Integrated Circuits IIS in Erlangen. Highly complex algorithms immediately localize human faces in the image, differentiate between men and women and analyze their expressions.

“The special feature of our facial analysis software is that it operates in real time,” says Dr. Christian Küblbeck, project manager at the IIS. “What’s more, it is able to localize and analyze a large number of faces simultaneously.” The most important facial characteristics used by the system are the contours of the face, the eyes, the eyebrows and the nose. First of all, the system has to go through a training phase in which it is presented with huge quantities of data containing images of faces. In normal operation, the computer compares 30,000 facial characteristics with the information that it has previously learned.

“On a standard PC, the calculations are carried out so quickly that mood changes can be tracked live,” explains Küblbeck. However, we do not need to worry about an invasion of our privacy, as the software analyzes the data on a purely statistical basis.

The software package is not only of interest to advertising psychologists; there are numerous potential applications for the system. It can be used, for example, to test the user-friendliness of computer software programs. The system monitors the facial expressions of the user in order to determine which aspects of the program arouse a particularly strong reaction. Alternatively, it can assess the reactions of the users of learning software, in order to establish the extent to which they are put under stress or challenged by the task they are performing. The system could also be used to check the levels of concentration of car drivers.

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

Questions
Has the art and science of reading faces ever been part of an auditing curriculum?
Have there been any accountics studies of Ekman's theories as applied to auditing behavioral experiments?
(I can imagine that some accounting doctoral students have not experimented along these lines?)

Paul Ekman video on how to read faces and detect lying --- http://www.youtube.com/watch?v=IA8nYZg4VnI
This video runs for nearly one hour

Paul Ekman --- http://en.wikipedia.org/wiki/Paul_Ekman

Ekman's work on facial expressions had its starting point in the work of psychologist Silvan Tomkins.^[Ekman showed that contrary to the belief of some anthropologists including Margaret Mead, facial expressions of emotion are not culturally determined, but universal across human cultures and thus biological in origin. Expressions he found to be universal included those indicating anger, disgust, fear, joy, sadness, and surprise. Findings on contempt are less clear, though there is at least some preliminary evidence that this emotion and its expression are universally recognized.^]

In a research project along with Dr. Maureen O'Sullivan, called the Wizards Project (previously named the Diogenes Project), Ekman reported on facial "microexpressions" which could be used to assist in lie detection. After testing a total of 15,000 [EDIT: This value conflicts with the 20,000 figure given in the article on Microexpressions] people from all walks of life, he found only 50 people that had the ability to spot deception without any formal training. These naturals are also known as "Truth Wizards", or wizards of deception detection from demeanor.

He developed the Facial Action Coding System (FACS) to taxonomize every conceivable human facial expression. Ekman conducted and published research on a wide variety of topics in the general area of non-verbal behavior. His work on lying, for example, was not limited to the face, but also to observation of the rest of the body.

In his profession he also uses verbal signs of lying. When interviewed about the Monica Lewinsky scandal, he mentioned that he could detect that former President Bill Clinton was lying because he used distancing language.

Ekman has contributed much to the study of social aspects of lying, why we lie, and why we are often unconcerned with detecting lies. He is currently on the Editorial Board of Greater Good magazine, published by the Greater Good Science Center of the University of California, Berkeley. His contributions include the interpretation of scientific research into the roots of compassion, altruism, and peaceful human relationships. Ekman is also working with Computer Vision researcher Dimitris Metaxas on designing a visual lie-detector.

Research Papers Worth Reading On Deceit, Body Language, Influence etc.. (with links to pdfs)

Sixteen Enjoyable Emotions. – (2003) Emotion Researcher, 18, 6-7. by Ekman, P

“Become Versed in Reading Faces”. Entrepreneur, 26 March 2009. Ekman, P. (2009)
Intoduction: Expression Of Emotion - In RJ Davidson, KR Scherer, & H.H. Goldsmith (Eds.) Handbook of Afective Sciences. Pp. 411-414.Keltner, D. & Ekman, P (2003)

Facial Expression Of Emotion. – In M.Lewis and J Haviland-Jones (eds) Handbook of emotions, 2nd edition. Pp. 236-249. New York: Guilford Publications, Inc. Keltner, D. & Ekman, P. (2000)

Emotional And Conversational Nonverbal Signals. – In L.Messing & R. Campbell (eds.) Gesture, Speech and Sign. Pp. 45-55. London: Oxford University Press.

A Few Can Catch A Liar. - Psychological Science, 10, 263-266. Ekman, P., O’Sullivan, M., Frank, M. (1999)
Deception, Lying And Demeanor.- In States of Mind: American and Post-Soviet Perspectives on Contemporary Issues in Psychology . D.F. Halpern and A.E.Voiskounsky (Eds.) Pp. 93-105. New York: Oxford University Press.

Lying And Deception. – In N.L. Stein, P.A. Ornstein, B. Tversky & C. Brainerd (Eds.) Memory for everyday and emotional events. Hillsdale, NJ: Lawrence Erlbaum Associates, 333-347.

Lies That Fail.- In M. Lewis & C. Saarni (Eds.) Lying and deception in everyday life. Pp. 184-200. New York: Guilford Press.

Who Can Catch A Liar. -American Psychologist, 1991, 46, 913-120.
Hazards In Detecting Deceit. In D. Raskin, (Ed.) Psychological Methods for Investigation and Evidence. New York: Springer. 1989. (pp 297-332)

Self-Deception And Detection Of Misinformation. In J.S. Lockhard & D. L. Paulhus (Eds.) Self-Deception: An Adaptive Mechanism?. Englewood Cliffs, NJ: Prentice-Hall, 1988. Pp. 229- 257.

Smiles When Lying. – Journal of Personality and Social Psychology, 1988, 54, 414-420.
Felt- False- And Miserable Smiles.Ekman, P. & Friesen, W.V.

Mistakes When Deceiving. Annals of the New York Academy of Sciences. 1981, 364, 269-278.

Nonverbal Leakage And Clues To Deception Psychiatry, 1969, 32, 88-105.

"You Can't Hide Your Lying Brain (or Can You?), by Tom Bartlett, Chronicle of Higher Education, May 6, 2010 ---
http://chronicle.com/blogPost/You-Cant-Hide-Your-Lying/23780/

Earlier this week Wired reported that a Brooklyn lawyer wanted to use fMRI brain scans to prove that his client was telling the truth. The case itself is an average employer-employee dispute, but using brains scans to tell whether someone is lying—which a few, small studies have suggested might be useful—would set a precedent for neuroscience in the courtroom. Plus, I'm pretty sure they did something like this on Star Trek once.

But why go to all the trouble of scanning someone's brain when you can just count how many times the person blinks? A study published this month in Psychology, Crime & Law found that when people were lying they blinked significantly less than when they were telling the truth. The authors suggest that lying requires more thinking and that this increased cognitive load could account for the reduction in blinking.

For the study, 13 participants "stole" an exam paper while 13 others did not. All 26 were questioned and the ones who had committed the mock theft blinked less when questioned about it than when questioned about other, unrelated issues. The innocent 13 didn't blink any more or less. Incidentally, the blinking was measured by electrodes, not observation.

But the authors aren't arguing that the blink method should be used in the courtroom. In fact, they think it might not work. Because the stakes in the study were low--no one was going to get into any trouble--it's unclear whether the results would translate to, say, a murder investigation. Maybe you blink less when being questioned about a murder even if you're innocent, just because you would naturally be nervous. Or maybe you're guilty but your contacts are bothering you. Who knows?

By the way, the lawyer's request to introduce the brain scanning evidence in court was rejected, but lawyers in another case plan to give it a shot later this month.

(The abstract of the study, conducted by Sharon Leal and Aldert Vrij, can be found here. The company that administers the lie-detection brain scans is called Cephos and their confident slogan is "The Science Behind the Truth.")

"The New Face of Emoticons: Warping photos could help text-based communications become more expressive," by Duncan Graham-Rowe, MIT's Technology Review, March 27, 2007 --- http://www.technologyreview.com/Infotech/18438/

Computer scientists at the University of Pittsburgh have developed a way to make e-mails, instant messaging, and texts just a bit more personalized. Their software will allow people to use images of their own faces instead of the more traditional emoticons to communicate their mood. By automatically warping their facial features, people can use a photo to depict any one of a range of different animated emotional expressions, such as happy, sad, angry, or surprised.

All that is needed is a single photo of the person, preferably with a neutral expression, says Xin Li, who developed the system, called Face Alive Icons. "The user can upload the image from their camera phone," he says. Then, by keying in familiar text symbols, such as ":)" for a smile, the user automatically contorts the face to reflect his or her desired expression.

"Already, people use avatars on message boards and in other settings," says Sheryl Brahnam, an assistant professor of computer information systems at MissouriStateUniversity, in Springfield. In many respects, she says, this system bridges the gap between emoticons and avatars.

This is not the first time that someone has tried to use photos in this way, says Li, who now works for Google in New York City. "But the traditional approach is to just send the image itself," he says. "The problem is, the size will be too big, particularly for low-bandwidth applications like PDAs and cell phones." Other approaches involve having to capture a different photo of the person for each unique emoticon, which only further increases the demand for bandwidth.

Li's solution is not to send the picture each time it is used, but to store a profile of the face on the recipient device. This profile consists of a decomposition of the original photo. Every time the user sends an emoticon, the face is reassembled on the recipient's device in such a way as to show the appropriate expression.

To make this possible, Li first created generic computational models for each type of expression. Working with Shi-Kuo Chang, a professor of computer science at the University of Pittsburgh, and Chieh-Chih Chang, at the Industrial Technology Research Institute, in Taiwan, Li created the models using a learning program to analyze the expressions in a database of facial expressions and extract features unique to each expression. Each of the resulting models acts like a set of instructions telling the program how to warp, or animate, a neutral face into each particular expression.

Once the photo has been captured, the user has to click on key areas to help the program identify key features of the face. The program can then decompose the image into sets of features that change and those that will remain unaffected by the warping process.

Finally, these "pieces" make up a profile that, although it has to be sent to each of a user's contacts, must only be sent once. This approach means that an unlimited number of expressions can be added to the system without increasing the file size or requiring any additional pictures to be taken.

Li says that preliminary evaluations carried out on eight subjects viewing hundreds of faces showed that the warped expressions are easily identifiable. The results of the evaluations are published in the current edition of the Journal of Visual Languages and Computing.

Continued in article

Bob Jensen's threads on visualization ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

Question
Do big bonuses lead to worse performance?

"Does Bigger Bonus Equal Worse Performance?Around the turn of every year, bankers can think of only one thing: the size of their bonuses," by Dan Ariely, Wall Street Technology, June 18, 2010 ---
http://wallstreetandtech.com/career-management/showArticle.jhtml?articleID=225700612&cid=nl_wallstreettech_daily
Thanks Jagdish!

Around the turn of every year, bankers can think of only one thing: the size of their bonuses.

Even beyond bonus season, they run different scenarios and assumptions, trying to calculate their number.

This distracts them so much that the bigger the bonus at stake, the worse the performance, according to behavioral economist Dan Ariely, who lays out his theory in his new book "The Upside of Irrationality" (HarperCollins, $27.99).

"For a long time we trained bankers to think they are the masters of the universe, have unique skills and deserve to be paid these amounts," said Ariely, who also wrote the New York Times bestseller "Predictably Irrational."

"It is going to be hard to convince them that they don't really have unique skills and that the amount they've been paid for the past years is too much."

Ariely's findings come as regulators try to rein in Wall Street's bonus culture after the 2008 financial collapse. The financial industry argues it needs to pay large bonuses to attract and motivate its top employees.

In an experiment in India, Ariely measured the impact of different bonuses on how participants did in a number of tasks that required creativity, concentration and problem-solving.

One of the tasks was Labyrinth, where the participants had to move a small steel ball through a maze avoiding holes. Ariely describes a man he identified as Anoopum, who stood to win the biggest bonus, staring at the steel ball as if it were prey.

"This is very, very important," Anoopum mumbled to himself. "I must succeed." But under the gun, Anoopum's hands trembled uncontrollably, and he failed time after time.

A large bonus was equal to five months of their regular pay, a medium-sized bonus was equivalent to about two weeks pay and a small bonus was a day's pay.

There was little difference in the performance of those receiving the small and medium-sized bonuses, while recipients of large bonuses performed worst.

SHOCK TREATMENT

More than a century ago, an experiment with rats in a maze rigged with electric shocks came to a similar conclusion. Every day, the rats had to learn how to navigate a new maze safely.

When the electric shocks were low, the rats had little incentive to avoid them. At medium intensity they learned their environment more quickly.

But when the shock intensity was very high, it seemed the rats could not focus on anything other than the fear of the shock.

This may provide lessons for regulators who want to change Wall Street's bonus culture, Ariely said. Paying no bonus or smaller bonuses could help fix skewed incentives without loss of talent.

"The reality is, a lot of places are able to attract great quality people without paying them what bankers are paid," Ariely said. "Do you think bankers are inherently smarter than other people? I don't." (Reporting by Kristina Cooke; Editing by Daniel Trotta)

"Dan Ariely: The Mind's Grey Areas: By controlling situations that create conflicts of interest, we can combat frauds and scandals better," Forbes, June 2010 --- Click Here
http://www.forbes.com/2010/06/15/forbes-india-dan-ariely-the-minds-grey-areas-opinions-ideas-10-ariely.html?boxes=Homepagelighttop

My interest in the irrationality of human behavior started many years ago in hospital after I had been badly burned. If you spend three years in a hospital with 70% of your body covered in burns, you are bound to notice several irrationalities. The one that bothered me in particular was the way my nurses would remove the bandage that wrapped my body. Now, there are two ways to remove a bandage. You can rip it off quickly, causing intense but short-term pain. Or you can remove it slowly, causing less intense pain but for a longer time.

My nurses believed in the quick method. It was incredibly painful, and I dreaded the moment of ripping with remarkable intensity. I begged them to find a better way to do this, but they told me that this was the best approach and that they knew the best way for removing bandages. It was their intuition against mine, and they chose theirs. Moreover, they thought it unnecessary to test what appeared (to them) to be intuitively right.

After leaving the hospital, I started doing experiments that simulated these two ripping methods. And I found that the nurses were wrong: Quick ripping turned out to be more painful than slow ripping. In my experiments, I discovered a collection of tricks that could have been used to lessen the pain or manage it more effectively. For instance, they could have started from the most painful part of the treatment and moved to less painful areas to give me a sense of improvement; they could have given me breaks in between to recover. There are great lessons to be learned from such experiments, lessons that apply to economics, markets, policymaking and even our personal lives.

Is there an idea you believe can change the world? Describe it in the comments section at the bottom of this story, and Forbes could publish your idea.

As it turns out, it is not that useful, and sometime even costly, to base our decisions on our intuitions. Instead, we need to inject some science in the way we go about everyday life because if one merely keeps following his instincts, he will continue making the same (preventable) mistakes.

Over the years, I have examined many topics related to the mistakes we all make when we make decisions, and one topic that I have explored in some depth is that of cheating behavior, and I would like to describe this in a bit more depth.

Bob Jensen's threads on rationality and behavioral economics are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH

Bob Jensen's threads on outrageous compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Better to watch porn at the SEC (you might get fired, however, for doing your job)

"SEC Settles Firing Claim For $755,000," by Kara Scannell, The Wall Street Journal, June 30, 2010 ---
http://online.wsj.com/article/SB20001424052748704103904575336813522797370.html#mod=todays_us_money_and_investing

The Securities and Exchange Commission agreed to pay $755,000 to an enforcement lawyer who said he was fired for aggressively pursuing an insider-trading case involving the hedge fund Pequot Capital Management.

The settlement, approved Tuesday by a judge with the U.S. Merit Systems Protection Board, ends the wrongful termination claim brought by Gary Aguirre. The dispute had triggered a congressional investigation into the agency's handling of the matter and brought a black eye to the federal securities regulator.

Mr. Aguirre said he was fired after seeking permission to interview a senior Wall Street executive in connection with the Pequot probe. Mr. Aguirre said the executive, John Mack, received special treatment because of his powerful position and high-profile attorney. Mr. Mack at the time was under consideration to become CEO of Morgan Stanley, a job he ultimately took. The SEC denied the allegation and a review by the agency's inspector general said it conducted a thorough investigation. Mr. Mack was never alleged to have engaged in any wrongdoing.

In May, after new information surfaced in a divorce case, Pequot founder Arthur Samberg agreed, without admitting or denying wrongdoing, to pay $28 million to settle allegations he engaged in insider trading of Microsoft stock.

The SEC also sued former Microsoft Corp. employee David Zilkha, who worked a short time at Pequot. He is contesting the allegations. Mr. Aguirre expressed regret that his firing prevented him from staying on the Pequot case. "Had we not been stopped in 2005, we may have been able to enforce the law in a way that would have told Wall Street that the SEC also was looking at big fish, which was a message it needed to hear at that time," he said. Mr. Aguirre added that his lawsuit "wasn't about money really. I felt more vindication really from the SEC's decision to file against Pequot and their willingness to pay $28 million."

Mr. Aguirre said he didn't seek to return to the SEC and that he will re-enter private practice after a two-month vacation.

The settlement equals Mr. Aguirre's pay for the years since his termination in September 2005 plus attorneys' fees, said the Government Accountability Project, a whistle-blower organization. Mr. Aguirre also agreed to drop two related cases against the SEC.

SEC spokesman John Nester said, "The settlement resolves all outstanding litigation between the parties and reflects the agency's determination to focus on its core mission of protecting investors."

Money as a Motivator

June 18, 2010 message from Bill Ellis [bill.ellis@furman.edu]

Daniel Pink - Drive
http://www.youtube.com/watch?v=u6XAPnuFjJc

Bob,

Here’s Daniel Pink’s latest book. This time he presents theories on motivation. This clever YouTube clip is a great animation explaining a point made in the book.

Bill Ellis, CPA, MPAcc
Furman University
Accounting UES
864-908-4743

June 19, 2010 reply from Bob Jensen

Hi Bill,

What a great animation video that makes such good points about compensation.

By the way, this animated video reminds me of why BYU’s variable-speed videos are so successful for teaching basic accounting --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo

Bob Jensen

Bob Jensen's threads on outrageous compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

KPMG Caught Up in Diebold's Bill and Hold Fraud

"Diebold Restatement Calls Its Integrity Into Question," by: George Gutowski, Seeking Alpha, October 3, 2007 ---
http://seekingalpha.com/article/48871-diebold-restatement-calls-its-integrity-into-question

Diebold (DBD) will change the way revenue is reported after its accounting practices came under SEC scrutiny, the company said in a press release issued Oct 2. Diebold may now record sales only after its products are delivered or installed, said spokesman Mike Jacobsen.

A quick scan of their financial statements includes this note to financial statements that defines revenue recognition.

Revenue Recognition The company's revenue recognition policy is consistent with the requirements of Statement of Position [SOP] 97-2, Software Revenue Recognition and Staff Accounting Bulletin 104 (SAB 104). In general, the company records revenue when it is realized, or realizable and earned. The company considers revenue to be realized or realizable and earned when the following revenue recognition requirements are met: persuasive evidence of an arrangement exists, which is a customer contract; the products or services have been provided to the customer; the sales price is fixed or determinable within the contract; and collectibility is probable. The sales of the company's products do not require production, modification or customization of the hardware or software after it is shipped.

Kudos to the SEC for finally protecting the investor. The corporate press release makes mention that while they are still figuring it out, they will have to restate previous financial reports, but do not believe that the cash position will be affected. This is universal corporate baffle gab. Investors are supposed to be quiet if the cash position does not change, everything else is not so important.

Essentially Diebold was not following its publicly stated policies. Diebold was not following accounting standards that investors should be able to rely on. KPMG the auditors in this case certified the statements when they should not have. The Board OK'ed everything. Governance! Governance! Governance!

What consequences will Diebold executives have for this inadequacy? Many in the political arena contend that their voting machines cannot count correctly. The SEC has definitively determined that the corporate accounting was not counting correctly.

Does Diebold have a corporate culture problem?

"SEC CHARGES DIEBOLD AND FORMER EXECUTIVES WITH ACCOUNTING FRAUD," AccountingEducation.com, June 2, 2010 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=151150

The Securities and Exchange Commission today charged Diebold, Inc. and three former financial executives for engaging in a fraudulent accounting scheme to inflate the company's earnings. The SEC separately filed an enforcement action against Diebold's former CEO seeking reimbursement of certain financial benefits that he received while Diebold was committing accounting fraud.

The SEC alleges that Diebold's financial management received "flash reports" sometimes on a daily basis comparing the company's actual earnings to analyst earnings forecasts. Diebold's financial management prepared "opportunity lists" of ways to close the gap between the company's actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold's financial performance.

Diebold an Ohio-based company that manufactures and sells ATMs, bank security systems and electronic voting machines agreed to pay a $25 million penalty to settle the SEC's charges. Diebold's former CEO Walden O'Dell agreed to reimburse cash bonuses, stock, and stock options under the "clawback" provision of the Sarbanes-Oxley Act.

The SEC's case against Diebold's former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller is ongoing.

"Diebold's financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," said Robert Khuzami, Director of the SEC's Division of Enforcement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."

Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "Section 304 of Sarbanes-Oxley is an important investor protection provision because it encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch. We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases."

Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

According to the SEC's complaint against Diebold, filed in U.S. District Court for the District of Columbia, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million. Among the fraudulent accounting practices used to inflate earnings and meet forecasts were: Improper use of "bill and hold" accounting.

Recognition of revenue on a lease agreement subject to a side buy-back agreement.

Manipulating reserves and accruals.

Improperly delaying and capitalizing expenses.

Writing up the value of used inventory.

Without admitting or denying the SEC's charges, Diebold consented to a final judgment ordering payment of the $25 million penalty and permanently enjoining the company from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.

The SEC charged Geswein, Krakora, and Miller, in a complaint filed in U.S. District Court for the Northern District of Ohio, with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b 5 and 13b2-1; and aiding and abetting Diebold's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. In addition, the SEC charged Geswein and Krakora with violating Exchange Act Rules 13a-14 and 13b2-2 and Section 304 of the Sarbanes-Oxley Act. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks officer-and-director bars against Geswein and Krakora as well as their reimbursement of bonuses and other incentive and equity compensation.

Scott Friestad, Robert Kaplan, Brian Quinn, Christopher Swart, Pierron Leef, and Kristen Dieter conducted the SEC's investigation in this matter. Litigation efforts in the ongoing case will be led by David Gottesman and Robyn Bender. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Northern District of Ohio and the Federal Bureau of Investigation.

For more details see http://www.thehighroad.us/showthread.php?t=204185

Bob Jensen's threads on Bill and Hold Fraud are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#BillAndHold

Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 25, 2010

Legal Fights Loom over Ratings-Firm Liability Rule
by: Jeannette Neumann
Jun 18, 2010
Click here to view the full article on WSJ.com

TOPICS: Corporate Governance, Disclosure, Disclosure Requirements, Financial Reporting, Legal Liability, Securitization

SUMMARY: "A panel of Senate and House lawmakers negotiating final details of a financial-overhaul bill agreed this week to allow investors to bring legal action against credit-rating firms that 'knowingly or recklessly' fail to 'conduct a reasonable investigation of the rated security.'" At least one legal analyst comments that the questions of "recklessly" and "reasonable" are likely to be the subjects of a string of lawsuits before their definitions are settled.

CLASSROOM APPLICATION: The three articles in this week's review all cover issues in disclosure and other corporate governance matters. All three articles are useful in any financial accounting or ethics course covering corporate social responsibility and governance issues. This article in particular continues coverage of the financial reform legislation stemming from the U.S. financial crisis.

QUESTIONS:
1. (Introductory) What is the purpose of credit-rating firms such as McGraw-Hill Cos. Standard & Poor's Corp. and Moody Corp.'s Moody's Investors Service?

2. (Introductory) What is the role that these entities are considered to have played in the financial crisis? (Hint: see the related article to answer this question.)

3. (Advanced) What will be the implication of allowing "investors to bring legal action against credit-rating firms..."?

4. (Advanced) Why would "ratings firms 'fear litigation more than they fear regulation'"?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Buffett to Testify to Crisis Panel on Moody's
by Aaron Lucchetti
May 27, 2010
Online Exclusive

"Legal Fights Loom over Ratings-Firm Liability Rule," by: Jeannette Neumann, The Wall Street Journal, Jun 18, 2010 ---
http://online.wsj.com/article/SB10001424052748703650604575313153186936336.html?mod=djem_jiewr_AC_domainid

Credit-rating firms are a big step closer to facing a harsher liability standard on their work. But it could take years for courts to decide what the planned rules mean.

A panel of Senate and House lawmakers negotiating final details of a financial-overhaul bill agreed this week to allow investors to bring legal action against credit-rating firms that "knowingly or recklessly" fail to "conduct a reasonable investigation of the rated security."

The new standard, if passed into law, likely would make it easier for investors to sue the ratings companies, such as McGraw-Hill Cos.' Standard & Poor's and Moody's Corp.'s Moody's Investors Service, which for long have enjoyed near immunity from liability for ratings gone awry.

But "what an 'investigation' is in this context is not an easy question," said Jonathan Macey, a professor of corporate governance and securities regulation at Yale Law School. "You're going to spend tons of time litigating that question."

Ratings firms and others studying the industry have maintained a tougher legal standard will come at a price. For one, companies may increase the cost of rating debt to balance the risk of litigation, said Joseph Mason, a professor of finance at Louisiana State University.

Ratings firms "fear litigation more than they fear regulation" because past regulation efforts haven't "been that draconian," said Scott McCleskey, a former Moody's compliance officer who has testified before Congress about the industry. He is now working at Complinet Inc. as managing editor, North America.

The new liability standard "strikes the right balance," Mr. McCleskey said, because it makes it easier for investors to sue credit-rating agencies, but it doesn't open the floodgates for a slew of lawsuits.

Representatives of the three major credit-rating firms, including Fitch Ratings, a unit of Fimalac SA, didn't immediately comment.

The news comes as the industry had a win in the Capitol Hill negotiations—a proposed delay in implementation of a quasigovernment board that would assign initial ratings for structured-finance bonds.

Rating firms had resisted the idea, and members of a conference committee on Wednesday agreed that the Securities and Exchange Commission should study whether to establish the entity, which would be designed to address potential conflicts of interest in the credit-ratings business.

Under the new plan, the SEC would be required to implement the proposed new board unless it determines that an alternate mechanism is more appropriate.

As for the higher liability standard, industry critics say it is high time the credit rating firms faced one. Raters were blamed for catalyzing the housing bubble by assigning their highest ratings to billions of dollars of financial products that later turned out to be worthless.

The credit rating agencies have invoked the First Amendment, largely with success, when faced with claims that their ratings were too high or too low. The First Amendment cannot protect the ratings companies from claims of fraud, lawyers say. But plaintiffs have a high legal hurdle to establish that a firm issued a fraudulent rating.

The credit rating agencies are "essentially liability proof and it's not because they're infallible," said Columbia Law School professor John Coffee, who helped craft the liability standard for the Senate bill, the version that was eventually chosen this week by the conference committee.

The goal of the new standard is to "make litigation a credible deterrent" by creating an incentive for the firms to step up due diligence measures, said Mr. Coffee. While some maintain that the phrase a "reasonable investigation" is unclear, Mr. Coffee says that if a rating company hires a due diligence firm to vet the data they are using for their rating, that should stand up in court as a "reasonable investigation."

Would the new standard have helped prevent the credit crisis? Not necessarily, said Mr. Macey, the Yale professor. "I don't think it would have significantly altered the probability of having this debacle" because the firms are still so tightly-knit into the financial system, he said. "It fails that litmus test."

The agreement on the liability standard is set to be included in a conference report to be sent to the House and the Senate for final approval. The provision could still be altered before a final compromise.

Bob Jensen's threads on credit rating agency scandals are at
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

"Notes from day 3 of June 2010 IASB-FASB meeting," IAS Plus, June 18. 2010 ---
http://www.iasplus.com/index.htm

Lessor accounting – Accounting models

In May 2010, the IASB expressed an interest in using a hybrid lessor accounting model. Under a hybrid model, a lessor would use a performance obligation approach to lessor accounting in some situations and a partial derecognition approach in others. The FASB have tentatively decided to adopt a performance obligation approach for all leases. The Boards debated whether the hybrid approach should be adopted for lessors' accounting.

Two possible variants of the hybrid approach were discussed (known as 'D' and 'F'):

Approach D would use the performance obligation approach for leases for which the lessor's exposure to the risks associated with the underlying asset is significant. (The IASB staff commented that this approach was similar to the existing requirement to classify leases as finance leases or operating leases. The performance obligation approach would apply to leases where the lessor's exposure to the underlying asset is significant (operating leases). The partial derecognition approach would apply to all other leases (finance leases).)

Approach F would use the partial derecognition approach for all leases except short term leases and leases of certain real estate (including but not limited to investment property as defined in IAS 40). (The IASB staff commented that this approach would avoid the problems associated with short-term leases and investment property leases and would result in the partial derecognition approach for most leases.)

Both approaches had their supporters, and the debate was heated at times. Those supporting the performance obligation approach usually would not accept the partial derecognition approach at all. However, some Board members did not think that either approach advanced lessor accounting significantly.

One Board member thought the approaches were looking at the wrong issue: to him the key issue was accounting for the underlying asset; the right to use that asset was a separate item to be accounted for under revenue recognition. However, this view did not receive support.

Ultimately, the session chairman determined that Approach D (performance obligation) had majority support among both Boards. However, the Boards then seemed to second-guess themselves as they were concerned that Approach D would challenge their decisions on leases with inseparable service elements on the previous day. A discussion ensued in which it became apparent that the IASB actually preferred a different lessor model in some cases – for example in leases involving real estate (both investment property and other real estate leases). This approach would bifurcate the lease payments: the lease element would be accounted for using the leasing standard; the service element using revenue recognition.

The Boards ended in two different places on this issue: the FASB were firmly (4 in favour) in the performance obligation (Approach D) approach. The IASB was firmly (11 in favour) in the bifurcation approach.

The session chairman asked the staff to develop realistic examples of both approaches to lessor accounting using a lease that included inseparable service elements. Those examples would be discussed in July.

One IASB member noted that he would not sign a ballot on the revenue recognition ballot draft while the lease accounting issue remain unresolved. This would mean that he would be unable to sign the ballot as the lease issue would not be resolved until after his term as a Board member expired.

Accounting for purchase options

The staff invited the Boards to reconsider their tentative decisions on accounting for purchase options. They proposed that the Boards adopt one of two fundamental approaches – as the staff was split, they were unable to make a definitive recommendation. Approach A would account for purchase options consistently with the accounting for options to extend or terminate a lease; Approach B would account for purchase options only upon exercise.

Some Board members who supported Approach B wanted bifurcate the option from the lease and account for the renewal option as any other kind of option. Purchase options were seen as fundamentally different from renewal options - a renewal option provided an additional period of a right to use; a purchase option gave access to the underlying asset. These are different in substance and deserved different accounting.

After another vigorous debate, a majority of both Boards (IASB: 10 in favour; FASB: 3 in favour) voted for Approach B. In follow-up votes, both Boards agreed that the option should not be bifurcated (that is, a 'do nothing with it' approach).

Insurance Contracts

Alternative views in the Exposure Draft

The IASB members who had indicated an intention to present an Alternative View in the forthcoming Insurance Contracts Exposure Draft outlined the likely reasons for their dissents.

John T Smith

Mr Smith would dissent for many of the reasons he dissented to the issue of IFRS 4 Insurance Contracts. In addition, he objects to the treatment of the risk adjustment, the treatment of renewal options, and the accounting for investment contracts with a discretionary participation feature issued by an insurance company. He summarised his reasons by saying that he does not think the package of decisions in the ED advanced financial reporting. He thought that IFRS users knew that IFRS 4 was imperfect; he did not want to convey the message that the ED was a better answer.

Jan Engstrom

Mr Engstrom noted that he was still assessing whether he would dissent.

He is concerned that the scope was too broad. He agreed that health, life and catastrophe (high severity, low risk) contracts should have 'insurance accounting'. However, he saw many general insurance contracts (fire, auto, etc) as being no different in substance to service contracts and to force them into the proposed insurance accounting model would not help the insurance companies or their investors.

He disagrees with the treatment of acquisition costs. He noted that other types of business incur substantial costs when securing a contract (he used a defence supply contract as an example). Payments to agents and other experts were expensed in the period incurred; he did not see these 'contract acquisition costs' as any different in substance to insurance contract acquisition costs and asked why they should get different accounting.

Finally, he is not convinced that he understands (and therefore can accept) the overall model to be proposed in the ED.

Patricia McConnell

Mrs McConnell had not yet confirmed her intention to dissent.

However, she was particularly concerned about the treatment of acquisition costs and issues of display and disclosure.

James Leisenring

Mr Leisenring noted that his dissent was moot, since the ED would not be balloted until after his term as a Board member expired. However, he would have dissented for a number of reasons.

Fundamentally, he believes that the approach to insurance accounting to be proposed in the ED is inconsistent with the IASB Framework in that it recognises things as assets and liabilities that demonstratively do not meet the definitions of assets and liabilities in the Framework.

He does not believe that the scope is operational, especially with respect to health care and investment contracts. He does not see the logic for not recording the cash surrender value of an insurance policy as a liability when it is, in substance, the same as the demand deposit floor, which is recorded as a liability.

He would also object to a number of the display issues highlighted by other Board members.

Bob Jensen's threads on accounting theory and standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm

Ketz Me If You Can
"CPA Firms and Credit Rating Agencies," by J. Edward Ketz, Smartpros, June 2010 ---
http://accounting.smartpros.com/x69608.xml

My father-in-law tells the story about when he was a young lad the cows wandered into the garlic patch; he drank the milk and gagged. While milk and garlic are great, they weren't meant to be combined. In the same way, I wonder why some are thinking about combining accounting firms and credit rating agencies.

The Financial Times ran the story on May 16. In particular, the reporters claimed that KPMG and PwC were evaluating whether to enter the world of credit rating, even quoting John Griffith Jones from KPMG that the firm was in fact “passively considering it.” PwC’s Richard Sexton added that CPA firms were always looking for ways to grow their business.

My first reaction was obvious—wouldn’t this relationship create a conflict of interest? The auditor examines the accounting reports and attests the assertions by management contained in those reports. A credit rating agency takes the quantitative and qualitative disclosures in the accounting reports—and other information—and evaluates the entity’s ability to repay the credit obligations on a timely basis. An enterprise that engaged in both tasks might be pulled to give a thumbs up for some accounting shenanigan to assure it received the fees of both audit and credit rating activities, rationalizing that it could always downgrade the firm’s rating.

If you think such rationalization is impossible, consider the strategic decisions made by Arthur Andersen in their Waste Management audit, as well as some of the others. To his credit, Mr. Jones acknowledged these conflicts of interest.

Let’s also review the structure of the audit process and the credit rating evaluation process. The audit firm is paid by the firm it audits. In today’s world, the credit rater is paid by the company it evaluates. Before the 1970s, this was not true; in fact, today’s conflicts of interest were avoided when rating agencies made their money by selling the information to investors. (See my essays on the performance of credit raters and on the SEC study of credit rating agencies.)

Notice that both business models are the same: revenues come from the party being evaluated. While neither structure is ideal, the audit process works as well as it does because securities laws allow aggrieved investors to sue auditors if it appears the auditor did not perform an adequate job. It isn’t perfect, but at least these disincentives help align the interests of auditors with the interests of the investment community.

Continued in article

Credit Rating Agencies ---- http://en.wikipedia.org/wiki/Credit_rating_agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2008 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Dun & Bradstreet

China Credit Information Service (China)

Fitch Ratings (U.S.)

Japan Credit Rating Agency (Japan)

Moody's Investors Service (U.S.)

Standard & Poor's (U.S.)

Rating Agency Malaysia (Malaysia)

Egan-Jones Rating Company (U.S.)

Brickwork Rating (India)

The Pakistan Credit Rating Agency Limited (Pakistan)

How to Get AAA Ratings on Junk Bonds

Pay cash under the table to credit rating agencies
Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
Hire away top-level credit rating agency employees with insider information and great networks inside the credit rating agencies

"Rating Agency Data Aided Wall Street in Deals," The New York Times, April 24, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/24/rating-agency-data-aided-wall-street-in-deals/#more-214847

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good, The New York Times’s Gretchen Morgenson and Louise Story report. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. Read More »

Bob Jensen's threads on credit rating agency scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

1996 Case Loses after 14 Years:
"PwC loses ruling on big Pa. healthcare bankruptcy," by Jonathan Stempe, Reuters, May 28, 2010 ---
http://www.reuters.com/article/idUSN2821575820100528

PricewaterhouseCoopers LLP suffered a defeat on Friday when a federal appeals court ordered an inquiry into whether the auditor dealt in good faith with a large Pennsylvania hospital system that went bankrupt.

The Third Circuit Court of Appeals in Philadelphia threw out a January 2007 ruling dismissing claims against PwC by a committee of unsecured creditors of behalf of the now defunct Allegheny Health, Education and Research Foundation.

These creditors accused Coopers & Lybrand LLP, one of PwC's predecessor companies, of conspiring with AHERF officials in the 1996 and 1997 fiscal years to hide the increasingly dire financial health of the Pittsburgh-based system.

AHERF ultimately sought Chapter 11 protection in July 1998, with about $1.3 billion of debt, in the largest U.S. nonprofit healthcare collapse. The system once ran 14 hospitals and two medical schools and employed an estimated 31,000 people.

It is not clear whether Friday's ruling will result in more litigation or prompt the parties to pursue a settlement.

PwC spokesman Steven Silber said company officials could not be reached for comment. James Jones, a Pittsburgh-based lawyer for the creditors, declined immediate comment.

In his 2007 ruling, U.S. District Judge David Cercone said the creditors could not recover on AHERF's behalf under a legal doctrine governing cases of equal fault, concluding AHERF was at least as much at fault as PwC.

But the Third Circuit asked the Pennsylvania Supreme Court for guidance on that state's law, including whether an auditor such as PwC could be held liable for breach of contract, negligence or aiding and abetting a breach of fiduciary duty.

Writing for a unanimous three-judge panel of the Third Circuit, Judge Thomas Ambro adopted the Pennsylvania court's conclusion that an auditor could be held liable if it had "not dealt materially in good faith with the client-principal."

This effectively barred the equal fault defense in cases of "secretive collusion between officers and auditors to misstate corporate finances to the corporation's ultimate detriment."

Ambro also directed the district court to reconsider its finding that misstated financials could have been a short-term "benefit" to AHERF.

He said that, as a matter of law, "a knowing, secretive, fraudulent misstatement of corporate financial information" cannot benefit a company.

The AHERF bankruptcy generated much litigation and regulatory activity. In 2007, the bond insurer MBIA Inc (MBI.N) agreed to pay $75 million to settle regulatory fraud charges over a reinsurance transaction involving defaulted AHERF debt.

The case is Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers LLP, U.S. Third Circuit Court of Appeals, No. 07-1397. (Reporting by Jonathan Stempel; editing by Steve Orlofsky and Andre Grenon)

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

A Two-Part Teaching Case: The Cost of Quality Versus the Cost of Poor Quality
Two decades ago, managerial and cost accounting textbooks and courses began to run modules on the "cost of quality" or to be more accurate the cost of poor quality. The following case fits into these types of modules.

From The Wall Street Journal Accounting Weekly Review on May 21, 2010

FDA Widens Probe of J&J's McNeil Unit
by: Jonathan D. Rockoff
May 18, 2010
Click here to view the full article on WSJ.com

TOPICS: Cost Management, Product Recall, Quality Costs

SUMMARY: On April 30, 2010, Johnson & Johnson "...recalled a number of over-the-counter medicines for children and infants after receiving complaints from consumers and discovering manufacturing problems. The company also closed the plant in Fort Washington, PA, that made the recalled products until it fixes the issues and can assure quality production....The FDA conducted a routine inspection of the Fort Washington plant last month. Agency inspectors found that the J&J unit received 46 complaints from consumers between June 2009 and April 2010 regarding 'foreign materials, black or dark specks' in certain medicines.'" The FDA has now widened its investigation and the J&J McNeil Consumer Healthcare unit that makes these products is conducting a comprehensive quality assessment over all its manufacturing operations. "Some parents say the recall has weakened J&J's sterling reputation for quality. The recall has also prompted a congressional investigation of the company's handling of consumer complaints and the adequacy of the FDA's inspections."

CLASSROOM APPLICATION: Questions focus on concepts in the cost of quality.

QUESTIONS:
1. (Introductory) How crucial is the concept of quality to Johnson & Johnson operations and profitability?

2. (Advanced) Define the terms "cost of quality" or "quality cost" and related concepts of 'prevention costs" and "appraisal costs."

3. (Advanced) Which of the categories of quality costs-prevention or appraisal-is about to increase significantly at J&J? Explain your answer.

4. (Advanced) Define the concepts of "internal failure costs" and "external failure costs."

5. (Advanced) The FDA and congress may investigate J&J's handling of consumer complaint. Under what part of the quality control process does handling these complaints fall under?

Reviewed By: Judy Beckman, University of Rhode Island

"FDA Widens Probe of J&J's McNeil Unit," by: Jonathan D. Rockoff, The Wall Street Journal, May 18, 2010

The Food and Drug Administration has widened its investigation into the recent recall of certain Johnson & Johnson children's medicines and is now inquiring into manufacturing across the company's consumer health-care unit.

J&J's McNeil Consumer Healthcare makes a range of products for adults and kids, notably Benadryl, St. Joseph aspirin, Motrin, Tylenol and Zyrtec.

On April 30, the company recalled a number of over-the-counter medicines for children and infants after receiving complaints from consumers and discovering manufacturing problems. The company also closed the plant in Fort Washington, Pa., that made the recalled products until it fixes the issues and can assure quality production.

The recall of the liquid children's medicines was the third by the J&J unit since last September. An FDA spokeswoman said there had been no specific complaints about products from other McNeil facilities. But given the history of recent recalls, the FDA wanted to make sure there weren't any similar manufacturing problems and to identify any steps the agency must take to prevent the problems from recurring.

Besides Fort Washington, J&J's McNeil unit has plants in Lancaster, Pa., and Las Piedras, Puerto Rico.

"We're doing our due diligence," said FDA spokeswoman Elaine Gansz Bobo.

The J&J unit "is conducting a comprehensive quality assessment across its manufacturing operations and continues to cooperate with the FDA," a company spokeswoman said.

Some parents say the recall has weakened J&J's reputation for quality. The recall has also prompted a congressional investigation of the company's handling of consumer complaints and the adequacy of the FDA's inspections. The House Committee on Oversight and Government Reform has asked J&J Chief Executive William Weldon to testify at a hearing on May 27.

The FDA and J&J have told the committee they will cooperate and are in the process of answering its questions, and the committee expects that Mr. Weldon will attend, said Kurt Bardella, a spokesman for Rep. Darrell Issa (R., Calif.), the panel's ranking Republican.

A J&J spokesman said the company is communicating with the committee and will respond appropriately to the panel's request but declined to say if Mr. Weldon will appear.

The recall last month involved more than 40 different Tylenol, Benadryl, Motrin and Zyrtec products for children and infants. Some of the medicines had higher concentrations of active ingredient than specified, and some products may contain tiny metallic particles left as a residue from the manufacturing process, according to J&J's McNeil unit.

The FDA conducted a routine inspection of the Fort Washington plant last month. Agency inspectors found that the J&J unit received 46 complaints from consumers between June 2009 and April 2010 regarding "foreign materials, black or dark specks" in certain medicines. The FDA also said bacteria contaminated raw materials to be used to make several lots of Tylenol products for children.

FDA has begun to review all complaints it has received to determine whether the recalled products caused any serious side effects. The agency has said the chances that the recalled products could cause harm were remote, but warned parents not to use the products as a precaution.

Update on June 3, 2010
From The Wall Street Journal Accounting Weekly Review on June 3, 2010

J&J Recall Probe Expands to Others
by: Jonathan D. Rockoff
Jun 03, 2010
Click here to view the full article on WSJ.com

TOPICS: Cost Accounting, Managerial Accounting, Product Recall

SUMMARY: "A Congressional probe of a Johnson & Johnson unit's manufacturing problems is spreading beyond the company's recent recall of its children's medicines to withdrawals of other over-the-counter products." The House Committee on Oversight and Government Reform also contacted Blacksmith Brands about its recall of PediaCare cough and cold medicines. The company purchased the Pedia line from J&J's McNeil Consumer Healthcare unit in 2009 and those products also were made in the same facility in which the other problem products were made.

CLASSROOM APPLICATION: This review follows on initial coverage of this issue on 5/20/2010. Questions focus on concepts in the cost of quality for management accounting classes and on implications for financial accounting and reporting for product recalls for financial accounting classes.

QUESTIONS:
1. (Advanced) Define the terms "cost of quality" or "quality cost" and related concepts of 'prevention costs" and "appraisal costs."

2. (Introductory) Which of the categories of quality costs-prevention or appraisal-are occurring at Johnson &Johnson's McNeil unit and at Blacksmith Brands, who bought J&J's PediaCare medicines, in response to manufacturing defects in over the counter medicines?

3. (Advanced) Define the concepts of "internal failure costs" and "external failure costs."

4. (Introductory) The FDA and Congress also are investigating J&J's use of an outside contractor "after discovering in late 2008 that some Motrin wasn't dissolving correctly." Under what part of the quality control process does the cost of using such a contractor fall? Specifically comment in light of J&J's statements about the purpose of hiring the contractor.

5. (Advanced) Summarize the financial accounting and reporting implications of a product recall such the one that Blacksmith Brands has issued for PediaCare cough and cold medicines.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
More Children's Medicine Made at J&J Facility Is Recalled
by Jonathan D. Rockoff
May 29, 2010
Online Exclusive

"J&J Probe Expands to Other Products," by: Jonathan D. Rockoff, The Wall Street Journal, June 2, 2010 ---
http://online.wsj.com/article/SB10001424052748704515704575283103714261396.html?mod=djem_jiewr_AC_domainid

A Congressional probe of a Johnson & Johnson unit's manufacturing problems is spreading beyond the company's recent recall of its children's medicines to withdrawals of other over-the-counter products.

The House Committee on Oversight and Government Reform asked Blacksmith Brands on Tuesday for further information about its recall last week of PediaCare cough and cold medicines. Those products were made by J&J at the same Fort Washington, Pa., plant that produced children's Tylenol and other recalled kids drugs.

J&J's McNeil Consumer Healthcare unit had recalled certain Benadryl, Motrin, Tylenol and Zyrtec pain and cold medicines for children on April 30 because of manufacturing problems including the potential for metal particles in the products. J&J has temporarily shut the plant.

A spokesman for Blacksmith Brands, of Tarrytown, N.Y., called the committee's request standard in the event of recalls and said the company would cooperate. Blacksmith Brands bought the four recalled PediaCare products from J&J's McNeil unit last year, and had arranged prior to the recall for other plants to make them starting in July.

The House committee sought information from WIS International, a merchandising consultant, as part of its examination of McNeil's handling of defective Motrin pain relief pills, according to a person familiar with the investigation.

In 2008, J&J's McNeil unit discovered that some of the pills weren't dissolving correctly. It hired a contractor to purchase the product from store shelves, according to documents released at the Congressional committee hearing last week.

The contractor advised its workers to buy up the Motrin packages, and to act like customers, making no reference to this being a recall, according to a memo released at the hearing.

In July 2009, McNeil issued a recall of the Motrin product.

Colleen Goggins, who oversees J&J's consumer group, told lawmakers last week that the company didn't have "any intent to mislead or hide anything" and that it had told the FDA it had hired a contractor to statistically sample the products. A J&J spokeswoman said it is looking into the contractor's work and would report back to the committee.

She wouldn't comment on whether WIS International was the contractor in the memo.

An entity called "WIS" is named in the contractor's memo.

Officials at the company did not return messages left Wednesday seeking comment. On Tuesday, Dave Haller, vice president of sales, account management and marketing, said: "We don't comment on activities for our clients, and Johnson & Johnson is not a client of ours." He would not say whether J&J or one of its units had been a client in the past.

WIS International, which has headquarters in San Diego, Calif., and Mississauga, Ontario, counts inventory on behalf of retailers, hospitals and other kinds of firms. It also helps manufacturers recall tainted products from retail store shelves.

The company's website says it has "worked on recalls and product purchases ranging from a few hundred stores to nearly 60,000."

May 21. 2010 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

Bob,

Using these cases is a good place to introduce and compare the various quality models including Juran's Zero defects, Taguchi's Loss function, and Deming's Robust quality philosophy.

(http://maaw.info/ConstrainoptTechs.htm#Quality Models Compared). It also leads to the Six Sigma approach to quality (http://maaw.info/SixSigmaSummary.htm), many other concepts and arguments related to quality (http://maaw.info/QualityRelatedMain.htm), and the controversy over constrained optimization concepts in general (http://maaw.info/ConstrOptMain.htm).

Bob Jensen's threads on managerial and cost accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#ManagementAccounting

Tax and Tax Evasion Fraud Teaching Cases from The Wall Street Journal Accounting Weekly Review on June 11, 2010

Showdown on Fund Taxes
by: Peter Lattman and Laura Saunders
Jun 09, 2010
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: REIT, Tax Laws, Tax Policy, Taxation

SUMMARY: A bill being co-sponsored by Rep. Sander Levin (D-Mich.) and Max Baucus (D-Mont.) proposed to increase taxes on gains by certain partnerships when selling assets, when partners sell out, and when an entire partnership is sold. Current law taxes these transactions at 15% capital gains rates; the proposal increases the rate to 30% in 2011 and 33% in 2013. Partnerships affected include those in venture capital, private equity, real estate and commodities.

CLASSROOM APPLICATION: The article is useful for partnership taxation courses.

QUESTIONS:
1. (Introductory) What types of entities might be impacted by a proposal for tax law changes recently proposed by Democrat Senators?

2. (Advanced) What is 'carried-interest' income to fund managers? How is this item part of a fund manager's basic compensation, like wages? How is this item like a capital gain?

3. (Advanced) What is the difference between taxation of capital gains and taxation of wages? Why are these differences part of the tax law?

4. (Advanced) What is the "enterprise-value tax" that is also proposed as part of the bill being co-sponsored by Rep. Sander Levin (D-Mich.) and Max Baucus (D-Mont.)?

Reviewed By: Judy Beckman, University of Rhode Island

Swiss Lower House Rejects UBS Pact
by: Deborah Ball
Jun 09, 2010
Click here to view the full article on WSJ.com

TOPICS: IRS, Tax Avoidance, Tax Evasion, Tax Havens, Taxation

SUMMARY: "Last August, the U.S. and Switzerland reached a deal to settle a case involving hidden offshore accounts at the banking giant. The U.S. accused UBS of having helped thousands of Americans avoid paying taxes at home by setting up the offshore accounts. UBS admitted wrongdoing and agreed to hand over the names of 4,450 American account holders to the U.S. Internal Revenue Service by August." Switzerland's lower house has now rejected "..a bill that would have allowed the government to provide the U.S. with the names of UBS account holders allegedly dodging American taxes." Previously, the Swiss Senate approved such a bill. The original agreement with UBS arose after a former UBS executive, Bradley Birkenfeld, told U.S. officials that the bank allegedly began telling American customers in 2002 it wasn't required to disclose their identities to the Internal Revenue Service, as described in the second related article.

CLASSROOM APPLICATION: The article is useful in tax classes to discuss tax avoidance versus tax evasion and offshore tax havens.

QUESTIONS:
1. (Advanced) What is the difference between tax avoidance and tax evasion?

2. (Introductory) What is the nature of the Swiss banking industry that makes the U.S. IRS want to access names of U.S. citizens with Swiss bank accounts in a search for tax evaders?

3. (Advanced) How are this IRS investigation and the agreement between UBS and the IRS likely to impact the Swiss banking industry?

4. (Advanced) Why do you think that the Swiss legislature voted as it did during the week of June 7, 2010?

5. (Introductory) What options are left for the IRS if the proposed law does not pass the Swiss legislative authority?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Related: Swiss Report Slams Government Over UBS Crisis
by Katharina Bart
Jun 01, 2010
Online Exclusive

Swiss Bank to Give Up Depositors' Names to Prosecutors
by Evan Perez and Carrick Mollenkamp
Feb 19, 2009
Page: A1

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

Humor Between June 1 and June 30, 2010

Ray Stevens - Illegal Immigrants Assistance Program ---
http://www.youtube.com/watch?v=WgOHOHKBEqE

Jagdish Gangolly clued me in on this link
Tom Lehrer on the great Russian mathgematician Lobachevsky:
http://www.youtube.com/watch?v=RNC-aj76zI4&feature=related

Forwarded by Gene and Joan

A SpanishTeacher was explaining to her class that in Spanish, unlike English, nouns are designated as either masculine or feminine.

'House' for instance, is feminine: 'la casa.' 'Pencil,' however, is masculine: 'el lapiz.'

A student asked, 'What gender is 'computer'?'

Instead of giving the answer, the teacher split the class into two groups, male and female, and asked them to decide for themselves whether computer' should be a masculine or a feminine noun. Each group was asked to give four reasons for its recommendation.

The men's group decided that 'computer' should definitely be of the feminine gender ('la computadora'), because:

1. No one but their creator understands their internal logic;

2. The native language they use to communicate with other computers is incomprehensible to everyone else;

3. Even the smallest mistakes are stored in long term memory for possible later retrieval; and

4. As soon as you make a commitment to one, you find yourself spending half your paycheck on accessories for it.

(THIS GETS BETTER!)

The women's group, however, concluded that computers should be Masculine ('el computador'), because:

1. In order to do anything with them, you have to turn them on;

2. They have a lot of data but still can't think for themselves;

3. They are supposed to help you solve problems, but half the time they ARE the problem; and

4. As soon as you commit to one, you realize that if you had waited a little longer, you could have gotten a better model.

The women won.

Send this to all the smart women you know...and all the men that have a sense of humor.

Comedy Video on Financial Crises
I'm beginning to think these are not perfect storms. I'm beginning to think these are regular storms and we just have a sh**ty boat.
Jon Stewart --- http://financeprofessorblog.blogspot.com/2010/05/jon-stewart-takes-on-perfect-storms.html

Groups of free riders on the Paris Metro have created informal insurance pools that pay the fine when riders get caught. The groups call themselves mutuelles des fraudeurs -- fraudster mutuals.
NPR --- http://www.npr.org/blogs/money/2010/05/dont_pay_your_fare_on_the_subw.html
Jensen Comment
One issue not considered in the above article is how many misdemeanors it takes for the sum to become a felony.

Also could these frauds affect credit scores?

Forwarded by Auntie Bev

Awful Puns For the Educated

1. King Ozymandias of Assyria was running low on cash after years of war with the Hittites. His last great possession was the Star of the Euphrates, the most valuable diamond in the ancient world. Desperate, he went to Croesus, the pawnbroker, to ask for a loan.

Croesus said, "I'll give you 100,000 dinars for it."

"But I paid a million dinars for it," the King protested. "Don't you know who I am? I am the king!"

Croesus replied, "When you wish to pawn a Star, makes no difference who you are."

2. Evidence has been found that William Tell and his family were avid bowlers. Unfortunately, all the Swiss league records were destroyed in a fire, ...and so we'll never know for whom the Tells bowled.

3. A man rushed into a busy doctor's office and shouted, "Doctor! I think I'm shrinking!" The doctor calmly responded, "Now, settle down. You'll just have to be a little patient."

4. A marine biologist developed a race of genetically engineered dolphins that could live forever if they were fed a steady diet of seagulls. One day, his supply of the birds ran out so he had to go out and trap some more. On the way back, he spied two lions asleep on the road. Afraid to wake them, he gingerly stepped over them. Immediately, he was arrested and charged with-- transporting gulls across sedate lions for immortal porpoises.

5. Back in the 1800's the Tate's Watch Company of Massachusetts wanted to produce other products, and since they already made the cases for watches, they used them to produce compasses. The new compasses were so bad that people often ended up in Canada or Mexico rather than California. This, of course, is the origin of the expression -- "He who has a Tate's is lost!"

6. A thief broke into the local police station and stole all the toilets and urinals, leaving no clues. A spokesperson was quoted as saying, "We have absolutely nothing to go on."

7. An Indian chief was feeling very sick, so he summoned the medicine man. After a brief examination, the medicine man took out a long, thin strip of elk rawhide and gave it to the chief, telling him to bite off, chew, and swallow one inch of the leather every day. After a month, the medicine man returned to see how the chief was feeling. The chief shrugged and said, "The thong is ended, but the malady lingers on."

8. A famous Viking explorer returned home from a voyage and found his name missing from the town register. His wife insisted on complaining to the local civic official who apologized profusely saying, "I must have taken Leif off my census."

9. There were three Indian squaws. One slept on a deer skin, one slept on an elk skin, and the third slept on a hippopotamus skin. All three became pregnant. The first two each had a baby boy. The one who slept on the hippopotamus skin had twin boys. This just goes to prove that... the squaw of the hippopotamus is equal to the sons of the squaws of the other two hides. (Some of you may need help with this one).

10. A skeptical anthropologist was cataloging South American folk remedies with the assistance of a tribal Brujo who indicated that the leaves of a particular fern were a sure cure for any case of constipation. When the anthropologist expressed his doubts, the Brujo looked him in the eye and said, "Let me tell you, with fronds like these, you don't need enemas."

Digital Comic Museum --- http://digitalcomicmuseum.com/

Forwarded from Romania by Dan Gheorghe Somnea [dan_somnea@yahoo.com]

AMAZING ANAGRAMS
Someone out there
Must be "deadly" at Scrabble..
(Wait till you see the last one)!

PRESBYTERIAN:
When you rearrange the letters:
BEST IN PRAYER

ASTRONOMER:
When you rearrange the letters:
MOON STARER

DESPERATION:
When you rearrange the letters:
A ROPE ENDS IT

THE EYES:
When you rearrange the letters:
THEY SEE

GEORGE BUSH:
When you rearrange the letters:
HE BUGS GORE

THE MORSE CODE:
When you rearrange the letters:
HERE COME DOTS

DORMITORY:
When you rearrange the letters:
DIRTY ROOM

SLOT MACHINES:
When you rearrange the letters:
CASH LOST IN ME

ANIMOSITY:
When you rearrange the letters:
IS NO AMITY

ELECTION RESULTS:
When you rearrange the letters:
LIES - LET'S RECOUNT

SNOOZE ALARMS:
When you rearrange the letters:
ALAS! NO MORE Z 'S

A DECIMAL POINT:
When you rearrange the letters:
I'M A DOT IN PLACE

THE EARTHQUAKES:
When you rearrange the letters:
THAT QUEER SHAKE

ELEVEN PLUS TWO:
When you rearrange the letters:
TWELVE PLUS ONE

AND FOR THE GRAND FINALE:

MOTHER-IN-LAW:
When you rearrange the letters:
WOMAN HITLER
======

Forwarded by Auntie Bev

More Reasons to have a bottle or two in the house! ! ! !

Who Knew???

1. To remove a bandage painlessly, Saturate the bandage with vodka. The stuff dissolves adhesive.

________________________________________

2. To clean the caulking around bathtubs and showers, Fill a trigger-spray bottle with vodka, spray the caulking, Let set five minutes and wash clean. The alcohol in the vodka kills mold and mildew.

________________________________________

3. To clean your eyeglasses, Simply wipe the lenses with a soft, Clean cloth dampened with vodka. The alcohol in the vodka cleans the glass and kills germs.

________________________________________

4. Prolong the life of razors by filling a cup with vodka And letting your safety razor blade Soak in the alcohol after shaving. The vodka disinfects the blade and prevents rusting.

________________________________________

5. Spray vodka on wine stains, Scrub with a brush, and then blot dry.

________________________________________

6. Using a cotton ball, apply vodka to your face As an astringent to cleanse the skin and tighten pores.

________________________________________

7. Add a jigger of vodka to a 12-ounce bottle of shampoo. The alcohol cleanses the scalp,removes toxins from hair, And stimulates the growth of healthy hair.

________________________________________

8. Fill a sixteen-ounce trigger-spray bottle with vodka And spray bees or wasps to kill them.

________________________________________

9 Pour one-half cup vodka And one-half cup water into a Ziploc freezer bag And freeze for a slushy, refreshing ice pack for aches, Pain or black eyes.

________________________________________

10. Fill a clean, used mayonnaise jar With freshly packed lavender flowers, Fill the jar with vodka, seal the lid tightly And set in the sun for three days. Strain liquid through a coffee filter, Then apply the tincture to aches and pains.

________________________________________

11. To relieve a fever, use a washcloth To rub vodka on your chest and back as a liniment.

________________________________________

12. To cure foot odor, Wash your feet with vodka.

________________________________________

13 Vodka will disinfect And alleviate a jellyfish sting.

________________________________________

14. Pour vodka over an area affected with poison ivy To remove the POISON IVY oil from your skin.

________________________________________

15. Swish a shot of vodka over an aching tooth. Allow your gums to absorb some of the alcohol to numb the pain.

________________________________________

And silly me! I used to just drink it !

Forwarded by Auntie Bev

Senior personal ads from Florida newspaper

Who says seniors don't have a sense of humour?

FOXY LADY: Sexy, fashion-conscious blue-haired beauty, 80's, slim, 5'4" (used to be 5'6"), Searching for sharp-looking, Sharp-dressing companion. Matching white shoes and belt a plus.

LONG-TERM COMMITMENT: Recent widow who has just buried fourth husband, And am looking for someone to Round out a six-unit plot. Dizziness, fainting, shortness of breath Not a problem.

SERENITY NOW: I am into solitude, long walks, Sunrises, the ocean, yoga and meditation. If you are the silent type, let's get together, Take our hearing aids out and enjoy quiet times.. BEATLES OR STONES? I still like to rock, Still like to cruise in my Camaro on Saturday nights And still like to play the guitar. If you were a groovy chick, Or are now a groovy hen, let's get together And listen to my eight-track tapes.

WINNING SMILE: Active grandmother with original teeth Seeking a dedicated flosser to share rare steaks, Corn on the cob and caramel candy

MEMORIES: I can usually remember Monday through Thursday. If you can remember Friday, Saturday and Sunday, let's put our two heads together.

MINT CONDITION: Male, 1932, high mileage, Good condition, some hair, Many new parts including hip, knee, cornea, valves. Isn't in running condition, but walks well.

Forwarded by Maureen

A little boy got on the bus, sat next to a man reading a book, and noticed he had his collar on backwards. The little boy asked why he wore his collar backwards.

The man, who was a priest, said, 'I am a Father.'

The little boy replied, 'My Daddy doesn't wear his collar like that.'

The priest looked up from his book and answered, ''I am the Father of many.'

The boy said, ''My Dad has 4 boys, 4 girls and two grandchildren and he doesn't wear his collar that way!'

The priest, getting impatient, said. 'I am the Father of hundreds', and went back to reading his book.

The little boy sat quietly thinking for a while, then leaned over and said, 'Maybe you should wear a condom and put your pants on backwards instead of your collar.'

"GMAT will replace an essay with sets of problems requiring different forms of analysis. Will this fend off competition from the GRE?" by Scott Jaschick, Inside Higher Ed, June 25, 2010 --- http://www.insidehighered.com/news/2010/06/25/gmat

Jensen Comment
GMAT testing officials were among the first to adopt computer grading rather than human grading of essays. I guess that will no longer be the case since the essay will disappear on the GMAT. However, perhaps the GMAT will still have some shorter essay questions.
http://www.trinity.edu/rjensen/assess.htm#ComputerBasedAssessment

"BP spoof video is runaway hit for UCB website," MIT's Technology Review, June 25, 2010 ---
http://www.technologyreview.com/wire/25663/?nlid=3166&a=f

The most memorable comedic take on the oil spill disaster in the Gulf of Mexico hasn't come from "Saturday Night Live," ''The Daily Show" or a late-night monologue.

Instead, a cheaply made video by an unlikely New York improv troupe has created the only commentary that has truly resonated online: a three-minute spoof that shows BP executives pathetically trying to clean up a coffee spill.

In the video, BP execs are in the middle of a meeting when someone overturns a coffee cup. The liquid oozes across the conference table. One exec says it will "destroy all the fish" (his sushi lunch); another says it's encroaching on his map of Louisiana. They try to contain the coffee spill by wrapping their arms around the perimeter, dumping garbage on top to absorb the liquid, clipping hair over it and other stupid human tricks.

Three hours later, the spill remains with all the mess left from attempts to contain it: paper, hair, soil, plants, etc. Finally, they get Kevin Costner on the phone.

"He'll know what to do for sure," an exec says with great hope.

"Do you have a golf ball?" Costner asks. No. A pingpong ball? Yes. Costner tells them to throw it at the spill. They do. Nothing happens. Then: 47 days later. The spill and the mess are still there with BP execs no closer to a solution.

In the last two weeks, the video has been watched by nearly 7 million people on YouTube. By the count of Viral Video Chart, it's been shared some 300,000 times on blogs, Facebook pages and Twitter feeds.

The video was dreamed up by the writers for the sketch show "Beneath Gristedes," a monthly stage show at the Upright Citizens Brigade Theatre in New York. While meeting to work on the show, a germ of the concept came to Erik Tanouye, who worked out the script with fellow writers John Frusciante, Gavin Spieller and Eric Scott.

They shot it two days later and within a week, it was up on UCBComedy.com. The site has had some viral hits -- a parody of a Google ad, a spoof of the "David After the Dentist" video -- but nothing on this level. UCBComedy.com's servers immediately crashed under the traffic.

"I couldn't do my day job," said Tanouye, 32, who is the director of student affairs for the UCB training center.

It's been the biggest hit yet for UCBComedy.com, which was founded in 2007 to give its performers an online outlet. The Upright Citizens Brigade Theatre, which has popular theaters in New York and Los Angeles, was co-founded by Amy Poehler.

For more than a decade, it has regularly churned out exciting young comic talent, including "SNL" players Bobby Moynihan and Jenny Slate, and "Office" regular Zach Woods. Young audiences line up on a nightly basis to pack the 300-seat New York theater, which has a youthful, collegiate vibe.

"What we're trying to do with videos is get out there to the general public the talent that we have," says Todd Bieber, 30, the website's director of content and production. "We can reach New York and L.A. audiences pretty easily, but there's a whole world out there that we can't reach through the theaters."

The boost in visitors to the site has been considerable. From May 21-June 21 last year, the site drew just under 43,000; the same period this year has attracted more than 450,000.

But Bieber, who formerly worked at the Onion News Network, is the only one being paid to work full time on the site. Videos don't have anything like the budgets of the Onion News Network, which shoots in the style of real news broadcasts.

UCBComedy.com includes a lot of footage of improv performances, which typically have much more energy in person, where the thrill of instant creation is immediate. But the dozens of UCB performers -- who are graduates of the theater's improv training classes -- have learned to fashion their comedy to the Web.

"Beta teams" -- performers dedicated to producing content for the site -- were formed in January. Original series have been created, including one called "Blackouts," which are short 30-second bites, one punch line at a time.

Bieber says that a viral sensation such as "BP Spills Coffee" can "energize the UCB community" in creating video for the website. Having so much talent at the ready makes UCBComedy.com a little like an amateur version of FunnyOrDie.com, the comedy site co-founded by Will Ferrell and Adam McKay, which pulls contributions from famous comedians.

"That's the hope," says Bieber. "There are so many terribly ridiculous things going on in the world that there's plenty of room for commentary. If we can be looked in the same way as FunnyOrDie, that would be terrific. We'd love to get the hits that they do."

There's plenty of competition when it comes to topical humor, though, and the oil spill has been a common topic. The slow-motion horror of the spill is utterly serious, but people have long turned to comics to give voice to rage. BP, which is said to have mismanaged the spill, has been an easy target.

David Letterman, Jay Leno and other late-night hosts have made BP jokes practically a nightly feature. Conan O'Brien, perhaps feeling like he was missing out, recently tweeted: "The past 2 months I've been on tour and haven't followed the news. What's with all the photos of chocolate pelicans?"

"The Colbert Report" and "The Daily Show" have battered the subject relentlessly. Mixing comedy with activism, Colbert Nation has launched a "Gulf of America Fund" to raise donations for the recovery efforts. "SNL" is off for the summer and so has missed the opportunity to lampoon BP.

One of the more interesting Internet-based parodies has been a mock Twitter feed, purporting to be from BP's public relations department: http://twitter.com/BPGlobalPR. It has more than 175,000 followers. One example: "Investing a lot of time & money into cleaning up our image, but the beaches are next on the to-do list for sure."

But the success of the UCB's video could well be a firm foothold in the world of online comedy, and boost the troupe's national presence.

"People can see these amazing talents come up," says Bieber. "As awesome as the theater is, at the end of the day, that sketch would have killed for 200 or 300 people, not 6 or 7 million."

Jensen Links to Some Other BP Videos

http://www.youtube.com/watch?v=2AAa0gd7ClM

http://www.youtube.com/watch?v=aPbZe43pTC8

http://www.youtube.com/watch?v=40kYQd7ybRA

http://www.youtube.com/watch?v=MLdAJn7YxeE
After the June 23 loss of the containment cap, 60,000 barrels per day are gushing out
This is no joking matter

David Albrecht has some YouTube recommendations at
http://profalbrecht.wordpress.com/2010/06/25/bp-in-social-commentary/

Bob Jensen's threads on Enron humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

Humor Between June 1 and June 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor063010

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

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 June 30, 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

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 Reality

I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)
From http://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

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

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/

May 31, 2010

Bob Jensen's New Bookmarks on May 31, 2010
Bob Jensen at Trinity University

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

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/

Bob Jensen's threads for online worldwide education and training alternatives ---
http://www.trinity.edu/rjensen/Crossborder.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

Teaching History With Technology --- http://www.thwt.org/
Some these ideas apply to accounting history and accounting education in general

Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm

Bob Jensen's threads on tricks and tools of the trade --- http://www.trinity.edu/rjensen/000aaa/thetools.htm

Bob Jensen's threads on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

Video on IOUSA Bipartisan Solutions to Saving the USA

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
David Walker, President & CEO, Peter G. Peterson Foundation
Sen. Bill Bradley
Maya MacGuineas, President of the Committee for a Responsible Federal Budget
Amy Holmes, political contributor for CNN
Joe Johns, CNN Congressional Correspondent
Diane Lim Rodgers, Chief Economist, Concord Coalition
Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

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

Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

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

"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

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

"Amazing Disgrace," by Scott McLemee, Inside Higher Ed, May 19, 2010 ---
http://www.insidehighered.com/views/mclemee/mclemee290

Accounting Jobs Information (free site) --- http://www.accountingjobshelp.com/
Thank you Kim Eaves for the heads up.

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

Adobe's Creative Suite 5 Ships (with educational discounts) --- http://thejournal.com/articles/2010/04/30/creative-suite-5-ships.aspx

Only a small percentage of college students are "very interested" in buying and iPad and the competition will soon heat up
"Minor Bumps for iPad," by Steve Kolowich, Inside Higher Ed, April 23, 2010 ---
http://www.insidehighered.com/news/2010/04/23/ipad

Bob Jensen's threads on electronic book readers are at
http://www.trinity.edu/rjensen/eBooks.htm
Of course the iPad is more than an electronic book reader, although this is one of its major features.

I filed this under "Things That Rankle Tax Professor Amy Dunbar at the University of Connecticut"
"Supreme Court Declines to Hear Textron Work Product Privilege Case," Journal of Accountancy, June 2006 ---
http://www.journalofaccountancy.com/Web/20102952.htm

Another item filed under "Things That Rankle Tax Professor Amy Dunbar at the University of Connecticut" is the announced retirement of Brooks and Dunn ---
http://www.associatedcontent.com/article/2047767/boot_scootin_boogie_hitmakers_brooks.html?cat=33

Boot Scootin' Boogie --- http://www.youtube.com/watch?v=d05tQrhNMkA

Tax Professor Amy Dunbar Loves Google Docs

May 31, 2010 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

I just finished the first week of a 12-week MSA online tax course at UConn. I put students in groups and I ask them to work fairly lengthy quizzes (homework) independently, putting their answers in an Excel spreadsheet, and then they meet in chats to discuss their differences. When they can’t resolve a question, they invite me into chat. This week a student introduced me to Google docs, and I was swept off my feet by the way this tool could be used in my class. I love it! I created a video on the fly on Thursday to illustrate how to create a spreadsheet and share it with other group members. I may be the last to the party on this tool, but in case some of you aren’t aware of it, I am posting the video.

http://users.business.uconn.edu/adunbar/videos/GoogleDocs/GoogleDocs.html

If anyone wants the “quiz” that the students worked, send me an email (not AECM), and I will send you the file.

Amy

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.ed

Interactive (online or offline) Homework and Other Student-Friendly Features of Google Apps

Google Docs has added an equation editor so students can actually complete math problems within a document, allowing students to not only write papers that include numbers and equations but also take notes from quantitative classes using Google Docs. Google has also added the ability to insert superscripts and subscripts, which can be useful for writing out chemical compounds or algebraic expressions.
"Google Docs Become More Student-Friendly," by Lena Rao, TechCrunch.com via The Washington Post, September 28, 2009 --- Click Here
http://www.washingtonpost.com/wp-dyn/content/article/2009/09/28/AR2009092802665.html?wpisrc=newsletter

Google has been aggressively marketing Google Apps to schools, recently launching a centralized site designed to recruit universities and colleges. Now, Google is tweaking Google Docs, which is a part of Google Apps' productivity suite, by adding a few student-friendly features.

Google Docs has added an equation editor so students can actually complete math problems within a document, allowing students to not only write papers that include numbers and equations but also take notes from quantitative classes using Google Docs. Google has also added the ability to insert superscripts and subscripts, which can be useful for writing out chemical compounds or algebraic expressions.

Google is also trying to make Docs appealing to those humanities majors out there by letting users to select from various bulleting styles for creating outlines and giving students ability to print footnotes as endnotes for term papers. And a few weeks ago, Google launched a translation feature in Google Docs.

As we've written in the past, Google is wise to recruit educational institutions because that's where many people get trained, start relying on, and form brand allegiances to productivity apps. Drawing from Apple's strategy, Google knows that brand loyalty is definitely forged at these schools and is steadily developing its products to become more appealing to students. Rival Microsoft is also launching web-based versions of its Office products aimed at the student audience. And startup Zoho offers a free web-based productivity suite.

May 31, 2010 reply from Rick Lillie [rlillie@CSUSB.EDU]

Hi Amy,

I use Google Docs and Spreadsheets with all of my courses. It's free, includes most of the Microsoft Office features, and makes it easy for students to collaborate on team projects. It also makes it easy to submit the final document in various formats (e.g., .pdf format).

My students use two communication tools in conjunction with Google Docs and Spreadsheets (i.e., TokBox and Skype). To use these tools, they need a headset/microphone and webcam.

TokBox (http://www.tokbox.com) is a free, hosted video messaging service. You can record up to a 10 minute video clip that can be shared by URL link. TokBox also includes a video chat feature that enables multiple people to video conference. This feature works great with study teams.

Skype (http://www.skype.com) includes chat, audio and video-conferencing. The chat feature works probably better than what you have been using. With a headset/microphone, you can have up to 10+ people in a audio conference call. Video-conferencing is 1:1 and includes a great screen sharing feature.

You can really change the nature of team collaboration when you combine Google Docs and Spreadsheets with TokBox and/or Skype. Following is an example of how to do this.

EXAMPLE

Students use Google Docs to create a shared workspace for writing a paper. One student sets up the workspace and invites team members into the space through an email link. Each team member is given editor rights.

Using a headset/microphone and webcam, students use TokBox to host a group video conference call. This enables students to brainstorm and get a project running.

During the work process, each team member adds/changes the paper in the common workspace in Google Docs.

When it is time to pull the paper together and do final editing, students use the audio conference call feature to talk with each other. While all are online in Skype, each team member logs into the Google Docs paper and views it on his/her computer screen. One or more students act as the editor. All see changes as they are made.

When editing is finished, one student exports the final assignment document in .pdf format to his/her hard drive. The student then submits the document for grading (e.g., student uploads the paper through the Digital Drop Box in Blackboard).

OUTCOME

By combining the features of Google Docs and Spreadsheets with communication tools like TokBox and Skype, students learn how to use technology to get things done. Major companies pay a fortune to do what your students can do for free. Purchasing a headset/microphone and webcam is relatively inexpensive. The experience students get is priceless.

I use this approach and technology tools with face-2-face, blended, and online classes. It works great. The approach changes the nature of how students and instructor interact in the teaching-learning experience.

Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA. 92407-2397
Email: rlillie@csusb.edu
Telephone: (909) 537-5726Skype (Username): ricklillie

On the last day of class, I would love to hear my 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.” (Joe Hoyle)

Bob Jensen's threads on Tricks and Tools of the Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm

Innovation in Website Design
"Bucknell U. Wins Webby Award for Virtual Tour," by Andrea Fuller, Chronicle of Higher Education, May 6, 2010 ---
http://chronicle.com/blogPost/Bucknell-U-Wins-Webby-Award/23740/?sid=wc&utm_source=wc&utm_medium=en

What do Roger Ebert and Jim Carrey have in common with Bucknell University? They all just won Webby Awards from the International Academy of Digital Arts and Sciences, picked from over 10,000 entries.

Bucknell won in the category of best school or university Web site. The academy specifically praised Bucknell's virtual tour. Visitors to the site can click buttons to complete sentences that describe their interests and characteristics. The site then shows visitors a campus map, with arrows pointing to programs and areas at the university in which those interests might be developed. Visitors can then read related blurbs about Bucknell and click on mutimedia describing the Bucknell experience.

Bob Jensen's updates on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

Nobel Laureate Gary Becker and Judge Richard Posner disagree over prospects of a VAT tax ---
Becker: http://uchicagolaw.typepad.com/beckerposner/2010/04/should-the-us-introduce-a-value-added-tax-becker.html
Posner: http://uchicagolaw.typepad.com/beckerposner/2010/04/should-the-united-states-institute-a-federal-valueadded-tax-posner.html
Jensen Comment
I'm will Posner on this!

"The Web Shatters Focus, Rewires Brains," by Nicholas Carr, Wired Magazine, June 2010 ---
http://www.wired.com/magazine/2010/05/ff_nicholas_carr/all/1

During the winter of 2007, a UCLA professor of psychiatry named Gary Small recruited six volunteers—three experienced Web surfers and three novices—for a study on brain activity. He gave each a pair of goggles onto which Web pages could be projected. Then he slid his subjects, one by one, into the cylinder of a whole-brain magnetic resonance imager and told them to start searching the Internet. As they used a handheld keypad to Google various preselected topics—the nutritional benefits of chocolate, vacationing in the Galapagos Islands, buying a new car—the MRI scanned their brains for areas of high activation, indicated by increases in blood flow.

The two groups showed marked differences. Brain activity of the experienced surfers was far more extensive than that of the newbies, particularly in areas of the prefrontal cortex associated with problem-solving and decisionmaking. Small then had his subjects read normal blocks of text projected onto their goggles; in this case, scans revealed no significant difference in areas of brain activation between the two groups. The evidence suggested, then, that the distinctive neural pathways of experienced Web users had developed because of their Internet use.

The most remarkable result of the experiment emerged when Small repeated the tests six days later. In the interim, the novices had agreed to spend an hour a day online, searching the Internet. The new scans revealed that their brain activity had changed dramatically; it now resembled that of the veteran surfers. “Five hours on the Internet and the naive subjects had already rewired their brains,” Small wrote. He later repeated all the tests with 18 more volunteers and got the same results.

When first publicized, the findings were greeted with cheers. By keeping lots of brain cells buzzing, Google seemed to be making people smarter. But as Small was careful to point out, more brain activity is not necessarily better brain activity. The real revelation was how quickly and extensively Internet use reroutes people’s neural pathways. “The current explosion of digital technology not only is changing the way we live and communicate,” Small concluded, “but is rapidly and profoundly altering our brains.”

What kind of brain is the Web giving us? That question will no doubt be the subject of a great deal of research in the years ahead. Already, though, there is much we know or can surmise—and the news is quite disturbing. Dozens of studies by psychologists, neurobiologists, and educators point to the same conclusion: When we go online, we enter an environment that promotes cursory reading, hurried and distracted thinking, and superficial learning. Even as the Internet grants us easy access to vast amounts of information, it is turning us into shallower thinkers, literally changing the structure of our brain.

Back in the 1980s, when schools began investing heavily in computers, there was much enthusiasm about the apparent advantages of digital documents over paper ones. Many educators were convinced that introducing hyperlinks into text displayed on monitors would be a boon to learning. Hypertext would strengthen critical thinking, the argument went, by enabling students to switch easily between different viewpoints. Freed from the lockstep reading demanded by printed pages, readers would make all sorts of new intellectual connections between diverse works. The hyperlink would be a technology of liberation.

By the end of the decade, the enthusiasm was turning to skepticism. Research was painting a fuller, very different picture of the cognitive effects of hypertext. Navigating linked documents, it turned out, entails a lot of mental calisthenics—evaluating hyperlinks, deciding whether to click, adjusting to different formats—that are extraneous to the process of reading. Because it disrupts concentration, such activity weakens comprehension. A 1989 study showed that readers tended just to click around aimlessly when reading something that included hypertext links to other selected pieces of information. A 1990 experiment revealed that some “could not remember what they had and had not read.”

Even though the World Wide Web has made hypertext ubiquitous and presumably less startling and unfamiliar, the cognitive problems remain. Research continues to show that people who read linear text comprehend more, remember more, and learn more than those who read text peppered with links. In a 2001 study, two scholars in Canada asked 70 people to read “The Demon Lover,” a short story by Elizabeth Bowen. One group read it in a traditional linear-text format; they’d read a passage and click the word next to move ahead. A second group read a version in which they had to click on highlighted words in the text to move ahead. It took the hypertext readers longer to read the document, and they were seven times more likely to say they found it confusing. Another researcher, Erping Zhu, had people read a passage of digital prose but varied the number of links appearing in it. She then gave the readers a multiple-choice quiz and had them write a summary of what they had read. She found that comprehension declined as the number of links increased—whether or not people clicked on them. After all, whenever a link appears, your brain has to at least make the choice not to click, which is itself distracting.

Continued in article (including hot links not provided above)

Why must we worry about the hiring-away pipeline?

Credit Rating Agencies ---- http://en.wikipedia.org/wiki/Credit_rating_agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2008 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Dun & Bradstreet

China Credit Information Service (China)

Fitch Ratings (U.S.)

Japan Credit Rating Agency (Japan)

Moody's Investors Service (U.S.)

Standard & Poor's (U.S.)

Rating Agency Malaysia (Malaysia)

Egan-Jones Rating Company (U.S.)

Brickwork Rating (India)

The Pakistan Credit Rating Agency Limited (Pakistan)

How to Get AAA Ratings on Junk Bonds

Pay cash under the table to credit rating agencies
Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
Hire away top-level credit rating agency employees with insider information and great networks inside the credit rating agencies

"Rating Agency Data Aided Wall Street in Deals," The New York Times, April 24, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/24/rating-agency-data-aided-wall-street-in-deals/#more-214847

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good, The New York Times’s Gretchen Morgenson and Louise Story report. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. Read More »

"Credit rating agencies should not be dupes," Reuters, May 13, 2010 ---
http://www.reuters.com/article/idUSTRE64C4W320100513

THE PROFIT INCENTIVE

In fact, rating agencies sometimes discouraged analysts from asking too many questions, critics have said.

In testimony last month before a Senate subcommittee, Eric Kolchinsky, a former Moody's ratings analyst, claimed that he was fired by the rating agency for being too harsh on a series of deals and costing the company market share.

Rating agencies spent too much time looking for profit and market share, instead of monitoring credit quality, said David Reiss, a professor at Brooklyn Law School who has done extensive work on subprime mortgage lending.

"It was incestuous -- banks and rating agencies had a mutual profit motive, and if the agency didn't go along with a bank, it would be punished."

The Senate amendment passed on Thursday aims to prevent that dynamic in the future, by having a government clearinghouse that assigns issuers to rating agencies instead of allowing issuers to choose which agencies to work with.

For investigators to portray rating agencies as victims is "far fetched," and what needs to be fixed runs deeper than banks fooling ratings analysts, said Daniel Alpert, a banker at Westwood Capital.

"It's a structural problem," Alpert said.

Continued in article

Also see http://blogs.reuters.com/reuters-dealzone/

Jensen Comment
CPA auditing firms have much to worry about these investigations and pending new regulations of credit rating agencies.

"Calpers Sues Over Ratings of Securities," by Leslie Wayne, The New York Times, July 14, 2009 --- http://www.nytimes.com/2009/07/15/business/15calpers.html

"Prosecutors Ask if 8 Banks Duped Rating Agencies," by Louise Story, The New York Times, May 12, 2010 ---
http://www.nytimes.com/2010/05/13/business/13street.html

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office notifying the banks of his investigation, representatives for Morgan Stanley, Credit Suisse, UBS and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment. A Fitch spokesman said Thursday that the firm would cooperate with Mr. Cuomo’s inquiry.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

. . .

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Question
Can any of you identify the mystery "Fraud Girl" who will be writing a weekly (Sunday) column for Simoleon Sense?

Hint
She seems to have a Chicago connection and seems very well informed about the blog posts of Francine McKenna.
http://retheauditors.com/
But I really do know know who is the mystery "Fraud Girl."

I’m exceptionally proud to introduce you to Fraud Girl, our new Sunday columnist. She will write about all things corp governance, fraud, accounting, and business ethics. To give you some background (and although I can not reveal her identity). Fraud girl recently visited me in Chicago for the Harry Markopolos presentation to the local CFA. We were incredibly lucky to meet with Mr. Markopolos and enjoyed 3 hours of drinks and accounting talk. Needless to say Fraud Girl was leading the conversation and I was trying to keep up. After a brainstorm session I persuaded her to write for us and teach us about wall street screw-ups.

So watch out, shes smart, witty, and passionate about making the world a better place. I think Sundays just got a lot better…

Miguel Barbosa
Founder of SimoleonSense

P.S. For Questions or Comments: Reach fraud girl at: FraudGirl@simoleonsense.com

Regulators, Ignore the Masses — It’s Your Responsibility

Men in general judge more by the sense of sight than by the sense of touch, because everyone can see but only a few can test feeling. Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion, supported by the majesty of the government. In the actions of all men, and especially of princes who are not subject to a court of appeal, we must always look to the end. Let a prince, therefore, win victories and uphold his state; his methods will always be considered worthy, and everyone will praise them, because the masses are always impressed by the superficial appearance of things, and by the outcome of an enterprise. And the world consists of nothing but the masses; the few have no influence when the many feel secure.

-Niccolo Machiavelli, The Prince

Why are Machiavelli’s words so astonishingly prophetic? How does a 500 year old quote explain contagion, bubbles, and Ponzi schemes? Do financial decision makers consciously overlook reality or do they merely postpone due diligence? That is the purpose of this series — to analyze financial fraud(s) and question business ethics.

Recent accounting scandals i.e. Worldcom, Enron, Madoff, reveal a variety of methods for boosting short term performance at the expense of long run shareholder value. WorldCom recorded bogus revenue, Enron boosted their operating income through improper classifications, and Madoff ran the largest Ponzi scheme in history. Sure these scandals were unethical, deceived the public, and made a ton of money. But what is the most striking similarity? Each of these companies was seen as the golden goose egg; an indestructible force that could never fail. Of course, the key word is “seen”, regulators, attorneys, financial analysts, and auditors failed to see reality. But why?

Fiduciaries are entrusted with protecting the public and shareholders from crooks like Skilling, Pavlo, and Schrushy. An average shareholder lacks the knowledge and expertise of a prominent regulator, right? Shareholders don’t perform the company’s annual audit, review all legal documentation, or communicate with top executives. No, shareholders base their decisions off information that is “accurate” and “meticulously examined”.

Unfortunately in each of these instances regulators failed to take a stand against consensus and became another ignorant face in the crowd. “Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion”. Who are the few that really know who these companies are? The answer should be evident. What isn’t clear is why these cowardly few are in charge of overseeing our financial markets.

When Auditors Look The Other Way

A week ago, I came across this article: Ernst & Young defends its Lehman work in letter to clients. I chuckled as I was reading it, remembering Roxie Hart from the play Chicago shouting the words “Not Guilty” to anyone who would listen. Like Roxie, the audit team pleaded that the media was inaccurate. In recording Lehman’s Repo 105 transactions, they claimed compliance with GAAP and believed the financial statements were ‘fairly represented’. But, fair reporting is more than complying with GAAP. Often auditors are “compliant” while cooking the books (a mystery that still eludes me). In this case, the auditors blatantly covered their eyes and closed their ears to what they must have known was deliberate misrepresentation of Lehman Brother’s financial statements.

We will explore the Lehman Brothers fiasco in next week’s post…but here’s the condensed version. Days prior to quarter end, Lehman Brothers used “Repo 105” transactions, which allowed them to lend assets to others in exchange for short-term cash. They borrowed around $50 Billion; none of which appeared on their balance sheet. Lehman instead reported the debt as sales. They used the borrowed cash to pay down other debt. This reduced both their total liabilities and total assets, thereby lowering their leverage ratio.

This was allegedly in compliance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities that allowed Lehman to move the $50 Billion of assets from its balance sheet. As long as they followed the rules, auditors could stamp [the] financial statements with a “Fairly Represented” approval and issue an unqualified opinion.

Clearly in this case complying was unethical and probably illegal. Howard Schilit, the author of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, once said, “You [the auditor] work for the investor, even though you are paid by someone else”. He insists that auditors should look beyond the checklists and guidelines and should instead question everything. Auditors are the first line of defense against fraud and the shareholders are dependent upon the quality of their services. So I ask again, with respect to Lehman Brothers, were the auditors working for the investors or where they in the pockets of senior management?

What can we do?

An admired value investor believes in a similar tactic for confirming the honesty of companies. It’s known as “killing the company”, where in his words, “we think of all the ways the company can die, whether it’s stupid management or overleveraged balance sheets. If we can’t figure out a way to kill the company, then you have the beginning of a good investment”. Auditors must think like this, they must kill the company, and question everything. If you can’t kill a company, then (and only then) are the financial statements truly a fair representation of the firms operations.

There was no “killing” going on when the lead auditing partner said that his team did not approve Lehman’s Accounting Policy regarding Repo 105s but was in some way comfortable enough with them to audit their financial statements. This engagement team failed in looking beyond SFAS 140 and should have realized what every law firm (aside from one firm in London) was stating; that the accounting methods Lehman Brothers used to record Repo 105s were a deliberate attempt to defraud the public.

So I repeat: Ignoring reality is not an option. Ignoring the crowd, however, is an obligation.

See you next week….

-Fraud Girl

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

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

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

"Guest Post: Fraud Girl – When The Financial Industry’s “Astrologers” Fail Us… Who’s Left To Analyze Credit Risk?" Fraud Girl, Simoleon Sense, May 30, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-when-the-financial-industry%e2%80%99s-%e2%80%9castrologers%e2%80%9d-fail-us%e2%80%a6-whos-left-to-analyze-credit-risk/

In light of Buffet testifying before the Financial Crisis Inquiry Commission, it’s only fitting to discuss the credit rating agencies and how Congress is considering fixing their “moral hazards”.

The Start of It All: “Doing it for the Money”

At the peak of the housing boom, credit rating agencies began reevaluating their AAA debt ratings. In 2006, agencies like S&P and Moody’s were forced to redo their models but nothing was significantly changed. At the height of the crisis, it was apparent that these ratings were incorrect and as a result a “whopping 91% of AAA-rated mortgage securities were downgraded to junk status”. Because these credit agencies are so highly relied upon by Wall Street, a shock spread across the market. It wasn’t long before the entire financial system was in midst of a collapse.

The government began an inquiry on the credit agencies failure to properly assess credit risk. As noted in an article from CNN, emails began to surface that agencies knew that the crisis was forming but kept company’s ratings high anyway. In one email, and employee wrote:

“This is frightening. It wreaks of greed, unregulated brokers, and ‘not so prudent’ lenders”

Why weren’t the agencies doing their jobs? They had no incentive to. Agencies get paid from the company’s they rate. If an agency downgrades their reliability, the company will stop paying for the ratings.

Ideas on How to Fix the Problem

I found a post via The Baseline Scenario blog: Reforming Credit Rating Agencies. Former analyst and then managing director at Moody’s Investors Service, Gary Witt, discusses what Congress wants to implement to resolve the credit agency issues as well as his opinion on the matter.

The Financial Stability Act of 2010 addresses what Congress believes should be done… including making the SEC responsible for examining the agencies at least once a year and making key findings public. It will also give the SEC the power to fine agencies for any wrongdoing they find.

Witt addresses the same concerns I do. He believes that having the SEC oversee the credit agencies is necessary but is uncertain as to whether they have the right qualifications to take that responsibility. We have seen what damage can occur when employees not experienced in Wall Street attempt to regulate the market (i.e. Bernie Madoff). We have learned that regulators aren’t asking the right questions and until they are educated enough as to how to ask those questions, they should not be asked to hold responsibility for our financial markets. If the SEC is going to take over, they are going to need well-experienced rating agents and must provide them with an incentive to work there.

Witt first suggests that we eliminate AAA ratings. How could anyone be sure that an instrument is 100% riskless? Witt instead believes there should be five simple categories to rate credit risk:

“A for securities expected to lose under 0.1%, B for expected losses between 0.1% and 1%, C for expected losses from 1% to 5%, D for expected losses from 5% to 10% and F for securities expected losses between 10% and 20%.”

If a credit agency performs poorly (i.e. rates credit an A that ended up in a loss), then the SEC can fine them. Though the agencies are still being paid by the companies themselves, they have more of an incentive to make accurate predictions.

Another option is to get rid of the agencies. I find this option more appealing.

The financial industry has placed too much trust in these agencies. Credit agencies are simply financial astrologists attempting to predict the future. An agency telling you an instrument is AAA rated does not mean that you should believe it.

Always ask the right questions: Where did this information come from? How did they make their decisions? What types of models do they use to come to these conclusions? If these types of questions were asked prior to the collapse, many investors would have realized that these ratings made no sense.

Individuals must perform the necessary research in order to determine their own judgments of risk. The problem we are having is that we have too much confidence in the regulators, auditors, agencies, etc. when most are falling short of their responsibilities.

Have any ideas on how to resolve the credit agency problems? Send me an email at fraudgirl [at] simoleonsense.com.

See you next week.

- Fraud Girl

Bob Jensen's Rotten to the Core threads on banks and investment banks ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's Rotten to the Core threads on credit rating agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bad Role Models for Our Children
"How Many Times Did Sen. Levin Say 'Sh**ty Deal'? by Cindy Perman, CNBC, April 28. 2010 ---
How Many Times Did Sen. Levin Say 'Sh**ty Deal'?

Bob Jensen's threads on the latest Goldman scandal are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

"Keeping Fraud in the Cross Hairs," by Joseph T. Wells (Interviewed) , Journal of Accountancy, June 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Jun/20102852.htm

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

Video: The Greek Economic Crisis Explained --- http://www.simoleonsense.com/video-the-greek-crisis-explained/

Video Lunch with a Laureate: Famous Financial Researcher Robert Merton ---
http://www.simoleonsense.com/lunch-with-a-laureate-famous-financial-researcher-robert-merton/

Phil McKinney: Hacking the Future (Fora TV) --- http://fora.tv/2010/05/22/Phil_McKinney_Hacking_the_Future

AICPA Hotline Questions and Answers on Ethics for Your Accounting Students
"Test Your Knowledge of Professional Ethics," by Jason Evans, Journal of Accountancy, June 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Jun/20102778.htm

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

Inefficiencies in the Information Thicket
"Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis," by Robert P. Bartlett III, Harvard Law School Forum, May 27, 2010 ---
http://blogs.law.harvard.edu/corpgov/2010/05/27/inefficiencies-in-the-information-thicket/

In the paper, Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis, which was recently made publicly available on SSRN, I provide an empirical examination of the effect of enhanced derivative disclosures by examining the disclosure experience of the monoline insurance industry in 2008. Conventional wisdom concerning the causes of the Financial Crisis posits that insufficient disclosure concerning firms’ exposure to complex credit derivatives played a key role in creating the uncertainty that plagued the financial sector in the fall of 2008. To help avert future financial crises, regulatory proposals aimed at containing systemic risk have accordingly focused on enhanced derivative disclosures as a critical reform measure. A central challenge facing these proposals, however, has been understanding whether enhanced derivative disclosures can have any meaningful effect given the complexity of credit derivative transactions.

Like AIG Financial Products, monoline insurance companies wrote billions of dollars of credit default swaps on multi-sector CDOs tied to residential home mortgages, but unlike AIG, their unique status as financial guarantee companies subjected them to considerable disclosure obligations concerning their individual credit derivative exposures. As a result, the experience of the monoline industry during the Financial Crisis provides an ideal setting with which to test the efficacy of reforms aimed at promoting more elaborate derivative disclosures.

Overall, the results of this study indicate that investors in monoline insurers showed little evidence of using a firm’s derivative disclosures to efficiently resolve uncertainty about a monoline’s exposure to credit risk. In particular, analysis of the abnormal returns to Ambac Financial (one of the largest monoline insurers) surrounding a series of significant, multi-notch rating downgrades of its insured CDOs reveals no significant stock price reactions until Ambac itself announced the effect of these downgrades in its quarterly earnings announcements. Similar analyses of Ambac’s short-selling data and changes in the cost of insuring Ambac debt securities against default also confirm the absence of a market reaction following these downgrade announcements.

Based on a qualitative examination of how investors process derivative disclosures, to the extent the complexity of CDOs impeded informational efficiency, it was most likely due to the generally low salience of individual CDOs as well as the logistic (although not necessarily analytic) challenge of processing a CDO’s disclosures. Reform efforts aimed at enhancing derivative disclosures should accordingly focus on mechanisms to promote the rapid collection and compilation of disclosed information as well as the psychological processes by which information obtains salience.

The paper is available for download from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585953

Bob Jensen's tutorials on accounting for derivative financial instruments and hedging activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm

PwC points out some of the major differences between these proposed FASB revisions versus the IASB provisions.

Click Here to download the ED http://snipurl.com/fasb5-26-2010

From: Jensen, Robert
Sent: Friday, May 28, 2010 6:39 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: May 26 FASB ED Mush http://snipurl.com/fasb5-26-2010

Hi again Paul,

Subject the May 26 FASB ED http://snipurl.com/fasb5-26-2010

Thank you Paul for telling me this ED was finally released …. On second thought a “thank you” for this mush is being too polite.

It will be interesting to compare the comment letters sent to the FASB regarding this mush with the comment letters sent in on an earlier (2008) ED ---
http://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=1590-100
Some comments might be carbon copies with new dates.
But watch for the comments that change between the 2008 ED versus the new 2010 ED.
For corporations that prefer mush to standards, I predict some glowing praise for going carte blanch on financial instruments standards.

It was late yesterday when I rushed out a reply to you that appears at the bottom of this current update message. I corrected a couple of bothersome typos.

Hedge accounting basically means that changes in the fair value of the hedging derivative get charged to AOCI rather than current earnings to eliminate earnings volatility due to hedging contracts that have not yet net settled. For example, firms that lock in future commodity prices or interest rates with a forward, futures, swap, or possibly an option contract will not see earnings fluctuate wildly because they hedged cash flows of forecasted transactions. But the AOCI can be charged only to the extent that the hedge is effective. Ineffectiveness must be charged to current earnings.

Those who want to see hedge effectiveness testing under the 80-125 bright line dollar offset guide (that was written into the original IAS 39) and implied in FAS 133 may do so at the following links:

Bob Jensen’s Amendment to the Teaching Note prepared by Smith and Kohlbeck for the following case: “Accounting for Derivatives and Hedging Activities Comparisons of Cash Flow Versus Fair Value Accounting,” by Pamela A. Smith and Mark J. Kohlbeck
Issues in Accounting Education, Volume 23, Number 1, February 2008, pp. 103-118
Bob Jensen's Amendment is at http://www.trinity.edu/rjensen/CaseAmendment.htm

Also scroll down to the term “Ineffectiveness” in my glossary at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#I-Terms

Some hedges are likely to be more effective than others. These usually include forward, futures, and swap contracts. Purchased options are notoriously ineffective due, in large measure, to the conservatism of commodity traders vis-à-vis commodity options traders. Commodities contracts and commodities options contracts are traded in separate markets. Because options are so notoriously ineffective as hedges, most companies only charge intrinsic value portions of price changes of options (when the options are in-the-money) to AOCI and charge changes in time value to current earnings. Under the 80-125 dollar offset rule, purchased options would otherwise not generally be eligible for any hedge accounting relief. The Smith and Kohlbeck case cited above illustrates how options rarely meet the 80-125 test. Smith and Kohlbeck simplified their case to their peril by not testing for hedge effectiveness. Virtually all their hedges were in fact ineffective. The case now makes a good example of what can happen if hedge effectiveness testing is ignored.

Paragraph 146 of the original IAS 39 reads as follows:

146. A hedge is normally regarded as highly effective if, at inception and throughout the life of the hedge, the enterprise can expect changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instrument, and actual results are within a range of 80 per cent to 125 per cent. For example, if the loss on the hedging instrument is 120 and the gain on the cash instrument is 100, offset can be measured by 120/100, which is 120 per cent, or by 100/120, which is 83 per cent. The enterprise will conclude that the hedge is highly effective.

Delta ratio D = (D option value)/ D hedged item value)
range [.80 < D < 1.25] or [80% < D% < 125%]
(FAS 133 Paragraph 85)
Delta-neutral strategies are discussed at various points (e.g., FAS 133 Paragraphs 85, 86, 87, and 89)

A hedge is normally regarded as highly effective if, at inception and throughout the life of the hedge, the enterprise can expect changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instrument, and actual results are within a range of 80-125% (IAS 39 Paragraph 146). The FASB requires that an entity define at the time it designates a hedging relationship the method it will use to assess the hedge's effectiveness in achieving offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged (FAS 133 Paragraph 62). In defining how hedge effectiveness will be assessed, an entity must specify whether it will include in that assessment all of the gain or loss on a hedging instrument. The Statement permits (but does not require) an entity to exclude all or a part of the hedging instrument's time value from the assessment of hedge effectiveness. (FAS 133 Paragraph 63).

Hedge ineffectiveness would result from the following circumstances, among others:

a) difference between the basis of the hedging instrument and the hedged item or hedged transaction, to the extent that those bases do not move in tandem.

b) differences in critical terms of the hedging instrument and hedged item or hedged transaction, such as differences in notional amounts, maturities, quantity, location, or delivery dates.

c) part of the change in the fair value of a derivative is attributable to a change in the counterparty's creditworthiness (FAS 133 Paragraph 66).

Because the dollar offset method is quite restrictive, many companies prefer accepted regression tests of hedge effectiveness. Regression, however, often does not bring hedge accounting relief for purchased options.
Hedge Effectiveness: The Wild Card in Accounting for Derivatives," by Ira C. Kawaller ---
http://www.kawaller.com/pdf/AFP-Hedge Effectiveness.pdf
Also see http://www.cs.trinity.edu/~rjensen/Calgary/CD/HedgeEffectiveness.pdf

I also have a hedge effectiveness testing tutorial (in PowerPoint) at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/JensenPowerPoint/
(click on the 06effectiveness.ppt file)

Companies have a lot of trouble both in quantitative testing for hedge effectiveness and in meeting the guidelines for a hedge to be effective. With a magic wave of the wand (http://snipurl.com/fasb5-26-2010 ), the IASB and FASB now propose to allow “qualitative testing” which in my viewpoint is tantamount to qualitative mush. Companies will soon be able to declare most any hedge as effective when they say their prayers faithfully night.

The Smith and Kohlbeck case shows what might happen in the future if management simply declares the hedging contracts as qualitatively effective.

Boo on that idea in http://snipurl.com/fasb5-26-2010

I don’t mind elimination of the short-cut method, because that was limited only to interest rate swaps and was not allowed in general for other types of hedging contracts.

I still have not really poured over all parts of the ED at http://snipurl.com/fasb5-26-2010
But I will ask if turning “standards” into qualitative judgment mush is the way to go whenever the former standards were complicated.

Is this the magical wave of the wand for convergence of FASB and IASB standards?

At what point does qualitative judgment mush cease to be a “standard?”

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Thursday, May 27, 2010 7:04 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: The Accounting Onion

Hi Paul,

Thanks for the heads up!

I’ve really not had time yet to go through the complex May 26 ED at http://snipurl.com/edmay26-2010

Some things really confuse me in what I’ve seen so far. One bothersome feature is the asymmetry between reported fair values of financial assets versus liabilities. Suppose Company D sells 10% of a bond issue to Company B for $850 per bond. On December 31 Company B reports the December 31 trading price of the bond at $1,010 as the fair value of each investment bond. Company D, however, has had no change in credit rating for the year ended December 31. Hence, it reports a fair value of $850 for each bond indebtedness that Company B reports as an asset worth $1,010 per bond. Debtors must somehow factor in the change in fair value of credit rating, whereas the investor only looks at change in trading fair value.

There’s also an issue of timing. Presumably credit rating agencies are not going to normally change Company D’s credit rating until after Company D releases its audited financial statements. Hence, changes in credit rating might have an awfully long lag in terms of current fair value adjustments to bond liabilities. This all must be as clear as mud to investors and creditors reading financial statements.

Some other parts of the ED seem like even worse mush. Effectiveness testing for hedge accounting seems more subjective and ambiguous than most anything that I’ve ever seen proposed accounting standards. It’s pure mush at this point relative to the 80-125 (egads a bright line) guideline suggested in the original version of IAS 39. How we can expect any kind of consistency between companies or even consistency between different hedging contracts within the same company is a mystery to me without some bright line guides.

Hedge effectiveness testing will essentially become more subjective than a beauty contest. If auditors could not say no to Repo 105 debt masking, how in the world can they buck clients who rate the beauty of their hedging contracts?

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Paul Polinski
Sent: Thursday, May 27, 2010 3:44 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: The Accounting Onion

Hi Bob. Late yesterday the FASB posted their financial instrument exposure draft to their web site.

Paul

From: "Jensen, Robert" <rjensen@TRINITY.EDU>
To: AECM@LISTSERV.LOYOLA.EDU
Sent: Thu, May 27, 2010 1:15:31 PM
Subject: Re: The Accounting Onion

The lame duck Superman zooms in to aid the SEC’s Superwoman!

"IASB Chairman Outlines Approach for Reconciling Financial Instrument Standards,"
by Matthew G. Lamoreaux, Journal of Accountancy, June 2010 ---
http://www.journalofaccountancy.com/Web/20102960.htm

Jensen Comment
What interests me is the ever-changing plans for revision of IAS 39. Hedging transactions are like staff infections that just will not go away no matter how much Sir David Tweedie wishes upon a star.

Bob Jensen's threads on FASB-IASB standards convergence are at
http://www.journalofaccountancy.com/Web/20102960.htm

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

Why FASB and IASB convergence will be "super."

The pictures of the SEC's Mary Shapiro and the FASB's (Lame Duck) leader Sir David Tweedie say it all regarding why convergence of IFRS and FASB standards is inevitable with the IASB grinding U.S. GAAP into oblivion:
I thank David Albrecht for sending Sir David's lame duck picture.

"IFRS Risk: Not What You Think," by Bruce Pounder, CFO.com, May 14, 2010 ---
http://www.cfo.com/article.cfm/14497802/c_14497718?f=home_todayinfinance

The switch from U.S. generally accepted accounting principles to international accounting standards is a hot topic. But CFOs of U.S. companies are wasting time and money managing imaginary risks while completely ignoring real ones.

Today's CFO is accustomed to managing risk. But few financial executives in the United States accurately perceive or understand the emerging risks that are associated with the global convergence of financial reporting standards (convergence). As a result, CFOs across America are wasting time and money managing imaginary risks while ignoring the real risks associated with convergence in general and International Financial Reporting Standards (IFRS) in particular.

To separate real from imagined risks, let's start by looking at some of the defining characteristics of the U.S. financial reporting environment. In the United States, as in most of the developed world, private companies outnumber public companies by a ratio of roughly 1,000 to 1. But in the United States—unlike most of the developed world—private companies have no statutory financial reporting obligations. No individual, organization, or governmental agency can unilaterally require private U.S. companies to use a particular set of financial reporting standards.

In practice, private U.S. companies frequently use U.S. generally accepted accounting principles (GAAP), and there are plenty of good reasons for doing so. But many private companies follow GAAP only up to a point, disclosing deviations in their financial statements. And other private companies use alternatives to GAAP, such as cash-basis accounting, tax-basis accounting, or some "other comprehensive basis of accounting" (OCBOA). So among private U.S. companies, diversity in financial reporting standards is the norm.

The relatively small number of public companies that exist in the United States operate in a very different environment. They are subject to statutory financial reporting obligations as determined by the Securities and Exchange Commission (SEC). The SEC has the legal authority to define the financial reporting standards that companies under its jurisdiction must or may use.

Since its inception, the SEC has relied on nongovernmental standard-setting organizations to set financial reporting standards for its regulants. Currently, the SEC looks to the Financial Accounting Standards Board (FASB) to set the financial reporting standards that the SEC requires public U.S. companies to adhere to. In some cases, the SEC has supplemented or overridden standards set by nongovernmental standard-setters, but for more than 70 years, public companies in the United States have had to use U.S. GAAP as set by the FASB and its predecessors for statutory financial reporting purposes.

IFRS and Convergence IFRS is a specific, existing set of financial reporting standards that are developed and maintained by the International Accounting Standards Board (IASB). At the standard level, IFRS and U.S. GAAP exhibit a number of similarities-and a far greater number of differences. There are significant similarities and differences in their conceptual underpinnings as well.

As a nongovernmental organization, the IASB has no authority to compel any country to require or permit the use of IFRS. Nor does the IASB have any authority to compel any individual company to use its standards. In short, only by developing and maintaining a set of standards that at least some countries and companies perceive as being superior to alternatives (such as U.S. GAAP) has the IASB achieved widespread adoption of IFRS throughout the world.

Set-level convergence occurs when countries and/or companies stop using country-specific financial reporting standards and start using the same set of country-neutral standards, as has been the case with the adoption of IFRS outside of the United States. But standard-level convergence has also occurred in parallel with set-level convergence. Since 2002, the FASB and IASB have been working together to converge U.S. GAAP and IFRS at the standard level, and the global financial crisis has brought even greater pressure on the Boards to make further progress.

For the most part, the boards are developing new, common standards designed to replace existing standards in U.S. GAAP and IFRS. And in most cases, the standards under development differ significantly from the standards in either U.S. GAAP or IFRS today.

Imagined Risks Many U.S. CFOs have been led to believe that their companies, at some point in the relatively near future, will be forced to switch from using U.S. GAAP, as we know it today, to using IFRS, as we know it today. On top of being concerned about the cost and effort that would likely accompany such a switch, U.S. CFOs have been bothered by the seeming uncertainty with regard to the timing of such a switch.

The responses of U.S. CFOs about their beliefs have been mixed. Some have invested time and money in voicing opposition to such a switch. Others have demanded more certainty in the timing, assuming that they'll commit resources to the switch once they get a "date certain." Still others, sensing both inevitability and imminence, have begun to study current IFRS and assess the impact of converting from current U.S. GAAP to current IFRS. But all of these represent responses to imagined risks, not real ones.

Bob Jensen's threads on accounting standard setting controversies are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

"Convergence talks accused of over-ambitious targets: IASB and FASB give "no guarantee" they will resolve all differences over international standards convergence," by Mario Christodoulou, Accountancy Age, April 22, 2010 ---
http://www.accountancyage.com/accountancyage/news/2261794/convergence-talks-accused

A progress report on international accounting convergence caused rumblings in the accounting world last week, with fears the world’s two chief standard setters were being overambitious in their quest to unite their two accounting codes by June next year.

Some even suggested the quality of international accounting rules may suffer as the international and US standard setters move towards a June 2011 deadline.

Jeremy Newman, chief executive officer of BDO International, was worried that too much was being compromised by the International Accounting Standards Board (IASB), headed by Sir David Tweedie, as it attempts to converge its standards with US rules. He fears a rush job may hurt the standards though a lack of thoroughness. “My fear at the moment is that in order for the IASB to say ‘we got there’ it will drop so much stuff that getting there just doesn’t mean a whole lot,” he said.

In a joint statement the IASB and its US counterpart the Financial Accounting Standards Board (FASB) said last week that while they were making good progress on the vast majority of accounting rules, there was “no guarantee” they would resolve “all, or any, of our differences” on its financial instruments project.

The two boards have been working towards a June 2011 deadline, imposed by G20 leaders last year, to converge US and international accounting rules. However fundamental differences remain on their approach to the measurement of financial instruments.

Nigel Sleigh-Johnson, head of the financial reporting faculty at the ICAEW, said he is worried the quality of international standards may suffer as respondents struggle to keep up with the number of proposals being released this year. “The concern is not that we have to work harder, it is that the risk of damaging the quality of the standards is magnified by having to address so many topics at one time,” he said.

FASB will next month release its full fair value proposal, which would result in all company assets valued at their market price. The IASB released its model in November 2008 incorporating a mixed-measurement approach which allows some bank loan books to be valued at amortized cost.

The US standard setter’s timing has raised questions about its “sense of urgency” to convergence. On key projects such as on financial instruments some suggest progress is needed soon to prevent rushing the standards at the deadline. They say the boards need to work together according to the same timetable, allowing constituents the best chance to understand then comment on them.

Newman said that FASB was travelling at a “slightly different pace” than the IASB. “However, those of us who would like to see adoption of a single set of high quality accounting standards will always say progress is going too slow.”

The IASB and FASB will issue a raft of joint reports on proposed converged standards in coming months. The IASB plans to release 11 exposure drafts for comment by June. Differences with FASB remain on their divergent treatment of financial instruments and insurance contracts, which, the boards warn, could alter their timetable.

Comment: In our view

Time is running out for the IASB and the issues being debated are matters of principle which cut to the heart of convergence. The US has a fundamental different point of view on some key headline standards. If these differences can’t be resolved, the question remains will the world accept almost-converged accounting rules. Is close enough, enough?

Jensen Comment
I don't understand claims that "time is running out." The convergence process should take as long as possible, maybe another decade, in order to deal with all the complicated accounting issues of the day. Why should the U.S. want to hurriedly give up its current leverage with regard to influencing the IASB? It will be much harder after convergence for the U.S. to get full IASB attention to its "ambitious projects.".

Slower convergence will also help the transition process in education and in transitioning the CPA examination.

May 6, 2010 reply from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

Bob:

"Time is running out" comes from the commitment of the boards to the G20 and to the SEC by June 2011. In my view, no other pressures would be sufficient to warrant the work plan and timetable that the two boards are committed to.

Despite the focus of the article on the IASB (the publicition is UK Accountancy), this is a FASB issue, too.

Pat

Bob Jensen's threads on convergence issues are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Question
How does fair IFRS value accounting differ for financial instruments versus derivative financial instruments?

The IASB is proposing an amendment to IAS 39 that will give the option to maintain financial instrument liabilities at fair value with gains and losses going to AOCI instead of current earnings. However, this does not make the fair value accounting totally consistent with fair value accounting for derivative financial instruments where changes in fair value go to current earnings except in qualified hedging transactions.

Whereas firms are increasingly pressured by the FASB and the IASB to maintain financial assets at fair value, maintaining financial liabilities at fair values is much more controversial since the future cash flows of fixed-rate debt may depart greatly from current fair value. For cash flows of a fixed rate mortgage are well defined whereas the fair value of those cash flows may fluctuate day-to-day with interest rates. Fair value adjustments of debt that the firm either cannot or does not intend to liquidate may be quite misleading regarding financial risk.

The same cannot be said for derivative financial instruments where FAS 133 and IAS 39 require maintaining the current reported balances at fair value.

However, the FASB is proposing an amendment to IAS 39 that will give the option to maintain financial instrument liabilities at fair value with gains and losses going to AOCI instead of current earnings. However, this does not make the fair value accounting totally consistent with fair value accounting for derivative financial instruments where changes in fair value go to current earnings except in qualified hedging transactions.

"Exposure Draft on measurement of financial liabilities," IAS Plus, May 11, 2010 --- http://www.iasplus.com/index.htm

The IASB has published for public comment an exposure draft (ED) of proposing to amend the way the fair value option in IAS 39 Financial Instruments: Recognition and Measurement is applied with respect to financial liabilities. Many investors and others have said that volatility in profit or loss resulting from changes in an entity's own credit risk is counter-intuitive and does not provide useful information – except for value changes relating to derivatives and liabilities held for trading (such as short sales). The IASB is proposing, therefore, that all gains and losses resulting from changes in 'own credit' for those financial liabilities that an entity chooses to measure at fair value should be recognised as a component of 'other comprehensive income', not in profit or loss. The ED does not propose any other changes for financial liabilities. Consequently, the proposals will affect only those entities that elect to apply the fair value option to their financial liabilities. Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so. That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the 'own credit' issue that these proposals cover.

Unlike FAS 133, IAS 39 no longer requires bifurcation of embedded derivatives that are not "clearly and closely related" to the host instrument.

"IASB Addresses 'Counter-intuitive' Effects of Fair Value Measurement of Financial Liabilities," SmartPros, May 10, 2010 ---
http://accounting.smartpros.com/x69432.xml

The International Accounting Standards Board (IASB) today published for public comment its proposed changes to the accounting for financial liabilities.

This proposal follows work already completed on the classification and measurement of financial assets (IFRS 9 Financial Instruments).

The IASB is proposing limited changes to the accounting for liabilities, with changes to the fair value option. The proposals respond to the view expressed by many investors and others in the extensive consultations that the IASB has undertaken—that volatility in profit or loss resulting from changes in the credit risk of liabilities that an entity chooses to measure at fair value is counter-intuitive and does not provide useful information to investors.

When the IASB introduced IFRS 9 many stakeholders around the world advised the IASB that the existing requirements for financial liabilities work well, except for the effects of changes in the credit risk of a financial liability (‘own credit’) that an entity chooses to measure at fair value.

Building on that global consultation on IFRS 9, the IASB sought the views of investors, preparers, audit firms, regulators and others on the ‘own credit’ issue. The views received were consistent with the earlier consultations—that volatility in profit or loss resulting from changes in ‘own credit’ does not provide useful information except for derivatives and liabilities that are held for trading.

The IASB is therefore proposing that all gains and losses resulting from changes in ‘own credit’ for financial liabilities that an entity chooses to measure at fair value should be transferred to ‘other comprehensive income’. Changes in ‘own credit’ will therefore not affect reported profit or loss.

No other changes are proposed for financial liabilities. Therefore, the proposals will affect only those entities that choose to apply the fair value option to their financial liabilities. Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so. That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the ‘own credit’ issue that these proposals cover.

Commenting on the proposals, Sir David Tweedie, Chairman of the IASB, said:

Whilst there are theoretical arguments for treating financial assets and liabilities in the same way it is hard to defend the accounting as providing useful information when a company suffering deterioration in credit quality is able to book a corresponding large profit, especially when investors tell us that such information is often excluded from their financial models.

An IASB ‘Snapshot’, a high level summary of the proposals, is available to download free of charge from the IASB website at http://go.iasb.org/financial+liabilities.

The exposure draft Fair Value Option for Financial Liabilities is open for comment until 16 July 2010. It can be accessed via the ‘Comment on a proposal’ section on www.iasb.org from today.

Jensen Comment
What the IASB has not done is eliminate the enormous inconsistency in fair value accounting for financial assets versus financial liabilities.

The worst part of all this is that students, let’s call them classic sophomores, are willing to jump to conclusions like the following:

1. Historical cost accounting, even when price-level adjusted, leads to ancient balances of assets and liabilities that are seriously out of date with current market values whether markets are entry or exit value markets.

2. Therefore, to the extent possible assets and liabilities should be carried at fair values (exit or entry) with changes in fair values reported in current earnings.

What these sophomores do not understand that fair value adjustments create utter fiction for held-to-maturity (the IASB changed the name to "amortized cost") or other “locked-in” items. Adjusting some assets and liabilities to fair values is utter fiction if there is no option or intent for fair value transactions to transpire before some shock such as contractual maturity or abandonment of a manufacturing operation (that makes factory real estate finally available for sale). The classic example is fixed-rate debt for which there is no embedded option to pay off the debt prematurely or purchase it back in an open market. If the cash flow stream is thus set in stone until maturity, any adjustments to fair value are accounting fictions. Temporal changes in current earnings for fictional accounting value changes are more misleading than helpful.

Creditors might propose deals for early retirement, but they do so when it is not particularly advantageous for the debtor. Conversely, debtors may propose deals for early retirement, but they will do so when it is not particularly advantageous for the creditors. Hence such debt is usually retired early only when either the debtor or the creditor is willing to negotiate a heavy penalty. Without a willingness to incur heavy penalties, changes in earnings for accounting fictions are highly misleading in terms of fictional earnings volatility.

When we have contracts that provide debtors more embedded options for premature settlements, then we might begin to think more seriously about adjusting the debt to fair value. Many debt contracts have embedded options for the debtor to pay the debt off before retirement (often at some contracted penalty such as bond call back prices). In the case of financial assets, we now have the classifications “Hold-to-Maturity” versus “Available-for-Sale” that we apply to financial assets.

It seems that under the proposed IAS 39 amendment, providing an option to carry debt at fair value, we could allow debtors to similarly classify debt as “Hold-to-Maturity” versus “Available-for-Buy-Back” where the debtor declares an intent to buy the debt back if the fair value of the debt in the market fair value becomes attractive. This often happens for fixed-rate marketable bonds when interest rates rise and market values of the bonds decline. In fact, Exxon invented “in-substance defeasance” to simulate debt buy backs when the transactional cost penalties for actual buy backs were too high. Until FAS 125 no longer allowed removing defeased debt from the balance sheet, this was a means by which Exxon could report realized gains on debt value reduction and remove debt from the balance sheet without truly abandoning payoff obligations ---
http://www.trinity.edu/rjensen/Theory01.htm

In-Substance Defeasance
In-substance defeasance used to be a ploy to take debt off the balance sheet. It was invented by Exxon in 1982 as a means of capturing the millions in a gain on debt (bonds) that had gone up significantly in value due to rising interest rates. The debt itself was permanently "parked" with an independent trustee as if it had been cancelled by risk free government bonds also placed with the trustee in a manner that the risk free assets would be sufficient to pay off the parked debt at maturity. The defeased (parked) $515 million in debt was taken off of Exxon's balance sheet and the $132 million gain of the debt was booked into current earnings --- http://www.bsu.edu/majb/resource/pdf/vol04num2.pdf

Defeasance was thus looked upon as an alternative to outright extinguishment of debt until the FASB passed FAS 125 that ended the ability of companies to use in-substance defeasance to remove debt from the balance sheet. Prior to FAS 125, defeasance became enormously popular as an OBSF ploy.

Since companies now have the option of classifying financial assets as HTM ( (the IASB changed the name to "amortized cost") versus AFS, it seems symmetrical in the proposed IAS 39 amendment to allow financial liabilities to be classified as HTM versus AVBB (available-for-buy-back). However, in both the AFS and the AVBB classifications, the unrealized changes in fair values should be charged to AOCI rather than current earnings. This keeps accounting fictions out of current earnings, at least with respect to financial asset and liability value change fictions.

One thing I propose for the proposed IAS 39 amendment is that the mandatory value changes for AFS financial assets not be declared optional for AVBB debt. The changes should be mandatory (not optional) for AVBB liabilities just as they are mandatory for AFS assets. In both instances, however, changes in value should not impact current earnings until the changes in value are realized.

Of course the AFS and AVBB classifications are built upon management declarations of intent. But the IASB imposes heavy penalties on companies that renege on their HTM classifications (that allow retention of historical cost accounting). Companies that renege on HTM classifications may long regret not staying true to their declared intent --- at bit like the penalty Tiger Woods is now paying for not staying true to marriage vows.

May 16, 2010 reply from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

Bob:

In IFRS 9 (eff 2013), the term "held to maturity" is gone. The classification "amortized cost" is effectively HTM, but the criteria is more specific than "intent and ability to hold to maturity" in IAS 39. IFRS 9 criteria are:

A financial asset shall be measured at amortised cost if both of the following conditions are met: (a) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows. (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Pat

May 16, 2010 reply from Bob Jensen

A rose by any other name is still HTM and is, I assume, still subjected to heavy IASB penalties for reneging on “amortized cost.”

You just restored my faith in IASB sensibility regarding fact over fiction.

Bob Jensen

Bob Jensen's threads on accounting for financial instruments and hedging activities are at
http://www.trinity.edu/rjensen/caseans/000index.htm

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

Question
To what extent should the FASB and the IASB modify accounting standards for new theories of structured finance and securitization?

"The Economics of Structured Finance," by Joshua D. Coval, Jakub Jurek, and Erik Stafford, Working Paper 09-060, Harvard Business School, 2008 ---
http://www.hbs.edu/research/pdf/09-060.pdf

The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools. As a result of the prioritization scheme used in structuring claims, many of the manufactured tranches are far safer than the average asset in the underlying pool. This ability of structured finance to repackage risks and create “safe” assets from otherwise risky collateral led to a dramatic expansion in the issuance of structured securities, most of which were viewed by investors to be virtually risk-free and certified as such by the rating agencies. At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised.

We examine how the process of securitization allowed trillions of dollars of risky assets to be transformed into securities that were widely considered to be safe, and argue that two key features of the structured finance machinery fueled its spectacular growth. First, we show that most securities could only have received high credit ratings if the rating agencies were extraordinarily confident about their ability to estimate the underlying securities’ default risks, and how likely defaults were to be correlated. Using the prototypical structured finance security – the collateralized debt obligation (CDO) – as an example, we illustrate that issuing a capital structure amplifies errors in evaluating the risk of the underlying securities. In particular, we show how modest imprecision in the parameter estimates can lead to variation in the default risk of the structured finance securities which is sufficient, for example, to cause a security rated AAA to default with reasonable likelihood.

A second, equally neglected feature of the securitization process is that it substitutes risks that are largely diversifiable for risks that are highly systematic. As a result, securities produced by structured finance activities have far less chance of surviving a severe economic downturn than traditional corporate securities of equal rating. Moreover, because the default risk of senior tranches is concentrated in systematically adverse economic states, investors should demand far larger risk premia for holding structured claims than for holding comparably rated corporate bonds. We argue that both of these features of structured finance products – the extreme fragility of their ratings to modest imprecision in evaluating underlying risks and their exposure to systematic risks – go a long way in explaining the spectacular rise and fall of structured finance.

For over a century, agencies such as Moody’s, Standard and Poor’s and Fitch have gathered and analyzed a wide range of financial, industry, and economic information to arrive at independent assessments on the creditworthiness of various entities, giving rise to the now widely popular rating scales (AAA, AA, A, BBB and so on). Until recently, the agencies focused the majority of their business on single-name corporate finance—that is, issues of creditworthiness of financial instruments that can be clearly ascribed to a single company. In recent years, the business model of credit rating agencies has expanded beyond their historical role to include the nascent field of structured finance.

From its beginnings, the market for structured securities evolved as a “rated” market, in which the risk of tranches was assessed by credit rating agencies. Issuers of structured finance products were eager to have their new products rated on the same scale as bonds so that investors subject to ratings-based constraints would be able to purchase the securities. By having these new securities rated, the issuers created an illusion of comparability with existing “single-name” securities. This provided access to a large pool of potential buyers for what otherwise would have been perceived as very complex derivative securities.

During the past decade, risks of all kinds have been repackaged to create vast quantities of triple-A rated securities with competitive yields. By mid-2007, there were 37,000 structured finance issues in the U.S. alone with the top rating (Scholtes and Beales, 2007). According to Fitch Ratings (2007), roughly 60 percent of all global structured products were AAA-rated, in contrast to less than 1 percent of the corporate issues. By offering AAA-ratings along with attractive yields during a period of relatively low interest rates, these products were eagerly bought up by investors around the world. In turn, structured finance activities grew to represent a large fraction of Wall Street and rating agency revenues in a relatively short period of time. By 2006, structured finance issuance led Wall Street to record revenue and compensation levels. The same year, Moody’s Corporation reported that 44 percent of its revenues came from rating structured finance products, surpassing the 32 percent of revenues from their traditional business of rating corporate bonds.

By 2008, everything had changed. Global issuance of collateralized debt obligations slowed to a crawl. Wall Street banks were forced to incur massive write-downs. Rating agency revenues from rating structured finance products disappeared virtually overnight and the stock prices of these companies fell by 50 percent, suggesting the market viewed the revenue declines as permanent. A huge fraction of existing products saw their ratings downgraded, with the downgrades being particularly widespread among what are called “asset-backed security” collateralized debt obligations—which are comprised of pools of mortgage, credit card, and auto loan securities. For example, 27 of the 30 tranches of asset-backed collateralized debt obligations underwritten by Merrill Lynch in 2007, saw their triple-A ratings downgraded to “junk” (Craig, Smith, and Ng, 2008). Overall, in 2007, Moody’s downgraded 31 percent of all tranches for asset-backed collateralized debt obligations it had rated and 14 percent of those nitially rated AAA (Bank of International Settlements, 2008). By mid-2008, structured finance activity was effectively shut down, and the president of Standard & Poor’s, Deven Sharma, expected it to remain so for “years” (“S&P President,” 2008).

This paper investigates the spectacular rise and fall of structured finance. We begin by examining how the structured finance machinery works. We construct some simple examples of collateralized debt obligations that show how pooling and tranching a collection of assets permits credit enhancement of the senior claims. We then explore the challenge faced by rating agencies, examining, in particular, the parameter and modeling assumptions that are required to arrive at accurate ratings of structured finance products. We then conclude with an assessment of what went wrong and the relative importance of rating agency errors, investor credulity, and perverse incentives and suspect behavior on the part of issuers, rating agencies, and borrowers.

Manufacturing AAA-rated Securities

Manufacturing securities of a given credit rating requires tailoring the cash-flow risk of these securities – as measured by the likelihood of default and the magnitude of loss incurred in the event of a default – to satisfy the guidelines set forth by the credit rating agencies. Structured finance allows originators to accomplish this goal by means of a two-step procedure involving pooling and tranching.

In the first step, a large collection of credit sensitive assets is assembled in a portfolio, which is typically referred to as a special purpose vehicle. The special purpose vehicle is separate from the originator’s balance sheet to isolate the credit risk of its liabilities – the tranches – from the balance sheet of the originator. If the special purpose vehicle issued claims that were not prioritized and were simply fractional claims to the payoff on the underlying portfolio, the structure would be known as a pass-through securitization. At this stage, since the expected portfolio loss is equal to the mean expected loss on the underlying securities, the portfolio’s credit rating would be given by the average rating of the securities in the underlying pool. The pass-through securitization claims would inherit this rating, thus achieving no credit enhancement.

By contrast, to manufacture a range of securities with different cash flow risks, structured finance issues a capital structure of prioritized claims, known as tranches, against the underlying collateral pool. The tranches are prioritized in how they absorb losses from the underlying portfolio. For example, senior tranches only absorb losses after the junior claims have been exhausted, which allows senior tranches to obtain credit ratings in excess of the average rating on the average for the collateral pool as a whole. The degree of protection offered by the junior claims, or overcollateralization, plays a crucial role in determining the credit rating for a more senior tranche, because it determines the largest portfolio loss that can be sustained before the senior claim is impaired.

Continued in article

Bob Jensen's threads on accounting for financial instruments and hedging activities are at
http://www.trinity.edu/rjensen/caseans/000index.htm

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

"Why losers have delusions of grandeur: The less you know, the more you think you do," by Daniel Simons and Chrostopher, Chapris, The Washington Post, May 23, 2010 --- Click Here
http://www.nypost.com/p/news/opinion/opedcolumnists/why_losers_have_delusions_of_grandeur_kmSEG1YrE1Uhfh1fL4tdWP

Charles Darwin observed that “ignorance more frequently begets confidence than does knowledge.” That was certainly true on the day in 1995 when a man named McArthur Wheeler boldly robbed two banks in Pittsburgh without using a disguise. Security camera footage of him was broadcast on the evening news the same day as the robberies, and he was arrested an hour later. Mr. Wheeler was surprised when the police explained how they had used the surveillance tapes to catch him. “But I wore the juice,” he mumbled incredulously. He seemed to believe that rubbing his face with lemon juice would blur his image and make him impossible to catch.

In movies, criminal masterminds often are geniuses, James Bond villains in volcano lairs. But the stereotype doesn’t apply to actual cons, at least not the ones who get caught.

Studies show those convicted of crimes are, on average, less intelligent than non-criminals. And they can be spectacularly foolish. One of us had a high school classmate who decided to vandalize the school — by spray painting his own initials on the wall. A Briton named Peter Addison went one step further and vandalized the side of a building by writing “Peter Addison was here.” Sixty-six-year-old Samuel Porter tried to pass a one-million-dollar bill at a supermarket in the United States and became irate when the cashier wouldn’t make change for him. All of these people seem to have been under what we call the “illusion of confidence,” which is the persistent belief that we are more skilled than we really are — in this case, that the criminals were so good they would not get caught.

The story of McArthur Wheeler was told by social psychologists Justin Kruger and David Dunning in a brilliant paper entitled “Unskilled and Unaware of It.” In a set of clever experiments, Kruger and Dunning showed that people with the least skill are the most likely to overestimate their abilities. For example, they measured people’s sense of humor (psychologists have learned that almost anything can be measured) and found that those who scored the lowest on their test still thought they had a better-than-average sense of what is funny.

These findings help to explain why shows like “American Idol” and “Last Comic Standing” attract so many aspiring contestants who have no hope of qualifying, let alone winning. Many are just seeking a few seconds of TV time and a shot at “Pants on the Ground” fame, but some seem genuinely shocked when the judges reject them.

It turns out that the illusion of confidence can survive even the measurement of skill.

Chess, for instance, has a mathematical rating system that provides up-to-date, accurate and precise numerical information about a player’s “strength” (chess jargon for ability) relative to other players. Ratings are public knowledge and are printed next to each player’s name on tournament scoreboards. Ratings are valued so highly that chess players often remember their opponents better by their ratings than by their names or faces. “I beat a 1600” or “I lost to a 2100” are not uncommon things to hear in the hallway outside the playing room.

Armed with knowledge of their own ratings, players ought to be exquisitely aware of how competent they are. But what do they actually think about their own abilities? Some years ago, in a study we conducted with our colleague Daniel Benjamin, we asked a group of chess players at major tournaments two simple questions: “What is your most recent official chess rating?” and “What do you think your rating should be to reflect your true current strength?”

As expected, all of the players knew their actual ratings. Yet 75% of them thought that their rating underestimated their true playing ability. The magnitude of their overconfidence was stunning: On average, these competitive chess players estimated that they would win a match against another player with the exact same rating as their own by a two-to-one margin — a crushing victory. Of course, the most likely outcome of such a match would be a tie.

This tendency for the least skilled among us to overestimate their abilities the most has more serious consequences than an inflated sense of humor or chess ability. Everyone has encountered obliviously incompetent managers who make life miserable for their underlings because they suffer from the illusion of confidence. And as the joke reminds us, the people who graduate last in their medical school class are still doctors; what is less funny is that they probably believe they are still the best ones.

Daniel Simons and Christopher Chabris are the authors of “The Invisible Gorilla, and Other Ways Our Intuitions Deceive Us” (Crown). Visit their website at theinvisiblegorilla.com.

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

"KPMG and PwC eye rating move," by Richard Milne and Rachel Sanderson in London, Financial Times, May 16, 2010 ---
http://www.ft.com/cms/s/0/d88c971e-60fd-11df-9bf0-00144feab49a.html?ftcamp=rss

KPMG and PwC, two of the world’s largest accounting firms, have considered entering the credit rating business, in a move that would pitch them against the current top three – and heavily criticised – agencies Moody’s, Standard & Poor’s and Fitch.

John Griffith Jones, chairman of KPMG in the UK and co-chair in Europe, told the Financial Times it had discussed the move as – being one of the four biggest accounting firms in the world – it had the skills, knowledge and people to provide credit ratings.

Continued in article

The Scandals of Credit Rating Agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Jensen Comment
If the auditing firms move into client credit rating business, I view this as an enormous conflict of interest.

My first objection is that auditors are supposed to have access to confidential data of clients. How is it possible to protect this confidential client-auditor relationship if auditors take on a credit rating service?

SEC --- http://www.sec.gov/comments/4-579/4579-28.htm
Subject: File No. 4-579
From: Carl Olson
Affiliation: Fund for Stockowners Rights

April 19, 2009

Dear Commissioners:

Credit rating agencies depend on audited financial statements to evaluate company finances. If garbage arrives in the form of erroneous audited financial statements, garbage goes out in the form of erroneous credit ratings.

In order for any credit rating agency to function reputably and effectively, it must have ways quickly to discipline misbehaving auditors.

CPA auditors are supposed to provide reliable figures to the public. But they instead have promoted the financial fiascos of the past year. Each of these debacle companies had CPA auditors who assured the public that the financial statements were all just fine:

AIG – PricewaterhouseCoopers
Merrill Lynch – Deloitte Touche
Lehman Brothers – Ernst Young
Fannie Mae – Deloitte Touche
Freddie Mac – PricewaterhouseCoopers
Washington Mutual – Deloitte Touche
Wachovia – KPMG
Bear Stearns – Deloitte Touche
Countrywide – KPMG
IndyMac Bank—Ernst Young

Reform of this industry requires essential reforms:

1. Fully fund the Public Company Accounting Oversight Board.
2. Double the SEC enforcement budget.
3. Triple the FBI white collar budget. It was decimated in 2002. Theres never been a criminal prosecution under the Sarbanes-Oxley Act.
4. Require CPA firms to put all their partners at risk for the misdeeds of the firms. They should not be allowed to be Limited Liability Partnerships. They should all be required to go back to General Partnerships, as they were until the 1990s.
5. Encourage state boards of accountancy to discipline CPA firms. No significant penalties have been imposed on the Big 4 auditors for years. See below for fuller reporting.

Much more is on the website www.cpawatch.org.

Sincerely,

Carl Olson
Chairman
Fund for Stockowners Rights
P. O. Box 65563
Washington, D. C. 20035
703-241-3700
West Coast Office
P. O. Box 6102
Woodland Hills, California
818-223-8080

Auditing firms certainly had a lousy record in the subprime mortgage scandal and now face international litigation threats to their very survival as auditing firms ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

The comparative advantages and disadvantages of auditing firms as credit rating agencies has not been researched at all well. But my knee jerk reaction is NO!

May 28, 2010 message from Rick Lillie [rlillie@csusb.edu]

Good morning Bob,

Earlier today, I posted a question on AECM about qualifications for being an audit professor. I hope you do not think my questions or comments are too naive. I am interested in how accounting faculty view the issue of qualifications for being an audit professor and teaching audit-related topics. Should an audit professor be a CPA with practice experience? Does it matter that an audit professor (or prospective audit professor) is not a CPA and has no audit experience?

I guess my questions could apply to any accounting professor. Is it important for an accounting professor to earn professional credentials beyond the PhD (or appropriate doctoral degree) and have at least some relevant practice experience?

As we search for new accounting faculty, I see more vita documents from faculty who are not CPAs, and frankly who are not interested in earning a professional designation. Many seem to view practice experience as irrelevant to their success as an accounting professor.

Am I missing something in all of this? I would appreciate your comments.

Best wishes,

Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA. 92407-2397

May 28, 2010 reply from Bob Jensen

Hi Rick,

Medical schools do not assign faculty to teach surgery courses unless those surgeons have both expertise and experience with live patients (not just experience with dead cadavers whose arteries won’t hemorrhage when nicked). Nor do law schools teach key law courses with attorneys not having highly relevant courtroom experience.

There are, of course, philosophical levels for which practice experience may not matter as much. For example, the current Supreme Court nominee has no judicial experience on the bench. This may not be as important for serving on the Supreme Court as it would be for teaching certain courses in law school where bench experience is very important in my opinion. Former judges should, in my opinion, be teaching some courses in virtually every law school.

Engagement experience may be less important for financial accounting courses than auditing. For example, Art Wyatt was a professor of accounting at Illinois and a long time director of accounting research at Arthur Andersen. Art had very little engagement-level experience in public accounting and probably would not have been a much better teacher of financial accounting with more engagement-level experience. However, I think that, if Art had to teach auditing at Illinois, experience as an auditor would be very important. Of course Art’s experience fielding FASB/SEC questions from Andersen’s engagement-level auditing managers gave him valuable experience for teaching financial accounting, but this probably did not make him better at teaching financial accounting relative to some of our great accounting theory teachers who never had any private sector accounting experience.

Thus when it comes to auditing, I think practice experience is very important unless the mission minimizes the value of experience. Unfortunately, the main mission of some auditing courses has only one major goal --- explaining the answers to auditing questions on the CPA Examination. Since the CPA Examination is an academic exam, where the arteries cannot hemorrhage when nicked, perhaps engagement-level experience of an instructor is less important that the rote memory ability and the course organizing ability of an instructor. Does CPA examination answer memorization trump experience? Probably so for some accounting, auditing, and tax courses that focus only on the CPA Examination! (Sigh!)

Where does experience really count for an auditing instructor?
Believe it or not, I think practice experience may be most important in having both answers and war stories when responding to student questions.

For example, suppose an auditing student at Notre Dame asks the following question:
“How did the PCAOB impact auditing practice at the engagement level?”

Experienced Auditor Answer:
Note that Jim now teaches auditing at Notre Dame

From: Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]
Sent: Tuesday, March 23, 2010 9:21 AM
To: Jensen, Robert
Subject: FW: Deloitte

Bob
I was the “Professional Practice Director”, that’s the audit quality control guy, for Deloitte’s Chicago office for the six years prior to my retirement in May 2007. I got to experience first-hand everything from the absorption of AA’s people in Chicago to the advent of the PCAOB and its annual inspection process the first few years. I don’t think most folks have any appreciation for the very real impact the PCAOB has had on the profession. The quality of documentation, the increased amount of partner involvement, the added quality control processes, the expansion of detail testing – the PCAOB has had a huge impact. Most folks also don’t have an appreciation for the impact of 404 not only on the audit process but on corporate cultures as well. As you pointed out a few messages ago, we do see all the failings in the press, but what we don’t see is all the positives and all the improvements.
Jim

Jensen Comment
As an auditor it would be reckless to ignore the PCAOB, especially in the United States where the plaintiff’s tort lawyers are pouncing on every weakness in an audit firm’s defense. Unlike Francine, I think that the PCAOB has been doing its job and that the people that count have been listening. That does not mean that the auditing firms have been pointing to each others’ PCAOB audit deficiencies when recruiting our new graduates. But I would not expect them to do this since the deficiencies arose on particular audits relative many other audits that were not deficient or caught being deficient.

In retrospect I think the auditing firms are “getting it” just like I think worker/product safety is truly a priority in the majority of our mining and manufacturing operations in America. But there are failures, some of them criminal, that simply reinforce the adage that no person and no organization is perfect all of the time. Some are just worse than others at times, and we must strive to minimize the imperfections.

Auditing is essential for detection and prevention of many bad things in any economic system ranging from communism to capitalism. Until people are perfect, we will need auditors.

But like Art Wyatt and the rest of the Executive Office folks at Andersen, perhaps the executive offices of the surviving large international accounting firms are "not getting it" as well as they should be "getting it." This may be what Francine has in mind, although I think she's not been giving sufficient credit where credit is due on the great audits taking place and the bad stuff the mere act of auditing is preventing.

But like Art Wyatt and the rest of the Executive Office folks at Enron, perhaps the executive offices of the surviving large international accounting firms are "not getting it" as well as they should be "getting it." This may be what Francine has in mind, although I think she's not been giving sufficient credit where credit is due on the great audits taking place and the bad stuff the mere act of auditing is preventing.

Bob Jensen

PS
I forgot to mention that one of the main advantages of having engagement-level experience is in inspiring students to major in accounting and become auditors. War stories from experienced auditors can be invaluable for career inspiration and motivation.

Cloud Computing --- http://en.wikipedia.org/wiki/Cloud_computing

"Learning About Everything Under The 'Cloud'," by Walter S. Mossberg, The Wall Street Journal, May 6, 2010 ---
http://online.wsj.com/article/SB10001424052748703961104575226194192477512.html?mod=WSJ_Tech_TECHEDITORSPICKS

The digital world loves to revel in its own jargon, and one of its most popular phrases today is "cloud computing." You see the expression everywhere new uses for the Internet are discussed. But what do techies and companies mean when they refer to doing things in "the cloud"? They aren't talking about meteorology, and all they see when they use the term—which is always singular—is sunshine, not rain.

To help you navigate through the talk about cloud computing, here's a very basic explainer. It doesn't cover every detail current among Internet experts. But I hope it gives regular folks a better understanding of the "cloud" products and services being offered them.

At its most basic level, the "cloud" is simply the Internet, or the vast array of servers around the world that comprise it. When people say a digital document is stored, or a digital task is being performed in the cloud, they mean that the file or application lives on a server you access over an Internet connection, via a Web browser or app, rather than on "local" devices, like your computer or smartphone.

This isn't a new idea. For years, there have been services that would back up your files to a distant server over the Internet or keep your photos online. And Web-based email programs, like Yahoo Mail or Hotmail, are familiar examples of cloud-based applications. These programs live on servers, not your PC, and you access them through a Web browser.

What's changed is that, in recent years, large-scale Internet-based storage has gotten cheaper, so it's possible for programmers to create more-sophisticated remote software, and the speed and ubiquity of Internet connections have improved. Also, some users have expressed a desire to share and collaborate in easier and richer ways than emailing files. Cloud-based services let many users view, comment on, and edit the same material. All this has given a boost to cloud computing.

On top of that, computers are changing in ways that make cloud services more desirable. Your little netbook may lack the huge hard disk needed to hold all your music or photos, but there are ways to keep this material in the cloud and access it at will. Your smartphone can't run all the sophisticated programs, or store all the files, that your PC can. But, if it's connected to cloud storage and cloud-based apps, it can do much more than its hardware specs suggest. And, with cloud file storage and apps that run on remote servers, you could conceivably travel without any computer. A borrowed PC, tablet or smartphone might be all you need to log in and do real work.

So, in recent years, a flood of cloud-based products and services have appeared to store and share files; to keep information on all your devices synchronized; and even to perform tasks like editing photos, or creating and editing long documents or large spreadsheets.

For instance, I wrote parts of this column in a private test edition of a cloud-based version of Microsoft Word that the company will release soon. In fact, Microsoft will be making its entire Office suite available free in the cloud. Google and others already have such cloud-based productivity suites. Another example: Many of the 200,000 apps for Apple's iPhone are merely small programs that tap data or services stored in the cloud to provide everything from restaurant choices to driving directions.

There are other good examples. At Picnik.com, you'll find an elegant, versatile cloud-based photo editor that can work on pictures from a wide variety of Web-based photo sites as well as those on your own hard disk. At Zoho.com, you'll find a cornucopia of cloud-based apps that interact with both the Web and your local hard disk. You can track your finances using a cloud-based program called Mint, which is available from a PC browser, or from an iPhone or Android-based phone.

Of course, clever readers will have noticed that this trend toward cloud computing has an obvious flaw. If you aren't connected to the Internet—or are saddled with a poor connection—you could be left high and dry when you want access to an important file stored remotely, or need to use a cloud-based program. Google, which is building an entire cloud-based operating system, and other companies have come up with ways to store some remote material on your local device. But these solutions aren't yet comprehensive, so wise users will make sure that the tools and files they need most are still available on their devices.

Some products get around this by offering hybrid cloud and local services. One of my favorites in this category is SugarSync, which backs up key folders you select to the Web and synchronizes them to the hard disks on your PCs or Macs, so you always have the freshest copies handy, whether you have a connection or not. Another problem is privacy. Many of these cloud services have good security, but prying hackers are relentless and smart, so consumers should be careful about what they store in the cloud. You may not care if a family photo is swiped, but your Social Security number is a different matter.

Cloud computing is here, and growing, and quite useful. It will only get better and better.

COSO Releases Latest Fraud Study . May 21, 2010 ---
http://financialexecutives.blogspot.com/2010/05/sec-fasb-pcaob-testimony-posted-for.html

Yesterday, COSO announced the release of a new research study, Fraudulent Financial Reporting: 1998-2007, that examines 347 alleged accounting fraud cases identified by a review of U.S. Securities and Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAER's) issued over a ten-year period ending December 31, 2007.

The COSO Fraud Study updates COSO's previous 10-year study of fraud and was led by the same core academic research team as COSO's previous Fraud Study.

COSO's Fraud Study provides an in-depth analysis of the nature, extent and characteristics of accounting frauds occurring throughout the ten years, and provides helpful insights regarding new and ongoing issues needing to be addressed.

COSO is more formally known as The Committee of Sponsoring Organizations of the Treadway Commission, and the five sponsoring organizations are the AAA, AICPA, FEI, IIA, and I MA. More COSO info is available on their website, www.coso.org.

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

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

"UK audits beyond reach of US regulators: US audit regulator publishes list of companies it is being blocked from inspecting," by Mario Christodoulou, Accountancy Age, May 19, 2010 --- http://www.accountancyage.com/accountancyage/news/2263271/uk-audits-beyond-reach
Thank you John Anderson for the heads up.

US authorities are being blocked from inspecting the audits of more than 60 UK-based multinational companies, amid fears American investors are being put at risk.

The US audit regulator, the Public Company Accounting Oversight Board (PCAOB), set up in the wake of the Enron scandal, inspects the auditors of US registered companies. The board, however, has been blocked from inspecting overseas auditors, which have US registrants as their clients, owing to a dispute over information sharing.

The PCAOB said no legal obstacle prevents a non-US regulator from coming to the United States to inspect a US audit firm and that it would will assist them, “to the extent of our authority”. However it is restricted by law from handing over internal working papers.

Reforms are currently being put before the US congress to free the PCAOB to share its papers with authorised authorities - including foreign regulators.

Today, the PCAOB raised the stakes publishing a list of more than 400 companies whose audits it has been unable to inspect.

The UK contained one of the largest proportions of companies, second only to China and Hong Kong.

In a statement the board said it published the list to alert investors of companies whose audits are not subject to US oversight.

“As long as those obstacles persist, however, investors in US markets who rely on those firms' audit reports are deprived of the potential benefits of PCAOB inspections of those auditors,” the board said in a statement.

Among the UK companies are Vodafone, BHP Billiton, HSBC, Barclays and BT. The PCAOB is hoping new legislation, traveling through congress as part of the vast US financial reform bill, will allow it to share information with its EU counterparts.

If a solution can not be reached the PCAOB has the option to revoke the licenses of overseas audit firms, which will stop them from auditing US registrants.

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

Lease Accounting and IFRS

PwC contends that one of the most significant impacts of IFRS in the U.S. will be the newer and highly controversial lease proposals will be in the financial statements of retailers ---
http://www.pwc.com/gx/en/retail-consumer/pdf/lease-accounting-thoughts.pdf

Also see
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=FSAE-85LMVC&ContentType=Content

You Rent It, You Own It (at least while you're renting it)
Not surprisingly, such companies are not overly enthusiastic about the preliminary leanings of FASB and the International Accounting Standards Board toward overhauling FAS 13. The rule update could, by some predictions, move hundreds of billions of dollars in assets and obligations onto their balance sheets. Many of them are hoping they can at least convince the standard-setters that the rule doesn't have to encompass all leases. Under the current rule, companies distinguish between capital lease obligations, which appear on the balance sheet, and operating leases (or rental contracts), which do not. Based on FASB's and IASB's discussion paper on the topic, released earlier this year, the new rule will likely require companies to also capitalize assets that have traditionally fallen under the "operating lease" category, making them appear more highly leveraged.
Sarah Johnson, "Companies: New Lease Rule Means Labor Pains," CFO.com, July 21, 2009 --- http://www.cfo.com/article.cfm/14072875/c_2984368/?f=archives

Jensen Comment
One of the big controversies is lease renewal of relatively short term leases that under old standards were typically operating leases with no chance of ever owning the leased property. For example, those tiny, tiny retail "benches" in the middle of walkways in a Galleria mall may have leased 60 square feet of space for six months. There is no hope that those tiny retailers like cell phone vendors will ever be deeded ownership of 100 square feet of the walkway of a Galleria mall. And the present value of six month lease is relatively small relative to the plan of a retailer to renew the lease ad infinitum. Therein lies a huge problem of deciding how far to extend the cash flow horizon. Retailers are concerned over how lease renewal options will be accounted for, especially those options that can be broken with relatively small penalty payments by the Galleria management. The retailer may intend to stay in this walkway for over 20 years but the Galleria might renege on renewal options for a pittance.

Bob Jensen's somewhat neglected threads on leases are at
http://www.trinity.edu/rjensen/Theory01.htm#Leases

Speech by SEC Chairman: Remarks at CFA Institute 2010 Annual Conference, May 18, 2010 ---
http://www.sec.gov/news/speech/2010/spch051810mls.htm

"SEC’s Shapiro on Accounting," by David Albrecht, The Summa, May 20, 2010 ---
http://profalbrecht.wordpress.com/2010/05/20/secs-schapiro-on-accounting/

Thanks to Rick Telberg at CPATrendlines, I am now aware of Mary Schapiro’s latest comments on accounting (to the CFA Institute 2010 Annual Conference in Boston, Mass.). We now have proof that the spirit of Professor Philip Barbay is alive and well inside the beltway. You don’t remember Professor Philip Barbay? He was the fool to Thornton Melon (played by Rodney Dangerfield) in the 1986 classic, Back to School. Here’s the scene I best remember:

Watch the Back to School video clip

Continued in article

Jim Peterson's critical take on Shapiro's speech --- http://snipurl.com/petersonshapiro

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

"A One-Two Accounting Punch? Next year U.S. public companies will find out if they have to adopt international accounting standards – just as they are implementing a host of new FASB rules," by Marie Leonem CFO.com, May 21, 2010 ---
http://www.cfo.com/article.cfm/14496195/c_14499425?f=home_todayinfinance

Will American companies have to go through a major accounting-standards overhaul twice? Some finance executives think so. They say the project to converge American and international standards is at odds with the push to introduce a host of new U.S. accounting rules over the next year, and warn that chaos could result.

That alarming prospect was raised last month during a panel discussion at a conference held by Pace University's Lubin School of Business. The problem will become more apparent in mid-2011, when American companies will be digesting at least 10 major new generally accepted accounting principles issued as joint projects of the Financial Accounting Standards Board and the International Accounting Standards Board. The areas covered include fair value measurement, accounting for financial instruments, leases, and revenue recognition (see list below).

Around the same time, the Securities and Exchange Commission is expected to announce whether public companies will have to abandon U.S. GAAP and adopt international financial reporting standards. If the answer is yes, it's likely that the regulator will require American companies to make the switch in 2016, just a few years after adopting the changes to U.S. GAAP.

Such a one-two punch would be costly and time-consuming, noted panelist Aaron Anderson, director of IFRS policy and implementation at IBM. Anderson hoped the SEC would allow companies to make the switch early and avoid the GAAP changes. The computer giant already reports results using IFRS at some of its subsidiary companies, Anderson said.

John McGinnis, chief accountant at HSBC North America, said that while he understood the need for "due process," he also believed that "early adoption [of IFRS] would be very helpful." Several HSBC subsidiaries already use IFRS, he said.

Regardless of the call from companies and foreign regulators to allow early adoption of IFRS, the SEC is not about to rush its decision. SEC chief accountant James Kroeker, who also spoke at the conference, said it was "too early" to comment on the progress of the commission's decision whether or not to abandon U.S. GAAP, although the SEC has promised to provide periodic updates starting in October.

Other groups publicly oppose the rapid pace of rulemaking and what a Financial Executives International committee characterizes as the "quality versus speed trade-off." In a letter to FASB, members of FEI's Committee on Private Company Standards said they were worried about private-company executives becoming "overwhelmed" by poring over exposure drafts while doing their day jobs.

Aware of the burden that both public and private companies face, FASB is considering "staggering" the rule implementation dates so the changes are rolled out more slowly, noted FASB technical director Russ Golden while speaking at an April industry meeting sponsored by the Zicklin School of Business at Baruch College.

"No one standard is an issue in and of itself," says Kelley Wall, senior consultant at accounting and financial advisory firm RoseRyan. "But the timing of all of them being issued in such a short time frame would be a significant strain on companies." Adds Jay Hanson, McGladrey & Pullen national director of accounting, "For companies that thought that [Sarbanes-Oxley] implementation was hard, implementing the new FASB rules will be even worse."

But Wall isn't too concerned about switching to IFRS after FASB issues its collection of new rules. She points out that all 10 rules currently in the exposure-draft stage are part of the IASB-FASB joint convergence project, meaning that in most cases, the IASB would be issuing a standard similar to the new FASB rules.

In fact, she believes the flood of new FASB rules may be in response to the SEC's notion that convergence should be complete before it decides whether to switch the country to IFRS. "Although implementing a host of new accounting standards in such a short time frame would be painful, it would make the eventual adoption of IFRS in the U.S. easier," says Wall.

The Joint Projects Are Jumpin'

Joint FASB/IASB Projects (Final rules due first half of 2011, unless otherwise noted)

Fair value measurement (due Q4 2010)

Consolidation: Policy and procedures

Accounting for financial instruments

Financial instruments with characteristics of equity

Financial statement presentation

Insurance contracts

Leases

Revenue recognition

Statement of comprehensive income

Reporting discontinued operations

Balance sheet offsetting

Emissions trading schemes (due date TBA)

Source: FASB Website, May 2010

Bob Jensen's threads on IFRS-FASB standards convergence are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

The Hazards of Financial Contract Creativity
Keywords
Financial Innovation; Raghuram Rajan; Junk Bonds; Credit-Default Swaps; Securitization; Index Funds; Currency Swaps
Read more: http://www.newyorker.com/talk/financial/2010/05/17/100517ta_talk_surowiecki#ixzz0o7msp3sa

"Too Clever by Half?" by James Surowiecki, The New Yorker, May 17, 2010 ---
http://www.newyorker.com/talk/financial/2010/05/17/100517ta_talk_surowiecki

Innovate or die. The phrase, popularized in Silicon Valley in the nineteen-nineties, has since become a mantra throughout the business world, and nowhere has it been more popular than on Wall Street, which in recent years has churned out a seemingly endless stream of new ways to manage capital and slice and dice risk. But, while Silicon Valley’s innovations have brought enormous benefits to society, the value of Wall Street’s innovations seems a lot less clear. (The former Fed chair Paul Volcker has said, for instance, that the last valuable new product in banking was the A.T.M.) The Valley gave us the microprocessor, Google, and the iPod. The Street gave us the C.D.O., the A.B.S., and the C.D.S.—not to mention the kind of computerized trading that enabled last week’s stock-market nosedive. Not surprisingly, then, the whole notion of “financial innovation” is being looked at with a gimlet eye, and Congress is now considering various ways to rein in the banking industry’s excesses. Given the tumult of the past few years, the barter system is starting to look good.

Not all of Wall Street’s concoctions have been pointless or destructive, of course. Take junk bonds, whose use Michael Milken pioneered in the nineteen-eighties. They got a bad name when Milken went to prison for securities fraud. But his insight that high-yield bonds could be a good investment—that, historically, the rewards outweighed the risks—allowed new companies, including eventual giants like Turner Broadcasting and M.C.I., as well as countless smaller businesses, to raise billions in capital that previously would have been out of their reach. Today, almost two hundred billion dollars’ worth of junk bonds is sold every year; they’re an integral part of the way Wall Street does what it’s supposed to do: channel money from investors to productive enterprises.

There are plenty of comparable examples, as Robert Litan, a scholar at the Brookings Institution, showed in a recent essay. Currency and interest-rate swaps, for instance, allow global corporations to focus on their businesses without having to worry about wild swings in currency values. Index funds have given individual investors a low-cost way of putting their money to work. Venture capital provides startups with access to tens of billions of dollars every year. Raghuram Rajan, a former chief economist at the I.M.F. and a finance professor at the University of Chicago, says, “There’s a lot of stuff that does a lot of good that we take for granted, because it’s just become part of our everyday financial lives.”

Unfortunately, the benefits of good financial innovations have, of late, been swamped by the costs of the ones that went bad. Things like “structured investment vehicles,” for instance, were designed to evade regulations and make bank balance sheets look safer than they were. Subprime loans, which offered lower-income Americans a rare chance to accumulate wealth, ended up inflating the housing bubble and leaving these same people with debts they couldn’t pay. Credit-default swaps, which are a useful way for investors to protect themselves against unavoidable risks, became a way for institutions like A.I.G. to make easy money in the short term while piling up billions of dollars in potential obligations that taxpayers ended up paying for. And securitization—the packaging of many loans into a single complex financial product—led investors to neglect the quality of the actual loans that were being made.

Some of these ideas, as it happens, were reasonable ones, within limits. But limits aren’t something that Wall Street knows much about: in recent years, it has shown an uncanny knack for taking reasonable ideas to unreasonable extremes. The economists Nicola Gennaioli, Andrei Shleifer, and Robert Vishny argue in a recent paper that financial innovation often leads to financial instability: investors get interested in a new product that seems to offer high returns, and, precisely because it’s new, underestimate the chance that this product will eventually blow up. They pour more and more money into the market, until things start to go wrong, at which point they panic en masse. The complex financial engineering that went into creating products like C.D.O.s exacerbated the problem by making the risks of those investments opaque. If investors had known the risks they were taking in the pursuit of greater returns, they would have been more prepared for failure—and would presumably have put less money into the housing market. Instead, they thought that financial wizardry had engineered all the danger out of the system. As Rajan argued in a prescient 2005 paper, financial development, which was supposed to make the system safer, could in fact make it riskier. The fundamental problem with innovation was that it made investors and executives forget the need to think for themselves.

Read more: http://www.newyorker.com/talk/financial/2010/05/17/100517ta_talk_surowiecki#ixzz0o7nchYvD

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

I added the following to my blog to my list of professors who blog ---
http://www.trinity.edu/rjensen/ListServRoles.htm

Paul Caron's Tax Prof Blog (Cincinnati College of Law) --- http://taxprof.typepad.com/taxprof_blog/

Ensuring Insurance: Colleges Investigating Fraudulent Medical Insurance Coverage “Dependents”

Question
Note that a major part of financial auditing is external verification of accounts and notes receivables.
I wonder how many CPA audits are also test checking eligibility for benefits in business firms?

"Ensuring Insurance," by Doug Lederman, Inside Higher Ed, May 24, 2010 ---
http://www.insidehighered.com/news/2010/05/24/insurance

With their revenues declining and prospects for replacing them fading, colleges and universities around the country are embracing a series of tactics aimed at lowering their costs, such as redesigning entry-level courses and pruning unproductive research institutes. The measures aren't always popular, especially when they are perceived as taking cherished benefits away from employees.

That's the case in Georgia, where the state's public college system has undertaken an audit designed to ensure that health insurance coverage goes only to those who are qualified to receive it -- and to shave as much as $4.6 million off the $290 million that the University System of Georgia spends each year on employer-provided benefits. The so-called dependent eligibility audit, after an "amnesty period," requires all employees whose dependents are covered under the health insurance policy to submit documents (such as marriage licenses, birth certificates and tax returns) proving that their spouses and children warrant such coverage.

Similar audits are underway or planned at the University of Michigan, the University of Kentucky, and the University of Colorado System.

Employee groups in the Georgia system have not taken kindly to the audit. Viewed in isolation, said Hugh Hudson Jr., a Georgia State University historian who heads the state chapter of the American Association of University Professors, the idea of requiring faculty and staff members to prove that they're following the system's current policy may seem like no big deal.

But much else is happening in Georgia, Hudson said. State political leaders are imposing major budget cuts on public colleges, promising furloughs and threatening layoffs of tenured faculty members (a threat from which the university has since backed off), and legislators have taken aim at what they perceive to be the inappropriate research interests of some professors.

In that context, "we're told, 'Prove to me that you haven't been cheating.' This is the proverbial straw breaking the camel’s back." It's hard not to view the current review of benefits, Hudson said, as "part of a larger sense of growing hostility toward the value of higher education and the faculty."

Officials of the Georgia system insist that such a view seriously misreads their intent. While such audits typically find that between 5 and 10 percent of enrolled dependents should not be covered, the overwhelming majority are enrolled because of mistakes or incomplete understanding, not ill intent.

And it is just good fiduciary practice to limit health insurance to those who are actually qualified to receive it, they say -- a point of view shared by the increasing numbers of colleges and universities that are undertaking such audits.

“Many colleges and universities have recently conducted similar audits and are realizing significant annual cost savings -- some in the millions of dollars per year," Andy Brantley, president and chief executive officer of the College and University Professional Association for Human Resources, said via e-mail. "These kinds of audits are not meant to be an invasion of privacy and are only conducted to verify information previously submitted by the employee.... All institutions should regularly conduct these types of audits as a standard business practice.“

The university system's Board of Regents approved the audit in March, as one of a series of changes it had undertaken in the preceding months (at large part at the direction of its new chairman, Robert F. Hatcher) to shave costs from its health care programs.

"What we're trying to do is to preserve our health care plan for the people on the plan," said Wayne Guthrie, vice chancellor for human resources for the Georgia system. The dependent care audit is one way to do that, system officials said in documents explaining the plan, since "[covering individuals who are not eligible dependents raises our cost for health coverage which is reflected in the annual premiums."

The audit is being conducted by Chapman Kelly, an Indiana-based firm to which the regents agreed to pay about $300,000. (The expenditure of funds to an outside company given the state's tight budgets has also raised faculty hackles, said Hudson of the AAUP. "Is there no agency in the state that could do this work?") The review includes a weeks-long “amnesty period ... in which employees may voluntarily remove ineligible dependents with no penalties," the system told employees in its communications to them. (Employees were notified of the amnesty phase on March 29 and given until April 21.)

Continued in article

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

Question
What causes asset price bubbles?
Something to consider in fair value accounting theory.

"Asset-Price Bubbles," by Richard Posner, Becker-Posner Blog, May 16, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/05/assetprice-bubblesposner.html

"Social Interactions and Bubbles," by Nobel Laureate Gary Becker, Becker-Posner Blog, May 16, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/05/social-interactions-and-bubbles-becker.html

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

Bob Jensen's threads on alternative asset valuation theories ---
http://www.trinity.edu/rjensen/Theory01.htm#BasesAccounting

The second is the comment that Joan Robinson made about American Keynsians: that their theories were so flimsy that they had to put math into them. In accounting academia, the shortest path to respectability seems to be to use math (and statistics), whether meaningful or not.
Professor Jagdish Gangolly, SUNY Albany

I don't think it's ready for IFRS prime time with the quants, but improvements are being suggested for Black Swan fat tails.
The quants are more desperate at Senator Spector (now a lame duck) running to save their jobs.
We might facetiously assert that its all for the birds.

Do we forecast? You bet. Do we have confidence in our forecasts? Never! Confidence about a non-linear chaotic system can only come in degrees, and even those degrees of confidence are guesses. Not all hope is lost. There are times when it seems our ability to predict is better than others. Thus we need to take advantage of it if we see it. Trading ranges, pivot points, support and resistance, and the like can help, and do help the trader.
Michael Covel, Trading Black Swans, September 2009 --- http://www.michaelcovel.com/pdfs/swan.pdf

"A Finer Formula for Assessing Risk," by Martin Hutchinson, The New York Times, May 10, 2010 ---
http://www.nytimes.com/2010/05/11/business/11views.html?src=busln

The credit crisis would not have been as bad if investment banks’ risk management systems worked well. But the systems rely on sophisticated mathematical models that have a fundamental flaw: they grossly underestimate a factor called “tail risk.” This problem can be solved fairly easily.

In a way, this is a highly technical dispute about the arcane details of the calculation of Value at Risk, the prime measure of the riskiness of trading books.

To nonmathematicians, the possible answers sound daunting: Gaussian, Cauchy and Pareto-Levy. But the underlying question is straightforward: how often and how badly do markets blow up?

On a day to day basis, financial asset prices seem to go up and down at random, or in response to news. But the rocket scientists of finance analyze thousands of movements to identify patterns.

The answer is what is known as a stable “Paretian distribution.” Picture a curve that looks like a cross-section of a hat, with a brim that is wide and thin and a great big crown in the middle.

The crown represents the days that prices don’t move very much. It is high because most days are like that. On those calm days, holders cannot lose much money. The brim represents the days of big losses or gains. The further from the center of the crown, the bigger the loss or gain. The wider the brim, the more often the big moves occur.

The argument is about the shape of the hat brim. The standard model employed by banks — named for the German mathematician Carl Friedrich Gauss — is one in which really bad days happen rarely and horrible days almost never.

How rarely? Well, in August 2007 David Viniar, the chief financial officer of Goldman Sachs, said, “We were seeing things that were 25 standard deviation moves, several days in a row.”

Standard deviations are a measure of the distance from the center of the hat, or, to use the common image in the trade, the length of the tail. If those days were really 25 standard deviations away, they would not be expected to come around in the lifetime of a billion universes.

But the 2007-style collapse had many precedents in the last few centuries, well within the life of this one universe.

The Gaussian model is too optimistic about market stability, because it uses an unrealistically high number for the key variable, the exponential rate of decay, known to its friends as alpha (not the alpha of performance measurement).

Gauss is at 2. If markets worked with an alpha of zero — known as the Cauchy distribution for its founder, Augustin-Louis Cauchy — the 2007 days would come around every 2.5 months. That is unrealistic in the other direction.

In 1962, the mathematician Benoit Mandelbrot demonstrated that an alpha of 1.7 provided the best fit with a 100-year series of cotton prices.

More recent market history — the 1987 crash, the Long Term Capital Management debacle and the 2007-8 crisis — suggest big bad events occur about once a decade.

That goes better with an alpha of 0.5, the Pareto-Levy distribution. This is the model used by the Options Clearing Corporation to assess option trading counterparty risk for margin purposes.

The Clearing Corporation has no incentive to allow counterparty risk to build up. But for investment banks, more conservative measures of the chance of big market drops would reduce returns on capital, because they would have to put aside more capital to protect against the possibility.

The lure of maximizing trading positions, profits and bonuses in noncrash years could well distort the experts’ judgment. Indeed, one way to look at the exotic financial instruments that have proliferated in recent years is as a sort of statistical arbitrage.

If alpha were calculated correctly, the tails for portfolios of complex derivatives and the like would be fat and long — more gains in the good times and bigger losses in the bad — and more capital would be needed. But the measure that is actually used, the Gaussian alpha, hides the actual risk.

Regulators should get a better handle on that risk, but by using less Gauss and more Pareto-Levy. That would reduce the chance that a pretty predictable market blowup wrecks the entire financial system.

Bob Jensen's threads on Black Swan fat tails are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Big (Accountnacy) Firms Exit Hawaii Market," by Rick Telberg, CPA Trendlines, May 17, 2010 ---
http://cpatrendlines.com/2010/05/17/big-firms-exit-hawaii-market/

Jensen Comment
One of the things the departing accountants will really miss: In Hawaii you're out of uniform unless you're wearing a Hawaiian shirt or Hawaiian dress. Departing male accountants might have to relearn how to tie a necktie.

Jerry Trites clued me into some new materials from Ernst & Young on risk management ---
http://www.ey.com/CA/en/Issues/Managing-risk

This is a Good Summary of Various Forms of Business Risk ---
http://en.wikipedia.org/wiki/Risk_management

Enterprise Risk Management
Credit Risk
Market Risk
Operational Risk
Business Risk
Other Types of Risk?

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

"Auditor Merry Go Round at Overstock.com," Big Four Blog, January 8, 2010 ---
http://www.bigfouralumni.blogspot.com/

"Overstock Back on Solid Footing With Help from KPMG ," The Big Four Blog, May 13. 2010 ---
http://www.bigfouralumni.blogspot.com/

We had blogged earlier about Overstock.com, which had changed three auditors in 2008-2009, from PricewaterhouseCoopers to Grant Thornton to KPMG, all in a space of about a year, and been in trouble with Nasdaq for filing unaudited financials.

See our earlier posts for all the drama with the company and its erstwhile auditors taking three disparate viewpoints on restatements, ownership and reporting.

However, over the last few months in 2010, things seem to have become much better for the company, and the online retailer seems to have put its heart back into retailing and put away the distraction of accounting from previous months.

Here’s a chronology of events:

Dec 29, 2009 Overstock.com Engages KPMG as the company's independent registered public accounting firm of record for the fiscal year ending December 31, 2009. KPMG will conduct an integrated audit of the company's 2009 financial statements, including review of the company's quarterly information for the periods ending March 31, 2009, June 30, 2009 and September 30, 2009.

KPMG is hired after a lot of back and forth with previous auditors, Grant Thornton.

March 31, 2010 Overstock.com Reports Restated FY 2009 Results with Revenue: $876.8M in FY 2009 vs. $829.9M in FY 2008 (6% increase); Gross margin: 18.8% vs. 17.4% (140 basis point improvement); Gross profit: $164.8M vs. $144.2M (14% increase); Contribution (non-GAAP measure): $109.2M vs. $86.6M (26% increase); Net income (loss) attributable to common shares: $7.7M vs. $(11.1M) ($18.8M increase in net income); and Diluted EPS: $0.33/share vs. $(0.48)/share ($0.81/share improvement)

Overstock.com ranked for the second year in a row, number 2 in the NRF/Amex survey of American consumers, behind only LL Bean and ahead of Amazon, Zappos, eBay, Nordstrom, and many other fine firms.

Patrick M. Byrne said, “As you may know, at the end of Q4 we engaged KPMG as our independent auditors, and announced that we were restating our FY 2008 and Q1, Q2 and Q3 2009 financial statements. I thank you for being patient with us as we worked through the questions raised by the SEC, the transition to the KPMG team, and the extra time it took to ensure that our financial statements are accurate.”

KPMG passed the actual audit of the company without adverse opinion, saying “In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Overstock.com, Inc. and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.”

But they did qualify that Overstock.com’s internal audit over financial reporting was not up to standards and provided an adverse opinion on internal controls. The company’s Audit Committee initiated strong steps to enhance internal audit by hiring competent professionals and instituting appropriate processes.

Overstock.com did restate its FY 2008 and Q1-2009 to Q3-2009 financial statements to account for a number of auditing issues and concerns.

A nice event, with all the accounting restatements done and good results to boot compared to FY 2008.

April 5, 2010 Overstock.com Regains Compliance with NASDAQ Listing Rules, receiving a notice from the NASDAQ Stock Market that the company is in compliance with the periodic filing requirement and this matter has been closed. Earlier, Overstock.com had received a letter on November 19, 2009 from the NASDAQ notifying the company that it had violated NASDAQ Listing Rule 5250(c)(1) when it filed its Quarterly Report on Form 10-Q for the period ended September 30, 2009 because the filing wasn't reviewed in accordance with Statement of Auditing Standards No. 100. In response to a compliance plan submitted by the company, NASDAQ granted an exception to enable the company to regain compliance by May 17, 2010.

Continued in article

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

"Silencing the Whistleblowers: Financial reform won’t prevent another bubble if banks bulldoze their internal warning systems," by Michael W. Hudson, The Big Money (Slate), May 9, 2010 --- http://www.thebigmoney.com/articles/judgments/2010/05/07/silencing-whistleblowers

In early 2006, Darcy Parmer began to worry about her job. She was a mortgage fraud investigator at Wells Fargo Bank. Her managers weren’t happy with her. It wasn’t that she wasn’t doing a good job of sniffing out questionable loans in the bank’s massive home-loan program. The problem, she said, was that she was doing too good a job.

The bank’s executives and mortgage salesmen didn’t like it, Parmer later claimed in a lawsuit, when she tried to block loans that she suspected were underpinned by paperwork that exaggerated borrowers’ incomes and inflated their home values. One manager, she said, accused her of launching “witch hunts” against the bank’s loan officers.

One of the skirmishes involved a borrower she later referred to in court papers as “Ms. A.” An IRS document showed Ms. A earned $5,030 a month. But Wells Fargo’s sales staff had won approval for Ms. A’s loan by claiming she made more than twice that—$11,830 a month. When Parmer questioned the deal, she said, a supervisor ordered her to close the investigation, complaining, “This is what you do every time.”

Amid the frenzy of the nation’s mortgage boom, the back-of-the-hand treatment that Parmer describes wasn’t out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business—including made-up addresses, pyramid schemes, and organized criminal rings—and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them.

In interviews and in court records, 10 former fraud investigators at seven of the nation’s biggest banks and lenders—including Wells Fargo (WFC), IndyMac Bank, and Countrywide Financial—describe corporate cultures that allowed fraud to thrive in the pursuit of loan volume and market share. Mortgage salesmen stuck homeowners into loans they couldn’t afford by exaggerating borrowers’ assets and, in some cases, forging their signatures on disclosure documents. In other instances, banks opened their vaults to professional fraudsters who arranged millions of dollars in loans using “straw buyers,” bogus identities, or, in a few instances, dead people’s names and Social Security numbers.

Corporate managers looked the other way as these practices flourished, the investigators say, because they didn’t want to crimp loan sales. The investigators discovered that they’d been hired not so much to find fraud but rather to provide window dressing—the illusion that lenders were vetting borrowers before they booked loans and sold them to Wall Street investors. “You’re like a dog on a leash. You’re allowed to go as far as a company allows you to go,” recalled Kelly Dragna, who worked as a fraud investigator at Ameriquest Mortgage Co., the largest subprime lender during the home-loan boom. “At Ameriquest, we were on pretty short leash. We were there for show. We were there to show people that they had a lot of investigators on staff.”

Continued in article

Bob Jensen's threads on the subprime sleaze --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Bob Jensen's threads on how whistle blowing is not rewarded --- http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing

Benford's Law: How a mathematical phenomenon can help CPAs uncover fraud and other irregularities

Benford's Law: It's interesting to read the "Silly" comments that follow the article.

"Benford's Law And A Theory of Everything: A new relationship between Benford's Law and the statistics of fundamental physics may hint at a deeper theory of everything," MIT's Technology Review, May 7, 2010 --- http://www.technologyreview.com/blog/arxiv/25155/?nlid=2963

In 1938, the physicist Frank Benford made an extraordinary discovery about numbers. He found that in many lists of numbers drawn from real data, the leading digit is far more likely to be a 1 than a 9. In fact, the distribution of first digits follows a logarithmic law. So the first digit is likely to be 1 about 30 per cent of time while the number 9 appears only five per cent of the time.

That's an unsettling and counterintuitive discovery. Why aren't numbers evenly distributed in such lists? One answer is that if numbers have this type of distribution then it must be scale invariant. So switching a data set measured in inches to one measured in centimetres should not change the distribution. If that's the case, then the only form such a distribution can take is logarithmic.

But while this is a powerful argument, it does nothing to explan the existence of the distribution in the first place.

Then there is the fact that Benford Law seems to apply only to certain types of data. Physicists have found that it crops up in an amazing variety of data sets. Here are just a few: the areas of lakes, the lengths of rivers, the physical constants, stock market indices, file sizes in a personal computer and so on.

However, there are many data sets that do not follow Benford's law, such as lottery and telephone numbers.

What's the difference between these data sets that makes Benford's law apply or not? It's hard to escape the feeling that something deeper must be going on.

Today, Lijing Shao and Bo-Qiang Ma at Peking University in China provide a new insight into the nature of Benford's law. They examine how Benford's law applies to three kinds of statistical distributions widely used in physics.

These are: the Boltzmann-Gibbs distribution which is a probability measure used to describe the distribution of the states of a system; the Fermi-Dirac distribution which is a measure of the energies of single particles that obey the Pauli exclusion principle (ie fermions); and finally the Bose-Einstein distribution, a measure of the energies of single particles that do not obey the Pauli exclusion principle (ie bosons).

Lijing and Bo-Qiang say that the Boltzmann-Gibbs and Fermi-Dirac distributions distributions both fluctuate in a periodic manner around the Benford distribution with respect to the temperature of the system. The Bose Einstein distribution, on the other hand, conforms to benford's Law exactly whatever the temperature is.

What to make of this discovery? Lijing and Bo-Qiang say that logarithmic distributions are a general feature of statistical physics and so "might be a more fundamental principle behind the complexity of the nature".

That's an intriguing idea. Could it be that Benford's law hints at some kind underlying theory that governs the nature of many physical systems? Perhaps.

But what then of data sets that do not conform to Benford's law? Any decent explanation will need to explain why some data sets follow the law and others don't and it seems that Lijing and Bo-Qiang are as far as ever from this.

It's interesting to read the "Silly" comments that follow the article.

"I've Got Your Number: How a mathematical phenomenon can help CPAs uncover fraud and other irregularities," by Mark J. Nigrini, Journal of Accountancy, May 1999 --- http://www.journalofaccountancy.com/Issues/1999/May/nigrini.htm

EXECUTIVE SUMMARY

BENFORD'S LAW PROVIDES A DATA analysis method that can help alert CPAs to possible errors, potential fraud, manipulative biases, costly processing inefficiencies or other irregularities.

A PHYSICIST AT GE RESEARCH LABORATORIES in the 1920s, Frank Benford found that numbers with low first digits occurred more frequently in the world and calculated the expected frequencies of the digits in tabulated data.

CPAs CAN USE BENFORD'S DISCOVERY in business applications ranging from accounts payable to Y2K problems. In addition, subset tests identify small lists of serious anomalies in large data sets, making an analysis more manageable.

DIGITAL ANALYSIS IS WELL SUITED to finding errors and irregularities in large data sets when auditors need computer assisted technologies to direct their attention to anomalies.

MARK J. NIGRINI, CA (SA), PhD, MBA, is an assistant professor at the Edwin L. Cox School of Business, Southern Methodist University, Dallas, and a Research Fellow at the Ernst & Young Center for Auditing Research and Advanced Technology, University of Kansas, Lawrence.

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

The Dark Side: Hiring Secrets of the Big 4
The suit claims Ernst & Young offers job contracts to graduating college seniors that “compel” them “to work for EY to the exclusion of all other employers,” but allow the company “to legally renege or cancel the offer of employment” if the senior does not maintain a vague “strong academic standing.”

"Taking a Louisville Slugger: Lawsuits Against E&Y, PwC Show Ugly Side of Big 4,″ written for Going Concern magazine by Francine McKenna, re: theAuditors, May 13, 2010 --- http://retheauditors.com/2010/05/13/going-concern-taking-a-louisville-slugger-lawsuits-against-ey-pwc-show-ugly-side-of-big-4/
With a video clip from The Untouchables

Robert DeNiro as Al Capone in The Untouchables:

“A man becomes preeminent, he’s expected to have enthusiasms. Enthusiasms, enthusiasms… What are mine? Baseball! A man stands alone at the plate. This is the time for what? For individual achievement. There he stands alone. But in the field, what? Part of a team. Teamwork…”

It must be heartbreaking to one day feel you’re part of a team, a big wonderful, eminent, respectable team and the next get cold-cocked.

Two new Big 4 lawsuits – one against Ernst & Young and the other against PwC – reminded me how many times professionals have written to say their firm had just knocked the stuffing out of them. They had been fired suddenly or a student’s offer was pulled at the last minute.

They were crushed. Humiliated. Confused. Betrayed.

It must be heartbreaking to one day feel you’re part of a team, a big wonderful, eminent, respectable team and the next get cold-cocked.

Two new Big 4 lawsuits – one against Ernst & Young and the other against PwC – reminded me how many times professionals have written to say their firm had just knocked the stuffing out of them. They had been fired suddenly or a student’s offer was pulled at the last minute. They were crushed. Humiliated. Confused. Betrayed.

Ms. Yunjung Gribben, 43, is the lead plaintiff in a class action lawsuit against EY in California. Ms. Gribben says Ernst & Young offered her a job with a starting annual salary of $50,000, then pulled the offer, after she graduated, because of “a couple of C grades she had received in accounting during her senior year at CSUF.” Ms. Gribben says she graduated from Cal State Fullerton with a 3.6 grade point average. The case seems to be more about age discrimination – she says younger candidates kept their jobs – than it is about contracts.

The suit claims Ernst & Young offers job contracts to graduating college seniors that “compel” them “to work for EY to the exclusion of all other employers,” but allow the company “to legally renege or cancel the offer of employment” if the senior does not maintain a vague “strong academic standing.”

I’ve written about the one-sided contracts and the high pressure recruiting tactics of the Big 4 audit firms at re: The Auditors. When the economy started to turn in 2007, the Big 4 began to slow the pipeline of recruits by offering fewer internships, offering fewer interns full time jobs, delaying start dates, and rescinding offers for vague, supposed breaches of their one sided agreements.

Candidates felt helpless since, like Ms. Gribben, once they had decided amongst all offers – many of the best students used to have a choice of all four of the largest firms and more – they were left with few choices if their selected firm reneged. Not only had the other firms moved on and given their slot to someone else, but the taint of having their offer fall through intimidates many students. Complaining might end up on their “permanent record” and “blacklist” them for the rest of their career. Many were locked in a stasis that sometimes only corrected itself after a call or email to me.

I have spoken to former Big 4 partners. They tell me getting fired after twenty years, their whole post-undergraduate degree career, is like getting whacked in the knees with a baseball bat. One day you’re leading engagements at prestigious Fortune 500 clients, smoking cigars and drinking single-malt scotch at parties, buying the McMansion in a “better” suburb and putting the BMW in the driveway and the next day you’re putting a profile together on “Linked In” and setting up an LLC in case you have to do independent consulting for an extended period.

Read the rest of the article at http://goingconcern.com/2010/05/taking-a-louisville-slugger-lawsuits-against-ey-pwc-show-an-ugly-side-of-the-big-4/

Recent Posts by Francine McKenna

re: theAuditors

Upcoming Speeches, Appearances and Conferences

Volcanic Lemonade

Forbes Interviews Francine McKenna

@Going Concern “Treasury Votes To Reappoint KPMG As Auditor of Citi”

Bob Jensen's threads on lawsuits and settlements of CPA firms ---
http://www.trinity.edu/rjensen/Fraud001.htm

What if the mezzanine has more square feet than the rest of the hotel?

Or put another way, what if neither the investor in a bond nor the borrower has the power to convert the debt into equity?
In other words, what if Big Brother holds the sledge hammer?

Here's what Tom Selling has to say about this.

Accounting for a Sweet Co-Co

Posted: 13 May 2010 11:23 PM PDT

Prof. Robert Bloomfield of Cornell University posted an interesting accounting question on the FASRI (FASB Research Initiative) blog. I'm taking the liberty of repeating it here in its entirety:

A policy proposal floating around these days is to require banks to issue contingent convertible debt:

My [Mankiw's] favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance.

A lawyer asks how these might be structured. This accountant asks: how would you account for them? Note that unlike many contingent convertible securities, the event on which conversion is contingent is a regulatory action.

I am attracted to the accounting question because I think the policy proposal itself is a brilliant idea; and because it dovetails nicely with my last post on the FASB/IASB deliberations on liabilities/equity classification. For the sake of the points I would like to make, I'm going to make three questions out of Rob's single question:

1.       How would the contingent convertible debt (known in the trade as a Co-Co) be accounted for under current GAAP?

2.       Would the answer change if current FASB proposals became final rules?

3.       How should the Co-Co be accounted for?

Current GAAP

I could not find specific GAAP for a Co-Co, but I can't be sure that none exists -- in part because the FASB's Accounting Standards Codification is so darn hard to read! There are many redeeming qualities of the Codification; however, it seems to sacrifice readability for systematic presentation. I used to think that some of the pre-codification Original Pronouncements read like gibberish; but now, alas, I pine for them.

So, here goes nothing. I surmise that GAAP does not make a distinction between regulatory events and other events triggering conversion. Thus, it would require that this particular Co-Co be accounted for as straight debt until conversion actually occurred. That accounting actually seems reasonable until we have a bank whose financial condition may actually be getting to the point where the regulator would flip the switch to convert the debt to equity. For simplicity, let's assume the debt was issued at par. Upon conversion that entire amount would have to be transferred to shareholders equity (probably through net income) in one fell swoop as of the date of conversion.

A big one-time credit to equity smacks of a rule devoid of any intent to provide timely information to investors. The economic value of the debt would have been declining as conversion inexorably approached, and current GAAP wouldn't have cared less. So, in the period that the regulator flips the debt over to equity, the huge cumulative catch-up adjustment to the debt could swamp the operating losses of the current period, which surely must be occurring. If the debt had been marked to market whie the bank was heading toward its nadir, the trends in the earnings available to the pre-conversion equity holders would have been reflected in a more timely and relevant fashion.

Future GAAP

Of the accounting that would occur if certain current FASB projects came to fruition as planned, I am more certain. Starting with the fair value project, the debt would be fair valued each period. That's a good thing, but the Co-Co also exposes a yet another (see my previous post) hole in the rules-based liability/equity project.

Let's take a bank that has the following components to its capital structure: the Co-Co, call options on its common shares (which may only be settled by issuing common shares), and common shares. According to the FASB's current position, the options will be classified as equity; but the Co-Co, which also contains a conversion option) will be classified as debt unless converted. Although the Co-Co would be fair valued each period, such treatment will be inconsistent with the treatment of the call option, the opening value of which will sit in the equity section of the balance sheet like cream cheese on a bagel forevermore. The economic events that could cause a change in both the fair value of the Co-Co and the option would be ignored as to their impact on the option, but the impact on the Co-Co would be recognized.

The accounting treatment for the option and the Co-Co would differ for no good reason. Both would affect the economic position of the current shareholders, but only the effect caused by the change in the value of the Co-Co would be recognized. This is just one of many reasons why the FASB should revert to its recently abandoned principled stance: it should classify all financial instruments as either assets or liabilities, except for common stock.

Accounting Onion GAAP

Rob Bloomfield correctly observes that lawyers would have to be consulted to precisely specify the Co-Co that Mankiw and others have envisaged. When considering current or future GAAP, I risked putting the cart before the horse by not anticipating key terms of the arrangement. That's because one of the huge problems with rules-based accounting (especially for financial instruments) is that the standards promulgators must ever be on the ready to publish new rules as those pesky financial engineers devise clever ways to circumvent those already in effect.   But, as I will demonstrate, there is no danger that a new financial instrument will threaten the sufficiency of truly principles-based standards.

First, the Co-Co liability –and for that matter, all other financial instruments other than common shares—would be measured at an investor's replacement cost. (Thus, no inactive markets problem for determining the exit price; even if there are no current buyers, there are always sellers for the right price.)

Second, any changes in replacement cost are to be reported through net income.

Third, upon conversion, I would derecognize the Co-Co, increase paid-in capital for the market value of common stock immediately prior to the conversion, and record any difference in these two amounts in equity through net income. That's the amount that the holders of basic ownership interests gained or lost when the government pulled the trigger on its conversion option.

Any questions? I have one: when is the FASB going to get some principles? Any and all changes that would make the Codification easier to read would be much appreciated!

Off Topic -- Tom on the Hot Seat

I had the honor of responding to questions from participatns during a recent hour-long FASRI Roundtable dubbed "Perspectives on Standard Setting." You can listen/watch a Second Life recording of my being grilled by some really smart folks slinging some really tough questions here.

Article continued at Accounting for a Sweet Co-C

Remember Crazy Eddie? --- http://en.wikipedia.org/wiki/Crazy_Eddie
"Guest Post: Fraud Girl Interviews Convicted Financial Felon Sam Antar," Simoleon Sense, May , 2010 ---
http://www.simoleonsense.com/guestpost-fraud-girl-interviews-convicted-financial-felon-sam-antar/

Hello Again –

On Monday, I had the pleasure of speaking with Sam E. Antar, the former CFO of Crazy Eddie who, in the 1980s, helped mastermind one of the largest securities frauds of its time. He eventually pleaded guilty to three felonies: conspiracy to commit securities fraud, conspiracy to commit mail and wire fraud, and obstruction of justice.

The following conversation involves a series of questions relating to fraud investigation and the misconceptions of white-collar criminals.

Do you have any additional questions for Sam Antar? Send me an email at fraudgirl@simoleonsense.com .

See you next week…

-Fraud Girl

Copyright 2010 Fraud Girl @ SimoleonSense

You mention the quote “It takes one to know one” on your website and on your blog. Most people in the fraud catching industry are honest and good people. How can honest people shield themselves from believing the lies of these criminals?

It’s hard because you don’t know what a lie is until you’ve been exposed to it or until you’ve done it, and hopefully you don’t get exposed to it. Let me just say this. To discuss crime I have to be a little bit politically incorrect, so don’t get offended, alright?

Females for instance. Females are lied to more than men. It’s just a fact of the matter. Think of it this way, if you’ve gone out on dates with more than one guy, how many guys have told you anything, “You’re beautiful, you’re lovely, you’re smart, you’re intelligent. I want to spend the rest of my life with you”? No sex. Just to get to first base. I’m not saying you specifically; you can ask a lot of females that. Again, I’m not trying to be male chauvinist but that’s just the way it is.

Criminals themselves are charmers. We use deceit and charm to get what we want. In a lot a ways criminals are like some of the females I’ve had in my life too, they used deceit and charm.

Most of the forensic accountants I know are females. Generally speaking female forensic accountants, barring the fact they’re not criminals, are generally better than males. Women by nature are much more cynical and skeptical than men because women are taken advantage of in many ways in our society more than men.

I don’t know if you know Tracy Coenen, she writes on Fraud Files blog. She’s probably one of the best in the business. The only handicap she has is that she’s not a criminal, former criminal, ex-criminal, or retired criminal. I travel a lot and I meet a lot of people, and I find that generally females are just better forensic accountants because they’ve experienced being lied to more often than men.

If you lead a life where you live in a bubble, how can you expect to catch the crooks? At the next level up, who better then the people who commit the crimes?

Drug addicts, for example, are either in recovery or they are active, but they’re always drug addicts. And the best drug counselors are former addicts. If you take it one level further, the government does a lot of work with convicted felons. I do a lot of work for them. The government also uses criminals to help catch other criminals. It’s not very well publicized; the only movie that was ever done about it was “Catch Me If You Can”. But it’s kind of like a partnership between former evil and justice against current evil.

How can people go acquire the experience to really understand financial criminals? Do courses help? Is it just real life experience? What will help forensic accountants get through it?

It’s a combination of both. For example, The Going Concern blog recently did a thing about what is takes to become a forensic accountant. The problem is before you even get to the skill set necessary to be a good forensic accountant you need to get a double set of iron clad balls and triple thick skin because criminals fight back. We don’t play fair. We have no respect for you. We have no respect for your laws. We don’t have respect for your customs. In fact, your laws and customs make it easier for us to commit our crimes. It’s a paradox. The more humane the society is, the easier it is for criminals to commit their crimes. Humanity limits your behavior but it doesn’t limit our behavior because we’re immoral human beings.

You have to understand that to combat criminality, you have to have that set of iron balls. The rest of the stuff, double-check this, cross check that; that’s textbook stuff, anybody could learn it. What you’re asking me is, “Well how do we do it?” There are some people that are just wired in to do it. And again, I’m not trying to appear male chauvinist but if I am I don’t care anyway. But the point is that females are more, as a group, generally more wired to be forensic accountants, than men are. So if you know any females that are former criminals, or retired criminals they would make the best forensic accountants. And they would have the combination of on hand experience and genetics.

Why is our society built upon the “innocent until proven guilty”, “benefit of the doubt”, “trust and then verify” mentality?

I actually did worse than that. I was a fraudster, matchmaker, and a pimp. The point being is distraction. Magic doesn’t really exist. We all know that you can’t really do magic. But what is magic really based on? Magic is based on distraction. Distracting somebody’s attention from something that is really going on. Small talk is very, very important. It distracts people. You see how politicians change the subject? That distracts people. We see how they argue on TV more about personalities than policy. That’s distraction. There are many ways to distract people. The easiest way to distract somebody is really with a smile because with a smile people increase their comfort level because you appear friendly to them. You appear charming to them.

The three rules of criminality: white color criminals consider your humanity as a weakness to be exploited in the execution of their crimes, we measure our effectiveness by the comfort level of our victims, and in order to increase our victim’s comfort level we have to build walls of false integrity around ourselves.

When we look at humanity with the presumption of innocence until proven guilty, that’s a Judeo-Christian tradition. That is giving somebody a benefit of the doubt. When you give somebody the benefit of the doubt, the criminal has the freedom of action. Your ethics limit your actions. It might make you into a better person, but it also makes it easier for criminals that commit their crimes.

The second part is comfort level; criminals measure their effectiveness by the comfort level of their victims. What did Bernie Madoff do? He was the president of NASDAQ, he was involved in a lot of so-called reform and regulation. People were comfortable with Bernie Madoff.

The third thing is that criminals build walls of false integrity around them to increase the comfort level of their victims. You got Bernie Madoff again, being the president of NASDAQ. These combinations set the stage for most of the crimes.

Colleges don’t teach people how they’re going to get screwed. They teach people how to succeed. Society doesn’t teach people how they’re going to get screwed. We don’t teach people what happens when the shit hits the fan (excuse the language).

We teach people how to earn a living and how to become better in their careers. We teach people more on a positive end but we don’t teach people too much on the defensive end. That’s something you learn from the streets. That’s the unfortunate part that we have today. We don’t have enough studies on criminal psychology.

We learn about psychology in general. Pavlov the dog, throws the food in front of the dog, saliva comes out of his mouth. It’s like a reflective instinct, or whatever.

We don’t know enough about the criminal psychology and how criminals play on your humanity. An example of the way that we play with your humanity is found in the movie, “The Devil’s Advocate.” See the movie “The Devil’s Advocate” with Al Pacino. The devil’s favorite sin is vanity. We all have vanity. We criminals really make you feel good about your self-esteem in many cases. “You’re smart. You’re beautiful. You’re a great investor. You’re smart enough to make this decision”.

White collar crime is psychological warfare. Most of it’s really done on the personal level and the major problem I see is not so much the techniques. Anybody can learn them. The problem is applying those techniques and part of applying those techniques is to get into the psychology of criminals so you can become more skeptical and cynical.

For most people, including myself, the first instinct is to trust the person. But it seems that we cannot put trust in anyone.

Continued in article

Bob Jensen's Fraud Updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

"Sen. Sherrod Brown Prods SEC/FASB to Fix Accounting Standards," by David Albrecht, The Summa, May 11, 2010 ---
http://profalbrecht.wordpress.com/2010/05/11/sen-sherrod-brown-prods-sec-fasb-to-fix-acct-standards/

Freshman Senator Sherrod Brown (D-Ohio), on May 5, 2010, offered an amendment to S. 3217: Restoring American Financial Stability Act of 2010. On May 7, 2010, a joint letter from seven prominent organizations was sent to the Senate, objecting the Brown’s excursion into accounting standard setting.

What’s going on, Prof Albrecht?

Thanks for asking. I’ll lay it out for you. Senator Brown is a voice of reason on this issue and the seven prominent organizations are blowing smoke.

First, let’s start with Senator Brown’s proposed amendment, SA 3853. It is co-sponsored by Senator Edward Kaufman (D-Delaware). It deals with the accounting for financial investments and off-balance sheet liabilities, which has led some to speculate that Senator Brown would be interested in chairing the FASB after Robert Herz gets done mucking it up. SA 3853 reads:

Continued in article

Bob Jensen's threads on the controversies in setting accounting standards are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Great Nova Video: Can a market of irrational people be a "rational market?"
PBS Nova Videp: "Mind Over Money," http://video.pbs.org/video/1479100777

Jensen Question
This seems to beg the question of how accountants can contribute information to irrational people with an underlying goal of helping their markets themselves be more rational.

Of course many scholars argue that markets themselves are not " rational" ---
http://en.wikipedia.org/wiki/Justin_Fox

Behavioral Economics --- http://en.wikipedia.org/wiki/Behavioral_economics

Bounded Rationality --- http://en.wikipedia.org/wiki/Bounded_rationality

Rationality in Economics
Peter J. Hammond
Department of Economics, Stanford University, CA 94305-6072, U.S.A.
e-mail: hammond@leland.stanford.edu
http://www.warwick.ac.uk/~ecsgaj/ratEcon.pdf

1 Introduction and Outline

Rationality is one of the most over-used words in economics. Behaviour can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are “rationalizable”.

Here I propose to assess how economists use and mis-use the term “rationality.”

Most of the discussion will concern the normative approach to decision theory. First, I shall consider single person decision theory. Then I shall move on to interactive or multi-person decision theory, customarily called game theory. I shall argue that, in normative decision theory, rationality has become little more than a structural consistency criterion. At the least, it needs supplementing with other criteria that reflect reality. Also, though there is no reason to reject rationality hypotheses as normative criteria just because people do not behave rationally, even so rationality as consistency seems so demanding that it may not be very useful for practicable normative models either.

Towards the end, I shall offer a possible explanation of how the economics profession has arrived where it is. In particular, I shall offer some possible reasons why the rationality hypothesis persists even in economic models which purport to be descriptive. I shall conclude with tentative suggestions for future research —about where we might do well to go in future.

2 Decision Theory with Measurable Objectives

In a few cases, a decision-making agent may seem to have clear and measurable objectives. A football team, regarded as a single agent, wants to score more goals than the opposition, to win the most matches in the league, etc. A private corporation seeks to make profits and so increase the value to its owners. A publicly owned municipal transport company wants to provide citizens with adequate mobility at reasonable fares while not requiring too heavy a subsidy out of general tax revenue. A non-profit organization like a university tends to have more complex objectives, like educating students, doing good research, etc. These conflicting aims all have to be met within a limited budget.

Measurable objectives can be measured, of course. This is not always as easily as keeping score in a football match or even a tennis, basketball or cricket match. After all, accountants often earn high incomes, ostensibly by measuring corporate profits and/or earnings. For a firm whose profits are risky, shareholders with well diversified portfolios will want that firm to maximize the expectation of its stock market value. If there is uncertainty about states of the world with unknown probabilities, each diversified shareholder will want the firm to maximize subjective expected values, using the shareholder’s subjective probabilities. Of course, it is then hard to satisfy all shareholders simultaneously. And, as various recent spectacular bank failures show, it is much harder to measure the extent to which profits are being made when there is uncertainly.

In biology, modern evolutionary theory ascribes objectives to genes —so the biologist Richard Dawkins has written evocatively of the Selfish Gene. The measurable objective of a gene is the extent to which the gene survives because future organisms inherit it. Thus, gene survival is an objective that biologists can attempt to measure, even if the genes themselves and the organisms that carry them remain entirely unaware of why they do what they do in order to promote gene survival.

Early utility theories up to about the time of Edgeworth also tried to treat utility as objectively measurable. The Age of the Enlightenment had suggested worthy goals like “life, liberty, and the pursuit of happiness,” as mentioned in the constitution of the U.S.A. Jeremy Bentham wrote of maximizing pleasure minus pain, adding both over all individuals. In dealing with risk, especially that posed by the St. Petersburg Paradox, in the early 1700s first Gabriel Cramer (1728) and then Daniel Bernoulli (1738) suggested maximizing expected utility; most previous writers had apparently considered only maximizing expected wealth.

3 Ordinal Utility and Revealed Preference

Over time, it became increasingly clear to economists that any behaviour as interesting and complex as consumers’ responses to price and wealth changes could not be explained as the maximization of some objective measure of utility. Instead, it was postulated that consumers maximize unobservable subjective utility functions. These utility functions were called “ordinal” because all that mattered was the ordering between utilities of different consumption bundles. It would have been mathematically more precise and perhaps less confusing as well if we had learned to speak of an ordinal equivalence class of utility functions. The idea is to regard two utility functions as equivalent if and only if they both represent the same preference ordering — that is, the same reflexive, complete, and transitive binary relation. Then, of course, all that matters is the preference ordering — the choice of utility function from the ordinal equivalence class that represents the preference ordering is irrelevant. Indeed, provided that a preference ordering exists, it does not even matter whether it can be represented by any utility function at all.

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

Bob Jensen's threads on the efficient market hypothesis ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Behavioralizing Finance," by Hersh Shefrin, SSRN, May 2, 2010 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1597934

Finance is in the midst of a paradigm shift, from a neoclassical based framework to a psychologically based framework. Behavioral finance is the application of psychology to financial decision making and financial markets. Behavioralizing finance is the process of replacing neoclassical assumptions with behavioral counterparts. This monograph surveys the literature in behavioral finance, and identifies both its strengths and weaknesses. In doing so, it identifies possible directions for behavioralizing the frameworks used to study beliefs, preferences, portfolio selection, asset pricing, corporate finance, and financial market regulation. The intent is to provide a structured approach to behavioral finance in respect to underlying psychological concepts, formal framework, testable hypotheses, and empirical findings. A key theme of this monograph is that the future of finance will combine realistic assumptions from behavioral finance and rigorous analysis from neoclassical finance.

Bob Jensen's threads on the behavioral finance or lack thereof ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH

Not surprisingly this behavior has carried over to the field of risk management, with an added twist. Like the joke about the man who looks for his dropped keys under the street light because that is where the light is rather than where he dropped the keys, financial economists have focused on things that they can ‘quantify’ rather than on things that actually matter. The latter include the structure of the financial system, the behavior of its participants, and its actual ability to capture and aggregate information.
"Economists’ Hubris – The Case of Risk Management," by Shahin Shojai and George Feiger, Cantango Captial Advisors, April 29, 2010
http://www.contangoadvisors.com/pdf/Economists_hubris_risk_website.pdf

In this, our third article in the economists’ hubris series, we look at the shortcomings of academic thinking on financial risk management, a very topical subject. In the previous two articles, we examined and rejected the notion that contributions from the academic community in the fields of mergers and acquisitions [Shojai (2009)] and asset pricing [Shojai and Feiger (2009)] were of practical use. Economists have drifted into realms of sterile, quasi-mathematical and a priori theorizing instead of coming to grips with the realities of their subject. In this sense, they have stood conventional scientific methodology, which develops theories to explain facts and tests them by their ability to predict, on its head.

Not surprisingly this behavior has carried over to the field of risk management, with an added twist. Like the joke about the man who looks for his dropped keys under the street light because that is where the light is rather than where he dropped the keys, financial economists have focused on things that they can ‘quantify’ rather than on things that actually matter. The latter include the structure of the financial system, the behavior of its participants, and its actual ability to capture and aggregate information.

A Framework for Thinking about Financial Risks

The recent (and ongoing) financial crisis has made it clear that every participant in the financial system, from the individual investor through banks and brokers up to central banks, needs to think of a three-level analysis of risk:

At the level of the individual financial instrument.

At the level of a financial institution holding diverse instruments.

At the level of the system of financial institutions.

A financial instrument might be a credit card or a residential mortgage or a small business loan. In the U.S., risks in many such instruments have been intensively studied and have proven moderately predictable in large pools. For example, a useful rule of thumb is to equate the default rate on national pools of seasoned credit card balances to the national unemployment rate.

A financial institution holding a diverse portfolio of such instruments might be a bank that originates them and retains all or some, or an investing institution like a pension fund or a hedge fund or an insurance company (or, indeed, an individual investor with a personal portfolio).

The system of financial institutions is the total of these individual players, in particular, embracing the diverse obligations of each to the others. A bank may have loaned unneeded overnight cash to another bank or it may have borrowed to fund its portfolio of tradable securities by overnight repurchase agreements; a hedge fund may have borrowed to leverage a pool of securities; an insurance company may have guaranteed another institution’s debt, backing that guarantee by pledging part of its own holding of securities;

and an individual may have guaranteed a bank loan to his small business by pledging a real estate investment, itself leveraged by a mortgage.

We would summarize the academic approach to risk management (enthusiastically adopted by the financial institutions themselves) as the sum of the following propositions:

The risks of individual financial instruments follow a stationary probability distribution;

The enterprise risk of a financial institution is measured by treating the institution as the portfolio of the individual instruments that it holds; and

As markets price instruments rationally, there are really no systemic risk issues not captured in the pricing of assets.

Unfortunately, recent events have shown each of these propositions to be false.

Stationarity of Instrument Risks

This is the foundation of all risk management modeling. As anyone who has tried to model instrument risks knows, they are not stationary but depend on the sample period chosen, a simple fact that we will return to again and again. This non-stationarity is not simply an empirical observation, it is endogenous to the way that markets operate. The recent crisis has highlighted one fundamental cause, namely moral hazard in the securitization process, and it is worth examining this in detail.

Continued in article

Jensen Comment
Aside from being part of a corporation name, Cantango really means --- http://en.wikipedia.org/wiki/Contango
I first encountered this term in FAS 133 ---
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

GPA-SAT correlations
"Psychometric thresholds for physics and mathematics," by Stephen Hsu and James Schombert, MIT's Technology Review, May 24, 2010 ---
http://www.technologyreview.com/blog/posts.aspx?bid=354

This is a follow up to our earlier paper on GPA-SAT correlations. Click below for the pdf.

Non-linear Psychometric Thresholds for Physics and Mathematics

ABSTRACT
We analyze 5 years of student records at the University of Oregon to estimate the probability of success (as deﬁned by superior undergraduate record; sufficient for admission to graduate school) in Physics and Mathematics as a function of SAT-M score. We ﬁnd evidence of a non-linear threshold: below SAT-M score of roughly 600, the probability of success is very low. Interestingly, no similar threshold exists in other majors, such as Sociology, History, English or Biology, whether on SAT combined, SAT-R or SAT-M. Our ﬁndings have signiﬁcant implications for the demographic makeup of graduate populations in mathematically intensive subjects, given the current distribution of SAT-M scores.

There is clearly something different about the physics and math GPA vs SAT distributions compared to all of the other majors we looked at (see figure 1 in the paper). In the other majors (history, sociology, etc.) it appears that hard work can compensate for low SAT score. But that is not the case in math and physics.

One interesting question is whether the apparent cognitive threshold is a linear or non-linear effect. Our data suggests that the probability of doing well in any particular quarter of introductory physics may be linear with SAT-M, but the probability of having a high cumulative GPA in physics or math is very non-linear in SAT-M. See figure below: the red line is the upper bound at 95% confidence level on the probability of getting an A in a particular quarter of introductory physics, and the blue line is the probability of earning a cumulative GPA of at least 3.5 or so.
Continued in article

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Accounting and Other Books for Sight Impaired "Readers"

"Archive Makes Over a Million Digital Books Available for Those Who Can't Use Print," by Mary Helen Miller, Chronicle of Higher Education, May 7, 2010 ---
http://chronicle.com/blogPost/Archive-Makes-Over-a-Million/23816/?sid=wc&utm_source=wc&utm_medium=en

With a service it started Thursday, the Internet Archive has more than doubled the number of books available to blind people and others who cannot read print books. The nonprofit organization, based in San Francisco, has made more than a million digital books available free in a format that can be downloaded to a device that reads them aloud.

The Internet Archive has been scanning books and making them available free online since 2005, and the books in the new format are part of the organization's collection of more than two million texts. To make a book accessible for those unable to read print volumes, the Internet Archive uses an automatic process to digitize it into a special format, Daisy.

The process does not work well for textbooks or other kinds of texts with complex formatting, said Brewster Kahle, the archive's founder and digital librarian. Other organizations, like Bookshare, make textbooks available for people who can't use print books, Mr. Kahle said.

He added that the Internet Archive's collection is useful for research. "You could find books that are now out of print that you wouldn't find in your library," he said.

Arielle Silverman, the president of the national association of blind students, said college students are often required to read popular books, which they might be able to get sooner through the new service.

"The situation right now is that for the majority of books, if we want to obtain them, we have to negotiate with the disabled-students office," said Ms. Silverman, who is a doctoral student at the University of Colorado at Boulder.

Ms. Silverman said that students sometimes have to wait months for the books they request to be provided in a digital format. Now many more books will be available instantly, she said. Ms. Silverman also said that the Daisy format is preferable to the traditional audio book because it lets the user skip around easily.

The Internet Archive will make all new additions to its library available in Daisy if the text's format allows. It is seeking book donations, and it has promised to pay for digitization of the first 10,000 volumes it receives.

Internet Archive --- http://www.archive.org/

Bob Jensen's threads on aids to handicapped learners ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped

For Members of the American Accounting Association
Welcome to the AAA Digital Library --- http://aaapubs.org/

The mission of the American Accounting Association is to promote worldwide excellence in accounting education, research, and practice. Founded in 1916 as the American Association of University Instructors in Accounting, its present name was adopted in 1936. The Association is a voluntary organization of persons interested in accounting education and research.

All full-text papers are provided in PDF format. All PDF papers are searchable using the Find utility in Adobe Acrobat Reader. All full-text papers provide links to references as available.

The AAA Commons gets bigger and better each year --- http://commons.aaahq.org/pages/home

American Accounting Association Home Page --- http://aaahq.org/index.cfm
It's time to register for AAA Annual Meeting in San Francisco

"You Complete My Audit: Amid the tumult of Sarbanes-Oxley and thorny auditor-client issues lie long-lasting relationships, some that have endured for more than 50 years," by Sarah Johnson, CFO Magazine, May 1, 2010 ---
http://www.cfo.com/article.cfm/14493283/c_14496720?f=home_todayinfinance

The relationship between accounting firms and their corporate clients has been shaky over the past decade, to say the least. In the wake of the Sarbanes-Oxley Act, accounting firms dumped some risky clients, shuttered ancillary consulting arms, and raised fees. That strained the collegial bond between firms and their clients.

More recently, as we reported last month ("Auditing Your Auditor"),, fees have dropped and it has become very much a buyer's market. At the same time, companies are demonstrating a new willingness to switch auditors. Last year, 1,331 public companies changed auditors, according to Audit Analytics; 82% of the time the client initiated the switch, versus the auditor dropping the account.

But amid all that tumult, many unions have endured — sometimes for more than a century. The longest-running relationship on record is between Deloitte & Touche and Procter & Gamble, which has employed only one primary audit firm since its incorporation in 1890. Indeed, to crack the list of the 100 longest-lasting auditor-client relationships, your company would need to have used the same firm for more than 50 years.

Sarbox frowned on cozy auditor-client relationships by instituting the auditor-rotation rule, which requires lead audit partners to move off an account after five consecutive fiscal years. Lawmakers have occasionally toyed with the idea of also requiring companies to switch audit firms every few years, to further increase independence. Companies and auditors have both pushed back, arguing that the costs would outweigh the benefits and further cramp competition by limiting an already small pool of viable auditors. If such a rule ever did come to pass, it would spell an end to some very long-standing relationships.

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

From the Joe Hoyle's Teaching Financial Accounting Blog on May 8, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/05/request-for-assistance.html

Request for Assistance

If you teach financial accounting, I have a request for you. A friend of mine recently gave me a list of articles (from newspapers, journals, and the like) that he uses in teaching financial accounting. I thought it might be interesting to create a more complete reading list of articles about financial accounting or the topics within financial accounting that I could post for teachers in connection with the new Financial Accounting textbook that I recently wrote with CJ Skender. I am always looking for creative/innovative things to add to "the package" to make the learning process better for teachers and students both. Consequently, if any of you who read this blog have articles that you use in teaching financial accounting or know of articles that might apply, could you send them to me? Just a list of the publication and date would be fine - I can dig them up from there. Just send me a note at Jhoyle@richmond.edu .

Likewise, if you've ever thought "I wish a textbook had the following," let me know. FlatWorldKnowledge (the book’s publisher) has let me do whatever I thought might be helpful for student learning but I'm always limited to my own ideas. If you have suggestions, I would love to hear them.

I always believe that a textbook should be more of a community project. I would love for you to be part of that community in connection with this textbook.

May 9 2010 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

Joe, Check out the financial accounting bibliography on MAAW: http://maaw.info/FinancialReportingArticles.htm

There are about 190 pages of financial accounting literature, some with links to the JSTOR database full text articles. Also see MAAW's accounting theory bibliography: http://maaw.info/AccountingTheoryArticles.htm

Jensen Comment
Although they are usually focused on intermediate and higher level financial accounting courses, search for the six word phrase
"From The Wall Street Journal Accounting"
in the very long, slow loading document at http://www.trinity.edu/rjensen/Theory01.htm
You will find a lot of financial accounting teaching cases prepared by The Wall Street Journal along with quotations of many of the answers to the case questions.

Open Sharing Joe Hoyle provides a free updated financial accounting textbook and he and his co-authors also provide a free CPA review course.
Search for "Hoyle" at http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

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

US News Rankings of Universities and Colleges --- http://www.usnews.com/rankings

Best Business Schools According to Business Week Magazine ---http://www.businessweek.com/magazine/toc/08_47/B4109best_business_schools.htm
This includes a history link on the rankings over the years.

Bob Jensen's threads on Ranking Controversies --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

How to Create 3-D Popup Books

May 21, 2010 message from Steven Hornik [shornik@BUS.UCF.EDU]

Fun for the weekend? I just came across an interesting site that enables creations of short (up to 10 pages currently) pop-up books. Whether or not this is useful for delivering basic concepts to our students is debatable but is certainly another technique to try. It also has the added fun of being an augmented reality book, so you can use the website to read your 3-D pop book as if its resting on your hand - neat in a very geeky way, but pedagogically I'm not so sure.

The website is at: http://alpha.zooburst.com/index.php and is currently in Alpha stage testing, I wrote up a blog article on it replete with pictures, a video and of course an accounting pop-up book:

http://www.mydebitcredit.com/2010/05/21/zooburst-3d-augmented-reality-story-telling/

Let me know what you think,

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

Jensen Comment
Steve Hornik is a pioneer in the use of Second Life in his accounting courses ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife

Bob Jensen's threads on Tricks and Tools of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"Replay Telecorder for Skype: Unique way to bring guest speakers to class," by Rick Lillie, Thinking Outside of the Box Blog, May 21, 2010 ---
http://iaed.wordpress.com/2010/05/21/replay-telecorder-for-skype-unique-way-to-bring-guest-speakers-to-class/

Watch the Video showing how easy it works
I use Skype with all of my classes (i.e., face-2-face, blended, and online). At the beginning of each term, I ask students to set up a Skype account and add me to their contacts list. I then add them to my Skype contacts list. Using Skype changes the nature of how I connect with students. We audio and video conference. Skype messaging archives all messages received and sent throughout a course. I subscribe to Skype Voicemail which allows me to send voicemail message to students. Likewise, students can send me a voicemail message. Skype recently added a new screen sharing featuring, which works great for one-on-one tutoring sessions. All of these Skype features (and more) changes the nature of instructor-student interaction.

Now, Applian Technologies has created a software tool that takes Skype to a whole new level. Replay Telecorder for Skype makes it possible to record Skype audio and video calls. This provides a unique way to bring “guest speakers” to the teaching-learning experience, especially to the blended and online learning environment. Click the picture below to view a short You Tube recording that demonstrates how to record a Skype call that displays in a side-by-side format. The presentation is a little silly, but illustrates what you can do with the program.

Continued in article

Bob Jensen's threads on Tricks and Tools of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

A Teaching Case: The Cost of Quality Versus the Cost of Poor Quality
Two decades ago, managerial and cost accounting textbooks and courses began to run modules on the "cost of quality" or to be more accurate the cost of poor quality. The following case fits into these types of modules.

From The Wall Street Journal Accounting Weekly Review on May 21, 2010

FDA Widens Probe of J&J's McNeil Unit
by: Jonathan D. Rockoff
May 18, 2010
Click here to view the full article on WSJ.com

TOPICS: Cost Management, Product Recall, Quality Costs

SUMMARY: On April 30, 2010, Johnson & Johnson "...recalled a number of over-the-counter medicines for children and infants after receiving complaints from consumers and discovering manufacturing problems. The company also closed the plant in Fort Washington, PA, that made the recalled products until it fixes the issues and can assure quality production....The FDA conducted a routine inspection of the Fort Washington plant last month. Agency inspectors found that the J&J unit received 46 complaints from consumers between June 2009 and April 2010 regarding 'foreign materials, black or dark specks' in certain medicines.'" The FDA has now widened its investigation and the J&J McNeil Consumer Healthcare unit that makes these products is conducting a comprehensive quality assessment over all its manufacturing operations. "Some parents say the recall has weakened J&J's sterling reputation for quality. The recall has also prompted a congressional investigation of the company's handling of consumer complaints and the adequacy of the FDA's inspections."

CLASSROOM APPLICATION: Questions focus on concepts in the cost of quality.

QUESTIONS:
1. (Introductory) How crucial is the concept of quality to Johnson & Johnson operations and profitability?

2. (Advanced) Define the terms "cost of quality" or "quality cost" and related concepts of 'prevention costs" and "appraisal costs."

3. (Advanced) Which of the categories of quality costs-prevention or appraisal-is about to increase significantly at J&J? Explain your answer.

4. (Advanced) Define the concepts of "internal failure costs" and "external failure costs."

5. (Advanced) The FDA and congress may investigate J&J's handling of consumer complaint. Under what part of the quality control process does handling these complaints fall under?

Reviewed By: Judy Beckman, University of Rhode Island

"FDA Widens Probe of J&J's McNeil Unit," by: Jonathan D. Rockoff, The Wall Street Journal, May 18, 2010

The Food and Drug Administration has widened its investigation into the recent recall of certain Johnson & Johnson children's medicines and is now inquiring into manufacturing across the company's consumer health-care unit.

J&J's McNeil Consumer Healthcare makes a range of products for adults and kids, notably Benadryl, St. Joseph aspirin, Motrin, Tylenol and Zyrtec.

On April 30, the company recalled a number of over-the-counter medicines for children and infants after receiving complaints from consumers and discovering manufacturing problems. The company also closed the plant in Fort Washington, Pa., that made the recalled products until it fixes the issues and can assure quality production.

The recall of the liquid children's medicines was the third by the J&J unit since last September. An FDA spokeswoman said there had been no specific complaints about products from other McNeil facilities. But given the history of recent recalls, the FDA wanted to make sure there weren't any similar manufacturing problems and to identify any steps the agency must take to prevent the problems from recurring.

Besides Fort Washington, J&J's McNeil unit has plants in Lancaster, Pa., and Las Piedras, Puerto Rico.

"We're doing our due diligence," said FDA spokeswoman Elaine Gansz Bobo.

The J&J unit "is conducting a comprehensive quality assessment across its manufacturing operations and continues to cooperate with the FDA," a company spokeswoman said.

Some parents say the recall has weakened J&J's reputation for quality. The recall has also prompted a congressional investigation of the company's handling of consumer complaints and the adequacy of the FDA's inspections. The House Committee on Oversight and Government Reform has asked J&J Chief Executive William Weldon to testify at a hearing on May 27.

The FDA and J&J have told the committee they will cooperate and are in the process of answering its questions, and the committee expects that Mr. Weldon will attend, said Kurt Bardella, a spokesman for Rep. Darrell Issa (R., Calif.), the panel's ranking Republican.

A J&J spokesman said the company is communicating with the committee and will respond appropriately to the panel's request but declined to say if Mr. Weldon will appear.

The recall last month involved more than 40 different Tylenol, Benadryl, Motrin and Zyrtec products for children and infants. Some of the medicines had higher concentrations of active ingredient than specified, and some products may contain tiny metallic particles left as a residue from the manufacturing process, according to J&J's McNeil unit.

The FDA conducted a routine inspection of the Fort Washington plant last month. Agency inspectors found that the J&J unit received 46 complaints from consumers between June 2009 and April 2010 regarding "foreign materials, black or dark specks" in certain medicines. The FDA also said bacteria contaminated raw materials to be used to make several lots of Tylenol products for children.

FDA has begun to review all complaints it has received to determine whether the recalled products caused any serious side effects. The agency has said the chances that the recalled products could cause harm were remote, but warned parents not to use the products as a precaution.

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? 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 hair cut.

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.

May 21. 2010 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

Bob,

Using these cases is a good place to introduce and compare the various quality models including Juran's Zero defects, Taguchi's Loss function, and Deming's Robust quality philosophy.

(http://maaw.info/ConstrainoptTechs.htm#Quality Models Compared). It also leads to the Six Sigma approach to quality (http://maaw.info/SixSigmaSummary.htm), many other concepts and arguments related to quality (http://maaw.info/QualityRelatedMain.htm), and the controversy over constrained optimization concepts in general (http://maaw.info/ConstrOptMain.htm).

Bob Jensen's threads on managerial and cost accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#ManagementAccounting

"Best Business Programs by Specialty: College business students rated their schools on a dozen disciplines, from ethics to sustainability. The top programs include some surprises," Business Week, May 6, 2010 ---
http://www.businessweek.com/bschools/content/may2010/bs2010055_765866.htm?link_position=link1

Irish eyes are smiling on Notre Dame's Mendoza College of Business (Mendoza Undergraduate Business Profile). Not only is Mendoza home to the top-ranked undergraduate business program in the nation and the most satisfied students; it's also the most decorated school in Bloomberg Businessweek's annual ranking of the Best Undergraduate Business Programs by Specialty.

As part of Bloomberg Businessweek's annual ranking of the top undergraduate business programs, senior business students from the 139 participating schools were asked to assign letter grades—from A to F—to their business programs in 12 specialty areas: quantitative methods, operations management, ethics, sustainability, calculus, microeconomics, macroeconomics, accounting, financial management, marketing management, business law, and corporate strategy. Based on those grades, scores were calculated for each of the ranked schools in each area.

Not surprisingly, the top-ranked schools in the overall ranking, published in March, have the most top-10 specialty rankings, as well. Notre Dame leads the way, appearing on eight top-10 lists, followed by Cornell University (Cornell Undergraduate Business Profile) and Babson College (Babson Undergraduate Business Profile)—Nos.5 and 15 in the overall ranking, respectively—with six top-10 specialty ranks apiece.Emory University's Goizueta School of Business (Goizueta Undergraduate Business Profile), the University of Pennsylvania's Wharton School (Wharton Undergraduate Business Profile), and the Kenan-Flagler Business School at the University of North Carolina-Chapel Hill (Kenan-Flagler Undergraduate Business Profile) each ranked near the top of five specialty lists.

Racking Up Top Awards

Among them, the top three programs in the overall ranking took eight of the No. 1 specialty ranks. No. 1 Notre Dame is tops in accounting and ethics, No. 2 University of Virginia McIntire School of Commerce (McIntire Undergraduate Business Profile) takes the top spot in both macroeconomics and business law, and No.3 Massachusetts Institute of Technology Sloan School of Management (Sloan Undergraduate Business Profile) is best in quantitative methods, operations management, calculus, and marketing. "Sloan requires a great deal of its students," says an MIT senior business student responding to the Bloomberg Businessweek survey. "It's exceedingly challenging, but that's a good thing."

Continued in article

Bob Jensen's threads on ranking controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

Elite Research University Online Degrees?
"Somebody is going to figure out how to deliver online education for credit and for degrees in the quality sector—i.e., in the elite sector," said Christopher Edley Jr., dean at Berkeley's law school and the plan's most prominent advocate. "I think it ought to be us—not MIT, not Columbia, not Caltech, certainly not Stanford."
Jensen Comment
Actually Stanford introduced one of the highest quality Master of Engineering online programs in history, the ADEPT Program --- http://www.trinity.edu/rjensen/000aaa/0000start.htm
Search for the word ADEPT at the above site. The ADEPT video approach, however is only suited to highly talented and highly motivated students. I doubt that the ADEPT program is suited for online students in general.

"U. of California (Berkeley) Considers Online Classes, or Even Degrees: Proposal for virtual courses challenges beliefs about what an elite university is—and isn't," by Josh Keller and Marc Parry, Chronicle of Higher Education, May 9, 2010 ---
http://chronicle.com/article/In-Crisis-U-of-California/65445/?sid=at&utm_source=at&utm_medium=en

Online education is booming, but not at elite universities—at least not when it comes to courses for credit.

Leaders at the University of California want to break that mold. This fall they hope to put $5-million to $6-million into a pilot project that could clear the way for the system to offer online undergraduate degrees and push distance learning further into the mainstream.

The vision is UC's most ambitious—and controversial—effort to reshape itself after cuts in public financial support have left the esteemed system in crisis.

Supporters of the plan believe online degrees will make money, expand the number of California students who can enroll, and re-establish the system's reputation as an innovator.

"Somebody is going to figure out how to deliver online education for credit and for degrees in the quality sector—i.e., in the elite sector," said Christopher Edley Jr., dean at Berkeley's law school and the plan's most prominent advocate. "I think it ought to be us—not MIT, not Columbia, not Caltech, certainly not Stanford."

But UC's ambitions face a series of obstacles. The system has been slow to adopt online instruction despite its deep connections to Silicon Valley. Professors hold unusually tight control over the curriculum, and many consider online education a poor substitute for direct classroom contact. As a result, courses could take years to gain approval.

The University of California's decision to begin its effort with a pilot research project has also raised eyebrows. The goal is to determine whether online courses can be delivered at selective-research-university standards.

Yet plenty of universities have offered online options for years, and more than 4.6 million students were taking at least one online course during the fall-2008 term, notes A. Frank Mayadas, a senior adviser at the Alfred P. Sloan Foundation who is considered one of the fathers of online learning.

"It's like doing experiments to see if the car is really better than the horse in 1925, when everyone else is out there driving cars," he said.

If the project stumbles, it could dilute UC's brand and worsen already testy relations between professors and the system's president, Mark G. Yudof.

As the system studies whether it can offer quality classes online, the bigger question might be this: Is California's flagship university system innovative enough to pull online off?

Going Big The proposal comes at a key moment for the University of California system, which is in the midst of a wrenching internal discussion about how best to adapt to reduced state support over the long term. Measures to weather its immediate financial crisis, such as reduced enrollment, furloughs for staff and faculty members, and sharply rising tuition, are seen as either temporary or unsustainable.

Administrators hope the online plan will ultimately expand revenue and access for students at the same time. But the plan starts with a relatively modest experiment that aims to create online versions of roughly 25 high-demand lower-level "gateway courses." A preliminary list includes such staples as Calculus 1 and Freshman Composition.

UC hopes to put out a request for proposals in the fall, says Daniel Greenstein, vice provost for academic planning, programs, and coordination. Professors will compete for grants to build the classes, deliver them to students, and participate in evaluating them. Courses might be taught as soon as 2011. So, for a current undergraduate, that could mean the option to choose between online and face-to-face versions of, say, Psychology 1.

The university plans to spend about $250,000 on each course. It hopes to raise the money from external sources like foundations or major donors. Nobody will be required to participate—"that's death," Mr. Greenstein said—and faculty committees at each campus will need to approve each course.

Building a collection of online classes could help alleviate bottlenecks and speed up students' paths to graduation. But supporters hope to use the pilot program to persuade faculty members to back a far-reaching expansion of online instruction that would offer associate degrees entirely online, and, ultimately, a bachelor's degree.

Mr. Edley believes demand for degrees would be "basically unlimited." In a wide-ranging speech at Berkeley last month, Mr. Edley, who is also a top adviser to Mr. Yudof, described how thousands of new students would bring new money to the system and support the hiring of faculty members. In the long term, he said, online degrees could accomplish something bigger: the democratization of access to elite education.

"In a way it's kind of radical—it's kind of destabilizing the mechanisms by which we produce the elite in our society," he told a packed room of staff and faculty members. "If suddenly you're letting a lot of people get access to elite credentials, it's going to be interesting."

'Pie in the Sky' But even as Mr. Edley spoke, several audience members whispered their disapproval. His eagerness to reshape the university is seen by many faculty members as either naïve or dangerous.

Mr. Edley acknowledges that he gets under people's skin: "I'm not good at doing the faculty politics thing. ... So much of what I'm trying to do they get in the way of."

Suzanne Guerlac, a professor of French at Berkeley, found Mr. Edley's talk "infuriating." Offering full online degrees would undermine the quality of undergraduate instruction, she said, by reducing the opportunity for students to learn directly from research faculty members.

"It's access to what?" asked Ms. Guerlac. "It's not access to UC, and that's got to be made clear."

Kristie A. Boering, an associate professor of chemistry who chairs Berkeley's course-approval committee, said she supported the pilot project. But she rejected arguments from Mr. Edley and others that faculty members are moving too slowly. Claims that online courses could reap profits or match the quality of existing lecture courses must be carefully weighed, she said.

"Anybody who has at least a college degree is going to say, Let's look at the facts. Let's be a little skeptical here," she said. "Because that's a little pie-in-the-sky."

Existing research into the strength of online programs cannot simply be applied to UC, she added, objecting to an oft-cited 2009 U.S. Education Department analysis that reported that "on average, students in online learning conditions performed better than those receiving face-to-face instruction."

"I'm sorry: I've read that report. It's statistically fuzzy, and there's only something like four courses from a research university," she said. "I don't think that's relevant for us."

But there's also strong enthusiasm among some professors in the system, including those who have taught its existing online classes. One potential benefit is that having online classes could enable the system to use its resources more effectively, freeing up time for faculty research, said Keith R. Williams, a senior lecturer in exercise biology at the Davis campus and chair of the UC Academic Senate's committee on educational policy, who stressed that he was speaking as a faculty member, not on behalf of the Senate. "We're supportive, from the faculty perspective, of looking into this in a more detailed way," he said.

A National Context While the University of California plans and looks, other public universities have already acted. At the University of Central Florida, for example, more than half of the 53,500 students already take at least one online course each year. Pennsylvania State University, the University of Texas, and the University of Massachusetts all enroll large numbers of online students.

UC itself enrolls tens of thousands of students online each year, but its campuses have mostly limited those courses to graduate and extension programs that fully enrolled undergraduates do not typically take for credit. "Pretty pathetic," is how Mr. Mayadas described California's online efforts. "The UC system has been a zilch."

But the system's proposed focus on for-credit courses for undergraduates actually stands out when compared with other leading institutions like the Massachusetts Institute of Technology and Yale University. Both have attracted attention for making their course materials available free online, but neither institution offers credit to people who study those materials.

Mr. Mayadas praised UC's online move as a positive step that will "put some heat on the other top universities to re-evaluate what they have or have not done."

Over all, the "quality sector" in higher education has failed "to take its responsibility seriously to expand itself to meet the national need," Mr. Greenstein said, dismissing elites' online offerings as "eye candy."

Jensen Comments
The above article suggests that online programs make more money than onsite programs. This is not universally true, but it can be true. The University of Wisconsin at Milwaukee charges more for online courses than equivalent onsite courses because online courses have become a cash cow for UWM. The reasons, however, are sometimes dubious. Online courses are often taught with relatively cheap adjunct specialists whereas onsite courses might be taught with more expensive full-time faculty.

Also the above article ignores the fact that prestigious universities like the University of Wisconsin, University of Illinois, and University of Maryland have already been offering accredited and highly respected undergraduate and masters degrees in online programs for years. They purportedly impose the same academic standards on online programs vis-a-vis onsite programs. Adjunct instructors with proper supervision need not necessarily be easy graders. In fact they may be more responsive to grading instructions than full-time faculty quavering in fear of teaching evaluations in their bid for tenure and promotions.

Who's Succeeding in Online Education?
The most respected online programs at this point in time seem to be embedded in large university systems that have huge onsite extension programs as well as online alternatives. Two noteworthy systems in this regard are the enormous University of Wisconsin and the University of Texas extension programs. Under the initial leadership of Jack Wilson, UMass Online thrives with hundreds of online courses. I think Open University in the U.K. is the largest public university in the world. Open University has online as well as onsite programs. The University of Phoenix continues to be the largest private university in the world in terms of student enrollments. I still do not put it and Open University in the same class as the University of Wisconsin, however, because I'm dubious of any university that relies mostly on part-time faculty.

From the University of Wisconsin
Distance Education Clearinghouse --- http://www.uwex.edu/disted/home.html

I wonder if the day will come when we see contrasting advertisements:
"A UC Berkeley Accounting PhD online in 5-6 Years Full Time"
"A Capella Accounting PhD online in 2 Years Full Time and no comprehensive examinations"

Capella University is one of the better for-profit online universities in the world. ---
http://www.capella.edu/

A Bridge Too Far
I discovered that Capella University is now offering an online Accounting PhD Program ---
http://www.capella.edu/schools_programs/business_technology/phd/accounting.aspx

Students with no business studies background (other than a basic accounting course) can complete the program in 2.5 years part time or slightly less than 2 years full-time.
The the Capella accounting PhD curriculum is more like an MBA curriculum and is totally unlike any other accounting PhD program in North America. There are relatively few accounting courses and much less focus on research skills.
There are no comprehensive or oral examinations. The only requirements 120 quarter credits, including credits to be paid for a dissertation
I'm still trying to learn whether there is access to any kind of research library or the expensive financial databases that are required for other North American accounting doctoral programs..

Although I have been recommending that accountancy doctoral programs break out of the accountics mold, I don't think that the Capella's curriculum meets my expectation ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Even in lean times, the $400 billion business of higher education is booming. Nowhere is this more true than in one of the fastest-growing -- and most controversial -- sectors of the industry: for-profit colleges and universities that cater to non-traditional students, often confer degrees over the Internet, and, along the way, successfully capture billions of federal financial aid dollars.

In College, Inc., correspondent Martin Smith investigates the promise and explosive growth of the for-profit higher education industry. Through interviews with school executives, government officials, admissions counselors, former students and industry observers, this film explores the tension between the industry --which says it's helping an underserved student population obtain a quality education and marketable job skills -- and critics who charge the for-profits with churning out worthless degrees that leave students with a mountain of debt.

At the center of it all stands a vulnerable population of potential students, often working adults eager for a university degree to move up the career ladder. FRONTLINE talks to a former staffer at a California-based for-profit university who says she was under pressure to sign up growing numbers of new students. "I didn't realize just how many students we were expected to recruit," says the former enrollment counselor. "They used to tell us, you know, 'Dig deep. Get to their pain. Get to what's bothering them. So, that way, you can convince them that a college degree is going to solve all their problems.'"

Graduates of another for-profit school -- a college nursing program in California -- tell FRONTLINE that they received their diplomas without ever setting foot in a hospital. Graduates at other for-profit schools report being unable to find a job, or make their student loan payments, because their degree was perceived to be of little worth by prospective employers. One woman who enrolled in a for-profit doctorate program in Dallas later learned that the school never acquired the proper accreditation she would need to get the job she trained for. She is now sinking in over $200,000 in student debt.

The biggest player in the for-profit sector is the University of Phoenix -- now the largest college in the US with total enrollment approaching half a million students. Its revenues of almost $4 billion last year, up 25 percent from 2008, have made it a darling of Wall Street. Former top executive of the University of Phoenix Mark DeFusco told FRONTLINE how the company's business-approach to higher education has paid off: "If you think about any business in America, what business would give up two months of business -- just essentially close down?" he asks. "[At the University of Phoenix], people go to school all year round. We start classes every five weeks. We built campuses by a freeway because we figured that's where the people were."

"The education system that was created hundreds of years ago needs to change," says Michael Clifford, a major education entrepreneur who speaks with FRONTLINE. Clifford, a former musician who never attended college, purchases struggling traditional colleges and turns them into for-profit companies. "The big opportunity," he says, "is the inefficiencies of some of the state systems, and the ability to transform schools and academic programs to better meet the needs of the people that need jobs."

"From a business perspective, it's a great story," says Jeffrey Silber, a senior analyst at BMO Capital Markets, the investment banking arm of the Bank of Montreal. "You're serving a market that's been traditionally underserved. ... And it's a very profitable business -- it generates a lot of free cash flow."

And the cash cow of the for-profit education industry is the federal government. Though they enroll 10 percent of all post-secondary students, for-profit schools receive almost a quarter of federal financial aid. But Department of Education figures for 2009 show that 44 percent of the students who defaulted within three years of graduation were from for-profit schools, leading to serious questions about one of the key pillars of the profit degree college movement: that their degrees help students boost their earning power. This is a subject of increasing concern to the Obama administration, which, last month, remade the federal student loan program, and is now proposing changes that may make it harder for the for-profit colleges to qualify.

"One of the ideas the Department of Education has put out there is that in order for a college to be eligible to receive money from student loans, it actually has to show that the education it's providing has enough value in the job market so that students can pay their loans back," says Kevin Carey of the Washington think tank Education Sector. "Now, the for-profit colleges, I think this makes them very nervous," Carey says. "They're worried because they know that many of their members are charging a lot of money; that many of their members have students who are defaulting en masse after they graduate. They're afraid that this rule will cut them out of the program. But in many ways, that's the point."

FRONTLINE also finds that the regulators that oversee university accreditation are looking closer at the for-profits and, in some cases, threatening to withdraw the required accreditation that keeps them eligible for federal student loans. "We've elevated the scrutiny tremendously," says Dr. Sylvia Manning, president of the Higher Learning Commission, which accredits many post-secondary institutions. "It is really inappropriate for accreditation to be purchased the way a taxi license can be purchased. ...When we see any problematic institution being acquired and being changed we put it on a short leash."

Also note the comments that follow the above text.

But first I highly recommend that you watch the video at --- Click Here
http://www.pbs.org/wgbh/pages/frontline/collegeinc/view/?utm_campaign=viewpage&utm_medium=toparea&utm_source=toparea

May 5, 2010 reply from Paul Bjorklund [paulbjorklund@AOL.COM]

Interesting program. I saw the first half of it and was not surprised by anything, other than the volume of students. For example, enrollment at University of Phoenix is 500,000. Compare that to Arizona State's four campuses with maybe 60,000 to 70,000. The huge computer rooms dedicated to online learning were fascinating too. We've come a long way from the Oxford don sitting in his wood paneled office, quoting Aristotle, and dispensing wisdom to students one at a time. The evolution: From the pursuit of truth to technical training to cash on the barrelhead. One question about the traditional university though -- When they eliminate the cash flow from big time football, will they then be able to criticize the dash for cash by the educational entrepreneurs?

Paul Bjorklund, CPA
Bjorklund Consulting, Ltd.
Flagstaff, Arizona

I wonder if the Secretary of Education watched the College Inc Frontline PBS show? I doubt it!
"Duncan Says For-Profit Colleges Are Important to Obama's 2020 Goal," By Andrea Fuller," by Andrea Fuller, Chronicle of Higher Education, May 11, 2010 ---
http://chronicle.com/article/Duncan-Says-For-Profit/65477/

Arne Duncan, the secretary of education, expressed support on Tuesday for the role that for-profit colleges play in higher education at a policy forum here held by DeVry University.

For-profit institutions have come under fire recently for their low graduation rates and high levels of student debt. A Frontline documentary last week focused on the for-profit sector, and a speech by Robert Shireman, a top Education Department official, was initially reported as highly critical of for-profit colleges, even though a transcript of Mr. Shireman's remarks showed that he actually spoke more temperately.

Mr. Duncan said on Tuesday in a luncheon speech at the forum that there are a "few bad apples" among actors in the for-profit college sector, but he emphasized the "vital role" for-profit institutions play in job training.

Those colleges, he said, are critical to helping the nation achieve President Obama's goal of making the United States the nation with the highest portion of college graduates by 2020. Mr. Duncan also praised a partnership between DeVry and Chicago high schools that allows students to receive both high-school and college credit while still in high school.

Mr. Duncan's comments come at a time when for-profit college officials are anxiously awaiting the release of new proposed federal rules aimed at them. A proposal that would tie college borrowing to future earnings has the sector especially concerned.

The rule is not yet final, but the Education Department is considering putting a cap on loan payments at 8 percent of graduates' expected earnings based on a 10-year repayment plan and earnings data from the Bureau of Labor Statistics.

Supporters of for-profit colleges say the rule would basically force them to shut down educational programs and as a consequence leave hundreds of thousands of students without classes.

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Brainstorm on What For-Profit Colleges are Doing Right as Well as Wrong

"'College, Inc.'," by Kevin Carey, Chronicle of Higher Education, May 10, 2010 ---
http://chronicle.com/blogPost/College-Inc/23850/?sid=at&utm_source=at&utm_medium=en

PBS broadcast a documentary on for-profit higher education last week, titled College, Inc. It begins with the slightly ridiculous figure of Michael Clifford, a former cocaine abuser turned born-again Christian who never went to college, yet makes a living padding around the lawn of his oceanside home wearing sandals and loose-fitting print shirts, buying up distressed non-profit colleges and turning them into for-profit money machines.

Improbably, Clifford emerges from the documentary looking OK. When asked what he brings to the deals he brokers, he cites nothing educational. Instead, it's the "Three M's: Money, Management, and Marketing." And hey, there's nothing wrong with that. A college may have deep traditions and dedicated faculty, but if it's bankrupt, anonymous, and incompetently run, it won't do students much good. "Nonprofit" colleges that pay their leaders executive salaries and run multi-billion dollar sports franchises have long since ceded the moral high ground when it comes to chasing the bottom line.

The problem with for-profit higher education, as the documentary ably shows, is that people like Clifford are applying private sector principles to an industry with a number of distinct characteristics. Four stand out. First, it's heavily subsidized. Corporate giants like the University of Phoenix are now pulling in hundreds of millions of dollars per year from the taxpayers, through federal grants and student loans. Second, it's awkwardly regulated. Regional accreditors may protest that their imprimatur isn't like a taxicab medallion to be bought and sold on the open market. But as the documentary makes clear, that's precisely the way it works now. (Clifford puts the value at $10-million.)

Third, it's hard for consumers to know what they're getting at the point of purchase. College is an experiential good; reputations and brochures can only tell you so much. Fourth—and I don't think this is given proper weight when people think about the dynamics of the higher-education market—college is generally something you only buy a couple of times, early in your adult life.

All of which creates the potential—arguably, the inevitability—for sad situations like the three nursing students in the documentary who were comprehensively ripped off by a for-profit school that sent them to a daycare center for their "pediatric rotation" and left them with no job prospects and tens of thousands of dollars in debt. The government subsidies create huge incentives for for-profit colleges to enroll anyone they can find. The awkward regulation offers little in the way of effective oversight. The opaque nature of the higher-education experience makes it hard for consumers to sniff out fraudsters up-front. And the fact that people don't continually purchase higher education throughout their lives limits the downside for bad actors. A restaurant or automobile manufacturer that continually screws its customers will eventually go out of business. For colleges, there's always another batch of high-school graduates to enroll.

The Obama administration has made waves in recent months by proposing to tackle some of these problems by implementing "gainful employment" rules that would essentially require for-profits to show that students will be able to make enough money with their degrees to pay back their loans. It's a good idea, but it also raises an interesting question: Why apply this policy only to for-profits? Corporate higher education may be the fastest growing segment of the market, but it still educates a small minority of students and will for a long time to come. There are plenty of traditional colleges out there that are mainly in the business of preparing students for jobs, and that charge a lot of money for degrees of questionable value. What would happen if the gainful employment standard were applied to a mediocre private university that happily allows undergraduates to take out six-figure loans in exchange for a plain-vanilla business B.A.?

The gainful employment standard highlights some of my biggest concerns about the Obama administration's approach to higher-education policy. To its lasting credit, the administration has taken on powerful moneyed interests and succeeded. Taking down the FFEL program was a historic victory for low-income students and reining in the abuses of for-profit higher education is a needed and important step.

Continued in article

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Dangers in Relying Upon Regional Academic Accrediting Agencies
Standards for measuring credit hours and program length, and affirmed its earlier critique that the commission had been too lax in its standards for determining the amount of credit a student receives for course work.

"Inspector General Keeps the Pressure on a Regional Accreditor," by Eric Kelderman, Chronicle of Higher Education, May 27, 2010 ---
http://chronicle.com/article/Inspector-General-Keeps-the/65691/?sid=at&utm_source=at&utm_medium=en

The inspector general of the U.S. Department of Education has reaffirmed a recommendation that the department should consider sanctions for the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations. In a report this week, the Office of Inspector General issued its final recommendations stemming from a 2009 examination of the commission's standards for measuring credit hours and program length, and affirmed its earlier critique that the commission had been too lax in its standards for determining the amount of credit a student receives for course work.

The Higher Learning Commission accredits more than 1,000 institutions in 19 states. The Office of Inspector General completed similar reports for two other regional accreditors late last year but did not suggest any sanctions for those organizations.

Possible sanctions against an accreditor include limiting, suspending, or terminating its recognition by the secretary of education as a reliable authority for determining the quality of education at the institutions it accredits. Colleges need accreditation from a federally recognized agency in order to be eligible to participate in the federal student-aid programs.

In its examination of the Higher Learning Commission, the office looked at the commission's reaccreditation of six member institutions: Baker College, DePaul University, Kaplan University, Ohio State University, the University of Minnesota-Twin Cities, and the University of Phoenix. The office chose those institutions—two public, two private, and two proprietary institutions—as those that received the highest amounts of federal funds under Title IV, the section of the Higher Education Act that governs the federal student-aid programs.

It also reviewed the accreditation status of American InterContinental University and the Art Institute of Colorado, two institutions that had sought initial accreditation from the commission during the period the office studied.

The review found that the Higher Learning Commission "does not have an established definition of a credit hour or minimum requirements for program length and the assignment of credit hours," the report says. "The lack of a credit-hour definition and minimum requirements could result in inflated credit hours, the improper designation of full-time student status, and the over-awarding of Title IV funds," the office concluded in its letter to the commission's president, Sylvia Manning.

More important, the office reported that the commission had allowed American InterContinental University to become accredited in 2009 despite having an "egregious" credit policy.

In a letter responding to the commission, Ms. Manning wrote that the inspector general had ignored the limitations the accreditor had placed on American InterContinental to ensure that the institution improved its standards, an effort that had achieved the intended results, she said. "These restrictions were intended to force change at the institution and force it quickly."

Continued in article

Jensen Comment
The most successful for-profit universities advertise heavily about credibility due to being "regionally accredited." In some cases this accreditation was initially bought rather than achieved such as by buying up a small, albeit still accredited, bankrupt not-for-profit private college that's washed up on the beach. This begs the question about how some for-profit universities maintain the spirit of accreditation acquired in this manner.

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

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

"A New Humanities Ph.D.," by Paula Krebs, Inside Higher Ed, May 24, 2010 ---
http://www.insidehighered.com/views/2010/05/24/krebs

Jensen Comment
I wonder how much of the above article can be extrapolated to accounting doctoral programs?

Bob Jensen's threads on the sad state of accounting doctoral programs are at
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Gina is not amused by the cartoon cover of the May 24, 2010 edition of The New Yorker
"Is There a Doctorate in the House?" by Gina Barreca, Chronicle of Higher Education, May 21, 2010 ---
http://chronicle.com/blogPost/Is-There-a-Doctorate-in-the/24202/?sid=at&utm_source=at&utm_medium=en

Student Term Paper and/or Debate Idea
One idea for a student term paper or student debate would be to compare consumer product protection legislation and tort litigation with auditing firm legislation (e.g,, Sarbox) and malpractice insurance costs. This is relevant at the moment because of the pending 2010 Consumer Product Safety Improvement Act versus questions whether auditing firms will recover from pending lawsuits of thousands of bank failures ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

This is now especially important debate for financial auditing firms who are possibly at risk of imploding like Andersen due to regulation and litigation risks.

One think I would like to learn more about is the cost of auditing firm malpractice insurance compared between different nations such as the U.S. versus Canada versus Japan versus Germany.

Consumer Product Safety Commission --- http://www.cpsc.gov/
The pending 2010 Consumer Product Safety Improvement Act --- http://www.cpsc.gov/ABOUT/Cpsia/cpsia.HTML

Sarbox --- http://en.wikipedia.org/wiki/Sarbox

One issue of great concern is how regulation and tort liability can easily put small businesses and small auditing firms out of business even before lawsuits due to the mere cost of meeting regulation requirements and the exploding cost of malpractice insurance.

A second issue extends these question to large businesses and international auditing firms.

Students can also be assigned to debate the pros and cons of regulation and liability protection "relief."

One important point to consider is the 2006 Texas amendment to its constitution that limits punitive damages in medical malpractice lawsuits without limiting damages for loss of income in medical malpractice awards. Before this amendment may medical specialists dropped high risk services due to the high cost of malpractice insurance. For example, my wife's great female OB/GYN surgeon in San Antonio dropped OB services completely in 2003 because insurance coverage and Medicaid payments did not even cover the malpractice insurance cost for her OB services. After Texas amended its constitution, malpractice insurance costs dropped significantly. This great GYN surgeon once again added OB to her services after 2006.

Years ago while we were still living in San Antonio, Texas my wife had two of her 12 spine surgeries performed by a surgeon from the South Texas Spinal Clinic. When it came time for next surgery her surgeon turned her away saying that the Clinic no longer accepted any Medicare patients (she was then covered under Medicare Disability Insurance before retirement age). Purportedly the soaring costs, especially malpractice insurance, made complicated Medicare surgeries, on average, big money losers in for spinal surgeons in Texas. We subsequently moved to New Hampshire where Erika had two spine surgeries from Dr. Levi at the Concord Hospital. Erika later became so bent over that we afterwards sought out one of the very few specialists in the nation who can perform a "Pedicle Subtraction Osteotomity for Severe Fixed Sagittal Imbalance."

She went into a Boston hospital bent over like the Hunchback of Notre Dame and came out walking Marine-drill erect in 2007 (but with no relief from her chronic pain). She has hundreds of thousands of dollars worth of metal attached to her spine from neck to hips. But since it is jointed in three places, she can pick up a paper towel off the floor. --- http://www.trinity.edu/rjensen/Erika2007.htm

Out of curiosity in November 2009, I phoned the South Texas Spinal Clinic and discovered it once again is accepting Medicare patients even though Erika has no intention of returning to that Clinic. Ostensibly a major factor in deciding to once again take on Medicare patients is the decline in malpractice insurance costs due largely to a change in the Texas Constitution. Interestingly, decreases in malpractice insurance costs have been a major factor in increasing competition for physician specialists in Texas:

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

Under financial stress hospitals in Massachusetts have had to take huge budget cuts. Rather than spread those cuts across the board to all departments, some hospitals have decided to concentrate on dropping the most money-losing departments. You probably can guess the leading candidate for being eliminated --- the obstetrics department.

My neighbor down the road has a second home up here in the White Mountains. However, he still practices cardiology in a Boston suburb. He says that Mass. hospital obstetrics departments are leading candidates for elimination, in large measure, because of the high cost of malpractice insurance covering obstetrics services relative to insurance payment caps in Mass.

Lawyers file cookie-cutter lawsuits against doctors, nurses, and hospitals for every defective baby irrespective of the facts in any given case. The reason is the tendency of sympathetic juries to make multimillion dollar awards to a mother of a defective baby irrespective of the facts in the case. Many juries feel that fat cat insurance companies owe it to the unlucky woman (and her lucky lawyers) who must nurture and raise a severely handicapped child. Juries make such awards even when the doctors, nurses, and hospitals performed perfectly under the circumstances. Paul Newman showed us how to love it when lawyers beat the medical system in favor of the "poor and powerless" in The Verdict --- http://www.youtube.com/watch?v=zVZFlBJftgg

But so-called "fat cat" insurance companies adjust rates based upon financial risks. The rates became so high for obstetrics that across most of the U.S. (less so in states like Texas that cap punitive damages) thousands of gynecologists dropped the obstetrics part of their services. And under then Governor Mitt Romney's Universal Healthcare in Massachusetts some strained hospitals dropped obstetrics services.

Canadian Malpractice Insurance Takes Profit Out Of Coverage," by Jane Akre, Injury Board, July 28, 2009 ---
Click Here

The St. Petersburg Times takes a look at the cost of insurance in Canada for health care providers.

A neurosurgeon in Miami pays about $237,000 for medical malpractice insurance. The same professional in Toronto pays about $29,200, reports Susan Taylor Martin.

These are just some factors to consider in the debate about the pros and cons of providing some relief from killer regulations and lawsuits for high risk product manufacturing and high risk services.

One think I would like to learn more about is the cost of auditing firm malpractice insurance compared between different nations such as the U.S. versus Canada versus Japan versus Germany.

This is now an important debate for financial auditing firms who are possibly at risk of imploding like Andersen due to regulation and litigation risks.

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

"Viking Drama: Glitnir Bank Sues PwC for Malpractice and Negligence," The Big Four Blog, May 12, 2010 ---
http://bigfouralumni.blogspot.com/2010/05/viking-drama-glitnir-bank-sues-pwc-for.html

It’s not just volcanic ash that comes out of Iceland.

We see today a large $2 billion lawsuit filed by one of Iceland’s largest banks, now defunct, naming PricewaterhouseCoopers as one of the defendants.

Glitnir Bank (we see in Wikipedia that Glitnir is the hall of Forseti, the Norse god of law and justice, and the seat of justice amongst gods and men), filed today a legal claim against Jon Asgeir Johannesson and also PwC for malpractice and negligence in the Supreme Court of the State of New York.

The suit against Jon Asgeir Johannesson, formerly its principal 39% shareholder, Larus Welding, previously Glitnir's Chief Executive, Thorsteinn Jonsson, its former Chairman, and other former directors, shareholders and third parties associated with Johannesson, alleges that these defendants fraudulently and unlawfully drained more than $2 billion out of the Bank.

Former auditors PricewaterhouseCoopers are also sued for “facilitating and helping to conceal the fraudulent transactions engineered by Johannesson and his associates, which ultimately led to the Bank's collapse in October 2008.”

The suits shows how a cabal of businessmen led by Johannesson conspired to systematically loot Glitnir Bank in order to prop up their own failing companies; how they seized control of Glitnir, removing or sidelining experienced Bank employees; and then facilitated and concealed their diversions from the Bank by overriding Glitner's financial risk controls, and finally how the transactions cost Glitnir more than $2billion and contributed significantly to the Bank's collapse.

There is in particular a sale of $1billion of Bonds to investors located in New York and elsewhere in the United States in September 2007, which is sure to get the attention of the very-aggressive US regulators.

According to Steinunn Guobjartsdottir, chair of the Glitnir Winding-Up Board, which conducted the investigation and is making the legal claim, "There is evidence supporting the allegation that Glitnir Bank was robbed from the inside."

In terms of PwC, the suit alleges, “Johannesson and the other individual Defendants could not have succeeded in their schemes without the complicity of PwC. PwC knew about Glitnir's irregular related party exposures, reviewed and signed off on Glitnir financial statements which grossly misrepresented these exposures, and facilitated Glitnir's fraudulent fundraising in New York.”

According to Reuters, “Neither PwC nor Mr Jóhannesson immediately responded to requests for comment.”

This is serious stuff, in that the bank’s own senior management is being accused of fraudulent intent to bankrupt the bank. Iceland’s banking system with its extraordinary regime of easy credit has negatively impacted thousands of investors and depositers all over Europe, but there are now government and non-governmental organizations investigating what happened and pursuing financial claims.

This Nordic Drama is just getting started, and likely other lawsuits will follow both in Europe and in the US. Auditors of Icelandic banks are sure to get named in these suits as defendants and parties to any misconduct.

"Worlds Apart But Two Of A Kind: Glitnir, Satyam And Their Auditor PwC," by Francine McKenna, re: The Auditors, May 17, 2010 ---
http://retheauditors.com/2010/05/17/worlds-apart-but-two-of-a-kind-glitnir-satyam-and-their-auditor-pwc/

Taking care of family and close friends first is universal. Whether Irish, Italian, Kenyan, Mexican, or Tunisian… Legal, regulatory, ethical and moral lines are often crossed in service to family and those who are “like a brother to me…”

re: Satyam in the New York Times January 9, 2009: “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”

Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to buy two construction firms in which the company’s founders held stakes.

The Times of India, January 8, 2009: The country’s fourth largest IT company—after TCS,Infosys and Wipro—was for several years cooking its books by inflating revenues and profits,thus boosting its cash and bank balances; showing interest income where none existed; understating liability; and overstating debtors position (money due to it)….[On December 16, 2008] Raju announced his ill-fated plan to shell out $1.6 billion to acquire his sons’ companies, Maytas Properties and Maytas Infra. It created such a furore that Raju was forced to backtrack. It now transpires that what was seen as a move by Raju to bail out his sons was actually a last-ditch effort to covering his tracks through fictitious cash transfers and wriggle out of a tight corner...There’s intense speculation as to what finally triggered Raju’s confession of wrongdoing. It’s clearly more than coincidence that it came hot on the heels of investment banker DSP Merrill Lynch’s letter to the company on Tuesday evening terminating its days-old agreement with Satyam to advise it on strategic options because of “material accounting irregularities’’. But the beginning of the end came when furious investors forced Raju to reverse his Maytas moves.

Contrast this scenario of cronyism run amok with the news out of Iceland re: Glitnir:

From Kevin LaCroix’s D&O Diary: In October 2008, in the midst of the global financial crisis, Iceland’s Financial Services Authority took control of Glitner. Glitner ultimately filed a petition for bankruptcy in the U.S. under Chapter 15 of the Bankruptcy Code. According to the May 11 complaint, creditors have filed claims exceeding $26 billion…The May 11 complaint alleges that Jon Asgeir Johannesson and his wife, Ingibjorg Stefania Palmadottir , and businesses they owned or controlled, used improper means to “wrest control” of Glitnir and to “fraudulently drain over $2 billion out of the Bank to fill their pockets and prop up their own failing companies.”

According to the complaint, beginning in 2006, Johannesson “engaged in a scheme” using his “web of companies” to take control of Glitnir in violation of Icelandic law. By April 2007, Johannesson and his companies owned about 39% of Glitnir’s stock. As a result, Johanneson was able to “stack” Glitnir’s board “with individuals who had connections with companies he controlled,” and he also “had his inexperienced hand-selected candidate” replace the existing CEO.

Having taken control of the Bank, its board and its management, Johannesson and the other individual defendants “used their control over the Bank and funds raised in U.S. financial markets to issue massive ‘loans’ to, and a series of equity transactions with, companies Johannesson controlled, in an effort to stave off their eventual collapse,” which “placed the Bank in extreme financial peril.

There are obvious similarities between Satyam and Glitnir…

Companies using loans and investments to related entities to hide distress at main firm and funnel cash abroad.

Glitnir sold U.S. investors $1 billion in medium-term notes to finance their schemes. Satyam’s ADR’s were listed on the NYSE.

Glitnir’s CEO stacked the bank’s board of directors with “willing accomplices” in “a sweeping conspiracy” to wrest control of the bank.

Satyam’s Board filled with Indian elite industry and academic leaders who didn’t get involved in details.

The involvement of the board, Chaudhuri adds, was at the “strategic level; in companies like Satyam, it is the owner/promoter/founder who runs the show. It has to do with the ownership structure.”

Satyam’s balance sheet included nearly $1.5 billion in non-existent cash and bank balances, accrued interest and misstatements. It had also inflated its 2008 second quarter revenues by$122 million, and actual operating margins were less than a tenth of the stated $135 million.

Per Times of London October 25, 2009: Each of the three big banks — Kaupthing, Landsbanki and Glitnir — loaned large sums to their biggest shareholders on favourable terms.It has emerged that at the time of Glitnir’s collapse, the 15 biggest creditors were all connected to FL Group, its largest shareholder, which was controlled by Jon Asgeir Johannesson, the boss of collapsed Icelandic retail group Baugur.

And then there is the most telling similarity between the two companies:

Both Satyam and Glitnir were audited by PwC.

PwC is now named in lawsuits in New York by shareholders and creditors of both entities.

Continued in article

"How Dangerous is the Two-Billion Dollar Suit Against PwC Over Iceland's Glitnir Bank? The Answer is Blowin' in the Wind," by James Peterson, re: Balance, May 12, 2010 --- Click Here

Bob Jensen's threads on large international auditing firm survival threats ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Bob Jensen's threads on large auditing firm litigations and settlements ---
http://www.trinity.edu/rjensen/Fraud001.htm

Wake Up Little Suzie, Wake Up: Big Brother's Watching at Northern Arizona University
"University Plans to Install Electronic Sensors to Track Class Attendance," by Karen Wilkinson, Converge Magazine, May 8, 2010 ---
http://www.convergemag.com/infrastructure/University-Plans-to-Install-Electronic-Sensors-to-Track-Class-Attendance.html

Jensen Comment
These "proximity cards" have many types of other uses, including crime prevention and law enforcement. But there are problems, including "Don't Leave Home Without It." "It's a trend toward a surveillance society that is not necessarily befitting of an institution or society," said Adam Kissel, defense program director of the Foundation for Individual Rights in Education. "It's a technology that could easily be expanded and used in student conduct cases."

Bob Jensen's threads on the dark side of education technology ---
http://www.trinity.edu/rjensen/000aaa/theworry.htm

"Changes on Tap for Compilation and Review Standards," by Carolyn H. McNerney, Charles E. Landes, and Michael P. Glynn, Journal of Accountancy, May 2010 --- http://www.journalofaccountancy.com/Issues/2010/May/20102466.htm

Significant changes to the standards for compilation and review engagements will soon take effect. The AICPA’s Accounting and Review Services Committee (ARSC) issued Statement on Standards for Accounting and Review Services no. 19, Compilation and Review Engagements, in December. The standard’s effective date is for compilations and reviews of financial statements for periods ending on or after Dec. 15, 2010, with early implementation permitted for the new reporting option for compilation engagements when the accountant’s independence is impaired. This article discusses the major changes made by the standard.

Continued in article

Visualizing Text
May 12, 2010 message from Scott Bonacker [lister@BONACKERS.COM]

No-one questions whether tax rules are hard to read or not, but in school I remember wondering if I would ever use sentence diagramming again.

Who knew?

This has a lot to do with the usefulness of http://www.tax-charts.com/ and http://www.andrewmitchel.com/html/topic.html

A college level refresher course on the meaning of words and sentence structure might not be a bad idea .....

Scott Bonacker CPA
Springfield, MO

May 13, 2010 reply from Bob Jensen

Thanks Scott,
I added this to my threads on visualization at
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

This is somewhat related to concept maps.

Questions
Has the art and science of reading faces ever been part of an auditing curriculum?
Have there been any accountics studies of Ekman's theories as applied to auditing behavioral experimens?
(I can imagine that some accounting doctoral students have not experimented along these lines?)

Paul Ekman video on how to read faces and detect lying --- http://www.youtube.com/watch?v=IA8nYZg4VnI
This video runs for nearly one hour

Paul Ekman --- http://en.wikipedia.org/wiki/Paul_Ekman

Ekman's work on facial expressions had its starting point in the work of psychologist Silvan Tomkins.^[Ekman showed that contrary to the belief of some anthropologists including Margaret Mead, facial expressions of emotion are not culturally determined, but universal across human cultures and thus biological in origin. Expressions he found to be universal included those indicating anger, disgust, fear, joy, sadness, and surprise. Findings on contempt are less clear, though there is at least some preliminary evidence that this emotion and its expression are universally recognized.^]

In a research project along with Dr. Maureen O'Sullivan, called the Wizards Project (previously named the Diogenes Project), Ekman reported on facial "microexpressions" which could be used to assist in lie detection. After testing a total of 15,000 [EDIT: This value conflicts with the 20,000 figure given in the article on Microexpressions] people from all walks of life, he found only 50 people that had the ability to spot deception without any formal training. These naturals are also known as "Truth Wizards", or wizards of deception detection from demeanor.

He developed the Facial Action Coding System (FACS) to taxonomize every conceivable human facial expression. Ekman conducted and published research on a wide variety of topics in the general area of non-verbal behavior. His work on lying, for example, was not limited to the face, but also to observation of the rest of the body.

In his profession he also uses verbal signs of lying. When interviewed about the Monica Lewinsky scandal, he mentioned that he could detect that former President Bill Clinton was lying because he used distancing language.

Ekman has contributed much to the study of social aspects of lying, why we lie, and why we are often unconcerned with detecting lies. He is currently on the Editorial Board of Greater Good magazine, published by the Greater Good Science Center of the University of California, Berkeley. His contributions include the interpretation of scientific research into the roots of compassion, altruism, and peaceful human relationships. Ekman is also working with Computer Vision researcher Dimitris Metaxas on designing a visual lie-detector.

From Simoleon Sense on May 5, 2010 --- http://www.simoleonsense.com/

Research Papers Worth Reading On Deceit, Body Language, Influence etc.. (with links to pdfs)

Sixteen Enjoyable Emotions. – (2003) Emotion Researcher, 18, 6-7. by Ekman, P

“Become Versed in Reading Faces”. Entrepreneur, 26 March 2009. Ekman, P. (2009)
Intoduction: Expression Of Emotion - In RJ Davidson, KR Scherer, & H.H. Goldsmith (Eds.) Handbook of Afective Sciences. Pp. 411-414.Keltner, D. & Ekman, P (2003)

Facial Expression Of Emotion. – In M.Lewis and J Haviland-Jones (eds) Handbook of emotions, 2nd edition. Pp. 236-249. New York: Guilford Publications, Inc. Keltner, D. & Ekman, P. (2000)

Emotional And Conversational Nonverbal Signals. – In L.Messing & R. Campbell (eds.) Gesture, Speech and Sign. Pp. 45-55. London: Oxford University Press.

A Few Can Catch A Liar. - Psychological Science, 10, 263-266. Ekman, P., O’Sullivan, M., Frank, M. (1999)
Deception, Lying And Demeanor.- In States of Mind: American and Post-Soviet Perspectives on Contemporary Issues in Psychology . D.F. Halpern and A.E.Voiskounsky (Eds.) Pp. 93-105. New York: Oxford University Press.

Lying And Deception. – In N.L. Stein, P.A. Ornstein, B. Tversky & C. Brainerd (Eds.) Memory for everyday and emotional events. Hillsdale, NJ: Lawrence Erlbaum Associates, 333-347.

Lies That Fail.- In M. Lewis & C. Saarni (Eds.) Lying and deception in everyday life. Pp. 184-200. New York: Guilford Press.

Who Can Catch A Liar. -American Psychologist, 1991, 46, 913-120.
Hazards In Detecting Deceit. In D. Raskin, (Ed.) Psychological Methods for Investigation and Evidence. New York: Springer. 1989. (pp 297-332)

Self-Deception And Detection Of Misinformation. In J.S. Lockhard & D. L. Paulhus (Eds.) Self-Deception: An Adaptive Mechanism?. Englewood Cliffs, NJ: Prentice-Hall, 1988. Pp. 229- 257.

Smiles When Lying. – Journal of Personality and Social Psychology, 1988, 54, 414-420.
Felt- False- And Miserable Smiles.Ekman, P. & Friesen, W.V.

Mistakes When Deceiving. Annals of the New York Academy of Sciences. 1981, 364, 269-278.

Nonverbal Leakage And Clues To Deception Psychiatry, 1969, 32, 88-105.

"You Can't Hide Your Lying Brain (or Can You?), by Tom Bartlett, Chronicle of Higher Education, May 6, 2010 ---
http://chronicle.com/blogPost/You-Cant-Hide-Your-Lying/23780/

Earlier this week Wired reported that a Brooklyn lawyer wanted to use fMRI brain scans to prove that his client was telling the truth. The case itself is an average employer-employee dispute, but using brains scans to tell whether someone is lying—which a few, small studies have suggested might be useful—would set a precedent for neuroscience in the courtroom. Plus, I'm pretty sure they did something like this on Star Trek once.

But why go to all the trouble of scanning someone's brain when you can just count how many times the person blinks? A study published this month in Psychology, Crime & Law found that when people were lying they blinked significantly less than when they were telling the truth. The authors suggest that lying requires more thinking and that this increased cognitive load could account for the reduction in blinking.

For the study, 13 participants "stole" an exam paper while 13 others did not. All 26 were questioned and the ones who had committed the mock theft blinked less when questioned about it than when questioned about other, unrelated issues. The innocent 13 didn't blink any more or less. Incidentally, the blinking was measured by electrodes, not observation.

But the authors aren't arguing that the blink method should be used in the courtroom. In fact, they think it might not work. Because the stakes in the study were low--no one was going to get into any trouble--it's unclear whether the results would translate to, say, a murder investigation. Maybe you blink less when being questioned about a murder even if you're innocent, just because you would naturally be nervous. Or maybe you're guilty but your contacts are bothering you. Who knows?

By the way, the lawyer's request to introduce the brain scanning evidence in court was rejected, but lawyers in another case plan to give it a shot later this month.

(The abstract of the study, conducted by Sharon Leal and Aldert Vrij, can be found here. The company that administers the lie-detection brain scans is called Cephos and their confident slogan is "The Science Behind the Truth.")

Bob Jensen's threads on visualization
Visualization of Multivariate Data (including faces) --- http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

Do you suppose we could also add CEO emotions to annual reports?
Or maybe this is the dawn of emotional corporate logos!

Computer scientists at the University of Pittsburgh have developed a way to make e-mails, instant messaging, and texts just a bit more personalized. Their software will allow people to use images of their own faces instead of the more traditional emoticons to communicate their mood. By automatically warping their facial features, people can use a photo to depict any one of a range of different animated emotional expressions, such as happy, sad, angry, or surprised.

All that is needed is a single photo of the person, preferably with a neutral expression, says Xin Li, who developed the system, called Face Alive Icons. "The user can upload the image from their camera phone," he says. Then, by keying in familiar text symbols, such as ":)" for a smile, the user automatically contorts the face to reflect his or her desired expression.

"Already, people use avatars on message boards and in other settings," says Sheryl Brahnam, an assistant professor of computer information systems at MissouriStateUniversity, in Springfield. In many respects, she says, this system bridges the gap between emoticons and avatars.

This is not the first time that someone has tried to use photos in this way, says Li, who now works for Google in New York City. "But the traditional approach is to just send the image itself," he says. "The problem is, the size will be too big, particularly for low-bandwidth applications like PDAs and cell phones." Other approaches involve having to capture a different photo of the person for each unique emoticon, which only further increases the demand for bandwidth.

Li's solution is not to send the picture each time it is used, but to store a profile of the face on the recipient device. This profile consists of a decomposition of the original photo. Every time the user sends an emoticon, the face is reassembled on the recipient's device in such a way as to show the appropriate expression.

To make this possible, Li first created generic computational models for each type of expression. Working with Shi-Kuo Chang, a professor of computer science at the University of Pittsburgh, and Chieh-Chih Chang, at the Industrial Technology Research Institute, in Taiwan, Li created the models using a learning program to analyze the expressions in a database of facial expressions and extract features unique to each expression. Each of the resulting models acts like a set of instructions telling the program how to warp, or animate, a neutral face into each particular expression.

Once the photo has been captured, the user has to click on key areas to help the program identify key features of the face. The program can then decompose the image into sets of features that change and those that will remain unaffected by the warping process.

Finally, these "pieces" make up a profile that, although it has to be sent to each of a user's contacts, must only be sent once. This approach means that an unlimited number of expressions can be added to the system without increasing the file size or requiring any additional pictures to be taken.

Li says that preliminary evaluations carried out on eight subjects viewing hundreds of faces showed that the warped expressions are easily identifiable. The results of the evaluations are published in the current edition of the Journal of Visual Languages and Computing.

Continued in article

Bob Jensen's threads on visualization of multivariate data are at
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

"Johns Hopkins Builds a B-School from Scratch: The elite research university launches a new Global MBA program in August. On the to-do list: AACSB accreditation, faculty, and money," by Allison Damasi, Business Week, May 10, 2010 ---
http://www.businessweek.com/bschools/content/may2010/bs20100510_439397.htm?link_position=link2

For years, Johns Hopkins' business offerings—mostly part-time degree and certificate programs—lingered in the shadow of the university's internationally renowned medical and public health schools. That all changed in 2006 when the university received a $50 million gift from banker William Polk Carey, leading to the founding of the Johns Hopkins Carey Business School in 2007 and a new lofty mission to become one of the world's leading business schools. That vision will be put to the test this August when the school launches its new Global MBA program, with a curriculum that the school's inaugural dean, Yash Gupta, says seeks to reinvent the modern MBA.

"Since we are the new kids, we don't have to change culture; we are building a culture," Gupta says. "We are trying to change the mold."

All eyes in the management education world will be on the new B-school in the coming year, as Gupta essentially builds a new MBA program from scratch, a daunting task that few universities have been eager to take on in the last decades. The Carey School is seeking to distinguish itself by designing a curriculum that will capitalize on Johns Hopkins' strength in fields like medicine and public health, have a focus on emerging markets and ethics, and encourage innovation and entrepreneurship.

To accomplish this, the school has recruited Gupta, a B-school dean with a proven fundraising track record and 14 years of experience, and installed him in leased office space in Baltimore's Harbor East area that Carey now calls home. Gupta's most recent deanship was at the University of Southern California's Marshall School of Business (Marshall Full-Time MBA Profile), where he helped raise $55 million. Since his arrival at Johns Hopkins, Gupta has spent much of his time recruiting students, designing courses, and hiring a new cohort of top research faculty, with the ultimate goal of putting the Carey School in a position where it can compete with the world's top B-schools. The school is in the process of obtaining accreditation from the Association to Advance Collegiate Schools of Business (AACSB), an essential credential that the school will need to get students and the business school community to take it seriously. Says Gupta: "We want to play in that sandbox."

Challenges Ahead

It's an ambitious goal for a fledgling business school, which still faces a number of significant challenges ahead, says John Fernandes, the AACSB president. The school already has a number of things working in its favor, perhaps the most important being the world-renowned Johns Hopkins brand, which will help the school establish itself as a serious player early on, and what appears to be a unique niche focus for its MBA program, Fernandes says. But in the next few years, the school will have to obtain accreditation, launch a major fundraising campaign, build up its alumni network, ramp up its career services offerings, and continue to attract top-rate faculty. Says Fernandes: "It's not an easy task to go from nothing to a top school in a very short period of time."

The last large university to open a new B-school was the University of California, San Diego, which opened the Rady School of Management (Rady Full-Time MBA Profile) in 2003 after receiving a $30 million gift from businessman Ernest Rady. Robert Sullivan, the school's inaugural and current dean, says he faced numerous challenges: hiring faculty for a school with no track record; launching an executive education program to help pay the bills; and raising $110 million for a new building and other expenses, no small feat when you have no highly placed MBA alumni to tap for cash. He even had to borrow faculty from other schools. Says Sullivan: "It was really kind of Band-Aids for the first year."

Continued in article

Jensen Comment
This begs the question of what comparative advantage Johns Hopkins brings to the business school world at this point in time. The main advantage of business schools in most private colleges and universities is student recruiting. Those that dropped or commenced to starve their business studies options for students, like Colorado College did for a while, discover that many student applicants really want an option to major in a quality business school or college within the university. It would seem that because of its graduate school stellar reputations in science, medicine, law, and political science that Johns Hopkins is not hurting for applicants to its graduate schools.

Because so many students want to major in business, colleges of business are often cash cows for a university. In addition, it is allegedly easier in many instances for colleges of business to raise endowment funds from the private sector. Somehow I just don't see this as being the case for Johns Hopkins where medicine is king.

It may well be that Johns Hopkins just wants to become more of a "university." In that case it is less like Brown and Princeton than it will be like Stanford, Northwestern, Chicago, Duke, Harvard, Emory, Penn, and Dartmouth.

Bob Jensen's threads on higher education controversies are at
http://www.businessweek.com/bschools/content/may2010/bs20100510_439397.htm?link_position=link2

Some elite schools like Brown University that do not have business schools are bringing European business schools to their U.S. campuses

European business schools are planting their flags on American soil
"Entering the U.S. Market," by Jennifer Epstein, Inside Higher Ed, May 25, 2010 ---
http://www.insidehighered.com/news/2010/05/25/business

The law of supply and demand drove SKEMA, a French business school, to open campuses in the emerging markets of China and Morocco, and to start planning for expansion into India, Brazil and possibly Russia.

But the decision to set up shop in the United States was driven by something a bit more emotional. “For European students, this is a dream; America is a dream for them,” says Alice Guilhon, the school’s dean. “And it is a dream for us, to be known in the U.S.”

While Harvard Business School, the Wharton School and the Stanford Graduate School of Business might not be the kind of competition that most institutions would willingly seek out, well-regarded European business schools like SKEMA have in the last few years ratcheted up their efforts to be known and respected in the United States.

SKEMA -- created last year by the merger of ESC Lille School of Management and CERAM Business School – is hoping to build its global reputation by situating its new campuses near hubs of the technology industry, and saw a venture in the United States as key to that strategy. “To be in America is to be close to the headquarters of all the big firms, to be where the story began,” Guilhon says. “To be well-known in America, it is leverage for the visibility of the school in the world.”

In plans announced last week, SKEMA will begin offering classes in English to about 300 of its own students on the Raleigh campus of North Carolina State University, beginning in January 2011. The school hopes to have its own 40,000 square foot building open by 2013. As time goes on, the school may become more distinctly American, but at least for the first few years its faculty, administrators and students will primarily come from France and elsewhere in Europe. “It’s very important that we build the Skema culture in the U.S.,” Guilhon said. “We need to show it works there.”

Skema's decision to build a campus in the United States is an unusual one, says Juliane Iannarelli, director of global research for the Association to Advance Collegiate Schools of Business. "Most programs are partnerships, collaborations," she stays. "The establishment of a campus -- constructing a building -- is pretty rare."

At least three other major European business schools have taken recent steps that go beyond partnerships, if stopping short of Skema's dramatic step. These new efforts are more than student and faculty exchanges, offering substantial instruction in the United States, and in some cases competing to attract American students from the start.

Robert F. Bruner, dean of the Darden School of Business at the University of Virginia and chair of the AACSB's Globalization of Management Education Task Force, says it is "an interesting choice" to see foreign business schools enter the U.S. market. "We have an abundance of schools here and usually the idea is to go where the competition isn't."

The schools are driven, he says, by "a desire to establish and succeed in the U.S. as a basis for validating their models." Aiming to have a successful business school in the United States “is like wanting to have your plays produced on Broadway -- the audiences are most discerning."

After three years of planning and renovations, Spain’s IESE Business School will open a North American facility just a block off Broadway. An opening ceremony for the school’s six-story New York Center, just across 57th Street from Carnegie Hall, is set for June 3, and is intended to be a big splash into the U.S. market.

Luis Cabral, the center’s academic director and an economics professor who was hired away from New York University, says expansion into the United States was a logical step in IESE’s efforts to become known worldwide. “We’ve been in South America, Asia, Africa for quite some time now,” he says. “But if we have the goal of being truly global, then we have to be in the United States.”

Despite being ranked as one of Europe’s top business schools, “we’re not as well-known in the United States as we would like to be,” he says. “There are elements of branding here, in making ourselves known on this side of the Atlantic.”

IESE already has reciprocity agreements in place with a few U.S. business schools, including NYU’s Stern School of Business and Columbia Business School. “The problem with those agreements is that they tend to be a relatively small number of students. If they send half a dozen, we send half a dozen,” Cabral says. But offering its own courses in its own facilities gives IESE a chance to send a far greater number of students to the United States. “We’re estimating 70 to 80, at least -- a different scale altogether.”

Full-time and part-time M.B.A. students will have the option of spending a few weeks in New York for elective courses in industries like media, entertainment and finance. “The advantage of taking these courses in New York is that you have a lot of guest speakers that can just walk up to the building,” he says. “They don’t even need to take a cab. That’s not something that most European business schools can say.”

For at least the next few years, though, the New York Center will be an outpost of the main school in Barcelona and won’t offer degrees. “This is just our first step,” Cabral says. “We’ll see what we do next.”

Another Spanish school beginning its foray into the United States is Instituto de Empresa Business School, which has campuses in Madrid and Segovia. Though the U.S. market is saturated with business schools and executive education programs, IE sees room to build its own programs that will largely be offered in the United States, says David Bach, dean of programs. “You could look at this and say you have very sophisticated customers. You could say, if you’re a foreign school, stay away from the U.S. market. But we want to show that we can have success in such a competitive, difficult market.”

In March, IE launched a joint program with Brown University – one of the few elite U.S. universities that doesn’t have its own business school – to offer an executive M.B.A. program that aims to infuse the humanities and social sciences into the typical business curriculum. The program will include five in-person sessions, four of which will be at Brown’s campus in Providence, R.I., and the fifth in Spain. “We’re expecting to attract Americans,” Bach says. “A European M.B.A. is increasingly attractive to U.S. employers who want to know they’re hiring people who understand the world, but not everybody can come to Europe for a year.” The degree will be awarded by IE.

Continued in article

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Auditing the Lepricons That Learned from Lehman --- http://wiki.answers.com/Q/What_do_lepricons_have_to_do_with_Ireland

"Not To Be Twistin’ Hay… Auditors Mucking It Up In Ireland," by Francine McKenna, re: theAuditors, May 4, 2010 ---
http://retheauditors.com/2010/05/04/not-to-be-twistin-hay-auditors-mucking-it-up-in-ireland/

Round trip loans. Director-approved balance sheet manipulation. Window-dressing of accounts at period-end.

“The regulator said auditing firms needed to pay “particular attention” to guidance that it had previously issued on monitoring transactions taking place around year-end, as well as the procedures expected to be followed by auditors…These standards and guidance notes require auditors to scrutinize “material” short-term deposits that are re-lent on broadly similar terms, and loan repayments that are received shortly before year-end and then subsequently re-advanced within a short timeframe.

The guidance notes emphasized that the auditors needed experience and judgment to identify the implications of such transactions, and assess whether they constituted attempts to engage in the so-called “window-dressing” of accounts.”

The Sunday Business Post, March 1, 2009

If that sounds like Lehman Brothers, it’s because the kinds of tricks and techniques used in that case, such as Repo 105, are neither new nor unique.

The PCAOB, the US regulator of public accounting firms, tried to remind the firms at the end of December 2008 of their responsibilities in the “current economic environment.”

In an audit of internal control over financial reporting, the auditor also should evaluate whether the company’s controls sufficiently address the identified risks of material misstatement due to fraud and controls intended to address the risk of management override of controls. Controls that might address these risks include:

Controls over significant, unusual transactions, particularly those that result in late or unusual journal entries;

Controls over journal entries and adjustments made in the period-end financial reporting process;

Controls over related party transactions;

Controls related to significant management estimates; and

Controls that mitigate incentives for, and pressures on, management to falsify or inappropriately manage financial results.

Repurchase agreements recorded as loans are legal “round trip” financing tools, often used to both improve liquidity as well as shuffle assets and liabilities at period end to suit management’s objectives. When disguised as “sales” without proper disclosure and splashed like mud over and over in the face of a skeptical attorney like Anton Valukas, Repo 105 transactions they gain high-class call-girl-type notoriety that’s undeserved given their common whore characteristics.

A round-trip loan was used by Refco executives to hide uncollectible receivables. Three of their executives, as well as an outside counsel, went to jail for that fraud.

In 2005, Time-Warner paid a $300 million penalty, agreed to an anti-fraud injunction and an order to comply with prior cease-and-desist order and agreed to restate its financial results and engage independent examiner. Their CFO, Controller and Deputy Controller also consented to a cease-and-desist order.

From the SEC press release:

“Beginning in mid-2000, stock prices of Internet-related businesses declined precipitously as, among other things, sales of online advertising declined and the rate of growth of new online subscriptions started to flatten. Beginning at this time, and extending through 2002, the company employed fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slow-down. The round-trip transactions ranged in complexity and sophistication, but in each instance the company effectively funded its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions, the company typically structured and documented round-trips as if they were two or more separate, bona fide transactions, conducted at arm’s length and reflecting each party’s independent business purpose…”

Time Warner Inc. and its auditor reached a $2.5 billion settlement of the resulting securities fraud litigation. Time Warner paid $2.4 billion, while its auditor, Ernst & Young, paid $100 million.

Continued in article

Bob Jensen's threads on the Lehman-Ernst controversies area at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

Where were the auditors before the banks failed?
http://www.trinity.edu/rjensen/2008bailout.htm#AuditFirms

Accountics Research in Action

Question
With tort lawyers circling the wagons, are the large international accounting firms shooting themselves in both feet by lobbying for IFRS principles-based standards?

"GAAP's Lawsuit Buffer: The rules-based nature of U.S. generally accepted accounting principles may actually discourage shareholder lawsuits, says a new study," by Sarah Johnson, CFO.com, May 12, 2010 ---
http://www.cfo.com/article.cfm/14496423/c_14497565?f=home_todayinfinance

The debate over whether principles-based accounting standards are better than rules-based standards has divided many accountants, and stymied regulators who want to move U.S. accounting toward less-prescriptive guidance.

One argument against that nearly decade-long push has been that moving away from bright lines and layers upon layers of rules (as is characteristic of U.S. generally accepted accounting principles) would lead to more class-action lawsuits from shareholders second-guessing companies' accounting decisions. Because standards more reliant on principles (such as international financial reporting standards, or IFRS) give users more room to make judgment calls, observers worry that adopting such standards will open companies up to more Monday-morning quarterbacking by auditors, regulators, and the plaintiffs' bar.

Indeed, it's long been assumed that adopting principles-based standards would raise companies' litigation risk. For instance, in a 2003 report encouraging a move toward more "objectives-oriented rules," the Securities and Exchange Commission said a new system would carry with it "litigation uncertainty." At the time, the commission argued that litigation exposure could be minimized by companies and their auditors properly documenting the reasoning behind their judgment calls under a principles-based system.

Now, three university professors have gathered empirical evidence suggesting that litigation is indeed an issue in the principles-versus-rules discussion. Their study, "Rules-Based Accounting Standards and Litigation," suggests that companies that violate rules-based standards have a lower likelihood of getting sued than those that are accused of violating more-principles-based standards.

The professors looked at securities class-action suits alleging GAAP violations filed between 1996 and 2005, as well as 84 restatements made during that same time frame that did not result in litigation. Rather than judge GAAP as a whole as a rules-based system, they considered the prescriptiveness of the standards mentioned in each case, based on four characteristics: level of bright-line thresholds, exceptions, implementation guidance, and detail.

The standards were measured on a "rules-based continuum" scale running from zero to four, with zero denoting the most principles-based standards and four indicating the most rules-based standards. Accordingly, the standard for contingent liabilities, which requires judgment calls, scored zero, while accounting for leases scored four.

However, the professors shied away from concluding whether the adoption of more-principles-based standards as a whole in the United States would invite more lawsuits for American companies. The unique litigation system of this country, as well as the more litigious nature of the society, makes it difficult to directly compare the U.S. system with that of Europe or beyond, they say.

Still, over time, IFRS could become more rules-based if demands for carve-outs and additional guidance continue as they have in the United States, says study co-author John McInnis, an assistant professor at the University of Texas at Austin. "Even if we adopt a more principles-based system, I'm not sure it would stay that way," he says. Rather, the professors believe their study provides a building block for U.S. regulators and other researchers to consider as the merits of adopting IFRS continue to be weighed. (The SEC plans to decide next year whether to require U.S. companies to make a switch to the global rules, starting in 2015.)

For now, apparently, GAAP and its inherent complexity give U.S. companies a defense against lawsuits by allowing them to "shield themselves behind the rules," says McInnis. "If you follow the rules, it appears that you are protected."

Shareholders have the burden of proving that a GAAP violation was intentional, not an easy task when many layers of rules provide many opportunities for mistakes. "We find that firms are less likely to be sued when they violate standards that are more rules-based, consistent with the view that the complexity of rules-based standards provides a credible 'innocent misstatement' presumption," the professors wrote.

The professors acknowledge several limitations of their research. Among them is the fact that it's not possible to observe initial shareholder claims that lawyers drop before submitting them into the court system. Also unanswerable is whether a more principles-based system would lead to fewer restatements, which often trigger shareholder lawsuits in the United States if they affect the stock price.

"Rules-Based Accounting Standards and Litigation,"
by Dain C. Donelson University of Texas at Austin - McCombs School of Business
John M. McInnis University of Texas at Austin - Department of Accounting
Richard Mergenthaler Jr. University of Iowa - Henry B. Tippie College of Business
SSRN, April 7, 2010 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531782

In the United States we have at a number of ways of dealing with principles-based standards that clients, auditors, and investors are unhappy with because of just plain not knowing how to apply the standard.

1. The standard setters paint bright lines in their own interpretations of the standard in specific contexts. Sometimes this is done by the standard setters themselves when issuing interpretations to supplement standards, e.g., see FIN 46-R.
2. The standard setters sometimes outsource the interpretations and implementation inquiries. The best example of this is when the FASB formed the Derivatives Implementation Group (DIG) that answered inquiries about how to implement FAS 133 and its amendments for particular types of complicated contracts involving derivative financial instruments ---
http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FDerivativesPage&cid=900000015389

3. The standard setters build bright lines into amended standards or new standards such as when FAS 138 added bright lines to FAS 133.
4. A large firm, particularly PwC, paints bright lines into a massive database used both by its clients and its own employees, but by anybody who pays for access to the database, especially colleges and universities that teach accountancy. In the case of PwC this database is called Comperio --- http://www.pwc.com/gx/en/comperio/index.jhtml
Comperio in a sense paints bright lines when a particular type of contract just does not seem to be clearly covered in the standards and the interpretations. Of course PwC does not have standard setting authority, but it can issue its own guidelines that others consider following.
5. The SEC paints bright lines when the FASB is slow to react such as now when the SEC is painting a bright line banning debt masking using repo contracts as defined in FAS 140.
6. In the United States common law court decisions paint bright lines that are statutes are vague or incomplete. Anybody that defies or ignores the common law does so at risk of losing out in a future court decision.

The IASB uses similar means of painting bright lines into IFRS. The one that is most problematic is the common law. When you have standard setting jurisdiction for nearly 100 nations, problems in common law arise due to different cultures and contracting that can differ greatly between nations. For example, some nations rely almost entirely on capitalization with debt and almost no equity. In the United States we are much more dependent upon equity markets.

Bob Jensen's threads on bright lines versus principles-based standards are at
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines

The Pentagon and the IRS are Deemed Unauditable by the GAO. What About the FED?
"Alan Grayson On The Passage Of The Partial "Audit The Fed" Amendment," by Alan Grayson, Zero Hedge, May 12, 2010 ---
http://www.zerohedge.com/article/alan-grayson-passage-partial-audit-fed-amendment

The Senate just voted, 96-0, to audit the Federal Reserve. Soon, we will know what the Federal Reserve did with the trillions of dollars that it handed out during the financial crisis.

A few months ago, such a vote would have been unthinkable. One senior Treasury official claimed he would fight to stop an audit 'at all costs'. Senator Chris Dodd predicted that an audit would spell economic doom, while Senator Judd Gregg attacked accountability for the Fed as "pandering populism".

Today, both the Treasury Department and Senator Dodd support this amendment. As for Judd Gregg, he was just on the floor of the Senate discussing -- of all people -- 19th century populist Presidential candidate William Jennings Bryan.

What happened?

People Power is what happened. We built a coalition of people on the right and the left, ordinary citizens and economists, ex-regulators and politicians, all with one question for which we demanded an answer: "What happened to our money?"

No longer can Ben Bernanke get away with saying, "I don't know."

Now, we're going to know who got what, and why.

Releasing this information will show that the Federal Reserve's arguments for secrecy are -- and have always been-- a ruse, to cover up the handing out of hundreds of billions of dollars like party favors to the Wall Street favorites who brought the American economy to the brink of ruin.

But our work isn't quite done. The Senate audit provision isn't as strong as what we passed in the House. The Senate provision has only a one-time audit, whereas what we passed in the House would allow audits going forward. There will be a conference committee that will merge the provisions from the two bills.

The need for audits and oversight over Fed handouts going forward is great. The financial crisis isn't over, and neither are the Fed's secret bailouts. Earlier this week, the Federal Reserve announced it was going underwrite the Greek bailout by lending dollars to the central banks of Europe, England, and Japan. The loans may never be paid back, the Fed accepts the risk that the dollar will strengthen in the meantime, and the interest rate charged by the Fed is very likely at below-market rates. So such loans are in effect just a subsidy, to bail out foreigners.

The Fed has not been chastened. It is bolder and more of a rogue actor than ever. It's clear that without full audit authority going forward, the Fed will continue to give out "foreign aid" without Congressional or even Executive permission.

And it will do so in secret.

So we will be fighting on to get a full audit from the conference committee.

But let's not lose sight of what we have accomplished so far - real independent inquiry into the Fed, and its incestuous relationships with Wall Street banks. For the first time ever.

Our calls, emails, lobbying, blogging, and support really mattered. We made it happen.

Today, we beat the Fed.

Courage,

Alan Grayson

Jensen Comment
It's important to trace where the bailout funds eventually ended up after being laundered. For example, billions went to AIG that in turn sent it on to Goldman Sachs. Without the Bailout, Goldman Sachs would've been left holding the empty bag.

Bob Jensen's threads on the bailout are at
http://www.zerohedge.com/article/alan-grayson-passage-partial-audit-fed-amendment

Our Broken Corporate Governance Model
"Why Executive Pay is So High," by Neil Weinberg, Forbes, April 22, 2010 ---
http://www.forbes.com/forbes/2010/0510/outfront-pay-bosses-ceo-chairman-why-executives-pay-is-high.html?boxes=Homepagetoprated

How can investors reel in pay and get more out of corporate bosses? Here's one view: Kick the chief executive out of the boardroom.

When it comes to the way corporate boards oversee chief executives--or, all too often, fail to--few people have as many war stories to tell from as many vantage points as Gary Wilson. He was Walt Disney Co. ( DIS - news - people )'s chief financial officer and, as a director, the subject of scorn when its board was twice ranked the worst in the country. As a Yahoo ( YHOO - news - people ) director Wilson was targeted by investor Carl Icahn, who sought to oust the board during a 2008 failed shotgun marriage with Microsoft ( MSFT - news - people ). As a private equity guy he led the 1989 Northwest Airlines ( NWA - news - people ) buyout along with Alfred Checchi.

So Wilson can say, with more than a little credibility, that the boards supposedly overseeing management are instead packed with lackeys with appalling frequency. It's a familiar complaint but one that he believes is responsible for out-of-control pay, the short-term greed that helped spawn the recent financial meltdown and a staggering waste of resources. Wilson's solution: Abolish the joint role of chief executive and chairman and install independent bosses to oversee boards.

"From what I've seen, managers are interested in what goes into their pockets and willing to use lots of leverage to add short-term profits, boost the stock price and sell their options," says Wilson, 70. "Long-term shareholders risk getting screwed."

The Alliance, Ohio native has joined up with Ira Millstein, a Wall Street attorney, and Harry Pearse, former General Motors general counsel and Marriott Corp. director, to push for independent chairmen. Their platform is the Millstein Center for Corporate Governance at Yale.

Does splitting the title benefit shareholders? Evidence is inconclusive, but here's an indicator suggesting they're on to something: 76% of the 25 bosses who rank lowest on our annual survey comparing compensation to shareholder return hold dual titles. Only 44% of the best 25 hold both titles. The dual players include Richard D. Fairbank of Capital One, Ray Irani of Occidental Petroleum ( OXY - news - people ), David C. Novak of Yum Brands and Howard Solomon of Forest Labs. ( FRX - news - people ) Wilson and Pearse insist that they saw boards transformed overnight from supplicants to independents when the roles were separated at companies where they were directors.

Boards occasionally go through spasms of feistiness. In 1992 General Motors' board ousted Robert Stemple as chairman, which led to similar moves at American Express ( AXP - news - people ), Westinghouse and other companies. But today only 21% of boards are chaired by bona fide independents, says RiskMetrics Group, a New York financial advisory firm that owns ISS Proxy Advisory Services. In 43% of big companies the roles are ostensibly split, but the chairman, says RiskMetrics, is an ex-chief executive or otherwise defined as a company "insider."

In some cases nothing less than corporate survival is at stake, Wilson argues. He points to Lehman Brothers ( LEHMQ - news - people ), where Richard Fuld was chief executive and chairman for 15 years and where management took the sorts of big risks that ultimately sank the firm.

Wilson isn't against stock options but believes in tying them to long-term returns with strike prices that rise at the rate of inflation plus some risk premium, as he has done at some companies he has invested in. That way management isn't rewarded just for showing up.

Independent boards might also rein in pay. In Europe Wilson sat on KLM's advisory board and says it's no coincidence that (a) chief executives typically run a management board, which reports up to the separate advisory board, and (b) pay is well below U.S. levels. At many U.S. companies, he says, the combined boss often recruits board members and then "directors feel obligated to the CEO/chairman, make the friendliest member chairman of the compensation committee and then hire a friendly consultant to do an analysis that favors high management pay."

Continued in Article

Comment Letter from 80 Business and Law 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

Bob Jensen's threads on outrageous executive compensation (that even rewards executives for failure) ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

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

"Senator Questions Another Break for Colleges: Tax-Exempt Bonds," by Goldie Blumenstyk, The Chronicle of Higher Education, May 2, 2010 ---
http://chronicle.com/article/Senator-Questions-Another/65374/?sid=at&utm_source=at&utm_medium=en

A U.S. senator with influence over federal tax policy may now be setting his sights on a longstanding cornerstone of colleges' financial practice: paying for new and renovated buildings by borrowing money with tax-exempt bonds.

The attention comes as a result of a just-released report from the Congressional Budget Office. The report, "Tax Arbitrage by Colleges and Universities," questions the merits of allowing nonprofit institutions to rely on taxpayer-subsidized debt while they also benefit from investing their assets to earn them more than what they pay out in interest on the debt.

The report says such a practice allows many universities to benefit from what it describes as "indirect tax arbitrage" because "holding those assets while borrowing on a tax-exempt basis is, in effect, equivalent to using tax-exempt proceeds to invest in those higher-yielding securities."

College advocates say the broad definition of tax arbitrage the report uses reflects an economic argument on the merits of tax-exempt financing but doesn't take into account the social good that colleges provide or the current financial pressures they face.

Sen. Charles E. Grassley, who requested the budget-office analysis in 2007 as part of a broad look at tax-exempt organizations, said in a statement on Friday that the report raises questions "for parents, students, and taxpayers about universities issuing bonds and going into debt when they have money in the bank."

The study estimates that allowing colleges and universities to borrow using tax-exempt debt will cost the federal government about $5.5-billion in forgone revenue in 2010.

In his statement, Senator Grassley, a Republican from Iowa, highlighted several concerns: "Issuing bonds costs money on interest and management fees. Does the expense of debt service take money away from student aid or academic service? Do bond issuances occur even as universities raise tuition and build investment assets?"

But it is unclear whether the senator, who is the senior minority member of the Senate Finance Committee, intends to propose any changes in law in response to the report. In the statement released on Friday evening, he says, "These are further questions to explore."

Charles A. Samuels, a lawyer for the National Association of Health and Educational Facilities Finance Authorities, a group of organizations that help private colleges issue bonds, said current law already restricts colleges and other organizations from directly profiting from their tax-exempt bond issues, or tax arbitrage. (To avoid tax arbitrage, a college that raises money from tax-exempt bonds can reinvest it only temporarily, and even then only in investments earning about the same as the cost of the debt.)

"Now would be a very bad time to make it more difficult for nonprofit organizations in this country to borrow money," Mr. Samuels said in an interview on Sunday.

He said the Congressional Budget Office report is "an 'academic' study in the worst sense of the word" and added that he hoped it would not result in some new limits on tax-exempt financing.

"It isn't going to really help the cost of higher education to restrict financing" that saves colleges money, he said.

Bob Jensen's threads on higher education controversies are at
http://chronicle.com/article/Senator-Questions-Another/65374/?sid=at&utm_source=at&utm_medium=en

Flagrant Foul: Call for a Forensic Accountant: Could it be a double dribble?
"Minority Owner Sues Cuban, Calls Mavericks ‘Insolvent’," by Richard Sandimir, The New York Times, May 11, 2010 ---
http://www.nytimes.com/2010/05/12/sports/basketball/12mavericks.html?hpw

Mark Cuban’s financial management of the Dallas Mavericks was described as reckless in a lawsuit filed Monday in Texas by a minority investor in the team who accused Cuban of amassing net losses of $273 million and debt of more than $200 million.

Ross Perot Jr., who sold Cuban control of the team in 2000 but retained a small stake, said in the state court filing that the team was essentially insolvent and lacked the revenue to pay its debts.

Perot is seeking damages, the naming of a receiver to take over the team and the appointment of a forensic accountant to investigate its finances. Perot said that Cuban’s actions had diminished the value of his investment in the team and violated his and other minority owners’ rights.

In an e-mail message to The Dallas Morning News, Cuban said: “There is no risk of insolvency. Everyone always has been and will be paid on time.” He added that “being in business with Ross Perot is one of the worst experiences of my business life.”

“He could care less about Mavs fans,” Cuban continued. “He could care less about winning.”

The lawsuit partly opened the Mavericks’ books, showing some results and projections. Perot said the team generated a net loss of more than $50 million in the year ended June 2009 and a net cash flow deficit of $176 million since 2001. Looking ahead, Perot said that internal projections showed additional losses of $92 million through 2013 and debt rising to $281 million.

Marc Ganis, a sports industry consultant, said that Perot “seems to want to be bought out at a premium, wants to restrict Cuban’s ability to spend money on players, or it’s personal.”

The N.B.A. does not seem to be worried by Perot’s accusations.

Adam Silver, the deputy commissioner of the N.B.A., said the league had “absolutely no concern” about Cuban’s financial situation. In an e-mail message, he said, “We are in the process of addressing our teams’ ongoing losses through the collective bargaining process with our players.”

Cuban acquired the Mavericks for $285 million from Perot in the 1999-2000 season and turned it into a winning franchise that has made the playoffs every year since 2001. The lawsuit said Cuban owned 76 percent of the team.

He has become one of the most famous and boisterous owners in sports, sitting courtside at home games and criticizing officials, which has accounted for much of his nearly $2 million in league fines.

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

"Deloitte India A Bomb Target?" The Big Four Blog, May 4, 2010 --- http://www.bigfouralumni.blogspot.com/

Indian papers are just reporting that Indian police had arrested Mohammad Zia Ul Haq in the southern city of Hyderabad, who was apparently directed by Pakistan-based Lashkar-e-Taiba (LeT)to “bomb the Hyderabad office of Deloitte Touche Tohmatsu, one of the four largest auditors in the world, and was in the process of carrying out the plan.” He has “already procured the explosives supplied by the LeT to carry out the attack, sources said.”

Continued in article

Jensen Comment
Audits sometimes bomb, but rarely are auditors bombed by anything other than a martini.

"PCAOB Inspection of Deloitte Audit – 20% Error Rate?" The Big Four Blog, May 6, 2010 ---
http://bigfouralumni.blogspot.com/2010/05/pcaob-inspection-of-deloitte-audit-20.html

In its first inspection report of a Big Four firm in the year 2010, the PCAOB just released its 2009 inspection report of Deloitte & Touche LLP, finding quite a high percentage of errors in the sample of audits selected to be reviewed.

The Public Company Accounting Oversight Board on May 4, 2010 conducted an inspection of the registered public accounting firm Deloitte & Touche LLP ("Deloitte" or "the Firm") in 2009, and issued a report in accordance with the requirements of the Sarbanes-Oxley Act of 2002.

Here are some interesting facts and numbers from this report summary:

Members of the Board's inspection staff conducted primary procedures for the inspection from October 2008 through October 2009.

Field work was done at Deloitte’s National Office and at 30 of its approximately 69 U.S. practice offices, indicating about 40% of offices were covered.

The scope of this review was determined according to the Board's criteria, and the Firm was not allowed an opportunity to limit or influence the scope.

The inspection reviewed aspects of 73 audits performed by Deloitte and found 15 issues (Issues A to O), which works out to a 20% error rate, by simply dividing 15 by 73, which we would think is quite high. Imagine that one of every five audits randomly selected and signed off by one of the largest accounting firms on the planet has purported errors.

We summarize below all the 15 issues, which PCAOB calls, “audit deficiencies, including failures by the Firm to identify or appropriately address errors in the issuer's application of GAAP, including, in some cases, errors that appeared likely to be material to the issuer's financial statements. In addition, the deficiencies included failures by the Firm to perform, or to perform sufficiently, certain necessary audit procedures.” – so quite stringent in its scope.

Issuer A The issuer's total U.S. net federal deferred tax assets, which exceeded its stockholders' equity at year end, included substantial U.S. income tax net operating loss carry forwards for which no valuation allowance had been recorded. The Firm, however, failed to give sufficient weight to relevant evidence that was more objectively verifiable, such as the fact that the issuer had experienced losses in seven of the last eight years (including cumulative losses in the last three years), had experienced two successive year-over-year declines in U.S. sales volumes, and considered the disruptions in the financial markets to be a risk factor to its business.

Issuer B The issuer evaluated its recorded goodwill for impairment during the third quarter of the year and concluded that the fair value of its total assets exceeded their book value by a small margin. The Firm failed to sufficiently evaluate the effect of these events on its assessment of the potential impairment of goodwill at year end.

Issuer C The Firm failed in the following respects to obtain sufficient competent evidential matter to support its audit opinion, in failing to perform adequate audit procedures to test the valuation of the issuer's inventory and investments in joint ventures (the primary assets of which were inventory). Etc.

Issuer D The Firm failed to adequately test the valuation of the issuer's inventory and the issuer's investments in unconsolidated entities, whose primary assets were inventory ("investments").

Issuer E The Firm failed to adequately test an intangible asset for impairment.

Issuer F The Firm failed to perform adequate audit procedures pertaining to a sale of a subsidiary to a newly formed entity in which the issuer held an ownership interest.

Issuer G The Firm failed in the following respects to obtain sufficient competent evidential matter to support its audit opinion, in one reporting unit, the Firm failed to evaluate whether management's use of historical results as the sole basis for its revenue projections, without considering the issuer's future prospects or the economic conditions, was reasonable.

Issuer H The issuer engaged a specialist to calculate the estimated amount of a significant contingent liability. The amount calculated by the specialist exceeded the amount recorded by the issuer by an amount that was approximately 13 times the Firm's planning materiality. The Firm failed to perform sufficient procedures to test the contingent liability.

Issuer I The Firm failed to perform adequate audit procedures to test the issuer's conclusion that certain available-for-sale securities with unrealized losses did not require a charge for other-than-temporary-impairment.

Issuer J The Firm failed to evaluate the reasonableness of certain significant assumptions that the issuer had used in developing its cash flow estimates to assess the recoverability of certain long-lived assets etc.

Issuer L The issuer acquired a company during the year, and this acquired company operated as a subsidiary of the issuer after the acquisition and was the source of a significant portion of the issuer's reported revenue. The Firm failed to test the operating effectiveness of the controls over the acquired company's revenue and, as a result, the Firm's testing of revenue was inadequate.

Issuer M The Firm failed to perform adequate audit procedures to test the fair value of an embedded derivative liability at year end.

Issuer N The Firm failed to sufficiently test revenue and cost of goods sold.

Issuer O The Firm failed to identify a departure from GAAP that it should have identified and addressed before issuing its audit report.

In its response to the PCAOB, Deloitte said, “We have evaluated the matters identified by the Board’s inspection team for each of the Issuer audits described in Part I of the Draft Report and have taken actions as appropriate in accordance with D&T’s policies and PCAOB standards….none of our reports on the Issuers’ financial statements was affected.”

A few things stand out in this report:

First, the PCAOB is actually providing the sample size of the inspected audits, for the first time, enabling us to calculate an error rate

The error rate in this situation is quite high, almost one of every five audits has errors. Obviously, Deloitte performs thousands of audit each year and extrapolating from a small sample is quite dangerous, nonetheless, even at half of 20%, the natural conclusion is that one in ten audits has an error, and would have gone unnoticed had not the PCAOB done a good post-audit on the audit.

Finally, there is a good deal of variance in the type of errors found, ranging from lack of inventory checking to impairment testing. Interesting to see that not all of these issues related to accounting for financial securities.

We’ll of course be waiting for the report on Ernst & Young to see if the PCAOB is highlighting any accounting deficiencies relating to its audit of Lehman Brothers’ infamous Repo 105, if that were indeed in the scope of the 2009 audit.

Jensen Comment
In 2007 the PCAOB also hit Deloitte with the PCAOB's largest fine in history.

From The Wall Street Journal on Accounting Weekly Review on December 14, 2007

Deloitte Receives $1 Million Fine
by Judith Burns
The Wall Street Journal
Dec 11, 2007
Page: C8
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB119734046614120346.html?mod=djem_jiewr_ac

TOPICS: Accounting, Audit Firms, Auditing, Big Four, PCAOB, Public Accounting, Public Accounting Firms

SUMMARY: The PCAOB, the nation's audit watchdog, recently fined Deloitte & Touche $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical. This is the first PCAOB enforcement case against a Big Four accounting firm.

CLASSROOM APPLICATION: This article can serve as a basis of discussion of audit firm responsibility and the enforcement process. It also discusses the PCAOB and a little of its history and enforcement, as well as provides information for discussion of Deloitte's response.

QUESTIONS:
1.) What firm recently agreed to a fine imposed by the PCAOB? What was the reason for the fine? Is this firm a large, medium, or small firm?

2.) What is the PCAOB? What is its purpose? When was it created? What caused the creation of the PCAOB?

3.) What is Deloitte's response to the fine? How does the firm defend itself against the allegations? What do you think of the firm's comments and actions?

4.) What does it mean that Deloitte settled this case "without admitting or denying claims?" Why would that be a good tactic to take? How could it hurt the firm/

5.) Is the PCAOB's main focus enforcement? Why or why not? What other responsibilities does the organization have?

6.) Relatively speaking, is this a substantial or minor fine for the firm? Will fines like this change the behavior of the firms? Why or why not?

SMALL GROUP ASSIGNMENT:
Examine the PCAOB's website? What information is offered there? What information are you interested in as an accounting student? What might interest you as an investor? What would interest a businessperson? Does the website offer extensive information or is it general information? What information is offered regarding enforcement? Is the website a good resource for accountants? Why or why not? Is it a valuable resource for businesspeople? Please explain your answers. Offer specific examples of value offered on the website? What would you like to see detailed or offered on the website that is not included? What did you learn from this website that you have not seen elsewhere?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Deloitte Receives $1 Million Fine," by Judith Burns, The Wall Street Journal, December 11, 2007; Page C8 --- http://online.wsj.com/article/SB119734046614120346.html?mod=djem_jiewr_ac

In its first-ever enforcement case against a Big Four accounting firm, the nation's audit watchdog fined Deloitte & Touche LLP $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical company.

Deloitte settled the matter without admitting or denying claims brought by the Public Company Accounting Oversight Board that one of the firm's former audit partners failed to perform appropriate and adequate procedures in a 2004 audit of Ligand Pharmaceuticals Inc.

Deloitte signed off on Ligand's books, finding they fairly presented the firm's results and complied with U.S. generally accepted accounting principles, or U.S. GAAP.

Ligand later restated financial results for 2003 and other periods because its recognition of revenue on product shipments didn't comply with U.S. GAAP.

Ligand's restatement slashed its reported revenue by about $59 million and boosted its net loss in 2003 by more than 2½ times, the oversight board said.

First-Ever Case

The PCAOB's action against Deloitte marked the first time since it was created in 2003 by the Sarbanes-Oxley corporate-reform legislation that it has taken action against one of the Big Four accounting firms -- Deloitte, PricewaterhouseCoopers LLP, KPMG LLP and Ernst & Young LLP.

The PCAOB previously took enforcement actions against 14 individuals and 10 firms, according to a spokeswoman, although they all involved smaller firms.

Oversight-board Chairman Mark Olson told reporters yesterday after a speech to the American Institute of Certified Public Accountants that the board isn't looking to bring a lot of enforcement actions but said "it is reasonable to expect that there will be others" against Big Four firms.

Mr. Olson said in an earlier statement that the board's disciplinary measures are needed to ensure public confidence isn't undermined by firms or individual auditors who fail to meet "high standards of quality and competence."

Competence was lacking in the 2003 Ligand audit, according to the regulatory body. The oversight board said former auditor James Fazio didn't give enough scrutiny to Ligand's reported revenue from sales of products that customers had a right to return, even though Ligand had a history of substantially underestimating such returns.

Deloitte's Response

In a statement yesterday, Deloitte said it is committed to ongoing efforts to improve audit quality and "fully supports" the role of the accounting-oversight board in those efforts.

"Deloitte, on its own initiative, established and implemented changes to its quality control policies and procedures that directly address the PCAOB's concerns," the company said.

It added that it is confident that Deloitte's audit policies and procedures "are among the very best in the profession and that they meet or exceed all applicable standards."

New York-based Deloitte began auditing Ligand in 2000 and resigned in August 2004.

Mr. Fazio, who resigned from Deloitte in October 2005, agreed to be barred from public-company accounting for a minimum of two years, the PCAOB said. Mr. Fazio's lawyer couldn't be reached to comment.

The oversight board also faulted Mr. Fazio for not adequately supervising others working on the audit and faulted Deloitte for leaving him in place even though some managers had determined he should be removed and ultimately asked him to resign from the firm.

Mr. Fazio remained on the job despite the fact that questions about his performance had been raised in the fall of 2003, the oversight board said.

In addition, the oversight board said Deloitte had assigned a greater-than-normal risk to Ligand's 2003 audit but failed to ensure that the partners assigned to the work had sufficient experience to handle it.

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

KPMG manager took HK$300,000 bribe: ICAC

“ICAC” is the Hong Kong Independent Commission Against Corruption. They have storefront offices all over Hong Kong at which any type of corruption of business or government can be reported.

Saturday, 8 May 2010
South China Morning Post
Reported by Enoch Yiu

KPMG manager took HK$300,000 bribe: ICAC

The ICAC yesterday slapped an additional charge on a senior manager of KPMG for accepting a bribe of HK$300,000 in connection with the Hontex International Holdings' initial public offering scandal.

Leung Sze-chit, 32, a senior manager of KPMG, allegedly received the bribe from an unidentified person as compensation for preparing the accountant's report in the prospectus for the global offering of Hontex, Independent Commission Against Corruption officer Caroline Yu said at the Eastern Court yesterday.

No plea was taken. Magistrate Bina Chainrai adjourned the case until May 28, pending transfer to the District Court.

Leung last month was charged by the ICAC with offering HK$100,000 to another employee of KPMG, whose identify has not been disclosed, "for preparing the accountant's report for the global offering" of Hontex, a Fujian sports clothing firm.

The Securities and Futures Commission in March won a court order freezing the HK$1 billion that Hontex raised in its initial public offering in December. The SFC alleged the firm had overstated its financial results and misled investors about its finances in the prospectus. The SFC ordered a suspension of trading of Hontex shares on March 30, two months after its listing.

KPMG was the auditor responsible for ensuring the accuracy of Hontex's prospectus in the share sale. Yesterday KPMG said it was the one that discovered the malpractices.

"KPMG wishes to emphasise again that the alleged payment was in fact reported through KPMG's internal hotline. After investigation, the member of staff in question was suspended by KPMG and a report was then made by KPMG to the relevant authority. KPMG has been, and continues, to co-operate fully with the authorities," the company said.

Hontex, controlled by Taiwanese businessman Shao Ten-po, said in its listing prospectus that it produces fabrics and makes garments for brands including Decathlon, Kappa and mainland sports chain Li Ning.

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

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

Ketz Me If You Can
"FASB and Repo Accounting," by: J. Edward Ketz, SmartPros, May 2010 ---
http://accounting.smartpros.com/x69361.xml

The facts of life continue to give discomfort to the FASB. When Anton Valukas criticized Lehman Brothers, there was plenty of disparagement left over for the FASB and the SEC. After all, when ambiguity exists in financial accounting rules, we shouldn't be surprised when managers take advantage of these ambiguities.

That’s, of course, assuming there are ambiguities. Given that Lehman’s transactions have no business purpose and were designed merely to deceive the investment community, maybe ambiguity is not the issue to debate.

FAS 140 dealt with accounting for the transfer of financial resources. Essentially, the board said that such a transaction should be treated in either of two ways. If the transfer shifted control of the resource to another entity, then one should account for the transaction as a sale. The cash is recorded, the financial resource is taken off the books, and a gain or loss is recorded. If the transfer does not shift control of the resource to another entity, then one should account for the transaction as a secured borrowing. The cash is recorded, but the firm also records a liability. No gain or loss is recorded; and the financial resource stays on the books.

(As an aside, I find it frustrating that virtually all reporters misstate the accounting issue. Consider this sentence as an example. “The transactions allowed Lehman to temporarily remove some $50 billion in assets from its balance sheet, presenting a stronger financial picture than existed.” If they would only use some common sense. If one applies for a mortgage on a house he or she is buying, do you think the bank will be impressed if they show less assets?)

FAS 140 goes on to spell out some criteria for assessing whether control has been transferred. Paragraph 9 spells out these criteria:

“The transferor has surrendered control over transferred assets if and only if all of the following conditions are met:

a. The transferred assets have been isolated from the transferor—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership (paragraphs 27 and 28).

b. Each transferee (or, if the transferee is a qualifying SPE (paragraph 35), each holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee (or holder) from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor (paragraphs 29−34).

c. The transferor does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity (paragraphs 47−49) or (2) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call (paragraphs 50−54).”

For me, the third condition nixes the sale-accounting executed by Lehman. The asset was coming back to the firm, so it should have employed the accounting for a secured borrowing.

But, Lehman Brothers treated these transactions as sales and Ernst & Young agreed. Did E&Y screw up or did its partners believe there was enough ambiguity in the rules to allow managers to choose gain accounting? Either FAS 140 is ambiguous or it is not. If so, we need to tighten the rules considerably, as I discuss below. If not, then society needs to hold some Lehman managers and some E&Y partners accountable.

I wonder whether the FASB could save its face and its political hide if it just simplified the accounting. It could require business enterprises to record the transaction as a secured borrowing in all cases where the financial asset returns to the firm and in all cases where there is even the possibility of its return.

The SEC could help as well. It should require all firms who account for a transfer of a financial asset as a sale and then receives it back, in part or repackaged in any way, to issue an 8-K. Managers would have to display for the entire world to see any and all phony sales of financial assets, and they would have to explain why they did not account for the transaction as a secured borrowing.

Last, let us note that the problem would be compounded exponentially if principles-based accounting were in place in the U.S. How could anybody fault Lehman Brothers in a regime of principles-based accounting? The managers could always retort that they were following the me-first principle.

Ketz Me If You Can
Here's Professor Ketz's Bombshell We've All Been Waiting For: And to Think I Was Shocked by Repo 105s Until Ed Wrote This

"Shock over Repo 105," by J. Edward Ketz, SmartPros, April 2010 ---
http://accounting.smartpros.com/x69280.xml

The bankruptcy report by Anton Valukas has created quite a stir. Given that we all knew about the demise of Lehman Brothers, what was the surprise? Ok, he wrote about some fast and loose accounting tricks, which are dubbed Repo 105 transactions. So what?

What I find fascinating about managers at Lehman’s is not so much what they did, but that the public is shocked—shocked!—at another accounting game. As if these behaviors were going to stop!

On what basis would the public believe that corporate accounting had become the truth, the whole truth, and nothing but the truth? Maybe they thought that Sarbanes-Oxley was the golden legislation that solved all our problems. But, as most of the act was incremental changes over previous dictates, that conclusion has exaggerated and continues to exaggerate the reality.

Besides, legislation today will never focus on the real issues of creating incentives for managers to walk the straight and narrow, generating disincentives for those who walk astray, and making sure these things are enforced. In today’s partisanship, what happens depends on who is in office. If it is the Republicans, they’ll talk about ethics and close their eyes. If it is the Democrats, they will ignore current violations and pass new legislation as they continue to build the Great Socialistic Society. And neither party enforces the law, unless you count the SEC’s fining of shareholders as enforcement.

With fewer accounting tricks, as documented by USA Today, maybe the public felt that the tide had turned. Maybe it had, but the cycle continues. Managers find accounting chicanery easier to carry out at some times than others. Never mistake a lull in accounting tricks as their cessation. It is merely a rest before a return to lies, damned lies, and accounting.

Perhaps people felt that the auditors were ferreting out fraud. While the auditors at least have to worry about potential lawsuits, that apparently does not mean that they are always skeptical of management’s actions, even with a credible whistleblower. Audits in the U.S. are better than audits in other countries, but there is still room for improvement. Let’s not think that the auditors are always vigilant.

Maybe with stock market prices going up after an extended downturn, folks started believing that the economy was resurging. I cannot share that optimism for we have so many asset bubbles yet to burst. Even if it were true, increasing stock market prices just accent the perverse incentives in our economy, as corporate managers and directors attempt to maximize their own wealth through share-based compensation, and accounting is merely a tool to accomplish their goals.

No, I don’t see much reason for accounting frauds to cease. I laugh when I watch television programs, listen to radio broadcasts, and read news accounts and op-ed pieces that lash out at the rascals that dominated Lehman Brothers. What are these people thinking? Why is anybody shocked?

The heart is deceitful above all things and desperately wicked—who can understand it? Clearly, not those who are shocked at the revelations by Valukas.

Bob Jensen's threads on the Lehman-Ernst scandals are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

"Derivatives Clearinghouses Are No Magic Bullet: Will the Dodd bill create another kind of institution that's too big to fail?" by Harvard's Mark J. Roe, The Wall Street Journal, May 6, 2010 ---
http://online.wsj.com/article/SB10001424052748703871904575216251915383146.html

As the Senate finalizes its financial reform legislation, a consensus is developing that if we could just get derivatives traded through a centralized clearinghouse we could avoid a financial crisis like the one we just went through. This is false. Clearinghouses provide efficiencies in transparency and trading, but they are no cure-all. They can even exacerbate problems in a financial crisis.

If I agree to sell you a product next month through a clearinghouse, I'll deliver the product to the clearinghouse and you'll deliver the cash to the clearinghouse on the due date. Let's say we both have many trades going through the clearinghouse and we've posted collateral to cover any single trade that fails. This is more efficient than each of us posting collateral privately for each trade. Moreover, we're not worried that I won't deliver or you won't pay because we both count on the clearinghouse to deliver and pay up if one of us doesn't.

This clearing system makes trading more efficient. If you default, the cost is spread through the clearinghouse so I don't get hurt severely. And if the clearinghouse has enough collateral from you, there's no loss to spread. But there's also a potential downside: The clearinghouse reduces our incentives to worry about counterparty risk. Your business might collapse before you need to pay up, but that's not my problem because the clearinghouse pays me anyway. The clearinghouse weakens private market discipline.

Still, if the clearinghouse is as good or better at checking up on your creditworthiness as I am, all will be well. But one has to wonder how good a clearinghouse will be, or can be.

Consider two of our biggest derivatives-related failures—Long-Term Capital Management in 1998 and the subprime market in 2008. When Russia's ruble dropped unexpectedly, LTCM was exposed on its more than $1 trillion in interest-rate and foreign-exchange derivatives. It could not pay up and collapsed. Ten years later the market rapidly revalued subprime mortgage securities, rendering several institutions insolvent. AIG was over-exposed in credit default swaps tied to the value of subprime mortgages.

Could a clearinghouse really have been ahead of the curve in getting sufficient capital posted before these problems became serious and well-known? I'm not so sure. Worse yet, major types of derivatives have built-in discontinuities—"jump-to-default" in derivatives-speak.

For a credit default swap, one counterparty guarantees the debt of another company to you, in return for you paying a fee for that guarantee. If no one goes bankrupt, the counterparty just collects the fees from you. But if the guarantee is called because the company you were worried about goes bankrupt, the counterparty must all of a sudden pay out a huge amount immediately.

Yet the guarantor is often called upon to pay in a weak economy, just when it can itself be too weak to pay. You get credit default protection on your real-estate investments from me, just in case the economy turns sour. But just when you need me the most, in a sour economy, I turn out to be so overextended I can't pay up. Collateralizing and monitoring such discontinuous obligations will not be so easy for the clearinghouse.

Moreover, if trillions of dollars of derivatives trading goes through a clearinghouse, we will have created another institution that's too big to fail. Regulators worried that an interconnected Bear or AIG could drag down the economy. Imagine what an interconnected clearinghouse's failure could do.

AIG needed $85 billion in government cash to avoid defaulting on its debts, including its derivatives obligations. Could one clearinghouse meet even a fraction of that call without backup from the U.S.? True, we could have many clearinghouses, each not too big to fail—but then maybe each would be too small to do enough good.

The Senate bill would allow a clearinghouse to grab new collateral out from failing derivatives-trading banks to cover old, but suddenly toxic, debts the banks owe to the clearinghouse. This could harm other creditors and cause the firm to suffer a run. Nevertheless, to protect itself in a declining market, a clearinghouse would have to make those big collateral calls. That's good if it protects the clearinghouse. But it's bad if it starts a run on a weakened but important bank.

One key but missing element in the search for reform has yet to gain traction in Washington. Derivatives players obtained exceptions from typical bankruptcy and bank resolution rules in the past few decades for their contracts with a bankrupt counterparty. This allowed them to grab and keep collateral other creditors cannot. That gives derivatives traders reason to pay less attention to their counterparties' riskiness and weakens market discipline. These rules should be changed before the Senate is done.

To say that a clearinghouse solution is very incomplete is not to say there is an easy solution out there. We may be unable to do more than to make incomplete improvements and muddle through.

Derivatives trades first of all should not just be centrally cleared, but should also be taken out from the government-guaranteed entities, such as commercial banks (or at least we need to impose tight capital requirements on those banks that deal in derivatives). Derivatives traders like doing business with Citibank because they know the government won't let Citibank go down. But this puts taxpayers at risk. It would be better to run those trades through an affiliate, not through the bank, so counterparties realize they might not be bailed out if the affiliate failed. If a banking affiliate's counterparty is the clearinghouse, then the clearinghouse will have incentives to make sure that the affiliate is well-capitalized. This is particularly so if the clearinghouse won't get any special priority treatment in a bankruptcy.

Critics of proposals to establish separate bank affiliates for derivatives trading complain about the large amount of capital that would be needed for such affiliates. But the capital that might be needed to buttress a bank affiliate indicates some level of the value (i.e., the taxpayer subsidy) to derivatives players of trading with a too-big-to-fail entity that they know the government will step in to save. They are implicitly getting insurance and should pay for it.

And, since a clearinghouse is itself at risk of being too big to fail, regulators need to police its capital and collateral requirements. If the derivatives market sees the clearinghouse as too big to fail, the potential for derivatives players making overly risky derivatives trades becomes real. Clearinghouses can help manage some systemic risk if they're run right. If not, they can become the Fannie and Freddie of the next financial meltdown.

Mr. Roe is a professor at Harvard Law School, where he teaches bankruptcy and corporate law.

Bob Jensen's timeline on the history of derivative financial instruments frauds and accounting rules for derivatives contracts ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

May 22, 2010 message from Ramesh and Nadee Fernando [mferna073@ROGERS.COM]

Dear Prof. Jensen and list members,

As accounting is very research focused it would be great if all accountants had access to other researchers in accounting. ResearchGate has lot's of various groups from economics to physics.

I created the Management Accountants group so that there could be access to discussion and research in management accounting.

http://www.researchgate.net/group/Management_accountants

There is also a financial accounting group on research net

http://www.researchgate.net/group/Financial_Accounting/

Finally there is an Accounting Information systems group

http://www.researchgate.net/group/Accounting_Information_Systems/

May I suggest to this list's members, if you are interested in research in accounting to please join ResearchGate and become a member of these groups. I might add I owe it to Economist for finding ResearchGate which mentioned ResearchGate in their special report on Social Networks.

Regards,
Ramesh
CMA (Canada) Candidate
Ottawa, Ontario, Canada

Bob Jensen's threads on listservs, blogs, and social networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Casino Accounting: The All Events Test Versus The Economic Performance Test

"FASB Hits the Jackpot: Question While casinos are only a small percentage of U.S. business, an update to an accounting rule on jackpots brings a welcome degree of uniform practice to accrual accounting," by Robert Willens, CFO.com, May 10, 2010 ---
http://www.cfo.com/article.cfm/14497136/c_14497565?f=home_todayinfinance

There is apparently a wide diversity in practice regarding the manner in which a casino operator accounts for slot-machine and other jackpots. With the issuance of Accounting Standards Update No. 2010-16, Accounting for Casino Jackpot Liabilities, the Financial Accounting Standards Board has introduced a welcome degree of uniformity to this issue.

The ASU provides that an entity shall accrue a liability, and charge a jackpot, at the time the entity has the obligation to pay the jackpot. Some slot machines, the ASU notes, may contain "base" jackpots. An entity may be able to avoid the payment of a base jackpot, for example, by removing the machine from play. Accordingly, no liability associated with the base jackpot is recognized in such cases until the entity has the obligation to pay the base jackpot. This is the case even if the entity has no plan or intention of removing the machine from play and fully expects the base jackpot to be won.

Some slot machines include "progressive" jackpots. Those are machines in which the value of the jackpot increases with every game played. Entities in many gaming jurisdictions cannot avoid payment of the portion of the progressive jackpot that is incremental to the base jackpot. That's because the gaming regulators consider such incremental portions of prizes to be funded by customers, and therefore are required to be paid out. In these cases, the incremental portion of the jackpot should be accrued as a liability at the time of funding (that is, play) by its customers.

These rules will be operative with respect to fiscal years (and interim periods within such fiscal years) beginning on or after December 15, 2010. Moreover, an entity shall apply this guidance with a "cumulative effect" adjustment recorded in retained earnings in the period of adoption of such guidance.

Tax Accounting for Jackpots When does the jackpot liability accrue for tax purposes? This issue was addressed by the Supreme Court in United States v. Hughes Properties, Inc., 476 US 593 (1986). There, the taxpayer owned and operated slot machines at its casinos, including a number of progressive machines. A progressive machine pays a fixed amount when certain symbol combinations appear on its reels. But a progressive machine has an additional progressive jackpot which is won only when a different combination of symbols appears. The casino initially sets these jackpots at a minimal amount. The figure increases, progressively, as money is gambled on the machine. The amount of the jackpot at any given time is registered on a "payoff indicator" on the face of the machine.

At the conclusion of each fiscal year, the taxpayer entered the total of the progressive-jackpot amounts shown on the payoff indicators as an accrued liability. From that total, it subtracted the corresponding figure for the preceding year to produce the current year's increase in accrued liability. On its tax return, the taxpayer asserted this net figure as a deduction. The Internal Revenue Service disallowed the deduction. In its view, the taxpayer's obligation to pay a progressive jackpot "matures" only upon a winning patron's "pull of the handle" in the future. From the perspective of the IRS, until that event occurs, the taxpayer's liability is merely contingent. However, both the Claims Court and the Court of Appeals for the Federal Circuit ruled in favor of the taxpayer. The Supreme Court sided with the taxpayer as well.

The All-Events Test
The high court noted that an accrual-method taxpayer is entitled to deduct an expense in the year in which it is incurred. The standard for determining when an expense is incurred is the so-called all-events test: all the events must have occurred that establish the fact of the liability, and the amount must be capable of being determined with "reasonable accuracy." So to satisfy the all-events test, a liability must be "final and definite" in amount, "fixed and absolute," and "unconditional."1

The IRS argued that the taxpayer's liability for the progressive jackpots was not "fixed and certain" and was not "unconditional or absolute" by the end of the fiscal year, for there existed no person who could assert any claim over those funds. It took the position that the indispensable event is the winning of the jackpot by a gambler.2

The effect of the Nevada Gaming Commission's regulations3 was to fix the taxpayer's liability. The regulations forbade reducing the indicated payoff without paying the jackpot. The taxpayer's liability — that is, its obligation to pay the indicated amount — was not contingent. That an extremely remote and speculative possibility existed that the jackpot might never be won does not change the fact that, as a matter of state law, the taxpayer had a fixed liability for the jackpot that it could not escape.

The IRS, the court concluded, misstates the need for identification of a winning player. That is a matter "of no relevance" for the casino operator. The obligation is there, and whether it turns out that the winner is one patron or another makes no conceivable difference as to basic liability. In fact, the court acknowledged that there is always the possibility that a casino may go out of business with the result that the amount shown on the jackpot indicators would never be won. However, this potential nonpayment of an incurred liability exists for every business that uses an accrual method, and it does not prevent accrual. "The existence of an absolute liability is necessary; absolute certainty that it will be discharged by payment is not...." ⁴

The Economic Performance Test
However, under the law that exists today, a liability is not incurred until the historical all-events test is satisfied and "economic performance" occurs with respect to the liability. As a result, the all-events test cannot be met with respect to an item any earlier than the time that economic performance occurs with respect to the item.⁵

Continued in article

The FASB has been named in a California civil suit:
http://www.siliconeconomics.com/pdfs/Complaint_SEI_v_FASB1.pdf
Is this kind of claim common? Can one “own” an accounting innovation or idea?
Thank you, Tammy Whitehouse, Compliance Week

Ketz Me If You Can

"Silicon Economics v. FASB, by: J. Edward Ketz, SmartPros, May 2010 ---
http://accounting.smartpros.com/x69458.xml

There aren't enough jokes in Accounting Land, but thanks to Joel Jameson, founder of Silicon Economics, Inc., that has been remedied. You see, Joel believes the FASB has a monopoly in accounting standards-setting and thinks that violates the Sherman Anti-Trust Act.

Worse, Joel has invented something he calls “EarningsPower Accounting,” has applied for a patent, and claims that the FASB has infringed upon his patent. Accordingly, he did what any blue-blood would do—he sued the FASB.
The complaint was filed in U.S. District Court in San Jose on May 5, 2010. This complaint is entertaining because it proves that legal discourse is cheap. Supply exceeds demand.

In paragraph 10 of the complaint, Mr. Jameson states that the Securities and Exchange Act of 1934 gives the SEC authority to set accounting standards, but the SEC has delegated that function to the FASB. Narancic & Katzman, attorneys for Jameson, should have told their client about section 108 of the Sarbanes-Oxley Act, which permits the SEC to delegate standards-setting to another appropriate body. In a policy statement, the SEC did in fact re-affirm its decision to rely on the FASB, as it stated in Accounting Series Release No. 150.

Which reminds me: how many lawyers does it take to change a light bulb? Answer: as many as the client can afford.

Joel Jameson goes on to assert (paragraph 13) that FASB “is far removed from industry participants and accounting practitioners, resulting in low-quality standards that are often divorced from reality.” Complete, utter nonsense, although it may be evidence that Silicon Valley is still miffed that it has to expense employee stock options. This argument shows that the only thing more dangerous than an economist is a Silicon Valley economist.

He next attacks fair value accounting and repeats old mantras about the volatility of income numbers (paragraph 18). He errs because fair value accounting does not induce volatility; instead, it reports the volatility that previously had been suppressed.

Jameson then provides a hint about his “invention,” which consists of “an equation derived from the present value equation of finance and credit/debit posting procedures to calculate instantaneous end-of-period asset and liability incomes and windfalls.” This sounds a lot like present value accounting and this has been around a long time. Perhaps Mr. Jameson should take a trip to Stanford and talk with Bill Beaver about Chapter 3 of Beaver’s “Financial Reporting.”

Mr. Jameson prefers to allow managers the ability to claim that assets will generate so much cash flows in the future and then discount those cash flows. He seems unperturbed about the distinct possibility that managers might exaggerate those future cash flows and minimize the discount rate. Further, he must not care whether these projections are auditable. Perhaps it is better if they aren’t. After all, society surely can reduce accounting scandals by preventing anybody from discovering them.

The complaint describes FASB’s alleged wrongful conduct in paragraphs 21-26, but it is much ado about nothing. The FASB stole nothing of value.

Let’s conclude with this observation. How many Silicon Valley entrepreneurs does it take to change a light bulb? None; they just have to turn on the light switch.

"Thousands of nonprofits may lose tax-exempt status," Yahoo News, May 15, 2010 --- Click Here

More than 200,000 small nonprofits across the nation are days away from losing their tax-exempt status because they haven't filed a new form with the Internal Revenue Service.

Many of these groups already operate on razor-thin budgets and some worry an unexpected tax bill could force organizations to close.

"The nonprofits in your backyards, some of them are going to be gone," said Suzanne Coffman, a spokeswoman for GuideStar, which tracks data on nonprofits.

It's most likely the nonprofits aren't aware of the Monday deadline that only applies to groups that report $25,000 or less in income, excluding churches. Those organizations may not find out until Jan. 1, 2011, when they're notified they have to pay taxes on donations they thought were exempt. And it could be months before their nonprofit status is restored.

Congress required the form, called a 990-N, when it amended the tax code three years ago and groups with a fiscal year ending Dec. 31 had until Monday to meet the deadline.

The Urban Institute's National Center for Charitable Statistics, which conducts economic and social policy research, estimated Friday that 214,000 nonprofit organizations haven't filed the form as required.

Tom Pollak, program director for the center, said organizations that lose their tax-exempt status are no longer eligible to receive tax-deductible donations and are not likely to be awarded grants.

Donors who give to the organizations that lose their status will be able to receive tax-deductions on gifts until January because the revocations won't be public until then.

In Iowa, the Warren County Historical Society was among more than 2,700 small nonprofits that hadn't submitted the form. The group's president, Linda Beatty, said she'd never heard of a 990-N until contacted by The Associated Press.

Beatty said she would scramble to get their application in, but if the society lost its nonprofit status, donations likely would drop and members would struggle to pay taxes until they could get the situation resolved. The group maintains a small museum and historical library in Indianola, south of Des Moines.

Stephen Baldassare, president of the Catwalk Theatre Guild in Arvada, Colo., said loss of its tax exemption would have endangered the college scholarships his group awards annually to two high school students and limited other programs.

"It's huge giving those scholarships," he said. "We'd also have to figure out how to do the rest of the functions we do. We would have to change how we bring in money."

In West Chester, Pa., the A Cappella Pops performing group also hadn't heard about the deadline.

Money already is a problem for the 40-member singing group, marketing director Bruce Koepcke said, and would have been far worse if donations dropped or the group faced a big tax bill. He said tax-exempt donations make up 25 percent of the group's revenue.

"We break even in good years," Koepcke said. "We can't afford to lose one iota of funding."

Bobby Zarin, an Internal Revenue Service director who works with non-profits, said the agency sent out press releases and letters to more than 500,000 nonprofit organizations to get the word out about the 990-N forms. She didn't know why the change was catching so many groups by surprise.

"I can honestly say this is the most extensive outreach we have done," Zarin said.

Ultimately, Zarin said the requirement would be helpful because it would eliminate defunct organizations from IRS records and provide more transparency for the public.

"It will give us a much cleaner list of organizations that actually do exist," Zarin said. "More organizations will be filing, so more information will be available."

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Humor Between May 1 and May 31, 2010

Forwarded by Paula

The Stock Market Gets the Fast Finger (Jon Stewart Comedy) --- http://financeprofessorblog.blogspot.com/2010/05/jon-stewart-takes-on-perfect-storms.html

Ellen listens to Gladys --- http://www.boreme.com/boreme/funny-2007/ellen-gladys-hardy-p1.php?

Forwarded from Romania by Dan Gheorghe Somnea [dan_somnea@yahoo.com]

WHERE DO RED-HEADED BABIES COME FROM?

After their baby was born, the panicked father went to see the Obstetrician. 'Doctor,' the man said, 'I don't mind telling you, but I'm a little upset because my daughter has red hair. She can't possibly be mine!!'

'Nonsense,' the doctor said. 'Even though you and your wife both have black hair, one of your ancestors may have contributed red hair to the gene pool.'

'It isn't possible,' the man insisted.’ This can't be, our families on both sides had jet-black hair for generations.'

'Well,' said the doctor, 'let me ask you this. How often do you have sex??? '

The man seemed a bit ashamed. 'I've been working very hard for the past year. We only made love once or twice every six months.'

'Well, there you have it!' The doctor said confidently.

'It's rust!!'

Forwarded by Maureen

Truths For Mature Humans

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 technical report 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 (Hello? Hello? Damn it!), but when I immediately call back, it rings nine times and goes to voice mail. What did 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. I think the freezer deserves a light as well.

19. I disagree with Kay Jewelers. I would bet on any given Friday or Saturday night more kisses begin with Miller Lite than Kay.

20. I wish Google Maps had an "Avoid Ghetto" routing option.

21. Sometimes, I'll watch a movie that I watched when I was younger and suddenly realize I had no idea what the heck was going on when I first saw it.

22. I would rather try to carry 10 over-loaded plastic bags in each hand than take 2 trips to bring my groceries in.

23. The only time I look forward to a red light is when I'm trying to finish a text.

24. I have a hard time deciphering the fine line between boredom and hunger.

25. How many times is it appropriate to say "What?" before you just nod and smile because you still didn't hear or understand a word they said?

26. I love the sense of camaraderie when an entire line of cars team up to prevent a jerk from cutting in at the front. Stay strong, brothers and sisters!

27. Shirts get dirty. Underwear gets dirty. Pants? Pants never get dirty, and you can wear them forever.

28. Is it just me or do high school kids get dumber & dumber every year?

29. There's no worse feeling than that millisecond you're sure you are going to die after leaning your chair back a little too far.

30. As a driver I hate pedestrians, and as a pedestrian I hate drivers, but no matter what the mode of transportation, I always hate bicyclists.

31. Sometimes I'll look down at my watch 3 consecutive times and still not know what time it is.

32. Even under ideal conditions people have trouble locating their car keys in a pocket, finding their cell phone, and Pinning the Tail on the Donkey - but I'd bet my ass everyone can find and push the snooze button from 3 feet away, in about 1.7 seconds, eyes closed, first time, every time !

Forwarded by Auntie Bev

If you are 30, or older, you might think this is hilarious!

When I was a kid, adults used to bore me to tears with their tedious diatribes about how hard things were. When they were growing up; what with walking twenty-five miles to school every morning.... Uphill... Barefoot... BOTH ways... yadda, yadda, yadda

And I remember promising myself that when I grew up, there was no way in hell I was going to lay a bunch of crap like that on my kids about how hard I had it and how easy they've got it!

But now that I'm over the ripe old age of thirty, I can't help but look around and notice the youth of today. You've got it so easy! I mean, compared to my childhood, you live in a damn Utopia! And I hate to say it, but you kids today, you don't know how good you've got it!

I mean, when I was a kid we didn't have the Internet. If we wanted to know something, we had to go to the damn library and look it up ourselves, in the card catalog!!

There was no email!! We had to actually write somebody a letter - with a pen! Then you had to walk all the way across the street and put it in the mailbox, and it would take like a week to get there! Stamps were 10 cents!

Child Protective Services didn't care if our parents beat us. As a matter of fact, the parents of all my friends also had permission to kick our ass! Nowhere was safe!

There were no MP3's or Napsters or iTunes! If you wanted to steal music, you had to hitchhike to the record store and shoplift it yourself!

Or you had to wait around all day to tape it off the radio, and the DJ would usually talk over the beginning and @#*% it all up! There were no CD players! We had tape decks in our car... We'd play our favorite tape and "eject" it when finished, and then the tape would come undone rendering it useless. Cause, hey, that's how we rolled, Baby! Dig?

We didn't have fancy crap like Call Waiting! If you were on the phone and somebody else called, they got a busy signal, that's it!

There weren't any freakin' cell phones either. If you left the house, you just didn't make a damn call or receive one. You actually had to be out of touch with your "friends". OH MY GOD !!! Think of the horror... not being in touch with someone 24/7!!! And then there's TEXTING. Yeah, right. Please! You kids have no idea how annoying you are.

And we didn't have fancy Caller ID either! When the phone rang, you had no idea who it was! It could be your school, your parents, your boss, your bookie, your drug dealer, the collection agent... you just didn't know!!! You had to pick it up and take your chances, mister!

We didn't have any fancy PlayStation or Xbox video games with high-resolution 3-D graphics! We had the Atari 2600! With games like 'Space Invaders' and 'Asteroids'. Your screen guy was a little square! You actually had to use your imagination!!! And there were no multiple levels or screens, it was just one screen... Forever! And you could never win. The game just kept getting harder and harder and faster and faster until you died! Just like LIFE!

You had to use a little book called a TV Guide to find out what was on! You were screwed when it came to channel surfing! You had to get off your ass and walk over to the TV to change the channel!!! NO REMOTES!!! Oh, no, what's the world coming to?!?!

There was no Cartoon Network either! You could only get cartoons on Saturday Morning. Do you hear what I'm saying? We had to wait ALL WEEK for cartoons, you spoiled little rat-finks!

And we didn't have microwaves. If we wanted to heat something up, we had to use the stove! Imagine that!

And our parents told us to stay outside and play... all day long. Oh, no, no electronics to soothe and comfort. And if you came back inside... you were doing chores!

And car seats - oh, please! Mom threw you in the back seat and you hung on. If you were lucky, you got the "safety arm" across the chest at the last moment if she had to stop suddenly, and if your head hit the dashboard, well that was your fault for calling "shot gun" in the first place!

See! That's exactly what I'm talking about! You kids today have got it too easy. You're spoiled rotten! You guys wouldn't have lasted five minutes back in 1980 or any time before!

Regards,
The Over 30 Crowd

A Little Odd History

There is an old Hotel/Pub in Marble Arch, London which used to have gallows adjacent. Prisoners were taken to the gallows (after a fair trial of course) to be hung. The horse drawn dray, carting the prisoner was accompanied by an armed guard, who would stop the dray outside the pub and ask the prisoner if he would like ''ONE LAST DRINK''. If he said YES it was referred to as “ONE FOR THE ROAD”. If he declined, that prisoner was “ON THE WAGON”

So there you go. More bleeding history.. They used to use urine to tan animal skins, so families used to all pee in a pot & then once a day it was taken & sold to the tannery. If you had to do this to survive you were "Piss Poor". But worse than that were the really poor folk who couldn’t even afford to buy a pot they "Didn’t have a pot to Piss in" & were the lowest of the low.

Jensen Comment
When I was invited to lecture at the University of Alaska, the Dean had a dinner party in his house in the evening. He'd just returned from a hunting trip and had the hides of two elk hung over a fence. He requested after dark that the male guests urinate on the hides. The trick was to hit the top of the fence.

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

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 May 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 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 Reality

What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

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/

April 30, 2010

Bob Jensen's New Bookmarks on April 30, 2010
Bob Jensen at Trinity University

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

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/

Bob Jensen's threads for online worldwide education and training alternatives ---
http://www.trinity.edu/rjensen/Crossborder.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

Teaching History With Technology --- http://www.thwt.org/
Some these ideas apply to accounting history and accounting education in general

Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm

Bob Jensen's threads on tricks and tools of the trade --- http://www.trinity.edu/rjensen/000aaa/thetools.htm

Bob Jensen's threads on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

Video on IOUSA Bipartisan Solutions to Saving the USA

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
David Walker, President & CEO, Peter G. Peterson Foundation
Sen. Bill Bradley
Maya MacGuineas, President of the Committee for a Responsible Federal Budget
Amy Holmes, political contributor for CNN
Joe Johns, CNN Congressional Correspondent
Diane Lim Rodgers, Chief Economist, Concord Coalition
Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

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

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
I 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

Congratulations to Paul Pacter for Being Appointed to the IASB

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Thursday, April 15, 2010 9:52 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Paul Pacter IASB appointment

Accounting standards and IAS Plus Webmastering are only secondary in Paul’s life.

He's really a worldwide photographer at heart.
Welcome to Paul's Photo Gallery --- http://www.whencanyou.com/index.htm

His accounting standard setting assignments have taken him to more countries than 99.999999999% of the people in the world have ever visited.

Actually I’m just kidding about what’s primary in Paul’s life. Since he received his PhD at Michigan State University the setting of accounting standards has been the Number One priority of Paul’s entire career. I had the good fortune of first meeting Paul while I was on the faculty at Michigan State, but I do not take credit for guiding him through the doctoral program.

One funny (in retrospect) story is how he got the only copies of his thesis data returned after items were stolen from his car in New Orleans (we only had main frame computers in those days and theses were typed on typewriters). It goes something to the effect of having to pay the police to have the thesis data returned, but I’m hazy on the details. Rumor has it that New Orleans Police Department retirees now consult with the Russian Police on how to master the art of getting bribes.

Accounting Age’s profile of Paul Pacter --- Click Here
http://www.accountancyage.com/accountancyage/features/2261351/profile-paul-pacter?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TheMostRecentFeaturesFromVnuBusinessPublications+(The+most+recent+Features+from+VNU+Business+Publications)

"WHAT’S WORKING IN TECH AT LEADING LOCAL CPA FIRMS," by Rick Tilberg, CPA Trendlines, April 23, 2010 --- Click Here
http://cpatrendlines.com/2010/04/23/top-techs-in-six-key-areas-for-cpa-firms/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+cpatrendlines%2FtPxN+%28CPA+Trendlines%29

Question
What makes accounting popular as a major in college?

April 25, 2010 message from Fisher, Paul [PFisher@ROGUECC.EDU]

I am looking for information on why students choose accounting as a profession. I would like to take an inventory look on how our teaching practices impact student choice and if there are some changes we can or have made to increase interest in the accounting profession. The Accounting Education Change Commission advanced a number of concepts a few years ago. Have we changed our teaching? Do we know if having made those changes (or not) actually created a difference?

Thanks for your thoughts,

pf

April 25, 2010 reply from Bob Jensen

Hi Paul,

I think the importance of teaching changed greatly from the Roaring 1990s vis-à-vis the early years of the 21st Century after the tech bubble of the 1990s burst.

The 1980s and 1990s were the opportunity years for computer science, computer engineering, and finance majors. Demand for good students exceeded supply to a point in the 1990s where graduates in those majors were getting signing bonuses and even stock options before they even spent the first day on the job.

The point here is that during the tech bubble there was great competition for luring top students into a major. The Big Six accounting firms actually went to the American Accounting Association and complained that the traditional way accounting was taught was actually turning the top students away instead of attracting to brightest and best into accounting. The Big 6 put its money where its mouth was and pledged $4 million if the AAA would create an Accounting Education Change Commission (AECC) to conduct teaching and curriculum experiments for purposes of doing a better job in attracting top students into accounting as opposed to computer science, computer engineering, and finance.

You can read about the AECC at http://aaahq.org/market/display.cfm?catID=7

Volume No. 13. Position and Issues Statements of the Accounting Education Change Commission

By Accounting Education Change Commission (AECC). Published 1996, 80 pages.

During its 7-year existence the AECC adopted two position statements and six issues statements. The purpose of this publication is to provide a convenient resource document for all of these statements.

Members No charge–print or online
Nonmembers No charge–print or online

Volume No. 14. The Accounting Education Change Commission Grant Experience: A Summary

Edited by Richard E. Flaherty. Published 1998, 150 pages.

Members No charge–print or online
Nonmembers No charge–print or online

Volume No. 15. The Accounting Education Change Commission: Its History and Impact

By Gary L. Sundem. Published 1999, 96 pages.

Members No charge–print or online
Nonmembers No charge–print or online

The point here is that the large CPA firms and many, many accounting educators thought that failings of accounting teachers and curricula was making the profession of accounting not competitive in a hot student market during the 1990s tech bubble.

Then the 1990s tech bubble burst. At the turn of Century computer science and computer engineering entry-level jobs dried up to a point where supply of top graduates in those areas greatly exceeded demand. Not long afterwards, finance majors and MBA graduates also became a dime a dozen.

But the job market for accounting graduates seems to remain relatively steady across the economic cycles. This is due heavily to the willingness of the largest accounting firms to provide entry-level jobs to top accounting graduates. Also because of some problems caused by the 150-hour requirement, the big accounting firms solved many of our problems by greatly expanding the widely-popular internship programs as an attraction for students to major in accounting in spite of having to invest another year or more to meet the 150-hour requirement.

The bottom line is that how we teach varies in importance with respect to attracting top student to major in accounting. If the competition for top students is hot, teaching becomes more important and more thought is probably given to what sells. If the competition can be largely ignored, there is less clamor for accounting education change on a scale envisioned by the AECC.

Also the AECC experiments themselves did not lead to widely popular changes that spread like wild fire to other colleges and universities. Some AECC experiments can probably be deemed as failures in bringing about change in the programs where the experiments took place.

In fairness, the AECC grants were spent before the dawn of explosive changes in education and networking technology. We’ve seen great changes in how college courses in general are taught and how students communicate interactively with teachers and other students. Because of unfortunate timing, the AECC did not surf the wave of education technology.

Now you ask why some of the best students who probably ranked accounting at the bottom of their interest list when arriving as first year students on campus eventually rank accounting as their top choice as a major by the second or third year of college?

I think the answer is heavily due to factors outside of what accounting teachers do in the classroom.

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.

Last year's rankings were similar --- Click Here
http://bigfouralumni.blogspot.com/search/label/Best Places to Launch a Career

"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

Profitability: Based on 300,000 companies, most with annual sales under $10 million. One takeaway: Specialization pays off

What a great Rank 1 slide for college recruitment of accounting majors ---
http://www.forbes.com/2010/04/15/most-profitable-small-businesses-entrepreneurs-finance-sageworks_slide_21.html

The most profitable niche of the bunch (CPA bunch) enjoys a nice mix of pricing power (everybody needs accountants, no matter how the economy is doing), low overhead and marketing scale, thanks to plenty of repeat clients.

Other Accounting Services comes it at Rank 3 ---
http://www.forbes.com/2010/04/15/most-profitable-small-businesses-entrepreneurs-finance-sageworks_slide_19.html

Various accounting, bookkeeping, billing and tax preparation services in any form, handled not necessarily by a Certified Public Accountant (see No. 1 on our list).

And at Rank 5 are Tax Preparation Services (one rank below dentist offices) ---
http://www.forbes.com/2010/04/15/most-profitable-small-businesses-entrepreneurs-finance-sageworks_slide_17.html

Who likes doing their taxes? Exactly.

"The Most Profitable Small Businesses," by Brett Nelson and Maureen Farrell, Forbes, April 15, 2010 ---
http://www.forbes.com/2010/04/15/most-profitable-small-businesses-entrepreneurs-finance-sageworks.html?boxes=entrepreneurschannelinentre

The 20 Most Profitable Slide Show (The top line has a Next button) ---
http://www.forbes.com/2010/04/15/most-profitable-small-businesses-entrepreneurs-finance-sageworks_slide.html

Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/bookbob1.htm#careers

And there, in a nutshell, you have the main reason why accounting became a much more popular major after the 1990s tech bubble burst.

Bob Jensen

Journal of Accountancy e-Alert on April 22, 2010

> > FASB Issues Health Care Proposals

April 16, 2010

FASB issued two exposure drafts that would change accounting for health care organizations. One proposal would require that the measurement of charity care for disclosure purposes by health care providers be based on the direct and indirect costs of providing the charity care. The second proposal is aimed at how organizations account for medical malpractice and similar liabilities and related insurance payouts.

Jensen Comment
There are some potential cost accounting research projects here regarding cost accounting in health care facilities.

Health care facility cost accounting may become an even greater priority for the FASB since the government intends to regulate health insurance premiums in the private sector. Price regulations make cost accounting an important, if not the most important, input into price regulation.

Bob Jensen’s threads on cost and managerial accounting ---
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting

Bob Jensen's threads on health care controversies ---
http://www.trinity.edu/rjensen/health.htm

Video: Mattel dresses up its pro forma forecasts with some toy PR ---
http://corporate.mattel.com/
This link was forwarded by David Albrecht

James Martin's references on accounting theory courses ---
http://maaw.blogspot.com/2010/03/my-response-to-question-about.html

Bob Jensen's threads on accounting theory courses ---
http://www.trinity.edu/rjensen/theory01.htm#AccountingTheoryCourses

"A Summary of the Financial Reporting and Disclosure Implications of the Health Care Reform Legislation," Deloitte Heads Up, IAS Plus, April 9, 2010 --- http://www.iasplus.com/usa/headsup/headsup1004healthcare.pdf

Just the Facts!
"How the health care bill will impact individuals, businesses," AccountingWeb, March 23, 2010 ---
http://www.accountingweb.com/topic/tax/how-health-care-bill-will-impact-individuals-businesses

"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

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

"ObamaCare by the Numbers: Part 2," by John Cassidy, The New Yorker, March 2010 ---
http://www.newyorker.com/online/blogs/johncassidy/2010/03/obamacare-by-the-numbers-part-2.html

Hi Scott,

Most leading sellers among basic, intermediate, and advanced accounting textbooks have relatively minor variations in content, although some may vary in terms of real-world illustrations and cases at the chapter endings. The biggest variations are in the “principles of accounting” category. There are also variations in quantity and quality of supplements. For example, leading publishers may promise videos for each chapter, but the videos themselves may be superficial snoozers.

Videos are lacking where they would really count for intermediate and advanced textbooks.

Personally, I recommend the Brigham Young University stand-alone basic accounting variable-speed videos and textbook used in exactly the same way as they are used at BYU ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo
However, these may not work as well in courses with poorly motivated students. BYU students tend to be better motivated than students in many colleges and universities.

Most intermediate and advanced textbook publishers are now rushing to improve IFRS content, so that is a newer consideration. I would look for real-world IFRS cases and financial statement illustrations.

Barnes & Noble has a pretty good FAQ page at http://www.barnesandnoble.com/help/cds2.asp?PID=8153
Barnes & Noble also has an easy-to find “sales rank” for each book but the rankings are not limited to a given book category.
For example, Garrison’s managerial accounting book is probably the leading seller in its category but has a sales rank of 8,463
Weygandt’s Principles of Accounting text is a leading seller in its category but has a sales rank of 26,629
Horngren has a leading Cost Accounting book that has a sales rank of 46,871
Richard Sansing adopts Zimmerman’s ISBN 0078136725 with a sales rank of 550,916
(which shows that in Professor Sansing’s discerning choice there’s more to a textbook than sales leadership)

To compare Amazon’s sales rankings it might pay to begin at http://www.fonerbooks.com/surfing.htm

Also note that for a given search term like “intermediate accounting,” Amazon has a box in the upper right that will let you sort books buy such criteria as “relevance.” “best selling,” “price”, and “average customer reviews.” The publishers themselves often write or otherwise influence the reviews such that reviews are dubious unless they are very specific about particular attributes. I usually get more value added from the one negative review relative to scores of glowing reviews.

I found that when I use the above-mentioned Amazon search box for “best sellers,” the listings sometimes include textbooks only slightly related to my original search term. For example, if I click on “best sellers” under the “intermediate accounting” search term I get such things as Horngren’s managerial accounting book and Hoyle’s advanced accounting book listings. The “best sellers” listing is interesting, however, in terms of being able to identify best sellers among accounting textbooks.

Keep in mind that many factors influence sales volume. Some doctoral program graduates are loyal to faculty authors of their alma maters and others are loyal to colleagues and friends who write books. Some authors themselves attend sales meetings themselves and are just better promoters than other authors. I know of one community college where the coordinator of the basic accounting courses expects a kickback in terms of free examination copies that he can resell --- the winning publisher’s rep may get him 30 or more free examination copies that he can sell for up to $80 apiece to the slimy used book buyers that roam the faculty office hallways.

I still think Amazon is the best place to begin for book research and shopping --- http://www.amazon.com/
Amazon often has great used book bargains and purchases from used book sellers are backed by Amazon’s guarantee of not being ripped off by a seller. Most used textbook sellers do not buy and sell the books. Rather they are sales brokers, and I have had great results with purchasing Amazon-brokered used books. One problem with accounting textbooks is that there are often few used book options for new edition releases.

When I enter “Principles of Accounting” into Amazon’s book search I get 13,547 hits which is overwhelming. Then you discover that most of the listings are probably not textbooks that would be used in the first two accounting courses.

After finding a textbook of possible interest, it may be worthwhile to look that book up in Bigwords --- http://bigwords.com/book/
Bigwords gives some vendor and pricing options, but don’t rely much on the reviews.

The AAA’s Issues in Accounting Education has book reviews, but these are of limited benefit. First, you have to pay to subscribe to IAE. Secondly, the reviews lag the frequent new editions of accounting textbooks and do not cover all textbooks. Thirdly, reviewers are usually not critical where they could be critical in my viewpoint.

Some thought should also be given to free textbooks, although it’s hard to find a free intermediate or advanced textbook that keeps up with the constantly-changing FASB and IASB standards. For principles of accounting there are some decent free textbook choices and free videos --- http://www.trinity.edu/rjensen/electronicliterature.htm#Textbooks

For the moment I recommend Joe Hoyle’s updated basic accounting free textbook and Susan Crossan’s free financial and managerial videos --- http://www.trinity.edu/rjensen/electronicliterature.htm#Textbooks
(you must scroll down a bit to find the free works of Hoyle and Crossan).

Lastly I might note that some of the best learning takes place in courses that do not have required textbooks --- http://www.trinity.edu/rjensen/265wp.htm
And the fabulous teachers who pull this off win the highest awards like Catenach, Croll, Barsky, and Pincus ---
http://aaahq.org/awards/awrd6win.htm

Actually, Karen Pincus may now use her own textbook, but I don’t think any textbook is central to her experiential learning pedagogy.

My listing of free IFRS learning materials is at
http://www.trinity.edu/rjensen/theory01.htm#IFRSlearning

Textbook Handouts from Jim Peters

April 2, 2010 message from Peters, James M [jpeters@NMHU.EDU]

Personally, I don't use published texts in most of my classes, I write my own. After 10 years working with the cognitive psychologists at Carnegie Mellon University and their Center for Innovations in Learning and their Center for Teaching Excellence, I realized that published texts are very poorly worded. I use the Socratic Method and so I don't lecture in the classroom. However, that method assumes that students get the explanations they need of the core material in the text. However, texts seem to be written more as encyclopedias that tools of explanation. I keep having to write explanations, which I termed "travelers guides" because students needed guidance through the theory. Eventually, I expanded them into my own text and dropped published texts. I tried to get one of my texts published one time, but was told they were too informal because I wrote them in a conversational style as if I were explaining the material to a student sitting in front of me.

My students love my texts. I regularly talk to my alumni who, even after 10 years, still have my texts on their shelves and use them on the job. I have written auditing, accounting information systems, and financial statement analysis texts as well as managerial accounting chapters and chapters on not-for-profit and governmental financial statement analysis. It is a ton of work, but my classes become very tightly engineered around the texts and their is nothing in the text that I don't cover in the class.

Periodically, another academic will look at them, but I don't think any have every used one. They are designed to cover exactly what I want to cover in a semester for my student population and to be used with Socratic Method and case-based teaching. (I also have developed a series of fairly comprehensive cases to go with them.) For my auditing text, I "stole with permission" a great, but very old tool Bill Felix and others created in the early 90's - SCAD. It is out of print and Bill told me I was free to use it as I see fit. While it certainly isn't a commercial piece of software, it is very simple, fast, and functional, and free.

I appreciate that this is a radical and very time consuming approach, but, IMHO, it works (as my students keep telling me). I have always taken the position that if you can't write the text, you should not be teaching the class and I just help myself, literally, to that standard.

Frankly, I think the text book industry has commoditized education and created the impression that good teaching only means finding the right text and using all their support materials. Their offerings are virtually identical to each other, turn into exercises in terminology overload, don't not explain things clearly, are way too expensive, and are continually revised for not reason other than increasing sales. There are some exceptions. I don't think I would try to replace Keiso in Intermediate. However, I felt that I needed to actually think about the material in great depth and insure that I understood it to its core principles. I didn't think I could do that effectively unless I wrote it down myself.

Of course, I end up spending much more time per credit hour teaching than any other professor I have ever met in over 20 years in this business, so I doubt my approach will scale up. But I feel comfortable that I am doing the right thing.

Jim

April 4, 2010 message from Peters, James M [jpeters@NMHU.EDU]

Jim Peters' Course Files

The following are links to the texts I have written on the topics shown. I can provide in-class assignments and solutions (the Socratic Method version of class notes) as well as cases and graded assignments for these classes on request. You can e-mail me at jpeters@nmhu.edu.

Financial Statement Analysis

Accounting Information Systems

Auditing

Managerial Accounting

Bob Jensen's threads on free textbooks. course videos, and cases ---
http://www.trinity.edu/rjensen/electronicliterature.htm#Textbook s

April 7, 2010 reply from Bob Jensen

Hi Jim,

These "notes" are quite good.

I was pleased to see that you teach MS Access in your in your AIS course.

I used two outstanding published textbooks when I taught AIS --- http://www.trinity.edu/rjensen/acct5342/acct5342.htm

However, I prepared self-study videos. Especially for students learning Access/
Students who are struggling with some of the quirks of Access might find some of the videos helpful ---
http://www.cs.trinity.edu/~rjensen/video/acct5342/
Most of the Access tutorials are called PQQ meaning "Possible Quiz Questions"

I did not teach much Access in the classroom, but students were assigned "Possible Quiz Questions" from the two textbooks and from my assigned tasks that I expected them to learn.
I taught this course in an electronic classroom where every student had a computer. I could then give quizzes and examinations where students had to perform computer tasks like write database queries, make charts, etc.

You will also find some Excel videos, but I really didn't teach Excel in the AIS course except for a few topics like pivot tables and charts. I did make students do financial statement analysis using Microsoft's annual reports that have downloadable pivot charts.

Bob Jensen

Includes Panel Member Tom Hood from the Maryland Society of CPAs
"DigitalNow 2009 Panel Discussion with Clay Shirky - Part 2 of 12," YouTube ---
http://www.youtube.com/watch?v=UAMrEG4pfJc&feature=youtu.be&a

Super Teacher Joe Hoyle says the degree of student preparation for class depends on the "payoff,"
Teaching Financial Accounting Blog, April 5, 2010 --- http://joehoyle-teaching.blogspot.com/2010/04/whats-payoff.html

Open sharing Joe Hoyle makes his financial accounting examinations available ---
http://joehoyle-teaching.blogspot.com/2010/04/third-test-available.html
His updated financial accounting textbook is also available for free online.

Is Our IT Future in the Clouds?

April 15, 2010 message from John Anderson [jcanderson27@COMCAST.NET]

Francine and Scott,

I am not trying to cast either one of you as a straw man, but I have a very strong point-of-view about many CISA's immediately writing-off anything they can condemn as being Cloud-related.

Although I know today that 99.9% of all IT Auditors (CISA's) would say "Nothing in the Cloud is safe" ... and therefore this is the current conventional wisdom about Cloud Security, I feel potentially we have a flat earth society becoming all too comfortable with that pat answer these CISA's dispense all too readily.

However, with 75% of Microsoft's Engineers and Programmers currently working on Cloud-related Applications, this one-size-fits-all response you are receiving is going to have to change. In my opinion many IT Auditors

(CISA's) are resisting the Cloud as it doesn't fit their existing Governance Models, but if we don't solve these problems, every IT auditor in the country will be steamrolled very soon!

Here is the best Cloud Security overview article I have found to date: --- Click Here
http://www.informationweek.com/news/security/management/showArticle.jhtml?articleID=224202319

The term "balanced" isn't really appropriate, but I guess it is a pretty realistic assessment of where we are currently at in this area at this time.

The article is right on the money about the reticence of some Cloud Providers in sharing their SAS 70's as I have a company which will not send me their SAS 70, but they want me to get behind their product!

The dirty little secret is that unless you are looking at a Trophy Target like a Fidelity Investments or an Intelligence Organization, a lot of Commercial IT Security has chinks in its armor. Therefore, taking an entity's data from the converted closet/Server Room and transferring it to a

24/7 monitored and hardened Cloud Computer Center with redundancy and a stand-by hot Recovery Site with continuous and accessible offsite encrypted backup is often a major step forward! After having attended many meetings with CISA's who are vehemently opposed to the Cloud, at least part of this opposition is due to the fear that this major step will leave them behind!

Naturally if the Data Center site is off-shore and you are not certain of the validity of the SAS 70 or other appraisal, these are additional concerns.

The irony is that higher we set the bar for IT Security the easier it will be to justify outsourcing this security for most small installations currently supporting some small IT Support Teams. Naturally to make this new world possible, the people holding the SAS 70's will have to have the gumption to send them out to clients.

Finally, the client will have to have the SAS 70 (or its evolving replacement document) competently reviewed in order to see that the Controls discussed are adequate to cover the risks present.

Whenever I receive this response from one of my fellow CISA's I always do them the favor of asking them what area concerns them most in their specific Risk Assessment. If they then persist in using the term "the Cloud" ... smile and slowly sidle away!

Best Regards!

John

John Anderson, CPA, CISA, CISM, CGEIT, CITP Financial & IT Business Consultant
14 Tanglewood Road
Boxford, MA 01921

jcanderson27@comcast.net

978-887-0623   Office
978-837-0092   Cell
978-887-3679   Fax

Jensen Comment
Cloud Computing --- http://en.wikipedia.org/wiki/Cloud_Computing

The cloud is already here for some CPA firms.
"Mike Braun Takes Paperless Accounting into the Cloud: Intacct CEO reports performance gains of 50% at CPA firms," Journal of Accountancy, July 2009 ---
http://www.journalofaccountancy.com/Web/MikeBraun

Microsoft Cloud Services --- Click Here
http://sharepoint.microsoft.com/businessproductivity/products/pages/cloud-services.aspx?CR_CC=100193171&WT.srch=1&WT.mc_id=Search&CR_SCC=100193171&mtag=SearBing#fbid=wl3Qhjt1FVT

Parallel Coordinates Book

I think accounting researchers are missing the boat by not focusing more on multivariate data visualization.

One possible research vector for XBRL would be to show how XBRL outcomes may be combined into XBRL visualization aids.

I am going to add the following message to my threads on data visualization at
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

Robert E. (Bob) Jensen
Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
. 603-823-8482
www.trinity.edu/rjensen

-----Original Message-----
From: Alfred Inselberg [mailto:aiisreal@post.tau.ac.il]
Sent: Friday, April 02, 2010 11:53 AM
To: Jensen, Robert
Subject: Parallel Coordinates Book

Dear Bob,

I saw some of your interesting work on "Data Visualization" and would like to recommend

Parallel Coordinates - This book is about visualization, systematically incorporating the fantastic human pattern recognition into the problem-solving

... www.springer.com/mathematics/numerical.../978-0-387-21507-5 -

which is now available. It contains an easy to read chapter (10) on Data Mining. Among others, I received a wonderful compliment from Stephen Hawking who also recommended this "valuable book" to his students.

Best regards

Alfred

-- Alfred Inselberg, Professor
School of Mathematical Sciences
Tel Aviv University
Tel Aviv 69978, Israel
Tel +972 (0)528 465 888
http://www.cs.tau.ac.il/~aiisreal/

"Is Economics Art or Science?" by Evan R. Goldstein, Chronicle of Higher Education's Chronicle Review, April 25, 2010 ---
http://chronicle.com/article/Is-Economics-Art-or-Science-/65188/?sid=at&utm_source=at&utm_medium=en

It began on the op-ed page of The Wall Street Journal. "For an economist, these are the best of times and the worst of times," wrote Russ Roberts, a professor of economics at George Mason University. While economic anxiety has heightened demand for economists, Roberts noted, "there is no consensus on the cause of the crisis or the best way forward." That got him thinking about how economics is unlike other areas of science, which tend to progress in a more linear fashion. Not so economics, where discredited theories regularly come back to life, and major thinkers—Friedman, Hayek, Keynes—move in and out of vogue. "The bottom line is that we should expect less of economists," he wrote.

Among the readers of the Roberts article was The New York Times columnist David Brooks, who was inspired to sketch a history of modern economics, in five acts. Brooks's account began with the discipline's embrace of a "crude vision" of human beings as perfectly rational, and a second act that questioned self-interest as the root of all behavior. The third act began with the economic crisis in 2008, a moment that, in Brooks's view, exposed the field's shortcomings. The current moment is Act IV, in which economics is pushed in a more humanistic direction as scholars turn to psychology, sociology, and neuroscience for insights. In the last act, Brooks predicted, economists will "blow up their whole field" and make it a subsection of history and moral philosophy. The future of economics is as an art, not a science, he concluded. And that is a good thing, because the "moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics."

Where is the field of economics heading? Several thinkers have weighed in.

N. Gregory Mankiw, professor of economics, Harvard University: Journalists are fond of writing articles about how recent events require a fundamental rethinking of economic theory. ... But when they try to predict trends in academic theorizing from current events, they are usually incorrect. In particular, I think what we teach in economics courses is more robust than a reader of David's column would think.

To be sure, in undergraduate economics courses, some specific topics will need more coverage in the future. ... The role of leverage in financial institutions is one example. Those people who study financial institutions and their regulation have moved to the forefront of the profession for a while, and that area of work may well get more coverage in the undergraduate curriculum.

But I doubt there will be a fundamental change in the field of economics. (Greg Mankiw's Blog)

Justin Fox, editorial director, Harvard Business Review Group: David Brooks wondered ... if economists shouldn't try to become more like historians. That was interesting to read, given that I had just spent time with a bunch of historians (and a few other humanities professors) who were wondering how they could become more like economists.

The occasion was a conference on "Reputation, Emotion and the Market," at the University of Oxford's Saïd Business School. I was there to speak about my book on the history of financial theory, but ended up mainly engaged in a long discussion with the 30 or so historians (and a smattering of scholars from other humanities disciplines) on hand about why economists had gained so much influence over the past half-century and historians had lost so much.

One answer I offered was that economists had managed a remarkable balancing act between making the guts of their work totally incomprehensible—and thus forbiddingly impressive—to the outside world while continuing to offer reasonably straightforward conclusions. ... An academic history paper, on the other hand, is often an uninterrupted cascade of semi-comprehensible jargon that neither impresses a lay reader nor offers any clear conclusions.

Why does any of this matter? Mainly because the ways in which scholars interpret the world can (with a time lag and a lot lost in translation) have a big influence on the way the rest of us see things. ... Economists have come to utterly dominate thinking about economic matters and begun to insinuate themselves into lots of other fields, too. Business education, and business advice, has certainly become much more economics-oriented. Which isn't all bad. But even an economist would agree that we could use more competition in the marketplace of ideas. Right? (Harvard Business Review Online)

Sean C. Safford, assistant professor of organizations and strategy, University of Chicago: Brooks makes it seem like sociologists, psychologists, and the like have been waiting for our moment. Sociology and the humanists originated the field, and we never really went away. (It's worth remembering that Max Weber called himself an economist; Act I in Brooks's formulation was preceded by a whole lot of people we would today call humanists, political scientists, and sociologists who were unpacking the nature of economic activity and action.) So one has to ask: If we've been right all along (and I think we have been), then why should we think that this crisis will be the one to change the game back in our favor? ...

People who need to make decisions want a rationale for those decisions to be conveyed with clarity. For as much as I think sociology and our sister—humanist-oriented—disciplines come closer to understanding reality, we nevertheless will continue to lose arguments because of the wishy-washy way we make our arguments. There is little interest or tolerance among economic sociologists for articulating a coherent, prescriptive philosophy of economic action.

Until we do, I'm afraid we are always going to be playing second fiddle. (orgtheory.net)

Barry W. Ickes, professor of economics, Pennsylvania State University: What sells in the wider audience, however, is not what economists are actually doing. It is a good market response to write a popular book saying economists are stupid, or whatever. But the professional work is getting more technical, not less. ... Economists for the most part do not see the financial crisis as a repudiation of their efforts. So there is no reason to re-evaluate what economists do. I think that is how this is viewed internally. And that is what governs the dynamics of the profession. (Ickman's Blog)

Aaron Bekemeyer, associate editor, Consider Magazine: Perhaps, as economists "perfect" their discipline, it won't be appropriate to call economics either a science or an art. The sharp disciplinary divisions between the arts and sciences (and their various subdisciplines) are a relatively recent development, only a century or two old. Who's to say these distinctions will be around forever? Maybe, in the not-too-distant future, we'll look back and see how silly and artificial our distinctions between art and science have been. Some of the disciplines we consider so vital to modern life—medicine, history, and, not least, economics—may come to be perfect examples of activities that rely equally on empiricism and inspiration, objectivity and intuition. (The Conversationalist, Consider online)

Mark D. White, professor of political science, economics, and philosophy, City University of New York's College of Staten Island: In a social science such as economics, we have persons, with intentions, emotions, and quirks—lots of them. Despite how they're reflected in economists' models, their actions are not determined solely by the forces around them, but also by the forces inside their heads—their preferences, beliefs, values, morals, principles, biases, prejudices, and so on. ...

If the government has already decided to spend around $2-trillion, then economists may be able to contribute to determining the precise amount necessary to achieve the desired end. But if the government is deciding whether or not to spend that large amount of money at all, or whether to nationalize health care, or bring back significant financial regulations—massive, qualitative changes in the economy, rather than marginal, quantitative changes—then a broader perspective is necessary, and philosophy certainly has a lot to offer to that discussion. (Economics and Ethics).

Jensen Comment
Sadly, some of our top accountancy teachers and researchers send accounting and economic history to the back of the bus.

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

"Supreme Court Rules on Investment Adviser Fees: The high court reaches back 70 years to reject two lower court rulings on investment adviser compensation," by Robert Willens, CFO.com, April 19, 2010 ---
http://www.cfo.com/article.cfm/14491972/c_14492636?f=home_todayinfinance

Deloitte's comment letters on Draft XBRL taxonomy for the IASB ---
http://www.iasplus.com/dttletr/comment.htm

"IFRS XBRL taxonomy for 2010 is available," IAS Plus, May 1, 2010 ---
http://www.iasplus.com/index.htm

The IASC Foundation has released the IFRS XBRL Taxonomy 2010. The 2010 taxonomy is consistent with IFRSs and with the IFRS for Small and Medium-sized Entities (SMEs), and for the first time both have been integrated into a single taxonomy. The IFRS Taxonomy 2010 is a translation of IFRSs as issued at 1 January 2010 into XBRL (eXtensible Business Reporting Language). XBRL facilitates simpler and faster electronic filing of financial information and comparison of IFRS financial data by companies, regulators, investors, analysts, and other users of financial information.

Click Here to access the IFRS Taxonomy files and accompanying materials on the Foundation's website.
http://www.iasb.org/XBRL/IFRS+Taxonomy/IFRS+Taxonomy+2010/IFRS+Taxonomy+2010.htm

Bob Jensen's somewhat neglected threads on XBRL are at
http://www.trinity.edu/rjensen/XBRLandOLAP.htm

I just don't understand why we need sleeping medications when we've got the tax code
The code is now 3,784,745 words long, not counting the 2009 and 2010 changes. It will get worse in the future.
John Stossel, "Lower and Simplify Taxes!" Townhall, April 14, 2010 ---
http://townhall.com/columnists/JohnStossel/2010/04/14/lower_and_simplify_taxes!

On my FBN show tomorrow, I'll show clips of the pandering legislators applauding themselves for offering tax credits to special interests. The favored groups cheer their tax breaks, but the result is that everyone else pays more, and everyone must spend more time deciphering the rules.
John Stossel, "Lower and Simplify Taxes!" Townhall, April 14, 2010 ---
http://townhall.com/columnists/JohnStossel/2010/04/14/lower_and_simplify_taxes!

Jensen Comment
Last week a great a great construction company put in new insulation on the upper rim and parts of the walls (under the windows) of our cottage. They also put in new roof vents for the kitchen stove and the four bathrooms. The total bill was $5,244, but I only had to pay $1,244. New Hampshire Electric Power paid $4,000 using laundered Federal money (thank you taxpayers). I paid $1,244, but that's not the end of the story. I'll also get a tax break on my 2010 Federal Tax return for the $1,244 that I paid. But since New Hampshire does not have an income tax I don't get any added state income tax break --- Darn!

I also got a terrific new clothes dryer vent to the outside (before the dryer only vented into the basement). Since more cold air can now come into the laundry room, I'm not certain how this is saving on my heating oil bill. But in any case I thank the taxpayers for saving me the trouble of having to empty a lint can in the basement.

This year on my 2009 return I got a tax break on the $2,419 dollars I spent for new windows on the north and west walls of our main bedroom. The energy experts that did my energy audit secretly revealed that new windows usually do not save a whole lot on oil bills (unless there's a severe need for new insulation around the edges of the windows). But our new flip-down Cadillac windows are a lot easier to clean. Thank you taxpayers!

Which allows an American Samoan worker to have a higher standard of living: being employed at $3.26 per hour or unemployed at a wage scheduled to annually increase by 50 cents until it reaches federally mandated wages at $7.25? You say, "Williams, that's a stupid question. Who would support people being unemployed at $7.25 an hour over being employed at $3.26 an hour?" That's precisely the outcome of Congress' 2007 increases in the minimum wage. Chicken of the Sea International moved its operation from Samoa to a highly automated cannery plant in Lyon, Georgia. That resulted in roughly 2,000 jobs lost in Samoa and a gain of 200 jobs in Georgia.
Walter E. Williams, "Minimum Wage Cruelty," Townhall, April 14, 2014 ---
http://townhall.com/columnists/WalterEWilliams/2010/04/14/minimum_wage_cruelty

"The Annual Report as Sustainability's Secret Weapon," by Robert G. Eccles. Harvard Business Review Blog, April 19, 2010 ---
http://blogs.hbr.org/hbsfaculty/2010/04/the-annual-report-as-sustainab.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

Spring brings April showers, May flowers — and a flurry of annual reports. Mine have been arriving in the mail, and I am always interested to see what the companies I own stock in have to say about themselves in this ritualistic document filled with financial information, different types of narratives, and lots of pretty pictures.

The amount of detail and the level of complexity in the financial section have grown considerably in response to the increasing onslaught of accounting rules and regulations. What's more, since going green is now red hot, a growing number of companies — especially in Europe and Japan — are also starting to issue Corporate Social Responsibility (CSR) or Sustainability reports. Sometimes these are mailed with the annual report, but more often they have to be ordered separately or downloaded from the company's Web site. Unfortunately, the two reports rarely add up to something greater than the sum of their parts.

This is a huge problem. A sustainable society requires that all companies be committed to sustainable strategies. Increasing social expectations regarding a company's commitment to sustainability mean that firms that ignore this do so at their own risk. BMW Group has been a leader in recognizing this. Several years ago, it issued a Sustainable Value Report detailing energy consumed, water consumed, waste removed, and volatile organic compounds per vehicle produced. Scoring high in all these categories, BMW believes that its reputation as the world's "greenest" car company plays an important role in brand awareness and customer satisfaction, factors that contribute to revenue growth.

So how can shareholders and other stakeholders know if a company's commitment to a sustainable society is contributing to a sustainable strategy that will create value for shareholders over the long term? The answer lies in combining the annual and CSR/sustainability reports into something I call "One Report," which provides the essential information on a company's financial, environmental, social, and governance performance and shows the relationships between them. This kind of Integrated reporting also involves leveraging the Internet to provide more detailed information to all a company's stakeholders while also providing them with the opportunity to engage in a virtual dialogue on these matters.

Some major corporations are starting to take the lead in this effort, including United Technologies Corporation, Philips (the Dutch electronics and health care giant), the German chemical company BASF, and Danish pharmaceutical maker Novo Nordisk.
At United Technologies, whose products include Carrier air conditioners, Otis elevators, and Pratt & Whitney aircraft engines, a recent integrated report focused on such nonfinancial metrics as lower fuel consumption and noise emissions in a new jet engine and a reduced carbon footprint and water consumption in the firm's factories. The juxtaposition of information on both operations and CSR symbolizes the company's commitment to more than just the bottom line and its belief that both sets of data have a significant impact on the long-term success and reputation of the company. In UT's view, CSR is both a reality and necessity, not an addendum.

Novo Nordisk presents stockholders and other stakeholders with a multidimensional Web site that enables visitors to create a customized version of their annual report, access in-depth information about sustainability practices, contact company officers, and even play interactive games showing the challenges and trade-offs the company faces in making difficult decisions.

Thanks to these kinds of One Report practices, these companies actually document their commitment to sustainability, make better decisions based on a broader collection of data, engage more deeply and effectively with all their stakeholders, and lower reputational risk through a high level of transparency.

Given the importance of sustainability, I think companies have an ethical obligation to practice integrated reporting, and investors have a similar obligation to demand it. In fact, I believe the SEC should make it a requirement. As we all try to come up with solutions to the problems of the planet, integrated reporting is one way to make sure that companies are part of the process.

Robert G. Eccles was a member of the HBS faculty from 1979 until 1993, when he left for a career in the private sector. In 2007, he returned to the School, where he teaches in both the MBA and Executive Education programs. His most recent book, coauthored with Michael P. Krzus, is One Report: Integrated Reporting for a Sustainable Strategy (Wiley, 2010).

Jensen Comment
One place to look for sustainability information is in any section of an annual report that deals with contingencies con ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
But this contingency accounting throughout history has probably been the weakest area of annual reporting.

Accounting for intangibles in general is a huge weakness in annual reporting. Remember how top executives at MCI let it into bankruptcy, executives that KPMG agreed had intangible foresight worth millions.

KPMG’s “Unusual Twist”
While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.
See http://www.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud

Punch Line
This "foresight of top management" led to a 25-year prison sentence for Worldcom's CEO, five years for the CFO (which in his case was much to lenient) and one year plus a day for the controller (who ended up having to be in prison for only ten months.) Yes all that reported goodwill in the balance sheet of Worldcom was an unusual twist.

Tom Selling wrote privately to me for more information on the quotation in red below.

Hi Again Tom,

I found the original reference

The potential claims against KPMG represent the most pressing issue for MCI. The report didn't have an exact tally of state taxes that may have been avoided, but some estimates range from $100 million to $350 million. Fourteen states likely will file a claim against the company if they don't reach settlement, said a person familiar with the matter.

"MCI Examiner Criticizes KPMG On Tax Strategy," by Dennis K. Berman, Jonathan Weil, and Shawn Young, The Wall Street Journal, January 27, 2004 --- http://online.wsj.com/article/0,,SB107513063813611621,00.html?mod=technology%5Fmain%5Fwhats%5Fnews

The examiner in MCI's Chapter 11 bankruptcy case issued a report critical of a "highly aggressive" tax strategy KPMG LLP recommended to MCI to avoid paying hundreds of millions of dollars in state income taxes, concluding that MCI has grounds to sue KPMG -- its current auditor.

MCI quickly said the company would not sue KPMG. But officials from the 14 states already exploring how to collect back taxes from MCI could use the report to fuel their claims against the telecom company or the accounting firm. KPMG already is under fire by the U.S. Internal Revenue Service for pushing questionable tax shelters to wealthy individuals.

In a statement, KPMG said the tax strategy used by MCI is commonly used by other companies and called the examiner's conclusions "simply wrong." MCI, the former WorldCom, still uses the strategy.

The 542-page document is the final report by Richard Thornburgh, who was appointed by the U.S. Bankruptcy Court to investigate legal claims against former employees and advisers involved in the largest accounting fraud in U.S. history. It reserves special ire for securities firm Salomon Smith Barney, which the report says doled out more than 950,000 shares from 22 initial and secondary public offerings to ex-Chief Executive Bernard Ebbers for a profit of $12.8 million. The shares, the report said, "were intended to and did influence Mr. Ebbers to award" more than $100 million in investment-banking fees to Salomon, a unit of Citigroup Inc. that is now known as Citigroup Global Markets Inc.

In the 1996 initial public offering of McLeodUSA Inc., Mr. Ebbers received 200,000 shares, the third-largest allocation of any investor and behind only two large mutual-fund companies. Despite claims by Citigroup in congressional hearings that Mr. Ebbers was one of its "best customers," the report said he had scant personal dealings with the firm before the IPO shares were awarded.

Mr. Thornburgh said MCI has grounds to sue both Citigroup and Mr. Ebbers for damages for breach of fiduciary duty and good faith. The company's former directors bear some responsibility for granting Mr. Ebbers more than $400 million in personal loans, the report said, singling out the former two-person compensation committee. Mr. Thornburgh added that claims are possible against MCI's former auditor, Arthur Andersen LLP, and Scott Sullivan, MCI's former chief financial officer and the alleged mastermind of the accounting fraud. His criminal trial was postponed Monday to April 7 from Feb. 4.

Reid Weingarten, an attorney for Mr. Ebbers, said, "There is nothing new to these allegations. And it's a lot easier to make allegations in a report than it is to prove them in court." Patrick Dorton, a spokesman for Andersen, said, "The focus should be on MCI management, who defrauded investors and the auditors at every turn." Citigroup spokeswoman Leah Johnson said, "The services that Citigroup provided to WorldCom and its executives were executed in good faith." She added that Citigroup now separates research from investment banking and doesn't allocate IPO shares to executives of public companies, saying Citigroup continues to believe its congressional testimony describing Mr. Ebbers as a "best customer." An attorney for Mr. Sullivan couldn't be reached for comment.

While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks. Just as patents might be licensed, WorldCom licensed its management's insights to its units, which then paid royalties to the parent, deducting such payments as normal business expenses on state income-tax returns. This lowered state taxes substantially, as the royalties totaled more than $20 billion between 1998 to 2001. The report says that neither KPMG nor WorldCom could adequately explain to the bankruptcy examiner why "management foresight" should be treated as an intangible asset.

Continued in the article

I also still highly, highly, highly recommend the WorldCom fraud video at
http://www.baylortv.com/streaming/001496/300kbps_str.asx

"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner The University of Chicago - Booth School of Business and Suraj Srinivasan , Harvard Business School, SSRN, Revised April 7, 2010 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1557231

Abstract:
We study events surrounding ChuoAoyama’s failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC’s Japanese affiliate and one of Japan’s “Big Four” audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama’s operations for two months as punishment for its role in the accounting fraud at Kanebo. This action was unprecedented, and followed a sequence of events that seriously damaged ChuoAoyama’s reputation for audit quality. We use these events to provide evidence on the importance of auditors’ reputation for audit quality in a setting where litigation plays essentially no role. We find that ChuoAoyama’s audit clients switched away from the firm as questions about its audit quality became more pronounced but before it was clear that the firm would be wound up, consistent with the importance of auditors’ reputation for delivering quality.

Four PricewaterhouseCoopers auditors arrested in Tokyo on criminal charges
Four certified public accountants at a Japanese unit of the PricewaterhouseCoopers Group were arrested Tuesday for allegedly collaborating with former executives at Kanebo Ltd. to falsify accounting reports. The special investigation department of the Tokyo District Public Prosecutor's Office also searched the offices of ChuoAoyama PricewaterhouseCoopers in Chiyoda Ward, Tokyo, and the suspects' homes jointly with the Securities and Exchange Surveillance Commission, prosecutors said. Pursuing criminal responsibility of certified public accountants in connection with window-dressing is unusual, and the arrests have blemished the credibility of those assigned auditing responsibilities, observers say. The accountants under arrest were identified as Kuniaki Sato, 63, Seiichiro Tokumi, 58, Kazutoshi Kanda, 55, and Kazuya Miyamura, 48.
The Japan Times, Sept. 14, 2005
This article was forwarded to me by Miklos A. Vasarhelyi [miklosv@andromeda.rutgers.edu]

Here are some of Francine's posts on the Kanebo fraud:.

http://retheauditors.com/2008/08/21/pwc-s-non-announcement/

http://retheauditors.com/2007/08/01/old-pwc-japan-fades-like-lotus-blossom/

http://retheauditors.com/2007/02/21/pwcs-two-card-monte-game-in-japan-fails-update/

Bob Jensen’s threads on PwC are at
http://www.trinity.edu/rjensen/fraud001.htm#PwC

Bob Jensen's threads on auditor professionalism and independence are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Questions
What is the importance of the Stanford University logo on a research study that is a political bomb shell?
What do accountancy pension experts think of this study?

"Pension Bomb Ticks Louder: California's public funds are assuming unlikely rates of return," The Wall Street Journal, April 27, 2010 ---
http://online.wsj.com/article/SB10001424052702303695604575181983634524348.html?mod=djemEditorialPage_t

The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice.

This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds.

The pension funds responsible for the time bombs denounced the report. Calstrs CEO Jack Ehnes declared at a board meeting that "most people would give [this study] a letter grade of 'F' for quality" but "since it bears the brand of Stanford, it clearly ripples out there quite a bit." He called its assumptions "faulty," its research "shoddy" and its conclusions "political." Calpers chief Joseph Dear wrote in the San Francisco Chronicle that the study is "fundamentally flawed" because it "uses a controversial method that is out of step with governmental accounting standards."

Those standards bear some scrutiny.

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.

Last year the accounting board proposed that the public pensions play by the same rules as corporate pensions. But unions for the public employees balked because the changed standard would likely require employees and employers to contribute more to the pensions, especially in times when interest rates are low. For now, it appears the public employee unions will prevail with the status quo accounting method.

Using these higher return rates for their pension portfolios, the pension giants calculate a much smaller, but still significant, $55 billion shortfall. Discounting liabilities at these higher rates, however, ignores the probability that actual returns will fall below expected levels and allows pension funds to paper over the magnitude of their problem.

Instead, the Stanford researchers choose to use a risk-free rate to calculate the unfunded liability because financial economics says that the risk of the investment portfolio should match the risk of pension liabilities. But public pensions carry no liability. They're riskless. That's because public employees will receive their defined benefit pensions regardless of the market's performance or the funds' investment returns. Under California law, public pensions are a vested, contractual right. What this means is that taxpayers are on the hook if the economy falters or the pension portfolios don't perform as well as expected.

As David Crane, California Governor Arnold Schwarzenegger's adviser notes, this year's unfunded pension liability is next year's budget cut—or tax hike. This year $5.5 billion was diverted from other programs such as higher education and parks to cover the shortfall in California's retiree pension and health-care benefits. The Governor's office projects that, absent reform, this figure will balloon to over $15 billion in the next 10 years.

What to do? The Stanford study suggests that at the least the state needs to contribute to pensions at a steadier rate and not shortchange the funds when markets are booming. It also recommends shifting investments to more fixed-income assets to reduce risks.

But what the public-pension giants find "political" and "controversial" is the study's recommendation to move away from a defined benefits system to a 401(k)-style system for new hires. Public employee unions oppose this because defined benefits plans are usually more lavish, and someone else is on the hook to make up shortfalls. Calpers and Calstrs are decrying the Stanford study because it has revealed exactly who is on the hook for all of this unfunded obligation—California's taxpayers.

April 28, 2010 reply from Mark Eckman, Rockwell Collins [mseckman@ROCKWELLCOLLINS.COM]

Every time one of these articles appears some reporter is shocked, and they focus on pointing a finger at the accounting, the actuarial science or the politics of pensions. But the story dies because the issues are too complicated to present in a newspaper or newscast. I'm not necessarily talking about corporate pensions. Yes, there have probably been more than a couple of companies that have nudged the expected rate of return to raise EPS and in turn the value of the executive stock options, but public pensions are much more direct in how they are abused.

Consider the three groups and their goals and you begin to get the idea. The accountant wants all the number to flow together in a neat package that can be explained in terms of cash flow, assets and liabilities. The actuary wants a theoretical value based on assumptions, and current investment conditions. But the politician wants only the power all this money provides. Mention discount rates, duration of liabilities and actuarial losses to confuse the real issue and focus on what is the defined benefit from either plan and politically created public confusion takes over any desire to understand in the masses. Add to that the localized nature of the report, (Does anyone in Mississippi really care about paying for California municipal pensions?) and that lack of desire becomes apathy.

Similar to the auto industry in the US, many public pension plans have offered and provided more than the public ever envisioned. In the public arena, pensions provide a license to steal on many levels. The examples of these articles typically tell of a one term mayor that receives a pension of 100% of salary as a pension, or the 20 year municipal employee with a pension equal to 200% of their wages when they retire at age 45. Need to settle a union dispute, bargain for more pension benefits. Got a budget crunch - defer payment to the pension system. All of the fuss about defined contributions comes from those that already have a vested stake in the defined contribution system. Those are gross abuses of the design to serve a political purpose rather than outright theft. But, theft also does occur. My personal favorite is how the State of New Jersey issued bonds to fund the pension, only to have the money stolen by the state legislature. When problems becomes visible in the public pension arena, those responsible have finished gorging at the trough, are not accountable, and look back thanking the accounting rules, the actuarial standards and the political control that made the theft legitimate.

Gee, sounds a lot like yesterday's Goldman Sachs hearings...

Mark S. Eckman

Bob Jensen's threads on accounting for pensions are at
http://www.trinity.edu/rjensen/theory01.htm#Pensions

From The Wall Street Journal Accounting Weekly Review on July 10, 2009

Public Pensions Cook the Books
by Andrew G. Biggs
The Wall Street Journal
Jul 06, 2009
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, Financial Accounting Standards Board, Governmental Accounting, Market-Value Approach, Pension Accounting

SUMMARY: As Mr. Biggs, a resident scholar at the American Enterprise Institute, puts it, "public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods...these plans are underfunded nationally by around $310 billion. [But] the numbers are worse using market valuation methods...which discount benefit liabilities at lower interest rates...."

CLASSROOM APPLICATION: Introducing the importance of interest rate assumptions, and the accounting itself, for pension plans can be accomplished with this article.

QUESTIONS:
1. (Introductory) Summarize the accounting for pension plans, including the process for determining pension liabilities, the funded status of a pension plan, pension expense, the use of a discount rate, the use of an expected rate of return. You may base your answer on the process used by corporations rather than governmental entities.

2. (Advanced) Based on the discussion in the article, what is the difference between accounting for pension plans by U.S. corporations following FASB requirements and governmental entities following GASB guidance?

3. (Introductory) What did the administrators of the Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System include in their advertisements to hire new actuaries?

4. (Advanced) What is the concern with using the "expected return" on plan assets as the rate to discount future benefits rather than using a low, risk free rate of return for this calculation? In your answer, comment on the author's statement that "future benefits are considered to be riskless" and the impact that assessment should have on the choice of a discount rate.

5. (Advanced) What is the response by public pension officers regarding differences between their plans and those of corporate entities? How do they argue this leads to differences in required accounting? Do you agree or disagree with this position? Support your assessment.

Reviewed By: Judy Beckman, University of Rhode Island

"Public Pensions Cook the Books: Some plans want to hide the truth from taxpayers," by Andrew Biggs, The Wall Street Journal, July 6, 2009 --- http://online.wsj.com/article/SB124683573382697889.html

Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset.

What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that's the essence of the managers' recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn't bother applying.

Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.

Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that "If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration."

Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: "The point is we aren't interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory."

While corporate pension funds are required by law to use low, risk-adjusted discount rates to calculate the market value of their liabilities, public employee pensions are not. However, financial economists are united in believing that market-based techniques for valuing private sector investments should also be applied to public pensions.

Because the power of compound interest is so strong, discounting future benefit costs using a pension plan's high expected return rather than a low riskless return can significantly reduce the plan's measured funding shortfall. But it does so only by ignoring risk. The expected return implies only the "expectation" -- meaning, at least a 50% chance, not a guarantee -- that the plan's assets will be sufficient to meet its liabilities. But when future benefits are considered to be riskless by plan participants and have been ruled to be so by state courts, a 51% chance that the returns will actually be there when they are needed hardly constitutes full funding.

Public pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business. Even so, the only true advantage public pensions have over private plans is the ability to raise taxes. But as the Congressional Budget Office has pointed out in 2004, "The government does not have a capacity to bear risk on its own" -- rather, government merely redistributes risk between taxpayers and beneficiaries, present and future.

Market valuation makes the costs of these potential tax increases explicit, while the public pension administrators' approach, which obscures the possibility that the investment returns won't achieve their goals, leaves taxpayers in the dark.

For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, "it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors."

Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association's objections seem less against market valuation itself than against the fact that higher reported underfunding "could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans."

The Government Accounting Standards Board, which sets guidelines for public pension reporting, does not currently call for reporting the market value of public pension liabilities. The board announced last year a review of its position regarding market valuation but says the review may not be completed until 2013.

This is too long for state taxpayers to wait to find out how many trillions they owe.

Bob Jensen's threads about fraud in government are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Société Générale Tradung Fraud in France

Jérôme Kerviel's duties included arbitraging equity derivatives and equity cash prices and commenced a crescendo of fake trades. This is an interesting fraud case to study, but I doubt whether auditors themselves can be credited with discovery of the fraud. It is a case of poor internal controls, but there are all sorts of suggestions that the bank was actually using Kerviel to cover its own massive losses. Kerviel did not personally profit from his fraud, although he may have been anticipating a bonus due to his "profitable" fake-trade arbitraging.

Société Générale --- http://en.wikipedia.org/wiki/Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale

On January 24, 2008, the bank announced that a single futures trader at the bank had fraudulently lost the bank €4.9billion (an equivalent of $7.2billionUS), the largest such loss in history.The company did not name the trader, but other sources identified him as Jérôme Kerviel, a relatively junior futures trader who allegedly orchestrated a series of bogus transactions that spiraled out of control amid turbulent markets in 2007 and early 2008.

Partly due to the loss, that same day two credit rating agencies reduced the bank's long term debt ratings: from AA to AA- by Fitch; and from Aa1/B to Aa2/B- by Moody's (B and B- indicate the bank's financial strength ratings).

Executives said the trader acted alone and that he may not have benefited directly from the fraudulent deals. The bank announced it will be immediately seeking 5.5 billion euros in financing. On the eve and afternoon of January 25, 2008, Police raided the Paris headquarters of Société Générale and Kerviel's apartment in the western suburb of Neuilly, to seize his computer files. French presidential aide Raymond Soubie stated that Kerviel dealt with $73.3 billion (more than the bank's market capitalization of $52.6 billion). Three union officials of Société Générale employees said Kerviel had family problems.On January 26, 2008, the Paris prosecutors' office stated that Jerome Kerviel, 31, in Paris, "is not on the run. He will be questioned at the appropriate time, as soon as the police have analysed documents provided by Société Générale." Kerviel was placed under custody but he can be detained for 24 hours (under French law, with 24 hour extension upon prosecutors' request). Spiegel-Online stated that he may have lost 2.8 billion dollars on 140,000 contracts earlier negotiated due to DAX falling 600 points.

The alleged fraud was much larger than the transactions by Nick Leeson that brought down Barings Bank

Main article: January 2008 Société Générale trading loss incident

Other notable trading losses

Yasuo Hamanaka caused a loss of about $2.6 billion, over ten years, in unauthorized copper trading on the London Metal Exchange

Nick Leeson caused a loss of £827 million for Barings Bank, leading to its collapse

List of trading losses

April 10 message from Jagdish Gangolly [gangolly@GMAIL.COM]

Francine,

1. In France, accountants and auditors are regulated by different ministries; accountants by Ministry of Finance, and auditors by the Ministry of Justice. Only auditors can perform statutory audits. All auditors are accountants, but not necessarily the other way round.

I am not sure there is a fundamental difference when it comes to apportionment of blame and so on, except that the ominous and heavy hand of the state pervades in France; even the codes assigned to the items in the national chart of accounts is specified in French law (in the so called Accounting Plan).

2. I do not think the accountants/auditors were involved in the Societe Generale case. The unauthorised trades were detected and the positions closed all within two days or so. Unfortunately us US taxpayers were left holding the bag in the long run; we paid $11 billion for the credit default swaps to SG.

Jagdish
--
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
Phone: 518-956-8251, Fax: 518-956-8247

April 11, 2010 reply from Francine McKenna [retheauditors@GMAIL.COM]

Societe Generale was not resolved that quickly. In the MF Global "rogue trading scandal" the positions were closed overnights because the trades were in wheat which is exchange traded and cleared by the CME. Societe General trader was working with primarily non-exchange traded derivatives. They did not see it right away and counterparties who could complain about margin calls did not exist.

The banks internal audit group was ignored (like AIG) and the auditors gave a bank that had poor internal controls and the ability for any controls to be overridden easily, a clean bill of health.

Thanks for further clarification of the French approach. I did not know they had accountants and auditors but that makes it seem even more like the barristers and solicitors division...

http://retheauditors.com/2008/10/14/what-the-auditors-saw-an-update-on-societe-generale/

http://retheauditors.com/2008/03/03/mf-global-socgen-and-rogue-traders-dont-fall-for-the-simple-answers/

April 11, 2010 reply from Tom Selling [tom.selling@GROVESITE.COM]

To refresh memories, the auditors (two Big Four firms) of Société Générale were involved in the aftermath, by exploiting a questionable loophole in IFRS. Société Générale chose to lump Kerviel's 2008 trading losses in 2007's income statement, thus netting the losses of the later year with his gains of the previous year. There is no disputing that the losses occurred in 2008, yet the company's position is that application of specific IFRS rules (very simply, marking derivatives to market) would, for reasons unstated, result in a failure of the financial statements to present a "true and fair view."

See Floyd Norris’s column in NYT:

http://www.nytimes.com/2008/03/07/business/07norris.html?ref=business

Best,
Tom

Bob Jensen's threads on brokerage trading frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's threads on the history of derivatives financial instruments, hedging, frauds, and related accounting standards ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Derivatives Financial Instruments History Paper
"Leveraging the British Railway Mania: Derivatives for the Individual Investor"
Campbell, Gareth (2010):
Leveraging the British Railway Mania: Derivatives for the Individual Investor. Unpublished.
http://mpra.ub.uni-muenchen.de/21822/

Abstract
During the British Railway Mania of the 1840s the promotion and construction of new railways increased dramatically. These new projects were generally financed by shares with uncalled capital, which allowed investors to make payments on an installment basis over a period of several years. There is evidence that these assets can be regarded as futures or options, implying that investors were purchasing highly leveraged derivatives. The leverage embedded in these assets multiplied both the positive returns during the boom, and the negative returns during the downturn. It also affected the payment schedule for investors as little capital was required initially, but the subsequent ‘calls for capital’ resulted in deleveraging.

Item Type:	MPRA Paper
Language:	English
Keywords:	bubbles, financial crises, Railway Mania
Subjects:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates N - Economic History > N2 - Financial Markets and Institutions > N23 - Europe: Pre-1913 G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing G - Financial Economics > G0 - General > G01 - Financial Crises
ID Code:	21822
Deposited By:	Gareth Campbell
Deposited On:	07. Apr 2010 03:49
Last Modified:	07. Apr 2010 09:28
References:	Allen, F. & Gale, D. (1997), ‘Bubbles and Crises’, The Economic Journal, vol. 110(460), pp. 236-55. Aoki, K., Proudman, J., and Vlieghe, G. (2002). ‘Houses as Collateral: Has the Link between House Prices and Consumption in the U.K. Changed?’, Economic Policy Review, Federal Reserve Bank of New York, May, pp. 163-77 Bernanke, B.S., and Gertler, M. (2001). 'Should Central Banks Respond to Movements in Asset Prices?' American Economic Review, vol. 91 (May), pp. 253-57. Black, F. & Scholes, M. (1973), ‘The Pricing of Options and Corporate Liabilities’, Journal of Political Economy, vol. 81, no. 3, pp. 637. Campbell, G. (2010), “Cross-Section of a ‘Bubble’: Stock Prices and Dividends during the British Railway Mania”, SSRN Working Paper. Campbell, G. and Turner, J. (2010), “‘The Greatest Bubble in History’: Stock Prices during the British Railway Mania”, SSRN Working Paper. Course of the Exchange (1843-50). Dale, R., Johnson, J.E.V. & Tang, L. (2005), ‘Financial Markets can Go Mad: Evidence of Irrational Behaviour during the South Sea Bubble’, Economic History Review, vol. 58, no. 2, pp. 233-271. Detken, C. and Smets, F. (2004), 'Asset Price Booms and Monetary Policy', ECB Working Paper no. 364. Economist (1843-50). Engle, R. F. and Granger, C.W.J. (1987), ‘Co-Integration and Error Correction: Representation, Estimation, and Testing’, Econometrica, vol. 55, pp.251-276. Foote, C.L., Gerardi, K. & Willen, P.S. (2008), ‘Negative Equity and Foreclosure: Theory and evidence’, Journal of Urban Economics, vol. 64(2), pp. 234-245. Froot, K.A. & Dabora, E.M. (1999), ‘How are Stocks Affected by the Location of Trade?’, Journal of Financial Economics, vol. 53, pp. 189-216. Guiso, L., Sapienza, P. & Zingales, L. (2009), ‘Moral and Social Constraints to Strategic Default on Mortgages’, CEPR Working Paper. Hull, J. (2003), Options, Futures, and other Derivatives, Pearson Prentice Hall. Jackman, W.T. (1966), The Development of Transportation in Modern England, Cass. Johansen, S. (1988), ‘Statistical Analysis Of Cointegration Vectors’, Journal of Economic Dynamics and Control, vol. 12, no. 2-3, pp. 231-254. Kindleberger, C.P. (2000), Manias, Panics, and Crashes: A History of Financial Crises, John Wiley & Sons. Lamont, O.A. & Thaler, R.H. (2003), ‘Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs’, Journal of Political Economy, vol. 111, no. 2, pp. 227-268. Lewin, H.G. (1968), The Railway Mania and its Aftermath, 1845-1852 (Being a Sequel to Early British Railways), Rev. Edn, A. M. Kelley. MacDermot, E.T. (1964), History of the Great Western Railway, Ian Allan Ltd. Mitchell, B.R. (1964), ‘The Coming of the Railway and United Kingdom Economic Growth’, Journal of Economic History, vol. 24, no. 3, pp. 315-336. Murphy, A.L. (2009), ‘Trading Options before Black-Scholes: A Study of the Market in Late Seventeenth Century London’, Economic History Review, vol. 62, no. S1, pp. 8-30. Nairn, A. (2002), Engines that Move Markets: Technology Investing from Railroads to the Internet and Beyond, Wiley. Parliamentary Papers (1847-48), LXIII, p.275-442 ‘Return of the names of railways for which acts have been obtained; calls made; amount received and remaining due; sums borrowed which remain owing; balance of capital uncalled for, and of money which the companies retain power to borrow; and, periods for which the companies have postponed making further calls.’ Parliamentary Papers (1847-48), VIII, Pt. I, p.1, ‘Reports from the Secret Committee on Commercial Distress; with an Index’. Pollins, H. (1971), Britain's Railways: An Industrial History, David and Charles (Publishers) Limited. Railway Times (1843-50). Shea, G.S. (2007a), ‘Understanding Financial Derivatives During the South Sea Bubble: The Case of the South Sea Subscription Shares’, Oxford Economic Papers, vol. 59, no. Supplement 1, pp. i73. Shea, G.S. (2007b), ‘Financial Market Analysis Can Go Mad (in the Search for Irrational Behaviour During the South Sea Bubble)’, Economic History Review, vol. 60, no. 4, pp. 742-765. Simmons, J. (1978), The Railway in England and Wales, 1830-1914, vol.1, Leicester University Press. Stock, J.H. & Watson, M.W. (2003), Introduction to Econometrics, Addison Wesley. The Railway Investment Guide. How to Make Money in Railway Shares: A Series of Hints and Advice to Parties Speculating (1845). The Times (1843-50). Tuck, H. (1845), The Railway Shareholder's Manual; Or Practical Guide to All the Railways in the World, Sixth Edition, Effingham Wilson. Tuck, H. (1848), The Railway Shareholder's Manual; Or Practical Guide to All the Railways in the World, Eighth Edition, Effingham Wilson.

Bob Jensen's free tutorials and videos on accounting for derivative financial instruments and hedging activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm

"Top stories (on CPA Trendlines) for accountants, CPAs, tax practitioners and finance managers this week from ---
Click Here for the Week Ended April 10
http://cpatrendlines.com/2010/04/10/top-10-clicks-what-accountants-are-reading-this-week/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+cpatrendlines/tPxN+(CPA+Trendlines)

Twitter for Business: 149 Smart and Interesting People to Follow Today http://ow.ly/1sj5q
Top Five Secrets of a CPA Start-Up http://ow.ly/1o6Qh
How do accountants define “success?” http://ow.ly/1eZUh
Wharton on Lehman’s Demise and Repo 105: No Accounting for Deception – Knowledge@Wharton http://ow.ly/16X3ks
Lehman chicanery is tip of the iceberg | Prem Sikka http://ow.ly/16OFEO
It’s a Great Time to Be a Tax Man (or Woman) http://ow.ly/16XEpe
Ernst & Young Said to Face Inquiry Into Lehman Role – New York Times (blog) http://ow.ly/16ZQTo
‘Big four audit firms bending laws in India’ – India Business – Biz – The Times of India http://ow.ly/16Zmps
Accounting Firms Help Overworked Employees Blow Off Steam in Tax Season http://ow.ly/16ZbIx
Ernst Confirms Client Letter to Address Lehman Accounting http://ow.ly/16YMrl

Posted at April 10, 2010

Jerry Trites called my attention to the new "Babbage" blog from my favorite magazine The Economist (I read it cover-to-cover every week.) ---
http://www.economist.com/blogs/babbage?fsrc=nlw|pub|03_30_2010|publishers_newsletter

From Trites E-Business Blog on April 1, 2010 (no fooling) --- http://www.zorba.ca/blog.html

Babbage - A New Blog

The Economist Magazine has launched a new blog called Babbage.

Named after Charles Babbage, the father of the computer, our new blog aims to understand the world through the technology that now impacts our lives and reveals so much about us. Recent posts investigate the role of geeks (they are now officially cool, running companies and making millions), mourn the demise of the analog car, and ask just who Apple's iPad is for. Answer: no one knows, not even Apple.

The blog is at this URL. It's worth bookmarking, as the Economist is always on point.

Bob Jensen's threads on listservs, blogs, and social networks ---
http://www.trinity.edu/rjensen/listservRoles.htm

Accountancy News Sites ---
http://www.trinity.edu/rjensen/accountingnews.htm

Risk-Based versus Detail-Testing Audits
Somebody asked me to comment on risk-based auditing. I dug up some old tidbits that might be of interest on this listserv.

Bob Jensen's threads on risk-based auditing ---
http://www.trinity.edu/rjensen/fraud001.htm#RiskBasedAuditing

My favorite illustration comes from the world’s worst audit in the history of the world --- Worldcom, As an auditor, you know one of the most important departments for detailed testing is the Purchasing Department. I was once told by an insider that for several years running, Worldcom’s Purchasing Department never had contact with any Andersen auditors. They were all doing analytical reviews of purchasing.

**********************

Note the 1995 Year Below --- http://www.trinity.edu/rjensen/FraudEnron.htm
The accountants at Arthur Andersen knew Enron was a high-risk client who pushed them to do things they weren’t comfortable doing. Testifying in court in May, partner James Hecker said he wrote a parody to that effect in 1995. The Financial Times of London reported: "To the tune of the Eagles hit song ‘Hotel California,’ Mr. Hecker wrote lines such as: ‘They livin’ it up at the Hotel Cram-It-Down-Ya, When the [law]suits arrive, Bring your alibis.’"
Business Ethics [BizEthics@lb.bcentral.com] on May 15, 2002

I don't know who wrote the following, but it was forwarded by a former student who is at the local office of Arthur Andersen.

A take-off from the movies "A Few Good Men" (Some phrases are in the original script and some are altered.)

Tom Cruise: "Did you order the shredding?"

Jack Nicholson: "You want answers?"

Tom Cruise: "I think I'm entitled."

Jack Nicholson: "You want answers!!"

Tom Cruise: "I want the truth!"

Jack Nicholson: "You can't handle the truth!"

Jack Nicholson: "Son, we live in a world that has financial statements. And those financial statements have to be audited by men with calculators. Who's gonna do it? You? You, Dept. of Justice? I have a greater responsibility than you can possibly fathom. You weep for Enron and you curse Andersen. You have that luxury. You have the luxury of not knowing what I know: that Enron's death, while tragic, probably saved investors. And my existence, while grotesque and incomprehensible to you, saves investors. You don't want the truth. Because deep down, in places you don't talk about at parties, you want me on that audit. You need me on that audit! We use words like materiality, risk-based, special purpose entity...we use these words as the backbone to a life spent auditing something. You use 'em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very assurance I provide, then questions the manner in which I provide it. I'd prefer you just said thank you and went on your way. Otherwise, I suggest you pick up a pencil and start ticking. Either way, I don't give a damn what you think you're entitled to!!"

Tom Cruise: "Did you order the shredding???"

Jack Nicholson: "You're damn right I did!"

**********************

"Behind Wave of Corporate Fraud: A Change in How Auditors Work: 'Risk Based' Model Narrowed Focus of Their Procedures, Leaving Room for Trouble,' " by Jonathan Weil, The Wall Street Journal, March 25, 2004, Page A1

The recent wave of corporate fraud is raising a harsh question about the auditors who review and bless companies' financial results: How could they have missed all the wrongdoing? One little-discussed answer: a big change in the way audits are performed.

Consider what happened when James Lamphron and his team of Ernst & Young LLP accountants sat down early last year to plan their audit of HealthSouth Corp.'s 2002 financial statements. When they asked executives of the Birmingham, Ala., hospital chain if they were aware of any significant instances of fraud, the executives replied no. In their planning papers, the auditors wrote that HealthSouth's system for generating financial data was reliable, the company's executives were ethical, and that HealthSouth's management had "designed an environment for success."

As a result, the auditors performed far fewer tests of the numbers on the company's books than they would have at an audit client where they perceived the risk of accounting fraud to be higher. That's standard practice under the "risk-based audit" approach now used widely throughout the accounting profession. Among the items the Ernst & Young auditors didn't examine at all: additions of less than $5,000 to individual assets on the company's ledger.

Those numbers are where HealthSouth executives hid a big part of a giant fraud. This blind spot in the firm's auditing procedures is a key reason why former HealthSouth executives, 15 of whom have pleaded guilty to fraud charges, were able to overstate profits by $3 billion without anyone from Ernst & Young noticing until March 2003, when federal agents began making arrests.

A look at the risk-based approach also helps explain why investors continue to be socked by accounting scandals, from WorldCom Inc. and Tyco International Ltd. to Parmalat SpA, the Italian dairy company that admitted faking $4.8 billion in cash. Just because an accounting firm says it has audited a company's numbers doesn't mean it actually has checked them.

In a September 2003 speech, Daniel Goelzer, a member of the auditing profession's new regulator, the Public Company Accounting Oversight Board, called the risk-based approach one of the key factors "that seem to have contributed to the erosion of trust in auditing." Faced with difficulty in raising audit fees, Mr. Goelzer said, the major accounting firms during the 1990s began to stress cost controls. And they began to place greater emphasis on planning the scope of their work based on auditors' judgments about which clients are risky and which areas of a company's financial reports are most prone to error or fraud.

Auditors still plow through "high risk" items, such as derivative financial instruments or "related party" business dealings between a company and its executives. But ostensibly "low risk" items -- such as cash on the balance sheet or accounts that fluctuate little from year to year -- often get no more than a cursory review, for years at a stretch. Instead, auditors rely more heavily on what management tells them and the auditors' assessments of a company's "internal controls."

Old and New

A 2001 brochure by KPMG LLP, which claims to have pioneered the risk-based audit during the early 1990s, explained the difference between the old and new ways. Under a traditional "bottom up" audit, "the auditor gains assurance by examining all of the component parts of the financial statements, ensuring that the transactions recorded are complete and accurate." By comparison, under the "top down" risk-based audit methodology, auditors focus "less on the details of individual transactions" and use their knowledge of a company's business and organization "to identify risks that could affect the financial statements and to target audit effort in those areas."

So, for instance, if controls over a company's sales and customer IOUs are perceived to be strong, the auditor might mail out only a limited number of confirmation requests to companies that do business with the audit client at the end of the year. Instead, the auditor would rely more on the numbers spit out by the company's computers.

For inventory, the lower the perceived risk of errors or fraud, the less frequently junior-level accountants might be dispatched on surprise visits to a client's warehouses to oversee the company's procedures for counting unsold goods. If cash and securities on the balance sheet are deemed low risk, the auditor might mail out only a relative handful of confirmation requests to a company's banks or brokerage firms.

In theory, the risk-based approach should work fine, if an auditor is good at identifying the areas where misstatements are most likely to occur. Proponents advocate the shift as a cost-efficient improvement. They also say it forces auditors to pay needed attention to areas that are more subjective or complex.

"The problem is that there's not a lot of evidence that auditors are very good at assessing risk," says Charles Cullinan, an accounting professor at Bryant College in Smithfield, R.I., and co-author of a 2002 study that criticized the re-engineered audit process as ineffective at detecting fraud. "If you assess risk as low, and it really isn't low, you really could be missing the critical issues in the audit."

Auditors can't check all of a company's numbers, since that would make audits too expensive, particularly in an age of sprawling multinationals. The tools at auditors' disposal can't ensure the reliability of a company's numbers with absolute certainty. And in many ways, they haven't changed much over the modern industry's 160-year history.

Auditors scan the accounting records for inconsistencies. They ask people questions. That can mean independently contacting a client's customers to make sure they haven't struck undocumented side deals -- such as agreeing to buy more products today in exchange for a salesperson's oral promises of future discounts. They search for unrecorded liabilities by tracing cash disbursements to make sure the obligations are recorded properly. They examine invoices and the terms of sales contracts to check if a company is recording revenue prematurely.

Auditors are supposed to avoid becoming predictable. Otherwise, a client's management might figure out how to sneak things by them. It's also important to sample-test tiny accounting entries, even as low as a couple of hundred dollars. An old accounting trick is to fudge lots of tiny entries that appear insignificant individually but materially distort a company's financial statements when taken together.

Facing a crush of shareholder lawsuits over the accounting scandals of the past four years, the Big Four accounting firms say they are pouring tens of millions of dollars into improving their auditing techniques. KPMG's investigative division has doubled to 280 its force of forensic specialists, some hailing from the Federal Bureau of Investigation. PricewaterhouseCoopers LLP auditors attend seminars run by former Central Intelligence Agency operatives on how to spot deceitful managers by scrutinizing body language and verbal cues. Role-playing exercises teach how to stand up to a company's management.

But the firms aren't backing away from the concept of the risk-based audit itself. "It would really be negligent" not to take a risk-based approach, says Greg Weaver, head of Deloitte & Touche LLP's U.S. audit practice. Auditors need to "understand the areas that are likely to be more subject to error," he says. "Some might believe that if you cover those high-risk areas, you could do less work in other areas." But, he adds, "I don't think that's been a problem at Deloitte."

Mr. Lamphron, the Ernst & Young partner, and his firm blame HealthSouth's former executives for deceiving them. Mr. Lamphron declined to comment for this article. Testifying before a congressional subcommittee in November, he said he had looked through his audit papers and "tried to find that one string that, had we yanked it, would have unraveled this fraud. I know we planned and conducted a solid audit. We asked the right questions. We sought out the right documentation. Had we asked for additional documentation here or asked another question there, I think that it would have generated another false document and another lie."

The pioneers of the auditing industry had a more can-do spirit. In Britain during the 1840s, William Deloitte, whose firm continues today as Deloitte & Touche, made a name for himself by helping to unravel frauds at the Great Eastern Steamship Co. and Great Northern Railway. A growing breed of professionals such as William Cooper, whose name lives on in PricewaterhouseCoopers, began advertising their services as an essential means for rooting out fraud.

"The auditor who is able to detect fraud is -- other things being equal -- a better man than the auditor who cannot," wrote influential British accountant Lawrence Dicksee in his 1892 book, "Auditing," one of the earliest on the subject.

But in the U.S., the notion of the auditor as detective never quite took off. The Securities and Exchange Commission in the 1930s made audits mandatory for public companies. The auditing profession faced its first real public test in 1937, when an accounting scandal broke open at McKesson & Robbins: More than 20% of the assets reported by the drug company were fictitious inventory and customer IOUs. The auditors had been fooled by forged documents.

The case triggered some reforms. Auditing standards began requiring that auditors perform more substantive tests, such as contacting third parties to confirm customer IOUs and physically inspecting clients' warehouses to check inventories. However, the American Institute of Certified Public Accountants, the group that set auditing standards, repeatedly emphasized the limitations on auditors' ability to detect fraud, fearing liability exposure for its members.

By the 1970s, a new force emerged to erode audit quality: price competition. For decades, the AICPA had barred auditors from publicly advertising their services, making uninvited solicitations to rival firms' clients or participating in competitive-bidding contests. The institute was forced to lift those bans, however, when the federal government deemed them anticompetitive and threatened to bring antitrust lawsuits.

Bidding wars ensued. The pressures to hold down hours on a job "inadvertently discouraged auditors to look for" fraud, says Toby Bishop, president of the Association of Certified Fraud Examiners, a professional association.

Increasingly, audits became a commodity product. Flat-fee pricing became common. The big accounting firms spent much of the 1980s and 1990s building more-lucrative consulting operations. Many audit clients soon were paying their independent accounting firms far more money for consulting than auditing. The audit had become a mere foot in the door for the consultants. Economic pressures also brought a wave of mergers, winnowing down the number of accounting firms just as the number of publicly traded companies was exploding and corporate financial statements were becoming more complex.

Even before the recent rash of accounting scandals, the shift away from extensive line-by-line number crunching was drawing criticism. In an October 1999 speech, Lynn Turner, then the SEC's chief accountant, noted that more than 80% of the agency's accounting-fraud cases from 1987 to 1997 involved top executives. While the risk-based approach was focusing on information systems and the employees who fed them, auditors really needed to expand their scrutiny to include top executives, who with a few keystrokes could override their companies' systems.

Looking back, the risk-based approach's flaws are on display at a variety of accounting scandals, from WorldCom to Tyco to HealthSouth.

When WorldCom was a small, start-up telecommunications company, its outside auditor, Arthur Andersen LLP, did things the old-fashioned way. It tested the thousands of details of individual transactions, and it reviewed and confirmed the items in WorldCom's general ledger, where the company's accounting entries were first logged.

But as WorldCom grew, Andersen shifted toward what it called a risk-based "business audit process." By 1998, it was incurring more costs to audit WorldCom than it was billing, making up the difference with fees for consulting and other work, according to an investigative report last year by WorldCom's audit committee. In its 2000 audit proposal to WorldCom, Andersen said it considered itself "a committed member of [WorldCom's] team" and saw the company as a "flagship client and a crown jewel" of the firm.

Under the revised audit approach, Andersen used sophisticated software to analyze WorldCom's financial statements. The auditors gathered for brainstorming sessions, imagining ways WorldCom might cook its books. After identifying areas of high risk, the auditors checked the adequacy of internal controls in those areas by reviewing the company's procedures, discussing them with some employees and performing sample tests to see if the procedures were followed.

'Maximum Risk'

When questions arose, the auditors relied on the answers supplied by management, even though their software had rated WorldCom a "maximum risk" client, according to a January report by WorldCom's bankruptcy examiner, former U.S. Attorney General Richard Thornburgh.

One question that Andersen auditors routinely asked WorldCom management was whether they had made any "top side" adjustments -- meaning unusual accounting entries in a company's general ledger that are recorded after the books for a given quarter had closed. Each year, from 1999 through 2002, WorldCom management told the auditors they hadn't. According to Mr. Thornburgh's report, the auditors conducted no testing to corroborate if that was true.

They did check to see if there were any major swings in the items on the company's consolidated balance sheet. There weren't any, and from this, the auditors concluded that follow-up procedures weren't necessary. Indeed, WorldCom executives had manipulated its numbers so there wouldn't be any unusual variances.

Had the auditors dug into specific journal entries -- the debits and credits that are the initial entries of transactions or events into a company's accounting systems -- they would have seen hundreds of huge entries of suspiciously round numbers that had no supporting documentation.

The sole documentation for one $239 million journal entry, recorded after the close of the 1999 fourth quarter, was a sticky note bearing the number "$239,000,000," according to the WorldCom audit committee's report. Sometimes the "top side" adjustments boosted earnings by reversing liabilities. Other times they reclassified ordinary expenses as assets, which delayed recognition of costs. Other unsupported journal entries included one for precisely $334 million in July 2000, three weeks after the second quarter's books were closed. Another was for exactly $560 million in July 2001.

Andersen signed its last audit report for WorldCom in March 2002, saying the numbers were clean. Three months later, WorldCom announced that top executives, including its former chief financial officer, had improperly classified billions of dollars of ordinary expenses as assets. The final tally of fraudulent profits hit $10.6 billion. WorldCom filed for Chapter 11 reorganization in June 2002, marking the largest bankruptcy in U.S. history. Now out of business, Andersen is appealing its June 2002 felony conviction for obstruction of justice in connection with its botched audits of Enron Corp.

"No matter what kind of audit you do, it is virtually impossible for an auditor to detect purposeful fraud by management," says Patrick Dorton, an Andersen spokesman. "And that's exactly what happened at WorldCom."

PricewaterhouseCoopers also fell prone to faulty risk assessments. In July, the SEC forced Tyco, the industrial conglomerate, to restate its profits, which it inflated by $1.15 billion, pretax, from 1998 to 2001. The next month, the SEC barred the lead partner on the firm's Tyco audits from auditing publicly registered companies. His alleged offense: fraudulently representing to investors that his firm had conducted a proper audit. The SEC in its complaint said that the auditor, Richard Scalzo, who settled without admitting or denying the allegations, saw warning signs about top Tyco executives' integrity but never expanded his team's audit procedures.

Mr. Scalzo declined to comment. A PricewaterhouseCoopers spokesman declined to comment on the SEC's findings in the Tyco matter.

Like Tyco and WorldCom, HealthSouth grew mainly by buying other companies, using its own shares as currency. So it needed to keep its stock price up. To do that, the company admitted last year, it faked its profits.

In their audit-planning papers, Ernst & Young auditors noted HealthSouth executives' "excessive interest" in maintaining or increasing its stock price and earnings. Twice since the 1990s, the Justice Department had filed Medicare-fraud suits against HealthSouth.

But none of that shook the Ernst & Young audit team's confidence in management's integrity, members of the team later testified. And at little more than $1 million annually, Ernst & Young's audits were fairly low cost. The firm charged slightly less to audit HealthSouth's financial statements than it did for one of its other services for HealthSouth: performing janitorial inspections of the company's 1,800 health-care facilities. The inspections, performed by junior-level accountants armed with 50-point checklists, included checking to see that the toilets and ceilings were free of stains, the magazine racks were neat and orderly, and the trash receptacles all had liners.

Most of HealthSouth's fraud occurred in an account called "contractual adjustments." This is an allowance on the income statement that estimates the difference between the gross amount charged to a patient and the amount that various insurers, including Medicare, will pay for a specific treatment. The company manipulated the account to make net revenue and bottom-line earnings look higher. But for every dollar of illicit revenue, HealthSouth executives had to make a corresponding entry on the balance sheet, where the company listed its assets and liabilities.

An Ernst & Young spokesman, Charlie Perkins, says the firm "performed appropriate procedures" on the contractual-adjustment account.

At an April 2003 court hearing, Ernst & Young auditor William Curtis Miller testified that his team mainly had performed "analytical type procedures" on the contractual adjustments. These consisted of mathematical calculations to see if the account had fluctuated sharply overall, which it hadn't. As for the balance-sheet entries, prosecutors say HealthSouth executives knew the auditors didn't look at increases of less than $5,000, a point Ernst & Young acknowledges. So the executives broke up the entries into tiny pieces, sprinkling them across lots of assets.

The company's ledger showed thousands of unusual journal entries that reclassified everyday expenses -- such as gasoline and auto-service bills -- as assets. Had the auditors seen those items, one congresswoman noted at a November hearing, they would have spotted that something was wrong. Mr. Lamphron conceded her point.

March 27, 2004 reply from MacEwan Wright, Victoria University [Mac.Wright@VU.EDU.AU]

-----Original Message-----
From:
Sent: Saturday, March 27, 2004 10:29 PM
Subject: Re: Attacks on Risk-Based Auditing

Dear Bob,

I wonder if this is not a case of throwing the baby out with the bathwater. I mean the idea of risk based auditing is not in itself a bad idea, The problem is that the idea of what constitutes risk is not properly understood. As I interpret it - risk means probability of event multiplied by cost of event. Risk as used in audit planning means probability of event. It is obvious that the team did not do enough to properly evaluate the inherent risk or more properly stated - the probability that management wouold lie and cheat for profit.

It is am American attitude problem. An American executive posted to an Australian company found the amount of work put into finding out how honest potential employees were a waste of time - "just bond them and sack them and claim the bond insurance if they cheat". Bonding is virtually unheard of in Australia.

I feel that attitude may encourage fraud - the game is what can each party get away with!

Sorry about the social implications.

Kind regards,

Mac Wright

March 27, 2004 reply from Bob Jensen

Hi Mac,

You are correct about the fact that risk-based auditing has led to game playing. Somehow the HealthSouth executives figured out that the risk of getting caught with fraudulent transactions under $6,000 each was nearly zero under their auditor's (E&Y) risk-based model, so they looted the company with transactions under $6,000 each.

I agree with you that some form of risk-based auditing should be utilized. I think this was the case long before KPMG formalized the concept. However, in addition the fear of detailed testing of small transactions must still remain high among client employees. Auditors must invest more in unpredictable detailed testing up to a point where the probability of being audited for even small transactions is significant.

Probably the worst-case scenario that virtually eliminated fear of getting caught was Andersen's notoriously defective audits of Worldcom. I'm told (rumor mill) that an Andersen auditor had not even been seen in Worldcom's purchasing department for a number of years. What is the first department an auditor should investigate for fraud?

Bob Jensen

March 28, 2004 reply from Glen L Gray [vcact00f@CSUN.EDU]

I know a treasurer of a major company. It used to bug him that the auditors came by every year and take up her staff's time collecting & reconciling bank and investment information. Then a few years ago, they just stopped showing up in the treasury dept. I've always wondered what the auditor's risk model was if suddenly cash and investments were no longer important.

Jensen Comment

April 9, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

Surely not the worst in history. The Equity Funding scandal from the 1960s must still take pride of place. As I recall the insurance company had, according to its records, insured all of the population of the USA, or something like that. A problem caused by a lack of analytical review. HIH was up there too. What was happening in that case is so egregious, it is humourous (presumably unintentionally so). To make a film of it Steve Martin would be cast in the role of the CEO, Bill Murray the CFO and John Cleese the auditor.

April 9, 2010 reply from John Anderson [jcanderson27@COMCAST.NET]

“Billion Dollar Bubble” is the movie about Equity Funding.

After begin told a few years ago that the position of the PCAOB was that the General Computer Controls could never lead to a Material Weakness, I brought up Equity Funding!

I was told that incident occurred too long ago!

If I knew where the guy was today, I’d ask him if Madoff is recent enough!

Best Regards!

John

John Anderson, CPA, CISA, CISM, CGEIT, CITP
Financial & IT Business Consultant 14 Tanglewood Road Boxford, MA 01921
jcanderson27@comcast.ne t
978-887-0623 Office 978-837-0092 Cell 978-887-3679 Fax

Jensen Comment
In recent years the PCAOB has had a tremendous impact on the writing of auditing controls and in conducting inspections of actual audits and audit firms.

For example, the PCAOB imposed a record fine of $1 million on Deloitte.

Here’s an example of an inspection (in this case KPMG’s lack of detailed testing of poisoned mortgages):

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.

Bob Jensen's threads on risk-based auditing ---
http://www.trinity.edu/rjensen/fraud001.htm#RiskBasedAuditing

"What Is the Auditor's Role in Finding Fraud? The PCAOB is trying to figure out how to explain the answer to the public," by Sarah Johnson, CFO.com, April 13, 2010 ---

In the standard audit reports that accompany corporate financial statements, the auditor's responsibility for detecting fraud is not discussed. Indeed, the word fraud isn't mentioned at all. Yet whenever an accounting deception is uncovered, one of the first questions investors ask is, "Where were the auditors?"

The auditing profession calls the discrepancy between what investors expect and what auditors do an "expectations gap." In recent years, audit firms have attempted to close the gap by educating the public on their role. Last May, for instance, the Center for Audit Quality, the trade group for audit firms, issued a brochure on public-company accounting that said auditors consider potential areas of misconduct for a particular company when deciding what areas of a business to review. However, the CAQ cautioned, "because auditors do not examine every transaction and event, there is no guarantee that all material misstatements, whether caused by error or fraud, will be detected."

Now, the Public Company Accounting Oversight Board (PCAOB) is also trying to close the expectations gap, based on a recommendation made more than a year ago by a Treasury Department–appointed advisory group that studied the auditing industry. The advisory group suggested that the audit report — which is the sole communication between auditors and investors on a particular company — explain the auditors' role and their limitations in finding fraud.

Such a clarification had been demanded by observers of the advisory group. "If the discovery of material errors and fraud is not a major part of what the audit is about, it is not clear what value-added service the auditor offers the investor and capital markets," wrote Andrew Bailey, University of Illinois accountancy professor emeritus.

Officially, the PCAOB's rules require auditors to provide "reasonable assurance" that the financial statements they've reviewed "are free of material misstatement whether caused by error or fraud." However, the language auditors use in their reports doesn't match the text of the rules. In a meeting last week, the PCAOB's own advisory group suggested that auditor reports be revised to add the phrase "whether caused by error or fraud" to indicate that auditors do have some responsibility for noticing fraud.

On their own, audit reports don't tell investors how auditors reached their conclusions beyond stating the general scope they worked under and that they followed generally accepted auditing standards. Written in boilerplate language, the reports are instead short summaries expressing that the financial statements under review fairly present the company's operations and cash flows.

Many years ago, auditor reports included the term certify as if to guarantee the reviewed financial statements with an external stamp of approval. But that wording stopped being used in the 1930s, according to the PCAOB. Since then, the reports have been considered to be opinions. However, the reports do "not adequately reflect the amount of audit work and judgment" that go into drawing those opinions, the Treasury advisory group concluded.

Some investors, such as those who responded to a 2008 CFA Institute survey, would like auditors to identify their clients' key risks as well as highlight areas that could possibly have questionable estimates made by management. "Investors want to know where the high risks are," said Mary Hartman Morris, a California Public Employees' Retirement System investment officer, at the PCAOB meeting.

However, except for its investor members, the PCAOB's advisory group — which also includes finance executives, accounting-firm representatives, and accounting professors — generally refrained from recommending that audit reports move in a more detailed direction. The group cited the complexity of amending existing auditing standards, the possibility of increased liability, and the uncertainty over whether doing so would provide true value to investors. The group also largely passed over the idea of going beyond the current "pass/fail" model for the audit report, such as by instituting a grading system.

For the most part, the advisory group discouraged the regulator from changing auditors' responsibilities or adding new procedures to their workloads. However, they seemed to agree that the public needs a more realistic view of an auditor's job. For example, "some people seem to confuse falsified documents, which the auditor can't authenticate, and falsified accounting records, which auditors should authenticate," said Douglas Carmichael, an accountancy professor at Ziklin School of Business at Baruch College.

As the PCAOB contemplates a solution, the board may need to think more about investors' wants rather than their expectations, suggested PCAOB board member Charles Niemeier. "Investors are not satisfied with the status quo," he said, "and I think that is justified, considering the disclosure of financial problems tends to come after the fact."

In the meantime, the PCAOB is working on establishing a financial-reporting fraud center for collecting information on preventing and detecting fraud. The regulator published a job posting for a director last month.

Bob Jensen's threads on auditing professionalism ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Are Auditing Firms Getting the Professionalism Message?

April 12, 2010 message from David Albrecht [albrecht@PROFALBRECHT.COM]

Bob, in the same way that not all auditors always act properly, it is just as fair to say that not all auditors always act improperly. I think that almost all act improperly at some time, and almost all act properly sometime. To say otherwise is to deny human nature.

As a critic of the current system, my position is that (1) it doesn't take too many improper acting auditors crossing the line for the system to be broken, and (2) if the line hasn't been crossed, it is being tap danced on. Supporting my position is the recognition that significant economic incentives exist for auditors to act improperly in certain circumstances.

I recall reading Arthur Young's speech, "They still don't get it." After the dot-com crash and AA's flameout, I was of a mindset that indeed the line had been crossed by all of the Big 5, and probably GT. Many were getting to that mind-set. I've even heard you say that SOX saved the audit industry. If that's the case, then it must have been in danger.

I have written a couple of posts which you have forwarded here, posts that say "they" really still don't get it. Coupled with the reasonable question, "Where were the auditors?" during the past crisis, and I'm ready to start looking for alternatives. Yes, a majority of auditors do the right thing, more likely than not. However, the business/auditor mindset is such that improper audit actions are rationalized away. Although this rationalization doesn't occur to every auditor every day, it does occur to a majority of auditors at least once in a blue moon.

When you combine the risk-averse nature of investors with their realization that the audit game is rigged, I think it a loser's game to play.

Let me use an analogy. There's a husband and wife. Both are at party, clothed, and in close proximity. A temptress appears and suggests that the husband accompany her to a bedroom for some mind-boggling (and illicit) sex. Does the wife fear that the husband will do the wrong thing? Probably not. Even if the husband wants to he isn't going to leave in full sight of his wife. The husband will probably do the right thing and refuse the temptress, thereby acting in the best interest of the wife. Now, shift some circumstances. The husband got tired, went up to bed, removed all clothing and tries going to sleep. The temptress sneaks up to the bedroom, removes her clothing, slides under the covers and placing a hand on the husband's genitals, asks, "can we do it now?" In this case (with the wife being somewhere else), will the wife fear that her husband will do the wrong thing? Yeah! Husbands have the capacity to let their wives down at just the wrong time.

It's the same way with auditors. Most of the time investors don't fear that auditors will let them down. It's just that the auditors tend to let the investors down at just the wrong time. The wrong times destroy trust and break the system.

I think that major structural changes need to be made. That the SEC has decided to change the game by destroying GAAP through the convergence process to me means that the traditional auditor model is no longer relevant. The traditional audit model might very well be salvageable if only bright lines hadn't been replaced in so many instances by "company judgment". As Tom Selling has written, who can audit that and produce results that could be achieved with bright-line rules and auditors willing to identify and speak up about non-compliance? If auditors are not willing to speak up against non-compliance when there are bright lines,then what value will auditors supply when there are no bright lines and little to speak up about?

Besides, you have the comparison group wrong. If you are comparing auditors acting in the public interest, then you need to compare their performance to some other group acting in the public interest. Pick your group. The SEC? broken or perilously close to it. Although legislatively charged with establishing accounting standards, it views this charge with such disdain that it is farming it out to a foreign group over which it has no control and probably little influence over the long-run. Law enforcement groups such as police? Oh my is there lots of corruption here. DA's? There are lots of stories of innocents being sacrificed in order to keep conviction rates up. Congress? The presidency? Give me a break.

If we remove auditable accounting standards, then I say that the system is broken and we need to put the auditors out of our misery.

David Albrecht

April 13, 2010 reply from Bob Jensen

Hi David,

One minor correction. It was Art Wyatt who gave the “They Just Don’t Get it Speech” at an AAA Annual Meeting plenary session ---
Art Wyatt admitted:
"ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf

Art Ramer Wyatt has an interesting and remarkable history as a University of Illinois Professor who became the lead research partner for Andersen and, after Andersen imploded, returned to the University of Illinois. Along the way he became a member of the FASB, President of the AAA, and has many other honors bestowed upon him as reported by the Accounting Hall of Fame ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/arthur-ramer-wyatt/

Art’s been one of the most active and long-time volunteers on the auditing standards executive committee of the AICPA.

I’ve shared a number of speaking platforms with Art over the years. One thing I greatly admire about Art over his entire professional career is the war he’s conducted on off-balance-sheet financing. I’m certain in my own mind that Art was not aware of the bad stuff taking place at Enron and Worldcom. He might’ve worked more proactively to centralize some Andersen’s Executive Office powers after the Waste Management scandal early on where Andersen got one of its first real warning signals that the Chicago Executive Office should’ve been more involved in Andersen’s largest audits. Auditing quality control at Andersen was not the number one Executive Office priority. Apparently Art, like Art’s Executive Office colleagues, did not “get it” at Andersen.

After Enron, when he returned to teaching, Art “got it” whereas the practicing profession, in his viewpoint, did not get it as well as it should be getting it.

I put Art on the same pedestal as Denny Beresford in my personal accountancy heroes platform.

I agree with you, David, about the many unpublicized competent and professional audits that take place. And you can tell that I admire Francine’s informative blogs about the audits that failed. I tracked the failures in my own archives for an even longer period of time at http://www.trinity.edu/rjensen/fraud001.htm

And I agree with Francine that the PCAOB has been doing its job. But I do not agree with her that “nobody is paying attention to the PCAOB.” This is easy to refute just by talking with Deloitte’s former quality control partner Jim Fuehrmeyer (now at Notre Dame) and another one of my heroes Paul Pacter with Deloitte and the IASB. I think the insiders will tell you that they are paying attention to the PCAOB.

From: Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]
Sent: Tuesday, March 23, 2010 9:21 AM
To: Jensen, Robert
Subject: FW: Deloitte

Bob
I was the “Professional Practice Director”, that’s the audit quality control guy, for Deloitte’s Chicago office for the six years prior to my retirement in May 2007. I got to experience first-hand everything from the absorption of AA’s people in Chicago to the advent of the PCAOB and its annual inspection process the first few years. I don’t think most folks have any appreciation for the very real impact the PCAOB has had on the profession. The quality of documentation, the increased amount of partner involvement, the added quality control processes, the expansion of detail testing – the PCAOB has had a huge impact. Most folks also don’t have an appreciation for the impact of 404 not only on the audit process but on corporate cultures as well. As you pointed out a few messages ago, we do see all the failings in the press, but what we don’t see is all the positives and all the improvements.
Jim

Jensen Comment
As an auditor it would be reckless to ignore the PCAOB, especially in the United States where the plaintiff’s tort lawyers are pouncing on every weakness in an audit firm’s defense. Unlike Francine, I think that the PCAOB has been doing its job and that the people that count have been listening. That does not mean that the auditing firms have been pointing to each others’ PCAOB audit deficiencies when recruiting our new graduates. But I would not expect them to do this since the deficiencies arose on particular audits relative many other audits that were not deficient or caught being deficient.

In retrospect I think the auditing firms are “getting it” just like I think worker/product safety is truly a priority in the majority of our mining and manufacturing operations in America. But there are failures, some of them criminal, that simply reinforce the adage that no person and no organization is perfect all of the time. Some are just worse than others at times, and we must strive to minimize the imperfections.

Auditing is essential for detection and prevention of many bad things in any economic system ranging from communism to capitalism. Until people are perfect, we will need auditors.

But like Art Wyatt and the rest of the Executive Office folks at Andersen, perhaps the executive offices of the surviving large international accounting firms are "not getting it" as well as they should be "getting it." This may be what Francine has in mind, although I think she's not been giving sufficient credit where credit is due on the great audits taking place and the bad stuff the mere act of auditing is preventing.

But like Art Wyatt and the rest of the Executive Office folks at Enron, perhaps the executive offices of the surviving large international accounting firms are "not getting it" as well as they should be "getting it." This may be what Francine has in mind, although I think she's not been giving sufficient credit where credit is due on the great audits taking place and the bad stuff the mere act of auditing is preventing.

Bob Jensen

Bob Jensen's threads on auditing professionalism and independence are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

From The Wall Street Journal Accounting Weekly Review on April 9, 2010

AT&T Fights Pension Suit
by: Ellen E. Schultz
Apr 07, 2010
Click here to view the full article on WSJ.com

TOPICS: Contingent Liabilities, Legal Liability, Pension Accounting

SUMMARY: AT&T changed its defined benefit pension plan to a cash balance plan in 1998. A long-running case by 24,000 current and former employees seeks one of the largest potential claims in pension litigation based on these plaintiffs' argument that AT&T discriminated against older workers upon implementing this change. The focus of the accounting question at hand now is not pension accounting but disclosure of the contingent liability, or lack thereof, by AT&T. "Last May, the Securities and Exchange Commission asked AT&T why it hadn't disclosed its potential exposure in the pension case." Legal papers filed Monday in federal court in Newark, N.J., include the first publicly disclosed estimate for potential damages.

CLASSROOM APPLICATION: Accounting and disclosure requirements for contingent liabilities, in this case a lawsuit related to pension plan benefits, can be covered with this article.

QUESTIONS:
1. (Introductory) What is a defined benefit pension plan? What is a cash balance plan?

2. (Introductory) According to the article, what improper action does the lawsuit claim that AT&T committed against current and former employees when it changed to a cash balance pension plan?

3. (Advanced) Even if AT&T loses this case, the company "...would face no cash impact for the $2.3 billion pension portion of the claim" according to the article. Does this mean that there would be no financial statement impact from this lawsuit? Explain.

4. (Introductory) How did AT&T respond when the SEC "...asked why it hadn't disclosed its potential exposure in the pension case"?

5. (Advanced) What are the requirements in accounting for and disclosure of contingent liabilities from lawsuits? What do you think must be the basis for AT&T's response to the SEC? In your answer, comment on the fact that Monday's legal filing included "the first publicly disclosed estimate for potential damages."

6. (Advanced) Access AT&T's annual report for 2009 filed with the SEC on 2/25/2010. The interactive form of the filing is available at http://www.sec.gov/cgi-bin/viewer?action=view&cik=732717&accession_number=0000732717-10-000013 Alternatively, click on the live link to AT&T in the online article, click on SEC Filings on the left hand side of the page, scroll to the filing on 2/25/2010 (at least one page back) and click on the interactive data link. Review the disclosures under Note 11 and Note 15. Does your review confirm your answer to the question above? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

"AT&T Fights Pension Suit," by: Ellen E. Schultz, The Wall Street Journal, April 6, 2010 ---
http://www.wsjsmartkit.com/wsj_redirect.asp?key=AC20100408-01&mod=djem_jiewr_AC_domainid

AT&T Inc. is seeking to dismiss a long-running pension case alleging age discrimination that seeks $2.3 billion in damages, according to documents filed this week in a federal court.

The suit alleges a 1998 pension change effectively froze the pensions of 40,000 older management employees at AT&T, in some cases for years, but not those of younger employees. AT&T said the pension didn't discriminate against older workers.

"We believe the conversion to our cash balance plan was appropriate and in accordance with all legal obligations," said AT&T spokesman Mark Siegel. "We believe our filing speaks for itself in explaining why we have no additional liabilities to these retirees."

The suit, filed in 1998, has received little attention despite the number of plaintiffs—24,000 current and former employees—and the size of the potential damages, one of the largest ever in pension litigation. Legal papers filed Monday in federal court in Newark, N.J., include the first publicly disclosed estimate for potential damages.

The $2.3 billion potential claim dwarfs the well-publicized $1 billion noncash charge the company will take to reflect the recent loss of its deductions for health-care subsidies it receives from the government.

Last May, the Securities and Exchange Commission asked AT&T why it hadn't disclosed its potential exposure in the pension case. AT&T responded that it didn't think the case met the reporting threshold for disclosure, SEC filings show.

Pension cases typically are decided by judges, and there are no punitive damages. But because this case includes an age-discrimination claim, under federal law the judge could send it to a jury trial. If a jury found that the company willfully discriminated against older workers, it could award punitive damages that would double the size of the claim to $4.6 billion.

However, if the case went to trial and the company lost, it would face no cash impact for the $2.3 billion pension portion of the claim. That is because the additional benefits to current and former management employees would be paid from the pension plan, which remains well-funded. In its motion for dismissal, AT&T is asking the judge to throw out the case without a jury trial.

AT&T was one of dozens of big companies including International Business Machines Corp. and Xerox Corp. that changed their traditional pensions to "cash-balance" plans in the 1990s. The change saved companies money because instead of calculating benefits by multiplying years of service and salary—which produces rapid pension growth in later years—the companies converted the pension to a cash-out value. This "balance" would then grow at a flat annual rate, say 4% of pay.

Among the plaintiffs in the case is Gerald Smit. In 1997, Mr. Smit was 47 and his pension was valued at $1,985 a month when he reached age 55, according to papers filed in the case. He continued to work at AT&T for eight more years, and when he retired in 2004, his pension was still worth $1,985 a month, according to court documents.

Minutes of a 1997 meeting of AT&T's pension consultants, included in court documents, noted that "employees in 40s could lose, [and] have to wait 10 years for benefits." Company spreadsheets, which were among the exhibits submitted by plaintiffs, found that many would wait three to eight years to begin building a benefit. By contrast, the benefit would build "immediately for younger employees," according to the meeting minutes.

AT&T doesn't dispute there were long waiting periods for benefits to build. But it said in court filings that the older workers' pensions were affected because the former pension plan included a formula that boosted benefit growth as employees approached age 55. AT&T calls this subsidy a "disparity," according to papers filed in the case, which "benefits older workers."

Many companies established opening "account balances" for older employees that were lower than the cash-out amounts they had earned. For example, a worker might have earned a pension that, if converted to a lump sum, would be worth $150,000. But its opening account balance would be set at $100,000. The balance would be effectively frozen until the worker received enough annual credits over the years to restore it to $150,000. Only then would the pension begin to increase again

The 2006 Pension Protection Act banned companies from freezing the benefits of older employees when it changes the formula, a practice called "wearaway." Not all cash-balance plans have wearaway; the plan covering AT&T union workers is among those that do not.

Documents filed by the plaintiffs' experts estimate that the average loss to people over age 45 was $65,000. SEC filings show that under the 2004 severance plan for senior officers, the officers retained the right to "participate and recover damages or other relief in the case." The company spokesman declined to comment.

"Pension Funding Is Up, but Shortfalls Remain Companies upped their pension contributions in 2009, but many plans face trouble ahead," by Alix Stuart - CFO.com, April 8, 2010 --- http://www.cfo.com/article.cfm/14489734/c_14490044?f=home_todayinfinance

Most of the nation's largest pension plans kept themselves out of trouble last year, according to a recent analysis of 10-K filings by Towers Watson, but many still face substantial underfunding after the 2008 market meltdown.

According to the analysis, aggregate pension contributions for the 100 largest plans nearly doubled last year, from $15.6 billion in 2008 to $30.8 billion in 2009. Those contributions, combined with an average 18% return on plan investments, helped push those plans to an average funding ratio of 81% at the end of last year, compared with 75% at year-end 2008. Only 17% of plan sponsors had funding ratios below 70%, compared with 41% the year earlier.

"It looks like plan sponsors put in more than the minimum contributions, probably enough to avoid the benefit restriction provisions in the Pension Protection Act of 2006," notes Mark Ruloff, director of asset allocation for Towers Watson. Under the PPA, companies start to face restrictions on their funds, such as constraints on the ability to offer retirees lump-sum payouts, if their funding level dips below 80%. If their funding level falls below 60%, companies must stop accruing new benefits for the participants until the level improves.

Liabilities also increased in 2009, due to lower discount rates used to calculate them. (The average discount rate last year was 5.92%, compared with 6.38% in 2008.) At year-end the largest plans had an aggregate deficit of $183.5 billion, compared with a deficit of $209.6 billion in 2008.

Companies report that they expect to reduce their pension contributions by about one-third in 2010, according to the Towers Watson research, with a projected $19.6 billion earmarked for the plans. However, PPA requirements that plans be 100% funded will likely mean much higher cash outlays in 2011 and 2012.

"We're looking at a doubling, tripling, or even quadrupling of contributions from already-high levels going into 2011 and 2012, absent something miraculous happening in the market," says Alan Glickstein, senior consultant at Towers Watson.

Regulatory relief in the form of an extension to the seven years that companies currently have to make up funding shortfalls would also be a potential help. The Senate passed a bill earlier this month that would allow employers two options along those lines, but the House of Representatives has yet to act on it. Extending the time frame "would probably still result in higher contributions than in the past, but they would not rise as dramatically as they would otherwise," says Glickstein.

An analysis of the asset mix of the largest pension sponsors showed only a slight shift away from equities, with the average target equity allocation at 52.8% for 2010, down from 55.1% in 2009. That's reflective of many large sponsors having already moved to a liability-driven strategy, in which assets are more heavily focused on fixed-income vehicles.

Ruloff says he expects the trend away from equities toward fixed income to continue, as more companies freeze or close their plans and have less of a need for "excess returns to cover growing accruals." He is also urging companies to take a proactive approach to likely changes in pension-accounting rules that would increase the level of equity-related volatility that needs to be reflected in plan valuations.

"The pace of change may be slower than what we've seen in recent years," he says, "but the shift away from equities could move at 5% a year for many years in the future."

Bob Jensen's threads on accounting for pensions and post-retirement beneftits ---
http://www.trinity.edu/rjensen/theory01.htm#Pensions

Bob Jensen's threads on accounting for intangibles and contingencies ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

A Teaching Case from the Commerce Secretary of the United States

From The Wall Street Journal Accounting Weekly Review on April 9, 2010

Don't Believe the Writedown Hype
by: Gary Locke
Apr 01, 2010
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, Income Tax, Medicare, Tax Deferrals

SUMMARY: Mr. Locke is the commerce secretary of the United States. In this opinion page piece, he expresses support for the recently-passed health care reform act as being "focused on three goals: protecting Americans' choice of doctors and health plans, assuring quality and affordable health care for all Americans, and reducing costs for families and businesses...[Mr. Locke notes that], in recent days, critics have seized on a minor provision in the law to suggest it's already increasing health-care costs for businesses. [He argues that] a fair reading of this provision suggests that its actual impact is quite modest, and far outweighed by the benefits for large businesses..." stemming from the three benefits described above. Mr. Locke focuses on large businesses because those are the firms reporting charges to write off deferred tax assets in the first quarter of 2010 stemming from a change instituted in the new law. The change eliminates deductibility of prescription drug benefits provided to retirees if those benefits have been subsidized by the federal government. "When the Medicare Part D prescription drug bill passed in 2003, businesses were given a double subsidy to help cover the cost of providing prescription drug coverage to their retirees. The government picked up 28% of the cost of their retiree prescription drug plans, and businesses were allowed to both exclude that 28% subsidy from their income and at the same time deduct that subsidy from their income for tax purposes... [The WSJ] reported...that while one company calculated a $100 million hit to its first-quarter earnings, its actual cost after taxes and subsidies, beginning in 2013, was closer to $7 million a year, or less than 1% of its profits last year." That final reference is to AT&T's write-off of deferred tax assets as described in the related article.

CLASSROOM APPLICATION: The article is useful to discuss accounting for income taxes, deferred tax assets, the lack of time value of money consideration in accounting for income taxes, and the impact of a change in estimate, particularly on quarterly reporting.

QUESTIONS:
1. (Introductory) What is a deferred tax asset? When is such an asset recorded? When is its value reduced by an allowance?

2. (Introductory) What health care cost deduction resulted in companies such as AT&T, Caterpillar, Inc., 3M Co. and others recording deferred tax assets? Explain your understanding of this particular example of a deferred tax asset.

3. (Introductory) What change in law was enacted with the health care reform, which required the companies to write off these deferred tax assets?

4. (Advanced) Why must companies record the entire amount of the write-off of deferred tax assets in one quarter? In your answer, cite authoritative accounting literature contained in the FASB codification which establishes these requirements.

5. (Advanced) Do you think that the amount of the Q1 2010 write-offs accurately measures potential cost increases to U.S. businesses stemming from the health care reform legislation? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
AT&T Joins in Health Charges
by David Reilly, Ellen E. Schultz and Ron Winslow
Mar 27, 2010
Page: A1

"Don't Believe the Writedown Hype," by Gary Locke, The Wall Street Journal, April 1, 2010 ---
http://www.wsjsmartkit.com/wsj_redirect.asp?key=AC20100408-00&mod=djem_jiewr_AC_domainid

President Obama began his campaign to reform the American health-care system focused on three goals: protecting Americans' choice of doctors and health plans, assuring quality and affordable health care for all Americans, and reducing costs for families and businesses.

The new comprehensive health-care legislation meets these goals, and will significantly benefit American businesses by slowing and eventually reversing the tide of crippling premium increases washing over our nation's employers.

These cost savings are real. They will grow over time. And they will make U.S. businesses more competitive.

First, by drastically cutting the number of uninsured, this law reduces the hidden tax of about $1,000 for family coverage that those with insurance pay to cover the cost of the uninsured who rely on emergency rooms for care.

Second, the law invests $5 billion in a new reinsurance program for early retirees starting this year. For employers paying for their retirees between ages 55-64, this provision will directly reduce family premiums by as much as $1,200.

Third, the new law contains numerous reforms that a 2009 study by the Business Roundtable—an association of CEOs of leading U.S. companies—says will help slow the growth rate of health costs over time.

It places a fee on insurance companies' most expensive plans that independent experts agree will put downward pressure on the long-term growth of health costs.

It empowers an Independent Payment Advisory Board to keep Medicare cost growth in check and promote payment and health delivery system reforms. And it realigns incentives to reward medical providers for the value, not the volume, of their care.

Based on the midrange estimates of the nonpartisan Congressional Budget Office (CBO), the present value benefit of the premium reductions from these reforms over the next three decades is in excess of $200 billion.

Add these system-wide reforms with measures like the $40 billion in tax credits that will be available to about four million small businesses over the next decade to help cover the cost of employee health coverage, and what you have is a law that is unquestionably pro-business and pro-jobs.

However, in recent days, critics have seized on a minor provision in the law to suggest it's already increasing health-care costs for businesses. A fair reading of this provision suggests that its actual impact is quite modest, and far outweighed by the benefits for large businesses outlined above.

Let's explain how this started. When the Medicare Part D prescription drug bill passed in 2003, businesses were given a double subsidy to help cover the cost of providing prescription drug coverage to their retirees. The government picked up 28% of the cost of their retiree prescription drug plans, and businesses were allowed to both exclude that 28% subsidy from their income and at the same time deduct that subsidy from their income for tax purposes.

In 2013, that changes. Under the new law, businesses will still get the same 28% subsidy, and it will still be tax free. They just don't get to deduct the subsidy.

Seems reasonable, right? This is how virtually every other federal subsidy for businesses and individuals is treated by the IRS. Indeed, Donald Marron, acting CBO director for President George W. Bush, put it this way: "[A]s the Joint Committee on Taxation recently noted, that treatment is highly unusual. In my view, it's right that the recent health legislation closed that loophole."

This change has garnered recent headlines because, to comply with accounting laws, companies affected by the provision have taken a one-time charge reflecting the loss of future tax deductions over the decades-long duration of their retiree health-care plans. Critics have seized on this accounting adjustment to suggest these costs—as much as $1 billion in one company's case—are going to place immediate and substantial cost burdens on America's businesses.

This is disingenuous.

The actual cash flow impact of these provisions begins in 2013, and is only a tiny fraction of the accounting charge-offs.

This newspaper reported last Friday that while one company calculated a $100 million hit to its first-quarter earnings, its actual cost after taxes and subsidies, beginning in 2013, was closer to $7 million a year, or less than 1% of its profits last year.

Credit Suisse's response to the tax controversy was: "don't overreact to the hit on earnings." Morgan Stanley referred to it as "noise" that would have "no impact whatsoever" on their view of this earnings cycle. And UBS projected that the impact in virtually all cases represented less than 1% of market capitalization for affected companies.

When you look past the hype and the overheated rhetoric, the benefits of the health reforms for America's businesses large and small far outweigh the impact of this small tax provision.

And while critics have rushed to highlight this small accounting measure, they conveniently leave out the one fact on which every serious health-care analyst agrees: The status quo was completely unsustainable for American businesses.

The Business Roundtable study said that if current cost trends continued through 2019, the total cost of employer and employee premiums and out-of-pocket expenses would be 166% higher than it is today.

That would either force companies to decrease or eliminate employee health-insurance benefits or subject them to back-breaking costs that would make them less competitive in the global marketplace.

The bill President Obama signed into law last week helps avoid each of these equally unappealing options.

I understand that in these difficult economic times, the potential for any additional expense is not welcomed by American businesses. But in the long run, the health insurance reform law promises to cut health-care costs for U.S. businesses, not expand them.

That's good for them. That's good for their employees. That's good for America.

Mr. Locke is the commerce secretary of the United States.

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

The Writedowns Revisited: Commerce Secretary Gary Locke owes CEOs an apology

Rep. Waxman has since canceled those hearings with much less dudgeon or media fanfare, and the report from his own staffers explains his retreat. "The companies acted properly and in accordance with accounting standards in submitting filings to the SEC in March and April," they write. "These one-time charges were required by applicable accounting rules." This may stand as the first time in history that Mr. Waxman has admitted a mistake.
Scroll Down for Update on April 29

Ketz Me If You Can
Another One from That Ketz Guy (this time questioning the reasoning of our Secretary of Commerce)
"Does Gary Locke Support Accounting Lies?" by: J. Edward Ketz, SmartPros, April 2010 ---
http://accounting.smartpros.com/x69221.xml

I just don't understand the current administration. You would think that after the last decade of financial thievery and accounting mischief, the Obama administration would not tolerate a return to such prevarications. But if one listens to his Secretary of Commerce Gary Locke, that might not be the case.

Mr. Locke wrote an op-ed (“Don’t Believe the Writedown Hype”) that appeared in the Wall Street Journal April 1, 2010. At least the date of publication was appropriate.

He repeats the political dogma that the recently passed healthcare act will reduce the number of uninsured, it will invest $5 billion in a reinsurance program, it contains a number of reforms that will slow the rate of increase in health care costs, and it creates a board that will restrain Medicare costs. Locke then asserts that these changes will benefit corporations as well as individuals.

While I believe these assertions exaggerate the benefits of the bill and ignore its dysfunctional components, for the sake of argument, let’s assume that Gary Locke is correct. So what? Any cost reductions will be accounted for in the future when the business enterprise actually enjoys cost reductions. Accountants don’t dream of fewer expenses and then book them. We wait for history to prove their validity and to correct any errors.

Locke then criticizes commentators for focusing on a “minor” provision in the legislation that increases health-care costs. He then asserts without proof that the actual impact will be “quite modest.” What puffery!

What motivated this discussion was various 8-Ks issued by corporate America. On March 24, AT&T informed investors that it would take a charge of about $1 billion. Specifically, it stated:

Included among the major provisions of the law is a change in the tax treatment of the Medicare Part D subsidy. AT&T… intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change. 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.

I find it interesting that Locke calls this a “minor” provision but AT&T calls it “major” because it involves an expense of $1 billion. I guess it depends on one’s perspective. To AT&T’s investors, $1 billion is probably significant as it reduces quarterly earnings by one-third. But to the government which creates budget deficits of trillions of dollars per year, maybe $1 billion is immaterial.

I would think that the administration would applaud the honesty by AT&T’s managers. FAS 106 specifies the accounting for other postemployment benefits (OPEBs), including their tax effects. As this legislation removes a tax subsidy from corporations (I’ll leave it to others to debate the merits of this part of the bill), the firms do indeed incur higher healthcare costs. And these costs are immediate and persistent. (There also is interaction with FAS 109, accounting for deferred taxes, but that need not concern us.)

The investment community needs honesty and I hope the administration does too. Accordingly, Mr. Locke should not be so critical of the immediate recognition of additional costs by corporations which are real and immediate and should be recognized in income statements. And he should not be pushy for the recognition of cost reductions until they materialize—if they in fact materialize.

Other companies are also issuing 8-Ks and announcing similar writedowns: Caterpillar, $100 million; Deere, $150 million; and Boeing, $150 million. Some estimate that when all is said and done, such writedowns will amount to $15 billion or so. Additionally, some corporations are doubtless considering whether to reduce the OPEBs they offer employees. I would not characterize these effects as “quite modest.”

On March 26, Henry Waxman announced that he would require corporate executives to appear before his committee on April 21 to determine whether they are playing politics through these 8-Ks. Unless Mr. Locke supports accounting lies, he too should make an appearance and explain to Mr. Waxman how investors and creditors appreciate more honesty and transparency in the accounting reports. Of course, it is possible that some members of Congress would prefer accounting shenanigans if they don’t reveal some of the costs of the recently passed legislation.

Gary Locke admonishes readers to “look past the hype and the overheated rhetoric.” I suggest he read his own sentence. I also suggest he include investors and creditors in the business community, for without their capital, the business of America ceases to operate. As Commerce Secretary, he should applaud the recent 8-Ks that managers are releasing. The information is invaluable to investors and creditors.

Another day, another never-mind ObamaCare moment. Earlier this week, House Democrats concluded that the deluge of corporate writedowns—amounting to about $3.4 billion so far—were in fact the result of ObamaCare, not the nefarious CEO conspiracy that the White House repeatedly cited when it was embarrassed soon after the bill's passage.

Commerce Secretary Gary Locke rushed to attack AT&T, Verizon, Caterpillar and many others reporting losses from a tax increase on retiree drug benefits as "premature and irresponsible." He later took to these pages to denounce those who noticed these writedowns as "disingenuous" and peddling "overheated rhetoric."

Meanwhile, House baron Henry Waxman vowed to summon the offending executives to his committee because their actions "appear to conflict with independent analyses, which show the new law will expand coverage and bring down costs."

Mr. Waxman has since canceled those hearings with much less dudgeon or media fanfare, and the report from his own staffers explains his retreat. "The companies acted properly and in accordance with accounting standards in submitting filings to the SEC in March and April," they write. "These one-time charges were required by applicable accounting rules." This may stand as the first time in history that Mr. Waxman has admitted a mistake.

The larger question is what motivated the White House to unleash this assault. Democrats were amply warned about the destructive consequences of these tax changes, and if they really thought these companies were acting out of political motives, then they didn't understand what was in their own bill. Or at least that's one possibility.

More likely is that they did know and were simply trying to intimidate business and mislead the public in the early days of what was supposed to be the rapturous response to ObamaCare's passage. Instead, the public has turned even more negative on the bill as Americans discover that it won't control costs but will raise insurance premiums and taxes. No wonder Democrats want to change the subject to immigration and Goldman Sachs.

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

It is the mark of an educated mind to be able to entertain a thought without accepting it.
Aristotle

"Science Warriors' Ego Trips," by Carlin Romano, Chronicle of Higher Education's The Chronicle Review, April 25, 2010 ---
http://chronicle.com/article/Science-Warriors-Ego-Trips/65186/

Standing up for science excites some intellectuals the way beautiful actresses arouse Warren Beatty, or career liberals boil the blood of Glenn Beck and Rush Limbaugh. It's visceral. The thinker of this ilk looks in the mirror and sees Galileo bravely muttering "Eppure si muove!" ("And yet, it moves!") while Vatican guards drag him away. Sometimes the hero in the reflection is Voltaire sticking it to the clerics, or Darwin triumphing against both Church and Church-going wife. A brave champion of beleaguered science in the modern age of pseudoscience, this Ayn Rand protagonist sarcastically derides the benighted irrationalists and glows with a self-anointed superiority. Who wouldn't want to feel that sense of power and rightness?

You hear the voice regularly—along with far more sensible stuff—in the latest of a now common genre of science patriotism, Nonsense on Stilts: How to Tell Science From Bunk (University of Chicago Press), by Massimo Pigliucci, a philosophy professor at the City University of New York. Like such not-so-distant books as Idiot America, by Charles P. Pierce (Doubleday, 2009), The Age of American Unreason, by Susan Jacoby (Pantheon, 2008), and Denialism, by Michael Specter (Penguin Press, 2009), it mixes eminent common sense and frequent good reporting with a cocksure hubris utterly inappropriate to the practice it apotheosizes.

According to Pigliucci, both Freudian psychoanalysis and Marxist theory of history "are too broad, too flexible with regard to observations, to actually tell us anything interesting." (That's right—not one "interesting" thing.) The idea of intelligent design in biology "has made no progress since its last serious articulation by natural theologian William Paley in 1802," and the empirical evidence for evolution is like that for "an open-and-shut murder case."

Pigliucci offers more hero sandwiches spiced with derision and certainty. Media coverage of science is "characterized by allegedly serious journalists who behave like comedians." Commenting on the highly publicized Dover, Pa., court case in which U.S. District Judge John E. Jones III ruled that intelligent-design theory is not science, Pigliucci labels the need for that judgment a "bizarre" consequence of the local school board's "inane" resolution. Noting the complaint of intelligent-design advocate William Buckingham that an approved science textbook didn't give creationism a fair shake, Pigliucci writes, "This is like complaining that a textbook in astronomy is too focused on the Copernican theory of the structure of the solar system and unfairly neglects the possibility that the Flying Spaghetti Monster is really pulling each planet's strings, unseen by the deluded scientists."

Is it really? Or is it possible that the alternate view unfairly neglected could be more like that of Harvard scientist Owen Gingerich, who contends in God's Universe (Harvard University Press, 2006) that it is partly statistical arguments—the extraordinary unlikelihood eons ago of the physical conditions necessary for self-conscious life—that support his belief in a universe "congenially designed for the existence of intelligent, self-reflective life"? Even if we agree that capital "I" and "D" intelligent-design of the scriptural sort—what Gingerich himself calls "primitive scriptural literalism"—is not scientifically credible, does that make Gingerich's assertion, "I believe in intelligent design, lowercase i and lowercase d," equivalent to Flying-Spaghetti-Monsterism?

Tone matters. And sarcasm is not science.

The problem with polemicists like Pigliucci is that a chasm has opened up between two groups that might loosely be distinguished as "philosophers of science" and "science warriors." Philosophers of science, often operating under the aegis of Thomas Kuhn, recognize that science is a diverse, social enterprise that has changed over time, developed different methodologies in different subsciences, and often advanced by taking putative pseudoscience seriously, as in debunking cold fusion. The science warriors, by contrast, often write as if our science of the moment is isomorphic with knowledge of an objective world-in-itself—Kant be damned!—and any form of inquiry that doesn't fit the writer's criteria of proper science must be banished as "bunk." Pigliucci, typically, hasn't much sympathy for radical philosophies of science. He calls the work of Paul Feyerabend "lunacy," deems Bruno Latour "a fool," and observes that "the great pronouncements of feminist science have fallen as flat as the similarly empty utterances of supporters of intelligent design."

It doesn't have to be this way. The noble enterprise of submitting nonscientific knowledge claims to critical scrutiny—an activity continuous with both philosophy and science—took off in an admirable way in the late 20th century when Paul Kurtz, of the University at Buffalo, established the Committee for the Scientific Investigation of Claims of the Paranormal (Csicop) in May 1976. Csicop soon after launched the marvelous journal Skeptical Inquirer, edited for more than 30 years by Kendrick Frazier.

Although Pigliucci himself publishes in Skeptical Inquirer, his contributions there exhibit his signature smugness. For an antidote to Pigliucci's overweening scientism 'tude, it's refreshing to consult Kurtz's curtain-raising essay, "Science and the Public," in Science Under Siege (Prometheus Books, 2009, edited by Frazier), which gathers 30 years of the best of Skeptical Inquirer.

Kurtz's commandment might be stated, "Don't mock or ridicule—investigate and explain." He writes: "We attempted to make it clear that we were interested in fair and impartial inquiry, that we were not dogmatic or closed-minded, and that skepticism did not imply a priori rejection of any reasonable claim. Indeed, I insisted that our skepticism was not totalistic or nihilistic about paranormal claims."

Kurtz combines the ethos of both critical investigator and philosopher of science. Describing modern science as a practice in which "hypotheses and theories are based upon rigorous methods of empirical investigation, experimental confirmation, and replication," he notes: "One must be prepared to overthrow an entire theoretical framework—and this has happened often in the history of science ... skeptical doubt is an integral part of the method of science, and scientists should be prepared to question received scientific doctrines and reject them in the light of new evidence."

Considering the dodgy matters Skeptical Inquirer specializes in, Kurtz's methodological fairness looks even more impressive. Here's part of his own wonderful, detailed list: "Psychic claims and predictions; parapsychology (psi, ESP, clairvoyance, telepathy, precognition, psychokinesis); UFO visitations and abductions by extraterrestrials (Roswell, cattle mutilations, crop circles); monsters of the deep (the Loch Ness monster) and of the forests and mountains (Sasquatch, or Bigfoot); mysteries of the oceans (the Bermuda Triangle, Atlantis); cryptozoology (the search for unknown species); ghosts, apparitions, and haunted houses (the Amityville horror); astrology and horoscopes (Jeanne Dixon, the "Mars effect," the "Jupiter effect"); spoon bending (Uri Geller). ... "

Even when investigating miracles, Kurtz explains, Csicop's intrepid senior researcher Joe Nickell "refuses to declare a priori that any miracle claim is false." Instead, he conducts "an on-site inquest into the facts surrounding the case." That is, instead of declaring, "Nonsense on stilts!" he gets cracking.

Pigliucci, alas, allows his animus against the nonscientific to pull him away from sensitive distinctions among various sciences to sloppy arguments one didn't see in such earlier works of science patriotism as Carl Sagan's The Demon-Haunted World: Science as a Candle in the Dark (Random House, 1995). Indeed, he probably sets a world record for misuse of the word "fallacy."

To his credit, Pigliucci at times acknowledges the nondogmatic spine of science. He concedes that "science is characterized by a fuzzy borderline with other types of inquiry that may or may not one day become sciences." Science, he admits, "actually refers to a rather heterogeneous family of activities, not to a single and universal method." He rightly warns that some pseudoscience—for example, denial of HIV-AIDS causation—is dangerous and terrible.

But at other points, Pigliucci ferociously attacks opponents like the most unreflective science fanatic, as if he belongs to some Tea Party offshoot of the Royal Society. He dismisses Feyerabend's view that "science is a religion" as simply "preposterous," even though he elsewhere admits that "methodological naturalism"—the commitment of all scientists to reject "supernatural" explanations—is itself not an empirically verifiable principle or fact, but rather an almost Kantian precondition of scientific knowledge. An article of faith, some cold-eyed Feyerabend fans might say.

In an even greater disservice, Pigliucci repeatedly suggests that intelligent-design thinkers must want "supernatural explanations reintroduced into science," when that's not logically required. He writes, "ID is not a scientific theory at all because there is no empirical observation that can possibly contradict it. Anything we observe in nature could, in principle, be attributed to an unspecified intelligent designer who works in mysterious ways." But earlier in the book, he correctly argues against Karl Popper that susceptibility to falsification cannot be the sole criterion of science, because science also confirms. It is, in principle, possible that an empirical observation could confirm intelligent design—i.e., that magic moment when the ultimate UFO lands with representatives of the intergalactic society that planted early life here, and we accept their evidence that they did it. The point is not that this is remotely likely. It's that the possibility is not irrational, just as provocative science fiction is not irrational.

Pigliucci similarly derides religious explanations on logical grounds when he should be content with rejecting such explanations as unproven. "As long as we do not venture to make hypotheses about who the designer is and why and how she operates," he writes, "there are no empirical constraints on the 'theory' at all. Anything goes, and therefore nothing holds, because a theory that 'explains' everything really explains nothing."

Here, Pigliucci again mixes up what's likely or provable with what's logically possible or rational. The creation stories of traditional religions and scriptures do, in effect, offer hypotheses, or claims, about who the designer is—e.g., see the Bible. And believers sometimes put forth the existence of scriptures (think of them as "reports") and a centuries-long chain of believers in them as a form of empirical evidence. Far from explaining nothing because it explains everything, such an explanation explains a lot by explaining everything. It just doesn't explain it convincingly to a scientist with other evidentiary standards.

A sensible person can side with scientists on what's true, but not with Pigliucci on what's rational and possible. Pigliucci occasionally recognizes that. Late in his book, he concedes that "nonscientific claims may be true and still not qualify as science." But if that's so, and we care about truth, why exalt science to the degree he does? If there's really a heaven, and science can't (yet?) detect it, so much the worse for science.

As an epigram to his chapter titled "From Superstition to Natural Philosophy," Pigliucci quotes a line from Aristotle: "It is the mark of an educated mind to be able to entertain a thought without accepting it." Science warriors such as Pigliucci, or Michael Ruse in his recent clash with other philosophers in these pages, should reflect on a related modern sense of "entertain." One does not entertain a guest by mocking, deriding, and abusing the guest. Similarly, one does not entertain a thought or approach to knowledge by ridiculing it.

Long live Skeptical Inquirer! But can we deep-six the egomania and unearned arrogance of the science patriots? As Descartes, that immortal hero of scientists and skeptics everywhere, pointed out, true skepticism, like true charity, begins at home.

Carlin Romano, critic at large for The Chronicle Review, teaches philosophy and media theory at the University of Pennsylvania.

Jensen Comment
One way to distinguish my conceptualization of science from pseudo science is that science relentlessly seeks to replicate and validate purported discoveries, especially after the discoveries have been made public in scientific journals ---
http://www.trinity.edu/rjensen/TheoryTar.htm
Science encourages conjecture but doggedly seeks truth about that conjecture. Pseudo science is less concerned about validating purported discoveries than it is about publishing new conjectures that are largely ignored by other pseudo scientists.

"Modern Science and Ancient Wisdom," Simoleon Sense, February 15, 2010 --- http://www.simoleonsense.com/modern-science-and-ancient-wisdom/

Pure Munger……must read!!!!!!
This is by Mortimier Adler the author of How to read abook, which as profiled in Robert Hagstrom’s Investing The Last Liberal Art and Latticework of Mental Models.

Full Excerpt (Via Mortimier Adler)

The outstanding achievement and intellectual glory of modern times has been empirical science and the mathematics that it has put to such good use. The progress is has made in the last three centuries, together with the technological advances that have resulted therefrom, are breathtaking.

The equally great achievement and intellectual glory of Greek antiquity and of the Middle Ages was philosophy. We have inherited from those epochs a fund of accumulated wisdom. That, too, is breathtaking, especially when one considers how little philosophical progress has been made in modern times.

This is not say that no advances in philosophical thought have occurred in the last three hundred years. They are mainly in logic, in the philosophy of science, and in political theory, not in metaphysics, in the philosophy of nature, or in the philosophy of mind, and least of all in moral philosophy. Nor is it true to say that, in Greek antiquity and in the later Middle Ages, from the fourteenth century on, science did not prosper at all. On the contrary, the foundations were laid in mathematics, in mathematical physics, in biology, and in medicine.

It is in metaphysics, the philosophy of nature, the philosophy of mind, and moral philosophy that the ancients and their mediaeval successors did more than lay the foundations for the sound understanding and the modicum of wisdom we possess. They did not make the philosophical mistakes that have been the ruination of modern thought. On the contrary, they had the insights and made the indispensable distinctions that provide us with the means for correcting these mistakes.

At its best, investigative science gives us knowledge of reality. As I have argued elsewhere, philosophy is, at the very least, also knowledge of reality, not mere opinion. Much better than that, it is knowledge illuminated by understanding. At its best, it approaches wisdom, both speculative and practical.

Precisely because science is investigative and philosophy is not, one should not be surprised by the remarkable progress in science and by the equally remarkable lack of it in philosophy. Precisely because philosophy is based upon the common experience of mankind and is a refinement and elaboration of the common-sense knowledge and understanding that derives from reflection on that common experience, philosophy came to maturity early and developed beyond that point only slightly and slowly.

Science knowledge changes, grows, improves, expands, as a result of refinements in and accretions to the special experience — the observational data — on which science as an investigative mode of inquiry must rely. Philosophical knowledge is not subject to the same conditions of change or growth. Common experience, or more precisely, the general lineaments or common core of that experience, which suffices for the philosopher, remains relatively constant over the ages.

Descartes and Hobbes in the seventeenth century, Locke, Hume, and Kant in the eighteenth century, and Alfred North Whitehead and Bertrand Russell in the twentieth century enjoy no greater advantages in this respect than Plato and Aristotle in antiquity or than Thomas Aquinas, Duns Scotus, and Roger Bacon in the Middle Ages.

How might modern thinkers have avoided the philosophical mistakes that have been so disastrous in their consequences? In earlier works I have suggested the answer. Finding a prior philosopher’s conclusions untenable, the thing to do is to go back to his starting point and see if he has made a little error in the beginning.

A striking example of the failure to follow this rule is to be found in Kant’s response to Hume. Hume’s skeptical conclusions and his phenomenalism were unacceptable to Kant, even though they awoke him from his own dogmatic slumbers. But instead of looking for little errors in the beginning that were made by Hume and then dismissing them as the cause of Humean conclusions that he found unacceptable, Kant thought it necessary to construct a vast piece of philosophical machinery designed to produce conclusions of an opposite tenor.

The intricacy of the apparatus and the ingenuity of the design cannot help but evoke admiration, even from those who are suspicious of the sanity of the whole enterprise and who find it necessary to reject Kant’s conclusions as well as Hume’s. Though they are opposite in tenor, they do not help us to get at the truth, which can only be found by correcting Hume’s little errors in the beginning, and the little errors made by Locke and Descartes before that. To do that one must be in the possession of insights and distinctions with which these modern thinkers were unacquainted. Why they were, I will try to explain presently.

What I have just said about Kant in relation to Hume applies also to the whole tradition of British empirical philosophy from Hobbes, Locke, and Hume on. All of the philosophical puzzlements, paradoxes, and pseudo-problems that linguistic and analytical philosophy and therapeutic positivism in our own century have tried to eliminate would never have arisen in the first place if the little errors in the beginning made by Locke and Hume had been explicitly rejected instead of going unnoticed.

How did those little errors in the beginning arise in the first place? One answer is that something which needed to be known or understood had not yet been discovered or learned. Such mistakes are excusable, however regrettable they may be.

The second answer is that the errors are made as a result of culpable ignorance — ignorance of an essential point, an indispensable insight or distinction, that has already been discovered and expounded.

It is mainly in the second way that modern philosophers have made their little errors in the beginning. They are ugly monuments to the failures of education — failures due, on the one hand, to corruptions in the tradition of learning and, on the other hand, to an antagonistic attitude toward or even contempt for the past, for the achievements of those who have come before.

Ten years ago, in 1974-1975, I wrote my autobiography, and intellectual biography entitled Philosopher at Large. As I now reread its concluding chapter, I can see the substance of this work emerging from what I wrote there.

I frankly confessed my commitment to Aristotle’s philosophical wisdom, both speculative and practical, and to that of his great disciple Thomas Aquinas. The essential insights and the indispensable distinctions needed to correct the philosophical mistakes made in modern times are to be found in their thought.

Some things said in the concluding chapter of that book bear repetition here in this work. Since I cannot improve upon what I wrote ten years ago, I shall excerpt and paraphrase what I said then.

In the eyes of my contemporaries the label “Aristotelian” has dyslogistic connotations. It has had such connotations since the beginning of modern times. To call a man an Aristotelian carries with it highly derogatory implications. It suggests that his is a closed mind, in such slavish subjection to the thought of one philosopher as to be impervious to the insights or arguments of others.

However, it is certainly possible to be an Aristotelian — or the devoted disciple of some other philosopher — without also being a blind and slavish adherent of his views, declaring with misplaced piety that he is right in everything he says, never in error, or that he has cornered the market on truth and is in no respect deficient or defective. Such a declaration would be so preposterous that only a fool would affirm it. Foolish Aristotelians there must have been among the decadent scholastics who taught philosophy in the universities of the sixteenth and seventeenth centuries. They probably account for the vehemence of the reaction against Aristotle, as well as the flagrant misapprehension or ignorance of his thought, that is to be found in Thomas Hobbes and Francis Bacon, in Descartes, Spinoza, and Leibniz.

The folly is not the peculiar affliction of Aristotelians. Cases of it can certainly be found, in the last century, among those who gladly called themselves Kantians or Hegelians; and in our own day, among those who take pride in being disciples of John Dewey or Ludwig Wittgenstein. But if it is possible to be a follower of one of the modern thinkers without going to an extreme that is foolish, it is no less possible to be an Aristotelian who rejects Aristotle’s error and deficiencies while embracing the truths he is able to teach.

Even granting that it is possible to be an Aristotelian without being doctrinaire about it, it remains the case that being an Aristotelian is somehow less respectable in recent centuries and in our time than being a Kantian or a Hegelian, an existentialist, a utilitarian, a pragmatist, or some other “ist” or “ian.” I know, for example, that many of my contemporaries were outraged by my statement that Aristotle’s Ethics is a unique book in the Western tradition of moral philosophy, the only ethics that is sound, practical, and undogmatic.

If a similar statement were made by a disciple of Kant or John Stuart Mill in a book that expounded and defended the Kantian or utilitarian position in moral philosophy, it would be received without raised eyebrows or shaking heads. For example, in this century it has been said again and again, and gone unchallenged, that Bertrand Russell’s theory of descriptions has been crucially pivotal in the philosophy of language; but it simply will not do for me to make exactly the same statement about the Aristotelian and Thomistic theory of signs (adding that it puts Russell’s theory of descriptions into better perspective than the current view of it does).

Why is this so? My only answer is that it must be believed that, because Aristotle and Aquinas did their thinking so long ago, they cannot reasonable be supposed to have been right in matters about which those who came later were wrong. Much must have happened in the realm of philosophical thought during the last three or four hundred years that requires an open-minded person to abandon their teachings for something more recent and, therefore, supposedly better.

My response to that view is negative. I have found faults in the writings of Aristotle and Aquinas, but it has not been my reading of modern philosophical works that has called my attention to these faults, nor helped me to correct them. On the contrary, it has been my understanding of the underlying principles and the formative insights that govern the thought of Aristotle and Aquinas that has provided the basis for amending or amplifying their views where they are fallacious or defective.

I must say one more that in philosophy, both speculative and practical, few if any advances have been made in modern times. On the contrary, must has been lost as the result of errors that might have been avoided if ancient truths had been preserved in the modern period instead of being ignored.

Modern philosophy, as I see it, got off to a very bad start — with Hobbes and Locke in England, and with Descartes, Spinoza, and Leibniz on the Continent. Each of these thinkers acted as if he had no predecessors worth consulting, as if he were starting with a clean slate to construct for the first time the whole of philosophical knowledge.

We cannot find in their writings the slightest evidence of their sharing Aristotle’s insight that no man by himself is able to attain the truth adequately, although collectively men do not fail to amass a considerable amount; nor do they ever manifest the slightest trace of a willingness to call into council the views of their predecessors in order to profit from whatever is sound in their thought and to avoid their errors. On the contrary, without anything like a careful, critical examination of the views of their predecessors, these modern thinkers issue blanket repudiations of the past as a repository of errors. The discovery of philosophical truth begins with themselves.

Proceeding, therefore, in ignorance or misunderstanding of truths that could have been found in the funded tradition of almost two thousand years of Western though, these modern philosophers made crucial mistakes in their points of departure and in their initial postulates. The commission of these errors can be explained in part by antagonism toward the past, and even contempt for it.

The explanation of the antagonism lies in the character of the teachers under whom these modern philosophers studied in their youth. These teachers did not pass on the philosophical tradition as a living thing by recourse to the writings of the great philosophers of the past. They did not read and comment on the works of Aristotle, for example, as the great teachers of the thirteenth century did.

Instead, the decadent scholastics who occupied teaching posts in the universities of the sixteenth and seventeenth centuries fossilized the tradition by presenting it in a deadly, dogmatic fashion, using a jargon that concealed, rather than conveyed, the insights it contained. Their lectures must have been as wooden and uninspiring as most textbooks or manuals are; their examinations must have called for a verbal parroting of the letter of ancient doctrines rather than for an understanding of their spirit.

It is no wonder that early modern thinkers, thus mistaught, recoiled. Their repugnance, though certainly explicable, may not be wholly pardonable, for they could have repaired the damage by turning to the texts or Aristotle or Aquinas in their mature years and by reading them perceptively and critically.

That they did not do this can be ascertained from an examination of their major works and from their intellectual biographies. When they reject certain points of doctrine inherited from the past, it is perfectly clear that they do not properly understand them; in addition, they make mistakes that arise from ignorance of distinctions and insights highly relevant to problems they attempt to solve.

With very few exceptions, such misunderstanding and ignorance of philosophical achievements made prior to the sixteenth century have been the besetting sin of modern thought. Its effects are not confined to philosophers of the seventeenth and eighteenth centuries. They are evident in the work of nineteenth-century philosophers and in the writings of our day. We can find them, for example, in the works of Ludwig Wittgenstein, who, for all his native brilliance and philosophical fervor, stumbles in the dark in dealing with problems on which premodern predecessors, unknown to him, have thrown great light.

Modern philosophy has never recovered from its false starts. Like men floundering in quicksand who compound their difficulties by struggling to extricate themselves, Kant and his successors have multiplied the difficulties and perplexities of modern philosophy by the very strenuousness — and even ingenuity — of their efforts to extricate themselves from the muddle left in their path by Descartes, Locke, and Hume.

To make a fresh start, it is only necessary to open the great philosophical books of the past (especially those written by Aristotle and in his tradition) and to read them with the effort of understanding that they deserve. The recovery of basic truths, long hidden from view, would eradicate errors that have had such disastrous consequences in modern times.

"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/

"Why Bayesian Rationality Is Empty, Perfect Rationality Doesn’t Exist, Ecological Rationality Is Too Simple, and Critical Rationality Does the Job,"
Simoleon Sense, February 15, 2010 --- Click Here
http://www.simoleonsense.com/why-bayesian-rationality-is-empty-perfect-rationality-doesn%e2%80%99t-exist-ecological-rationality-is-too-simple-and-critical-rationality-does-the-job/

Great Minds in Management: The Process of Theory Development ---
http://www.trinity.edu/rjensen//theory/00overview/GreatMinds.htm

"Top-Down Versus Bottom-Up: A Flawed Approach To Audit Risk Assessment," by Francine McKenna, re: The Auditors, April 10, 2010 ---
http://retheauditors.com/2010/04/10/top-down-versus-bottom-up-a-flawed-approach-to-audit-risk-assessment/
Here's the Weil quotation that I provided to Francine from my archives:

From Jonathan Weil’s 2004 article (courtesy of the vast resources curated by Professor Bob Jensen):

“The problem is that there’s not a lot of evidence that auditors are very good at assessing risk,” says Charles Cullinan, an accounting professor at Bryant College in Smithfield, R.I., and co-author of a 2002 study that criticized the re-engineered audit process as ineffective at detecting fraud. “If you assess risk as low, and it really isn’t low, you really could be missing the critical issues in the audit.”

Even before the recent rash of accounting scandals, the shift away from extensive line-by-line number crunching was drawing criticism. In an October 1999 speech, Lynn Turner, then the SEC’s chief accountant, noted that more than 80% of the agency’s accounting-fraud cases from 1987 to 1997 involved top executives. While the risk-based approach was focusing on information systems and the employees who fed them, auditors really needed to expand their scrutiny to include top executives, who with a few keystrokes could override their companies’ systems.

An Ernst & Young spokesman, Charlie Perkins, says the firm “performed appropriate procedures” on the contractual-adjustment account.

At an April 2003 court hearing, Ernst & Young auditor William Curtis Miller testified that his team mainly had performed “analytical type procedures” on the contractual adjustments. These consisted of mathematical calculations to see if the account had fluctuated sharply overall, which it hadn’t. As for the balance-sheet entries, prosecutors say HealthSouth executives knew the auditors didn’t look at increases of less than $5,000, a point Ernst & Young acknowledges.

Jensen Comments
We see a lot of ranting about Sarbox and the supposedly-toothless PCAOB --- Click Here

But here's what I see in the hundreds upon hundreds of PCAOB negative inspection reports of CPA firm audits
What I see is repeated stress on negligent or otherwise sloppy detailed testing that, in addition to uncovering client mistakes, serves in large measure to prevent audit mistakes (like the fear that the cops will show up) ---
http://pcaobus.org/Inspections/Reports/Pages/default.aspx

Here's my favorite and oft-repeated example:
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

April 12, 2012 reply from Francine McKenna [retheauditors@GMAIL.COM]

"repeated stress on negligent or otherwise sloppy detailed testing that, in addition to uncovering client mistakes, serves in large measure to prevent audit mistakes..."
Bob Jensen

I agree, Bob.

The PCAOB is doing the work and the firms and everyone else is ignoring it. I'd bet if you could put an issuer name on their inspection results that are published, you would find lots of fingers pointed at future failures, bailouts and problem children. How do we put more teeth in PCAOB? I used to think they had been "regulatory captured." Maybe that's the problem at the top in the past. But the work is being done.

Right now we are still waiting for the inspection report from March 2008 Pre-Satyam, when the PCAOB went to India. We do have two low level Indian professionals just recently sanctioned by the PCAOB for not cooperating in their investigation of Satyam. How can we have a report that is still not issued, two years later? Pushback in India? Pushback by PwC due to litigation? Pushback within the SCE and PCAOB because the report cites issues with the Satyam audit and auditors? Or pushback because it doesn't?

http://retheauditors.com/2009/01/12/satyam-what-we-know-what-i-think-my-predictions/

fm

Bob Jensen's threads on risk-based auditing ---
http://www.trinity.edu/rjensen/fraud001.htm#RiskBasedAuditing

Watch the MSNBC Video Featuring This Harvard Senior Who is Also a Very Talented Violinist
"Harvard senior thesis on CDOs," by Stephen Hsu, MIT's Technology Review, April 27, 2010 ---
http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=25107&nlid=2934

In the March 30, 2010 edition of Tidbits I posted the following Tidbit ---
http://www.trinity.edu/rjensen/tidbits/2010/tidbits033010.htm

Ah, the innocence of youth.
What really happened in the poisonous CDO markets?

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

Restructuring Audit Services

April 10, 2010 message from Jagdish Gangolly [gangolly@GMAIL.COM]

It is true that, for example a fortune 100 company has little choice. That is because of the way audit as a product is currently packaged.

Years ago, I had suggested that we look at the way the legal profession was structured in England and learn a few lessons. This is brought out in the movie "A Fish Called Wanda" starring John Cleese, the funny guy with a strange sense of humour from Monty Python.

The legal profession there used to be divided between barristers and solicitors. A very neat division of labour: barristers could argue cases in the courts but the solicitors could not; the solicitors could interact with clients and witnesses but barristers could not. The system enhances integrity because the perception and empathies of the lawyer who argues in court is not coloured by interactions with clients/witnesses.

My argument 25 years ago was: why not divide the audit product into two components: facilitation and execution. The facilitating firm (accounting equivalent of barristers) could interact with the client to determine the scope of the audit (but could not peform audits for any firm), and then put together a team of firms for the audit. This would have the following advantages:

1. The best talent for various parts of the audit could be assembled 2. Smaller firms could audit some aspects of large audits 3. The level of sophistication of practice in smaller firms would improve 4. The larger firms would be rid of practice that can not sustain the firms' large overheads

Over the years I have had discussions of this with many senior partners at the Big 4 as well as many academics in accounting. Most have been intrigued by the idea, but have had little to say by way of response.

More than two decades ago when I broached the idea, the information technology had not advanced enough to make this possible. But with the changes to the securities laws and the accounting profession makes this very possible today.

Jagdish --
|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 Phone: 518-956-8251, Fax: 518-956-8247

April 10, 2010 reply from Tom Selling [tom.selling@GROVESITE.COM]

Jagdish,

What happens when there is a failed audit? Which audit firm do the plaintiffs sue? The ’34 Act only exposes auditors to proportionate liability. How would a jury of non-accountants be able to fairly allocate proportionate liability among the “facilitator” and the potentially many firms involved in “execution”? (Even the ’33 Act, which allows for joint and several liability, requires allocation of responsibility.)

From the firm standpoint, they will all have to trust that they each did their jobs thoroughly. The legal environment may not be as sensitive to that issue, for a number of reasons.

Also, you did not list as a potential advantage, that the audit report will become more reliable, but I suppose that is strongly implied.

Finally, I am curious to know why the barrister/solicitor division of labor has gone away. Was it cost, theoretical advantages were not realized in practice, or something else?

Best,

Tom

Before reading below you may want to watch Francine McKenna in a NYT interview ---
http://www.thedeal.com/video/inside-the-deal/goldman-sec-charges-to-spark-c.php

You might also want to read about swaps since Goldman brokered questionable (from an ethics standpoint) swaps in this scandal ---
http://en.wikipedia.org/wiki/Swap_(finance)

"Goldman Sachs accused of fraud by US regulator SEC," BBC News, April 16, 2010 ---
http://news.bbc.co.uk/2/hi/business/8625931.stm

Goldman Sachs, the Wall Street powerhouse, has been accused of defrauding investors by America's financial regulator.

The Securities and Exchange Commission (SEC) alleges that Goldman failed to disclose conflicts of interest.

The claims concern Goldman's marketing of sub-prime mortgage investments just as the US housing market faltered.

Goldman rejected the SEC's allegations, saying that it would "vigorously" defend its reputation.

News that the SEC was pressing civil fraud charges against Goldman and one of its London-based vice presidents, Fabrice Tourre, sent shares in the investment bank tumbling 12%.

The SEC says Goldman failed to disclose "vital information" that one of its clients, Paulson & Co, helped choose which securities were packaged into the mortgage portfolio.

These securities were sold to investors in 2007.

But Goldman did not disclose that Paulson, one of the world's largest hedge funds, had bet that the value of the securities would fall.

The SEC said: "Unbeknownst to investors, Paulson... which was posed to benefit if the [securities] defaulted, played a significant role in selecting which [securities] should make up the portfolio."

"In sum, Goldman Sachs arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests," said the Commission.

Housing collapse

The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fabrice...

Email by Fabrice Tourre The SEC alleges that investors in the mortgage securities, packaged into a vehicle called Abacus, lost more than $1bn (£650m) in the US housing collapse.

Mr Tourre was principally behind the creation of Abacus, which agreed its deal with Paulson in April 2007, the SEC said.

The Commission alleges that Mr Tourre knew the market in mortgage-backed securities was about to be hit well before this date.

The SEC's court document quotes an email from Mr Tourre to a friend in January 2007. "More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

Goldman denied any wrongdoing, saying in a brief statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

The firm said that, rather than make money from the deal, it lost $90m.

The two investors that lost the most money, German bank IKB and ACA Capital Management, were two "sophisticated mortgage investors" who knew the risk, Goldman said.

And nor was there any failure of disclosure, because "market makers do not disclose the identities of a buyer to a seller and vice versa."

Calls to Mr Tourre's office were referred to the Goldman press office. Paulson has not been charged.

Asked why the SEC did not also pursue a case against Paulson, Enforcement Director Robert Khuzami told reporters: "It was Goldman that made the representations to investors. Paulson did not."

The firm's owner, John Paulson - no relation to former US Treasury Secretary Henry Paulson - made billions of dollars betting against sub-prime mortgage securities.

In a statement, Paulson & Co. said: "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges."

'Regulation risk'

Goldman, arguably the world's most prestigious investment bank, had escaped relatively unscathed from the global financial meltdown.

This is the first time regulators have acted against a Wall Street deal that allegedly helped investors take advantage of the US housing market collapse.

The charges come as US lawmakers get tough on Wall Street practices that helped cause the financial crisis. Among proposals being considered by Congress is tougher rules for complex investments like those involved in the alleged Goldman fraud.

Observers said the SEC's move dealt a blow to Goldman's standing. "It undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a Goldman critic. "It undermines their political clout."

Analyst Matt McCormick of Bahl & Gaynor said that the allegation could "be a fulcrum to push for even tighter regulation".

"Goldman has a fight in front of it," he said.

"Goldman CDO case could be tip of iceberg," by Aaron Pressman and Joseph Giannone, Reuters, April 17, 2010 ---
http://in.reuters.com/article/businessNews/idINIndia-47771020100417

The case against Goldman Sachs Group Inc over a 2007 mortgage derivatives deal it set up for a hedge fund manager could be just the start of Wall Street's legal troubles stemming from the subprime meltdown.

The U.S. Securities and Exchange Commission charged Goldman with fraud for failing to disclose to buyers of a collaterlized debt obligation known as ABACUS that hedge fund manager John Paulson helped select mortgage derivatives he was betting against for the deal. Goldman denied any wrongdoing.

The practice of creating synthetic CDOs was not uncommon in 2006 and 2007. At the tail end of the real estate bubble, some savvy investors began to look for more ways to profit from the coming calamity using derivatives.

Goldman shares plunged 13 percent on Friday and shares of other financial firms that created CDOs also fell. Shares of Deutsche Bank AG ended down 9 percent, Morgan Stanley 6 percent and Bank of America, which owns Merrill Lynch, and Citigroup each declined 5 percent.

Merrill, Citigroup and Deutsche Bank were the top three underwriters of CDO transactions in 2006 and 2007, according to data from Thomson Reuters. But most of those deals included actual mortgage-backed securities, not related derivatives like the ABACUS deal.

Hedge fund managers like Paulson typically wanted to bet against so-called synthetic CDOs that used derivatives contracts in place of actual securities. Those were less common.

The SEC's charges against Goldman are already stirring up investors who lost big on the CDOs, according to well-known plaintiffs lawyer Jake Zamansky.

"I've been contacted by Goldman customers to bring lawsuits to recover their losses," Zamansky said. "It's going to go way beyond ABACUS. Regulators and plaintiffs' lawyers are going to be looking at other deals, to what kind of conflicts Goldman has."

An investigation by the online site ProPublica into Chicago-based hedge fund Magnetar's 2007 bets against CDO-related debt also turned up allegations of conflicts of interest against Deutsche Bank, Merrill and JPMorgan Chase.

Magnetar has denied any wrongdoing. Deutsche Bank declined to comment. Merrill and JPMorgan had no immediate comment.

The Magnetar deals have spawned at least one lawsuit. Dutch bank Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., or Rabobank for short, filed suit in June against Merrill Lynch over Magnetar's involvement with a CDO called Norma.

"Merrill Lynch teamed up with one of its most prized hedge fund clients -- an infamous short seller that had helped Merrill Lynch create four other CDOs -- to create Norma as a tailor-made way to bet against the mortgage-backed securities market," Rabobank said in its complaint filed on June 12 in the Supreme Court of New York.

The two matters are unrelated and the claims today are not only unfounded but were not included in the Rabobank lawsuit filed nearly a year ago, said Merrill Lynch spokesman Bill Halldin.

Rabobank was a lender, not an investor, he added.

Regulators at the SEC and around the country said they would be investigating other deals beyond ABACUS.

We are looking very closely at these products and transactions," Robert Khuzami, head of the SEC's enforcement division, said. "We are moving across the entire spectrum in determining whether there was (fraud)."

Meanwhile, Connecticut Attorney General Richard Blumenthal said in a statement his office had already begun a preliminary review of the Goldman case.

"A key question is whether this case was an isolated incident or part of a pattern of investment banks colluding with hedge funds to purposely tank securities they created and sold to unwitting investors," Connecticut Attorney General Richard Blumenthal said in a statement.

"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

"Your Guide to the Goldman Sachs Lawsuit," Yahoo News, April 20, 2010 ---
http://news.yahoo.com/s/usnews/20100420/ts_usnews/yourguidetothegoldmansachslawsuit

As the Securities and Exchange Commission thrusts the Goldman Sachs case onto the national stage, Americans are once again getting acquainted with the most controversial members of the recession-era cast of characters: the subprime mortgage, the "too big to fail" doctrine, the Wall Street bailout, and the housing bubble, just to name a few.

But even as those themes hog the limelight, two other recurring, albeit slightly more obscure, characters--the matchmaker and the credit default swap--are also starting to peek out from behind the glamorous SEC indictment. And as they do so, they have the potential to reshape the contentious debate over Goldman's actions.

Matchmaker, matchmaker. The Goldman product that the SEC is targeting is quite complex. Known as ABACUS 2007-AC1, it is the result of years of evolution in the synthetic investment market. But the underlying theory is quite simple.

Gary Kopff, a mortgage expert and the president of Everest Management, uses the example of wheat. "Two parties get together. One says, 'I think the price of wheat is going up.' The other says, 'I think the price of wheat is going down,'" he explains. "Neither party owns any wheat."

With the Goldman case, of course, the big difference was that investors were instead betting on mortgages. And since the investment products were synthetic, investors were able to place bets on the direction of the housing market without actually owning any physical mortgage bonds.

[See How Strategic Defaults are Reshaping the Economy.]

In arranging these deals, one of Goldman's roles was that of matchmaker. In other words, it was Goldman's job to find some investors who thought that the housing market would stay healthy and others who thought it would tank. Goldman would then pair the two sides up in a transaction.

"Acting as a swaps dealer, Goldman has a commodity. And in order for it to earn a fee for that commodity going out into the marketplace, it has to put together the short side and the long side. So it has to be simultaneously in possession of the names of bona fide longs and shorts," says Kopff. Using a gambling metaphor, he says, "In that sense, [Goldman] has a duel incentive. It wants some people to go short and some people to go long because it's basically like the house. It's making money as long as it pairs up the longs and shorts."

The question then becomes: When should we blame the house? The most obvious answer is that the house could be at fault when the deck is stacked against some of the betters.

In the Goldman case, this issue is particularly relevant. Notably, the SEC is charging that Goldman let hedge fund manager John Paulson essentially hand pick mortgage bonds he thought were doomed to fail. Goldman then created a vehicle where investors could get synthetic exposure to those bonds.

Paulson, of course, effectively shorted the housing market by betting against the bonds, but there were also investors on the long side of the deal in question. The SEC is alleging that Goldman, in its role as matchmaker, never told these investors that the bonds they were getting exposure to were chosen because a prominent manager thought they were poised to implode.

In fact, they were never even made aware that Paulson was involved in the deal, according to the lawsuit. Instead, according to the SEC, they were made to believe that ACA Management, an independent third party, was behind the bond selection.

Legal issues aside, these charges raise a number of pressing questions, particularly at a time when Wall Street firms are under fire for what's perceived as a lack of corporate responsibility.

"I think there is a very large concern among American taxpayers that not only did Wall Street cause this problem and not only did the American tax payers have to bail Wall Street out, but now Wall Street is back and as profitable as ever--if not more profitable--and is going back to using the same old practices," says Michael Greenberger, a professor at the University of Maryland School of Law.

At the moment, one thing is clear: Goldman's own investors accurately predicted that the housing market would crash, and they placed their bets accordingly. But what remains to be seen is to what extent the investment bank encouraged some of its clients to take the opposite position.

As a result, at least in the court of public opinion, the Goldman case will be a key test of the matchmaker defense. Put another way, was Goldman merely allowing clients who had a bullish outlook toward the housing market to put money on that view? After all, in order for markets to function, intelligent investors need to disagree from time to time.

"In some ways, this is Wall Street 101 in that there needs to be somebody on both sides of every deal. So clearly you have a world full of smart financial firms, but still with those firms often taking bets opposite of each other," says Kevin McPartland, a senior analyst with the TABB Group, a financial-sector research and advisory firm. "There's always going to be somebody that's looking in the opposite direction."

But another possibility, some say, is that Goldman was knowingly giving its clients bad advice by actively prodding them into taking long positions rather than merely presenting them with the option. "[Goldman is] cynically saying, 'We're not making a recommendation on whether to buy or sell this.' But clearly they are. They're creating the instrument and they're sending their salesmen across the world to meet with institutional players," says Kopff. "To say they're not taking on point of view on that almost belies reality."

From a legal standpoint, the more pertinent question is: Did Goldman conceal the role of Paulson? And if so, would the long investors in the deal in question still have taken the same position had they known that Paulson picked the bonds with the goal of effectively shorting them?

In answering the latter question, the SEC points to the example of the German bank IKB Deutsche Industriebank, a Goldman client that took a long position in the Abacus deal that's the subject of the lawsuit. "IKB would not have invested in the transaction had it known that Paulson played a significant role in the collateral selection process while intending to take a short position in ABACUS 2007-AC1," the SEC says in the suit.

The 'naked' truth. Another issue that could take center stage in the fallout from the Goldman case is the validity of credit default swaps, the complex deals that are often likened to insurance policies.

With most forms of insurance, people take out policies on items, such as houses and cars, that they own. In some cases, credit default swaps work the same way. In other words, investors can own mortgage bonds in the belief that they will appreciate in value, but at the same time they can hold an insurance policy--through these swaps--that will pay out in the event that borrowers default. Used that way, these swaps allow investors to hedge their bets.

But there are also naked swaps, which let people short investments without ever having to own them directly. Using the insurance example, it would be the rough equivalent of a person taking out an insurance policy on his neighbor's house under the belief that the house would be struck by lightning.

That's what happened in the Goldman deal, which was created using a package comprised of various credit default swaps. Investors like Paulson were then able to take the short side of the deal by buying insurance on the bonds referenced in the deal.

In turn, the long investors were the insurers. They received regular payments, much in the same way insurance providers do, from policyholders like Paulson. These payments were much like the interest they would accumulate had they actually owned the bonds outright. In exchange, they agreed to make large payouts to the short investors should the bonds fail, which is exactly what happened.

During the downturn, Goldman was hardly the only firm that allowed investors to employ these naked credit default swaps. In fact, naked shorts are viewed by many as one of the prime reasons why the housing collapse was so painful. "The naked CDS... wreaked havoc on the market," says Greenberger.

That's because when these shorts are part of synthetic deals, investors are not constrained by physical supplies. Kopff uses the example of home insurance. In that industry, people can only buy as many insurance policies as there are actual houses.

"Once everyone's insured, you've hit the maximum. There's no more insurance that can be written," he says. "While that number can be exceedingly high, it is finite. When you allow naked positions, you allow what doesn't exist in the hazard insurance industry... Now you have someone saying, 'Listen, you've got a house over there, and I'm going to bet that lightning hits it.' And then somebody else comes in and says, 'Well, I'm going to bet that lightning doesn't hit it.' And you can have as many bets as you want."

This, in turn, compounded the losses that investors experienced when the housing market went under. "Essentially, [investors] found people who would give them insurance on the question of whether subprime mortgages would be paid," says Greenberger. "So every time a subprime mortgage collapsed, it wasn't just the real loss of the mortgage, but it was the loss of all the betting that was done on whether the mortgage would survive or not survive."

As the Goldman case continues to attract attention, the debate about swaps is likely to intensify. Importantly, this will happen right as Congress considers a sweeping financial overhaul package, one which many would like to see take a harder position on swaps and other similar deals.

Still, swaps do have ardent defenders who argue that when used correctly, they can actually reduce the riskiness of investors' portfolios. But as the Goldman case illustrates, these defenders are pitted against an American public that is clamoring for tighter regulations. Says Greenberger, "I think there's been a widespread desire to see some accountability for this horrific crisis."

Bob Jensen's threads on the 2010 Goldman Sachs SEC lawsuit ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Goldman might get off the hook if it sends enough free porn to the SEC ---
"GOP ramps up attacks on SEC over porn surfing," by Daniel Wagner, Yahoo News, April 23, 2010 ---
http://news.yahoo.com/s/ap/20100423/ap_on_bi_ge/us_sec_porn
Also see http://www.judicialwatch.org/blog/2010/apr/sec-absorbed-porn-during-economic-crisis

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

Here's the Morgenson and Story 2009 Article
"Banks Bundled Bad Debt, Bet Against It and Won," by Gretchen Morgenson and Louise Story, The New York Times, December 23, 2009 ---
http://www.nytimes.com/2009/12/24/business/24trading.html?em
My friend Larry clued me in to this link.

In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.

But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.

Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.

From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.

Goldman Saw It Coming

Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.

Continued in article

Bob Jensen's threads on banking and investment banking frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Accounting for Collateralized Debt Obligations (CDOs)

As to CDOs in VIEs, you might take a look at
http://www.mayerbrown.com/public_docs/cdo_heartland2004_FIN46R.pdf

Evergreen Investment Management case at
http://www.sec.gov/litigation/admin/2009/34-60059.pdf

Bob Jensen's threads on CDO accounting ---
http://www.trinity.edu/rjensen/theory01.htm#CDO

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

The Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

Accountants Claim Immorality is Acceptable if It Fails to Pass the Materiality Test
Bedtime Lesson 1 for Children: Only Steal a Little Bit at Any One Time and Stay Below Your Materiality Limit
Bedtime Lesson 2 for Children: The Materiality Limit is Higher for Thieves Who Are Already Rich
Bedtime Lesson 3 Attributed to Prize Fighter Joe Lewis: Being Rich is Better Than Being Poor

From The Wall Street Journal Accounting Weekly Review on April 23, 2010

Case Hinges on Vital Legal Concept
by: Ashby Jones, Kara Scannel, and Susanne Craig
Apr 19, 2010
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Fraud, Materiality, SEC, Securities and Exchange Commission

SUMMARY: The Securities and Exchange Commission's civil case against Goldman Sachs Group Inc. hinges in large part on the concept of materiality. The WSJ article gives a casual definition of this concept. Students are asked to provide the definition of the accounting concept of materiality and compare its use to that described in this case. The related article is the main page article with a clear graphic describing the transaction which led to the SEC case again Goldman Sachs.

CLASSROOM APPLICATION: The article is designed to expand students' understanding of the concept of material beyond a numerical threshold for financial statement adjustments.

QUESTIONS:
1. (Introductory) The WSJ article indicates that materiality is central to the case against Goldman Sachs that was brought this week by the SEC. How is this concept defined in the WSJ article?

2. (Introductory) Also refer to the WSJ video of Ashby Jones discussing the legal issues entitled SEC v. Goldman. How does he define this concept?

3. (Advanced) Identify the accounting concept of materiality in the conceptual literature behind U.S. GAAP or IFRS. Does this accounting definition differ from that provided in the WSJ article? From the WSJ video of Ashby Jones discussing the legal issues? Explain.

4. (Introductory) Refer to the related print article and especially the graphic associated with it, entitled "Middleman: How Goldman Sachs structured the deal under scrutiny." Describe the transaction that has triggered the SEC's case against Goldman Sachs.

5. (Introductory) What was the potentially material fact that was kept from investors who bought the Abacus CDO designed by ACA Management and sold by Goldman Sachs?

6. (Advanced) Refer again to the accounting definition of materiality. How does this example from outside accounting make it clear that the nature of a given item may create materiality concerns as much as the dollar value of that item?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Goldman Sachs Charged with Fraud
by Gregory Zuckerman, Susanne Craig and Serena Ng
Apr 17, 2010
Page: A1

SEC versus Goldman Sachs
"Will Wall Street (or the Rest of Us) Ever Learn?" by Bill Taylor, Harvard Business Review Blog, April 19, 2010 ---
http://blogs.hbr.org/taylor/2010/04/will_wall_street_or_the_rest_o.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

The SEC's decision to file civil-fraud charges against Goldman Sachs over one of the synthetic securities the investment bank issued during the subprime-mortgage bubble has generated major headlines, roiled the stock market, and otherwise created a flurry of shock and awe from Wall Street to Washington, DC. What I find surprising, though, is how surprised people seem to be by the charges. We still can't seem to come to terms with just how badly so many "blue-chip" institutions behaved over the last few years, and how easily so many high-profile executives got caught up in the speculative frenzy to turn a quick buck (or, in this case, a quick billion).

I might have been surprised, too, had I not just finished Michael Lewis's remarkable new book, The Big Short. This account of the subprime-mortgage fiasco, the small band of eccentrics who made billions betting against it, and the army of highly educated, well-dressed, overpaid investment bankers who engaged in a march of folly to the very end, left me angry, shaken, and depressed. It was as if I were reading a bigger, badder account of all the financial booms and busts that had come before--from the junk-bond craze to the LBO wave to the Internet bubble.

As I read the last page and sighed, one question nagged at me: How is it that so many allegedly brilliant people (just ask the folks at Goldman, they'll tell you how smart they are) never seem to learn? Why do the self-satisfied "lords of finance" keep making the same self-inflicted mistakes, whether they are matters of bad judgment, fraudulent conduct, or outright criminality?

I woke up the next morning, checked out The New York Times, and saw a different version of the same story played out yet again! A front-page article explored how the much-celebrated phenomenon of micro-lending, offering small loans to individuals and entrepreneurs in the poorest countries as a way to lift them from poverty, is facing a global backlash. Muhammad Yunus, the Bangladeshi economist who won the Nobel Peace Prize in 2006 for his work in the field, was watching in horror as powerful, hungry, often-reckless banks were rushing in to generate big profits from an idea they either didn't understand or didn't care about. "We created microcredit to fight the loan sharks; we didn't create microcredit to encourage new loan sharks," Professor Yunus fumed. "Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of people."

I love innovation as much as the next person--probably more so. But this makes me crazy! The story of finance over the last 25 years has been the story of innovation run amok--and of our systematic failure, as a society, as companies, as individual leaders, to learn from mistakes we seem determined to keep making. It might be condo loans in Miami, synthetic derivatives in London, or credits to yak herders in Mongolia, but it's déjà vu all over again: good ideas gone disastrously wrong, genuine steps forward that ultimately bring markets crashing down.

As I fumed once more, I thought back to some words of wisdom from Warren Buffet, who continues to amaze with his common-sense brilliance. Buffet gave the best explanation of this phenomenon I've ever heard in an interview with Charlie Rose. The PBS host, talking to the billionaire about the same disaster Michael Lewis writes about, asked the obvious question: "Should wise people have known better?" Of course, they should have, Buffett replied, but there's a "natural progression" to how good ideas go wrong. He called this progression the "three I's." First come the innovators, who see opportunities that others don't. Then come the imitators, who copy what the innovators have done. And then come the idiots, whose avarice undoes the very innovations they are trying to use to get rich.

The problem, in other words, isn't with innovation. It's with the bad behavior that inevitably follows. So how do we as individuals (not to mention as companies and societies) continue to embrace the value-creating upside of creativity while guarding against the value-destroying downsides of imitation and idiocy? It's not easy, which is why so many of us fall prey to so many bad ideas. "People don't get smarter about things that get as basic as greed," Warren Buffett told Rose. "You can't stand to see your neighbor getting rich. You know you're smarter than he is, but he's doing all these [crazy] things, and he's getting rich...so pretty soon you start doing it."

That's some pretty straight shooting and a pretty fair approximation of the delusional, foolish, and downright stupid behavior that Michael Lewis chronicles in such detail. It's also a central challenge for innovators everywhere. Sometimes, the most important form of leadership is resisting an innovation that takes hold in your field when that innovation, no matter how popular with your rivals, is at odds with your values and long-term point of view. The most determined innovators are as conservative as they are disruptive. They make big strategic bets for the long term and don't hedge their bets when strategic fashions change.

Can you distinguish between genuine creativity and mindless imitation? Are you prepared to walk away from ideas that promise to make money, even if they make no sense? Do you have the discipline to keep your head when so many around you are losing theirs? Those questions are something to think about. The answers may be the difference between being an innovator and an idiot.

Bob Jensen's threads on banking and investment banking fraud ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Questions
How is bright-line-rule Repo accounting in 2008 like the bright-line-rule “1% Solution” of a decade earlier?
Answer is suggested below.

How do we simultaneously award PwC for being the world’s Number 1 financial management consulting firm and the Number 1 financial auditing firm?
Question is raised below.

First Let’s Talk About 2010

PwC is the auditor of Goldman Sachs, and we really don't know if and how long PwC will be off the hook on Goldman’s 2010 lawsuits. The former Treasury Secretary, Hank Paulson, was previously the CEO of Goldman. He made it his number one priority to save Goldman in the Bailout, which in turn made it necessary to bail out AIG since billions in AIG credit derivative obligations were owed to Goldman. The net effect was to bail out AIG, which of course is also audited by PwC.

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
Francine McKenna, "Liberté, Egalité, Fraternité: Big Lehman Brothers Troubles For Ernst & Young," 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/

Also see
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/

If and when shareholders lose money in 2010 because of proven Goldman frauds, it’s inevitable that Goldman’s shareholders and creditors will file lawsuits against the PwC auditors as well as Goldman Sachs itself and the credit agencies that fraudulently gave Goldman’s toxic CDO bonds AAA ratings when they should’ve been junk. The credit rating agencies in turn will sue PwC claiming they were misled by Goldman’s golden financial statement.

The 2010 lawsuit merry-go-round is barely beginning since the SEC’s lawsuit against Goldman is hot off the presses. Worse, the Justice Department has yet to decide whether it will pursue criminal prosecution of Goldman. I doubt that this will happen since hauling Goldman into criminal court might greatly upset the Administration’s economic recovery plan and create massive unemployment and economic disruption.

Thus it’s become a waiting game for PwC in 2010. Meanwhile PwC can bank hundreds of millions in a war chest, much of it earned from the administration of the Lehman Bankruptcy. It’s also not clear that PwC is as culpable for any Goldman audit failures as much Ernst & Young is culpable, in my opinion, for the alleged Lehman audit failures --- http://www.trinity.edu/rjensen/fraud001.htm#Ernst

PwC does have other legal battles pending ---
http://www.trinity.edu/rjensen/fraud001.htm#PwC

Goldman and PwC might well survive the 2010 legal battle like they survived a huge 2000 legal battle:

A History Lesson on Goldman that Sounds a Bit Like Repo Accounting Issues with the “1% Solution”

Question
How can you "PUT" away your cares about clear-cut (bright line) rules of accounting?

Answer
See how AOL did it in conspiracy with Goldman Sachs

With the AOL-Time Warner deal due to close in just three months, Bertelsmann needed to reduce its AOL Europe holding -- pronto. But the obvious buyer, AOL, didn't want to own more than 50% or more of the venture, either. Going above half might trigger a U.S. accounting rule that would force AOL to consolidate all the struggling unit's losses on its books when AOL was already grappling with deteriorating ad revenues and a declining stock price. Enter Goldman Sachs Group Inc. (GS ) Business Week has learned that the premier Wall Street bank agreed to buy 1% of AOL Europe -- half a percent from each parent -- for $215 million. AOL Europe, in return, agreed to a "put" contract promising Goldman that it could sell back the 1% by a specific date and at a set price. That simple transaction solved Bertelsmann's EU problem without trapping AOL in an accounting conundrum -- a perfect solution.

"Goldman's 1% Solution," by Paula Dwyer, Business Week, June 28, 2004 --- http://www.businessweek.com/@@ajkOUmUQQWvg7RMA/premium/content/04_26/b3889045_mz011.htm?se=1

Goldman's 1% Solution
In 2000, it cut a questionable deal that smoothed the AOL-Time Warner merger. Will the SEC take action?

In more ways than one, the news from the European Union was bad. It was October, 2000, and the EU's executive arm, the European Commission, had just jolted America Online Inc. with a ruling that its pending acquisition of Time Warner Inc. (TWX ) could harm competition in Europe's media markets, especially the emerging online music business. The EC was concerned that AOL was a 50-50 partner with German media giant Bertelsmann in one of Europe's biggest Internet service providers, AOL Europe. Now the EC was ordering Bertelsmann to give up control over AOL Europe.

Enter Goldman Sachs Group Inc. (GS ) Business Week has learned that the premier Wall Street bank agreed to buy 1% of AOL Europe -- half a percent from each parent -- for $215 million. AOL Europe, in return, agreed to a "put" contract promising Goldman that it could sell back the 1% by a specific date and at a set price. That simple transaction solved Bertelsmann's EU problem without trapping AOL in an accounting conundrum -- a perfect solution.

LEGAL HEADACHES

Or so it seemed at the time. But the deal also may have violated U.S. securities laws. The Securities A: Exchange Commission and the Justice Dept. have construed some deals involving promises to buy back assets at a specific time and price as share-parking arrangements designed to mislead investors. The former chief executive of AOL Europe says the Goldman deal may have kept up to $200 million in 2000 losses off of the combined AOL-Time Warner financials -- enough, he says, that Time Warner might have tried to change the terms of the $120 billion merger, since AOL wouldn't have looked as healthy. But as the deal moved toward consummation, the Goldman arrangement was never disclosed in public documents to AOL or Time Warner shareholders.

The AOL Europe transaction threatens to create problems for Goldman Sachs. But it could also prolong the legal headaches of Time Warner Inc., as the AOL-Time Warner combine is now called. For the past two years, Time Warner has been in heated negotiations with the SEC over AOL's accounting for advertising revenues (BW -- June 7). Just as the SEC is wrapping up that case -- it could warn Time Warner as early as this summer that it intends to bring civil fraud charges -- the Goldman transaction raises troubling new questions about AOL's financial dealings prior to the merger.

The SEC has not brought charges over the 1% solution, and an SEC spokesman would not comment on whether the agency is probing the deal. Time Warner spokeswoman Tricia Primrose Wallace says the company will not comment on any part of the Goldman arrangement. A lawyer for Stephen M. Case, AOL's chairman and CEO at the time of the deal, referred questions to Time Warner. Thomas Middelhoff, who was Bertelsmann's chairman at the time of the deal and negotiated the AOL Europe joint venture with Case in 1995, says through a spokesman that the sale of a 0.5% stake was "purely a financial technique" handled by others. And Lucas van Praag, a Goldman Sachs spokesman, says: "We handled this entirely appropriately. We don't believe there is anything untoward here."

Continued in the article

"University of California, Bank Sue AOL: Lawsuit claims firm lied about finances, cost them," by Pamela Tate, The Wall Street Journal, April 15, 2003 --- http://www.yourlawyer.com/practice/printnews.htm?story_id=5448

The University of California has joined with Amalgamated Bank to file a lawsuit against AOL Time Warner Inc., claiming their stakes have lost more than $500 million in value because the media company allegedly lied about its financial condition.

The University of California, which dropped out of a federal class-action suit against AOL earlier this month, filed the complaint Monday in the Superior Court of California in Los Angeles. The university and co-plaintiff Amalgamated Bank, a New York institution that manages funds for several dozen union pension funds, are being represented by Milberg Weiss Bershad Hynes & Lerach.

The plaintiffs allege that AOL Time Warner materially misrepresented its revenue and subscriber growth after the merger of AOL and Time Warner in January 2001. In two separate restatements in October and March, AOL slashed nearly $600 million from previously reported revenue over the past two years.

The University of California and Amalgamated allege that AOL's admissions so far have been "too conservative," and that the company may have overstated results by almost $1 billion.

In a March 28 filing with the Securities and Exchange Commission, AOL Time Warner said it faces 30 shareholder lawsuits that have been centralized in the U.S. District Court for the Southern District of New York. The company said in the filing it intends to defend itself "vigorously." The lawsuit filed by the University of California and Amalgamated names several current and former AOL Time Warner executives, as well as financial-services giants Citigroup and Morgan Stanley.

Citigroup is the parent of Salomon Smith Barney, now called Smith Barney, which with Morgan Stanley allegedly reaped $135 million in advisory fees from the AOL and Time Warner merger.

Defendants include Stephen Case, who resigned as chairman in January; former Chief Executive Gerald Levin, who left the company in May; current Chairman and Chief Executive Richard Parsons; and Ted Turner, who recently stepped down as vice chairman.

The lawsuit claims they and more than two dozen other insiders sold off $779 million in stock just after the merger closed but before the accounting revelations that would cause the stock price to plummet. The suit also names AOL's auditor, Ernst & Young.

The University of California claims it lost $450 million in the value of its AOL Time Warner shares, which were converted from more than 11.3 million Time Warner shares in the merger. At the end of 2002, the value of the university's portfolio was at $49.9 billion.

Continued in the article

And so the beat goes on a decade later with Goldman raking in billions in profits and PwC thriving like never before in assurance services and consulting.

"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.

Jensen Comment
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.

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.

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

Art Wyatt asserted:
"ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf

Bob Jensen's threads on auditing professionalism and independence are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Accounting Professionalism in the Good Old Days

April 21, 2010 message from David Albrecht [albrecht@PROFALBRECHT.COM]

In a recent e-mail, I pointed out the questionable timing of corporate announcements about Obamacare corporate charges against earnings (e.g., ATT's 1 billion dollar charge). I think it possible that corporate disclosures could be above board, but then I think it possible that they are below board.

I think government actions can always be questioned. Presidents, senators, congressmen and their appointees consider honesty to be a random walk variable.

It is no secret that the Obama administration has seriously leaned on the SEC since Schapiro was named chair a long year ago. For her part, Schapiro seems quite willing to do whatever to keep her job. Reportedly, the pressure on her to adopt the party line with respect to IFRS was immense.

The Christian Science Monitor has a new piece out ( http://www.csmonitor.com/USA/Politics/2010/0420/Goldman-Sachs-SEC-case-Is-it-all-about-politics ) questioning whether the SEC fraud charge against Goldman Sachs has been timed to coincide with crunch time for the Dodd financial reform bill. Although I think it possible that GS could be guilty as charged, I also think it possible that Obama has forced the SEC to lob a grenade at GS and will (in a couple weeks) call it all off ("just kidding, GS) or be willing to settle for a very very very small amount with the words "fraud" removed.

I wish we could go back to the good old days when Denny ran a good FASB, and before that when auditors sought to serve the public interest.

David Albrecht

April 21, 2010 reply form Bob Jensen

Hi David,

I grabbed a few quotations both in support and in opposition to your comments about the good old days. You might especially want to scroll down to accounting historian Steve Zeff’s remarks about a CPA Certificate being a union card versus a license to be a member of a profession.

It’s always easy to block out the bad stuff when remembering the good old days. It’s like when I remember warmth of three teams of draft horses, gentle giants, inside the barn when I was a little kid pushing down hay from the hay loft. I block out how freezing cold it was before daybreak in the smelly privy. There’s a song I hear on Pandora Internet Radio that says “the privy was a hundred feet too far away in the winter and a hundred feet too close in the heat of summer.”

The quotations below are taken from “The Saga of Auditing Professionalism and Independence” ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Bob Jensen

Message from Steven Bachrach (Department of Chemistry at Trinity University)

The Sunday New York Times this past weekend (1/13/02) has a very interesting article on the "integrity" of sports records that clearly indicates that the Favre-Strahan controversy is not unprecedented.

A few examples:

Nykesha Sales, opened up the last game of her college career hobbling onto the floor due to a ruptured Achilles tendon and was allowed to unopposedly sink a basket to set a career scoring mark.

Gordie Howe skates for 47 seconds in a minor league hockey game to set the "record" for being the first athlete to compete in 6 decades.

Denny McLain grooves 3 pitches to Mickey Mantle so that Mantle can hit a home run, passing Jimmie Foxx into 3rd place all time.

Our own David Robinson scores 71 points (thanks to exclusive feeding of the ball) in the last game of the 1993-1994 season to pass Shaq as the scoring leader. A similar situation lead to Wilt Chamberlin's famous 100 point game.

One begins to wonder whether there is any point to a discussion of ethics when it comes to sports records, especially those involved in team sports.

Steve

Hi Bill,

Andersen and the other firms "shifted their focus from prestige to profits --- and thereby transformed the firm. "

The same thing happened in Morgan Stanley and other investment banking firms. Like it or not, the quote below from Frank Partnoy (a Wall Street insider) seems to fit accounting, banking, and other firms near the close of the 20th Century.

From Page 15 of the most depressing book that I have ever read about the new wave of rogue professionals. Frank Partnoy in FIASCO: The Inside Story of a Wall Street Trader (New York: Penguin Putnam, 1997, ISBN 0 14 02 7879 6)

************************************************

This was not the Morgan Stanley of yore. In the 1920s, the white-shoe (in auditing that would be black-shoe) investment bank developed a reputation for gentility and was renowned for fresh flowers and fine furniture (recall that Arthur Andersen offices featured those magnificent wooden doors), an elegant partners' dining room, and conservative business practices. The firm's credo was "First class business in a first class way."

However, during the banking heyday of the 1980s, the firm faced intense competition from other banks and slipped from its number one spot. In response, Morgan Stanley's partners shifted their focus from prestige to profits --- and thereby transformed the firm. (Emphasis added) Morgan Stanley had swapped its fine heritage for slick sales-and-trading operation --- and made a lot more money.

************************************************

Bob Jensen

-----Original Message-----
From: William Mister [mailto:bmister@LAMAR.COLOSTATE.EDU]
Sent: Tuesday, February 19, 2002 11:05 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Andersen again

I refer you back to the Fortune article some years ago (old timers may remember it) that referred to then AA&Co as the "Marine Corp of the accounting Profession." In those days there were no "rogue partners." I wonder what changed?

William G. (Bill) Mister
William.Mister@colostate.edu

Here is some of the good we remember about the good old days
The Accounting Hall of Fame Citation for Leonard Spacek --- http://fisher.osu.edu/acctmis/hof/spacek.html

It must be kept in mind that the statements certified are not ours but are our clients--and our clients do not care to mix explanations of accounting theory with explanations of their business nor can we pass onto our readers the responsibility for appraisal of differences in accounting theory. Those fields are for you and me to grapple with, not the public. In general, clients are not primarily interested in arguments of accounting theory at the time of preparing their reports. The companies whose accounts are certified are chiefly interested in what is said to their shareholders, and in the hard practical facts of how accounting rules affect them, their competitors and other companies. Usually they are very critical of what we call accounting principles when these called principles are unrealistic, inconsistent, or do not protect or distinguish scrupulous management from the scrupulous.
"The Need for An Accounting Court," by Leonard Spacek, The Accounting Review, 1958, Pages 368-379 --- http://www.trinity.edu/rjensen/FraudSpacek01.htm

Jensen Comment
Fifty years later I'm a strong advocate of an accounting court, but I envision a somewhat different court than envisioned by the great Leonard Spacek in 1958. Since 1958, the failure of anti-trust enforcement has allowed business firms to merge into enormous multi-billion or even trillion dollar clients who've become powerful bullies that put extreme pressures on auditors to bend accounting and auditing principles. For example see the way executives of Fannie Mae pressured KPMG to bend the rules (an act that eventually got KPMG fired from the audit).

In my opinion the time has come where auditors and clients can take their major disputes to an Accounting Court that will use expert independent judges to resolve these disputes much like the Derivatives Implementation Group (DIG) resolved technical issues for the implementation of FAS 133. The main difference, however, is that an Accounting Court should hear and resolve disputes in private confidence that allows auditors and clients to keep these disputes away from the media. The main advantage of such an Accounting Court is that it might restrain clients from bullying auditors such as became the case when Fannie Mae bullied KPMG.

Here is some of the bad we forget about the good old days.

External Auditing Combined With Consulting and Other Assurance Services: Audit Independence?

TITLE: "Auditor Independence and Earnings Quality"
AUTHORS:
Richard M. Frankel MIT Sloan School of Business 50 Memorial Drive, E52.325g Cambridge, MA 02459-1261 (617) 253-7084 frankel@mit.edu
Marilyn F. Johnson Michigan State University Eli Broad Graduate School of Management N270 Business College Complex East Lansing, MI 48824-1122 (517) 432-0152 john1614@msu.edu
Karen K. Nelson Stanford University Graduate School of Business Stanford, CA 94305-5015 (650) 723-0106 knelson@gsb.stanford.edu
DATE: August 2001
LINK: http://gobi.stanford.edu/ResearchPapers/Library/RP1696.pdf

Stanford University Study Shows Consulting Does Affect Auditor Independence --- http://www.accountingweb.com/cgi-bin/item.cgi?id=54733

Academics have found that the provision of consulting services to audit clients can have a serious effect on a firm's perceived independence.

And the new SEC rules designed to counter audit independence violations could increase the pressure to provide non-audit services to clients to an increasingly competitive market.

The study (pdf format), by the Stanford Graduate School of Business, showed that forecast earnings were more likely to be exceeded when the auditor was paid more for its consultancy services.

This suggests that earnings management was an important factor for audit firms that earn large consulting fees. And such firms worked at companies that would offer little surprise to the market, given that investors react negatively when the auditor also generates a high non-audit fee from its client.

The study used data collected from over 4,000 proxies filed between February 5, 2001 and June 15, 2001.

It concluded: "We find a significant negative market reaction to proxy statements filed by firms with the least independent auditors. Our evidence also indicates an inverse relation between auditor independence and earnings management.

"Firms with the least independent auditors are more likely to just meet or beat three earnings benchmarks – analysts' expectations, prior year earnings, and zero earnings – and to report large discretionary accruals. Taken together, our results suggest that the provision of non-audit services impairs independence and reduces the quality of earnings."

New SEC rules mean that auditors have to disclose their non-audit fees in reports. This could have an interesting effect, the study warned: "The disclosure of fee data could increase the competitiveness of the audit market by reducing the cost to firms of making price comparisons and negotiating fees.

"In addition, firms may reduce the purchase of non-audit services from their auditor to avoid the appearance of independence problems."

A Lancaster University study in February this year found that larger auditors are less likely to compromise their independence than smaller ones when providing non-audit services to their clients.

And our sister site, AccountingWEB-UK, reports that research by the Institute of Chartered Accountants in England & Wales (ICAEW) showed that, despite the prevalence of traditional standards of audit independence, the principal fear for an audit partner was the loss of the client.

-----Original Message-----
From: Jensen, Robert
Sent: Sunday, December 30, 2001 2:13 PM
To: 'Stephen A. Zeff'
Subject: RE: threads on accounting fraud

Hi Steve,

What a nice message to encounter in my message box. Thank you for the kind words.

I think your remarks should be shared with accounting educators. Would you mind if I place your remarks in my next (probably January 5) edition of New Bookmarks? The archives are at http://www.trinity.edu/rjensen/bookurl.htm

I hear from you so rarely that it is really a pleasure when I get a message from you. I have more respect for your dedication to our craft than you can ever imagine. I wish that you, like Denny Beresford, would share your vast storehouse of accounting knowledge and history with accounting educators on the AECM --- http://pacioli.loyola.edu/aecm/

Our younger accounting educators communicating on the AECM are very bright and skilled in technology, but they are usually a mile wide and an inch deep when it comes to accounting history.

I don't recall if I ever told you this, but your efforts to find Marie in the Rice alumni database led to the subsequent marriage between her and my friend Billy Bender. Both were well into their eighties on the wedding day. They were engaged while both attended Rice University in the 1940s, but the war called Billy away to be a Navy pilot. They had no subsequent contact for over 50 years until you helped Billy find Marie.

Thanks,

Bob Jensen

-----Original Message-----
From: Stephen A. Zeff [mailto:sazeff@rice.edu]
Sent: Sunday, December 30, 2001 1:36 PM
To: rjensen@trinity.edu
Subject: threads on accounting fraud

Dear Bob:

Yesterday I happened across your Threads on Accounting Fraud, etc. (the Enron case) at http://www.trinity.edu/rjensen/fraud.htm , and I found it to be fascinating reading. I had already seen quite a few of the items, but I knew I could count on you to pull everything--and I mean everything--together. You do wonders on the Internet.

I don't know if you recall seeing my short article, "Does the CPA Belong to a Profession?" (Accounting Horizons, June 1987). The previous year, I was invited by the chairman of the Texas State Board of Public Accountancy to give a 15-minute address to newly admitted CPAs at the Erwin Center in Austin in November. Even though I am not a CPA, I accepted. I asked if they would mind if I were to say something controversial. They said no. Some 2,500 candidates, relatives and friends, and elders of the profession were in attendance, the largest audience to which I have ever spoken. Typically at such gatherings, the speaker enthuses about the greatness of the profession the candidates are about to enter. Instead, I opted to discuss whether the CPA actually belongs to a profession, and my view came down heavily on the skeptical side. Some of the questions I raised are being raised today about the supposedly independent posture of auditors and about the teaching of accounting. Fifteen years have passed, and things don't seem to have changed.

My address raised the question of whether the CPA certification constitutes a union card, a license to practice a trade, or admission to a profession. I reviewed a number of recent trends, including the growing commercialization of the practice of accounting, the increasing number of points of possible conflict between the widening scope of services and the attest function, the decline in the vitality of the professional literature, and the even greater emphasis on the rule-bound approach to teaching accounting in the universities. My conclusion was that accounting was in a state of professional decline that should concern all of its leaders.

Following the address, I expected to be taken to task for using such a solemn occasion, at which speakers are normally heard to celebrate the profession, to deliver a pessimistic message. I was, however, astonished that not one of the professional leaders in attendance uttered a word of criticism. When I pointedly asked several of the senior practitioners for their reaction to my remarks, the general response was a shrug of their shoulders. Yes, professionalism is not what it once was, but there seemed to be little that one could, or should, do to attempt to reverse the trend. This wholly unexpected reaction led me to conclude that I had underestimated the depth and pervasiveness of the malaise in the profession.

I wish you and Erika a Happy New Year.

Steve. --

***************************************************************
Subsequent Message received from Steve Zeff

Bob:

It's always a delight to hear from you. Yes, of course you have my permission to place my remarks in your Bookmarks.

In fact, a lot of what I know about accounting history was packed into my recent book, Henry Rand Hatfield: Humanist, Scholar, and Accounting Educator (JAI Press/Elsevier, 2000).

For some years in the early 1990s, I wrote to successive directors of the AAA's doctoral consortium to persuade them that a session should be provided on the history of accounting thought. When the directors replied (which was less than half the time), they said that their planned programs were already full with the standard people and the standard subjects. They typically do bring a standard setter in (usually Jim Leisenring), but the last time someone held a session on accounting history at the consortium was in 1987 (I was the presenter, and the students told me that the subject I treated was entirely new to them.).Virtually no top doctoral programs in the country treat accounting history or even accounting theory. They deal only with how to conduct analytical or empirical research, and the references given to the students are, with a few exceptions (Ball and Brown, and Watts and Zimmerman), from the last six or eight years. Small wonder that tyro assistant professors struggle to learn what accounting is all about once they start teaching the subject. Our emerging doctoral students, for years, have had no knowledge of the evolution of the accounting literature, even the theory that is now finding its way in the work of Stephen Penman and Jim Ohlson.

I think that one of the aims of the consortium should be to "round out" the intellectual preparation of the doctoral students. Instead, the consortium goes deeper in the areas already studied.

Keep up the good work. You are one of the very few people in our field who really cares. And you have done a great deal--more than anyone else I know--to broaden the vision and knowledge base of our colleagues.

Steve. --

Stephen A. Zeff
Herbert S. Autrey Professor of Accounting
Jesse H. Jones Graduate School of Management
Rice University 6100 Main Street Houston, TX 77005

One of the most prominent CPAs in the world sent me the following message and sent the WSJ link:

Bob, More on Enron.
It's interesting that this matter of performing internal audits didn't come up in the testimony Joe Beradino of Andersen presented to the House Committee a couple of days ago

"Arthur Andersen's 'Double Duty' Work Raises Questions About Its Independence," by Jonathan Weil, The Wall Street Journal, December 14, 2001 --- http://interactive.wsj.com/fr/emailthis/retrieve.cgi?id=SB1008289729306300000.djm

In addition to acting as Enron Corp.'s outside auditor, Arthur Andersen LLP also performed internal-auditing services for Enron, raising further questions about the Big Five accounting firm's independence and the degree to which it may have been auditing its own work.

That Andersen performed "double duty" work for the Houston-based energy concern likely will trigger greater regulatory scrutiny of Andersen's role as Enron's independent auditor than would ordinarily be the case after an audit failure, accounting and securities-law specialists say.

It also potentially could expose Andersen to greater liability for damages in shareholder lawsuits, depending on whether the internal auditors employed by Andersen missed key warning signs that they should have caught. Once valued at more than $77 billion, Enron is now in proceedings under Chapter 11 of the U.S. Bankruptcy Code.

Internal-audit departments, among other things, are used to ensure that a company's control systems are adequate and working, while outside independent auditors are hired to opine on the accuracy of a company's financial statements. Every sizable company relies on outside auditors to check whether its internal auditors are working effectively to prevent fraud, accounting irregularities and waste. But when a company hires its outside auditor to monitor internal auditors working for the same firm, critics say it creates an unavoidable conflict of interest for the firm.

Still, such arrangements have become more common over the past decade. In response, the Securities and Exchange Commission last year passed new rules, which take effect in August 2002, restricting the amount of internal-audit work that outside auditors can perform for their clients, though not banning it outright.

"It certainly runs totally contrary to my concept of independence," says Alan Bromberg, a securities-law professor at Southern Methodist University in Dallas. "I see it as a double duty, double responsibility and, therefore, double potential liability."

Andersen officials say their firm's independence wasn't impaired by the size or nature of the fees paid by Enron -- $52 million last year. An Enron spokesman said, "The company believed and continues to believe that Arthur Andersen's role as Enron's internal auditor would not compromise Andersen's role as independent auditor for Enron."

Andersen spokesman David Tabolt said Enron outsourced its internal-audit department to Andersen around 1994 or 1995. He said Enron began conducting some of its own internal-audit functions in recent years. Enron, Andersen's second-largest U.S. client, paid $25 million for audit fees in 2000, according to Enron's proxy last year. Mr. Tabolt said that figure includes both internal and external audit fees, a point not explained in the proxy, though he declined to specify how much Andersen was paid for each. Additionally, Enron paid Andersen a further $27 million for other services, including tax and consulting work.

Following audit failures, outside auditors frequently claim that their clients withheld crucial information from them. In testimony Wednesday before a joint hearing of two House Financial Services subcommittees, which are investigating Enron's collapse, Andersen's chief executive, Joseph Berardino, made the same claim about Enron. However, given that Andersen also was Enron's internal auditor, "it's going to be tough for Andersen to take that traditional tack that 'management pulled the wool over our eyes,' " says Douglas Carmichael, an accounting professor at Baruch College in New York.

Mr. Tabolt, the Andersen spokesman, said it is too early to make judgments about Andersen's work. "None of us knows yet exactly what happened here," he said. "When we know the facts we'll all be able to make informed judgments. But until then, much of this is speculation."

Though it hasn't received public attention recently, Andersen's double-duty work for Enron wasn't a secret. A March 1996 Wall Street Journal article, for instance, noted that a growing number of companies, including Enron, had outsourced their internal-audit departments to their outside auditors, a development that had prompted criticism from regulators and others. At other times, Mr. Tabolt said, Andersen and Enron officials had discussed their arrangement publicly.

Accounting firms say the double-duty arrangements let them become more familiar with clients' control procedures and that such arrangements are ethically permissible, as long as outside auditors don't make management decisions in handling the internal audits. Under the new SEC rules taking effect next year, an outside auditor impairs its independence if it performs more than 40% of a client's internal-audit work. The SEC said the restriction won't apply to clients with assets of $200 million or less. Previously, the SEC had imposed no such percentage limitation.

-----Original Message-----
From: Roselyn Morris [mailto:rm13@BUSINESS.SWT.EDU]
Sent: Friday, January 11, 2002 1:45 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Oh No!

I am president of the Board of Directors of a higher education authority, which provides secondary financing for student loans. By nature of that position, I am chairman of the audit committee. From that experience, I know that I do battle with the auditors annually. The auditors did not see any reason to meet with the audit committee until they were threatened with dismissal. I know that I have asked hard questions and do not allow the auditors to take the easy way out. I am continuing being told by the auditors that I am the only one asking these questions and that I am wasting valuable time, especially for a small client. The quality of the audit from the Big Five firm is of questionable quality. I continually find mistakes, and for the last two of three years the audit report draft was completely wrong. As I press hard, the auditors annually let me know that the audit is a small audit ($100,000 annually for the authority, and $35,000 for a subsidiary) and that there are more valuable and worthwhile jobs to be done. Why is the authority using Big Five auditors then? Because is required by the bond covenants. The Big Five have worked hard to get all the publicly traded and SEC audit work, but want to make more money through the big audits or consulting only.

In working with the audit committee, I have found that real-world auditors don't know what the standards or the profession require, only what that particular Big Five firm requires. The real-world auditors do not want to know those things because most of those auditors are putting in their time at the Big Five in order to get a bigger paying job.

As an academic, what can we do?

Roselyn E. Morris, PhD, CPA
Associate Dean College of Business Administration
Southwest Texas State University San Marcos, Texas 78666-4616 Phone (512)245.2311 Fax (512)245.8375 e-mail: rm13@business.swt.edu

Worldcom Inc.'s restated financial reports aren't even at the printer yet, and already new questions are surfacing about whether investors can trust the independence of the company's latest auditor, KPMG LLP -- and, thus, the numbers themselves.

I suspect by now, most of you are aware that after the world's largest accounting scandal ever, our Denny Beresford accepted an invitation to join the Board of Directors at Worldcom. This has been an intense addition to his day job of being on the accounting faculty at the University of Georgia. Denny has one of the best, if not the best, reputations for technical skills and integrity in the profession of accountancy. In the article below, he is quoted extensively while coming to the defense of the KPMG audit of the restated financial statements at Worldcom. I might add that Worldcom's accounting records were a complete mess following Worldcom's deliberate efforts to deceive the world and Andersen's suspected complicity in the crime. If Andersen was not in on the conspiracy, then Andersen's Worldcom audit goes on record as the worst audit in the history of the world. For more on the Worldcom scandal, go to http://www.trinity.edu/rjensen/fraud.htm#WorldcomFraud

"New Issues Are Raised Over Independence of Auditor for MCI," by Jonathan Weil, The Wall Street Journal, January 28, 2004 --- http://online.wsj.com/article/0,,SB107524105381313221,00.html?mod=home_whats_news_us

Worldcom Inc.'s restated financial reports aren't even at the printer yet, and already new questions are surfacing about whether investors can trust the independence of the company's latest auditor, KPMG LLP -- and, thus, the numbers themselves.

The doubts stem from a brewing series of disputes between state taxing authorities and WorldCom, now doing business under the name MCI, over an aggressive KPMG tax-avoidance strategy that the long-distance company used to reduce its state-tax bills by hundreds of millions of dollars from 1998 until 2001. MCI, which hopes to exit bankruptcy-court protection in late February, says it continues to use the strategy. Under it, MCI treated the "foresight of top management" as an asset valued at billions of dollars. It licensed this foresight to its subsidiaries in exchange for royalties that the units deducted as business expenses on state tax forms.

It turns out, of course, that WorldCom management's foresight wasn't all that good. Bernie Ebbers, the telecommunications company's former chief executive, didn't foresee WorldCom morphing into the largest bankruptcy filing in U.S. history or getting caught overstating profits by $11 billion. At least 14 states have made known their intention to sue the company if they can't reach tax settlements, on the grounds that the asset was bogus and the royalty payments lacked economic substance. Unlike with federal income taxes, state taxes won't necessarily get wiped out along with MCI's restatement of companywide profits.

MCI says its board has decided not to sue KPMG -- and that the decision eliminates any concerns about independence, even if the company winds up paying back taxes, penalties and interest to the states. MCI officials say a settlement with state authorities is likely, but that they don't expect the amount involved to be material. KPMG, which succeeded the now-defunct Arthur Andersen LLP as MCI's auditor in 2002, says it stands by its tax advice and remains independent. "We're fully familiar with the facts and circumstances here, and we believe no question can be raised about our independence," the firm said in a one-sentence statement.

Auditing standards and federal securities rules long have held that an auditor "should not only be independent in fact; they should also avoid situations that may lead outsiders to doubt their independence." Far from resolving the matter, MCI's decision not to sue has made the controversy messier.

In a report released Monday, MCI's Chapter 11 bankruptcy-court examiner, former U.S. Attorney General Richard Thornburgh, concluded that KPMG likely rendered negligent and incorrect tax advice to MCI and that MCI likely would prevail were it to sue to recover past fees and damages for negligence. KPMG's fees for the tax strategy in question totaled at least $9.2 million for 1998 and 1999, the examiner's report said. The report didn't attempt to estimate potential damages.

Actual or threatened litigation against KPMG would disqualify the accounting firm from acting as MCI's independent auditor under the federal rules. Deciding not to sue could be equally troubling, some auditing specialists say, because it creates the appearance that the board may be placing MCI stakeholders' financial interests below KPMG's. It also could lead outsiders to wonder whether MCI is cutting KPMG a break to avoid delaying its emergence from bankruptcy court, and whether that might subtly encourage KPMG to go easy on the company's books in future years.

"If in fact there were problems with prior-year tax returns, you have a responsibility to creditors and shareholders to go after that money," says Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta. "You don't decide not to sue just to be nice, if you have a legitimate claim, or just to maintain the independence of your auditors."

In conducting its audits of MCI, KPMG also would be required to review a variety of tax-related accounts, including any contingent state-tax liabilities. "How is an auditor, who has told you how to avoid state taxes and get to a tax number, still independent when it comes to saying whether the number is right or not?" says Lynn Turner, former chief accountant at the Securities and Exchange Commission. "I see little leeway for a conclusion other than the auditors are not independent."

Dennis Beresford, the chairman of MCI's audit committee and a former chairman of the Financial Accounting Standards Board, says MCI's board concluded, based on advice from outside attorneys, that the company doesn't have any claims against KPMG. Therefore, he says, KPMG shouldn't be disqualified as MCI's auditor. He calls the tax-avoidance strategy "aggressive." But "like a lot of other tax-planning type issues, it's not an absolutely black-and-white matter," he says, explaining that "it was considered to be reasonable and similar to what a lot of other people were doing to reduce their taxes in legal ways."

Mr. Beresford says he had anticipated that the decision to keep KPMG as the company's auditor would be controversial. "We recognized that we're going to be in the spotlight on issues like this," he says. Ultimately, he says, MCI takes responsibility for whatever tax filings it made with state authorities over the years and doesn't hold KPMG responsible.

He also rejected concerns over whether KPMG would wind up auditing its own work. "Our financial statements will include appropriate accounting," he says. He adds that MCI officials have been in discussions with SEC staff members about KPMG's independence status, but declines to characterize the SEC's views. According to people familiar with the talks, SEC staff members have raised concerns about KPMG's independence but haven't taken a position on the matter.

Mr. Thornburgh's report didn't express a position on whether KPMG should remain MCI's auditor. Michael Missal, an attorney who worked on the report at Mr. Thornburgh's law firm, Kirkpatrick & Lockhart LLP, says: "While we certainly considered the auditor-independence issue, we did not believe it was part of our mandate to draw any conclusions on it. That is an issue left for others."

Among the people who could have a say in the matter is Richard Breeden, the former SEC chairman who is overseeing MCI's affairs. Mr. Breeden, who was appointed by a federal district judge in 2002 to serve as MCI's corporate monitor, couldn't be reached for comment Tuesday.

KPMG’s “Unusual Twist”
While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.

Worldcom Inc.'s restated financial reports aren't even at the printer yet, and already new questions are surfacing about whether investors can trust the independence of the company's latest auditor, KPMG LLP -- and, thus, the numbers themselves.

I suspect by now, most of you are aware that after the world's largest accounting scandal ever, our Denny Beresford accepted an invitation to join the Board of Directors at Worldcom. This has been an intense addition to his day job of being on the accounting faculty at the University of Georgia. Denny has one of the best, if not the best, reputations for technical skills and integrity in the profession of accountancy. In the article below, he is quoted extensively while coming to the defense of the KPMG audit of the restated financial statements at Worldcom. I might add that Worldcom's accounting records were a complete mess following Worldcom's deliberate efforts to deceive the world and Andersen's suspected complicity in the crime. If Andersen was not in on the conspiracy, then Andersen's Worldcom audit goes on record as the worst audit in the history of the world. For more on the Worldcom scandal, go to http://www.trinity.edu/rjensen/fraud.htm#WorldcomFraud

And the saga goes on and on and on.

After the Bailout the Banks are Still Hiding Debt and the Auditors Acquiesce
"Major Banks Said to Cover Up Debt Levels," The New York Times via The Wall Street Journal, April 9, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/09/major-banks-said-to-cover-debt-levels/?dlbk&emc=dlbk

Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup are the big names among 18 banks revealed by data from the Federal Reserve Bank of New York to be hiding their risk levels in the past five quarters by lowering the amount of leverage on the balance sheet before making it available to the public, The Wall Street Journal reported.
The Federal Reserve’s data shows that, in the middle of successive quarters, when debt levels are not in the public domain, that banks would acknowledge debt levels higher by an average of 42 percent, The Journal says.

“You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you’re taking less risk,” William Tanona, a former Goldman analyst and head of financial research in the United States at Collins Stewart, told The Journal.

The newspaper suggests this practice is a symptom of the 2008 crisis in which banks were harmed by their high levels of debt and risk. The worry is that a bank displaying too much risk might see its stocks and credit ratings suffer.

There is nothing illegal about the practice, though it means that much of the time investors can have little idea of the risks the any bank is really taking.

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.

"PwC's Administration of Lehman Translates to $24,000 Per Hour!" Big Four Blog, April 16, 2010 ---
http://www.bigfouralumni.blogspot.com/

April 19, 2010 message from Francine McKenna [retheauditors@GMAIL.COM]

This is a great article by Jennifer hughes in FT, from early in the process that describes PwC's approach to the engagement.

http://www.ft.com/cms/s/2/e4223c20-aad1-11dd-897c-000077b07658.html

Francine

Bob Jensen's threads on the Lehman-Ernst Controversies ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Where Were the Auditors? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Bob Jensen's threads on off-balance-sheet financing (OBSF) ---
http://www.trinity.edu/rjensen/theory01.htm#OBSF2

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

-----Original Message-----
From: Jensen, Robert [mailto:rjensen@trinity.edu]
Sent: Thursday, April 08, 2010 9:18 AM
To: Jim Fuehrmeyer
Subject: RE: AT&T $1 billion write-down, Repo 105 and other dumb questions

Yes, but can the FAS 140 defense be used in the British Courts when British investors sue the failed London office of Lehman and the London office of E&Y?

I assumed that branch investment banks in England are subject to UK accounting/auditing standards. Or can investment banks avoid local accounting/auditing standards by having headquarters in other nations?

Bob Jensen

-----Original Message-----
From: Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]
Sent: Thursday, April 08, 2010 11:51 AM
To: Jensen, Robert
Subject: RE: AT&T $1 billion write-down, Repo 105 and other dumb questions

I guess that depends on what their basis is for suing. I'm not a lawyer, of course. I expect the local Lehman office filed statutory reports in the UK, whether they were regulated or not, and those would have been done using IFRS. The Repo 105 would not qualify as a sale under IFRS - the fixed price repurchase arrangement would take care of that (IFRS No. 39R, AG40) - so I expect this would have shown as a secured borrowing on those financials. I'm quite sure UK companies file financial statements, even wholly-owned subsidiaries of US companies. Assuming the Lehman entities did that, the financials may even be available to the public/press and someone's likely already pouring over them. So it's not clear to me that a UK plaintiff would be relying on the US GAAP financials nor is it clear to me what damages there are in the UK related to the Lehman subsidiaries. The plaintiffs I guess would be creditors, lenders and so on, and you're correct, they would not have been using the consolidated Lehman 10K as a basis for their credit decisions if they had local financials to go on - and I bet that would be the case here.

The requirement to file local financials is typical all around the world - except in the US of course. A US subsidiary of a foreign company doesn't have to do separate financials. And that's among the reasons the big US multinationals want to be on IFRS. Their subsidiaries all around the world already have to prepare local, statutory financials and most places are now using IFRS so they have to convert all those subs to US GAAP for purposes of reporting here. They could actually save a lot of time and effort if the US piece went to IFRS.

Jim

Demystify the Lehman Shell Game," by Floyd Norris, The New York Times, April 1, 2010 ---
http://www.nytimes.com/2010/04/02/business/02norris.html

Making unattractive assets disappear from corporate balance sheets was one of the great magical tricks performed by accountants over the last few decades.

Whoosh went assets into off-balance-sheet vehicles that seemed to be owned by no one. Zip went assets into securitizations that turned mortgage loans for poor credit risks into complicated pieces of paper that somehow earned AAA ratings.

As impressive as those accomplishments were, they did not make the assets vanish altogether. If you dug deep enough, you could find the structured investment vehicle or the underlying assets of that strange securitization.

Now there is another possibility in the world of accounting magic. Did accountants find a way to make some assets disappear altogether? Was it possible for everybody with an interest in them to disclaim ownership?

Until recently, it never would have occurred to me that companies would want to do that — particularly if the assets in question were perfectly respectable ones. But now that we have learned Lehman Brothers did it, the question arises of how far the practice went.

Lehman’s reasons for doing it were simple: to mislead investors into thinking the company was not overleveraged. Were other firms doing that? Are they still? Lehman thought not, but no one really knows.

Now the Securities and Exchange Commission is demanding that other firms disclose whether they did the same. If it finds they did, the commission ought to go further and examine whether there were conspiracies to make the assets vanish, thus making Wall Street appear to be less leveraged than it was.

Lehman’s practices, outlined in a bankruptcy examiner’s report released last month, showed the creative use of accounting for repos.

Don’t let your eyes glaze over. I’ll try to keep it simple.

A repo is simply a “sale” of a financial asset to someone else, with an agreement to repurchase it at a fixed price and date. That amounts to borrowing secured by the asset, often a Treasury bond, with the added security that the lender has the bond, and so can sell it quickly if need be.

Normally, such transactions are accounted for as loans, as they should be. They are often the cheapest way for a brokerage firm to borrow money.

I had taken for granted that repos were always accounted for as loans, but it turns out there was a loophole. The Financial Accounting Standards Board had accepted that under some conditions a repo could be treated as a sale. One condition: if the securities securing the transaction were worth significantly more than the loan, that could be a sale.

In the examples the board provided, it concluded that securing the loan with assets worth 102 percent of the amount borrowed did not produce a sale, but that 110 percent would push the deal over the line. In between was a gray area.

Lehman appears to have concluded that 105 percent was enough if the assets being borrowed against were bonds. If they were equities, it set the bar at 108 percent.

By doing such sales repos at the end of each quarter, and reversing them a few days later, the firm could seem to have less debt than it really did.

It started the practice in 2001 but really accelerated it in 2007 and early 2008, when investors belatedly discovered there were risks to high leverage ratios. At the end of 2007, the bankruptcy examiner concluded, Lehman’s real leverage ratio was 17.8 — meaning it had $17.80 in assets for every dollar of equity. It reported a ratio of 16.1.

By the end of June 2008 — Lehman’s last public balance sheet — it was hiding $50 billion of debt that way, enabling it to appear to be reducing its leverage far more than it was. When investors asked how it was doing that, Lehman officials chose not to explain what was actually happening.

Lehman’s collapse is history, but after it was allowed to collapse other firms were rescued. We don’t know whether those firms used the same tricks, although we do know that Lehman thought they were not doing so.

The questions sent to financial companies by the S.E.C. this week should provide answers to that question. Companies that classified repos as sales are going to have to provide specifics and explain exactly why the accounting was justified. The reports will go back three years, so we can see history as well as current practices.

It would be nice if the commission found that other firms did not choose to hide borrowing this way.

But if that is not what is found, then the commission should dig deeper into actual transactions. It should find out how the firm on the other side of each repo accounted for it.

There are at least two abuses that might have happened.

The first would stem from differing reporting periods. One firm could hide debt with another when its quarter ended. Then, when the other firm’s quarter ended, that firm could hide debt with the first firm.

The second method would reflect the fact that two companies involved in a transaction do not have to use the same accounting. Lehman could treat the repo as a sale, but the other firm could call it a financing. Presto: Nobody reports owning the assets in question.

That could even be legal. The second firm could conclude that an asset-to-loan ratio of 105 percent was not high enough to qualify for sales treatment, while the first firm thought 105 percent was high enough.

But legal or not, it would be misleading.

Wall Street leverage remains an important issue. The S.E.C. should discover if it was, or is, being concealed, and then get to the bottom of how that was done.

Floyd Norris comments on finance and economics in his blog at nytimes.com/norris.

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.
"Lehman's Demise and Repo 105: No Accounting for Deception," Knowledge@Wharton, March 31, 2010 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2464

Bob Jensen's threads on the Lehman-Ernst controversies are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

"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

The messages below are in reverse order as to the time received on April 7m 2010

From: THE Internet Accounting List/Forum for CPAs [mailto:CPAS-L@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Wednesday, April 07, 2010 10:43 AM
To: CPAS-L@LISTSERV.LOYOLA.EDU
Subject: Re: AT&T $1 billion write-down, Repo 105 and other dumb questions

Hi Jim,

I agree. But then why does do auditors contend that financial statements have greater transparency because of the many additions to standards and interpretations.

The Repo 105 deception seems like one of the simpler cosmetic that could’ve been made more transparent with a rather simple footnote indicating the sales amount, the repurchase amount, and the probability of repurchase under the buy-back contracts. That was probably more transparency than Lehman wanted at the time.

Bob Jensen

From: THE Internet Accounting List/Forum for CPAs [mailto:CPAS-L@LISTSERV.LOYOLA.EDU] On Behalf Of Jim Fuehrmeyer
Sent: Wednesday, April 07, 2010 10:21 AM
To: CPAS-L@LISTSERV.LOYOLA.EDU
Subject: FW: AT&T $1 billion write-down, Repo 105 and other dumb questions

Bob,

I agree completely. This was strictly for financial statement cosmetics around a particular ratio – otherwise why convert high quality liquid securities into cash? But as I said once before, we’re focusing on these particular cosmetics and in the US business world there are a lot of things that are done purely for cosmetics. Structuring a lease to get operating treatment is cosmetic. Doing year-end clearance sales is cosmetic. Securitizations themselves are cosmetic – who would want to show all those subprime loans as assets? And by the way, in my humble opinion, those are among the biggest of the “poisons” behind our financial crisis – and I’ve been hearing the ads for loans with no down-payment and no credit checks on the radio so it’s going to continue. So long as we have an economy that is dependent on us going into debt to buy things we don’t need or can’t afford, it won’t get better.

As an aside, I suspect some of the things that we in Academia do at the department/college/university level for the purpose of improving the ratings are also cosmetic. J

Jim

That is very helpful Jim. But I still don’t understand how the Lehman Repo 105 contracts had any economic purpose other than to deceive. The probability of not having the poison returned seems asymptotically close to zero.

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jagdish Gangolly
Sent: Wednesday, April 07, 2010 11:03 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: AT&T $1 billion write-down, Repo 105 and other dumb questions

Bob and Jim,

The last sentence in Rule 203 states:

_______________________________________

If, however, the statements or data contain such a

departure and the member can demonstrate that

due to unusual circumstances the financial

statements or data would otherwise have been

misleading, the member can comply with the rule

by describing the departure, its approximate effects,

if practicable, and the reasons why compliance with

the principle would result in a misleading statement.
_____________________________________

Bob,

I’ve just started working through Lehman’s last 10Q and you certainly can’t see any specific evidence of the Repo 105/108 arrangements in there. I suspect they’re included in the derivative note and in MD&A in the liquidity section. I’m guessing the Repo 105/8 arrangement is in the “Other Commitments and Guarantees” table in the first number – the $114 billion of derivatives’ notional value maturing in 2008. But again, the $50 billion isn’t even 10% of Lehman’s off-balance-sheet derivative activity. I’m not aware of requirements to disclose in detail the make-up of one’s derivatives by contracts or counterparties so if that’s in fact where it is, they’ll argue that the disclosure “is there”.

I’ve been struggling for a couple of days trying to understand how they did qualify for sale treatment given the fixed price repurchase provision. I’ve always understood fixed price repurchase options to be terms that “constrain the transferee and provide more than a trivial benefit to the transferor” thus resulting in no sale treatment. Lehman had to use a fixed price arrangement because an agreement to repurchase at market would have resulted in the “05” being a loss on sale rather than a “derivative asset”. I think this is one of those times where the effort to structure transactions to meet the rules really shows up. In FAS 140, paragraphs 47 to 49 discuss the issues one has to look at for repurchase agreements to meet the “sale” test. There are four key points that if present cause the repo to be treated as a borrowing. One of those points is having a fixed repurchase price (47c). It appears to me that the way Lehman was able to comply with the rule relates to 47b – which says that if Lehman had the means to repurchase even on default by the transferee they could not get sale treatment. This is explained in paragraph 49 as meaning Lehman would have to obtain cash or other collateral sufficient to fund the repurchase throughout the term of the agreement. They got the cash but likely determined that if they paid down debt and thus didn’t “fund” the repurchase, they’d meet this one requirement of the four and thus not have to account for the repos as borrowings. I’m not an expert on financial instruments, but so far, this is all I can see. The FASB did deal with repos, though. Back in the discussion about their deliberations on FAS 125 (in paragraph 210 et seq. of FAS 140) they mention that at one point they had considered requiring a 90-day period between “sale” and repurchase for these things to qualify. They opted not to go that route after pressure from respondents who argued this was an arbitrary rule. That might have dampened this a little had that requirement been in place.

Jim

"Repo 105 Explained With Barbie Dolls," by David Albrecht, The Summa, April 23, 2010 ---
http://profalbrecht.wordpress.com/2010/04/23/repo-105-explained-with-barbie-dolls/
Jensen Comment
It took Mattel's Mary Doll to fully explain the SEC's potential role in resolving n this controversy.

April 24, 2010 Message from dberesfo@TERRY.UGA.EDU

Dave's pictorial is very cute. But a better example would be to show Barbie reducing her weight from 32 to 1 leverage to about 30.5 to 1 leverage. Of course, that wouldn't have looked very dramatic just like the Repo 105 transaction had hardly any impact on Lehman's leverage.

Denny Beresford

April 24, 2010 reply from Bob Jensen

That’s a very good point Denny! I do appreciate the details on how little Lehman got prettier at closing time from “32 to 1 leverage to about 30.5 to 1.”

But your message begs the question: If diet pills (Repos 105 transactions) were virtually worthless for losing weight (improving leverage attractiveness at closing time), why take these potentially dangerous pills in the first place?
And why do so only at quarterly “closing times”?

Of course we might recall the Mickey Gilley’s song lyrics "Don't the Girls All Get Prettier at Closing Time?"
http://www.youtube.com/watch?v=j6ltTzLMgJQ
But that might be extending the concept of bookkeeping’s “closing time” diet pills a bit too far.
And now would probably not be a good time to also recall that “it’s never over ‘til the fat lady sings.”

Perhaps you can give us more perspective on why Lehman's CFO purportedly invented Repo 105 contracts if he knew in advance that the benefits to leverage attractiveness were not significant at closing times. Seems like a whole lot trouble and risk in accounting if nobody will ever notice the weight loss at closing time.

I repeat my argument criticizing the FASB’s “control reasoning” in the FAS 140 standards. The major justification for allowing a repo contract to be booked as a sale seems to be that the buyer rather than the seller "controls" when and if the purchased items are returned to the seller (which was a virtual certainty in Lehman’s case since the rate of return as very high to the temporary owner of the securities for a matter of days.)

The FASB reasons inconsistently with respect to "control." FAS 133 requires booking and maintaining written options at fair value even though the seller of the option loses control. It’s the buyer of the option, especially an American option, who determines if and when the option is exercised. The buyer has less control in a European option contract, but American options are vastly more popular in the United States.

When Chrysler sells a SUV’s power train, the buyer over his/her entire lifetime has control over if and when the power train is returned. Of course in this case, tradition in accounting allows the initial sale to be booked as a sale. But accounting rules also require that warranty reserves be booked with realistic estimates as to the cost a percentage of the power train parts that will have to be replaced over the expected lifetimes of all buyers. Of course in the case of Chrysler, the government has set up a multi-billion warranty fund for replacing Chrysler power trains or entire cars if Chrysler should eventually tank. Taxpayers should be grateful that Hank Paulson did not set up a similar government warranty fund for Lehman’s Repo 105 returns.

It would seem that in FAS 140 the FASB should’ve required some type of accounting for the financial risk of a seller having to repossess the contracted item. In the case of Lehman’s Repo 105 contracts it was 99.99999% certain the “sold” securities would be returned in a matter of days.

The FASB apparently did not anticipate that FAS 140 would be used to “mask debt” at closing times, and it would seem that the FASB should now act quickly in the interest of investors to devise some rule for greater transparency of repo contract sales. Perhaps something like warranty reserves will suffice. Or perhaps, merely FASB-mandated repo sales disclosures will suffice where the company must disclose the contracted return price, the contracted return period, and the estimated amounts that will be paid out for the repossessions.

I realize that the matching concept reasoning is no longer politically acceptable. However, AC Littleton would’ve argued that the $5 cost in the $105 might be better matched to the sales revenues if the cost is to be incurred a few days after the sale. Keep in mind that if Lehman called the $5 an interest expense, the Repo 105 contracts would violate usury laws in most of our 50 states (South Dakota being an exception).

Once again Denny, I do appreciate the details on how little Lehman got prettier at closing time from “32 to 1 leverage to about 30.5 to 1.” And the resolution of issues raised in the Lehman Bankruptcy Examiner’s Report won’t end until “the fat lady sings.”
Thank you for the value added.
Bob Jensen

April 25, 2010 reply from Tom Selling [tom.selling@GROVESITE.COM]

Hi folks,

I agree with Bob’s assessment of the lack of effectiveness of the control criteria as being the appropriate criteria for recognition or derecognition of assets. As Walter Schuetze once remarked to me, “legal form is economic substance.” In this context, changes in legal ownership of the securities should determine how a repo is accounted for—“effective control” is an even more dubious concept than “control.”

However, I disagree with Bob on two other points.

First, in accounting for the $5 in the Lehman repo 105, you need to consider it together with the initial fair value of the forward contract to repurchase the transferred securities. I would imagine that if you fair valued the asset component separately from the liability component of the forward contract, they would not be equal.

Second, as Shayam Sunder wrote, “unlike a uniform system of weights and measures, the conduct of business changes in response to the accounting rules applied.” The FASB has a responsibility to anticipate abuses, and Congress should ask whether the FASB can do a better job in anticipating abuses of complex, rules-based standards with highly subjective criteria. I am not ready to conclude that the FASB should be resolved of responsibility for these abuses without looking at their due diligence records.

I have more to say on this in my latest blog post, which I just published 15 minutes ago:
http://accountingonion.typepad.com/theaccountingonion/2010/04/fasb-could-easily-stop-repo-accounting-games-assuming-it-wants-to.html

Best,

Tom

April 25, 2010 reply from Bob Jensen

Hi Tom,

I think you misinterpreted my point. My point is that the term “forward contract” implies that the contract is a derivative. Since Lehman’s Repo 105 contract is not a derivative, it must be called something else. That’s all I meant.

With respect to your proposed solution, I would have to study more on the issue of repo contracts in practice. In particular, how frequently are these contracts used in situations where repossession is only a very remote possibility? It would be great if somebody who mines big databases could provide more information upon how other companies use repo contracts, what accounting disclosures are provided about such contracts, etc. It would be helpful to know more about why the FASB embedded repo sales in FAS 140. Surely some industry groups were lobbying the FASB and making arguments for allowing repo contracts to be accounted for as sales.

I think Lehman’s purported “debt masking” using the Lehman Repo 105 invention is an outlier among possible repo contracts and may not even be a good example of the more common types of repo contracts. Lehman’s Repo 105 contracts have a fixed return price and a very short (maybe two weeks?) return horizon. What about repo contracts with longer time horizons such as five or ten years? What about repo contracts where the returns vary under some type of time amortization? What about repo contracts that depend upon some contingency event with regard to the return and/or the price paid for the repossession?

It may very well be that some repo contracts can be structured as derivative financial instruments scoped into FAS 133. For example, repossession could possibly be contracted as a written option based upon some underlying.

If I were to approach rewriting a standard for repo contracts I would first of all state that whenever the contracts fall under some other standard such as FAS 133, that those other standards dictate the accounting treatment. For repo contracts not covered by other standards, then I would break them down into those with a fixed return price, those with a fixed amortized price, and those with variable and uncertain return prices. Then I would have to give more thought on how investors might best be served under the various types of repossession contract alternatives. It may well be that when repossession has a low probability (similar to the case for bad debts and warranties), then perhaps what should be done is to currently expense the present value of expected future losses much like is done with warranty reserve accounting.

I don’t think Lehman’s Repo 105 contracts should even be called sales if and when the FASB revises FAS 140. It is inconsistent with the entire history of accounting to book the “sale” of an item as a sale if it’s certain to be returned in a matter of days. When Sears sells a dress that’s returned in two days, the original sale was booked as a sale, but the probability of the dress being returned is relatively low. This is not the same as if all dresses sold are certain to be returned.

Perhaps a fixed or amortized price repo contract in many instances contract is better accounted for as a lease. However, I hesitate to call Lehman’s Repo 105 contracts leases since the “lessee” really is not getting an item with any utility other than the anticipated return price. The item itself need not even be moved from storage between when the lease period begins and ends. That begins to look more like a “bill and hold” transaction. Perhaps Lehman’s Repo 105 contracts should be accounted for as “bill and holds” ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#BillAndHold

In any case, I hope the FASB is re-studying the entire realm of repo contracts found in practice. Then I hope that repo contracts that are tantamount to debt masking are no longer accounted for under present FAS 140 rules.

One person wrote that the Lehman Repo 105 is nothing other than channel stuffing. I might be inclined to agree if what Lehman really intended was to push up sales ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#ChannelStuffing
However, I don’t think the motive in Lehman’s case was to inflate sales. Rather the purpose seems to be more balance sheet related in an effort to mask debt.

Perhaps the best alternative standard in this particular case really is a principles-based standard rather than a bright line standard. The principle would be for the accounting to be fully transparent with respect to the intent of the “seller” of the item and on the other side of the coin the “buyer” of the item. Perhaps repo contracts are just too varied in practice to embrace in a single standard other than maybe a principles-based standard. There should be a proviso, however, that if the contract really is a derivative or a lease or insurance or whatever, the accounting should conform to the standard that is written for that particular type of contract.

Bob Jensen

April 25, 2010 reply from Francine McKenna [retheauditors@GMAIL.COM]

Tom/Bob,

I think any reasonable criteria for ownership and control was not met in the Lehman Repo 105 situation. Why? Lehman continued to collect the coupon on the underlying securities per the bankruptcy examiner's report. There were major machinations required on both the Lehman side and the counterparty's side to present one thing for financial reporting purposes and to ignore the reality that the securities were most likely still recorded on the Lehman subsidiary investment accounting systems. Otherwise, how to match up the coupon with a CUSIP? It's enough to make me dizzy. Any objective regulator or watchdog/gatekeeper as the auditors should be should have cringed and called a fake on the sale treatment.

http://goingconcern.com/2010/03/let-me-tell-you-a-funny-story-lehman’s-repo-105-accounting/

Francine

One Auditing Firm Has Become Better Known for Its Auditing Specialty Than Other Firms that are only pretenders

"The Leading Indicator of Repurchase Risk Losses? Audited By KPMG," by Francine McKenna, re: The Auditors, April 25, 2010 ---
http://retheauditors.com/2010/04/25/the-leading-indicator-of-repurchase-risk-losses-audited-by-kpmg/

If you are a regular reader of this site, you may remember the first time I warned you about the poor disclosure practices surrounding repurchase risk. It was all the way back in March of 2007 and I was referring to the lack of disclosures surrounding New Century Financial. I warned you again seven months ago that another KPMG client, Wachovia/Wells Fargo, has the same disclosure issues with regard to repurchase risk. The latest announcements of potentially material losses due to forced repurchases of mortgages from Fannie Mae (Deloitte) and Freddie Mac (PwC) were made by JP Morgan and Bank of America – both audited by PwC. Maybe ya’ll should kick the tires a little more on Citibank’s big comeback

Continued in article

Jensen Comment
Francine also added a video entitled “It’s Like Déjà Vu All Over Again!”

Bob Jensen's threads on the largest auditing firms are at
http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on Lehman's Repo 105 contracts ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Ketz Me If You Can
Here's Professor Ketz's Bombshell We've All Been Waiting For: And to Think I Was Shocked by Repo 105s Until Ed Wrote This

"Shock over Repo 105," by J. Edward Ketz, SmartPros, April 2010 ---
http://accounting.smartpros.com/x69280.xml

The bankruptcy report by Anton Valukas has created quite a stir. Given that we all knew about the demise of Lehman Brothers, what was the surprise? Ok, he wrote about some fast and loose accounting tricks, which are dubbed Repo 105 transactions. So what?

What I find fascinating about managers at Lehman’s is not so much what they did, but that the public is shocked—shocked!—at another accounting game. As if these behaviors were going to stop!

On what basis would the public believe that corporate accounting had become the truth, the whole truth, and nothing but the truth? Maybe they thought that Sarbanes-Oxley was the golden legislation that solved all our problems. But, as most of the act was incremental changes over previous dictates, that conclusion has exaggerated and continues to exaggerate the reality.

Besides, legislation today will never focus on the real issues of creating incentives for managers to walk the straight and narrow, generating disincentives for those who walk astray, and making sure these things are enforced. In today’s partisanship, what happens depends on who is in office. If it is the Republicans, they’ll talk about ethics and close their eyes. If it is the Democrats, they will ignore current violations and pass new legislation as they continue to build the Great Socialistic Society. And neither party enforces the law, unless you count the SEC’s fining of shareholders as enforcement.

With fewer accounting tricks, as documented by USA Today, maybe the public felt that the tide had turned. Maybe it had, but the cycle continues. Managers find accounting chicanery easier to carry out at some times than others. Never mistake a lull in accounting tricks as their cessation. It is merely a rest before a return to lies, damned lies, and accounting.

Perhaps people felt that the auditors were ferreting out fraud. While the auditors at least have to worry about potential lawsuits, that apparently does not mean that they are always skeptical of management’s actions, even with a credible whistleblower. Audits in the U.S. are better than audits in other countries, but there is still room for improvement. Let’s not think that the auditors are always vigilant.

Maybe with stock market prices going up after an extended downturn, folks started believing that the economy was resurging. I cannot share that optimism for we have so many asset bubbles yet to burst. Even if it were true, increasing stock market prices just accent the perverse incentives in our economy, as corporate managers and directors attempt to maximize their own wealth through share-based compensation, and accounting is merely a tool to accomplish their goals.

No, I don’t see much reason for accounting frauds to cease. I laugh when I watch television programs, listen to radio broadcasts, and read news accounts and op-ed pieces that lash out at the rascals that dominated Lehman Brothers. What are these people thinking? Why is anybody shocked?

The heart is deceitful above all things and desperately wicked—who can understand it? Clearly, not those who are shocked at the revelations by Valukas.

Bob Jensen's threads on the Lehman-Ernst scandals are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Repo 105: FASB published on its Web site a letter from FASB Chairman Herz to the House Financial Services Committee

April 21, 2010 message from Paul Polinski [paulp_is@YAHOO.COM]

The FASB has published on its web site a letter from Chairman Herz to the House Financial Services Committee regarding Lehman's accounting for repurchase agreements. I've attached the pdf file here, or you can go to the FASB web site and follow the news link.

Paul

The letter is shown below.

April 19, 2010

The Honorable Barney Frank, Chairman
The Honorable Spencer T. Bachus III, Ranking Minority Member
House Financial Services Committee
2129 Rayburn House Office Building
Washington, DC 20515

Re: Discussion of Selected Accounting Guidance Relevant to Lehman Accounting Practices

Dear Chairman Frank and Ranking Minority Member Bachus:

Thank you for the opportunity to submit an explanation of the accounting standards and relevant guidance relating to repurchase agreements for your April 20, 2010 hearing "Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner." In order to focus my response on the most relevant financial accounting guidance, I have referred to certain matters discussed in the report of the Lehman Bankruptcy Examiner.1 Additionally, I have also provided a brief discussion of the relevant accounting guidance relating to consolidation of special-purpose entities, which I believe may be helpful to the Members of the Committee as they deliberate the public policy issues relating to Lehman’s bankruptcy.

1 Report of Anton R. Valukas, Examiner, United States Bankruptcy Court Southern District of New York, In re Lehman Brothers Holdings Inc., et al., Debtors, March 11, 2010.

The FASB does not have regulatory or enforcement powers. However, whenever there are reports of significant accounting or financial reporting issues, we monitor developments closely to assess whether standard-setting actions by us may be needed. In some cases, a misreporting is due to outright fraud and/or violation of our standards, in which case accounting standard-setting action is not necessarily the remedy. Other cases reveal weaknesses in current standards or inappropriate structuring to circumvent the standards, in which case revision of the standards may be appropriate. In some cases, there are elements of both.

At this point in time, while we have read the report of the Lehman Bankruptcy Examiner, press accounts, and other reports, we do not have sufficient information to assess whether Lehman complied with or violated particular standards relating to accounting for repurchase agreements or consolidation of special-purpose entities. Furthermore, we do not know whether other major financial institutions may have engaged in accounting and reporting practices similar to those apparently employed by Lehman. 2

In that regard, we work closely with the SEC. We understand that the SEC staff is in the process of obtaining information directly from a number of financial institutions relating to their practices in these areas. As they obtain and evaluate that information, we will continue to work closely with them to discuss and consider whether any standard-setting actions by us may be warranted.

However, in the meantime, this letter and its attachments summarize the current accounting and reporting standards relating to repurchase agreements and consolidation of special-purpose entities, including some of the recent changes the FASB has put in place.

Accounting and Reporting Standards for Repurchase Agreements

In a typical repurchase (repo) transaction, a bank transfers securities to a counterparty in exchange for cash with a simultaneous agreement for the counterparty to return the same or equivalent securities for a fixed price at a later date, usually a few days or weeks.

Accounting standards prescribe when a company can and cannot recognize a sale of a financial asset based on whether it has surrendered control over the asset. In this context, two of the criteria key in determining whether a sale has occurred are:

(a) The transferred financial assets must be legally isolated from the company that transferred the assets. In other words, Lehman or its creditors would not be able to reclaim the transferred securities during the term of the repo, even in the event of Lehman’s bankruptcy.2

(b) The company that transferred the assets does not maintain effective control over those assets. Specific tests relate to whether the company has maintained effective control, which are described below.

2 The Audit Issues Task Force Working Group of the AICPA issued an Auditing Interpretation, "The Use of Legal Interpretations As Evidential Matter to Support Management’s Assertion That a Transfer of Financial Assets Has Met the Isolation Criterion in Paragraph 9(a) of Statement of Financial Accounting Standards No. 140," to assist auditors in their analysis. I have separately provided a copy to the Committee staff.

If both of these criteria are met (among other criteria), the repo would be accounted for as a sale. If either of these criteria is not met, the repo would be accounted for as a secured borrowing. As a general matter, most standard repo transactions fail one or both of these criteria and, therefore, are accounted for as financings.

In the case of repos, one of the relevant tests for assessing effective control relates to the amount of cash collateral that has been provided, relative to the value of the securities transferred. The rationale behind this condition is that the counterparty has promised to return the securities, but even if it defaults, the arrangement provides for sufficient cash collateral at all times, so that the company could buy replacement securities in the market.

My understanding of Lehman’s Repo 105 and 108 transactions is based on what I have read in the Examiner’s report, press accounts, and other reports. Lehman apparently engaged in structured transactions, known within Lehman as "Repo 105" and "Repo 108" transactions, 3

to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days. Lehman reported its Repo 105 and Repo 108 transfers as sales rather than secured borrowings. The cash received in the transfers was used to pay down liabilities.

Lehman reported its Repo 105 and Repo 108 transactions as sales rather than secured borrowings, apparently by attempting to structure the transactions so as to try to support the following conclusions:

(a) That the transferred securities had been legally isolated from Lehman (based on a true sale opinion from a U.K. law firm), and

(b) That the collateralization in the transactions did not provide Lehman with effective control over the transferred securities.

Based on the Examiner’s report, Lehman’s Repo 105 and Repo 108 transactions were structurally similar to ordinary repo transactions. The transactions were conducted with the same collateral and with substantially the same counterparties.3

3 Report of Anton R. Valukas, Examiner, United States Bankruptcy Court Southern District of New York, In re Lehman Brothers Holdings Inc., et al., Debtors, March 11, 2010, v3, pg. 746.

Additionally, the following two points may be relevant to the analysis of Lehman’s accounting for Repo 105 and Repo 108 transactions.

First, the assessment of legal isolation may have only considered whether the securities were isolated from a U.K. subsidiary, as opposed to the consolidated U.S. entity. We understand that, at least in some cases, the securities were first transferred from a U.S.-based entity to a U.K. subsidiary, and were then repoed with a counterparty in the U.K. Attorneys have told us that there are significant legal differences in how repo transactions are viewed in the event of the insolvency of a repo seller under U.S. and English laws. In the United States, case law related to repurchase transactions has been varied enough that most attorneys generally would not provide a true sale opinion. In England, there is apparently significantly less uncertainty about how a transfer related to a repo would be viewed by a court of law in the event of the insolvency of the repo seller (transferor). Under English law, a transfer in which the documents clearly demonstrate a seller intends to transfer outright to the buyer his entire proprietary interest in an asset apparently would be considered a true sale.

We understand that the opinion prepared by the English law firm may have limited applicability and pertains only to the portion of the transaction executed by the U.K. subsidiary with the repo counterparty. It is not clear that claims could not be pressed in another jurisdiction such as the U.S., since the securities were registered in the U.S. and it is not clear whether the transfer from Lehman to its U.K. subsidiary would be deemed to be a true sale under U.S. law. It is also not clear that the transfers would have resulted in isolation (including in bankruptcy) of the transferred assets from the consolidated Lehman entity, not just the U.K. subsidiary, and thus any legal analysis would likely need to address all relevant jurisdictions including U.K. and U.S. law. 4

Second, with respect to the level of collateralization in the arrangement, Lehman apparently took a discount on the face value of the transferred assets (known as a "haircut") offered to the counterparty. Instead of transferring approximately $100 worth of securities for every $100 of cash received, Lehman transferred $105 worth of debt securities or $108 of equity securities for every $100 in cash received (hence, the names Repo 105 and Repo 108). It appears that Lehman structured the transactions in an attempt to support a conclusion that there was inadequate cash collateral to ensure the repurchase of the securities in the event of a default by the counterparty, and, on that basis, Lehman determined that sale accounting was appropriate. Under sale accounting, Lehman

(a) Removed the transferred securities from its balance sheet,

(b) Recognized the cash received, and

(c) Recognized the difference ($105 or $108 securities derecognized less $100 cash received) as a forward purchase commitment.

When developing the guidance for determining whether a company maintains effective control over transferred assets, the FASB noted that repo transactions have attributes of both sales and secured borrowings. On one hand, having a forward purchase contract—a right and obligation to buy an asset—is not the same as owning the asset. On the other hand, the contemporaneous transfer and repurchase commitment entered into in a repo transaction raises questions about whether control actually has been relinquished. To differentiate between the two, the FASB developed criteria for determining whether a company maintains effective control over securities transferred in a repo transaction.

As noted above, one of those criteria requires a company to obtain adequate cash or collateral during the contract term to be able to purchase replacement securities from others if the counterparty defaults on its obligation to return the transferred securities ("collateral maintenance requirement"). The accounting guidance provides the following example of a collateral maintenance requirement that does maintain effective control:

Arrangements to repurchase securities typically with as much as 98–102% collateralization, valued daily and adjusted up or down frequently for changes in market prices, and with clear powers to use that collateral quickly in the event of the counterparty’s default, typically fall clearly within that guideline.

The accounting guidance emphasizes the need for understanding the terms of a repo agreement and applying judgment in other situations to determine whether a company maintains effective control over the transferred securities. That example was not intended to, nor does it, create a "bright-line" for making that determination. Rather, the example describes typical collateral arrangements in repurchase agreements involving marketable securities indicating that these typical arrangements clearly result in the transferor maintaining effective control over the transferred securities.

The accounting guidance for repos has been in place since 1997 and has not been changed significantly over the years. 5

When there are material structured or unusual transactions, disclosure is also very important. The Examiner’s report indicates that Lehman’s disclosure was incorrect and misleading. According to the Examiner’s report, Lehman disclosed that it accounted for all repos as secured borrowings.

Accounting and Reporting Standards for Consolidation of Special-Purpose Entities

A recent press account indicates that Lehman used a small company run by former Lehman employees apparently to shift investments off its books.4 Based on that press account, it is not possible to determine whether that company was an operating business or a special-purpose entity (SPE). Although the press account does not describe whether and how the presence of related parties may have affected Lehman’s consolidation analysis, consolidation accounting standards require consideration of related parties and de-facto agents in the consolidation analysis. In addition, accounting standards require companies to disclose significant related party transactions and de-facto agent arrangements.

4 Article in New York Times on April 13, 2010, titled Lehman Channeled Risks Through "Alter Ego" Firm.

The financial crisis revealed that accounting standards governing which entity must recognize and report interests in SPEs were inadequate to protect against "surprise" risks to institutions that had treated these entities as "off balance sheet." Before the recent changes to the accounting standards on consolidation described below, certain entities were exempt from consolidation requirements. Those exemptions assumed that some SPEs (including mortgage trusts) could function on "autopilot," in which no entity was deemed to be in control of such SPEs. This assumption has not been borne out in the recent period of severe stress in the mortgage market. Consolidation requirements before the recent changes had a simple concept that a company should consolidate an SPE if it has the majority of risks and/or rewards of that entity. However, the implementation of this concept was effected through complex mathematical calculations that often excluded the effect of key risks such as liquidity risk. With the benefit of hindsight, it seems that judgments were made based on overly optimistic forecasts of returns and risk, enabling companies to avoid consolidating entities in which they retained significant continuing risks and obligations. While there were numerous required disclosures under generally accepted accounting principles and SEC rules, many financial companies failed to clearly disclose retained risks, obligations, and involvements with SPEs.

Also, with the benefit of hindsight, it appears that arrangements were structured to achieve the desired outcomes of removing financial assets and obligations from balance sheets and reporting lower ongoing risk and leverage. From an investor’s viewpoint, this obfuscated important risks and obligations.

To address this, the FASB, at the request of the SEC, completed targeted projects that resulted in removing the exemption for certain entities from consolidation requirements (FAS 166 on transfer of financial assets) and in tightening the requirements governing when such entities should be consolidated (FAS 167 on consolidation of variable interest entities). In addition, the FASB enhanced disclosure requirements to improve disclosure of a company’s 6 The enhanced disclosure requirements became effective in December 2008.

April 21, 2010 reply from Bob Jensen

Hi Paul,

One thing the FASB letter fails to demonstrate is how Lehman’s Repo sales could possibly serve any economic purpose other than to deceive, especially sales that only took place just prior to balance sheet reporting dates.

The letter reads like an attempt to get E&Y off the hook, although one paragraph of the FASB’s letter must be disturbing to the auditors about failures to disclose:

“When there are material structured or unusual transactions, disclosure is also very important. The Examiner’s report indicates that Lehman’s disclosure was incorrect and misleading. According to the Examiner’s report, Lehman disclosed that it accounted for all repos as secured borrowings.”
Page 5 of the FASB letter

Another disturbing paragraph of the FASB letter reads as follows:

“A recent press account indicates that Lehman used a small company run by former Lehman employees apparently to shift investments off its books. Based on that press account, it is not possible to determine whether that company was an operating business or a special-purpose entity (SPE). Although the press account does not describe whether and how the presence of related parties may have affected Lehman’s consolidation analysis, consolidation accounting standards require consideration of related parties and de-facto agents in the consolidation analysis. In addition, accounting standards require companies to disclose significant related party transactions and de-facto agent arrangements.”
Page 5 of the FASB letter.

It seems to me there is also something that the standard setters have to change. If it is virtually certain that nearly all of the Repo sales are coming back (e.g., because terms of the sales returns are exceedingly attractive), then it should be explicit that either the sales are not to be reported as sales or if they were reported as sales then full disclosure is required as to the price, timing, and likelihood of the repossessions.

There is such a thing as the letter of the law and the spirit of the law. In my viewpoint, the Lehman Repos were only intended to deceive investors and regulators. The smoking gun here is the timing of the repo sales around the balance sheet dates. It would be far less suspicious if most of the Repos sales took place after the balance sheet dates.

If the FASB does not add more explicit disclosure requirements to Repo sales transactions then we’ve got a sorry FASB that needs to be replaced by the IASB. Also the FASB's accounting requirements for SPEs, SPVs, VIEs, or whatever you want to call them are still convoluted and explosive ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Bob Jensen

April 21, 2010 reply from AECM@LISTSERV.LOYOLA.EDU

Hi Bob. I agree with your analysis of the letter. I was not surprised that the FASB's letter did not address the managerial intent issue. Even the most recently proposed standards (including the coming financial statement presentation proposal) provide managements latitude to classify, measure, and disclose important information based on their own view or intent. I don't think the FASB would call into question its own reasoning in this respect.

I spent several months while working for Grant Thornton doing work for their public policy group (much of which related to the Treasury committee on the auditing profession and the CIFIR committee). I marveled at how every word of every communication from professional bodies and the major firms was thoroughly vetted to target a certain image and outcome from the communication.

Paul

Bob Jensen's threads on the Lehman-Ernst controversies are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

April 21, 2010 message from David Albrecht [albrecht@PROFALBRECHT.COM]

I think it is great that the FASB is involved early, this time. But now, post Codification, how will it not always be the case that the FASB will be the one source to haul into Congress and ask, "How could this have happened?"

How will the FASB not be in perpetual "damage control" mode?

After IFRS is adopted, who will be Congress's whipping boy? With the SEC increasingly echoing presidential policies, hearings on accounting issues will lack any pizzazz.

David Albrecht

April 22, 2010 reply from Bob Jensen

Hi David,

Does anything prevent governments from debating anything they choose, especially when doing post-mortems on scandals?

The adoption of IFRS certainly does not prevent IFRS from being a political football in the EU. If anything the EU is making matters worse for the IASB. Most certainly the IASB has to be concerned with the EU’s decision to allow some cherry picking of IFRS rulings.

I think it’s significant that the SEC is considering taking its own standard setting moves on “Debt Masking” because of the failure of the FASB to move quickly enough on this deceptive practice. Of course the FASB can only set accounting standards. The SEC has greater power over setting regulations on the underlying transactions.

However, time and time again the FASB that I admire has taken moves on accounting standards that virtually end the transactional abuses themselves --- such as changing FAS 123 to FAS 123R. The FASB also went part of the way in changing FIN 141 to FIN 141R. But the FASB has long put off doing what it needs to be done on accounting for SPEs and what needs to be done on “Debt Masking” accounting.

The Lehman Bankruptcy Examiner’s Report should lead to some significant new rulings of the FASB if this a FASB that I still greatly admire. The recent letter from Bob Herz on Repo 105 accounting worries me greatly. Herz sounds more like a defense lawyer for E&Y and the FASB than an advocate of more transparent accounting for investors --- Click Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156813156

And I don’t agree with you that in banning “Debt Masking” that Mary Shapiro would be simply bowing on her hands and knees at President Obama’s feet. I’m more inclined to believe that Lehman’s Repo 105 deceptive accounting really was a failure of the FASB and SEC to anticipate how deceptive Lehman’s creative accounting could be by unscrupulous Wall Street opportunists. The SEC is trying to make amends for an FASB failure here. My hope is that the FASB is willing to make amends for a bad mistake in FAS 140.

Bob Jensen

Lehman's Ghost Has Been Named "Debt Masking"
The initials DM, however, stand for "Deception Manipulation"

Debt Masking Teaching Case from The Wall Street Journal Accounting Weekly Review on April 23, 2010
From The Wall Street Journal Accounting Weekly Review on April 23, 2010
Debt 'Masking' Under Fire
by: Tom McGinty, Kate Kelly and Kara Scannell
Apr 20, 2010
Click here to view the full article on WSJ.com

TOPICS: Banking, Debt, Degree of Operating Leverage, Disclosure, Disclosure Requirements, SEC, Securities and Exchange Commission

SUMMARY: The SEC is now considering changing financial firms', and perhaps others' as well, required disclosures to ensure that their debt levels, and associated risk, are adequately evident to investors and other financial statement users. Currently, banks are required to disclose average debt balances in their annual reports. However, quarterly reports require only discussion of significant changes in liquidity or any efforts that impact this issue. The SEC maintains that these requirements should already trigger disclosure if a financial institution significantly reduces debt at the end of a reporting quarter. Questions about these policies stem from a WSJ analysis of data on all bank's weekly activities reported by the Federal Reserve Bank of New York." Excessive borrowing by banks is widely considered to be one of the causes of the financial crisis, leading to bank runs in 2008 on firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have grown more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished."

CLASSROOM APPLICATION: The article is useful for making clear the benefit of disclosures in addition to the amounts shown on primary financial statements.

QUESTIONS:
1. (Introductory) Refer to the chart presented with this article. Describe what the chart implies and where the WSJ obtained the information on which it is based (hint: the data are not taken from these banks' financial statements).

2. (Advanced) How does adding disclosure about the average level of debt during a year add to the information provided in a company's balance sheet? In your answer, be sure to describe what is included in any company's balance sheet.

3. (Introductory) Why are banks particularly motivated at this point in time to reduce the level of debt shown on their balance sheets?

4. (Advanced) Refer to the related article. What is the repurchase, or "repo," market which big banks use for financing? How does the financing help these firms to glean greater profits from securities trading activities? How does this activity increase a bank's risk?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Big Banks Mask Risk Levels
by Kate Kelly, Tom McGinty and Dan Fitzpatrick
Apr 09, 2010
Page: C1

"Debt 'Masking' Under Fire: SEC Considers New Rules to Deter Banks From Dressing Up Books; Ghost of Lehman, by Tom McGinty, Kate Kelly, and Kara Scannell, " The Wall Street Journal, April 21, 2010 ---
http://online.wsj.com/article/SB20001424052748703763904575196334069503298.html#mod=todays_us_page_one

The Securities and Exchange Commission is considering new rules that would prevent financial firms from masking the risks they take by temporarily lowering their debt levels before quarterly reports to the public are due.

SEC Chairwoman Mary Schapiro's disclosure, at a hearing of the House Committee on Financial Services, came two weeks after The Wall Street Journal reported that 18 large banks had consistently lowered one type of debt at the end of each of the past five quarters, reducing it on average by 42% from quarterly peaks.

That practice, if done intentionally to deceive, already violates SEC guidelines, an official said. But now, the SEC is weighing requiring stricter disclosure and a clearer rationale from firms about their quarter-end borrowing activities. The agency may also extend these rules to all companies, not just banks.

Excessive borrowing by banks is widely considered to be one of the causes of the financial crisis, leading to bank runs in 2008 on firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have grown more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

Tuesday's hearing focused on a recent report by a bankruptcy examiner that found that Lehman Brothers, through transactions the firm dubbed "Repo 105s," had hidden its true debt levels before its collapse by treating certain loans as sales, thus reducing its end-of-quarter debt levels.

Rep. Gregory W. Meeks (D., N.Y.) asked Ms. Schapiro about The Journal's findings regarding banks' end-of-quarter debt reductions. "It appears investment banks are temporarily lowering risk when they have to report results, [then] they're leveraging up with additional risk right after," Mr. Meeks said. "So my question is: Is that still being tolerated today by regulators, especially in light of what took place with reference to Lehman?"

Ms. Schapiro said the commission is gathering detailed information from large banks, "so that we don't just have them dress up the balance sheet for quarter end and then have dramatic increases during the course of the quarter."

She added: "We are considering whether...we need new rules to prevent sort of the masking of debt or liquidity at quarter end, as we saw Lehman do with the Repo 105 transaction."

Under current rules, bank holding companies are required to disclose their average debt balances in their annual reports. The SEC is considering extending this disclosure requirement to all companies, an SEC official said. The SEC is also mulling whether those figures should be made public to shareholders every quarter rather than just once a year, the official said.

Currently, companies are required every quarter to discuss their readily available cash, or liquidity, as well as any important changes to it and any efforts they're undertaking to address liquidity problems. If a company used a transaction at the end of the quarter to temporarily reduce debt or increase liquidity in a significant way, the SEC official said, the company would be required under current rules to disclose that.

The SEC official said the goal of any new rules would be to give shareholders a better sense of financial institutions' actual debt levels. The official said the agency is concerned companies are misleading investors if what they are disclosing at the period end doesn't reflect what the true activity was during the period. The official said they are considering whether to shed more light on the intra-period levels, for example, by requiring companies to disclose what the high debt level was during the period. The SEC is analyzing responses to the letters before formally proposing new rules.

The Journal story focused on weekly disclosures filed with the New York Federal Reserve Bank by 18 major banks that are known as "primary dealers" because they trade directly with the central bank. The reports detail money the banks have lent and borrowed on the repurchase, or "repo," market, where short-term loans are made in exchange for collateral such as treasury bonds and mortgage-backed securities. The list of primary dealers includes the U.S. brokerage units of J.P. Morgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. Because the weekly figures released by the Fed reflect aggregate repo borrowing by all the banks, it is impossible to determine the behavior of any one bank.

Some banks privately confirm that they lower their borrowing activities at quarter end, but others deny doing so. Several pointed to their SEC filings, which disclose average asset levels and end-of-period asset levels during the course of a year. Those figures, the firms say, tell investors that risk and indebtedness vary during a given quarter.

The latest New York Fed data show that in the first week of this year's second quarter, the 18 banks had together raised their net borrowings on the repo market by 8% from the total that was reported on March 31.

In a statement, a Goldman representative denied that the firm's risk-taking in the repo market was masked, adding that "normal fluctuations in the size of our balance sheet...are fully disclosed in our quarterly and annual SEC filings."

J.P. Morgan said that in five out of the past six quarters, repo financing levels at its U.S. brokerage firm—which accounts for about 15% of its total assets—either rose or stayed flat at the end of the quarter.

A Morgan Stanley spokeswoman said: "Over the past five quarters, our quarter-end repo balances are virtually identical to our average quarterly balances."

Citigroup and Bank of America declined to comment.

A spokeswoman for the New York Fed cautioned that the repo data "reflects only a portion of a firm's total assets and liabilities" and noted that the Fed requires additional reporting of firm-wide figures.

Some on Wall Street reacted strongly to the end-of-quarter declines in repo financing revealed by the Fed data. "The fact that window-dressing produces distorted financial data (both for individual firms and for the system as a whole) is unhealthy," wrote Lou Crandall, chief economist at research firm Wrightson ICAP LLC, in a note reviewing the Fed data last week.

Bob Jensen's threads on the Lehman-Ernst controversies are at
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Bob Jensen's threads on off-balance-sheet financing, OBSF, are at
http://www.trinity.edu/rjensen/theory01.htm#OBSF2

April 22, 2010 message from Paul Polinski

Bob: The FASB seems to be making much more of an effort recently to emphasize and practice 'neutrality' in standard setting. The proposed new conceptual framework features the neutrality principle more centrally, and does not feature traditional sources of bias (such as conservatism and matching). I think that the letter is consistent with this philosophy.

At a recent speaking engagement, Bob Herz underscored more than once your point about the respective roles of the SEC vs. the FASB. Bob stated that the SEC is the regulator, their role being to oversee and control certain business practices and reporting. The FASB is not a regulator - it is the accounting standard-setter - and its role is not, under law and the neutrality principle, to oversee and control business practices; its role is limited to setting standards for reporting. As a result, they discuss standard setting in terms of achieving transparency and disclosure for investors, and not to achieve business practice-related ends per se.

Paul

April 22, 2010 reply from Bob Jensen

Hi Paul,

FAS 133, for example, was neither a neutral nor an unbiased standard. It greatly impacted the use of derivative financial instruments for both financial speculation as well as hedging purposes.

Perhaps the neutrality goal is to have zero consequences, but it’s literally impossible in many instances to require better disclosures, changed principles for principles-based standards, and even bright lines for booking without having economic consequences and impacts on behavior.

If you change the basis of keeping score or of calling fouls, it’s inevitable that the way the game is played will change. Think of what changing long shots from two to three points per basket did for basketball. Think of what penalties, sometimes very severe penalties, for driving helmet shots did for tackling and blocking behavior in football.

Denny Beresford noted that economic consequences are often inevitable in a great article years ago about neutrality (that relates neutrality more to bias than to consequences). I might contend that even bias is permitted when it is in favor of the users of financial statements. I think this is what Denny contends as well.

"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
Fortunately this 1989 link is still active ---
http://www.allbusiness.com/accounting/methods-standards/105127-1.html

Jensen Comment
In my viewpoint the FASB can change the repo sales rules for more transparency regarding “debt masking” disclosures by arguing that debt masking secrecy is unnecessarily deceptive for investors and creditors and regulators. I can’t imagine that the FASB would justify not changing FAS 140 in grounds of neutrality after having been witness to Lehman’s deceptive use of FAS 140 (according to the Bank Examiner’s report). FAS 140 could be changed by simply requiring more disclosures on circumstances surrounding relatively large repo sales transactions, disclosures that explain the terms of the buy-back contracts and the likelihood of having to buy them back. This should be no more complicated than estimating loan losses and bad debt reserves.

In some ways a repo sales contract is like a written option where the writer of the option has no control over when and if the buyer of the option will exercise the option. However, repo sales contracts do not meet the technical definition of derivatives, because the notional is entirely at risk whereas in option contracts the risk is usually only a fraction of the total notional. But we still require booking of written options and maintaining them at fair value even though control has been passed to the buyer of the options and not the seller of the options.

In FAS 140 and in the recent Herz letter on Lehman’s Repo 105 accounting, it seems to me that the FASB is overplaying a “control” argument that is inconsistent with FAS 133 treatment of written options not allowed to have hedge accounting. Control is not the issue in FAS 133. What is the issue of the booking and disclosure of financial risk of derivative financial instruments.

Financial risk disclosures should nearly always dominate FASB reasoning even if neutrality is at stake. This should apply to repo sales contracts as well as derivative financial instruments.

FAS 133, for example, was neither a neutral nor an unbiased standard. It greatly impacted the use of derivative financial instruments for both financial speculation as well as hedging purposes.

Bob Jensen

Hi Pat,

Never say never. Auditors can certainly uncover intent, and often they can do so by asking. If the client refuses to answer, then that is certainly an incentive to probe deeper into the audit questions.

Auditors are responsible to fully understand the transactions and circumstances affecting those transactions.

In many instances, the client mentions intent to the auditors hoping that the auditors can devise a way to meet that intent in the accounting rules. I’ve no idea if the CFO of Lehman, a former E&Y audit partner, spelled out the leverage problem faced by Lehman and requested ideas from Lehman’s auditors. But this would not necessarily be an unusual request.

In any case it is highly unlikely that E&Y auditors did not fully understand the real reasons behind the Repo 105 transactions and the timing of those transactions (even if some of those transactions arose in quarterly review periods rather than full audit periods).

It’s a huge stretch to assume that E&Y auditors did not fully understand intent of the Repo 105 transactions.

And ignorance is generally a poor defense in court no matter what the circumstances, especially when the defendants are professional experts in such matters.

“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

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!

"Balance Sheets Are Busting Out All Over: About $1.2 trillion in off-balance-sheet assets could end up on the balance sheets of banks that have yet to claim them, or "on no one's balance sheet," a new report claims," by Marie Leone, CFO.com, April 23, 2010 ---
http://www.cfo.com/article.cfm/14492562/c_14492952?f=home_todayinfinance

New accounting rules governing off-balance-sheet transactions went into effect for most companies in January. As a result, 53 large companies have already estimated that they will have put back an aggregate $515 billion in assets to their balance sheets during the first quarter, according to a new study of S&P 500 companies released by Credit Suisse.

But the future state of the companies' balance sheets remains unclear, since they only consolidated 9% of the $5.7 trillion in off-balance sheet assets they reported in the fourth quarter of last year. About $4 trillion of the remaining assets will be taken up on the balance sheets of mortgage companies Fannie Mae and Freddie Mac, which guaranteed many of the subprime residential mortgages. The rest of the assets — about $1.2 trillion worth — could find their way to the balance sheets of companies that have yet to claim them, or "on no one's balance sheet," assert report authors David Zion, Amit Varshney, and Christopher Cornett.

Because some assets are lingering in accounting limbo or hidden by murky disclosures, gauging their final effect on company financials could be akin to hitting "a moving target," says the report. Indeed, Credit Suisse notes that it's unclear whether all reported estimates issued during the first quarter included deferred taxes, loan loss provisioning, and such off-balance-sheets assets as mortgage-servicing rights. (Selling mortgage servicing rights is a multi-billion dollar industry.)

The rules that force companies to put such assets back on their balance sheets were issued in 2008 and went into effect at the beginning of this year. They are Topic 860 (formerly FAS 166), which deals with transfers and servicing of financial assets and liabilities, and Topic 810 (formerly FAS 167), the rule governing the consolidation of off-balance-sheet entities in their controlling companies' financial reports.

In reviewing the results and disclosures as of March 11, the study's authors found that only 183 companies in the S&P 500 reported the balance-sheet effects of FAS 166 in their financial results, with 24 providing an estimated impact and 117 reporting either no impact or an immaterial one. Forty-two companies are still evaluating the effects of the new rules, while 317 made no mention of the rules at all. In contrast, 342 companies disclosed the effects of FAS 167, with 29 providing estimates and 214 registering no impact or an immaterial one. That leaves 99 companies still evaluating the FAS 167 impact, and 158 making no mention of the financial statement effects.

Predictably, most of the asset increases belong to companies in the financial sector, where off-balance-sheet transactions like securitization, factoring, and repurchase agreements are popular. As of Q4 2009, financial services companies in the S&P 500 had stashed $5.5 trillion, and $1.6 trillion, respectively, in variable-interest entities (VIEs) and the now-defunct qualified special-purporse entities (QSPEs). That left a mere $110 billion in assets spread among the QSPEs and VIEs associated with companies in nine other industries.

Assets are returning to balance sheets for several reasons, most notably the Financial Accounting Standards Board's elimination if QSPEs, or "Qs," in 2008, when it became apparent that the structures were being abused. Indeed, Qs were permitted to remain off bank balance sheets if they took a "passive" role in managing the structures' finances. But when the subprime crisis hit, and the mortgages being held in Qs began to fail, banks — with the blessing of regulators — took a more active role, reworking the terms of the entities' mortgage investments. At the time, FASB Chairman Robert Herz called Qs "ticking time bombs" that started to "explode" during the credit crunch.

VIEs, on the other hand, are still used. These vehicles are thinly capitalized business structures in which investors can hold controlling interests without having to hold voting majorities. As of the fourth quarter last year, S&P 500 companies parked $1.7 trillion worth of assets in VIEs.

The revised standards were supposed to wreak havoc on bank balance sheets because, among other things, the rules for keeping loan-related assets off the books would be rewritten. At the time, bankers expected the rewrite would force them to consolidate big swaths of assets that were being held in VIEs and QSPEs. And consolidating the assets from the entities would have required them to increase the amount of regulatory capital they kept on hand — a charge to cash — and thereby reduce the amount of lending they could do. Dampening lending during a credit crisis, argued bankers, would hurt the recovery.

Since their enactment, the accounting rules have affected their industry big-time. Of the companies reporting an impact, nine purely financial-sector outfits plus General Electric account for 96% of the $515 billion being consolidated during the first quarter, says Credit Suisse. Of that group, which includes Bank of America, JP Morgan Chase, and Capital One, Citigroup tops the list with an estimated $129 billion in assets being brought back on the books in the first quarter — which represents 7% of its existing total assets. The newly-consolidated assets come in all shapes and sizes, says the report: $86.3 billion in credit card loans, $28.3 billion in asset-backed commercial paper, $13.6 billion in student loans, and $4.4 billion in consumer mortgages, for example. ($5 trillion or the $ $5.7 trillion held in VIEs and QSPEs are mortgage related.) Citigroup also disclosed a $13.4 billion charge for setting up additional loan loss reserves and eliminating interest lost from consolidating the assets.

Of the companies that disclosed the financial-statement impact, only eight estimated the increase to be more than 5% of total assets, says Credit Suisse. Invesco was the hardest hit, reporting the highest percentage at 55%, bringing back $6 billion worth of assets during the first quarter. Invesco's assets are parked in collateralized loan obligations and collateralized debt obligations.

Non-financial companies, like Harley-Davidson and Marriott International also reported relatively big percentage jumps compared to existing assets. Harley's additional assets represent 18% of existing assets, or $1.6 billion. Meanwhile, Marriott's consolidation represents 13% of its assets, or $1 billion.

Jensen Comment
It's about time. Bank financial statements have been "fiction" for way to long.
But the accounting and auditing rules have a long way to go for banks. A huge problem is the way auditing firms have allowed banks to underestimate loan loss reserves. A more recent problem with FAS 140 was uncovered by Lehman's use of Repo 105 contracts for debt masking.

Fighting the Battle Against Off-Balance-Sheet Financing" Winning a Battle Does Not Mean Winning a War
But it's better than losing the battle

"FASB Issues New Standards for Securitizations and Special Purpose Entities," SmartPros, June 15, 2009 --- http://accounting.smartpros.com/x66815.xml

Bob Jensen's threads on SPEs, VIEs, SPVs, and synthetic leasing are at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Bob Jensen's threads on off-balance-sheet financing are at
http://www.trinity.edu/rjensen/theory01.htm#OBSF2

REPORT REVEALS CRUSHING HIDDEN TAX OF 10,000 COMMANDMENTS OF FEDERAL REGULATION

Accounting Education News, April 15, 2010 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=150993

Federal regulations cost a whopping $1.187 trillion last year in compliance burdens on Americans. That’s the finding of a new report, Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, from the Competitive Enterprise Institute that examines the costs imposed by federal regulations.

“Trillion-dollar deficits and regulatory costs in the trillions are both unsettling new developments for America,” said report author, Clyde Wayne Crews, CEI Vice President for Policy. “It is sobering to note how both dwarf the initial $150 billion ‘stimulus package’ of early 2008.”

The costs of federal regulations often exceed the benefits, yet receive little official scrutiny from Congress. The report urges Congress to step up and take responsibility as lawmakers to review and roll back economically harmful regulations. “Rolling back regulations would constitute the deregulatory stimulus that the U.S. economy needs,” said Crews.

Among the report’s findings:
• 3,503 new regulations took effect last year. The burden of government is heavier than ever.
• How much does government cost? Government is spending $3.518 trillion of our money and imposing another $1.187 trillion dollars in the form of regulatory compliance costs.
• How much of our economic output should be eaten by regulatory costs? Regulatory costs now absorb 8.3 percent of the U.S. gross domestic product.
• What's the federal government's total share of the economy? Regulations + spending combined puts the federal government's share of the economy at over 30 percent.
• Regulations cost more than the income tax.
• New rules that cost at least $100 million increased by 13 percent between 2007 and 2008.

The report urges reforms to make the regulatory costs more transparent and accountable to the people, including annual “report cards” on regulatory costs and benefits, and congressional votes on significant agency rules before they become binding.

Read the report: Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State

"Could Codification Weaken Internal Controls? Maybe. And here's what you can do to mitigate the effect on your accounting policies, disclosures, and error detection," by Bruce Pounder, CFO.com April 16, 2010 ---
http://www.cfo.com/article.cfm/14491629/?f=rsspage

April 17, 2010 reply from Jagdish Gangolly [gangolly@GMAIL.COM]

Bob,

I read the article carefully.

If the author really means to say that codification has added to the costs of financial reporting because of the five effects of codification, I completely agree. However, the author's arguments that codification weakens internal controls are transparently bogus.

It is true that all references to GAAP requires revision because of codification, and that it requires additional work and entails additional cost. But to say that the impact of codification on internal controls could be to weaken them is like saying that I could make more mistakes and pay more penalties on this years tax return because the tax law changed. Of course you will pay penalties if you don't follow the tax law changes, but you don't have to be careless enough not to know what the changes are.

Jagdish --
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 Phone: 518-956-8251, Fax: 518-956-8247

April 18, 2010 reply from Bob Jensen

I agree Jagdish and still think the money and time given FASB Codification is a waste if the SEC does not shoot IFRS convergence down. And the chances of the SEC doing this are almost zero in my opinion. Soon the FASB’s Codification database will be only an expensive accounting history database --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Codification is a good idea only if we do not abandon FASB standards.

Another more interesting question will be whether the IASB standards and interpretations can be eliminated as hard copy (and the present electronic reproductions of hard copy) in the same manner that the FASB eliminated hard copy/PDF files with the Codification database. In my opinion, it will be much more difficult to create a codification database for IFRS due to the language and other barriers, including a much more complicated costing and billing problem. The FASB worked out a usage and billing scheme for members of the American Accounting Association. It is much more difficult, however, to reach IFRS educators in remote parts of the world.

Codification (complete with over a hundred language translations) could be a wonderful thing for international standards But the cost of complete codification is truly immense.

It will be many years before the IASB and its many constituencies can achieve the efficiencies that are envisioned for the FASB Codification database (that I personally consider a pain in the tail at present). One of my complaints as an educator is the way the Codification database left out many wonderful teaching illustrations contained in the hard copy versions and revisions of standards and interpretations. FAS 133, FAS 138, and other amendments of FAS 133 contain many examples of wonderful learning illustration losses in the Codification database.

Bob Jensen

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

"13 Bankers Versus One Professor: The author of a new book on financial reform makes a case for breaking up the nation's largest banks," by Scott Leibs, CFO.com, April 2, 2010 ---
http://www.cfo.com/article.cfm/14488823/c_14489620?f=home_todayinfinance

"This is about power and control and who decides your future," Simon Johnson warned for at least the second time on Friday. He had just returned to the campus of MIT's Sloan School of Management in Cambridge, Massachusetts, having been in New York hours earlier to deliver a similar message on The Today Show. Both appearances were part of an intensive launch of his latest book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, co-authored with former McKinsey consultant James Kwak.

The "13 bankers" of the book's title refers to the financial-industry luminaries who were summoned to the White House on March 27, 2009, in a mostly futile effort to enlist their help in solving the very economic crisis they had been so instrumental, in Johnson's view, in creating.

"We're all in this together," President Obama told the assembled bankers. The statement was more apt than Obama intended, Johnson contends. Wall Street bankers have become so entrenched in Washington in the past three decades that the solution proposed by Johnson and Kwak — break up "too big to fail" banks into smaller entities for which failure is, in fact, an option — faces a very long uphill climb.

If Johnson's solution isn't adopted, it won't be for lack of effort on his part. Speaking to an audience of 150 at MIT, where he is the Ronald A. Kurtz Professor of Entrepreneurship, Johnson argued forcefully that the astounding rise of the nation's largest banks mandates immediate corrective action. In 1995, he pointed out, the assets of the six largest banks equaled 17% of GDP; by last year that figure had risen to more than 60%. Profits (and compensation) have followed similarly stunning trajectories, as has the clout wielded by bankers on both sides of the political aisle.

When bankers came looking for a bailout, Johnson said, they not only got one, they got it on terms that were "completely at odds with conventional practices" in similar financial catastrophes. The result was a rescue operation that amounts to "nontransparent corporate welfare that must be stopped."

Johnson disagrees with Treasury Secretary Timothy Geithner's claim that the Great Recession represents a 30- or 40-year flood that few people will see again in their working lifetimes. A more apt comparison, he said, is to weakened levees, and the key question is whether the structural changes that have taken place in the financial industry will cause those levees to be breached again in the near future. "Do we want to experience this crisis again," he asked, "just because six banks can't be made smaller?"

Johnson has no illusions that enacting stronger regulations than those currently put forward will be easy. "It will take time to change people's attitudes," he admitted, but he said there is historical precedent for picking a fight that few people grasp, let alone support. "When Teddy Roosevelt took on J.P. Morgan," he said, "no one understood why, and of those who did, no one thought he would win." Yet Roosevelt triumphed over not only Morgan but also monopolies such as Standard Oil, which was broken into almost three dozen smaller companies.

Asked by an audience member whether banks have learned valuable lessons from the meltdown and thus won't need tighter regulation, Johnson responded, "The recent executive bonuses handed out suggest not much has been learned." Indeed, Wells Fargo and several others have recently announced lavish compensation awards to some of the very executives Johnson believes should have been ousted as one condition of the bailouts.

But he remains hopeful, citing several chief executives who support his argument, sometimes publicly, sometimes privately. Asked about potential support from CFOs, who rarely, if ever, champion any form of financial regulation, Johnson quipped, "I don't expect CFOs to be in the vanguard, but I do believe many will support the concept of breaking up too-big-to-fail banks once they take a close look at the issues."

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

"An Update on the FASB’s and IASB’s Joint Project on Financial Instruments With Characteristics of Equity," by Magnus Orrell and Ana Zelic, Deloitte & Touche LLP Heads Up, April 15, 2010 --- http://www.iasplus.com/usa/headsup/headsup1004liabequity.pdf

Entities have long struggled with the question of whether instruments they issue to raise capital should be reported as liabilities or equity when those instruments possess characteristics of both debt and equity. The demand for a set of accounting principles that clearly distinguishes between equity and nonequity instruments is greater than ever in this era of increasing sophistication and rapid change in financial markets. The current accounting requirements governing the classification of financial instruments as liabilities or equity under both IFRSs and U.S. GAAP have been criticized for lacking a clear and consistently applied set of principles and for not distinguishing between equity and nonequity in a manner that best reflects the economics of the transactions involving those instruments.

Responding to these concerns, in February 2006, as part of their Memorandum of Understanding, the IASB and FASB agreed to undertake a joint project on financial instruments with characteristics of equity to improve and simplify the financial reporting for financial instruments considered to have one or more characteristics of equity.1 In this project, the two boards have developed a new classification approach (see the Decisions Reached to Date section below) that we expect will be exposed for public comment in June 2010. The boards have agreed that the exposure draft will have a 120-day comment period and hope to publish a final standard in the first half of 2011; the effective date is yet to be determined.

The classification approach contemplated by the two boards would, if finalized, significantly affect the manner in which entities determine whether to classify many financial instruments as liabilities or equity and account for exercises of options and conversions of debt into equity instruments. Entities are well-advised to begin assessing the implications of, and planning for, these changes and their effect on debt and equity, interest coverage, and other financial ratios; earnings; and compliance with debt covenants.

Continued in article

History from two years ago

Debt Versus Equity: Dense Fog on the Mezzanine Level
Deloitte has submitted a Letter of Comment (PDF 277k) on the IASB's Discussion Paper: Financial Instruments with Characteristics of Equity. We strongly support development of a standard addressing how to distinguish between liabilities and equity. We do not support any of the three approaches outlined in the Discussion Paper, but we believe that the basic ownership approach is a suitable starting point. Below is an excerpt from our letter. Past comment letters are Here.
IASPlus, September 5, 2008 --- http://www.iasplus.com/index.htm

July 19, 2009 reply from John Anderson [jcanderson27@COMCAST.NET]

Professor Jensen,

Thanks for your very interesting post!

This peek into the work of the IASB illustrates much of what is happening within the IFRS iceberg … where 6/7th's of the activity is under the surface, or else seemingly ignored in the US press and perhaps intentionally under-reported by US professional organizations.

I have pulled the following excerpts from the IASB’s linked site in your post ---
http://www.iasplus.com/dttletr/0809liabequity.pdf

The approach was prepared by staff of the Accounting Standards Committee of Germany on behalf of the European Financial Reporting Advisory Group (EFRAG) and the German Accounting Standards Board (GASB) under the Pro-active Accounting Activities in Europe Initiative (PAAinE) of EFRAG and the European National Standard Setters.

The staff pointed out that the basic principle for the classification of equity and liability has been established but that all other components still represent work-in-progress.

Also:

The staff asked the Board whether there was agreement on acknowledging in the IASB's forthcoming discussion paper that the European Financial Reporting Advisory Group (EFRAG) had also issued a discussion paper on the distinction between equity and liabilities. Most Board Members disagreed with the staff's proposed wording and emphasised that the IASB should make it clear that it had not deliberated the final version of the EFRAG document, had therefore reached no final position on its merits and that the acknowledgement of the existence of the EFRAG paper should not be seen as the IASB endorsing the positions taken therein. It was decided to take the staff proposals offline to agree a suitable wording.

Also:

The FASB document describes three approaches to distinguish equity instruments and non-equity instruments:

·         basic ownership,

·         ownership-settlement, and

·         reassessed expected outcomes.

The FASB has reached a preliminary view that the basic ownership approach is the appropriate approach for determining which instruments should be classified as equity. The IASB has not deliberated any of the three approaches, or any other approaches, to distinguishing equity instruments and non-equity, and does not have any preliminary view.

The IASB's DP describes some implications of the three approaches in the FASB document for IFRSs. For instance:

·         Significantly fewer instruments would be classified as equity under the basic ownership approach than under IAS 32.

·         The ownership-settlement approach would be broadly consistent with the classifications achieved in IAS 32. However, under the ownership-settlement approach, more instruments would be separated into components and fewer derivative instruments would be classified as equity.

The goal of the Discussion Paper is to solicit views on whether FASB's proposals are a suitable starting point for the IASB's deliberations. If the project is added to the IASB's active agenda, the IASB intends to undertake it jointly with the FASB. The IASB requests responses to the DP by 5 September 2008. Click for Press Release PDF 52k).

My concerns are the following:

About a year ago I understood that in IFRS most Preferred Stock would be classified as Debt, not Equity.

There was some question about Callable and Convertible Debt.

Today, going through the IASB’ abstract of all of their meetings on this subject, I cannot determine if the Germans in ERFAG are arguing for Preferred Stock to be classified as Equity or not. Logically their issue of the Loss Absorbing nature of the Security should be the determining factor for classifications and therefore classify Preferred Stock as Equity or not. This is critical in areas like Boston where many of our VC backed companies would be transformed into companies having little or no Equity under IFRS. I have seen IFRS “experts” present on Route 128 in Boston and seemingly being unaware of this difference between US GAAP and IFRS. Similarly, Tweedie’s stand-by illustrative company from Scotland that he loves to use is Johnnie Walker. This would indicate to me that maybe McGreevy should introduce Tweedie to some of the Microsoft development now performed in Ireland, unless Johnnie Walker is about to enter the Technology Business.

As has been the theme in some of my prior posts, after correctly bringing the US position (FASB) into the discussions about a year ago, since then the IASB seems to have its hands full dealing with the Contingencies from the EU.

Clearly with 55 conventions in the EU, 2½ for each EU country, a key task for the IASB is the de-Balkanization of the EU’s Accounting. During this necessary period of consolidation within the EU, we should not be required to mark time as the IASB planned during the EU conversion from 2005 throughout 2008. (The Credit Crunch and Financial Meltdown in September 2008 threw a monkey-wrench into these plans!)

As in their December 2008 Revenue Recognition “Discussion Paper” the IASB seems to have their hands full now introducing these revolutionary new concepts such as Equity Section Accounting and Revenue Recognition to their subscribing countries. They are seemingly starting each exercise with a blank sheet. Unfortunately this is no way conducive to their goal of converging with us in the US. This methodology also will create excess fatigue within the EU’s apparently limited and diffused technical resources.

Given that the IASB has been struggling with Equity Accounting since 2005 this also confirms my fear of future lack of responsiveness to newly arising needs for new accounting regulations. We are now down to only the FASB in this country. I shudder to consider a world with only the IASB. Could they handle Cash in 3 months, or would this require further study?

They were quick with Derivatives in 2008 Q4 and in recent threats to us in the US.

Apparently they can only be decisive in emotional moments of pique or fear!

Best Regards!

John

John Anderson, CPA, CISA, CISM, CGEIT, CITP

Financial & IT Business Consultant

14 Tanglewood Road

Boxford, MA 01921

jcanderson27@comcast.net

978-887-0623   Office

978-837-0092   Cell

978-887-3679   Fax

Bob Jensen's threads on debt versus equity are at
http://www.trinity.edu/rjensen/theory01.htm#FAS150

A Teaching Case on Joint Ventures

From The Wall Street Journal Accounting Weekly Review on April 9, 2010

Verizon CEO Sees No Case for Merger
by: Roger Cheng
Apr 07, 2010
Click here to view the full article on WSJ.com

TOPICS: Mergers and Acquisitions

SUMMARY: "Verizon Communications Inc. Chief Executive Ivan Seidenberg said he sees little compelling reason to merge with Vodafone Group PLC...[though] he would eventually like to resolve the structure of the companies' Verizon Wireless U.S. joint venture." The article reports on this question because "recent reports suggest the two [companies-Verizon Communications Inc. and Vodafone Group PLC--] were discussing a larger alliance."

CLASSROOM APPLICATION: The article can be used in a course covering business combinations to introduce reasons for various corporate structures and ownership interests such as joint ventures, controlling interests, and minority (noncontrolling) interests. References to footnote disclosures by Vodafone PLC require students to identify a description of the equity method of accounting for its investment in Verizon Wireless.

QUESTIONS:
1. (Introductory) What is a joint venture? What is one possible strategic reason for entering into a joint venture arrangement?

2. (Advanced) Do you think the description of Verizon Communications' ownership interest in Verizon Wireless meets the definition of a joint venture? Explain.

3. (Introductory) What does Ivan Seidenberg, Chief Executive of Verizon Communications Inc., see as a compelling reason for expanding their alliance through joint venture arrangements?

4. (Introductory) What instead would Mr. Seidenberg like to do about the current structure of ownership of Verizon Wireless?

5. (Introductory) Access the Vodaphone Vodafone Group Plc Annual Report 2009. It is available on the SEC web site at http://www.sec.gov/Archives/edgar/data/839923/000095012309010070/u06917e20vf.htm#175 Alternatively, click on the live link to Vodafone Group PLC in the online article, click on SEC Filings on the left hand side of the page, and click on the "Documents' button for the 20-F filing dated June 1, 2009. Scroll to the balance sheet on page 40. Review the footnote disclosure for Investments in associated undertakings. How is Vodafone accounting for its investment in Verizon Wireless? Explain and support your answer.

6. (Advanced) Where is Vodafone incorporated? How and why does this company report to the U.S. Securities and Exchange Commission? In your answer, define the Form 20-F that you examined to answer question 3 above.

7. (Advanced) Access the Verizon Communications 10-K filing with the SEC that was made on 2/26/2010, available at http://www.sec.gov/cgi-bin/viewer?action=view&cik=732712&accession_number=0001193125-10-041685 for interactive data. Click on the statement of financial position and review its contents. Then click on the Noncontrolling Interest link. How is Verizon Communications accounting for its interest in Verizon Wireless? Explain your answer.

8. (Advanced) Why do the amounts recorded by Vodafone and Verizon Communications for this interest in Verizon Wireless differ?

Reviewed By: Judy Beckman, University of Rhode Island

"Verizon CEO Sees No Case for Merger," by: Roger Cheng, The Wall Street Journal, April 7, 2010 ---
http://online.wsj.com/article/SB10001424052702304172404575167821216754724.html?KEYWORDS=Verizon+CEO+Sees+No+Case+for+Merger

Verizon Communications Inc. Chief Executive Ivan Seidenberg said he sees little compelling reason to merge with Vodafone Group PLC.

Mr. Seidenberg, speaking Tuesday at a conference in New York, said he would eventually like to resolve the structure of the companies' Verizon Wireless U.S. joint venture. He has often said he would like to buy out Vodafone's stake in Verizon Wireless, but didn't provide a timetable. Verizon owns a controlling stake in the carrier.

The direction the two carriers will take has been a subject of continuing speculation in the telecom industry.

Recent reports suggest the two were discussing a larger alliance. Mr. Seidenberg, however, dismissed the notion, saying that absent new information, there wasn't any appeal to a merger.

"There's no compelling reason that this is an exciting thing to do," Mr. Seidenberg said at the conference, which was hosted by the Council on Foreign Relations. He added, however, that his opinion on a merger wasn't a final position, and that things could change.

The model of a global wireless company, which is what Vodafone is, isn't the preferred one, Mr. Seidenberg said. At some point, that model would lose economies of scale, he added, noting that a combined company would have a difficult time finding enough growth to justify the tie-up.

In comments on the proposed National Broadband Plan, which aims to make U.S. Internet access faster and more widely available. Mr. Seidenberg said he is concerned the plan could lead to an "overreach" of regulation that could cut into private investment.

Still, he added, it's early in the game and Verizon is working with other players, such as Google Inc., to find a more reasonable position on hot-button issues such as "net neutrality," which is intended to create open and equal access to the Internet.

Mr. Seidenberg said it isn't a "slam dunk" that net neutrality is the right policy, and he doesn't want too many government rules.

"We have to be careful that well-intentioned policies don't become burdensome rules and regulations," Mr. Seidenberg said. "Any time the government decides it knows what the market wants and makes it a static requirement, you always lose."

Mr. Seidenberg also commented on the potential of Verizon Wireless getting the Apple Inc. iPhone, saying he has expressed interest in bringing it to the carrier. But he said he doesn't know when it would happen, and that it would be Apple's decision.

"We're open to getting the device," he said. "Our network is capable of handling it."

Mr. Seidenberg declined to comment on whether it would run on Verizon Wireless's current third-generation, or 3G, network, or the 4G one, which is scheduled to be rolled out in the second half of this year. He insisted it was "Apple's call."

AT&T Inc., which exclusively sells the iPhone in the U.S., has run into trouble over the past year in major cities such as New York and San Francisco.

One of the reasons AT&T had so much trouble was because a small percentage of users would clog up the network with excessive wireless data demands.

Mr. Seidenberg showed support for his wireless rival by saying that Verizon Wireless would be willing to "throttle," or slow down the connection speed of excessive users and find a way to make them pay more for their service.

AT&T has in the past mentioned a willingness to explore pricing caps on its data plans, but hasn't made any firm commitments.

On the U.S. health-care overhaul, which prompted Verizon to plan a $970 million write-down because of an accounting change on subsidies it receives for providing care, Mr. Seidenberg said the legislation is light on cutting costs. He noted that while the cost-cutting part of the bill doesn't kick in for another few years, the additional fees are going to kick in right away.

He added, however, that he believes the attempt to broaden access to health care is a positive. Verizon spent about $3.7 billion on health care last year.

"Are Business School Students Under Too Much Pressure?" by Louis Lavelle, Business Week, March 31, 2010 ---
http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2010/03/are_business_sc.html?link_position=link5

Bloomberg is reporting today that the young man who leaped to his death from the Empire State Building yesterday (May 30) was a Yale junior, Cameron Dabaghi. His death follows six suicides at Cornell since September, including three in the last six weeks.

In the immediate aftermath of the most recent deaths at Cornell, campus police there have posted officers at the bridges that span Ithaca’s famous gorges, and several other schools have begun taking precautions against a “suicide contagion.” The Harvard Crimson is reporting that University Health Services is educating students on how to help depressed peers. Boston University has undertaken similar efforts. And at the University of Pennsylvania, Bill Alexander, interim director of counseling and psychological services, told the Daily Pennsylvanian: “We are just checking and rechecking the system to make sure we don’t get rusty or complacent.”

All the recent deaths involved undergraduates, and the explanations offered by assorted experts have run the gamut, but one of the big ones was the high-pressure atmosphere of the Ivy League. True enough, I suppose, but it occurs to me that if any student group is subject to serious, debilitating pressure it’s not undergrads…it’s graduate students, particularly graduate business students.

Think about it. If you’re reading this blog you probably have shelled out something close to $300,000 for a top-notch education (including forgone salary) and you’re under intense pressure to find a job that will make it all worthwhile—a job that right now may be a figment of your imagination. When you entered your program, you were out of school for five years or more, and suddenly you’re knee-deep in advanced math, business jargon, and bad study habits. At some schools all the first years might stand around singing Kumbaya, but let’s face it, the atmosphere at many top schools (for jobs, internships, even classes) is one of intense, even cutthroat competition.

All of which raises the question: how do you deal with the pressure? Are mental health issues like depression—and yes, suicide—a big concern at business school? And is enough being done to help students? The suicides at Cornell are clearly a wake-up call. But what can be done to help students as they struggle with issues like these?

Jensen Comment
We should of course seek solutions, but I don't believe in watering down academic standards. Also, many of the pressures come from outside the academy such as competition for a job opening, employer recruiting focus on grade averages, and stress upon graduate admission test scores to get into top MBA programs and doctoral programs.

The U.S. Labor Department's new ruling that bans unpaid internships will only increase stress. Unpaid internships enabled students with lower grade averages to both get on-the-job experience and to prove their employment merits beyond their grade records.

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Tom’s latest blog module points out what David Raggay has told us all along should never happen with IFRS. David rightly contends that nations should either be on IFRS or not on IFRS as a package. They should not be able to cherry pick what IFRS standards and interpretations will be excluded for their jurisdictions. The EU, however, set a cherry picking precedent. IFRS convergence won’t mean as much if the U.S. decides to go cherry picking (like maybe those yummy Lifo Cherries).

EU to IASB: It's Our Way, or the Highway

The Accounting Onion --- Click Here
http://feedproxy.google.com/~r/typepad/theaccountingonion/~3/N6VYNPYjwTI/eu-to-iasb-its-our-way-or-the-highway.html?utm_source=feedburner&utm_medium=email

Posted: 06 Apr 2010 10:41 PM PDT
by Tom Selling

The EU is simply too committed to pertuating the giddy notion that financial statements can serve investors -- and be smoothed at the same time. That's why I predicted that they would soon respond negatively and vociferously to the SEC's recent statement of support for a brand of convergence that would end up forcing broader application of fair value on unwilling European financial institutions.

But, I could not have predicted that a reaction would come so soon, or so crudely. In an article entitled "Accounting Convergence Threatened by EU Drive," the Financial Times has reported that, "in a tense meeting on future funding for the IASB," the EU's internal market commissioner made its financial support conditional on greater board representation for banks and their regulators.

Is this a credible threat? I think, yes. The EU has already achieved its major objective for beating down US GAAP, which was to browbeat the SEC into accepting financial statements prepared in accordance with IFR S. from European issuers without reconciliation to US GAAP. Granted, that objective has only been partially met, because the SEC still insists on the reconciliation of differences between "IFRS as issued by the IASB" and any provincial variation.

Nonetheless, the EU's saber rattling may not resonate well with European companies listed in the US. They could end up facing more onerous reconciliation requirements over time if the EU takes this issue to the brink. What's a bank to do if US GAAP requires fair value for its assets and liabilities, while a future watered-down version of IFRS, permitted in the EU, does not require reporting those fair values?

The bank would either have to break ranks with its European counterparts and reconcile to US GAAP, or terminate its US listing (including ADR sponsorship).* Neither would be an appetizing prospect, but the indications to this point are that the EU would dislike that scenario less than losing its leverage over the IASB should convergence continue—and especially if the US adopts IFRS. It seems that henceforth, the EU will be saying at virtually every new fair value increment that it really, really does not want to see the US adopt IFRS.

For its part, the IASB is boxed in. If it were to make a principled stand against this blatant threat to its independence, it could he be quite easy for Europe to abandon the IASB for some alternative standard setting mechanism. Or, if the IASB caves to the demands of the EU, then it will lose the US. So, either way, convergence and US adoption of the IFRS are lost causes; obviously, the IASB cannot afford to be abandoned by the EU.

Some at the SEC may continue to disingenuously insist that convergence is like 'apple pie,' but this recent development should finally make it evident that convergence has become more like an albatross around the neck of the FASB. If the EU had their way, convergence would be nothing more than a race to the bottom, with the interests of investors cast aside in the process.

As one friend who called the FT article to my attention put it, "it appears the independence of the IASB is more a matter of one's imagination than reality." It's time for the SEC to get real.

----------------------

If you are curious to know how a foreign issuer can avoid filing a Form 20-F even though it has US shareholders, you should take a look at Exchage Act Rule 12g3-2(b).

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

IFRS-FASB Convergence Will Lead to Worldwide Monopoly

Much of the economic resistance to IFRS in the American Academy stems from fear of monopoly power as well as cultural politics.

Lest we forget Professor Sunders stand at Yale University---
SEC's Mandate Will Lead to a Monopoly
Shyam Sunder
Yale School of Management
Also published in the Financial Times
September 18, 2008
(Even convergence proponent Patricia Walters admitted this was one of her main fears about convergence.)

If US companies are required to use international accounting standards, it will effectively create a single set of standards used around the world by taking away the one system — US GAAP — with the influence and significance to challenge the international rules.

According to the Securities and Exchange Commission, which has proposed a roadmap for companies to transfer to the new international financial reporting standards, the move would integrate the world's capital markets by providing a common high-quality accounting language, and increase confidence and transparency in financial reporting.

These are lofty and desirable goals. But why mandate a monopoly? The top-down imposition of a single set of standards will move us away from, not closer to, the SEC's goals.

First, principles-based standards are less enforceable. By allowing more room for judgment of managers and auditors, they introduce greater diversity and result in fewer, not more, comparable reports.

Second, the SEC does not explain what it means by "high quality". Qualities such as decision usefulness, reliability, timeliness, and verifiability often conflict: expensing the value of employee stock options is a high-quality standard for some and low for others.

Third, standard-setters try to devise new rules to account for market innovations. Identifying which accounting rule is better calls for experimentation. At the moment, US standard-setters can look overseas; with the proposed worldwide monopoly of IFRS, comparisons of alternative treatments will become impossible.

Fourth, the economic substance of business transactions depends on their legal, commercial, market, governance and managerial environment. Even within the US, the same set of accounting rules does not yield similar results across industries. Greater comparability of financial reports of all public firms across more than 100 countries is a pipedream. Within the European Union, accountants find little comparability between the financial reports of, say, Italian and Dutch firms - and both report under IFRS. Many Asian countries embraced IFRS to attract foreign capital but plan to use their own interpretations. So much for comparability.

Fifth, unlike a uniform system of weights and measures, the conduct of business changes in response to the accounting rules applied.

The metaphor of natural languages is more appropriate, where the meaning of words arises from their usage, and ambiguity and multiplicity of meanings are norms, not exceptions. Esperanto is an example of a failed effort to replace the world's languages with a single language.

The SEC would better protect investors by allowing two or more standard-setters to compete for royalty revenues from companies that could choose one brand of standards to prepare their reports. Standards competition produces efficient results in fields such as appliances, bond ratings, higher education and stock exchanges.

Investor or consumer self-interest, combined with some regulatory oversight, keeps such competition from racing to the bottom. It also keeps the door open for faster response to financial engineering and limits the complexity of the standards.

Allowing a worldwide monopoly to a single manufacturer serves neither the public nor the manufacturer for long. Development of IFRS is good news; a government mandate to grant it a monopoly is not.

Shyam Sunder is James L. Frank Professor of Accounting, Economics and Finance at Yale School of Management.

IFRS and the Accounting Consensus
Shyam Sunder
Yale School of Management
July 28, 2008

A broad consensus in accounting favors principles over rules to guide creation of a uniform high quality set of standards for use everywhere, and granting monopoly power to a single body for this purpose. This consensus has little logical basis, and if implemented into policy, will discourage discovery of better methods of financial reporting, make it difficult if not impossible to conduct comparative studies of the consequences of using alternatives methods of accounting, promote substitution of analysis and thinking by rote learning in accounting classes,

drive talented youth away from collegiate programs in accounting, and probably endanger the place of accounting discipline in university curricula. The paper calls for a re-examination of the accounting consensus.

Key Words: IFRS, Accounting standards, uniformity, accounting education

JEL Codes: M41, M44

Bob Jensen’s threads on IFRS-US GAAP convergence are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

IFRS and Cultural Differences

April 11, 2010 message from jcanderson27@comcast.net

Anderson Wrote Professor Gangolly,

Thanks for your recent post clarifying a number of points about the Legal profession in the UK. This was very helpful! For example I had previously thought a barrister was a criminal attorney and a solicitor a civil attorney, but now thanks to your post I understand the bifurcation of the UK Legal System across both of what we in the US know as civil and criminal law.

Perhaps you could help some of us who are hopelessly American understand our cousins across the sea and their professional culture a little better than we currently do.

Frankly I feel that converging professional cultures may be a bigger challenge than converging IFRS and US GAAP.

Can you expand upon the cultural differences between the US and the UK on the following areas involving the Accounting Profession:

Education – I note that in a presentation about a year ago on Long Island for KPMG, Sir David seemed contemptuous of the need for accountants to be college educated or waiting for US colleges to begin teaching IFRS. Therefore, in your estimation: • What Percentage of UK accountants were trained from the age of 14 on, through an apprenticeship program versus, having formal college training? Is there ever a combo as in US co-op programs? • How do these varying backgrounds play out into the ACCA and other certifying organizations? • How does this play out in UK Public Accounting?

Social Class – How does class play into this? Are there still positions in the UK that the most talented cannot attain? Or, worst case, would we say there are … and they feel this is not true, because we have fundamental disagreements on what qualifies one for Management?

Country – Why can’t the UK standardize? How do the Professional Standards and GAAP vary among the following: • England • Scotland • Wales • Cornwall – Is this always grouped with Wales? • Northern Ireland – Why are there still Standards in Northern Ireland? Why isn’t it amalgamated with the Republic of Ireland? • The Republic of Ireland

Can a Welsh CA practice in England or Scotland? Traditionally, before 2005, who developed UK GAAP? How did this work? My Pro-IFRS friends tell me this doesn’t matter but these are the sorts of cultural issues which must be considered in any proposed merger, which is what I see convergence as. If even with our common language, we and the UK still have major cultural disconnects, we will have even rougher sledding with other regions. Not talking about these differences is a non-starter if we are looking to succeed!

I haven’t forgotten about our disagreement back in December of Cost Accounting! I will respond sometime very soon!

Best Regards!

John

John Anderson, CPA, CISA, CISM, CGEIT, CITP
Financial & IT Business Consultant
14 Tanglewood Road Boxford, MA 01921

jcanderson27@comcast.net
978-887-0623 Office 978-837-0092 Cell 978-887-3679 Fax

April 12, 2010 reply from Bender, Ruth [r.bender@CRANFIELD.AC.UK]

John – here’s my answers to your questions, and no doubt someone else will be able to improve on them. For much better info, go the ICAEW website www.icaew.com and type ‘Divided by Common Language’ in to the search engine. This was the title of a paper on UK v US governance and accounting etc, which is excellent. It turned into a whole ICAEW research programme - Beyond the myth of Anglo-American corporate governance.

In the meantime:

What Percentage of UK accountants were trained from the age of 14 on, through an apprenticeship program versus, having formal college training? Is there ever a combo as in US co-op programs?

How do these varying backgrounds play out into the ACCA and other certifying organizations?

How does this play out in UK Public Accounting?

As far as I’m aware, the answer is zero from age 14, as our school-leaving age is 16 and we don’t specialise before then. Chartered accountants generally have degrees before they go into firms to undertake the ACA qualification. I don’t have numbers for the other qualifications.

Social Class – How does class play into this?

Are there still positions in the UK that the most talented cannot attain? Or, worst case, would we say there are … and they feel this is not true, because we have fundamental disagreements on what qualifies one for Management?

The ‘correct’ answer to your class question is that anyone can do anything, and we can cite a load of examples of people who have made it. A pragmatic answer is that yes, class is still a barrier, but talent does seem to outweigh it. A glance at the electioneering that’s going on at the moment shows that the Labour party is trying to play the class card. There was a brilliant piece about this on the radio last night. It pointed out that George Osborne, the Shadow Chancellor (i.e. the guy who will be in charge of our economy if the Tories win on May 6^th) is considered by most people to be Upper class, as his father is a baronet and he went to Eton and such. But when he was at Oxford, he was looked down upon by his upper class peers because his father had made his money in ‘trade’!

Country – Why can’t the UK standardize? How do the Professional Standards and GAAP vary among the following:

England

Scotland

Wales

Cornwall – Is this always grouped with Wales?

Northern Ireland – Why are there still Standards in Northern Ireland? Why isn’t it amalgamated with the Republic of Ireland?

The Republic of Ireland

The question ‘why isn’t Northern Ireland amalgamated with the Republic of Ireland is one that led to a car bomb there in the early hours of this morning, and there’s probably enough politics in this list without me trying to address the Irish question here.

We can’t standardise because the UK comprises separate countries, The Republic of Ireland is a completely different country, and even ignoring that, within the Profession, everyone is too pig-headed to even think about merging the 6 different accounting bodies.

England & Wales (and Cornwall, which – although Cornish nationalists will protest – is still part of England) are together in the ICAEW. ICAS is a separate Institute, but the standards of all of the Institutes are the same – certainly as far as accounting goes.

Can a Welsh CA practice in England or Scotland? Traditionally, before 2005, who developed UK GAAP? How did this work? My Pro-IFRS friends tell me this doesn’t matter but these are the sorts of cultural issues which must be considered in any proposed merger, which is what I see convergence as. If even with our common language, we and the UK still have major cultural disconnects, we will have even rougher sledding with other regions. Not talking about these differences is a non-starter if we are looking to succeed!

Any member of the ICAEW or ICAS can practice anywhere in the UK. Other than the Institutes themselves, nobody cares. Indeed, I think that any qualified accountant in the EU can practice anywhere else in the EU. (Although I’ll take correction on that if anyone knows more.)

Wikipedia is okay on the ICAEW - http://en.wikipedia.org/wiki/ICAEW and on the umbrella group, the CCAB - http://en.wikipedia.org/wiki/Consultative_Committee_of_Accountancy_Bodies

Our accounting standards in the UK go back to the ‘60s. (When I started my degree we just had a handful of them to learn - bliss!) We used to have Accounting Standards. Then Statements of Standard Accounting Practice. Then Financial Reporting Standards. Now IFRS for larger companies. They are all principles-based, which is the fundamental difference between UK and US. I love the idea of principles-based, and can’t see why you guys like rules … but I’ve been on this list long enough to know that most of you think the exact opposite, so let’s not go there!

Our standards have always been ‘voluntary’, i.e. put out by the joint accounting bodies rather than the government. As we all know, the EU is trying to change that…

Hope this helps a bit

R

Bob Jensen’s threads on IFRS-US GAAP convergence are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

Illustration of a Great Tutorial Site That Relies Heavily on Camtasia videos ---
http://www.bionicturtle.com/

April 26, 2010 message from Richard Campbell [campbell@RIO.EDU]

David Harper has built an excellent site providing study materials for finance certification exams. He relies heavily on Camtasia videos.

http://www.bionicturtle.com/

Richard J. Campbell
mailto:campbell@rio.edu

Here's a free sample (recommended by Amy Dunbar).
"How to use Excel’s LINEST() function to return multivariate regression - 10 min. screencast," by David Harper, Bionic Turtle, April 28, 2010 ---
http://www.bionicturtle.com/learn/article/how_to_use_excels_linest_function_to_return_multivariate_regression_10_min_/

Scroll down to watch the Camtasia video

Bob Jensen's Free Accounting Tutorials Using Camtasia Videos ---
http://www.cs.trinity.edu/~rjensen/video/acct5342/

It’s amazingly easy to use Camtasia Studio from TechSmith ---
http://www.techsmith.com/

Images are from Bankruptcy Visuals Produced by Lynn M LoPucki (for educational purposes only, I recommend ordering the large size poster for your wall)
"Visualizing The Bankruptcy Process: Chapter 7, Chapter 11, Chapter 13," Simoleon Sense, April 15, 2010 ---
http://www.simoleonsense.com/visualizing-the-bankruptcy-process-chapter-7-chapter-11-chapter-13/

Jensen Comment
I think it is ironic that this article is dated on the date taxes are due to the IRS for individuals.

Bankruptcy seems to be only slightly more complicated than a Raptor's SPE formed by Andy Fastow for Enron ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Bob Jensen's threads on visualization of multivariate data (including faces) ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

Just Say No to Wall Street: Putting a Stop to the Earnings Game --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1583563

Joseph Fuller
The Monitor Company

Michael C. Jensen
Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.

Journal of Applied Corporate Finance, Vol. 22, No. 1, Winter 2010
Harvard Business School NOM Unit Working Paper No. 10-090

Abstract:
Putting an end to the “earnings game” requires that CEOs reclaim the initiative by avoiding earnings guidance and managing expectations in such a way that their stocks trade reasonably close to their intrinsic value. In place of earnings forecasts, management should provide information about the company's strategic goals and main value drivers. They should also discuss the risks associated with the strategies, and management's plans to deal with them.

Using the experiences of several companies, the authors illustrate the dangers of conforming to market pressures for unrealistic growth targets. They argue that an overvalued stock, by encouraging overpriced acquisitions and other risky, value-destroying bets, can be as damaging to the long-run health of a company as an undervalued stock.

CEOs and CFOs put themselves in a bind by providing earnings guidance and then making decisions designed to meet Wall Street's expectations for quarterly earnings. When earnings appear to be coming in short of projections, top managers often react by suggesting or demanding that middle and lower level managers redo their forecasts, plans, and budgets. In some cases, top executives simply acquiesce to increasingly unrealistic analyst forecasts and adopt them as the basis for setting organizational goals and developing internal budgets. But in cases where external expectations are impossible to meet, either approach sets up the firm and its managers for failure and in the process value is destroyed.

Keywords: Value Maximization, Overvaluation, Incentives, Managing Earnings, Analyst Expectations, Managing Wall Street, Earnings Guidance, Financial Reporting, Budgeting Process

Great Nova Video: Can a market of irrational people be a "rational market?"
PBS Nova Videp: "Mind Over Money," http://video.pbs.org/video/1479100777

Jensen Question
This seems to beg the question of how accountants can contribute information to irrational people with an underlying goal of helping their markets themselves be more rational.

Of course many scholars argue that markets themselves are not " rational" ---
http://en.wikipedia.org/wiki/Justin_Fox

Behavioral Economics --- http://en.wikipedia.org/wiki/Behavioral_economics

Bounded Rationality --- http://en.wikipedia.org/wiki/Bounded_rationality

Rationality in Economics
Peter J. Hammond
Department of Economics, Stanford University, CA 94305-6072, U.S.A.
e-mail: hammond@leland.stanford.edu
http://www.warwick.ac.uk/~ecsgaj/ratEcon.pdf

1 Introduction and Outline

Rationality is one of the most over-used words in economics. Behaviour can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are “rationalizable”.

Here I propose to assess how economists use and mis-use the term “rationality.”

Most of the discussion will concern the normative approach to decision theory. First, I shall consider single person decision theory. Then I shall move on to interactive or multi-person decision theory, customarily called game theory. I shall argue that, in normative decision theory, rationality has become little more than a structural consistency criterion. At the least, it needs supplementing with other criteria that reflect reality. Also, though there is no reason to reject rationality hypotheses as normative criteria just because people do not behave rationally, even so rationality as consistency seems so demanding that it may not be very useful for practicable normative models either.

Towards the end, I shall offer a possible explanation of how the economics profession has arrived where it is. In particular, I shall offer some possible reasons why the rationality hypothesis persists even in economic models which purport to be descriptive. I shall conclude with tentative suggestions for future research —about where we might do well to go in future.

2 Decision Theory with Measurable Objectives

In a few cases, a decision-making agent may seem to have clear and measurable objectives. A football team, regarded as a single agent, wants to score more goals than the opposition, to win the most matches in the league, etc. A private corporation seeks to make profits and so increase the value to its owners. A publicly owned municipal transport company wants to provide citizens with adequate mobility at reasonable fares while not requiring too heavy a subsidy out of general tax revenue. A non-profit organization like a university tends to have more complex objectives, like educating students, doing good research, etc. These conflicting aims all have to be met within a limited budget.

Measurable objectives can be measured, of course. This is not always as easily as keeping score in a football match or even a tennis, basketball or cricket match. After all, accountants often earn high incomes, ostensibly by measuring corporate profits and/or earnings. For a firm whose profits are risky, shareholders with well diversified portfolios will want that firm to maximize the expectation of its stock market value. If there is uncertainty about states of the world with unknown probabilities, each diversified shareholder will want the firm to maximize subjective expected values, using the shareholder’s subjective probabilities. Of course, it is then hard to satisfy all shareholders simultaneously. And, as various recent spectacular bank failures show, it is much harder to measure the extent to which profits are being made when there is uncertainly.

In biology, modern evolutionary theory ascribes objectives to genes —so the biologist Richard Dawkins has written evocatively of the Selfish Gene. The measurable objective of a gene is the extent to which the gene survives because future organisms inherit it. Thus, gene survival is an objective that biologists can attempt to measure, even if the genes themselves and the organisms that carry them remain entirely unaware of why they do what they do in order to promote gene survival.

Early utility theories up to about the time of Edgeworth also tried to treat utility as objectively measurable. The Age of the Enlightenment had suggested worthy goals like “life, liberty, and the pursuit of happiness,” as mentioned in the constitution of the U.S.A. Jeremy Bentham wrote of maximizing pleasure minus pain, adding both over all individuals. In dealing with risk, especially that posed by the St. Petersburg Paradox, in the early 1700s first Gabriel Cramer (1728) and then Daniel Bernoulli (1738) suggested maximizing expected utility; most previous writers had apparently considered only maximizing expected wealth.

3 Ordinal Utility and Revealed Preference

Over time, it became increasingly clear to economists that any behaviour as interesting and complex as consumers’ responses to price and wealth changes could not be explained as the maximization of some objective measure of utility. Instead, it was postulated that consumers maximize unobservable subjective utility functions. These utility functions were called “ordinal” because all that mattered was the ordering between utilities of different consumption bundles. It would have been mathematically more precise and perhaps less confusing as well if we had learned to speak of an ordinal equivalence class of utility functions. The idea is to regard two utility functions as equivalent if and only if they both represent the same preference ordering — that is, the same reflexive, complete, and transitive binary relation. Then, of course, all that matters is the preference ordering — the choice of utility function from the ordinal equivalence class that represents the preference ordering is irrelevant. Indeed, provided that a preference ordering exists, it does not even matter whether it can be represented by any utility function at all.

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

Note that I’m not in favor of repealing the recent legislation. But I am in favor of adding a public option so long as taxation and insurance premiums are added to fully cover the annual costs of health insurance. And let's stop the BS on the left and on the right side of this debate.

Fuzzy Congressional Budget Office Accounting Tricks
"ObamaCare by the Numbers: Part 2," by John Cassidy, The New Yorker, March 26, 2010 ---
http://www.newyorker.com/online/blogs/johncassidy/2010/03/obamacare-by-the-numbers-part-2.html

This is a long and somewhat involved followup to my previous post on ObamaCare. . For those of you with O.A.D.D. (online attention-deficit disorder), I’ve provided an express and local version.

EXPRESS:

The official projections for health-care reform, which show it greatly reducing the number of uninsured and also reducing the budget deficit, are simply not credible. There are three basic issues.

The cost and revenue projections rely on unrealistic assumptions and accounting tricks. If you make some adjustments for these, the cost of the plan is much higher.

The so-called “individual mandate” isn’t really a mandate at all. Under the new system, many young and healthy people will still have a strong incentive to go uninsured.

Once the reforms are up and running, some employers will have a big incentive to end their group coverage plans and dump their employees onto the taxpayer-subsidized individual plans, greatly adding to their cost.

LOCAL:

For future reference (or possibly to roll up and beat myself over the head with in my dotage) I have filed away a copy the latest analysis (pdf) of health-care reform from the Congressional Budget Office. By 2019, it says, the bills passed by the House and Senate will have cut the number of uninsured Americans by thirty-two million, raised the percentage of people with some form of health-care coverage from eighty-three per cent to ninety-four per cent, and reduced the federal deficit by a cumulative $143 billion. If all of these predictions turn out to be accurate, ObamaCare will go down as one of the most successful and least costly government initiatives in history. At no net cost to the taxpayer, it will have filled a gaping hole in the social safety net and solved a problem that has frustrated policymakers for decades.

Does Santa Claus live after all? According to the C.B.O., between now and 2019 the net cost of insuring new enrollees in Medicaid and private insurance plans will be $788 billion, but other provisions in the legislation will generate revenues and cost savings of $933 billion. Subtract the first figure from the second and—voila!—you get $143 billion in deficit reduction.

The first objection to these figures is that the great bulk of the cost savings—more than $450 billion—comes from cuts in Medicare payments to doctors and other health-care providers. If you are vaguely familiar with Washington politics and the letters A.A.R.P. you might suspect that at least some of these cuts will fail to materialize. Unlike some hardened skeptics, I don’t think none of them will happen. One part of the reform involves reducing excessive payments that the Bush Administration agreed to when it set up the Medicare Advantage program in 2003. If Congress remains under Democratic control—a big if, admittedly—it will probably enact these changes. But that still leaves another $300 billion of Medicare savings to be found.

The second problem is accounting gimmickry. Acting in accordance with standard Washington practices, the C.B.O. counts as revenues more than $50 million in Social Security taxes and $70 billion in payments towards a new home-care program, which will eventually prove very costly, and it doesn’t count some $50 billion in discretionary spending. After excluding these pieces of trickery and the questionable Medicare cuts, Douglas Holtz-Eakin, a former head of the C.B.O., has calculated that the reform will actually raise the deficit by $562 billion in the first ten years. “The budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed,” he wrote in the Times. “So fantasy in, fantasy out.”

Holtz-Eakin advised John McCain in 2008, and he has a reputation as a straight shooter. I think the problems with the C.B.O.’s projections go even further than he suggests. If Holtz-Eakin’s figures turned out to be spot on, and over the next ten years health-care reform reduced the number of uninsured by thirty million at an annual cost of $56 billion, I would still regard it as a great success. In a $15 trillion economy—and, barring another recession, the U.S. economy should be that large in 2014—fifty or sixty billion dollars is a relatively small sum—about four tenths of one per cent of G.D.P., or about eight per cent of the 2011 Pentagon budget.

My two big worries about the reform are that it won’t capture nearly as many uninsured people as the official projections suggest, and that many businesses, once they realize the size of the handouts being offered for individual coverage, will wind down their group plans, shifting workers (and costs) onto the new government-subsidized plans. The legislation includes features designed to prevent both these things from happening, but I don’t think they will be effective.

Consider the so-called “individual mandate.” As a strict matter of law, all non-elderly Americans who earn more than the poverty line will be obliged to obtain some form of health coverage. If they don’t, in 2016 and beyond, they could face a fine of about $700 or 2.5 per cent of their income—whichever is the most. Two issues immediately arise.

Even if the fines are vigorously enforced, many people may choose to pay them and stay uninsured. Consider a healthy single man of thirty-five who earns $35,000 a year. Under the new system, he would have a choice of enrolling in a subsidized plan at an annual cost of $2,700 or paying a fine of $875. It may well make sense for him to pay the fine, take his chances, and report to the local emergency room if he gets really sick. (E.R.s will still be legally obliged to treat all comers.) If this sort of thing happens often, as well it could, the new insurance exchanges will be deprived of exactly the sort of healthy young people they need in order to bring down prices. (Healthy people improve the risk pool.)

If the rules aren’t properly enforced, the problem will be even worse. And that is precisely what is likely to happen. The I.R.S. will have the administrative responsibility of imposing penalties on people who can’t demonstrate that they have coverage, but it won’t have the legal authority to force people to pay the fines. “What happens if you don’t buy insurance and you don’t pay the penalty?” Ezra Klein, the Washington Post’s industrious and well-informed blogger, asks. “Well, not much. The law specifically says that no criminal action or liens can be imposed on people who don’t pay the fine.”

So, the individual mandate is a bit of a sham. Generous subsidies will be available for sick people and families with children who really need medical care to buy individual coverage, but healthy single people between the ages of twenty-six and forty, say, will still have a financial incentive to remain outside the system until they get ill, at which point they can sign up for coverage. Consequently, the number of uninsured won’t fall as much as expected, and neither will prices. Without a proper individual mandate, the idea of universality goes out the window, and so does much of the economic reasoning behind the bill.

The question of what impact the reforms will have on existing insurance plans has received even less analysis. According to President Obama, if you have coverage you like you can keep it, and that’s that. For the majority of workers, this will undoubtedly be true, at least in the short term, but in some parts of the economy, particularly industries that pay low and moderate wages, the presence of such generous subsidies for individual coverage is bound to affect behavior eventually. To suggest this won’t happen is to say economic incentives don’t matter.

Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

Even if the government tried to impose additional sanctions on such firms, I doubt it would work. The dollar sums involved are so large that firms would try to game the system, by, for example, shutting down, reincorporating under a different name, and hiring back their employees without coverage. They might not even need to go to such lengths. Firms that pay modest wages have high rates of turnover. By simply refusing to offer coverage to new employees, they could pretty quickly convert most of their employees into non-covered workers.

The designers of health-care reform and the C.B.O. are aware of this problem, but, in my view, they have greatly underestimated it. According to the C.B.O., somewhere between eight and nine million workers will lose their group coverage as a result of their employers refusing to offer it. That isn’t a trifling number. But the C.B.O. says it will be largely offset by an opposite effect in which employers that don’t currently provide health insurance begin to offer it in response to higher demand from their workers as a result of the individual mandate. In this way, some six to seven million people will obtain new group coverage, the C.B.O. says, so the overall impact of the changes will be minor.

The C.B.O.’s analysis can’t be dismissed out of hand, but it is surely a best-case scenario. Again, I come back to where I started: the scale of the subsidies on offer for low and moderately priced workers. If economics has anything to say as a subject, it is that you can’t offer people or firms large financial rewards for doing something—in this case, dropping their group coverage—and not expect them to do it in large numbers. On this issue, I find myself in agreement with Tyler Cowen and other conservative economists. Over time, the “firewall” between the existing system of employer-provided group insurance and taxpayer-subsidized individual insurance is likely to break down, with more and more workers being shunted over to the public teat.

At that point, if it comes, politicians of both parties will be back close to where they began: searching for health-care reform that provides adequate coverage for all at a cost the country can afford. What would such a system look like? That is a topic for another post, but I don’t think it would look much like Romney-ObamaCare.

Read more: http://www.newyorker.com/online/blogs/johncassidy/2010/03/obamacare-by-the-numbers-part-2.html#ixzz0jrFSFK3j

More Headaches for Deloitte After Auditing the Biggest Bank to Ever Fail
"Investigation finds fraud in WaMu lending: Senate report: Failed bank’s own action couldn’t stop deceptive practices," by Marcy Gordon, MSNBC, April 12, 2010 --- http://www.msnbc.msn.com/id/36440421/ns/business-mortgage_mess/?ocid=twitter

The mortgage lending operations of Washington Mutual Inc., the biggest U.S. bank ever to fail, were threaded through with fraud, Senate investigators have found.

And the bank's own probes failed to stem the deceptive practices, the investigators said in a report on the 2008 failure of WaMu.

The panel said the bank's pay system rewarded loan officers for the volume and speed of the subprime mortgage loans they closed. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report being released Tuesday by the investigative panel of the Senate Homeland Security and Governmental Affairs Committee.

Sen. Carl Levin, D-Mich., the chairman, said Monday the panel won't decide until after hearings this week whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations into Washington Mutual soon after its collapse in September 2008.

The report said the top WaMu producers, loan officers and sales executives who made high-risk loans or packaged them into securities for sale to Wall Street, were eligible for the bank's President's Club, with trips to swank resorts, such as to Maui in 2005.

Fueled by the housing boom, Seattle-based Washington Mutual's sales to investors of packaged subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, collapsed in September 2008. It was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the Federal Deposit Insurance Corp.

Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase, declined to comment on the subcommittee report.

WaMu was one of the biggest makers of so-called "option ARM" mortgages. These mortgages allowed borrowers to make payments so low that loan debt actually increased every month.

The Senate subcommittee investigated the Washington Mutual failure for a year and a half. It focused on the thrift as a case study for the financial crisis that brought the recession and the loss of jobs or homes for millions of Americans.

The panel is holding hearings Tuesday and Friday to take testimony from former senior executives of Washington Mutual, including ex-CEO Kerry Killinger, and former and current federal regulators.

Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."

The investors who bought the mortgage securities from Washington Mutual weren't informed of the fraudulent practices, the Senate investigators found. WaMu "dumped the polluted water" of toxic mortgage securities into the stream of the U.S. financial system, Levin said.

In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements. The company's own probe in 2005, three years before the bank collapsed, found that two top producing offices — in Downey and Montebello, Calif. — had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.

Washington Mutual was repeatedly criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates by borrowers, according to the report. Violations were so serious that in 2007, Washington Mutual closed its big affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.

Senior executives of the bank were aware of the prevalence of fraud, the Senate investigators found.

In late 2006, Washington Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed the bank an additional year to comply with new, stricter guidelines for issuing subprime loans.

According to an internal bank e-mail cited in the report, Washington Mutual would have lost about a third of the volume of its subprime loans if it applied the stricter requirements.

Deloitte is Included in the Shareholder Lawsuit Against Washington Mutual (WaMu)

"Feds Investigating WaMu Collapse," SmartPros, October 16, 2008 --- http://accounting.smartpros.com/x63521.xml

Oct. 16, 2008 (The Seattle Times) — U.S. Attorney Jeffrey Sullivan's office [Wednesday] announced that it is conducting an investigation of Washington Mutual and the events leading up to its takeover by the FDIC and sale to JP Morgan Chase.

Said Sullivan in a statement: "Due to the intense public interest in the failure of Washington Mutual, I want to assure our community that federal law enforcement is examining activities at the bank to determine if any federal laws were violated."

Sullivan's task force includes investigators from the FBI, Federal Deposit Insurance Corp.'s Office of Inspector General, Securities and Exchange Commission and the Internal Revenue Service Criminal Investigations division.

Sullivan's office asks that anyone with information for the task force call 1-866-915-8299; or e-mail fbise@leo.gov.

"For more than 100 years Washington Mutual was a highly regarded financial institution headquartered in Seattle," Sullivan said. "Given the significant losses to investors, employees, and our community, it is fully appropriate that we scrutinize the activities of the bank, its leaders, and others to determine if any federal laws were violated."

WaMu was seized by the FDIC on Sept. 25, and its banking operations were sold to JPMorgan Chase, prompting a Chapter 11 bankruptcy filing by Washington Mutual Inc., the bank's holding company. The takeover was preceded by an effort to sell the entire company, but no firm bids emerged.

The Associated Press reported Sept. 23 that the FBI is investigating four other major U.S. financial institutions whose collapse helped trigger the $700 billion bailout plan by the Bush administration.

The AP report cited two unnamed law-enforcement officials who said that the FBI is looking at potential fraud by mortgage-finance giants Fannie Mae and Freddie Mac, and insurer American International Group (AIG). Additionally, a senior law-enforcement official said Lehman Brothers Holdings is under investigation. The inquiries will focus on the financial institutions and the individuals who ran them, the senior law-enforcement official said.

FBI Director Robert Mueller said in September that about two dozen large financial firms were under investigation. He did not name any of the companies but said the FBI also was looking at whether any of them have misrepresented their assets.

"Federal Official Confirms Probe Into Washington Mutual's Collapse," by Pierre Thomas and Lauren Pearle, ABC News, October 15, 2008 --- http://abcnews.go.com/TheLaw/story?id=6043588&page=1

The federal government is investigating whether the leadership of shuttered bank Washington Mutual broke federal laws in the run-up to its collapse, the largest in U.S. history.
. . .

Eighty-nine former WaMu employees are confidential witnesses in a shareholder class action lawsuit against the bank, and some former insiders spoke exclusively to ABC News, describing their claims that the bank ignored key advice from its own risk management team so they could maximize profits during the housing boom.

In court documents, the insiders said the company's risk managers, the "gatekeepers" who were supposed to protect the bank from taking undue risks, were ignored, marginalized and, in some cases, fired. At the same time, some of the bank's lenders and underwriters, who sold mortgages directly to home owners, said they felt pressure to sell as many loans as possible and push risky, but lucrative, loans onto all borrowers, according to insiders who spoke to ABC News.

Continued in article

Allegedly "Deloitte Failed to Audit WaMu in Accordance with GAAS" (see Page 351) --- Click Here
Deloitte issued unqualified opinions and is a defendant in this lawsuit (see Page 335)
In particular note Paragraphs 893-901 with respect to the alleged negligence of Deloitte.

Bob Jensen's threads on Deloitte's troubles are at
http://www.trinity.edu/rjensen/fraud001.htm#Deloitte

From The Wall Street Journal Accounting Weekly Review on April 16, 2010

For Entrepreneurs, Sharing Isn't Always Fun
by: Sarah E. Needleman
Apr 13, 2010
Click here to view the full article on WSJ.com

TOPICS: Compensation, Dilution, Equity, Stock Options, Stock Valuation

SUMMARY: The article discusses small businesses' use of equity "as a substitute for a portion of salary when trying to attract top talent" either in the form of a portion of the company's overall financial value or in stock options that become valuable if the company goes public. In essence, when employees accept equity in lieu of salary, small business owners are diluting potential reward, notes Michael Keeling, president of ESOP Association, "a Washington trade group representing businesses with employee stock ownership plans." Another issue arising in relation to small businesses in particular is that "companies sometimes outgrow the competence of the individuals they hire," in the words of Chris Carey, a small-business adviser in Brooklyn, NY, and so owners considering using equity-based compensation "

CLASSROOM APPLICATION: The article can be used to discuss the use of stock option plans by small businesses in addition to the typical view of larger firms' use of these plans and the recent focus on the backdating scandal in executive stock option plans. Though the article doesn't address accounting issues per se, points about compensation value stemming from equity-based compensation and the definition of dilutive effects on owners' shares in firm value are useful for understanding the economic substance behind accounting for equity-based compensation.

QUESTIONS:
1. (Introductory) Define the term equity-based compensation.

2. (Introductory) What two forms of equity-based compensation used by small businesses, particularly at the start-up phase of business, are described in this article?

3. (Introductory) What is dilution? How does offering a share of stockholders' equity or a stock option plan to an employee dilute an owner's interest in a business currently? In the future?

4. (Advanced) Consider the accounting for stock option plans offered by ForceLogix to its employees in 2008 and 2009 as described in the article. How do you think the granting of these stock options was accounted for?

5. (Advanced) Access the ForceLogix (formerly Courtland Capital Corp.) Financial Statements for the year ended August 31, 2009, available online at http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00026340 or by searching for them through the company's web site link to investor information. Read Note 2, Summary of Significant Accounting Policies (particularly the paragraph on stock-based compensation) and Note 6, Share Capital. Does this description confirm your answer to the question above? Explain, including a comment on the method used to value the options.

6. (Advanced) Have the stock options described in the article been exercised? Cite your source for this information.

7. (Introductory) Have the stock options described in the article been exercised? Cite your source for this information.

8. (Advanced) Refer again to the ForceLogix financial statements Note 2, this time the paragraph on Loss per share. What can you infer about the current market value of the company's stock from the fact that no diluted earnings (loss) per share is shown in these financial statements and the statement in this note that the impact of potentially dilutive securities would be anti-dilutive.

Reviewed By: Judy Beckman, University of Rhode Island

"For Entrepreneurs, Sharing Isn't Always Fun," by: Sarah E. Needleman, The Wall Street Journal, April 13, 2010 ---
http://online.wsj.com/article/SB10001424052702303828304575180073125261114.html?mod=djem_jiewr_AC_domainid

Business owners with limited payroll budgets may be tempted to use equity as a substitute for a portion of salary when trying to attract top talent—but this means possibly parting with a piece of their business's future success.

Mary and Matt Paul say they're grateful that their employees turned down an offer of equity in lieu of more pay when they launched their transportation-services firm, Crown Cars & Limousines Inc., more than 15 years ago.

"They didn't trust that the company was going to be successful," says Ms. Paul of the recruits. "I'm happy it worked out that way because now I couldn't imagine sharing my profits." She says the company earned roughly $4 million in 2009.

Businesses have long used part-ownership in place of—or in addition to—bigger salaries. Some offer a piece of their firm's overall financial value as equity. Others dispense it in the form of stock options that only become valuable if their company goes public.

The latter may be a tougher sell these days since few companies have gone public in recent years: There were just 63 U.S. initial-public offerings last year and 43 in 2008, compared with 272 in 2007 and 221 in 2006, according to Renaissance Capital LLC, an independent research firm in Greenwich, Conn.

For a small business, where profits often aren't too big to begin with, this can mean dividing the pot even further. "In essence you are diluting your potential reward," says Michael Keeling, president of ESOP Association, a Washington trade group representing businesses with employee-stock-ownership plans.

Chris Carey, a small-business adviser in Brooklyn, N.Y., says owners thinking about offering new recruits equity-based pay should consider what would happen if they later decide that those workers aren't worth retaining.

"Companies sometimes outgrow the competence of the individuals they hire," says Mr. Carey. Other recruiting incentives, such as performance-based bonuses, may be more palatable for owners fearful of landing in that kind of situation, he says.

On the flip side, sharing a smaller percentage of something successful can be "better than 100% of your business closing down," says ESOP's Mr. Keeling.

View Full Image

Studio West Photography

Employees at ForceLogix Offering equity can be an especially useful tool in a downturn. Business owners should be able to more easily offset a below-market salary with equity-based pay when unemployment is high, theorizes Andrew Zacharakis, professor of entrepreneurship at Babson College in Wellesley, Mass. "A lot of people are trying to get something on their résumé, even though it may not pay as much as what they earn in a good economic climate," he says.

Equity can also sweeten a job offer for candidates who are always in high demand because they possess unique skills or knowledge. Bret Farrar proposed giving a financial stake in his small consulting firm to two prospective recruits last year in lieu of bigger salaries.

He says both candidates accepted the positions over other, higher-paying opportunities. "We wanted to attract better people and keep them for the long haul," says Mr. Farrar, founder of Sendero Business Services LP in Dallas.

Even in prosperous times, equity can be an effective recruiting tool for small firms, says David Wise, a senior consultant for Hay Group Inc., a management-consulting firm based in Philadelphia.

"There's a limited pool of equity available, and larger companies with more employees have to be that much more selective in allocating it," says Mr. Wise. "For a smaller company, providing an equity stake is one way to compete for talent with the big boys."

When Patrick Stakenas co-founded ForceLogix Technologies Inc. in Chicago in 2005, he says he and his business partner, Steve Potts, couldn't afford to pay recruits salaries on par with market rates. So they offered equity in their sales-technology firm to compensate for the difference.

"We looked for people who understood they'd have the opportunity to make a lot of money down the road," says Mr. Stakenas.

Over the next few years, ForceLogix employees also received pay raises mostly in the form of equity. "A couple of times in 2008 and 2009 cash was very tight, so tight that we weren't going to potentially make payroll," says Mr. Stakenas. "We promised employees that if they stay, there will be more equity for them, and all of them stayed."

This past December, ForceLogix went public on the Toronto stock exchange at 10 cents a share, making its 10 employees' stock options finally worth something. The price has been fluctuating between eight and 11 cents ever since.

"They can sit on it or sell it," says Mr. Stakenas, who declines to offer specifics on how much equity his staff has in his firm. "All of them are holding onto it because they want to see the company go further."

Bob Jensen's threads on employee stock options and equity sharing are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

"SBA Warns Small Businesses of Scams to Help Obtain Government Loans," Journal of Accountancy, April 1, 2010 ---
http://www.journalofaccountancy.com/Web/20102758.htm

The U.S. Small Business Administration (SBA) warned that the agency has received several complaints from small businesses about abusive marketing practices, scams and exorbitant fees charged by companies offering to help businesses get a loan, grant or other federal funds from the SBA. Complaints received by the SBA’s Office of the Inspector General (SBA OIG) include:

Companies charging small businesses high fees to provide assistance applying to SBA funding programs. Some companies allegedly guaranteed that the small business would obtain SBA funding if they paid the fee. The SBA does not endorse or give preference to specific private companies or their clients.

Companies charging small businesses for services never requested after the small business gave bank account and routing information to a caller claiming to be a company offering assistance.

Companies alleging that a small business would be issued a “forfeiture letter” that would make the small business ineligible for any SBA funding for three years if the small business refused to use the company’s services.

The SBA said small businesses can get free assistance by calling one of the SBA’s 68 District Offices, or by visiting the SBA’s Web site. Assistance is also available at Small Business Development Centers, Women’s Business Centers, Veterans Business Outreach Centers and SCORE Chapters, either free or for a reasonable fee. Location and contact information for the centers is available at sba.gov.

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

Bob Jensen's small business helpers are at
http://www.trinity.edu/rjensen/bookbob1.htm#SmallBusiness

"Auditing Your Auditor: After nearly a decade of turmoil, companies have gained the advantage in negotiating with their auditors," by Tim Reason, CFO.com, April 1, 2010 --- http://www.cfo.com/article.cfm/14485723/c_14487989?f=home_todayinfinance

When telecommunications provider IDT decided to switch auditors from Ernst & Young to Grant Thornton in early 2008, the "driving force was to save money," says CFO Bill Pereira. It worked. Part of a companywide effort to reduce corporate overhead, the move cut IDT's $4.3 million audit bill almost in half. Although initially "we were fearful of leaving the Big Four," says Pereira, "in retrospect, we are really happy with the decision."

In fact, the switch went so smoothly that IDT declined to announce the renewal of Grant Thornton's contract in its most recent proxy because IDT was open to switching again. "We knew there had been changes in the market and we wanted to evaluate where fees stood," says Pereira. "We didn't just make the automatic assumption that we'd stick with Grant Thornton. We felt it was our responsibility to do our homework." (IDT eventually did renew with Grant Thornton and cut its bill by nearly another million dollars, to $1.42 million last year.)

Welcome to the new auditor-client relationship. In the wake of the Sarbanes-Oxley Act of 2002, audit fees soared, auditors dumped risky clients by the hundreds, and "value-added" services all but vanished under the weight of new independence rules. Today, the reverse is true. Audit fees have been dropping across the board since 2007. In 2004, more than a third of auditor changes were the result of audit firms walking away from clients. Last year, 82% of auditor changes were because companies fired their auditors (among the Big Four, the number was 90%). And companies aren't just negotiating lower fees; they are also demanding more value read "services" covering everything from corporate-board education to competitive intelligence.

No More Sticker Shock In 2000, the Securities and Exchange Commission required that companies begin disclosing all payments made to their auditors. Prompted by the 1998 merger of Price Waterhouse and Coopers Lybrand, the rule was intended to shine a light on potential independence problems created by nonaudit work. But it also seemed likely that, in a normal market, such transparency would affect the price of audits.

Alas, the ensuing decade proved anything but normal. That Big Six merger was followed quickly by dramatic audit failures that culminated in the Enron and WorldCom debacles, the implosion of Arthur Andersen, and the Sarbanes-Oxley Act and its infamous Section 404, creating the most turbulent era in the history of auditing. "From 2000 to 2007, there was one shock after another, so there really wasn't normal pricing during that period," observes associate professor Scott Whisenant of the University of Houston, who studies audit fees.

It is still a bitter irony for finance executives that Sarbox much of it aimed squarely at Arthur Andersen's failings as auditor to Enron and WorldCom turned into a bonanza for surviving audit firms. Between 2004 and 2006, internal-control audits created intense auditor shortages, which rippled through the market, affecting companies not even required to comply with Section 404. The supply-versus-demand dilemma combined with new auditing requirements and auditor risk aversion drove costs skyward during those years.

That has now changed markedly. "We have seen price competition return in 2007 and 2008," observes Whisenant. Not only have fees been falling, but they have fallen for companies of all sizes, including those not directly affected by 404. Companies with revenues between $100 million and $250 million saw an average 8% drop in fees from 2007 to 2008, while those with revenues of $250 million to $500 million saw them drop 5%, according to a CFO analysis of data provided by Audit Analytics (see "Fees Fall Everywhere," below).

Chalk up much of that change to a long-delayed reaction to the fee transparency ushered in by the SEC's 2000 decree. When fee disclosure was first proposed, some experts theorized that it would actually result in higher fees, in that audit firms would no longer offer a discount in the early years of an engagement to win new clients. On the contrary, says Whisenant, "fee disclosure probably gave auditors more information to underbid existing audits."

But, he adds, it now appears that the larger impact of price transparency is its potential to help clients control their costs once an engagement is under way. "After the second or third year, when the fee starts to revert to a normal level, then the clients have the advantage, because they can start benchmarking."

In other words, clients are wising up to initial discounting and are leveraging the new transparency not only to help select a new auditor, but to rebuff fee increases in subsequent years.

While Sarbox may have been a windfall for auditors in its early days, it is actually driving fees down now for several reasons. Fee disclosure was intended to shed light on potential conflicts when auditors acted as consultants, but Sarbox went further and outlawed many types of auditor consulting altogether. It also emphasized a relatively straightforward "check-the-box" review of controls. Both aspects of the law make it harder for audit firms to differentiate their services.

Continued in article

Jensen Comment
There are a number of factors that can contribute to better audits. Aggressive fee negotiation is seldom one of these.

April 1, 2010 reply from David Albrecht [albrecht@PROFALBRECHT.COM]

Bob, I agree with you that it is at least very possible that auditor effectiveness will suffer as a result of this price competition. Here are some of the problems I see. First, auditors will have less time on-site performing the audit. Although this is cheap grunt time, there will be less testing and evidence gathering. Second, there will be renewed pressure to continue the problematic business model of audit firms relying on new hires. Fewer experienced professionals and partners will be around to supply judgment (I can't believe I'm attributing judgmental prowess to audit firms). Third, increased price competition will only increase pressure on audit firms to go along with management, or else there will be the loss of precious remaining revenues. Fourth, it will give more power to corporate management in the company-auditor relationship. If the U.S. moves to IFRS, audit firms will need to be in a position to exercise judgment and the power to express its will. Too much price competition will turn the audit firms into cheap whores.

Sox is frequently a failed experiment. So many of us had high hopes for a focus on internal controls having some positive impact on reducing financial statement manipulation. It has, in many cases, turned into a check-the-box exercise with little meaningful import.

If there is any hope for audit firms to serve the public interest, this increasing price competition will effectively kill off the hope. Audit firms will continue to place their own self-interest over those of investors.

David Albrecht

Bob Jensen's threads on professionalism in auditing are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Question
What's the difference between a John Meriwether hedge fund and a Larry King marriage?

Answer
Larry King flamed out eight times whereas John's hedge funds have flamed out only twice --- but far more spectacular than any Larry King divorce..

"Long Term Capital Management Again? Wow John Meriwether Has a Short Memory," by Dave Manuel, Simoleon Sense, April 14, 2010 ---
http://www.simoleonsense.com/long-term-capital-management-again-wow-john-meriwether-has-a-short-memory/

In October of 2009, multiple news organizations reported that John Meriwether, formerly of Salomon Brothers/LTCM/JWM Partners, would be forming his third hedge fund.

Now, this wouldn’t normally be big news, but it is when you consider that Meriwether’s two previous hedge funds both flamed out, one of which was in spectacular fashion.

John Meriwether founded LTCM (Long-Term Capital Management) in 1994. This fund, which included famous bond traders (John Meriwether), two Nobel Memorial Prize winners (Robert C. Merton and Myron Scholes) and a Vice Chairman of the Federal Reserve (David Mullins), was an instant success due to the incredible collection of talent that comprised the fund’s team of partner

Bob Jensen's threads on the spectacular Long Term Capital Management Trillion Dollar Bet that nearly brought down Wall Street ---
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM

Question
Will students buy iPads instead of laptops?

Answer
Probably not since the iPad is not really intended to be a production machine. It's primarily a reader of multimedia (except for the popular Flash videos which it will not read). The question is more of whether students will leave their laptops at home while on campus or whether they will have to lug yet another device on top of their iPhones and laptops.

Egads!
What if an accounting instructor requires that students use Excel workbook? (There are of course still PC labs on most campuses but what about the distance education student who buys an iPad instead of a real computer?)

What about the many AIS courses that require that students use MS Access? MS Access is popular in AIS course in part because the college saves a great deal of money by not having to by site licenses for more expensive relational database software.

Jensen Conclusion
Students should be advised to buy computers that will run the most popular collegiate Microsoft software (including PowerPoint, Excel, Word, and other Office software commonly used by faculty). Of course this does not always mean purchasing a Windows computer since MS Office will run on Mac laptops.

MS Office software will not, however, run on an iPad. It is possible to read Excel spreadsheets and PowerPoint files that are online in the Safari Browser. However, suppose an instructor assigns an Excel problem that requires that the student both read an Excel problem and answer in Excel such as using an Excel function like the Bond Yield function? No can do on an iPad!

Also suppose that a student creates a project file that is too large to send to the instructor as an email attachment. Currently some students burn the file to a DVD disk that is submitted to the instructor. But students cannot burn DVD disks on an iPad. In fact they cannot even read a DVD disk on an iPad.

"iPads Arrive on Campuses, to Mixed Reviews," by Jeff Young, Chronicle of Higher Education, April 6, 2010 ---
http://chronicle.com/blogPost/iPads-Arrive-on-Campus-to/22308/?sid=wc&utm_source=wc&utm_medium=en

It's not every day that a new category of computer hits the market, which explains some of the hype over Apple's new iPad. It's not quite a laptop (because it doesn't have all the features of a standard personal computer), not exactly a giant smartphone (because it's not a phone), and not quite an e-reader (because it can play video and do other things those machines can't). On campuses, the question is: Will this new type of mobile device help teaching and research?

George Washington University's campus bookstore was one of many across the country to start selling the devices today, and just about every student who walked by the iPad display here stopped to give it a look, and to flip around the device's shiny touch screen.

"I wanted to see if I could actually type on it," said Vince Kooper, a freshman who tapped out a sentence or two. Several students said they would love to have one but could not afford the price, which ranges from $499 to $829. "It's hard to afford that kind of stuff when you're in college," said Matt Weitzfeld, an undergraduate who also stopped to look.

While the iPad is certainly good enough to take notes on in class, Mr. Weitzfeld said that several professors ban laptops for fear that students would poke around on Facebook rather than listen to lectures, and that iPads would most likely face the same restrictions.

The devices were not exactly flying off the bookstore's shelves. Zach Dunseth, computer and software coordinator, said 15 iPads went to students who had preordered them, but that the store had more in stock. Nationwide, Apple officials said they sold more than 300,000 iPads on the first day, though stores are not reporting widespread shortages.

Eric Weil, managing partner at Student Monitor, which studies student buying habits, said a survey last month found a growing interest in e-reading devices (which is how the group categorized them), and a stronger interest in the iPad than in the Kindle or other e-readers.

"Better than three in 10 students said, 'I'm somewhat interested in purchasing a wireless reading device,'" he reported.

Several professors spent the past few days sparring on blogs and Twitter feeds over whether iPads will send big waves over the academic and media landscape or something closer to a ripple.

"It's actually been a fairly interesting debate online," said Dan Cohen, director of the Center for History and New Media at George Mason University. Scholars profess either love or hate for iPads, he said. "There's no gray area here."

Opponents of the device argue that it is not open enough and sets a bad precedent for how computers and software are sold, since Apple, by controlling access to its online store of apps, controls what iPad software is allowed to be sold. Some fans, though, including some artists and writers, are excited by what they see as a machine that simplifies the experience of reading and viewing multimedia.

It will take months before the potential of these new pad-style computers becomes clear, Mr. Cohen said, because developers are still working out what a light, nine-inch computer can do that laptops, netbooks, and smartphones can't.

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

Hi Richard,

The problem is that some of the leading accounting textbooks that have electronic versions that can be purchased from Amazon do not have the exhibits included in the purchase. Hard copy exhibits must be purchased separately (at least from Amazon for the Kindle).

For accounting textbooks in question, Amazon will only sell the exhi8bits in hard copy to Kindle Users.
http://www.trinity.edu/rjensen/EbooksDeal.htm

I was wondering if the iPad overcame this problem for these textbooks purchased from Amazon . Wiley and other publishers will “lease” electronic textbooks that contain the exhibits. By leasing I mean that the downloaded book expires and cannot be permanently stored by lessees.

Amazon.com
Kindle Version of
Accounting Principles
Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
Wiley, 9th Edition, 2010

Kindle eBook Price $95.96 --- Click Here
We'll add in the chapter exhibits for an additional $147.95
Note that the chapter exhibits are only available in hard copy from Amazon
Amazon doesn't tell you that there are no chapter exhibits when you order the Kindle version
Order online today

Note that this book may also be leased as eBook --- Click Here
The one year lease price direct from WileyPlus is $119.50
But it is only available from the Wiley server and may not be downloaded into a student's computer
The leased online version does have all chapter exhibits
This leasing deal is only available through the publisher directly and not through Amazon

February 21, 2010 reply from Burnell, Mary [Mary.Burnell@FAIRMONTSTATE.EDU]

Bob,

I see lots of comments here, but not an exact answer about Wiley Plus. I've used Wiley Plus since it was new with their introductory books.

Their books are not downloadable. You must use them on the Wiley server. That means that the student has a "lease" for a limited time to all their material. Students can use the book for a set time period -- usually a year.

I understand that is the same model with other publishers.

I've tried to negotiate a more permanent options for students, but so far I've not managed it.

Just 2 cents from a lurker.

Dede Burnell

Mary A. Burnell, CPA Coordinator of Accounting and Finance Fairmont State University 1201 Locust Avenue Fairmont, WV 26554 (304) 367-4189 Mary.Burnell@fairmontstate.edu

Jensen Comment
Back when I was teaching I almost always gave in-class open book examinations. But I did not let students turn on computers in fear that a miscreant might contact a buddy via email for help on the examination or search for unauthorized help on the Internet.

I guess if some students only had leased online eBook versions of a textbook, I could no longer give open book examinations.

About the only way for students to get permanent eBook ownership of this Weygandt et al Accounting Principles textbook is to download the $95.96 Kindle version (or some comparable version on another reader such as the Sony Reader or Nook). But those downloadable versions apparently don't have the essential chapter exhibits. The good news is that if your Amazon Kindle blows, Amazon will forever let you re-download the purchased edition for free. The bad news is that it does not have chapter exhibits.

If this is beginning to sound like a Catch 22 here it's because it's Catch $95.96 for the Kindle Edition 9 version of this particular textbook?

For students who do not want permanent copies of an eBook version, it's cheaper to buy the hard copy new from Amazon or some other retailer for $147.95 (or eventually much less as a used book once used Edition 9 hard copy versions are available from Amazon and B&N and campus bookstores) and then sell them back as used books in Amazon, B&N, or campus bookstores.

If a student has to repeat a basic accounting course a year later, I wonder if WileyPlus will discount the $119.50 lease price for the eBook containing all chapter exhibits?

I also found pirated downloads of the solutions manual and test bank available at a Hong Kong site, but I will not disclose that link.

It is also interesting why publishing companies continue to give instructors hard copy examination versions before the book is actually adopted. It would seem that publishers could end the process where instructors sell their free examination copies to sleazy book buyers that stop by faculty offices with wads of cash in their fists. All the publishers would have to do is give free access to the online eBook versions. But some unscrupulous instructors might never adopt any textbook where the book rep did not give them several hard copy versions to sell for extra income. It's a dog eat dog world out there.

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

"Distance Education's Rate of Growth Doubles at Community Colleges," by Helen Miller, Chronicle of Higher Education, April 13, 2010
http://chronicle.com/blogPost/Distance-Educations-Rate-of/22540/?sid=wc&utm_source=wc&utm_medium=en

Distance education is growing quickly at community colleges, according to the results of a study published by the Instructional Technology Council. For the 2008-9 academic year, enrollment in distance learning at community colleges grew 22 percent over the 2007-8 academic year, up from a growth rate of 11 percent in the previous year.

The Instructional Technology Council, which is affiliated with the American Association of Community Colleges, conducted its annual survey by e-mail and received responses from 226 community colleges. The 22 percent growth from 2007-8 to 2008-9 is somewhat higher than the 17-percent growth that the Sloan Consortium noted for all distance education from fall 2007 to fall 2008 in a recent report. Overall enrollment in higher education grew less than 2 percent during that time.

Fred Lokken, associate dean for the Truckee Meadows Community College WebCollege and author of the technology-council report, said he thinks that one reason distance education has grown more quickly at community colleges than it has in general is because community colleges are more enthusiastic about it than universities are.

Most respondents cited the economic downturn as the main reason for growth in online enrollment, and other respondents said that the growth was typical or was a result of new enrollment efforts. Community-college enrollment has increased in general with the downturn, and Mr. Lokken said that online courses are particularly appealing to people who are job hunting.

“They now see the online classes giving them the greatest flexibility, given the crises they’re facing their lives,” Mr. Lokken said.

The survey also found that for administrators, the greatest challenge in distance learning was a lack of support staff needed for training and technical assistance. In regard to faculty, the administrators who responded to the survey said, workload issues were the biggest obstacle. For students, the institutions' greatest challenge was preparing them to take classes online.

When distance education first became common about 10 years ago, completion rates for online courses were about 50 percent, but survey findings indicate that they are now up to 72 percent. For face-to-face learning, completion rates are only a little higher, at 76 percent.

Mr. Lokken will present the survey findings on April 18 at the American Association of Community Colleges' annual convention in Seattle.

Bob Jensen's threads on distance education and training alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm

Humor Between April 1 and April 30, 2010

April 26, 2010 message from Michael CPA [taxtalker99@GMAIL.COM]

That was hilarious.

Michael

On Sun, Apr 25, 2010 at 5:44 PM, Accountants CPA Hartford CT William Brighenti CPA <accountantscpahartford@gmail.com> wrote:

The examination is available here:
http://www.cpa-connecticut.com/blog/?p=356
Answer honestly, since non-nerds already know if you are or not.
--
William Brighenti, CPA
Accountants CPA Hartford, LLC
46 Mildrum Rd, Berlin, CT 06037-2423
860-828-3269
accountantscpahartford@gmail.com
http://www.cpa-connecticut.com

Very funny Jewish wedding with English subtitle (la boda) --- http://www.youtube.com/watch?v=7NF3OWNJgYw
It gets better near the end!

Me and My Shadow ( a very funny video link forwarded by David Fordham) --- Click Here
http://www.urlesque.com/2010/04/06/math-teacher-pranks/?icid=main|main|dl6|link5|http://www.urlesque.com/2010/04/06/math-teacher-pranks/
The only thing missing is the music --- http://www.youtube.com/watch?v=e5hXtGkzZ9k
1927 Version --- http://www.youtube.com/watch?v=RrRsNWzfEZA

Dear professor Robert Bob,

Thank for these funny videos.

My reply now:

1 http://vodpod.com/watch/2908094-are-you-smarter-then-a-monkey

2 http://www.youtube.com/watch?v=M5xVPJUdTHk&NR=1

3 http://riddles.yolasite.com/funny-videos.php

All the best,
Dan (from Rumania)

Voters pick dead man for mayor over the incumbent in Tracy City, Tennessee ---
http://content.usatoday.com/communities/ondeadline/post/2010/04/voters-pick-dead-man-for-mayor-over-the-incumbent/1?csp=34

Jensen County
In some counties in Texas it could've been the graveyard voters that pushed the dead candidate over the top.

Forwarded by Nancy

A Cowboy from Sweetwater , Texas walked into a bank in New York City and asked for the loan officer. He told the loan officer that he was going to Paris for an international rodeo for two weeks and needed to borrow $5,000 and that he was not a depositor of the bank..

The bank officer told him that the bank would need some form of security for the loan, so the Cowboy handed over the keys to a new Ferrari. The car was parked on the street in front of the bank. The Cowboy produced the title and everything checked out.. The loan officer agreed to hold the car as collateral for the loan and apologized for having to charge 12% interest.

Later, the bank's president and its officers all enjoyed a good laugh at the Cowboy from Texas for using a $250,000 Ferrari as collateral for a $5,000 loan. An employee of the bank then drove the Ferrari into the bank's private underground garage and parked it.

Two weeks later, the Cowboy returned, repaid the $5,000 and the interest of $23.07.

The loan officer said, "Sir, we are very happy to have had your business, and this transaction has worked out very nicely, but we are a little puzzled. While you were away, we checked you out on Dunn & Bradstreet and found that you are a highly sophisticated investor and multimillionaire with real estate and financial interests all over the world. Your investments include a large number of wind turbines around Sweetwater , Texas . What puzzles us is, why would you bother to borrow $5,000?"

The good 'ole Texas boy replied, "Where else in New York City can I park my car for two weeks for only $23.07 and expect it to be there when I return?"

Don't mess with TEXANS....

Forwarded by Nancy

1. She was in the bathroom, putting on her makeup, under the watchful eyes of her young granddaughter, as she'd done many times before. After she applied her lipstick and started to leave, the little one said, "But Gramma, you forgot to kiss the toilet paper good-bye!" I will probably never put lipstick on again without thinking about kissing the toilet paper good-bye...

2. My young grandson called the other day to wish me Happy Birthday. He asked me how old I was, and I told him, 62. My grandson was quiet for a moment, and then he asked, "Did you start at 1?"

3. After putting her grandchildren to bed, a grandmother changed into old slacks and a droopy blouse and proceeded to wash her hair. As she heard the children getting more and more rambunctious, her patience grew thin. Finally, she threw a towel around her head and stormed into their room, putting them back to bed with stern warnings. As she left the room, she heard the three-year-old say with a trembling voice, "Who was THAT?"

4. A grandmother was telling her little granddaughter what her own childhood was like: "We used to skate outside on a pond. I had a swing made from a tire; it hung from a tree in our front yard. We rode our pony. We picked wild raspberries in the woods." The little girl was wide-eyed, taking this all in. At last she said, "I sure wish I'd gotten to know you sooner!"

5. My grandson was visiting one day when he asked, "Grandma, do you know how you and God are alike?" I mentally polished my halo and I said, "No, how are we alike?'' "You're both old," he replied.

6. A little girl was diligently pounding away on her grandfather's word processor. She told him she was writing a story.. "What's it about?" he asked. "I don't know," she replied. "I can't read.."

7. I didn't know if my granddaughter had learned her colors yet, so I decided to test her. I would point out something and ask what color it was She would tell me and was always correct. It was fun for me, so I continued. At last, she headed for the door, saying, "Grandma, I think you should try to figure out some of these, yourself!"

8. When my grandson Billy and I entered our vacation cabin, we kept the lights off until we were inside to keep from attracting pesky insects. Still, a few fireflies followed us in. Noticing them before I did, Billy whispered, "It's no use Grandpa. Now the mosquitoes are coming after us with flashlights."

9. When my grandson asked me how old I was, I teasingly replied, "I'm not sure." "Look in your underwear, Grandpa," he advised, "mine says I'm 4 to 6."

10. A second grader came home from school and said to her grandmother, "Grandma, guess what? We learned how to make babies today." The grandmother, more than a little surprised, tried to keep her cool "That's interesting," she said, "how do you make babies?" "It's simple," replied the girl. "You just change 'y' to 'i' and add 'es'.."

11 Children's Logic: "Give me a sentence about a public servant," said a teacher. The small boy wrote: "The fireman came down the ladder pregnant." The teacher took the lad aside to correct him. "Don't you know what pregnant means?" she asked. "Sure," said the young boy confidently. 'It means carrying a child."

12. A grandfather was delivering his grandchildren to their home one day when a fire truck zoomed past. Sitting in the front seat of the fire truck was a Dalmatian dog. The children started discussing the dog's duties. "They use him to keep crowds back," said one child. "No," said another. "He's just for good luck." A third child brought the argument to a close."They use the dogs," she said firmly, "to find the fire hydrants."

13. A 6-year-old was asked where his grandma lived. "Oh," he said, "she lives at the airport, and when we want her, we just go get her. Then, when we're done having her visit, we take her back to the airport."

14. Grandpa is the smartest man on earth! He teaches me good things, but I don't get to see him enough to get as smart as him!

15. My Grandparents are funny, when they bend over; you hear gas leaks, and they blame their dog.

Forwarded by Maureen

How to get to Heaven from Ireland

I was testing children in my Dublin Sunday school class to see if they understood the concept of getting to heaven.

I asked them, 'If I sold my house and my car, had a big garage sale and gave all my money to the church, would that get me into heaven?'

'NO!' the children answered.

'If I cleaned the church every day, mowed the garden, and kept everything tidy, would that get me into heaven?'

Again, the answer was 'NO!' By now I was starting to smile.

'Well, then, if I was kind to animals and gave sweets to all the children, and loved my husband, would that get me into heaven?'

Again, they all answered 'NO!' I was just bursting with pride for them.

I continued, 'Then how can I get into heaven?' A six year-old boy shouted out:

"YUV GOTTA BE FOOKN' DEAD...."

Forwarded by Maureen

Getting old in Florida
Two elderly
ladies are sitting on the front porch in Bradenton , doing
nothing.
One lady turns and asks, 'Do you
still get horny?'
The other replies, 'Oh sure I
do.'
The first old lady asks, 'What do
you do about it?'
The second old lady replies, 'I
suck a lifesaver.'
After a few moments, the first
old lady asks, 'Who drives you to the beach?'
**********************************************************
Three old
ladies were sitting side by side in their retirement home
in Sarasota reminiscing. The
first lady recalled shopping at the green grocers and demonstrated with
her hands, the length and thickness of a cucumber she could buy for a
penny.
The second old lady nodded,
adding that onions used to be much bigger and cheaper also, and
demonstrated the size of two big onions she could buy for a penny a
piece..
The third old lady remarked, 'I
can't hear a word you're saying, but I remember the guy you're talking
about.
**********************************************************
A little old
lady was sitting on a park bench in The Villages,
a Florida Adult community. A
man walked over and sits down on the other end of the bench. After a few
moments, the woman asks, 'Are you a stranger
here?'
He replies, 'I lived here years
ago.'
'So, where were you all these
years?'
'In prison,' he
says.
'Why did they put you in
prison?'
He looked at her, and very
quietly said, 'I killed my wife.'
'Oh!' said the woman. 'So you're
single...?!'
**********************************************************
Two elderly
people living in Tamarac , he was a widower
and she a widow, had known each other for a number of years. One evening
there was a community supper in the big arena in the
Clubhouse.
The two were at the same table,
across from one another. As the meal went on, he took a few admiring
glances at her and finally gathered the courage to ask her, 'Will you
marry me?'
After about six seconds of
'careful consideration,' she answered 'Yes. Yes, I
will!'
The meal ended and, with a few
more pleasant exchanges, they went to their respective places. Next
morning, he was troubled. 'Did she say 'yes' or did she say
'no'?'
He couldn't remember. Try as he
might, he just could not recall. Not even a faint memory. With
trepidation, he went to the telephone and called
her.
First, he explained that he
didn't remember as well as he used to. Then he reviewed the lovely
evening past.. As he gained a little more courage, he inquired, 'When I
asked if you would marry me, did you say ' Yes' or did you say
'No'?'
He was delighted to hear her say,
'Why, I said, 'Yes, yes I will' and I meant it with all my heart.' Then
she continued, 'And I am so glad that you called, because I couldn't
remember who had asked me.'
* * * * * * * * * * * * * * * * *
* * * * * * * * *
A man was
telling his neighbor in Naples , 'I just bought a
new hearing aid. It cost me four thousand dollars, but it's state of the
art. It's perfect.'
'Really,' answered the neighbor.
'What kind is it?'
'Twelve
thirty.'
* * * * * * * * * * * * * * * * *
* * * * * * * * *
A little old
man shuffled slowly into the 'Orange Dipper', an ice cream
parlor in Ft Myers , and pulled himself slowly, painfully, up
onto a stool.
After catching his breath he
ordered a banana split.
The waitress asked kindly,
'Crushed nuts?'
'No,' he replied,
'hemorrhoids

Forwarded by Hossein Nouri.

Somali Pirates Say They Are Subsidiary of Goldman Sachs. Could Make Prosecution Difficult, Experts Say

Eleven indicted Somali pirates dropped a bombshell in a U.S. court today, revealing that their entire piracy operation is a subsidiary of banking giant Goldman Sachs.

There was an audible gasp in the courtroom when the leader of the pirates announced, “We are doing God’s work. We work for Lloyd Blankfein.” The pirate, who said he earned a bonus of $48 million in doubloons last year, elaborated on the nature of the Somali’s work for Goldman, explaining that the pirates forcibly attacked ships that Goldman had already shorted.

”We were functioning as investment bankers, only every day was casual Friday,” the pirate said.

The pirate acknowledged that they merged their operations with Goldman in late 2008 to take advantage of the more relaxed regulations governing bankers as opposed to pirates, “plus to get our share of the bailout money.”

In the aftermath of the shocking revelations, government prosecutors were scrambling to see if they still had a case against the Somali pirates, who would now be treated as bankers in the eyes of the law.

”There are lots of laws that could bring these guys down if they were, in fact, pirates,” one government source said. “But if they’re bankers, our hands are tied.”

Forwarded by Auntie Bev

In Pharmacology, all drugs have two names, a trade name and generic name. For example, the trade name of Panadol also has a generic name ofParacetamol. Amoxil is also call Amoxicillin and Nurofen is also called Ibuprofen.

The FDA has been looking for a generic name for Viagra. After careful consideration by a team of government experts, it recently announced that it has settled on the generic name of Mycoxafloppin. Also considered were Mycoxafailin, Mydixarizin, Dixafix, and of course, Ibepokin.

Pfizer Corp. announced today that Viagra will soon be available in liquid form, and will be marketed by Pepsi Cola as a power beverage suitable for use as a mixer. It will now be possible for a man to literally pour himself a stiff one. Obviously we can no longer call this a soft drink, and it gives new meaning to the names of 'cocktails', 'highballs' and just a good old-fashioned 'stiff drink'. Pepsi will market the new concoction by the name of: MOUNT & DO.

Thought for the day: There is more money being spent on breast implants and Viagra today than on Alzheimer's research. This means that by 2040, there should be a large elderly population with perky Boobs and huge erections and absolutely no recollection of what to do with them.

Forwarded by Auntie Bev
WHY MEN ARE NEVER DEPRESSED

Men Are Just Happier People-- What do you expect from such simple creatures? Your last name stays put. The garage is all yours. Wedding plans take care of themselves. Chocolate is just another snack. You can be President. You can never be pregnant. You can wear a white T-shirt to a water park. You can wear NO shirt to a water park. Car mechanics tell you the truth. The world is your urinal. You never have to drive to another gas station restroom because this one is just too icky. You don't have to stop and think of which way to turn a nut on a bolt. Same work, more pay. Wrinkles add character. Wedding dress $3500 Tux rental-$75.. People never stare at your chest when you're talking to them. One mood all the time. Phone conversations are over in 30 seconds flat.. A five-day vacation requires only one suitcase. You get extra credit for the slightest act of thoughtfulness. If someone forgets to invite you, he or she can still be your friend.

Your underwear is $3.99 for a three-pack. You are unable to see wrinkles in your clothes. Everything on your face stays its original colour. The same hairstyle lasts for years, maybe decades. You only have to shave your face and neck.

You can play with toys all your life. You can wear shorts no matter how your legs look. You can 'do' your nails with a pocket knife. You have freedom of choice concerning growing a moustache.

You can do Christmas shopping for 25 relatives on December 24 in 25 minutes.

No wonder men are happier.

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

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 April 30, 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 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

What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

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/

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

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



Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

Eye on the Hot Spots

Manhattan Opening

SEC --- http://www.sec.gov/comments/4-579/4579-28.htm Subject: File No. 4-579 From: Carl Olson Affiliation: Fund for Stockowners Rights

Recent Posts by Francine McKenna

Request for Assistance

Racking Up Top Awards

Challenges Ahead

Evaluating Employers

Experience Abroad

Other notable trading losses

REPORT REVEALS CRUSHING HIDDEN TAX OF 10,000 COMMANDMENTS OF FEDERAL REGULATION

SEC --- http://www.sec.gov/comments/4-579/4579-28.htm
Subject: File No. 4-579
From: Carl Olson
Affiliation: Fund for Stockowners Rights