New
Bookmarks
Year 2011 Quarter 4: October 1 - December 31 Additions to
Bob Jensen's Bookmarks
Bob Jensen at
Trinity University
For
earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Tidbits Directory ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Click here to search Bob Jensen's web site if you have
key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/.
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
574 Shields
Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Choose a
Date Below for Additions to the Bookmarks File
2011
December 31, 2011
November 30, 2011
October 31, 2011
December 31, 2011
Bob
Jensen's New Bookmarks December 1-31, 2011
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
Bob Jensen's Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Hasselback Accounting Faculty
Directory ---
http://www.hasselback.org/
Humor Between
December 1-31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor123111
Humor Between November 1 and November 30, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor113011
Humor Between October 1 and October 31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor103111
Humor Between September 1 and September 30, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor093011
Humor Between August 1 and August 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor083111
Humor Between July 1 and July 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor073111
Humor Between May 1 and June 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor063011
Humor Between April 1 and April 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor043011
Humor Between February 1 and March 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor033111
Humor Between January 1 and January 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor013111
I had nothing whatsoever to do with two good news items from Trinity
University, so that gives me license to brag.
Trinity's MS in Accounting graduates scored 5th in the Nation on the CPA
Examination ---
http://web.trinity.edu/x17476.xml
Bravo Linda, Sankarin, John, Kate and Julie!
My long-time friend, as winner of the Scott All-University Excellence in
Teaching Award, gave the Fall Semester Commencement Address. I don't think the
video of his talk is posted at this moment, but I will be looking forward to it.
Don holds a PhD from Columbia University and is a Professor of Organization
Behavior at Trinity University. He is a retired U.S. Army Colonel and a former
Battalion Commander in the Viet Nam War. For years he's also been an extensive
consultant to NASA of organizational matters and leadership training.
Bravo Don!
http://www.cs.trinity.edu/~rjensen/temp/VanEynde2011.htm
These two things make me very proud to have been on the faculty of Trinity
University for 24 years. I retired in 2006.---
http://www.cs.trinity.edu/~rjensen/PictureHistory/2006RetirementParty/
Update on Will Yancey's Family
My long-time tribute to my former accounting professor and friend Will Yancey
is at
http://www.trinity.edu/rjensen/Yancey.htm
Also see Steve Blow's article in the Dallas
Morning News, December 18, 2010 ---
http://www.dallasnews.com/news/columnists/steve-blow/20101218-dallas-resident_s-brave-christmas-letter-addresses-irreversible-mistake_of-suicide.ece
or
Click Here
Jensen Comment
As many of you know, Will committed suicide in 2010 He's the father of Michael
Yancey, a junior in finance and economics at Trinity University.
His widow, Carol, thankfully included me once again in her holiday letter
distribution. She's an excellent writer and sends many news items about her own
life in recovery, including a tidbit about Michael's summer internship at
financial services giant USAA. She's able to continue living in both their
Dallas winter home and Maine summer home. While recovering from an ankle
transplant she broke her arm, which she turned into a humor tidbit in her
letter.
What stands out most to me in her 2011 letter, however, is her ownership of a
new business. Being an male chauvinist pig, I started thinking a sewing shop or
something else feminine. Here's what she writes:
A friend of mine
gave me a book on being a widow., in which one of the chapters was titled "From
Housewife to Mechanic". It was never my intention to take this chapter so
seriously! However, I now own a transmission shop in Dallas, TS. I employ six
people and we are growing this business daily. We just celebrated our one year
anniversary,.
Some AICPA Links of Possible Interest
|
|
|
|
Product announcements appearing in SmartBrief are paid
advertisements and do not reflect actual AICPA endorsements. The
news reported in SmartBrief does not necessarily reflect the
official position of AICPA. |
"N.C. State University Students Win AICPA Competition (among 98
student teams)," by Michael Cohn, Accounting Today, December 20, 2011 ---
http://www.accountingtoday.com/acto_blog/NC-State-University-Students-AICPA-Competition-61183-1.html
Bob Jensen's threads on Accounting News ---
http://www.trinity.edu/rjensen/AccountingNews.htm
"Foreign Enrollment Surges at (Top) U.S. B-Schools: When the
economic downturn hit, international enrollment at top business schools tanked.
Today, it's back up to prerecession levels," by Alison Damast, Business
Week, December 19, 2011 ---
http://www.businessweek.com/business-schools/foreign-enrollment-surges-at-us-bschools-12192011.html
"A Christmas List from Grumpy Old Accountants (includes a lump of coal
for the FASB)," by Anthony H. Cantanach Jr. and J. Edward Ketz, Grumpy Old
Accountants Blog, December 22, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/465#more-465
"IESBA Proposes Changes to The Code of Ethics for Professional Accountants
to Address Conflicts of Interest," IFAC, December 20, 2011 ---
http://www.ifac.org/news-events/2011-12/iesba-proposes-changes-code-ethics-professional-accountants-address-conflicts--0
Bob Jensen's threads on professionalism in accounting and auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
December 27, 2011 comment by Shyam Sunder (Yale)
Shyam Sunder has posted a new comment in IFRS Content, on the post titled
"FECE calls for a halt on convergence talks".
To read the 14 comment(s) or to post your
own, visit:
http://commons.aaahq.org/posts/42322b85c1
posted 7:23 AM by Shyam Sunder
| Comment: |
Paradox
of Writing Clear Rules: Interplay of Financial Reporting
Standards and Engineering1
Shyam Sunder
Yale School of Management
Abstract
Attempts to improve financial reporting by adding clarity to its
rules and standards through issuance of interpretations and
guidance also serve to furnish a better roadmap for evasion
through financial engineering. Thus, paradoxically, regulation
of financial reporting becomes a victim of its own pursuit of
clarity. The interplay between rules written to govern
preparation and auditing of financial reports on one hand, and
financial engineering of securities to manage the appearance of
financial reports on the other, played a significant role in the
financial crisis of the recent years. Fundamental rethinking
about excessive dependence of financial reporting on written
rules (to the exclusion of general acceptance and social norms)
may be necessary to preserve the integrity of financial
reporting in its losing struggle with financial engineering.
JEL Codes: G24; M41
Keywords: Financial Reporting; Financial Engineering; Written
Standards; Social Norms; Regulatory Equilibrium
For full
text:
http://faculty.som.yale.edu/shyamsunder/Research/Accounting
and Control/Presentations and Working
Papers/UCSC_2011/UCSC2010-8Dec11Clean.pdf
Revised
Draft Dec. 8, 2011
1 An earlier version of this paper was presented at the
conference on Rethinking Capitalism, Bruce Initiative of the
University of California at Santa Cruz in April 2010.
Corresponding Author. Address: Yale School of Management, 135
Prospect Street, New Haven, Connecticut, 06511, USA. Telephone
+1 203 432 6160
E-mail
shyam.sunder@yale.edu. |
Jensen Comment to the AECM
I am forwarding a new comment by Shyam to one of my posts on the AAA Commons.
Note that you can reply on the AECM to his comment even though you must go to
this item on the Commons to put a reply to his post on the Commons itself.
Shyam has been a long-time opponent of convergence to IFRS in the United
States but, as a highly respected researcher in economics journals as well as
accounting research journals, his objections have mainly centered around the
potential IASB abuses of its monopoly powers in the setting of global accounting
standards ---
http://faculty.som.yale.edu/shyamsunder/Jamal Sunder Stds Dec 14.pdf
There are many objections to the mountains of standards, interpretations, and
bright line rules in both international and domestic accounting standard
setting. I think it was Paul Polanski who once noted on the AECM that, in spite
of being principles-based in theory, the IASB's standards and interpretations
are moving toward a mountain of bright line rules ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines
Denny Beresford is also on record as opposing the build up of exceeding
complexity in bright line rules --- "Can We Go Back to the Good Old Days?" by
Dennis R. Beresford, The CPA Journal ---
http://www.nysscpa.org/cpajournal/2004/1204/perspectives/p6.htm
Bob Jensen does not agree with Beresford, Sunder, and others on the issue of
bright lines and interpretations.
Firstly, I think the FASB's Codification Database (along with Comperio
from PwC) is demonstrating that modern technology allows clients and auditors to
deal more efficiently with standards complexity and bright lines.
Secondly, I think the explosion of evidence that clients and their
auditors take advantage of loopholes in standards such as the Repo 105/108
principles-based loopholes in FAS 140 that were used by Lehman Brothers and
Ernst & Young to put out deceptive financial statements. Taking away the bright
lines simply makes it easier for clients and their auditors to deceive the
public using more subjective principles-based rules. The Lehman Bankruptcy
Examiner is not at all kind to Lehman Brothers or Ernst & Young in this matter
---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
Thirdly, I'm really opposed to having a contract that Client A reports
differently than Client B to a significant degree such as when Client A will
eventually use IFRS 9 to judge a hedge as being fully effective and Client B
will judge the same hedge as being too ineffective to permit hedge accounting
relief. IFRS 9 as proposed will really soften effectiveness testing for hedges
using derivative financial instruments.
As a matter of fact the leeway given to clients to test hedge effectiveness
in the proposed IFRS 9 (now delayed until 2015) is a perfect example of a
standard that will lead to great inconsistencies in how given contracts are
accounted for differently under principles-based standards.
Fourthly, Sunder, Beresford, and other proponents of reduced
complexity in accounting standards and interpretations fail to point out the
main reason for exceeding complexity in the U.S. Tax Code and its IRS and tax
court interpretations. Time and time again the build up in complexity is caused
by taxpayers who abuse what started out as as a rather simple tax rule. I think
the same thing happens when abusers like Lehman Brothers and Ernst & Young
deceptively twist a standard like FAS 140, thereby leading to further complexity
in ensuing standards and interpretations.
Time and time again the cause of complexity is what Pogo realized years ago:
"We have met the enemy and he is us."
In any case, I predict that over 99% of the subscribers to the AECM will side
with Sunder and Beresford and less than 1% will side with Bob Jensen on this
issue. But Jensen will win in the long run as simple principles-based standards
become abused even worse than bright line rules are abused.
Jensen still argues for bright line speed limit signs (20 mph, 45 mph, 55 mph
etc.) in place of a single principles-based law "Drive at a safe speed in this
zone."
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines
How to Lie/Mislead With Statistics: Great Graphs on Correlation
vs.Causes
"Correlation or Causation? Need to prove something you already believe?
Statistics are easy: All you need are two graphs and a leading question," by
Vali Chandrasekaran, Business Week, December 1, 2011 ---
http://www.businessweek.com/magazine/correlation-or-causation-12012011-gfx.html
Visualization of Multivariate Data (including faces) ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm
New Years Day: What channel will carry the IMA versus AICPA faceoff?
"IMA Ready to Compete with AICPA/CIMA Management Accounting Designation,"
AccountingWeb, December 28, 2011 ---
http://www.accountingweb.com/topic/education-careers/ima-ready-compete-aicpacima-management-accounting-designation
The Institute
of Management Accountants (IMA),
which has offered the Certified Management Accountant (CMA) credential
since 1972 and represents more than 60,000 accountants and financial
professionals in business worldwide, is facing "fierce competition" from
a new management accounting designation – Chartered Global Management
Accountant (CGMA) – that will be launched by the American Institute of
Certified Public Accountants (AICPA) and the Chartered Institute of
Management Accountants (CIMA) in January 2012, according to Jeffrey
Thomson, IMA President and Chief Executive Officer.
AICPA voting members will
be automatically eligible for the credential upon verifying three years
of qualifying experience. CPAs who are members of both the AICPA and
their state CPA society will receive a special discounted annual fee to
maintain the CGMA credential.
"While IMA welcomes these
organizations' recognition of the important role of management
accounting, we have some serious questions about the designation, and we
intend to stand up and be counted," Thomson told AccountingWeb in a
recent interview.
Thomson has questioned the
length of the grandfathering period and the fact that AICPA members
qualify without passing a test. He also objected to the automatic
enrollment. "It is our understanding that they must opt out of the
designation initially."
"Management accountants
need to be able to make more judgmental analyses," Thomson said. "They
need to pursue their credential and pass a rigorous, focused, relevant
exam." He pointed out that in addition to passing a two-part exam, CMA
candidates must fulfill both an education and experience requirement.
"At IMA, we are not just in
the business of increasing our membership, although we are expanding our
presence worldwide. We will continue to be focused on our mission, which
is to respond to the market and to the needs of organizations and
society."
"The market and
organizations have shown a need for accounting professionals working in
business to be prepared to analyze, plan, and budget, and to understand
their obligation to investors and their role in preventing fraud.
Studies have shown a talent management gap in forward-looking
activities among finance professionals. We have an obligation to fill
that gap."
"We expect finance and
accounting personnel will choose to follow a professional management
accounting path based on what the market and organizations have said
that they need," Thomson said. "Surveys and focus groups have found that
financial planners and individuals with knowledge of risk management,
performance management, and measurement top the list of people they are
looking to hire."
"Statistics show that a
high percentage of students who graduate with accounting degrees will go
into public accounting and perform audits, but after a few years they
move into finance departments of companies of all sizes where they are
responsible for planning and budgeting. They have learned to analyze
historic information, but many will have had only one course in
management accounting as part of their undergraduate degree in
accounting. Working in public accounting is a great way to start one's
career, but an accountant in business still needs to acquire management
accounting skill sets," Thomson said.
"Working from a strong
technical basis, the accountant working in finance needs to be able to
go from data to decisions, from information to insights, and sit across
the table as a trusted business advisor."
"To have a great career, a
young professional with an accounting degree needs to develop a
well-rounded set of skills, but those skills have value at any stage in
a career. I became a management accountant just two years ago after
working in telecommunications for over twenty years, ending in a CFO
role at AT&T. When I completed the 150 hours of required study for the
CMA and passed both parts of the exam, I felt more competent, more
rounded."
"An aspiring CMA needs to
possess the skills to perform:
- financial planning
analysis,
- strategic planning,
- risk management,
- mergers and
acquisitions,
- strategic costing, and
- performance management
and measurement."
Looking ahead, Thomson
concluded that "the market will determine the future of management
accountant credentials. But the market is not as rational as we would
like, and it is very forgiving. When an organization has credibility and
has reached a critical mass, people do not ask the tough questions,
often building in inefficiencies."
Jensen Comment
This may become less relevant when the prestigious accounting designations of
the future are Certified Cognitors and Condorsers. In accountics science a mere
PhD will no longer cut it. The prestigious accountics scientists will place
their proud CEW credentials beside their names --- Certified Equation Writers.
Bob Jensen's threads and cases on managerial
accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
"Top B-School Stories of 2011: 2011 brought good news on the MBA job
front, with unconventional careers more popular than ever. Plagiarism and
cheating marred an otherwise-upbeat year," by Alison Damast and Erin Zlomek,
Business Week, December 28, 2011 ---
http://www.businessweek.com/business-schools/top-bschool-stories-of-2011-12282011.html
"Six Predictions for Digital Business in 2012," by Andrew McAfee,
Harvard Business Review Blog, December 28, 2011 ---
Click Here
http://blogs.hbr.org/hbr/mcafee/2011/12/six-predictions-for-digital-bu.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
"The 10 Biggest Web News Stories of 2011," by John Paul Titlow,
ReadWriteWeb, December 23, 2011 ---
http://www.readwriteweb.com/archives/the_10_biggest_web_news_stories_of_2011.php
"Top 10 Culture-Tech Stories of 2011," ReadWriteWeb, December
19, 2011 ---
http://www.readwriteweb.com/archives/top_10_culture-tech_stories_of_2011.php
"The Top 10 tech trends for 2012," by Pete Cashmore, CNN,
December 19, 2011 ---
http://www.cnn.com/2011/12/19/tech/innovation/top-tech-trends-2012/index.html?eref=mrss_igoogle_cnn
"52 Cool Facts About Social Media,"
http://dannybrown.me/2010/07/03/cool-facts-about-social-media/
Thank you David Albrecht for the heads up on this link
NPR's list of Best Books in 2011 ---
http://www.npr.org/series/142590674/best-books-of-2011
"10 Most Hated Movies of 2011," by Michael Lennon, Wired News
---
http://www.wired.com/underwire/2011/12/movies-we-hated-2011/
2011 In Film: Bob Mondello's Top 10 (Plus 10) ---
http://www.npr.org/2011/12/30/144447920/2011-in-film-bob-mondellos-top-10-plus-10
The Year's Weirdest News Stories ---
http://www.thedailybeast.com/cheat-sheets/2011/12/23/strangest-cheats-of-the-year.html
Wow, this is an Amazon-centric list
"8 Ed Tech Predictions for 2012," by Joshua Kim, Inside Higher Ed,
December 22. 2011 ---
http://www.insidehighered.com/blogs/8-ed-tech-predictions-2012
Graduates Who Are Happy to Land Minimum Wage Careers
"Little-Known (usually unaccredited) Colleges Exploit Visa Loopholes to Make
Millions Off Foreign Students," by Tom Bartlett, Karin Fischer, and Josh
Keller, Chronicle of Higher Education, March 20, 2011 ---
http://chronicle.com/article/Little-Known-Colleges-Make/126822/
Bob Jensen's threads on for-profit colleges working in the gray zone of
fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud
Bob Jensen's threads on diploma mills ---
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill
Inside Footnotes (advice from and for security analysts) ---
http://www.footnoted.com/inside-footnotes/
Bob Jensen's investment helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
From Deloitte in Tabular Form ---
http://www.iasplus.com/standard/1112effective.htm
"NEW AND REVISED PRONOUNCEMENTS AS AT 31 DECEMBER 2011"
The information below is organised as follows:
New or revised standards
Amendments
Interpretations
Other pronouncements.
"FASB, IASB Chiefs Agree New Convergence Model is Needed,"
Journal of Accountancy, December 6, 2011 ---
http://www.journalofaccountancy.com/Web/20114869.htm
"SEC releases reports on IFRS in practice and US GAAP-IFRS
differences," IAS Plus, November 17, 2011 ---
http://www.iasplus.com/index.htm
More Detailed
Differences (Comparisons) between FASB
and IASB Accounting Standards
2011 Update
"IFRS and US GAAP: Similarities and Differences"
according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities
and differences mentioned in the booklet are not comprehensive of all
similarities and differences. The document is, however, a valuable addition
to students of FASB versus IASB standard differences and similarities.
It's not easy keeping track of what's
changing and how, but this publication can help. Changes for 2011
include:
- Revised introduction reflecting
the current status, likely next steps, and what companies should be
doing now
(see page 2);
- Updated convergence timeline,
including current proposed timing of exposure drafts, deliberations,
comment periods, and final standards
(see page 7);
- More current analysis of the
differences between IFRS and US GAAP -- including an assessment of
the impact embodied within the differences
(starting on page 17); and
- Details incorporating
authoritative standards and interpretive guidance issued through
July 31, 2011
(throughout).
This continues to be one of PwC's
most-read publications, and we are confident the 2011 edition will
further your understanding of these issues and potential next steps.
For further exploration of the
similarities and differences between IFRS and US GAAP, please also visit
our
IFRS Video Learning Center.
To request a hard copy of this publication, please
contact your PwC engagement team or
contact us.
Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly
downplays the importance of these differences. It may well be that IFRS is
more restrictive in some areas and less restrictive in other areas to a
fault. This is one topical area where IFRS becomes much too subjective such
that comparisons of derivatives and hedging activities under IFRS can defeat
the main purpose of "standards." The main purpose of an "accounting
standard" is to lead to greater comparability of inter-company financial
statements. Boo on IFRS in this topical area, especially when it comes to
testing hedge effectiveness!
One key quotation is on Page 165
IFRS does not specifically discuss the
methodology of applying a critical-terms match in the level of detail
included within U.S. GAAP.
Then it goes yatta, yatta, yatta.
Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail"
and more importantly fails to provide "implementation guidance" comparable
with the FASB's DIG implementation topics and illustrations.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
Bob Jensen's threads on accounting standards setting
controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Bob Jensen's threads on accounting theory ---
http://www.trinity.edu/rjensen/Theory01.htm
Among disclosure issues, fair value prompts the most SEC reviews
As of Dec. 19, 2011 the SEC had sent 874 comment letters regarding fair value
and estimates of assets and contracts, Audit Analytics reports.
And we were led to believe that fair value accounting for financial
instruments entailed little more than reading the closing prices in the
financial data tables of The Wall Street Journal.
Yeah right!
"The Big Number: 874," by Maxwell Murphy, CFO.com, December 28, 2011 ---
http://blogs.wsj.com/cfo/2011/12/28/the-big-number-874/?mod=wsjcfo_hp_cforeport
Bob Jensen's threads on fair value accounting controversies ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Richard Sansing's SSRN accountics science (mostly tax) research papers ---
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=016942
My December 22, 2011 news update from PwC notes the following:
The
IASB has issued an amendment to IFRS 9, Financial instruments, that
delays the effective date to annual periods beginning on or after January 1,
2015. The original effective date was for annual periods beginning on or
after January 1, 2013.
The amendment is a result of the board extending its timeline for
completing the remaining phases of its project to replace IAS 39,
Financial instruments: Recognition and measurement, (such as impairment
and hedge accounting) as well as the delay in the insurance project. In
issuing the amendment, the IASB confirmed the importance of applying the
requirements of all the phases of the project to replace IAS 39 at the same
time.
Read our
In
brief article
for highlights of the IASB amendment.
Regards,
CFOdirect Network team
More focus on Intangibles
These are probably the most systemic problems in theory and in financial
reporting practice
"Integrated Reporting Essential for Useful
Business Reporting," AICPA, December 2011 ---
http://blog.aicpa.org/2011/12/integrated-reporting-essential-for-useful-business-reporting.html
The current model for
financial reporting has long been under discussion; investors and other
stakeholders want more than a historical look back and one that only
focuses on financial measures. They want to see the value companies
create through intangible assets too. Part of the solution is
integrated reporting, which provides a holistic presentation of data and
brings together the many disparate reports that organizations provide
(as opposed to being an add-on to existing reports).
Just last week the
comment period closed for the International Integrated Reporting
Committee’s discussion paper,
Towards Integrated Reporting. As a
long-time supporter of the concept of integrated reporting, founder of
the
Enhanced Business Reporting Consortium and
participant in the
World
Intellectual Capital Initiative, the
AICPA submitted a comment letter offering
suggestions for the development an international integrated reporting
framework.
In the AICPA’s
comment letter, it encouraged the IIRC to leverage the preliminary,
high-level
Enhanced Business Reporting Framework. This
framework has been developed through an open-collaborative approach and
additional ongoing work efforts by WICI continue to build upon this
framework. A new integrated reporting framework should be comprehensive
enough so that organizations can find and report the common framework
elements that are most relevant to their stakeholders. The elements
should also be presented in a way that is comparable across companies
and time periods. Finally, the AICPA called upon the IIRC to develop a
framework so that standardized integrated reports could be created using
data standards, such as XBRL, to improve transparency and provide easy
access to and analysis of integrated reporting disclosures.
This is, understandably,
a very large undertaking. The IIRC has done an excellent job of
exploring existing best practices frameworks; however there will need to
be significant involvement from CPAs and CAs with advisory, reporting
and auditing backgrounds to develop a robust, verifiable integrated
reporting framework covering all relevant content areas. As a starting
point, the AICPA has recommended that the IIRC consult with members of
the Accounting Bodies Network, of which the AICPA is a member. The AICPA
is committed to both fulfilling its role and supporting the IIRC both
internationally and through its U.S. efforts.
For more
information on integrated reporting and the development of an integrated
reporting framework, visit the
Enhanced Business Reporting section on AICPA.org.
Bob Jensen's threads on accounting for
intangibles are at
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
M.I.T. Camera Captures Speed of Light: A Trillion-Frames-Per-Second
---
Click Here
http://www.openculture.com/2011/12/mit_camera_captures_speed_of_light.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
Jensen Comment
Imagine being able to view the booked U.S. National Debt in 15 seconds.
And in less than two minutes scientists at MIT can view the entire unfunded U.S.
OBSF debt.
Audio
Harvard Business Review's 2012 List of Audacious Ideas ---
Click Here
http://blogs.hbr.org/ideacast/2011/12/hbrs-2012-list-of-audacious-id.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
"Freakonomics: What Went Wrong? Examination of a very popular
popular-statistics series reveals avoidable errors," by Andrew Gelman and
Kaiser Fung, American Scientist, 2011 ---
http://www.americanscientist.org/issues/id.14344,y.0,no.,content.true,page.3,css.print/issue.aspx
The nonfiction publishing phenomenon known as
Freakonomics has passed its sixth anniversary. The original book, which
used ideas from statistics and economics to explore real-world problems, was
an instant bestseller. By 2011, it had sold more than four million copies
worldwide, and it has sprouted a franchise, which includes a bestselling
sequel, SuperFreakonomics; an occasional column in the New York
Times Magazine; a popular blog; and a documentary film. The word
“freakonomics” has come to stand for a light-hearted and contrarian, yet
rigorous and quantitative, way of looking at the world.
The faces of Freakonomics are Steven D. Levitt, an
award-winning professor of economics at the University of Chicago, and
Stephen J. Dubner, a widely published New York–based journalist. Levitt is
celebrated for using data and statistics to solve an array of problems not
typically associated with economics. Dubner has perfected the formula for
conveying the excitement of Levitt’s research—and of the growing body of
work by his collaborators and followers. On the heels of Freakonomics,
the pop-economics or pop-statistics genre has attracted a surge of interest,
with more authors adopting an anecdotal, narrative style.
As the authors of statistics-themed books for
general audiences, we can attest that Levitt and Dubner’s success is not
easily attained. And as teachers of statistics, we recognize the challenge
of creating interest in the subject without resorting to clichéd examples
such as baseball averages, movie grosses and political polls. The other side
of this challenge, though, is presenting ideas in interesting ways without
oversimplifying them or misleading readers. We and others have noted a
discouraging tendency in the Freakonomics body of work to present
speculative or even erroneous claims with an air of certainty. Considering
such problems yields useful lessons for those who wish to popularize
statistical ideas.
On a Case-by-case Basis
In our analysis of the Freakonomics approach, we
encountered a range of avoidable mistakes, from back-of-the-envelope
analyses gone wrong to unexamined assumptions to an uncritical reliance on
the work of Levitt’s friends and colleagues. This turns accessibility on its
head: Readers must work to discern which conclusions are fully quantitative,
which are somewhat data driven and which are purely speculative.
The case of the missing girls: Monica Das
Gupta is a World Bank researcher who, along with others in her field, has
attributed the abnormally high ratio of boy-to-girl births in Asian
countries to a preference for sons, which manifests in selective abortion
and, possibly, infanticide. As a graduate student in economics, Emily Oster
(now a professor at the University of Chicago) attacked this conventional
wisdom. In an essay in Slate, Dubner and Levitt praised Oster and
her study, which was published in the Journal of Political Economy
during Levitt’s tenure as editor:
[Oster] measured the incidence of hepatitis B in
the populations of China, India, Pakistan, Egypt, Bangladesh, and other
countries where mothers gave birth to an unnaturally high number of
boys. Sure enough, the regions with the most hepatitis B were the
regions with the most “missing” women. Except the women weren’t really
missing at all, for they had never been born.
Oster’s work stirred debate for a few years in the
epidemiological literature, but eventually she admitted that the
subject-matter experts had been right all along. One of Das Gupta’s many
convincing counterpoints was a graph showing that in Taiwan, the ratio of
boys to girls was near the natural rate for first and second babies
(106:100) but not for third babies (112:100); this pattern held up with or
without hepatitis B.
In a follow-up blog post, Levitt applauded Oster
for bravery in admitting her mistake, but he never credited Das Gupta for
her superior work. Our point is not that Das Gupta had to be right and Oster
wrong, but that Levitt and Dubner, in their celebration of economics and
economists, suspended their critical thinking.
The risks of driving a car: In
SuperFreakonomics, Levitt and Dubner use a back-of-the-envelope
calculation to make the contrarian claim that driving drunk is safer than
walking drunk, an oversimplified argument that was picked apart by bloggers.
The problem with this argument, and others like it, lies in the assumption
that the driver and the walker are the same type of person, making the same
kinds of choices, except for their choice of transportation. Such
all-else-equal thinking is a common statistical fallacy. In fact, driver and
walker are likely to differ in many ways other than their mode of travel.
What seem like natural calculations are stymied by the impracticality, in
real life, of changing one variable while leaving all other variables
constant.
Stars are made, not born—except when they are
born: In 2006, Levitt and Dubner wrote a column for the New York
Times Magazine titled “A Star Is Made,” relying on the research of
Florida State University psychologist K. Anders Ericsson, who believes that
experts arise from practice rather than innate talent. It begins with the
startling observation that elite soccer players in Europe are much more
likely to be born in the first three months of the year. The theory: Since
youth soccer leagues are organized into age groups with a cutoff birth date
of December 31, coaches naturally favor the older kids within each age
group, who have had more playing time. So far, so good. But this leads to an
eye-catching piece of wisdom: The fact that so many World Cup players have
early birthdays, the authors write,
may be bad news if you are a rabid soccer mom or
dad whose child was born in the wrong month. But keep practicing: a
child conceived on this Sunday in early May would probably be born by
next February, giving you a considerably better chance of watching the
2030 World Cup from the family section.
Perhaps readers are not meant to take these
statements seriously. But when we do, we find that they violate some basic
statistical concepts. Despite its implied statistical significance, the size
of the birthday effect is very small. The authors acknowledge as much three
years later when they revisit the subject in SuperFreakonomics.
They consider the chances that a boy in the United States will make
baseball’s major leagues, noting that July 31 is the cutoff birth date for
most U.S. youth leagues and that a boy born in the United States in August
has better chances than one born in July. But, they go on to mention, being
born male is “infinitely more important than timing an August delivery
date.” What’s more, having a major-league player as a father makes a boy “eight
hundred times more likely to play in the majors than a random boy,”
they write. If these factors are such crucial determinants of future
stardom, what does this say about their theory that a star is made, not
born? Practice may indeed be a more important factor than innate talent, but
in opting for cute flourishes like these, the authors venture so far from
the original studies that they lose the plot.
Making the majors and hitting a curveball:
In the same discussion in SuperFreakonomics, Levitt and Dubner
write:
A U.S.-born boy is roughly 50 percent more likely
to make the majors if he is born in August instead of July. Unless you
are a big, big believer in astrology, it is hard to argue that someone
is 50 percent better at hitting a big-league curveball simply because he
is a Leo rather than a Cancer.
But you don’t need to believe in astrology to
realize that the two cited probabilities are not the same. A .300 batting
average is 50 percent better than a .200 average. In such a competitive
field, the difference in batting averages between a kid who makes the majors
and one who narrowly misses out is likely to be a matter of hundredths or
even thousandths of a percent. Such errors could easily be avoided.
Predicting terrorists: In
SuperFreakonomics, Levitt and Dubner introduce a British man, pseudonym
Ian Horsley, who created an algorithm that used people’s banking activities
to sniff out suspected terrorists. They rely on a napkin-simple computation
to show the algorithm’s “great predictive power”:
Starting with a database of millions of bank
customers, Horsley was able to generate a list of about 30 highly
suspicious individuals. According to his rather conservative estimate,
at least 5 of those 30 are almost certainly involved in terrorist
activities. Five out of 30 isn’t perfect—the algorithm misses many
terrorists and still falsely identified some innocents—but it sure beats
495 out of 500,495.
The straw man they employ—a hypothetical algorithm
boasting 99-percent accuracy—would indeed, if it exists, wrongfully accuse
half a million people out of the 50 million adults in the United Kingdom. So
the conventional wisdom that 99-percent accuracy is sufficient for terrorist
prediction is folly, as has been pointed out by others such as security
expert Bruce Schneier.
But in the course of this absorbing narrative,
readers may well miss the spot where Horsley’s algorithm also strikes out.
The casual computation keeps under wraps the rate at which it fails at
catching terrorists: With 500 terrorists at large (the authors’
supposition), the “great” algorithm finds only five of them. Levitt and
Dubner acknowledge that “five out of 30 isn’t perfect,” but had they noticed
the magnitude of false negatives generated by Horsley’s secret recipe, and
the grave consequences of such errors, they might have stopped short of
hailing his story. The maligned straw-man algorithm, by contrast, would have
correctly identified 495 of 500 terrorists.
This unavoidable tradeoff between false positive
and false negative errors is a well-known property of all
statistical-prediction applications. Circling back to check all the factors
involved in the problem might have helped the authors avoid this mistake.
The climate-change dustup: Rendering
research conducted by others is much more challenging than explaining your
own work, especially if the topic lies outside your domain of expertise. The
climate-change chapter in SuperFreakonomics is a case in point. In
it, Levitt and Dubner throw their weight behind geoengineering, a
climate-remediation concept championed at the time by Nathan Myhrvold, a
billionaire and former chief technology officer of Microsoft. Unfortunately,
having moved outside the comfort zone of his own research, Levitt is in no
better a position to evaluate Myhrvold’s proposal than we are.
When an actual expert, University of Chicago
climate scientist Raymond Pierrehumbert, questioned the claims in Levitt and
Dubner’s writing on climate, Levitt retorted that he enjoyed Pierrehumbert’s
“intentional misreading” of the chapter. Referring to his own writings on
the subject, Levitt wrote, “I’m not sure why that is blasphemy.” We’re not
sure on this point either—we could not find a place where Pierrehumbert
described Levitt’s writings in those terms. It is easy to be preemptively
defensive of one’s own work, or of researchers whose work one has covered.
Viewing alternative points of view as useful rather than threatening can
help take the sting out of critiques. And if you’re covering subject matter
outside your expertise, it pays to get second—and third and fourth—opinions.
Problems—and Solutions
How
could an experienced journalist and a widely respected researcher slip up in
so many ways? Some possible answers to this question offer insights for the
would-be pop-statistics writer.
Leave friendship at the door: We attribute
many of these errors to the structure of the authors’ collaboration, which,
from what we can tell, relies on an informal social network that has many
potential failure points. In the original Freakonomics, much of
whose content appeared originally in columns for the New York Times
Magazine, the network seems to have been more straightforward: Levitt
did the research, Dubner trusted Levitt, the Times trusted Dubner,
and we the readers trusted the Times’s endorsement. In
SuperFreakonomics and the authors’ blog, it becomes less clear: Levitt
trusts brilliant stars such as Myhrvold or Oster, Dubner trusts Levitt, and
we the readers trust the Freakonomics brand. A more ideal process
for science writing (as shown in the illustration above) will likely look
much messier—but it offers the promise of better results.
Don’t sell yourself short: Perhaps
Levitt’s admirable modesty—he has repeatedly attributed his success to luck
and hard work rather than genius—has led him astray. If he feels he is
surrounded by economists more exceptional and brilliant than he is, he may
let their assertions stand without challenge. Here it might be good to
remember the outsider’s perspective so prized by Levitt: If you find
yourself hesitant to ask questions that seem “stupid,” or if you feel
intimidated, think of yourself as a “rogue.” Just don’t take it so far that
you value your own rogueness over empirical evidence.
Maintain checks and balances: A solid
collaboration requires each side to check and balance the other side.
Although there’s no way we can be sure, perhaps, in some of the cases
described above, there was a breakdown in the division of labor when it came
to investigating technical points. The most controversial statements are the
most likely to be mistaken; if such assertions go unchallenged, you will
have little more than a series of press releases linked by gung-ho
commentary and eye-popping headlines. Hiring a meticulous editor who can
evaluate the technical arguments is another way to avoid embarrassing
mistakes.
Take your time: Success comes at a cost:
The constraints of producing continuous content for a blog or website and
meeting publisher’s deadlines may have adverse effects on accuracy. The
strongest parts of the original Freakonomics book revolved around
Levitt’s own peer-reviewed research. In contrast, the Freakonomics blog
features the work of Levitt’s friends, and SuperFreakonomics relies
heavily on anecdotes, gee-whiz technology reporting and work by Levitt’s
friends and colleagues. Just like good science, good writing takes time.
Remembering this can help hedge against the temptation to streamline
arguments or narrow the pool of sources, even in the face of deadlines.
Be clear about where you’re coming from:
Levitt’s publishers, along with Dubner, characterize him as a “rogue
economist.” We find this odd: He received his Ph.D. from the Massachusetts
Institue of Technology, holds the title of Alvin H. Baum Professor of
Economics at the University of Chicago and has served as editor of the
mainstream Journal of Political Economy. He is a research fellow
with the American Bar Foundation and a member of the Harvard Society of
Fellows, and has worked as a consultant for Corporate Decisions, Inc. One
can be an outsider within such institutions, of course. But much of his
economics is mainstream. And his statistical methods are conventional
(which, we hasten to add, is not a bad thing at all!). One of the pleasures
of reading Freakonomics is Levitt’s knack for finding interesting
quantitative questions in obscure corners, such as the traveling bagel
salesman and cheating sumo wrestlers. Often such problems have not been
extensively studied or even been noticed by others, and in these cases one
is hard-pressed to identify any consensus or conventional wisdom. Often, in
the authors’ writing, the “conventional” and the “rogue” live side by side.
Chapter one of SuperFreakonomics, for instance, can be viewed
either as a clear-eyed quantitative examination of the economics of
prostitution, or as an unquestioning acceptance of conventional wisdom about
gender roles. In exploring new territory, it’s especially important to be
plainspoken about where your assumptions come from and what your primary
ideas are.
Use latitude responsibly: When a
statistician criticizes a claim on technical grounds, he or she is declaring
not that the original finding is wrong but that it has not been convincingly
proven. Researchers—even economists endorsed by Steven Levitt—can make
mistakes. It may be okay to overlook the occasional mistake in the pursuit
of the larger goal of understanding the world. But once one accepts this
lower standard—science as plausible stories or data-supported reasoning,
rather than the more carefully tested demonstrations that are characteristic
of Levitt’s peer-reviewed research articles—one really has to take extra
care, consider all sides of an issue, and look out for false positive
results.
Continued in article
What went
wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
574 Shields Against Validity Challenges in
Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
SEC chief accountant announces delay in decision on IFRS ---
http://www.sec.gov/news/speech/2011/spch120511jlk.htm
But Resistance is Futile ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
No longer headed down the road less taken
Headed down the popular road of capitulation to the power of the IASB
Video: The Road Less Taken
Robert Frost ---
http://www.youtube.com/watch?v=vz34R1sTqkM
Oops! What will be the new role of condorsers?
Will FASB condorsers be beached whales left flopping in the sand?
Will this fork in the road to IFRS speed U.S. adoption?
Oh my!
"FASB, IASB Chiefs Agree New Convergence Model is Needed," Journal of
Accountancy, December 6, 2011 ---
http://www.journalofaccountancy.com/Web/20114869.htm
The heads of the U.S. and international accounting
boards that have been working to resolve standards differences agree that
their current convergence process should be replaced by one that is more
manageable and effective.
FASB Chair Leslie Seidman said Tuesday at the AICPA
National Conference on Current SEC and PCAOB Developments that side-by-side
convergence is not the optimal model in the long run. Hans Hoogervorst,
chair of the International Accounting Standards Board (IASB), spoke
immediately after Seidman at the conference in Washington and echoed her
sentiment.
Seidman said FASB would like to work with the IASB
to complete the current priority convergence projects on revenue
recognition, leasing, financial instruments and insurance. But she said
indefinite convergence is not a viable option, politically or practically.
“As any observer can see, this process is
challenging technically and administratively,” Seidman said. “Plus, we
appreciate that the IASB, as an international body, must be responsive to
the priorities of other countries that have already adopted IFRS.”
Hoogervorst said the IASB’s convergence history
with FASB, which dates back to 2002, has been extremely useful in bringing
IFRS and U.S. GAAP closer together. But he said that two boards of
independently thinking professionals sometimes simply reach different
conclusions.
“It’s tempting to just maintain the status quo,”
Hoogervorst said. “But for the long term, the status quo is an unstable way
of decision making that inevitably leads to diverged solutions or suboptimal
outcomes.”
Hoogervorst cited the example of one part of the
financial instruments project, offsetting, where FASB and the IASB were
aligned initially but ended up in different places. Because of those
differences, he said, the balance sheets of many U.S. banks will look much
smaller than those of Asian and European banks. U.S. banks are allowed to
show net derivatives, while banks in Asia and Europe must present them in
gross.
“Through disclosures, we will try to bridge the
gap,” Hoogervorst said. “But I doubt that investors in the U.S. or elsewhere
will see it as a satisfactory outcome. At the same time, we at the IASB
believe that our conclusion is right for investors. I am sure that Leslie
would believe the same for the FASB.”
The next step for convergence could be
incorporation of IFRS into U.S. GAAP. The SEC’s long-awaited decision on
whether and how to incorporate IFRS for U.S. issuers is at least a few
months away, based on a
speech Monday by SEC Chief Accountant James
Kroeker.
The Financial Accounting Foundation (FAF), in
consultation with FASB, has sent a
letter to the SEC outlining its preferred path for
incorporating IFRS into U.S. GAAP. FAF is FASB’s parent organization.
In the letter, FAF Chairman John Brennan described
a number of recommended changes to the approach dubbed “condorsement.” The
SEC floated the condorsement concept in a work plan released in May as one
possible path to IFRS for U.S. public companies.
Continued in article
Bob Jensen's threads on controversies in accounting standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
From Wikipedia ---
http://en.wikipedia.org/wiki/The_Road_Not_Taken_%28poem%29
"The Road Not Taken" is a
poem by
Robert Frost, published in 1915 in the collection
Mountain Interval. It is the first poem in the volume and is printed
in italics. The title is often mistakenly given as "The Road Less
Traveled", from the penultimate line: "I took the one less traveled by".
"The Road Not Taken" is a
narrative poem consisting of four
stanzas of
iambic tetrameter (though it is
hypermetric by one beat - there are nine syllables per line, instead of
the strict eight required for tetrameter) and is one of Frost's most popular
works.
- I took the one less traveled by,
- And that has made all the difference.
cannot be taken literally : whatever difference the choice might have
made, it could not have been made on the non-conformist or individualist
basis of one road's being less traveled, the speaker's protestations to the
contrary. The speaker admits in the second and third stanzas that both paths
may be equally worn and equally leaf-covered, and it is only in his future
recollection that he will call one road "less traveled by."
The sigh can be interpreted as one of regret or of self-satisfaction; in
either case, the irony lies in the distance between what the speaker has
just told us about the roads' similarity and what his or her later claims
will be. Frost might also have intended a personal irony; in a 1926 letter
to Cristine Yates of Dickson, Tennessee, asking about the sigh, Frost
replied, "It was my rather private jest at the expense of those who might
think I would yet live to be sorry for the way I had taken in life.
Jensen Comment
The road to U.S. adoption of IFRS up to now has been a road less taken by other
nations who had little or no say on about road construction of IFRS standards.
The U.S. wanted to help pave an uncharted road.
Now the U.S. may simply take the road more heavily traveled by by other
nations --- that road of capitulation to the power of the IASB without
insistence about putting domestic cobble stones into the road.
No longer headed down the road less taken
Headed down the popular road of capitulation to the power of the IASB
Ernst & Young
|
To the Point -
Support grows for keeping US GAAP but basing future standards on IFRS
The incorporation of IFRS into the US financial reporting system was
once again a focus of discussion at the AICPA National Conference on
Current SEC and PCAOB Developments in Washington D.C. this week.
Representatives from the SEC, FASB and IASB all indicated that the SEC
could incorporate IFRS into the US financial system but retain US GAAP.
Our
To the Point publication tells you what you need to know about these
developments. |
| |
Click Here
http://www.ey.com/Publication/vwLUAssets/TothePoint_BB2229_IFRSSECConference_8December2011/%24FILE/TothePoint_BB2229_IFRSSECConference_8December2011.pdf
From Ernst & Young on December 15, 2011
December 2011 Financial reporting
briefs issued
We have issued the general and
industry-specific December 2011 editions of Financial reporting briefs.
These publications provide you with a snapshot of the major accounting and
regulatory developments that have occurred during the quarter.
The general Financial reporting briefs and the industry-specific
editions are available online.
"Banks use (IFRS) accounting loopholes to inflate profits and bolster
bonuses: Gordon Kerr former banker and author of the report calls for radical
reform to stop banks investing in risky assets," by Jill Treanor, The
Guardian, December 13, 2011 ---
http://www.guardian.co.uk/business/2011/dec/14/banks-accounting-loopholes-profits-bonuses?newsfeed=true
The cited report is at
http://www.adamsmith.org/sites/default/files/research/files/ASI_Law_of_opposites.pdf
December 14, 2011 reply from Jim Peters
I looked at the article in detail, the term
“loophole” isn’t quite accurate. The issue is fair value accounting and
marking derivatives to market, which I wouldn’t call a loophole. It seems
the author considers fair value accounting a loophole because banks record
profits in their income statements before there is a hard transaction, which
is just fair value accounting. He also complained that mark to market
accounting allows banks to record assets at market value even if they can’t
be sold for that value. I found that a bit confusing because a market value
is, by definition, what the market is currently paying for assets. I could
imagine a situation where a bank held enough securities that, if sold all at
once, might depress the prices. But other than that, the market is supposed
to be the arbiter of asset values in free markets. My summary conclusion is
that the title of the article and issue raised is intentionally inflammatory
to gain readership and really, the underlying issue is old news.
December 15, 2011 reply from Bob Jensen
Hi Jim and Pat,
I think you're both correct in theory, but the problem in Europe is that
companies, especially banks, are not being symmetric in the implementation
of the fair value rules --- fair values are moved fully upward but not
necessarily fully downward. The
IASB has
objected to a degree (Tweedie
sent a ranting protest letter), but eventually the
IASB caved in
to pressures from the EU to allow over-estimations of tanking bond values
and also delayed
IFRS 9 implementation until 2015. We might allege, therefore, that
the IASB is
being somewhat complicit with corporate overstatements of earnings under
fair value accounting in an effort to keep the EU in the fold regarding the
IASB
standards and interpretations.
In the U.S., FAS
157 is somewhat loose about fair value estimation. For a variety of reasons
that sound good on paper companies can depart from mark-to-market
adjustments and use fair value (Level 3) models that are not clearly
defined. The devil is in the details, and I think companies and their
auditors can abuse the subjectivity in the rules. Of course Lehman Brothers
derivatives value estimates showed us that this could never happen (wink,
wink)!
"Lehman Examiner Punted on
Valuation,"
by Frank Partnoy,
Professor of Law and Finance University of San Diego School of Law and
author of
Fiasco, Infectious Greed, and The Match King
Naked Capitalism, March 14, 2010 ---
http://www.nakedcapitalism.com/2010/03/frank-partnoy-lehman-examiner-punted-on-valuation.html
The buzz on the Lehman bankruptcy examiner’s
report has focused on
Repo 105, for
good reason. That scheme is one powerful example of how the balance sheets
of major Wall Street banks are fiction. It also shows why Congress must
include real accounting reform in its financial legislation, or risk another
collapse. (If you have 8 minutes to kill, here is my
recent talk on the off-balance sheet problem,
from the Roosevelt Institute financial conference.)
But an even
more troubling section of the Lehman report is not Volume 3 on
Repo 105. It
is Volume 2, on Valuation. The
Valuation section is 500 pages of utterly terrifying reading. It shows that,
even eighteen months after Lehman’s collapse, no one – not the bankruptcy
examiner, not Lehman’s internal valuation experts, not Ernst and Young, and
certainly not the regulators – could figure out what many of Lehman’s assets
and liabilities were worth. It shows Lehman was too complex to do
anything but fail.
The report cites extensive evidence of valuation
problems. Check out page 577, where the report concludes that Lehman’s high
credit default swap valuations were reasonable because Citigroup’s marks
were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s
valuations the objective benchmark?
Or page 547, where the report describes how
Lehman’s so-called “Product Control Group” acted like Keystone
Kops: the
group used third-party prices for only 10% of Lehman’s
CDO
positions, and deferred to the traders’ models, saying “We’re not
quants.” Here
are two money quotes:
While the function of the Product Control Group was to serve as a check on the
desk marks set by Lehman’s traders, the CDO product controllers were hampered in
two respects. First, the Product Control Group did not appear to have sufficient
resources to price test Lehman’s CDO positions comprehensively. Second, while the
CDO product controllers were able to effectively verify the prices of many positions
using trade data and third‐party prices, they did not have the same level of quantitative
sophistication as many of the desk personnel who developed models to price CDOs. (page 547)
Or this one:
However, approximately a quarter of Lehman’s
CDO positions
were not affirmatively priced by the Product Control Group, but simply noted
as ‘OK’ because the desk had already written down the position
significantly. (page 548)
My favorite section describes the valuation of
Ceago,
Lehman’s largest CDO
position. My corporate finance students at the University of San Diego
School of Law understand that you should use higher discount rates for
riskier projects. But the Valuation section of the report found that with
respect to Ceago,
Lehman used LOWER discount rates for the riskier tranches than for the safer
ones:
The discount rates used by Lehman’s Product
Controllers were significantly understated. As stated, swap rates were used
for the discount rate on the
Ceago
subordinate tranches. However, the resulting rates (approximately 3% to 4%)
were significantly lower than the approximately 9% discount rate used to
value the more senior S tranche. It is inappropriate to use a discount rate
on a subordinate tranche that is lower than the rate used on a senior
tranche. (page 556)
It’s one thing to have product controllers who
aren’t “quants”; it’s quite another to have people in crucial risk
management roles who don’t understand present value.
When the examiner compared
Lehman’s marks on these lower tranches to more reliable valuation estimates,
it found that “the prices estimated for the C and D tranches of
Ceago
securities are approximately one‐thirtieth
of the price reported by Lehman. (pages 560-61) One thirtieth? These
valuations weren’t even close.
Ultimately, the examiner concluded that these
problems related to only a small portion of Lehman’s overall portfolio. But
that conclusion was due in part to the fact that the examiner did not have
the time or resources to examine many of Lehman’s positions in detail
(Lehman had 900,000 derivative positions in 2008, and the examiner did not
even try to value Lehman’s numerous corporate debt and equity holdings).
The bankruptcy examiner didn’t see enough to
bring lawsuits. But the valuation section of the report raises some
hot-button issues for private parties and prosecutors. As the report put it,
there are issues that “may warrant further review by parties in interest.”
For example, parties in interest might want to
look at the report’s section on
Archstone, a
publicly traded REIT Lehman acquired in October 2007. Much ink has been
spilled criticizing the valuation of
Archstone.
Here is the Report’s finding (at page 361):
… there is sufficient evidence to support a
finding that Lehman’s valuations for its
Archstone
equity positions were unreasonable beginning as of the end of the first
quarter of 2008, and continuing through the end of the third quarter of
2008.
And
Archstone is
just one of many examples.
The
Repo 105
section of the Lehman report shows that Lehman’s balance sheet was fiction.
That was bad. The Valuation section shows that Lehman’s approach to valuing
assets and liabilities was seriously flawed. That is worse. For a levered
trading firm, to not understand your economic position is to sign your own
death warrant.
But as I said in previous messaging on this thread, the
issue in this thread is the problem that EU banks are now marking assets
fully upward for fair value changes but are not always marking assets fully
downward for tanking asset values. Tom Selling's post hits that problem nail
directly on the head of the nail:
http://accountingonion.typepad.com/theaccountingonion/2011/08/peeling-the-onion-on-the-accounting-for-greek-bonds.html
Bob Jensen's threads on creative accounting and earnings management are at
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
I would like to nominate Tom Selling as the AECM's Losing Cause Man of the
Year --- a True Champion of Losing Causes
Tom has thrown his support for losing causes both in:
AECM messaging ---
http://listserv.aaahq.org/cgi-bin/wa.exe?A0=AECM&X=17BC0C4A6D4F75CE5D&Y=rjensen%40trinity.edu
and in his Accounting Onion Blog ---
http://accountingonion.typepad.com/
2011 has been his banner year ever in championing major losing causes.
I intend my nomination to be a compliment to Tom rather than any sort
of insult
Losing Cause 1 --- Fending Off the Takeover (Convergence)
of US GAAP by the International Accounting Standards Board
Tom has never accepted that international standards will replace domestic
accounting standards in the United States. He never felt that convergence was a
fait
accompli ever since the IOSCO Agreement in July 1995. In that agreement,
the New York Stock Exchange (NYSE) went along with an IOSCO promise to accept
international standards of listed companies provided the IASB (then called the
IASC) put some teeth in its milk toast accounting standards.
Since the IOSCO Agreement, the road has been slow and arduous for the IASB in
getting all member nations to go along with slowly emerging tougher and tougher
standards culminating in IAS 39 (soon to be IFRS 9 in 2015) that's still being
resisted by the European Union. Meanwhile the FASB has been a willing partner
with the IASB in helping to rewrite international standards in what is now known
as the Convergence Project. FASB board members seem willing to accept their new
roles as condorsers.
The takeover of US GAAP by the IASB is
fait
accompli because all the people that count applaud such a takeover.
Domestic corporations like the idea of softer principles-based international
standards replacing the thousands of bright line hard rules in present U.S.
GAAP. Multinational corporations really like the idea of only having one set of
accounting standards to deal with year after year. Large auditing firms and the
AICPA are salivating over being able to bill companies for IFRS training
programs and materials and software.
The only serious, albeit ineffectual, resistance to IASB takeover of U.S.
GAAP has been perpetrated by a few powerless academics like Tom Selling (now a
full-time consultant), Shyam Sunder, Ray Ball, David Albrecht, and Bob Jensen.
Among these protesters, Tom Selling is our persistent champion.
However, in a matter of months the SEC will choose in favor of international
standards and academic and professional resistance to international standards
will be ancient history.
Losing Cause 2 --- Mandatory Rotation (Term Limits) of
Audit Firms
In 2011 the PCAOB put mandatory audit firm rotation out for discussion. The
response from the business community and auditing firms has been overwhelmingly
negative to the idea.
Partly as a result of the many letters protesting the idea of mandatory
rotation, the PCAOB is leaning toward forgetting about the idea.
"PCAOB Chair takes aim at auditors' controls testing and says mandatory
rotation could be difficult," Reuters, November 11, 2011 ---
http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111
The academic community remains largely silent on the issue, but when push
comes to shove I suspect that most accounting professors, like me, see more
costs than benefits of audit firm rotation even though rotation of the auditor
partners themselves on audits is a current practice supported by almost all
academics.
Tom Selling remains the lone voice in favor of mandatory audit firm rotation
---
Click Here
http://accountingonion.typepad.com/theaccountingonion/2011/12/im-for-auditor-term-limits-but.html
Tom proposes something like seven-year term limits before a corporation has to
change its audit firm.
Losing Cause 3 --- Financial Statements Entirely Based on
Replacement Costs
For nearly 100 years, some leading academics have advocated some type of
current cost or value replacement of the historical cost basis of accounting.
Historical cost never pretended, as repeatedly noted by AC Littleton, to be
valuation accounting. Some leading academics pushed for valuation accounting. In
1929 John Canning started the ball rolling for current (replacement) cost
accounting with is sometimes called "entry value" accounting in spite of the
fact that it is really cost accounting with arbitrary depreciation and depletion
formulas rather than "value accounting." In 1939 Kenneth McNeal commenced the
ball rolling for exit value accounting where a buildings, vehicles, and factory
machinery will be valued at what they can sell for in yard sales rather than
amortized historical costs.
In the 1990s both the IASB and FASB adopted standards requiring the
replacement of historical costs of financial instruments with "fair values"
based on current trading market prices of those instruments. But we're now
discovering that interpretations that fair value declines be "permanent" rather
than transitory market movements are causing some chagrin among financial
instrument fair value accounting advocates who want to see Greek bonds written
down to almost nothing.
And, except in isolated instances, fair value accounting is not yet required
for operating assets. Exit value accounting is required for non-going concerns
where it becomes more likely that the operating assets of a non-going concern
will be sold off piecemeal in yard sales. Replacement costs were required for
operating assets in the short-lived FAS 33 1980s experiment that went down in
flames.
From an academic standpoint the literature on value accounting has probably
been more focused upon the bad features (e.g., goodwill accounting) of
historical cost accounting rather than the convincing research that some type of
"value" accounting justifies the cost of generating annual financial statements
on a "value" accounting basis. Thousands of pages of academic research journals
were devoted to sermons on the evils of historical cost accounting. But
preachers like John Canning, Kenneth McNeal, Ray
Chambers, Bob Sterling, Edgar Edwards, Phillip Bell, and others became less
convincing as accountics science research emerged in the 1990s showing that
historical cost accounting really did have value for both earnings forecasting
and stock price forecasting. Nobody lamented when the FASB's experiment for
requiring supplemental current (replacement) cost statements was terminated as
not having sufficient benefits to justify the costs of generating current cost
data.
John Canning's current (replacement) cost baton has now been passed to Tom
Selling. Like John Canning, Tom advocates that business firms spend tens of
billions of dollars annually shifting from traditional historical cost reporting
of operating assets to replacement costs. The problem is that replacement cost
advocates can point to zero research convincing us that the benefits of such
drastic changes in financial statements justify the costs.
But if his replacement cost advocacy ever gets some traction, Tom Selling
will have some powerful allies. Real estate appraisers will jump at the chance
to earn billions annually appraising factory buildings, office buildings, retail
stores, malls, hotels, farm land, ranch land, etc. Engineers will be ecstatic
over new jobs estimating what portion of new technology systems (such as ERP
systems) are really replacements of old technology systems. Audit firms will
probably jump on the band wagon of having audit fees soar through the roof.
Lawyers will dance in the streets when they are able to sue corporations and
audit firms for misleading value estimations.
But there's one very powerful group in society that will not dance in the
streets --- the business firms that will have to pay the added tens of billions
of dollars for their audited financial statements. And these business firms own
the most representatives in the U.S. House and Senate. Hence, Tom's advocacy of
replacement cost accounting for operating assets is dead before it's even led up
to the starting gates.
Nevertheless, I would like to
nominate Tom Selling as the AECM's Losing Cause Man of the Year ---
a True Champion of Losing Causes
I intend my nomination to be a compliment to Tom rather than any sort of
insult. Tom frequently interjects clever reasons for resisting the IASB takeover
of U.S. GAAP. Tom presents some good reasons why audit firms should be rotated.
His arguments for replacement cost accounting are probably his weakest arguments
because there's just no convincing research that the cost of verifiable
replacement cost numbers justifies the benefits of such numbers.
But Tom never gives up!
Hence I nominate him for the AECM's Losing Cause Man of the Year --- a True
Champion of Losing Causes.
December 30, 2011 reply from Tom Selling
Bob,
Bob, I have strong views and I don’t expect everyone to agree with all of
them. I appreciate the compliment, especially coming from you. However, I
need to make it clear that I see nothing in this to joke about – however
well-meaning the joking might be. Here’s why (and be forewarned—I am not
going to mince my words):
·
From the standpoint of my personal economics, my truculence and candor have
done me more harm than good. Why do I persist? I honestly can’t tell you
why, because I believe that such introspection would be more self-serving
than informative. I prefer to let my actions speak for themselves.
·
You state that the academic community remains largely silent on the issue of
mandatory audit firm rotation, but I say that the academic community has
remained (with few exceptions) silent on all of these issues that you
inaccurately characterize as “lost causes” -- IFRS, auditor rotation and
independence, and crappy accounting standards. I never dreamed that
academics as a group would prove themselves to be such milquetoasts at such
a critical juncture for society and especially the profession on which we
claim to have a unique and valuable perspective. I can’t know what I would
have been writing and saying if I were still a faculty member somewhere, but
I would like to think that my training and upbringing would not have
permitted me to stifle strongly-held points of view that directly affect my
teaching and/or research activities. The academic accountant who denies
having strong viewpoints on at least one of these topics that you
inaccurately characterize as “lost causes,” should be asking themselves what
the heck they do actually think about!
·
As to costs and benefits on each of the causes you mention, you seem to
focus on incremental costs (like amounts paid for experts to make
various estimations); and I focus on avoidable costs because I
believe they are many times larger:
o
The vast amounts spent on auditors and accountants need only be a small
fraction of the amounts that are currently incurred.
o
The amounts of shareholder value destroyed because of “earnings management”
and similar games that executives play can be stupefying if you think of the
role that financial reporting played in Enron, Worldcom, GM, Lehman, S&Ls in
the 1990s, financial institutions over the last few years, just to name a
few.
·
There is plenty more value waiting to be destroyed by crappy accounting and
auditing, and I can’t believe how few academics act as if they are
indifferent to the opportunity to try and prevent it from happening. Bob,
you may not agree that replacement cost accounting is the answer, but surely
you see that financial reporting has many more and far more unsightly warts
than simply goodwill accounting! The financial reporting system we have is
not analogous to the result of some Darwinian evolutionary process of
natural selection. It is -- in the words of a former FASB member, and
despite (or perhaps because of) all of the supportive research on
information content, value relevance, etc. -- a “garbage truck.”
I’ve said my peace. Happy New Year to you, Erika, and everyone who reads my
rants on AECM!
Best,
Tom
Thomas I. Selling PhD, CPA
Weblog:
www.accountingonion.com
Website:
www.tomselling.com
Email:
tom.selling@grovesite.com
Tel:
602-228-4871 (mobile)
December 30, 2011 reply from Bob Jensen
Hi Tom,
Thanks for the informative response.
I never intended my nomination to be the least bit humorous. I think I
implied in the tidbit that I thought you were dead serious even when I view
the issues as "lost causes." The only issue that will probably be a lost
cause in the near future will be convergence to international standards ---
I think that's a done deal waiting to be announced by the SEC. If I were Pat
Walters I'd be chilling the champagne already.
Audit firm rotation may keep rearing up over the years, but I think if it
comes to a head it will probably be in Europe where the atmosphere for the
Big Four auditing firms is more hostile. Rather than audit firm rotation,
however, Europe may insist on downsizing the largest auditing firms before
it insists on audit firm rotation. Part of this is complicated by hostility
toward the United States. Recall how hostile Europe was about Microsoft's
alleged repression of competition from European competitors.
On Issue 3, verifiable and accurate replacement cost numbers for operating
assets are just too expensive in my viewpoint relative to unknown and
unmeasureable benefits. The major expense may well come from appraisers and
engineers more than auditors reviewing assumptions, but the auditors are
going to insist upon quality replacement cost numbers and herein lies the
expense to clients.
One of the failings of FAS 33 is that it allowed cheap-shot replacement cost
numbers and investors and analysts just were not interested in the outcomes.
Would investors and analysts have been more interested in FAS 33 numbers if
they had been quality numbers costing billions of dollars for appraisers and
engineers? Perhaps. But I don't think analysts and investors care much about
the replacement costs of operating assets if there's a low probability in
going concerns that these will be replaced in the near future. And they are
not particularly interested in fair values if fixed operating assets like
hotels and earth movers have very low probability of being disposed of in
present operations. Analysts might be interested in the disposal values only
when disposal becomes a genuine alternative, but the standards already allow
this type of exit value accounting for assets awaiting disposal.
Your argument that replacement costs should have some value in terms of
stewardship accounting. But investors and analysts are more interested in
the "value in use" of complex sets of operating booked and unbooked
assets..
To my knowledge replacement cost theorists have never researched the costs
and benefits of generating costs and benefits of grouped operating assets
that are not being considered for disposal. In part this is due to being
unable to measure the covariance (synergy) values above and beyond the
replacement costs of individual machines and buildings, More importantly
replacement cost researchers bail out when it comes to measuring interactive
(synergy) value in use of unbooked intangible assets and liabilities that we
cannot begin to value such as the synergy values of a work force in a
factory or the human capital value of R&D workers.
In any case Tom, I hope you will continue to be a
driving force for causes you believe in in your professional career. And I
hope you will be open to debates from others who do not side with your
positions. At the moment you seem to be quite open to debate. I will
continue to help you when I can and argue with you when I don't agree.
Your gravestone might read that nobody can accuse Tom
Selling of not trying.
My gravestone might read that Bob Jensen never ducked out of a good fight.
Neither one of us would be very good diplomats or mere lurkers on the AECM.
Respectfully,
Bob Jensen
Question
Even if it's impossible for the
Victoria's
Secret store in a Galleria Mall to ever own that cube of air space, will the
CPA auditor's insist that the retail outlet owns the store and most others like
for accounting purposes?
Answer
Honestly, I'm not now sure, especially unless we know more about cancellation
clauses that companies like Victoria's Secret may insist upon in future lease
negotiations. I don't think this new lease standard will be a poster child for
accounting standard neutrality. But then there are a lot of others that are
lesser candidates for poster children --- with FAS 123R leading the way.
"FASB, IASB Make Progress in Convergence Project on Leasing,"
Journal of Accountancy, December 16, 2011 ---
http://www.journalofaccountancy.com/web/20114910.htm
In one of their most
important convergence projects, FASB and the International Accounting
Standards Board (IASB) have
reached tentative decisions on aspects of the
treatment of leases in financial reporting.
How to account for
leases is one of four remaining major areas in which FASB and the IASB are
trying to
reach convergence in standards.
The boards issued
the initial exposure draft on leases in August
2010. In July, the boards announced
a decision to
re-expose a revised proposal. The boards intended to complete their
deliberations in the third quarter of this year, with hopes of publishing a
revised exposure draft shortly afterward.
That draft has yet to emerge.
But the boards announced tentative decisions with regard to leases as a
result of their joint meetings this week.
On cancellable leases, the
boards tentatively decided that the lease proposals should apply only to
periods when enforceable rights and obligations exist. Cancellable leases
would be defined as short-term leases if the initial noncancellable period,
combined with any notice period, is less than one year.
These standards would exist
for leases that:
- Can be canceled by
the lessee and lessor with minimal termination payments, or
- Include renewal options
that the lessor and lessee must agree to.
The IASB tentatively decided that a lessor should recognize rental income on
a straight-line basis or another systematic basis if that basis more closely
represents the pattern of earnings from the investment property, according
to a FASB summary of the joint board meeting.
FASB’s tentative decision
follows a similar path, but only for lessors that are not investment
property entities or investment companies.
According to FASB’s summary
of the discussions, the boards also tentatively decided that a lessor with
leases of investment property that doesn’t fall within the scope of the
receivable and residual approach should recognize only the underlying
investment property on its statement of financial position. Accrued or
prepaid rental income should be recognized as well.
Continued in article
Bob Jensen's threads on lease accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#Leases
"The Most Satisfied Business School Graduates," Forbes,
December 5, 2011 ---
Click Here
http://www.forbes.com/sites/kurtbadenhausen/2011/12/05/the-most-satisfied-business-school-graduates/?feed=rss_home
The best teaching universities according to RateMyProfessor ---
http://www.ratemyprofessors.com/topLists11/topLists.jsp
"Who Are the Top Technology Innovators in Higher Education?" by Marc
Parry, Chronicle of Higher Education, December 12, 2011 ---
Click Here
http://chronicle.com/blogs/wiredcampus/who-are-the-top-technology-innovators-in-higher-education/34638?sid=wc&utm_source=wc&utm_medium=en
This is only at the nominating stage at this point.
It is, however, informative to read the nominations already listed as comments
to the above article.
I liked Paul Miller's nomination and try very hard year after year to serve
accounting like Tom Bruce serves law.
Bob Jensen's threads on education technology are at
http://www.trinity.edu/rjensen/000aaa/0000start.htm
Marian E. Koshland Integrated Natural Sciences Center at Haverford College
Biography of an Experiment ---
http://www.haverford.edu/kinsc/boe/
The Biography of Experiment Series is an ongoing
cooperative effort between students and faculty at Haverford College to
expose undergraduates to the stories behind influential manuscripts in the
Natural Sciences.
Posted on this site are excerpts of original
manuscripts, each of which has been annotated by undergraduates who have
spent a semester critically evaluating the work and assessing the authors’
own perspectives.
By including their interviews with primary
investigators, links to background information, and tips for understanding
and critically interpreting data, these undergraduates have developed a
unique pedagogical tool that should enhance their peers ability to navigate
and understand the primary literature. Developing scholars will benefit from
their colleagues’ insights as they are invited to explore the living history
of a scientific inquiry.
Jensen Comment
Some of these are great learning modules for students in experimental science.
Most of the cases are in the natural sciences.
However once case involves the psychology of prediction:
On the Psychology of Prediction (Daniel
Kahneman and
Amos Tversky),
1973 ---
http://www.haverford.edu/kinsc/Biography/Psych/Armstrong/BOEhome.htm
This is one of the classic works that led to a Nobel Prize for Professor
Kahneman
These resources might be especially useful to accounting students seeking
to know what went wrong with accountics science ---
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
Accounting Doctoral Program Behavioral Experimentation
December 2, 2011 reply from Bob Jensen to Dan Stone
Hi Dan,
You may want to take a look at the terrific BYU database of of information
about accounting doctoral programs ---
http://www.byuaccounting.net/mediawiki/index.php?title=University_Information
Your question is really not clear, because there are core courses in
statistics, econometrics, and probability theory in virtually all accounting
doctoral programs in AACSB accredited universities. In other words, it is
not usually possible to avoid studying econometrics by choosing a behavioral
track or non-quantitative beyond the core requirements. Michigan State many
years ago had no required core courses, but I'd bet my shirt that MSU now
has some core courses that require econometrics, statistics, and probability
theory.
Various programs have archival versus behavioral tracks versus other tracts
(e.g., accounting history at Ole Miss. and Case Western) beyond the core
requirements. For example, look at Question 14 about Cornell University that
is made public on a BYU site ---
http://aaahq.org/temp/phd/StudyMaterials/Questions/CornellUniv.pdf
BYU has a unique masters program (called a PhD Prep Track) to prepare
accounting students for admission into accounting doctoral programs (this
Prep Track program won an AAA Innovation in Accounting Education Award) ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.?
You may want to take a look at the terrific BYU database of of information
about accounting doctoral programs ---
http://www.byuaccounting.net/mediawiki/index.php?title=University_Information
Related to this are issues of why most accounting doctoral students these
days prefer archival research to other types of research, which accounts
somewhat for the domination of archival research professors and courses and
databases in accounting doctoral programs.
Some of the reasons are given below:
- The top accounting research journals in which publishing has become
a necessary condition in top universities publish more archival research
articles than any other kind. Steve Kachelmeir argues that there is a
"denominator effect" making competition for publication in that category
difficult, but at least there is more of a chance of publishing in TAR,
JAR, and JAE than if you do accounting history research without
equations, field research without equations, or case method research
without equations.
- Archival research in many respects is easier. Archival researchers
have their databases delivered free to their office computers (no need
to collect data off campus or roam the campus library stacks and
reference collections). There is an exception in the case of a Bloomberg
or Reuters terminal for which researchers may actually have to walk to
the campus library to obtain access.
- Skills for archival research are part of the doctoral program core
such that no added specialties are required such as specialties needed
for most types of AIS research, accounting history research, field
research, etc.
- We often blame journal editors and professors trained more in
econometrics than accountancy for the archival bias of accounting
research journals and doctoral programs. Perhaps part of the blame is
really due to the easier data collection tasks of archival research,
particularly events studies in capital market research. The data is
literally handed to archival researchers on a silver platter for free in
their offices (although their universities are paying the database
access fees to such services as CRSP, Compustat, West Tax, and
AuditAnalytics).
Respectfully,
Bob Jensen
Bob Jensen's threads on accountancy doctoral programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
"Technology 2012 Preview: Part 1 Experts explain what should be at the top
of your tech wish list for the new year," by Jeff Drew, Journal
of Accountancy, November 2011 ---
http://www.journalofaccountancy.com/Issues/2011/Nov/20114310.htm
Bob Jensen's neglected threads on accounting software ---
http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware
December 3, 2011 message from Rick Newmark
For collaboration tools, we used Sharepoint in our
intro to MIS course, which is required for all business students. Since we
adopted Pearson products, Pearson provided with the full version of
Sharepoint and 200 access codes. Students can rent the ebook for 180 days on
Coursesmart for $24 (list price of hard copy is $56). My techphobic students
struggled with learning Sharepoint, and all of us, I included, did take some
time to get the hang of it. I think Sharepoint makes a great tool for an AIS
course because students have to make many security/control/access decisions
for their own group sites. For example, what kind of permissions do you
grant to various people/groups? How are you going to control access to
documents? Are you going to use check-out/check-in for documents or are you
going to let multiple people edit simultaneously?
I am going to use it in my graduate AIS course next
semester for the reasons stated above and because they will likely use
Sharepoint or some other set of collaboration tools in their professional
careers.
Rick Newmark
Bob Jensen's somewhat neglected threads on accounting education software
can be found at
http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware
Credit Scoring Models in the U.S. ---
http://en.wikipedia.org/wiki/Credit_score_%28United_States%29
FICO ---
http://en.wikipedia.org/wiki/FICO
"A Credit Score That Tracks You More Closely," by Tra Siegel Bernard,
The New York Times, December 2, 2011 ---
Click Here
http://www.nytimes.com/2011/12/03/your-money/credit-scores/corelogics-new-credit-score-exposes-even-more-of-your-financial-life.html?_r=1
Anyone who has recently applied for a mortgage
knows that lenders are already looking much more closely at your financial
affairs. But soon, they’ll be able to easily delve into the deepest recesses
of your financial life, accessing information that never before appeared on
your credit report.
This week, a company called CoreLogic introduced a
new type of credit file, which is based on the giant repository of consumer
data it maintains on just about everything that most of the traditional
credit bureaus do not: missed rental payments that have gone into
collection, any evictions or child support judgments, as well as any
applications for payday loans, along with your repayment history.
The new report also includes any property tax liens
and whether you’ve fallen behind on your homeowner’s association dues. It
may reflect that you now owe more than your house is worth or if you own any
other real estate properties outright. It also is supposed to catch
mortgages made by smaller lenders that the big credit bureaus may have
missed.
The idea, CoreLogic says, is to provide lenders
with more details about prospective borrowers, supplementing what they
already know through the more traditional credit reports furnished by the
big three credit bureaus, Equifax, Experian and TransUnion. Moreover,
CoreLogic has formed a partnership with FICO — the provider of one of the
most popular credit scores used by lenders — which will formulate a new
consumer score based on the new data.
Perhaps it’s not surprising that a company decided
to pull together this information, since much of it is already publicly
available. But because it comes on top of all the other information that’s
being collected about you — your exact location at every minute, where
you’ve been on the Web — you can’t help but feel that some of these
companies know more about your activities than your spouse.
While the CoreScore credit report became available
to all types of lenders on Wednesday, the actual score, which will be ready
in March, is being created specifically for mortgage and home equity
lenders, though it could eventually be developed for other types of credit.
For many consumers, the files are likely to reveal
black marks that previously went undetected, which may damage an otherwise
clean record. But the companies contend that it works both ways: The added
information could help consumers with thin credit files by illustrating
positive behaviors elsewhere, say making timely rent payments.
So why now? Clearly, the two companies saw a
business opportunity. Lenders, who just a few years back looked the other
way, remain particularly skittish about mortgage lending and are looking for
more information about prospective borrowers’ ability to pay their debts.
“Lending is very constrained and origination
volumes need to grow to make for a profitable mortgage business,” said
Joanne Gaskin, director of product management global scoring at FICO. “So
lenders are looking for ways to expand, but to expand safely.”
An estimated 100 million American consumers will
have a CoreScore credit report, while more than 200 million people have
traditional reports from the big three bureaus. Though the new information
can influence a lender’s decision, the new score isn’t replacing the classic
scores used in the automated mortgage underwriting systems kept by Fannie
Mae, Freddie Mac or the Federal Housing Administration, which buy or back
the vast majority of mortgages (though CoreLogic said it has let the
agencies know what it is doing). But the added information may sway a lender
to charge you more (or less) in interest on a mortgage. Lenders of all
stripes, including auto lenders, have access to the reports, and they will
be marketed to employers and insurers, too.
Ms. Gaskin said that FICO was still tweaking the
credit score’s formula. But the next step is to build something that will
try to get even deeper inside your financial mind: The company plans to
create a more sophisticated tool that will predict how you might behave
under different loan terms.
The reason all of this is such a big deal,
according to John Ulzheimer, president of consumer education at
SmartCredit.com, is that CoreLogic already has major inroads with many
lenders. When lenders want to pull your credit file, they go to a company
like CoreLogic, which collects all three reports from the traditional
bureaus, cleans them up a bit and merges them into a more user-friendly
report. “They already have this massive market of mortgage companies that
buy these credit reports from them,” he said. “It’s not like they have to go
out and convince the companies to work with them.”
Continued in article
Bob Jensen's threads on FICO Scores ---
http://www.trinity.edu/rjensen/FraudReporting.htm#FICO
"Regulators propose credit rating alternatives," by David Clarke,
Reuters, December 7, 2011 ---
http://www.reuters.com/article/2011/12/07/us-financial-regulation-fdic-idUSTRE7B61IG20111207
U.S. banking regulators on Wednesday released their
first proposal for replacing the work of much-maligned credit rating
agencies in the rules that govern bank capital requirements.
The 2010 Dodd-Frank financial oversight law bans
any reliance on credit rating agencies, such as Moody's Corp and McGraw-Hill
Cos' Standard & Poor's, in banking rules but regulators have struggled to
come up with an alternative.
Until a replacement is found, it will be difficult
for the United States to begin implementing new international capital
requirements such as Basel III.
The Federal Deposit Insurance Corp board on
Wednesday voted to put out the alternatives for comment through February 3.
The credit rating alternatives proposal released on
Wednesday would only directly affect a rule to update capital requirements
regarding risks posed by banks' trading books. This rule applies only to the
largest U.S. banks such as JPMorgan Chase, Goldman Sachs and Citigroup.
The credit rating proposal is expected, however, to
lay the groundwork for a rule to be released next year on how to get rid of
references to credit ratings in all bank capital rules.
That rule will affect banks of all sizes.
Among the alternatives proposed on Wednesday are
using the assessments produced by the Organisation for Economic Co-operation
and Development on the fiscal health of individual countries as a marker for
assessing the risk of sovereign debt held by banks.
For certain assets, market indicators - such as
stock price volatility - would be used to measure risk.
The amount of capital that would have to be held
against securitizations would, in part, depend on the risk of the assets
that make up the different parts, or tranches, of the security.
REGULATOR ANGST
How to assess the risk of assets is key to
determining how much capital banks should hold to guard against financial
shocks that could sink an institution and roil the economy.
Credit rating agencies have been pilloried for not
recognizing the risk of such things as mortgage backed securities leading up
to the 2007-2009 financial crisis, though Dodd-Frank Congress sought to
eliminate their official use by bank regulators.
Still, the directive is one of the rare parts of
Dodd-Frank that regulators have openly pleaded with Congress to change.
Their argument has been that while reducing a
reliance on credit ratings agencies is sensible, completely casting aside
their work is troublesome because good alternatives are not readily
available.
That plea has fallen on deaf congressional ears.
On Wednesday, regulators said they have made their
best effort to comply with the law but noted they are entering unchartered
territory.
"The approaches that are being proposed are
intended to be simple and easily implemented, but they are relatively
novel," Acting Comptroller of the Currency John Walsh said.
With this in mind officials said they will
carefully review all the feedback they receive.
Regulators were under pressure to move forward with
the alternatives now because the rule governing capital requirements for
trading books is supposed to be in place early next year.
In response to the 2007-2009 financial crisis
regulators from across the world agreed to update their capital guidelines
to better take into account the risks posed by such things as securities
made up of mortgages, which played a key role in the meltdown.
This update for trading books is known as Basel
2.5.
Continued in article
Bob Jensen's threads on credit rating company scandals leading up to
having to bail out Wall Street companies that bought and sold poisoned
collateralized debt obligations (CDOs) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
James Madison wrote disapprovingly in 1792 of “a
government operating by corrupt influence, substituting the motive of private
interest in place of public duty” where eventually “the terror of the sword, may
support a real domination of the few, under an apparent liberty of the many.”
"The corporations that occupy Congress," by David Coy Johnston,
Reuters, December 20, 2011 ---
http://blogs.reuters.com/david-cay-johnston/2011/12/20/the-corporations-that-occupy-congress/
Some of the biggest companies in the United States
have been firing workers and in some cases lobbying for rules that depress
wages at the very time that jobs are needed, pay is low, and the federal
budget suffers from a lack of revenue.
Last month Citizens for Tax Justice and an
affiliate issued “Corporate Taxpayers and Corporate Tax Dodgers 2008-10″. It
showed that 30 brand-name companies paid a federal income tax rate of minus
6.7 percent on $160 billion of profit from 2008 through 2010 compared to a
going corporate tax rate of 35 percent. All but one of those 30 companies
reported lobbying expenses in Washington.
Another report, by Public Campaign, shows that 29
of those companies spent nearly half a billion dollars over those three
years lobbying in Washington for laws and rules that favor their interests.
Only Atmos Energy, the 30th company, reported no lobbying.
Public Campaign replaced Atmos with Federal
Express, the package delivery company that paid a smidgen of tax — $37
million, or less than one percent of the $4.2 billion in profit it reported
in 2008 through 2010.
For the amount spent lobbying, the companies could
have hired 3,100 people at $50,000 for wages and benefits to do productive
work.
The report – “For Hire: Lobbyists or the 99
percent” – says that while shedding jobs, the 30 companies are “spending
millions of dollars on Washington lobbyists to stave off higher taxes or
regulations.”
These and other companies have access to lawmakers
and regulators that are unavailable to ordinary Americans.
CALL CONGRESS
Doubt that? Dial the Capitol switchboard at 1 (202)
224-3121, ask for your representative’s office and request a five-minute
audience, in person, at the lawmaker’s convenience back in the home
district.
In more than a decade of lectures recommending
this, I have yet to have a single person email me (see address to the right)
about having scored a private meeting with the representative called.
Corporations have vast resources to pour into
ensuring access — resources that expand when little or no taxes are paid on
profits thanks to rules they previously lobbied into law.
Companies form nonprofit trade associations, hire
former lawmakers and agency staffers, and have jobs to dole out to lawmakers
after they leave office and to friends and family while they’re in office.
Thanks to the Supreme Court’s Citizens United decision, corporations can now
pour unlimited sums into influencing elections. So can unions, but they are
financial pipsqueaks compared to companies.
Then there are political action committees, or
PACs, to finance campaigns as well as donations by executives and major
shareholders.
Combine all this and you have a powerful formula
for making rules that favor corporate interests over human interests,
something that the framers of the U.S. Constitution understood more than two
centuries ago.
James Madison wrote disapprovingly in 1792 of “a
government operating by corrupt influence, substituting the motive of
private interest in place of public duty” where eventually “the terror of
the sword, may support a real domination of the few, under an apparent
liberty of the many.”
FEARS COME TRUE
The late U.S. president’s fears have come to life.
For swords, just substitute police with rubber bullets, batons and pepper
spray at Occupy demonstrations, including perfectly peaceful ones.
Company reports to shareholders show that among the
30 companies in the Public Campaign report, the 10 firms that spent the most
on lobbying during the same three-year period fired more than 93,000
American workers.
Those firings took place in an economy that had
five million fewer people with any work in 2010 than in 2008.
Continued in article
Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/fraud001.htm#Governance
XBRL in the News
"Staff Observations from the Review of Interactive Data Financial Statements,
SEC, December 13, 2011---
http://www.sec.gov/spotlight/xbrl/staff-review-observations-121311.shtml
. . .
We continue to see the same issues around the
topics of formatting of the financial statements, negative values, use of
unnecessary extensions, and the completeness of the tagging (i.e.,
parentheticals and string values). Filers should continue to pay attention
to these topics when submitting information to the Commission and should
carefully review our previous Staff observations (http://www.sec.gov/spotlight/xbrl/staff-review-observations.shtml).
Continued in article (much more)
Bob Jensen's somewhat neglected threads on OLAP and XBRL ---
http://www.trinity.edu/rjensen/XBRLandOLAP.htm
We
hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop
If the law passes in its current form, insider
trading by Congress will not become illegal.
"Congress's Phony Insider-Trading Reform: The denizens of Capitol Hill
are remarkable investors. A new law meant to curb abuses would only make their
shenanigans easier," by Jonathan Macey, The Wall Street Journal,
December 13, 2011 ---
http://online.wsj.com/article/SB10001424052970203413304577088881987346976.html?mod=djemEditorialPage_t
Members of Congress already get better health
insurance and retirement benefits than other Americans. They are about to
get better insider trading laws as well.
Several academic studies show that the investment
portfolios of congressmen and senators consistently outperform stock indices
like the Dow and the S&P 500, as well as the portfolios of virtually all
professional investors. Congressmen do better to an extent that is
statistically significant, according to studies including a 2004 article
about "abnormal" Senate returns by Alan J. Ziobrowski, Ping Cheng, James W.
Boyd and Brigitte J. Ziobrowski in the Journal of Financial and Qualitative
Analysis. The authors published a similar study of the House this year.
Democrats' portfolios outperform the market by a
whopping 9%. Republicans do well, though not quite as well. And the trading
is widespread, although a higher percentage of senators than representatives
trade—which is not surprising because senators outperform the market by an
astonishing 12% on an annual basis.
These results are not due to luck or the financial
acumen of elected officials. They can be explained only by insider trading
based on the nonpublic information that politicians obtain in the course of
their official duties.
Strangely, while insider trading by corporate
insiders has long been the white collar crime equivalent of a major felony,
the Securities and Exchange Commission has determined that insider trading
laws do not apply to members of Congress or their staff. That is because,
according to the SEC at least, these public officials do not owe the same
legal duty of confidentiality that makes insider trading illegal by
nonpoliticians.
The embarrassing inconsistency was ignored for
years. All of this changed on Nov. 13, 2011, after insider trading on
Capitol Hill was the focus of CBS's "60 Minutes." The previously moribund
"Stop Trading on Congressional Knowledge Act" (H.R. 1148), first introduced
in 2006, was pulled off the shelf and reintroduced. The bill suddenly had
more than 140 sponsors, up from a mere nine before the show.
The "Stock" Act, as it is called, would make it
illegal for members of Congress and staff to buy or sell securities based on
certain nonpublic information. It would toughen disclosure obligations by
requiring congressmen and their staffers to report securities trades of more
than $1,000 to the clerk of the House (or the secretary of the Senate)
within 90 days. And it would bring the new cottage industry in Washington,
the so-called political intelligence consultants used by hedge funds, under
the same rules that govern lobbyists. These political intelligence
consultants are hired by professional investors to pry information out of
Congress and staffers to guide trading decisions.
Publicly, House members echo bill sponsor Rep.
Louise Slaughter (D., N.Y) in saying things like: "We want to remove any
current ambiguity" about whether insider trading rules apply to Congress. Or
as co-sponsor Rep. Timothy Walz (D., Minn.) put it: "We are trying to set
the bar higher for members of Congress."
On closer examination, it appears that what
Congress really wants is to keep making the big bucks that come from trading
on inside information but to trick those outside of the Beltway into
believing they are doing something about this corruption. For one thing, the
rules proposed for Capitol Hill are not like those that apply to the rest of
us. Ours are so broad and vague that prosecutors enjoy almost unfettered
discretion in deciding when and whom to prosecute.
Congress's rules would be clear and precise. And
not too broad; in fact they are too narrow. For example, the proposed rules
in the Stock bill are directed only at information related to pending
legislation. It would appear that inside information obtained by a
congressman during a regulatory briefing, or in another context unrelated to
pending legislation, would not be covered.
At a Dec. 6 House hearing, SEC enforcement chief
Robert Khuzami opined that any new rules for Congress should not apply to
ordinary citizens. He worried that legislators might "narrow current law and
thereby make it more difficult to bring future insider trading actions
against individuals outside of Congress."
This don't-rock-the-boat approach serves the
interests of the SEC because it maximizes the commission's power and
discretion, but it's not the best approach. The sensible thing to do would
be to rationalize the rules by creating a clear definition of what
constitutes insider trading, and then apply those rules to everyone on and
outside Capitol Hill.
If the law passes in its current form, insider
trading by Congress will not become illegal. I predict such trading will
increase because the rules of the game will be clearer. Most significantly,
the rule proposed for Congress would not involve the same murky inquiry into
whether a trader owed or breached a "fiduciary duty" to the source of the
information that required that he refrain from trading.
Continued in article
From The Wall Street Journal Accounting Weekly Review on December 8,
2011
Congress Pushing Curb on Trading
by:
Brody Mullins
Dec 07, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Disclosure, Ethics, Insider Trading, Securities and
Exchange Commission
SUMMARY: The article describes the case behind enacting legislation
to ban insider-trading by members of Congress and their aides. This
initiative was spurred in part by WSJ reporting on the topic. The related
video presents the case for why Congressional insider-trading doesn't matter
as does the 2009 opinion page piece listed in the related articles.
CLASSROOM APPLICATION: The article is useful in classes covering
topics in ethics or in the relationship between information and market
responses.
QUESTIONS:
1. (Introductory) What is insider trading?
2. (Advanced) In general, how does the Securities and Exchange
Commission undertake enforcement actions against suspected violations of
insider trading rules by corporate insiders?
3. (Advanced) On what basis are members of Congress considered not
to be subject to insider-trading rules?
4. (Introductory) Who is Rober Khuzami? What is his suggestion for
resolving questions of whether members of Congress and their aides are
undertaking improper insider trading?
5. (Advanced) What is a blind trust? What role might blind trusts
and disclosure practices provide in alleviating this issue?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Panel Cancels Vote on Insider Ban
by Brody Mullins
Dec 08, 2011
Online Exclusive
Learning to Love Insider Trading
by Donald J. Boudreaux
Oct 24, 2009
Page: W1
"Congress Pushing Curb on Trading," by: Brody Mullins, The Wall Street
Journal, December 7, 2011 ---
Click Here
http://online.wsj.com/article/SB10001424052970204083204577082751846890664.html?mod=djem_jiewr_AC_domainid
Congress is pressing its most concerted effort in
decades to curb improper stock investing by U.S. lawmakers and their aides,
with a focus on preventing trading based on nonpublic information gathered
in the halls of Washington.
A House bill to outlaw insider trading on Capitol
Hill has the support of more than 180 lawmakers, up from nine a month ago.
In the Senate, lawmakers introduced two similar proposals a few weeks ago
that have won support of more than 20 senators.
In a House hearing on the matter Tuesday, lawmakers
batted around other ideas, such as requiring lawmakers to hold their
finances in blind trusts, and mandating near-simultaneous disclosure of
stock trades.
The rules covering how lawmakers can trade stocks,
and what constitutes inside information in Congress, are murky.
Congressional ethics rules justifying stock ownership say lawmakers
shouldn't be insulated from "the personal and economic interests" of their
constituents. At the same time, lawmakers regularly pick up information
through briefings with top officials that is not available to the investing
public.
At Tuesday's hearing, the director of enforcement
for the Securities and Exchange Commission gave the legislation a boost by
saying it would make it easier for the agency to prosecute insider-trading
cases against members of Congress, something that has never happened. House
and Senate committee chairman have scheduled votes on the various proposals
next week.
The moves, inspired in part by a series of articles
in The Wall Street Journal, are gaining momentum on Capitol Hill as approval
ratings for Congress nose-dive. The Journal analysis last year found that a
total of 86 legislators and congressional aides on both sides of the aisle
reported frequent trades of securities in 2009. One aide posted nearly 2,300
trades in his brokerage account.
The push received a boost after a recent report on
CBS's "60 Minutes" also examined lawmakers' trading practices, and lawmakers
say approving such legislation is a good way for Congress to help restore
the faith of Americans in government.
"It is not right that Congress can benefit from
information that is not available to other Americans," Rep. Tim Walz (D.,
Minn.) said at the House hearing. Mr. Walz is a chief co-sponsor of the Stop
Trading on Congressional Knowledge Act, or Stock Act.
Despite the recent momentum, the legislation is
unlikely to make it into law this year. Time is running out on the calendar
and not all lawmakers believe legislation is needed.
A key player in the push is Rep. Spencer Bachus
(R., Ala.), chairman of the House Financial Services Committee. Last year,
the Journal documented that Mr. Bachus made more than 200 trades in stocks
and options in 2008, according to congressional disclosure forms. He often
made multiple trades per day in the depths of the financial crisis.
Among his transactions, Mr. Bachus made $28,000 on
short-term trades involving a fund designed to profit on declines in the
Nasdaq 100 index, the disclosures show. At the time, Mr. Bachus was involved
in briefings with key Fed and Treasury Department officials about the
government's response to the financial collapse.
Mr. Bachus told the Journal that he didn't trade on
nonpublic information, and argued more lawmakers should invest in markets to
better understand them.
Rep. Bachus last year made 28 trades, primarily in
a portfolio of the largest Chinese stocks available to international
investors, more recent disclosure forms show. He said he stopped trading
after the Journal's articles appeared.
"After your articles and others criticizing my
successful purchase of Apple, Focus Media and [ProShares UltraShort QQQ, an
exchange-traded fund], the only way to avoid mischaracterization of my stock
market activities was to stop all trading. I did so in October of 2010," he
said Tuesday in a statement.
In a separate statement, Mr. Bachus said he
believes SEC rules already prohibit insider trading on Capitol Hill, but
that "legislation that clarifies and improves the existing law would be
welcomed."
Under SEC rules, insider trading is defined as
buying or selling stocks based on information that is market-moving and
nonpublic. To enforce a case, the SEC must also show that an individual used
the information in violation of a duty to keep it private. Many people say
insider-trading rules don't apply on Capitol Hill because lawmakers don't
have such a "duty" to anyone. By contrast, the SEC brings insider-trading
cases against government employees at federal departments and agencies,
because the executive branch has clear rules and employees have a duty to
their bosses and the companies they regulate.
On Capitol Hill, the law is "not as clear as it
needs to be," said Sen. Joseph Lieberman last week at a hearing in the
Homeland Security and Governmental Affairs panel.
Testifying before the House, Robert Khuzami,
director of SEC enforcement, said under current law a judge could throw out
an SEC case on the grounds that lawmakers don't have a clear duty not to
trade on information they pick up while performing their regular duties.
Mr. Khuzami said "if there is a law that says that
a duty exists, that is pretty clear and removes the ambiguity."
Other ideas considered include requiring lawmakers
to create blind trusts to hold their stock portfolios, an idea proposed by
Rep. Sean Duffy (R., Wis.). Under Mr. Duffy's proposal, if a lawmaker chose
not to create a blind trust, he or she would be required to disclose stock
trades within three days.
Mr. Duffy said mandating the disclosure of stock
trades by lawmakers would bring Congress in line with the rules for
corporate insiders.
Continued in article
Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television ---
CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider"
is the most depressing segment I've ever watched on television ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
Jensen Comment
- It came as no surprise that many (most?)
members of the U.S. House of Representatives and the U.S. Senate that writes
the laws of the land made it illegal for to trade in financial and real
estate market by profiting personally on insider information not yet
available, including pending legislation that they will decide, wrote
themselves out of the law making it legal for them to personally profit
from trading on insider information. What came as a surprise is how
leaders at the very top of Congress make millions trading on inside
information with impunity and well as immunity.
- The Congressional leader that comes
off the worst in this Sixty Minutes "Insider" segment is former House
Speaker and current Minority leader
Nancy Pelosi. When
confronted with specific facts on how she and her husband made some of their
insider trading millions she fired back at reporter Steve Kroft with an evil
glint saying what is tantamount to: "How dare you question me about
insider trades that are perfectly legal for members of Congress. Who are you
to question my ethics about exploiting our insider trading privileges. Back
off Steve or else!" Her manner can be extremely scary. Other Democratic
Party members of Congress come off almost as bad in terms of insider trading
for personal gain.
- Current Speaker of the House,
John
Boehner, is more subtle. He denies making any of his personal portfolio
investment decisions and denies communicating with the person he hires to
make such decision. However, that trust investor mysteriously makes money
for Rep. Boehner using insider information obtained mysteriously. Other
Republican members of Congress some off even worse in terms of insider
trading.
- Members of Congress on powerful committees
regularly make insider profits on legislation currently being written into
the law that is still being held secret from the public. One of my heroes,
former Senator
Judd Gregg,
is no longer my hero.
- Everybody knows that influence peddling in
Congress by lobbyists, many of them being former members of Congress, is a
dirty business of showering gifts on current members of Congress. What is
made clear, however, is that these lobbyists are personally getting
something in return from friendly members of Congress who pass along insider
information to lobbyists. The lobbyists, in turn, peddle this insider
information back to the private sector, such as hedge fund managers, for a
commission. Moral of story: Voters do not stop insider trading by a
member of Congress by voting him or her out of office if they become
peddlers of insider information obtained, as lobbyists, from their old
friends still in the Congress.
- Five out of 435 members of the House of
Representatives are seeking to sponsor a bill to make it illegal for
representatives and senators to profit from trading on inside information.
The Sixty Minutes show demonstrates how Nancy Pelosi, John Boehner, and
other House leaders have buried that effort so deep in the bowels of the
legislative process that there's no chance in hell of stopping insider
trading by members of Congress. Insider trading is a privilege that attracts
unethical people to run for Congress.
Watch
the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody
THIS IS HOW YOU FIX
CONGRESS!!!!!
If you agree with the above, pass it on.
Warren Buffett, in a recent interview with CNBC, offers one of the best
quotes about the debt ceiling:"I could end the deficit in 5 minutes," he
told CNBC. "You just pass a law that says that anytime there is a deficit of
more than 3% of GDP, all sitting members of Congress are ineligible for
re-election. The 26th amendment (granting the right to vote for 18
year-olds) took only 3 months & 8 days to be ratified! Why? Simple! The
people demanded it. That was in1971...before computers, e-mail, cell phones,
etc. Of the 27 amendments to the Constitution, seven (7) took 1 year or less
to become the law of the land...all because of public pressure.Warren Buffet
is asking each addressee to forward this email to a minimum oftwenty people
on their address list; in turn ask each of those to do likewise. In three
days, most people in The United States of America will have the message.
This is one idea that really should be passed around.*Congressional Reform
Act of 2011......
1. No Tenure / No Pension. A Congressman collects a salary while in office
and receives no pay when they are out of office.
2.. Congress (past, present & future) participates in Social Security. All
funds in the Congressional retirement fund move to the Social Security
system immediately. All future funds flow into the Social Security
system,and Congress participates with the American people. It may not be
used for any other purpose..
3. Congress can purchase their own retirement plan, just as all Americans
do...
4. Congress will no longer vote themselves a pay raise. Congressional pay
will rise by the lower of CPI or 3%.
5. Congress loses their current health care insurance and participates in
the same health care plan as the American people.
6. Congress must equally abide by all laws they impose on the American
people..
7. All contracts with past and present Congressmen are void effective
1/1/12. The American people did not make this contract with Congressmen.
Congressmen made all these contracts for themselves. Serving in Congress is
an honor,not a career. The Founding Fathers envisioned citizen legislators,
so ours should serve their term(s), then go home and back to work.
If each person contacts a minimum of twenty people then it will only take
three days for most people (in the U.S.) to receive the message. Maybe it is
time.
PLEASE PASS THIS ON
The Most Criminal Class Writes the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
Bob Jensen's threads on Rotten to the Core
---
http://www.trinity.edu/rjensen/FraudRotten.htm
Question: Can you believe the following scenario about a 10-year old
daughter named Karen and her father Ken?
Karen:
"Honestly Dad, a $1,000 per week allowance is just too much. I can get along
on $5 per week plus whatever mom thinks is fair for new clothes."
Ken:
"But I make $1 million a week running the company, and $1,000 per week is
mere chicken feed to me."
Karen
"But that might spoil me rotten and made me look bad among my closest
friends who get even less than $5 per week Please, please Dad, just leave $5
per week on the kitchen table."
Point to Keep in Mind Below
The SEC is the plaintiff in this case and the defendant, Citigroup, allegedly
damaged investors by more than $1 billion.
In most instances the plaintiff in a case like this would be overjoyed if the
judge declared the preliminary out-of-court settlement is way too low.
The Judge
"I want to award you much, much more since the defendant was criminally
conspired one of the largest frauds in history and stole so much more than
the relative pittance you agreed to in a preliminary settlement."
The SEC
"Please don't make us settle for more than 30% of the damages. Who cares
about what this bank cost investors? We worry more about retaliation from
the banking industry on our government agency. To hell with what investors
lost!"
"SEC Appeals Judge Rakoff’s Rejection of $285 Million Citigroup Settlement,"
by Joshua Gallu and Patricia Hurtado, Bloomberg News, December 16, 2011
---
http://www.bloomberg.com/news/2011-12-15/sec-appeals-rejection-of-285-million-citigroup-settlement-1-.html
"THE SEC’S SETTLEMENT WITH CITIGROUP—AND JUDGE RAKOFF," by Anthony H.
Catanach and J. Edward Ketz, Grumpy Old Accountants, December 19, 2011
---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/459
. . .
The SEC has for a long time engaged in these civil
judgments against firms that have experienced accounting and securities
fraud. It would do well for the SEC to re-examine this policy, realize that
its effects are pernicious and counterproductive, and then repeal the
strategy. It is silly for the investors to suffer for the wrongdoing by
corporate thieves masquerading as managers. If the SEC continues to fine
firms for wrongdoing and gives a pass to managers, you can expect Wall
Street to continue its lascivious dalliance.
And in another unrelated case:
"Commissioner slams SEC settlement," SmartPros, July 13, 2011
---
http://accounting.smartpros.com/x72323.xml
One of the SEC's five
commissioners has taken the extraordinary step of publicly dissenting from
an enforcement action on the grounds that it was too weak.
Commissioner Luis A.
Aguilar said the Securities and Exchange Commission should have charged
a former Morgan Stanley trader with fraud in view of what he called "the
intentional nature of her conduct."
The dissent comes weeks
after the SEC took flak for negotiating a $153.6 million fine from J.P.
Morgan Chase in another enforcement case but taking no action against
any of the firm's employees or executives.
Under a settlement
announced Tuesday, the SEC alleged that former Morgan Stanley trader
Jennifer Kim and a colleague who previously settled with the agency had
executed at least 32 sham trades to mask the amount of risk they had
been incurring and to get around an internal restriction.
Their trading
contributed to millions of dollars of losses at the investment firm, the
SEC said.
Without admitting or
denying the SEC's findings, Kim agreed to pay a fine of $25,000.
Aguilar said the
settlement was "inadequate" and "fails to address what is in my view the
intentional nature of her conduct."
"The settlement should
have included charging Kim with violations of the antifraud provisions,"
Aguilar wrote.
Continued in article
Jensen Comment
Maybe Jennifer also did porn. SEC enforcers like porn (daily).---
http://abcnews.go.com/GMA/sec-pornography-employees-spent-hours-surfing-porn-sites/story?id=10452544
"SEC Brings Crisis-Era Suits Fannie, Freddie Ex-Executives Face Cases
Stemming From Subprime Disclosures," by Nick Timiraos and Chad Bray, The
Wall Street Journal, December 17, 2011 ---
http://online.wsj.com/article/SB10001424052970203733304577102310955780788.html
U.S. securities regulators accused six former
executives at mortgage firms Fannie Mae and Freddie Mac of playing down the
risks to investors of the firms' foray into subprime loans.
The civil lawsuits, filed Friday by the Securities
and Exchange Commission in Manhattan federal court, rank among the
highest-profile crisis-related cases the government has brought. They are
also the first cases against the top executives at Fannie and Freddie before
their 2008 government takeover, which has cost taxpayers $151 billion.
The complaints name as defendants former Freddie
Mac Chief Executive Richard Syron and former Fannie Mae CEO Daniel Mudd, who
is currently chief executive of Fortress Investment Group LLC. The agency
also accused four other high-ranking former executives at Freddie Mac and
Fannie Mae.
The executives and their lawyers said they would
vigorously contest the charges.
At the heart of the lawsuits is the government's
contention that Fannie and Freddie executives knowingly misled investors
about the volumes of risky mortgages that the companies were purchasing as
the housing boom turned to bust. Documents
Complaints: SEC v. Fannie Mae | SEC v. Freddie Mac
Nonprosecution Agreements: Fannie Mae | Freddie Mac
"Fannie Mae and Freddie Mac executives told the
world that their subprime exposure was substantially smaller than it really
was," said Robert Khuzami, director of the SEC's Enforcement Division.
The lawsuits come as the SEC and other
law-enforcement agencies face rising political pressure to take more
aggressive action against financial companies over the 2008 crisis. Federal
authorities have a mixed record in cases tied to the subprime-mortgage bust,
with no major cases having been brought in some of the highest-profile
blowups, such as the September 2008 bankruptcy of Lehman Brothers Holdings
Inc.
Continued in article
Also see The New York Times report on the SEC's case at
http://dealbook.nytimes.com/2011/12/16/s-e-c-sues-6-former-top-fannie-and-freddie-executives/?scp=4&sq=fannie
mae&st=cse
Jensen Comment
So why is the Department of Justice and the SEC backing off of bigger criminals
like the banksters of Countrywide, Washington Mutual, Citigroup, JP Morgan,
Merrill Lynch, Lehman Brothers, Bear Sterns, etc.?
The Justice Department can put criminals in jail, but the SEC can only go for
fines. The problem is that when dealing with banksters the SEC has a track
record of pittance, chicken feed fines. Steal a dollar and the SEC will go
after less than a dime from a bankster.
Another CBS Sixty Minutes Blockbuster (December 4, 2011)
"Prosecuting Wall Street"
Free download for a short while
http://www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street/?tag=pop;stories
Note that this episode features my hero Frank Partnoy
Key provisions of Sarbox with respect to the Sixty Minutes revelations:
The act also covers issues such as
auditor independence,
corporate governance,
internal control assessment, and enhanced financial disclosure.
Sarbanes–Oxley Section 404: Assessment of internal control ---
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Sarbanes.E2.80.93Oxley_Section_404:_Assessment_of_internal_control
Both the corporate CEO and the external auditing firm are to
explicitly sign off on the following and are subject (turns out to be a
ha, ha joke) to huge fines and jail time for egregious failure to
do so:
- Assess both the design and operating
effectiveness of selected internal controls related to significant
accounts and relevant assertions, in the context of material
misstatement risks;
- Understand the flow of transactions,
including IT aspects, in sufficient detail to identify points at
which a misstatement could arise;
- Evaluate company-level (entity-level)
controls, which correspond to the components of the
COSO framework;
- Perform a fraud risk assessment;
- Evaluate controls designed to
prevent or detect fraud, including management override of
controls;
- Evaluate controls over the period-end
financial
reporting process;
- Scale the assessment based on the size and
complexity of the company;
- Rely on management's work based on factors
such as competency, objectivity, and risk;
- Conclude on the adequacy of internal
control over financial reporting.
Most importantly as far as the CPA auditing firms are concerned is
that Sarbox gave those firms both a responsibility to verify that
internal controls were effective and the authority to charge more
(possibly twice as much) for each audit. Whereas in the 1990s auditing
was becoming less and less profitable, Sarbox made the auditing industry
quite prosperous after 2002.
There's a great gap between the theory of Sarbox and its enforcement
In theory, the U.S. Justice Department (including the FBI) is to enforce
the provisions of Section 404 and subject top corporate executives and audit
firm partners to huge fines (personal fines beyond corporate fines) and jail
time for signing off on Section 404 provisions that they know to be false.
But to date, there has not been one indictment in enormous frauds where the
Justice Department knows that executives signed off on Section 404 with
intentional lies.
In theory the SEC is to also enforce Section 404, but the SEC in Frank
Partnoy's words is toothless. The SEC cannot send anybody to jail. And the
SEC has established what seems to be a policy of fining white collar
criminals less than 20% of the haul, thereby making white collar crime
profitable even if you get caught. Thus, white collar criminals willingly
pay their SEC fines and ride off into the sunset with a life of luxury
awaiting.
And thus we come to the December 4 Sixty Minutes module that features
two of the most egregious failures to enforce Section 404:
The astonishing case of CitiBank
The astonishing case of Countrywide (now part of Bank of America)
The Astonishing Case of CitiBank
What makes the Sixty Minutes show most interesting are the whistle
blowing revelations by a former Citi Vice President in Charge of Fraud
Investigations
- What has to make the CitiBank revelations the most embarrassing
revelations on the Sixty Minutes blockbuster emphasis that top
CItiBank executives were not only informed by a Vice President in Charge of
Fraud Investigation of huge internal control inadequacies, the outside U.S.
government top accountant, the U.S. Comptroller General, sent an official
letter to CitiBank executives notifying them of their Section 404 internal
control failures.
- Eight days after receiving the official warning from the government, the
CEO of CitiBank flipped his middle finger at the U.S. Comptroller General
and signed off on Section 404 provisions that he'd also been informed by his
Vice President of Fraud and his Internal Auditing Department were being
violated.
http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html
- What the Sixty Minutes show failed to mention is that the
external auditing firm of KPMG also flipped a bird at the U.S. Comptroller
General and signed off on the adequacy of its client's internal controls.
- A few months thereafter CitiBank begged for and got hundreds of billions
in bailout money from the U.S. Government to say afloat.
- The implication is that CitiBank and the other Wall Street corporations
are just to0 big to prosecute by the Justice Department. The Justice
Department official interviewed on the Sixty Minutes show sounded
like hollow brass wimpy taking hands off orders from higher authorities in
the Justice Department.
- The SEC worked out a settlement with CitiBank, but the fine is such a
joke that the judge in the case has to date refused to accept the
settlement. This is so typical of SEC hand slapping settlements --- and the
hand slaps are with a feather.
The astonishing case of Countrywide (now part of Bank of America)
- Countrywide Financial before 2007 was the largest issuer of mortgages on
Main Streets throughout the nation and by estimates of one of its own
whistle blowing executives in charge of internal fraud investigations over
60% of those mortgages were fraudulent.
- After Bank of America purchased the bankrupt Countrywide, BofA top
executives tried to buy off the Countrywide executive in charge of fraud
investigations to keep him from testifying. When he refused BofA fired him.
- Whereas the Justice Department has not even attempted to indict
Countrywide executives and the Countrywide auditing firm of Grant Thornton
(later replaced by KPMG) to bring indictments for Section 404 violations,
the FTC did work out an absurdly low settlement of $108 million for 450,000
borrowers paying "excessive fees" and the attorneys for those borrowers ---
http://www.nytimes.com/2011/07/21/business/countrywide-to-pay-borrowers-108-million-in-settlement.html
This had nothing to do with the massive mortgage frauds committed by
Countrywide.
- Former Countrywide CEO Angelo Mozilo settled the SEC’s Largest-Ever
Financial Penalty ($22.5 million) Against a Public Company's Senior
Executive
http://sec.gov/news/press/2010/2010-197.htm
The CBS Sixty Minutes show estimated that this is less than 20% of what he
stole and leaves us with the impression that Mozilo deserves jail time but
will probably never be charged by the Justice Department.
I was disappointed in the CBS Sixty Minutes show in that it completely
ignored the complicity of the auditing firms to sign off on the Section 404
violations of the big Wall Street banks and other huge banks that failed.
Washington Mutual was the largest bank in the world to ever go bankrupt. Its
auditor, Deloitte, settled with the SEC for Washington Mutual for
$18.5 million. This isn't even a hand slap relative to the billions lost by
WaMu's investors and creditors.
No jail time is expected for any partners of the negligent auditing
firms. .KPMG settled for peanuts with Countrywide for
$24 million of negligence and New Century for
$45 million of negligence costing investors billions.
CFO's job description should have read: financial
professional with extensive consulting, management, and prison experience.
"SEC Charges Add to an Already Blemished Bio," by Sarah Johnson,
CFO.com, December 22, 2011 ---
http://www3.cfo.com/blogs/risk-compliance/risks--compliance/2011/12/SEC-Charges-Add-to-an-Already-Blemished-Bio
Jensen Comment
Note that the SEC cannot send bad men and women to prison. It's mission really
is to let them off the hook for a penny fine on every dollar that they steal.
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on how white collar crime pays even if you get caught
---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
"What Fannie and Freddie Knew The SEC shows how the toxic twins
turbocharged the housing bubble.," The Wall Street Journal, December
22, 2011 ---
http://online.wsj.com/article/SB10001424052970204791104577110643650732030.html?mod=djemEditorialPage_t
Democrats have spent years arguing that private
lenders created the housing boom and bust, and that Fannie Mae and Freddie
Mac merely came along for the ride. This was always a politically convenient
fiction, and now thanks to the unlikely source of the Securities and
Exchange Commission we have a trail of evidence showing how the failed
mortgage giants turbocharged the crisis.
That's the story revealed Friday by the SEC's civil
lawsuits against six former Fannie and Freddie executives, including a pair
of CEOs. The SEC says the companies defrauded investors because they "knew
and approved of misleading statements" about Fan and Fred's exposure to
subprime loans, and it chronicles their push to expand the business.
The executives deny the charges, and we hope they
don't settle. The case deserves to play out in court, so Americans can see
in detail how Fan and Fred were central to the bubble. The lawsuits
themselves, combined with information admitted as true by Fan and Fred in
civil nonprosecution agreements with the SEC, are certainly illuminating.
The Beltway story of the crisis claims that
Congress's affordable housing mandates had nothing to do with it. But the
SEC's lawsuit shows that Fannie degraded its underwriting standards to
increase its market share in subprime loans. According to the SEC suit, for
instance, in 2006 Fannie Mae adjusted its widely used automated underwriting
system, "Desktop Underwriter." Fannie did so as part of its "Say Yes"
strategy to "provide more 'approve' messages . . . for larger volumes of
loans with lower FICO [credit] scores and higher LTVs [loan-to-value] than
previously permitted."
The SEC also shows how Fannie led private lenders
into the subprime market. In July 1999, Fannie and Angelo Mozilo's
Countrywide Home Loans entered "an alliance agreement" that included "a
reduced documentation loan program called the 'internet loan,'" later called
the "Fast and Easy" loan. As the SEC notes, "by the mid-2000s, other
mortgage lenders developed similar reduced documentation loan programs, such
as Mortgage Express and PaperSaver—many of which Fannie Mae acquired in
ever-increasing volumes."
Mr. Mozilo and Fannie essentially were business
partners in the subprime business. Countrywide found the customers, while
Fannie provided the taxpayer-backed capital. And the rest of the industry
followed.
As Fannie expanded its subprime loan purchases and
guarantees, the SEC alleges that executives hid the risk from investors.
Consider Fannie's Expanded Approval/Timely Payment Rewards (EA) loans, which
the company described to regulators as its "most significant initiative to
serve credit-impaired borrowers."
By December 31, 2006, Fannie owned or securitized
some $43.3 billion of these loans, which, according to the SEC, had "higher
average serious delinquency rates, higher credit losses, and lower average
credit scores" than Fannie's disclosed subprime loans. By June 30, 2008,
Fannie had $60 billion in EA loans and $41.7 billion in another risky
program called "My Community Mortgage," but it only publicly reported an $8
billion exposure.
The SEC says Fannie executives also failed to
disclose the company's total exposure to risky "Alt-A" loans, sometimes
called "liar loans," which required less documentation than traditional
subprime loans. Fannie created a special category called "Lender Selected"
loans and it gave lenders "coding designations" to separate these Alt-A
loans from those Fannie had publicly disclosed. By June 30, 2008, Fannie
said its Alt-A exposure was 11% of its portfolio, when it was closer to
23%—a $341 billion difference.
All the while, Fannie executives worked to calm
growing fears about subprime while receiving internal reports about the
company's risk exposure. In February 2007, Chief Risk Officer Enrico
Dallavecchia told investors that Fannie's subprime exposure was
"immaterial." At a March 2007 Congressional hearing, CEO Daniel Mudd
testified that "we see it as part of our mission and our charter to make
safe mortgages available to people who don't have perfect credit," adding
that Fannie's subprime exposure was "relatively minimal." The Freddie record
is similarly incriminating. ***
The SEC's case should embarrass Congress's
Financial Crisis Inquiry Commission, which spent 18 months looking at the
evidence and issued a report in January 2011 that whitewashed Fan and Fred's
role. Speaker Nancy Pelosi created the commission to prosecute the Beltway
theory of the crisis that private bankers caused it all, and Chairman Phil
Angelides delivered what she wanted.
Far from being peripheral to the housing crisis,
the SEC lawsuit shows that Fan and Fred were at the very heart of it.
Private lenders made many mistakes, but they could never have done as much
harm if Fan and Fred weren't providing tens of billions in
taxpayer-subsidized liquidity to lend on easy terms to borrowers who
couldn't pay it back.
Congress created the two mortgage giants as well as
their "affordable housing" mandates, and neither the financial system nor
taxpayers will be safe until Congress shrinks the toxic twins and ultimately
puts them out of business.
Also see The New York Times report on the SEC's case at
http://dealbook.nytimes.com/2011/12/16/s-e-c-sues-6-former-top-fannie-and-freddie-executives/?scp=4&sq=fannie
mae&st=cse
Subprime: Borne of Greed, Sleaze, Bribery, and Lies ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Barney Frank: I've destroyed the economy, my work
here is done.
Washington Times headline, Nov. 29, 2011
Barney's Rubble ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble
In a separate scandal, Fannie Mae was involved in the largest
earnings/bonus management fraud in the history of the world ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
David Albrecht had a final examination essay question that reads as follows
at
http://profalbrecht.wordpress.com/2011/12/21/meh-no/
The rest of
the world uses FIFO, but does not permit LIFO.
Should the U.S. continue to use LIFO?
Jensen Comment
This illustrates to me how in some instances an accounting standard should
perhaps not be discussed apart from its relevance in terms of a nation's tax
code. For example,
synthetic leasing accounting standards are probably irrelevant to nations
who do not have synthetic leasing provisions in the tax code. Similarly, a
question on LIFO probably should not be answered without mention of a nation's
tax code.
The LIFO issue is much less important in nations that do not allow LIFO for
tax reporting purposes. But in the U.S. companies choose LIFO to defer serious
amounts of cash outflow for tax purposes. If a nation allows LIFO for tax
purposes in periods of inflation, and adds an added stipulation that use of LIFO
for tax purposes also requires use of LIFO for financial reporting purposes,
then the loss of LIFO as an option for financial reporting can clobber cash flow
unless our brilliant Congress adjusts with revisions to the tax code such as
revisions for changes in price levels in inventory reporting.
At the moment Congress seems to be unable to pass anything other than a
motion to adjourn for every conceivable holiday (and motions to pass each
other's earmark bills).
December 25, 2011 reply from Bob Jensen
Bob,
A couple of students considered which one (FIFO or
LIFO) would be more desirable for investors. They both came down on the FIFO
side. One reasoned that comparability of U.S. company financial results with
the rest of the world would outweigh any increase in the effective tax rate.
The other reasoned that investors would prefer an accounting method that
approximates the physical flow of products.
This has me thinking about investor preferences in
the accounting for inventories. I'm not aware this has been explicitly
considered before.
My first thought is that there is significant
benefit to investors about from LIFO-based cost of goods sold expense.
Three decades ago, I read an article about NIFO
accounting (wish I had a citation for it). Nifo is Next-In, First-Out. U
find LIFO desirable because it is the closest thing to NIFO.
My second thought is that American investors seem
to have adapted well to a LIFO-FIFO world. Banning LIFO might actually
disadvantage investors.
I am readying a post on this topic. I will work in
Ed Scribner's FISH (first in, still here) accounting. My students always
enjoy hearing about fish accounting.
Dave Albrecht
December 25, 2011 reply from Bob Jensen
Hi David,
I think that managers that choose FIFO to increase reported eps are
possibly either naive or bonus hungry. I do indeed believe that in most
cases the capital markets are efficient in seeing through inventory
valuation differences.
If a company that's paying corporate income taxes has a huge investment
in inventories then I think management is negligent for not choosing LIFO,
because the cash flow advantages of LIFO tax deferral are very real in
periods of inflation. Investors should complain to management if the company
is not on LIFO. Of course this is less relevant to corporations that
annually dodge or defer all corporate taxes.
There may be occasional situations where management paid way too much for
commodities or investment securities relative to current prices, in which
case FIFO has some tax deferral advantages. But the IRS does not allow
repeatedly flipping back and forth between FIFO and LIFO, and over the long
run it's probably best to think in terms of price inflation in inventories.
NIFO is really a very old concept and dates as far back as J. Lee
Nicholson in accounting history (he died in 1924) ---
http://www.jstor.org/pss/241148
Although NIFO is not allowed under GAAP or the IRS, it's probably the
inventory valuation method most consistent with fair value accounting. We
really have GAAP-allowed NIFO for precious commodities provided current
market prices are our best estimates of the next prices to be paid for those
commodities like gold, silver, and platinum.
In the case of such precious commodities, however, current prices really
may not be the best estimates of the next prices to be paid. One of the
reasons for carrying inventory is to provide more alternatives to having to
buy needed inventory when prices are temporarily skyrocketing such as a
military flare up in the Middle East that's driving oil price speculators
crazy.
Also NIFO does not necessarily provide the best estimates of the "next"
prices for companies that are heavy into long hedges. For example, Southwest
Airlines is almost always hedged on jet fuel over a relatively long period
of time such that current spot prices are not good estimates of what
Southwest will be paying for jet fuel in six months or even a year.
Teaching Cases: Hedge Accounting
Scenario 1 versus Scenario 2 Two Teaching Cases Involving Southwest
Airlines, Hedging, and Hedge Accounting Controversies ---
http://www.trinity.edu/rjensen/caseans/SouthwestAirlinesQuestions.htm
Respectfully,
Bob Jensen
December 25, 2011 reply from Beryl Simonson
Don't you also need to discuss the difference between a balance sheet vs an
income statement approach to financial reporting? Over a long period of
time, even with a moderate price increases, LIFO vastly distorts the balance
sheet yet the income statement would only be minimally different on an
annual basis. On a practical basis, LIFO can have you selling goods that
have not yet been received, depending on how inventory turns. It has always
seemed to me to be artificial since it generally does not reflect the flow
of goods.
Beryl D. Simonson CPA
Partner, Assurance Services
McGladrey & Pullen, LLP
December 25, 2011 reply from Bob Jensen
As I vaguely recall, some of the LIFO layers in U.S. Steel went back 40
years or more. Obviously the balance sheet then becomes out of date.
But to me in this regard, cash flow advantages trump the balance sheet
valuation of inventories when there are essentially interest-free loans from
tax deferrals.
In nations having no such interest free loans due to LIFO in the tax
code, the main advantage of LIFO disappears.
Being an old timer, I recall that the main argument for building LIFO
into the tax code was an inflation accounting compromise to companies
wanting price-level adjustment indexing relief for inventory tax accounting.
Japan allows LIFO for similar inflation accounting reasons.
Bob Jensen
December 26, 2011 reply from Beryl Simonson
Financial statements are prepared to reflect the
economic results of the business. I understand analysts might have other
needs in doing their jobs, but GAAP is not designed for those interested in
the future. Beryl D. Simonson CPA Partner, Assurance Services McGladrey &
Pullen, LLP (267) 515-5144
Beryl
December 26 reply from Patricia Walters
Beryl,
That assumes that it's possible for both the
balance sheet and the income statement CAN both be equally as reflective of
economic reality. Since every account including cash and cash equivalents
has some degree of estimation in the measurement we must either focus on
estimating either the balance sheet amount or the income statement amount in
that process. Given the balance sheet equation, one or the other effect is a
plug.
As I said in an earlier post in this thread, my
preference as an analyst is to compare current costs with current costs.
Neither FIFO or LIFO provides that information in the statements because the
balance sheet equation has to hold. At least the LIFO disclosures provide
the data to make the adjustments.
If there's a set of financial statements that do
what you suggest, I haven't met it.
Pat
December 26, 2011 reply from Bob Jensen
Hi Patricia,
I don't think your negativism about historical cost accounting is
justified in the empirical accounting research literature.
In particular, note ---
http://www.trinity.edu/rjensen/LIFOJennings.htm
"Does LIFO Inventory Accounting Improve the Income Statement at the Expense
of the Balance Sheet?" by Ross Jennings, Paul J. Simko, Robert B. Thompson
II, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996),
pp. 85-109
My recollection is that empirical studies of forecasting and accounting
valuations is somewhat the opposite of what you are claiming about useless
predictability of historical cost financial statements.. In particular, note
the attached Jennings02.jpg picture.
Before I commence a hunt further, do you have any academic research
citations to back your claims or are are these mere personal opinions that
historical cost statements are useless for analyst forecasting?
Off the top of my head, I recall some contrary evidence in Biddle and
Lindahl (JAR, 1982), Elliott and Philbrick (TAR, 1990), Brown (International
Journal of Forecasting, 1993), Rayburn (JAR, 1996) and in particular
Jennings, Simco, and Thompson (JAR, 1996).
Above are two pictures of the conclusion in the Jennings, Simco, and
Thompson JAR paper that are contrary to your argument of the incremental
value of current cost information.
A 2009 PhD dissertation by Brian Batten has a more extensive listing of
references ---
http://repositories1.lib.utexas.edu/bitstream/handle/2152/6551/brattenb47610.pdf?sequence=2
Also see
"Sucking the LIFO Out of Inventory The government sees billions of dollars
in potential tax revenue sitting on the shelves of company warehouses," by
Marie Leone, CFO Magazine, July 15, 2010 ---
http://www.cfo.com/article.cfm/14508745/c_14515016
Please send us some references in support of the uselessness of
historical cost accounting in forecasting and recommendations of security
analysts.
Thanks in advance,
Bob Jensen
Rudy Ruettiger was a high school football star who lacked the size and talent
to play for Notre Dame and yet became the nation's poster boy for a walk on
player who never gave up and ultimately inspired the tens of thousands of
Fighting Irish fans --- not with his accomplishments but rather his
never-give-up attitude.
The movie Rudy brought tears to my eyes ---
http://en.wikipedia.org/wiki/Rudy_%28film%29
Rudy Ruettiger ---
http://en.wikipedia.org/wiki/Rudy_Ruettiger
Now Rudy Ruettiger is bringing tears to investors eyes.
"SEC Says Rudy Ruettiger Is A Stock Scammer," by Nathan Vardi,
Forbes, December 16, 2011 ---
http://www.forbes.com/sites/nathanvardi/2011/12/16/sec-says-rudy-ruettiger-is-a-stock-scammer/
To many football and movie fans, Daniel “Rudy”
Ruettiger is a hero, an ordinary kid who overcame extraordinary odds through
hard work and determination to become part of Notre Dame folklore.
The Securities & Exchange Commission, however, says
Rudy Ruettiger has grown up to become a penny stock promoter and scammer.
The former Notre Dame walk-on has agreed to pay $382,866 to resolve the
SEC’s claim that he participated in a pump-and-dump, fraudulently inducing
investors to bid up the stock of his sports drink company, Rudy Nutrition.
He did not admit or deny the allegations.
According to the SEC complaint filed in federal
court in Las Vegas, Ruettiger’s company sold only a small amount of a sports
drink called “Rudy” and instead the company served as a vehicle for a 2008
pump-and-dump scheme that generated $11 million in illicit profits. The SEC
revoked registration of the stock of Rudy Nutrition in 2008.
“Investors were lured into the scheme by Mr.
Ruettiger’s well-known, feel-good story but found themselves in a situation
that did not have a happy ending,” said Scott Friestad, associate director
of the SEC’s enforcement division, in a statement. “The tall tales in this
elaborate scheme included phony taste tests and other false information.”
What kind of tall tales is the SEC talking about?
One example is literature mailed to potential investors falsely claiming
that in “a major southwest test, Rudy outsold Gatorade 2 to 1.” While these
sorts of promotions were going on, the SEC says promoters were artificially
inflating the price of Rudy Nutrition’s stock while selling unregistered
shares to investors.
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Potential Accounting Cases Regarding Sears In-Home (on-site) Service
Contracts
Some Big Retail Chains Are Unhappy With 2011 Holiday Sales
"Sears, Kmart to shut 100-120 stores," CNN Money, December 27,
2011 ---
http://money.cnn.com/2011/12/27/news/companies/sears_kmart_closings/index.htm
Sears Holdings on Tuesday reported a sharp drop in
holiday sales compared to a year ago, and said the results will force it to
close 100 to 120 Sears and Kmart stores.
The company said the stores to be closed have yet
to be identified.
Sears Holdings said sales at stores open at least a
year, a closely watched retail measure known as same-store sales, tumbled
5.2% in the eight weeks ended on Christmas Day. That came from a 4.4% drop
in sales at Kmart stores and a 6% slide in sales at domestic Sears stores.
Continued in article
Jensen Comment
I don't know of any Kmart in our vicinity. There are, however, somewhat limited
Sears stores in Littleton (10 miles away) and St. Johnsbury, Vermont (30 miles
away). I shop for almost all appliances at Sears because I think Sears has
the best and reasonably priced in-your-home service contracts. I hate service
contracts that make you haul an item back to the store or haul it for miles to a
service center. My neighbor has a huge Circuit City TV set that I recently
helped him load into his car to take to a distant service center (not Sears).
And the first time he brought it home it still didn't work. So I once again
helped him load it up for a long trip.
For my items from Sears, either Sears repairs the item at my home or Sears
hauls it to and from a Sears service center. Sears has had to come to my house
12 times to repair a snow thrower. All is better now after Sears engineers
finally solved a fundamental engineering problem of having long chute cables
that froze up in cold weather. At last Sears manufactured shorter cables that
won't freeze up. Sears also came into our basement last month and put a new
motor and belt on our walking machine. I sure would not want to have to hall
that big thing to a service center. And the parts and labor were all free under
our five-year service contract that cost much less than the new motor and belt.
In addition Sears makes annual free visits to service and clean all our other
Sears appliances (over ten items in our house).
This raises some accounting questions about how Sears should account for its
repair and maintenance service contracts that our closest Sears dealer tells me
is the main selling point of appliances in her Sears store.
- Should the revenue from these many service contracts for 3-5 years
(renewable) be recognized or amortized over the contract life?
- How should costs of parts and service be accounted for such as the
motor, belt, technician labor, fuel to get a service van to our home, and
van depreciatuin be accounted for over the service contract period?
- When teaching managerial accounting, how can the contribution of
in-house service contracts to sales be measured for Sears management? I
think there is a potential here for a great managerial accounting case.
Bob Jensen's threads and cases on managerial accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
"FASB Defers Part of Comprehensive Income Standards Update,"
Journal of Accountancy, December 23, 2011 ---
http://journalofaccountancy.com/Web/20114948.htm
"Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank
Partnoy, New York Review of Books, November 10, 2011 ---
http://www.nybooks.com/articles/archives/2011/nov/10/should-some-bankers-be-prosecuted/
Thank you Robert Walker for the heads up!
More than three years have passed since the
old-line investment bank Lehman Brothers stunned the financial markets by
filing for bankruptcy. Several federal government programs have since tried
to rescue the financial system: the $700 billion Troubled Asset Relief
Program, the Federal Reserve’s aggressive expansion of credit, and President
Obama’s additional $800 billion stimulus in 2009. But it is now apparent
that these programs were not sufficient to create the conditions for a full
economic recovery. Today, the unemployment rate remains above 9 percent, and
the annual rate of economic growth has slipped to roughly 1 percent during
the last six months. New crises afflict world markets while the American
economy may again slide into recession after only a tepid recovery from the
worst recession since the Great Depression.
n our article in the last issue,1 we showed that,
contrary to the claims of some analysts, the federally regulated mortgage
agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis.
Rather, private financial firms on Wall Street and around the country
unambiguously and overwhelmingly created the conditions that led to
catastrophe. The risk of losses from the loans and mortgages these firms
routinely bought and sold, particularly the subprime mortgages sold to
low-income borrowers with poor credit, was significantly greater than
regulators realized and was often hidden from investors. Wall Street bankers
made personal fortunes all the while, in substantial part based on profits
from selling the same subprime mortgages in repackaged securities to
investors throughout the world.
Yet thus far, federal agencies have launched few
serious lawsuits against the major financial firms that participated in the
collapse, and not a single criminal charge has been filed against anyone at
a major bank. The federal government has been far more active in rescuing
bankers than prosecuting them.
In September 2011, the Securities and Exchange
Commission asserted that overall it had charged seventy-three persons and
entities with misconduct that led to or arose from the financial crisis,
including misleading investors and concealing risks. But even the SEC’s
highest- profile cases have let the defendants off lightly, and did not lead
to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide
Financial, the nation’s largest subprime mortgage underwriter, settled SEC
charges that he misled mortgage buyers by paying a $22.5 million penalty and
giving up $45 million of his gains. But Mozilo had made $129 million the
year before the crisis began, and nearly another $300 million in the years
before that. He did not have to admit to any guilt.
The biggest SEC settlement thus far, alleging that
Goldman Sachs misled investors about a complex mortgage product—telling
investors to buy what had been conceived by some as a losing proposition—was
for $550 million, a record of which the SEC boasted. But Goldman Sachs
earned nearly $8.5 billion in 2010, the year of the settlement. No
high-level executives at Goldman were sued or fined, and only one junior
banker at Goldman was charged with fraud, in a civil case. A similar suit
against JPMorgan resulted in a $153.6 million fine, but no criminal charges.
Although both the SEC and the Financial Crisis
Inquiry Commission, which investigated the financial crisis, have referred
their own investigations to the Department of Justice, federal prosecutors
have yet to bring a single case based on the private decisions that were at
the core of the financial crisis. In fact, the Justice Department recently
dropped the one broad criminal investigation it was undertaking against the
executives who ran Washington Mutual, one of the nation’s largest and most
aggressive mortgage originators. After hundreds of interviews, the US
attorney concluded that the evidence “does not meet the exacting standards
for criminal charges.” These standards require that evidence of guilt is
“beyond a reasonable doubt.”
This August, at last, a federal regulator launched
sweeping lawsuits alleging fraud by major participants in the mortgage
crisis. The Federal Housing Finance Agency sued seventeen institutions,
including major Wall Street and European banks, over nearly $200 billion of
allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie
Mac, which it oversees. The banks will argue that Fannie and Freddie were
sophisticated investors who could hardly be fooled, and it is unclear at
this early stage how successful these suits will be.
Meanwhile, several state attorneys general are
demanding a settlement for abuses by the businesses that administer
mortgages and collect and distribute mortgage payments. Negotiations are
under way for what may turn out to be moderate settlements, which would
enable the defendants to avoid admitting guilt. But others, particularly
Eric Schneiderman, the New York State attorney general, are more
aggressively pursuing cases against Wall Street, including Goldman Sachs and
Morgan Stanley, and they may yet bring criminal charges.
Successful prosecutions of individuals as well as
their firms would surely have a deterrent effect on Wall Street’s deceptive
activities; they often carry jail terms as well as financial penalties.
Perhaps as important, the failure to bring strong criminal cases also makes
it difficult for most Americans to understand how these crises occurred. Are
they simply to conclude that Wall Street made well- meaning if very big
errors of judgment, as bankers claim, that were rarely if ever illegal or
even knowingly deceptive?
What is stopping prosecution? Apparently not public
opinion. A Pew Research Opinion survey back in 2010 found that three
quarters of Americans said that government policies helped banks and
financial institutions while two thirds said the middle class and poor
received little help. In mid-2011, half of those surveyed by Pew said that
Wall Street hurts the economy more than it helps it.
Many argue that the reluctance of prosecutors
derives from the power and importance of bankers, who remain significant
political contributors and have built substantial lobbying operations. Only
5 percent of congressional bills designed to tighten financial regulations
between 2000 and 2006 passed, while 16 percent of those that loosened such
regulations were approved, according to a study by the International
Monetary Fund.2 The IMF economists found that a major reason was lobbying
efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby
Congress during the passage of the Dodd-Frank Act. The financial
reregulation legislation was weakened in such areas as derivatives trading
and shareholder rights, and is being further watered down.
Others claim federal officials fear that punishing
the banks too much will undermine the fragile economic recovery. As one
former Fannie official, now a private financial consultant, recently told
The New York Times, “I am afraid that we risk pushing these guys off of a
cliff and we’re going to have to bail out the banks again.”
The responsibility for reluctance, however, also
lies with the prosecutors and the law itself. A central problem is that
proving financial fraud is much more difficult than proving most other
crimes, and prosecutors are often unwilling to try it. Congress could fix
this by amending federal fraud statutes to require, for example, that
prosecutors merely prove that bankers should have known rather than actually
did know they were deceiving their clients.
But even if Congress does not, it is not too late
for bold federal prosecutors to try to bring a few successful cases. A
handful of wins could create new precedents and common law that would set a
higher and clearer standard for Wall Street, encourage more ethical
practices, deter fraud—and arguably prevent future crises.
Continued in article
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!
The greatest swindle in the history of the world ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Bob Jensen's threads on how the banking system is rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Ernst & Young
To the Point:
Impairment - a major step toward achieving convergence
The FASB and the IASB have agreed on several tentative decisions regarding their
"three-bucket" expected loss approach to the impairment of financial assets.
These include the transfer principle from Bucket 1 into Bucket 2 or Bucket 3,
the Bucket 1 impairment allowance, the differentiating factor between Bucket 2
and Bucket 3, the grouping of financial assets for impairment evaluation and the
application of the new impairment approach to retail loans, commercial loans and
debt securities. Our
To the
Point publication discusses these decisions ---
http://www.ey.com/Publication/vwLUAssets/TothePoint_BB2250_Impairment_22December2011/%24FILE/TothePoint_BB2250_Impairment_22December2011.pdf
Jensen Comment
I think we should name the three buckets Hyacinth, Richard, and Onslow.---
http://en.wikipedia.org/wiki/Keeping_Up_Appearances
Ernst & Young
Technical Line: Revenue
recognition proposal - media and entertainment, retail and consumer products and
telecommunications
The Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB) recently re-exposed their joint revenue recognition
proposal, which would converge revenue recognition guidance under US GAAP and
IFRS into a single model and replace essentially all revenue recognition
guidance, including industry-specific guidance.
These industry-specific publications supplement our Technical Line,
Double-exposure: The revised revenue recognition proposal, and
highlight some of the more significant implications that the latest revenue
recognition proposal may have on the (1)
media and
entertainment, (2)
retail
and consumer products and (3)
telecommunications industries. These publications provide an analysis of the
proposed model and highlight key changes from current practice.
International Journal of Accounting Information Systems
Volume 13, No. 1, March 2012
1. Editor's Prologue
2. Arnold, V., J.C. Bedard, J.R. Phillips and S.G. Sutton: "THE IMPACT
OF TAGGING QUALITATIVE FINANCIAL INFORMATION ON INVESTOR DECISION MAKING:
IMPLICATIONS FOR XBRL"
3. Jee-Hae Lim; Theophanis Stratopoulos; Tony Wirjanto: "ROLE OF IT
EXECUTIVES ON THE FIRM'S ABILITY TO ACHIEVE COMPETITIVE ADVANTAGE THROUGH
IT CAPABILITY"
4. Ogan M. Yigitbasioglu and Oana Velcu: "A Review of Dashboards in
Performance Management: Implications for Design and Research"
5. M. Dale Stoel; D. Havelka; J. Merhout "An analysis of attributes
that impact information technology audit quality: A study of IT and
financial audit practitioners"
Andreas Nicolaou
Editor, International Journal of Accounting Information Systems
http://www.elsevier.com/locate/accinf
"Dismissed' partner accuses Ernst & Young of corruption: Accountant
Ernst & Young is facing an allegation of corruption at one of its global
headquarters as part of a whistleblowing case brought by one of its ex-managing
partners," by Jonathan Russell, The Telegraph, December 4, 2011 ---
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8933219/Dismissed-partner-accuses-Ernst-and-Young-of-corruption.html
The allegation is made in a High Court case brought
against the Big Four accountant by former employee Cathal Lyons. The ex-E&Y
partner claims he was dismissed from the company and had hundreds of
thousands of pounds worth of medical cover withdrawn after he reported the
alleged corruption to the practice’s director of global tax.
Mr Lyons’ claim in the High Court relates to his
employment by E&Y’s Russian practice.
In 2006 he suffered a serious road accident
resulting in permanent disabilities and partial amputation. Despite
suffering serious medical complications Mr Lyons continued to work for Ernst
& Young, albeit in a reduced capacity, until he claims he was dismissed in
2010.
Following his dismissal, the medical insurance
cover provided by Ernst & Young was withdrawn. Mr Lyons claims this was in
direct breach of an agreement he had reached with E&Y that he would be
covered by the medical insurance for life.
His dismissal and the subsequent removal of his
medical insurance were a direct result of him reporting his concerns about
corruption, he claims.
Continued in article
Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Arthur Andersen Ex-CEO: Enron, Europe Are Similar," by former
Andersen CEO Joe Berardino, CNBC, December 2, 2011 ---
http://www.cnbc.com/id/45521699
A number of similarities exist between the collapse
of Enron in 2001 and the current sovereign debt crisis in the euro zone, Joe
Berardino, a managing director at Alvarez and Marsal and the former CEO of
Enron's accounting firm, Arthur Andersen, told CNBC.
"If you look at the Enron story at its most
simplistic, you had a really successful company that was a bricks and mortar
company, that became a trading company, that was very successful as a
trading company… levered up," he said, using the term popular in business
parlance for borrowing. "And then we found that leverage is really good,
until it's bad," Berardino said.
Enron filed for bankruptcy 10 years ago on Friday.
The scandal surrounding the energy trading firm also effectively brought
down Arthur Andersen as a going concern.
Asked whether lessons had been learned since Enron
filed for bankruptcy, Berardino said, "we're still learning" and pointed to
the sovereign debt crisis currently engulfing the euro zone.
"(Enron) ran out of time in terms of its liquidity
and a lot of the same elements — leverage, the need for liquidity, crisis
when you lose confidence — are repeated in all those examples. And I would
argue we're now living through it with the sovereign crisis in Europe," he
said. "There are a lot of the same elements."
The 'Greed Path'
Berardino said "it's easy to go down the greed
path" in corporate America due to the nature of financial transactions and
the rise of service sector industries, where what is "produced" is less
tangible.
"I think what complicates the matter is that we've
gone more toward a service economy and years ago went off the gold standard…
(now) you're finding you're trading pieces of paper, and when you're trading
pieces of paper, the underlying issue is trust in your counterparty and
trust in the system and transparency in the system. And so these two issues
I think get intertwined," he said.
He added that although he believed leverage was
essentially a good thing, the real matter at hand for markets is a lack of
liquidity.
"What leverage does is it puts all your trades on
octane, and it's great until it's not great and I think the real lasting
issue there is also the need for liquidity which we lived through three
years ago and we're living through now," Berardino said.
Europe Crisis 'Solvable'
Following a speech by German Chancellor Angela
Merkel in which she warned the crisis in the euro zone would take years to
solve, Berardino agreed it would take time, but the issue of sovereign debt
was "largely solvable"
Continued in article
Jensen Comment
Chicago Joe did not get into the criminal things that might've brought Enron
down in spite of its liquidity problem --- things like manipulating energy
markets fraudulently, especially when overcharging California power companies
billions in excess rate hikes. Joe did not mention the fraudulent financial
statements to which his company as both a consulting firm and an auditing firm
was party to fraudulent financial statements, including overvaluing derivative
financial instruments and over 3,000 SPEs, many of which were phony ---
http://www.trinity.edu/rjensen/FraudEnron.htm
Nor did he get into the things we've learned about auditing firms since the
PCAOB started issuing audit inspection reports. One thing we've most certainly
learned is that the Big Four charges much more for audits but often delivers
worse audits than the smaller firms. For example, when KPMG took over the
Countrywide Financial audit from Grant Thornton in 2004, the quality of
Countrywide's audits headed south. This is also near the time when KPMG was
fired from the Fannie Mae audit for incompetence. Ernst & Young and Deloitte
were fined the maximum $1 million by the PCAOB for shoddy auditing.
And we thought auditing could not get any worse than Andersen's audits of
Worldcom, Enron, and a raft of other bankrupted clients
"PCAOB Sees Decline in
Audit Quality," by Michael Cohn, Accounting Today, November
5, 2011 ---
http://www.accountingtoday.com/news/PCAOB-Sees-Decline-Audit-Quality-60375-1.html?CMP=OTC-RSS
A December 21, 2011 WSJ Article on Those Startling Deloitte Audits That Are
Beginning to Remind Us of Those Sorry Andersen Audits
"Accounting Board Finds Faults in Deloitte Audits," by Michael Rapaport,
The Wall Street Journal, December 21, 2011 ---
http://online.wsj.com/article/SB10001424052970204879004577110922981822832.html
Inspectors for the government's audit-oversight
board found deficiencies in 26 audits conducted by Deloitte & Touche LLP in
its annual inspection of the Big Four accounting firm.
The report from the Public Company Accounting
Oversight Board, released Tuesday, said some of the deficiencies it found in
its 2010 inspection of Deloitte's audits were significant enough that it
appeared the firm didn't obtain enough evidence to support its audit
opinions.
The 26 deficient audits found were out of 58
Deloitte audits and partial audits reviewed by PCAOB inspectors. The
inspectors found that, in various audits, Deloitte didn't do enough testing
on issues like inventory, revenue recognition, goodwill impairment and fair
value, among other areas. In one case, follow-up between Deloitte and the
audit client led to a change in the client's accounting, according to the
report.
The board didn't identify the companies involved,
in accordance with its typical practice.
The report is the first PCAOB assessment of
Deloitte's performance issued since the board rebuked Deloitte in October by
unsealing previously confidential criticisms of the firm's quality control.
Deloitte said in a statement that it is "committed
to the highest standards of audit quality" and has taken steps to address
both the PCAOB's findings on the firm's individual audits and the board's
broader observations on Deloitte's quality control and audit quality. The
firm said it has been making a series of investments "focused on
strengthening and improving our practice."
Last month, the board released its annual reports
on PricewaterhouseCoopers LLP, in which it found 28 deficient audits out of
75 reviewed, and KPMG LLP, in which it found 12 deficient audits out of 54
reviewed. The yearly report on the fourth Big Four firm, Ernst & Young LLP,
hasn't yet been issued.
The PCAOB conducts annual inspections of the
biggest accounting firms in which it scrutinizes a sample of each firm's
audits to evaluate their performance and compliance with auditing standards.
The first part of the report is released publicly, but a second part, in
which the board evaluates the firm's quality controls, remains confidential
as long as the firm resolves any criticisms to the board's satisfaction
within a year.
Only if that doesn't happen does the PCAOB release
that section of the report, as it did with Deloitte in October, the first
time it had done so with one of the Big Four. In that case, the board made
public a section of a 2008 inspection report in which it said Deloitte
auditors were too willing to accept the word of clients' management and that
"important issues may exist" regarding the firm's procedures to ensure
thorough and skeptical audits.
Bob Jensen's threads on Deloitte and the Other Large Auditing Firms ---
http://www.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's threads on professionalism and independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"At Deloitte, More Pain Before Any Quality Gain," by Francine McKenna,
re"TheAuditors, November 30, 2011 ---
http://retheauditors.com/2011/11/30/at-deloitte-more-pain-before-any-quality-gain/
The PCAOB, the audit industry regulator,
shamed global audit firm Deloitte recently when
they exposed the private portion of the inspection report of the firm’s 2006
audits. It was the first time that had happened to one the Big Four audit
firms, the largest firms that audit the vast majority of publicly listed
firms in and out of the U.S..
I’m sure Deloitte, and the rest of the Big Four,
thought the PCAOB would never have the nerve.
re: The Auditors has seen a confidential,
internal Deloitte training document, prepared this past summer, that reveals
the firm expects the worst when the inspection reports for their 2009, 2010,
and 2011 audits are published by the PCAOB. The 2009 report should be out by
the end of this year. The training document also shows how difficult it is
for Deloitte leadership to steer the largest global firm away from the
“audit failure”
iceberg.
It seems audit competence and capacity to audit
complex topics are in short supply at all the firms, based on PCAOB
inspection
results for audits conducted during the financial crisis period and
the reports for 2010 audits at PwC and KPMG released recently. Deloitte has
been particularly hard pressed to maintain audit quality since the firm lost
several engagements that would have helped to grow specialized knowledge and
retain experts. Big clients like Merrill Lynch, Bear Stearns, and Washington
Mutual helped pay the bills for subject matter experts and quality control
but those revenues were lost to financial crisis failures and forced
combinations with better capitalized, non-audit client banks.
I think the PCAOB decided to publicly criticize
Deloitte for two reasons.
- The firm has been
piling on the negatives via a $1,000,000
fine/disciplinary sanction as a firm for a previous issue, two high
level insider trading scandals (Flanagan and McClellan), the failures
and frauds of Deloitte China clients CCME, Longtop and now Focus Media,
and the specific failures of major clients during the crisis (Bear
Stearns, Merrill Lynch, WaMu, Taylor Bean & Whitaker, American Home, and
Royal Bank of Scotland, to name a few).
- Deloitte was resistant to the inspections,
resistant to the criticisms, and unwilling to make changes based on the
PCAOB’s requests. If you can’t fix something that’s one thing. If you
won’t and thumb your nose at the regulator, you are getting close to
Arthur Andersen-like behavior.
We know how that story ended.
If they did nothing, the PCAOB risked having a new
major failure of a Deloitte client expose their lack of push on the firm to
even respond, let alone improve.
I wrote in
American Banker about the special risks to
financial services firms when the regulated, like Deloitte, resists the
regulator:
The PCAOB’s decision to make the Deloitte 2006
quality control criticisms public, and the fact that the Securities and
Exchange Commission allowed it to do so, tell me Deloitte is still
fighting the regulators. The deadlines for Deloitte to fix or
sufficiently respond to criticisms in the 2007 and 2008 inspection
reports have passed. We could soon see previously nonpublic information
from those reports, too.
The risk for banks in a situation like this is
that an auditor that brazenly irritates its regulator may draw unwanted
attention to its clients from their regulators. For example, PCAOB
spokeswoman Colleen Brennan reminds me that the SEC knows the names of
every company whose audit deficiencies are mentioned in a PCAOB auditor
inspection report.
These risks apply to all of Deloitte’s clients and
to all public companies if the rest of the firms – KPMG, PwC, and Ernst &
Young – are also playing chicken with the regulator.
A little more than a month after releasing the
Deloitte private report, the PCAOB released the inspection reports for
audits performed by PwC and KPMG in 2009. The Financial Times’
Kara
Scannell
summarizes the findings:
The Public Company Accounting Oversight Board’s
findings from an annual inspection revealed that years after the
financial crisis both auditing firms were not adequately challenging
companies’ valuations of certain assets when the market for them dried
up…
The board reviewed 71 audits completed by PwC
in 2010 and 52 audits done by KPMG in 2010.
The Wall Street Journal’s Michael Rapoport
tells us how bad the results really were:
The government’s auditing regulator found
deficiencies in 28 audits conducted by PricewaterhouseCoopers LLP and 12
audits by KPMG LLP in its annual inspections of the Big Four accounting
firms.
The Public Company Accounting Oversight Board
said many of the deficiencies it found in its 2010 inspection reports of
the two firms, released Monday, were significant enough that it appeared
the firms didn’t obtain sufficient evidence to support their audit
opinions.
The regulator hasn’t yet issued its yearly
reports on its inspections of the other Big Four firms, Ernst & Young
LLP and Deloitte LLP.
KPMG’s response to the PCAOB was not quite as
belligerent as Deloitte’s persistent irritation at having their
“professional judgment second-guessed”. But, it was not exactly conciliatory.
Floyd Norris of the New York Times:
Normally these letters say something like what
KPMG wrote:
“We conducted a thorough evaluation of the
matters identified in the draft report and addressed the
engagement-specific findings in a manner consistent with PCAOB auditing
standards and KPMG policies and procedures.”
You may note that said nothing about whether
the firm accepted the board’s conclusions or not. That is better than
what Deloitte did a few years ago, when it essentially said the board
did not know what it was talking about.
PwC, on the other hand, met the regulator more than
half way according to Norris:
PwC’s letter addressed that issue, saying that
while there were cases where it differed with the board’s conclusions,
“they generally related to the significance of the finding in relation
to the audit taken as a whole, and not to the substance of the finding.”
“Accordingly,” wrote the PWC officials, “the
overall PCAOB inspection results, as well as the results of our internal
inspections, were important considerations in formulating our quality
improvement plan,” which it then describes.
PwC’s spokesperson sent me this additional
statement:
“PwC is built on our reputation for delivering
quality. We also recognize that the role we play in the capital markets
requires consistent, high-quality audit performance. We therefore are
focused on the increase in the number of deficiencies in our audit
performance reported in the 2010 PCAOB inspection over prior years. We
are working to strengthen and sharpen the firm’s audit quality,
including making investments designed to improve our performance over
both the short- and long-term.”
Did the quality of the auditing really deteriorate
for KPMG and PwC or
is the PCAOB getting tougher, and maybe better, at what they do?
We’ll have to see what the upcoming Ernst & Young
and Deloitte reports show.
Ernst & Young has been criticized for the
Groupon multiple S-1 issue, as well as questions
about accounting at future IPOs
Zynga and Facebook. Now we have
Olympus, too. And, of course, the jury is still
out on the firm’s role in
Repo 105 and Lehman Brothers.
And what about the Deloitte improvement plan for
prior years? Has Deloitte accepted the PCAOB’s criticisms and moved on or
are they still fighting the regulator? Is Deloitte working hard to get ahead
of their 2009, 2010, and 2011 results and avoid the embarrassment or worse –
sanctions – if the PCAOB has to publish another private report?
The confidential internal training report, intended
to brief Subject Matter Resources (SMR), is called, “FY 2012 Engagement
Quality Activities”.
The Audit Quality Activity Plan for FY2012 has
been socialized with:
- – The OAQ Steering Committee
- – The Audit Quality Council
- – The RMPs
- – The NPPDs
- – The RILs
- – Leaders in the PPN
- – Extended Leadership Team
- – CFO / CEO
Yeah, that’s a lot of acronyms. And I’m not sure
anymore – maybe I’ve been out of the firms too long or maybe I was never in
them enough – what “socializing” a quality plan
means. Suffice to say, the document, one hundred and eight-one very dense
PowerPoint pages, has tons of information for the SMRs to absorb and pass on
to engagement teams like now.
But, by this summer, it was too late to make a
difference in the inspection reports for the 2009 and 2010 audits.
2009
- Response submitted on May 4
2010
- Total of 98 comments (56 engagements
inspected)
- Expect about 25 engagements to appear in
Part I
- Draft report has not yet been issued
2011
- 33 engagements selected to date
- Focus areas
– Continue to include: fair value and impairment determinations;
internal controls – Also focusing more on revenue recognition
- 16 completed
– 5 with no written comments
- Total of 24 comments on 11 completed
inspections
If Deloitte sent their response to the PCAOB for
the 2009 audits on May 4th,
why are we still waiting for the final report?
Given the PCAOB’s decision to release Part 2 of the inspection report for
Deloitte’s 2006 audits last month, I believe Deloitte was still treating
PCAOB comments as an affront to partners’ professional judgments.
What are the root causes for so many negative PCAOB
comments, according to Deloitte?
Continued in article
Jensen Comment
Deloitte may be frustrated with the PCAOB at the moment, but my guess is
Deloitte's partners are raising their glasses at being able settle the
Washington Mutual (WaMu) case for a settlement share of a mere $18.5 million.
WaMu was the biggest bank to ever fail. And the bank failed after receiving a
glowing going concern audit reports from Deloitte. It could've been far worse
when the banking lawsuit dust settled for Deloitte, at least to date.
Francine contends that Deloitte is the biggest loser among all the Big Four
firms since the 2008 financial crisis. However, in the banking lawsuits all the
Big Four auditors seem to be getting off for pennies on the dollar relative to
the losses to banking shareholders, creditors, and taxpayers. KPMG seems to be a
bigger loser than Deloitte in terms of subprime fraud settlements, but even for
KPMG the settlements are merely hand slaps relative to damages done by slipshod
auditing and enormous underestimations of loan loss reserves.
None of the Big Four auditing firms are doing well in the PCAOB audit
inspection reports. The highest auditing fees in the world do not seem to be
buying as much auditing value added as those auditing firms would like us to
believe.
Bob Jensen's threads on auditing firm lawsuits are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Ernst Audits Found Deficient," by Michael Rapaport, The Wall
Street Journal, December 22, 2011 ---
http://online.wsj.com/article/SB10001424052970203686204577114763482556658.html?KEYWORDS=ernst
The government's auditing-oversight board found
deficiencies in 13 audits conducted by Ernst & Young LLP in its annual
inspection of the Big Four accounting firm.
In a report released Thursday, the Public Company
Accounting Oversight Board said some of the deficiencies it identified in
its 2010 inspection were significant enough that it appeared Ernst & Young
hadn't obtained enough evidence to support its audit opinions.
The 13 deficient audits were out of 63 Ernst &
Young audits and partial audits that inspectors reviewed. The board didn't
identify the companies involved, in accordance with its usual practice.
In seven of the 13 audits, the oversight board said
Ernst & Young was deficient in its testing of how clients applied fair value
to their hard-to-value securities. The accounting board also said that in
various audits, the firm made incorrect assumptions that led to inadequate
testing of clients' internal controls, and didn't do enough testing on
matters like revenue and loan-loss reserves.
Ernst & Young said in a statement that the
accounting board's observations "benefit our efforts to continuously
strengthen our audit processes and improve the high quality of our audit
services."
The Ernst & Young report is the last of the current
year's oversight reports on the Big Four to be released. Earlier this week,
the board's annual report on Deloitte & Touche LLP found 26 deficient audits
out of 58 reviewed. Last month, the report on PricewaterhouseCoopers LLP
found 28 deficient audits out of 75 reviewed, and the report on KPMG LLP
found 12 deficient audits out of 54 reviewed.
The PCAOB conducts annual inspections of the
largest accounting firms, scrutinizing a sample of each firm's audits to
assess its performance and its compliance with auditing standards. The first
part of the report, detailing deficient audits, is released publicly, but a
second part, evaluating the firm's quality controls, is sealed permanently
as long as the firm addresses any criticisms to the board's satisfaction
within 12 months.
Only once has the board unsealed that section of
the report for a Big Four firm. In October, the board made public a section
of a 2008 report in which it criticized Deloitte, saying "important issues
may exist" regarding the firm's procedures to ensure thorough and skeptical
audits.
"KPMG Scrutinized Over Handling of Olympus Accounting Fraud Scandal,"
by Kalen Smith, Big Four Blog, December 15, 2011 ---
http://www.big4.com/kpmg/kpmg-scrutinized-over-handling-of-olympus-accounting-fraud-scandal
KPMG’s auditors in Tokyo are under scrutiny after
signing off on reports issued by Olympus Corp. Auditors found several
accounting irregularities when they reviewed financial statements provided
by Olympus executives. The auditors were particularly concerned over $600
million worth of takeover advisory fees and payments on acquisitions.
Despite their concerns, auditors chose to sign off on the reports after an
outside consultant approved of the findings.
Although the consultant said the takeover costs
were justified, they were also hired from Olympus Corp. This has raised some
red flags over a possible conflict of interest in the matter.
Olympus has now been revealed to have engaged in
financial fraud for more than two decades. Following the revelation of the
accounting scandal at Olympus, regulators are looking closely at KPMG and
Ernst & Young. Regulators feel the auditors should have seen signs of the
fraud and taking measures to stop them.
According to allegations, KPMG was Olympus’s
auditor for years. They failed to catch the discrepancies and Ernst & Young
was called in as well.
According to Yuuki Sakurai of Fukoku Capital
Management, auditors work for the companies that pay them. Auditors are
going to have a hard time staying in business if they get a reputation for
being the kind of company that goes to the regulators without solid evidence
of malfeasance.
Although the manner in which KPMG handled the
Olympus case created some concern for regulators, it may signify greater
concern over the corporate culture that has created a serious conflict of
interest between auditors’ responsibilities for their clients and need to
uphold the law.
Bob Jensen's threads on KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's threads on the the decline of professionalism and
independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"Update: Mortgage Servicer Foreclosure Review Process," by Francine
McKenna, re:TheAuditors, December 27, 2011 ---
http://retheauditors.com/2011/12/27/update-mortgage-servicer-foreclosure-review-process/
On November
22, 2011, the Office of the Comptroller of the
Currency (OCC) issued a report on the actions by 12 national bank and
federal savings association mortgage servicers to comply with consent orders
issued in April 2011. These consent orders are intended to correct deficient
and unsafe or unsound foreclosure practices by the servicers. The OCC also
posted the twelve engagement letters between the consultants and the
servicers on the OCC website.
These disclosures were a result of pressure brought
to bear by Congresswoman Maxine Waters and several other congressional
members who sent a letter to the OCC and the Fed on October 28. This letter
expressed the legislators’ displeasure with the way the OCC and the Federal
Reserve Bank had so far run the “independent” foreclosure review process
that is intended to overhaul mortgage-servicing processes and controls and
to compensate borrowers harmed financially by wrongdoing or negligence.
Congresswoman Waters cited my October
6 column for American Banker in this
letter to the OCC and Fed when demanding that the regulators
manage conflicts of interest in the foreclosure review process as well as
make a full disclosure of vendors and their engagement letters with the
banks.
On December 6, I wrote again in American Banker
after I reviewed the engagement letters that were posted by the OCC. I had
several concerns. Congresswoman Waters did, too.
“[The OCC] issued a report on the actions of a
dozen national bank and federal savings association mortgage servicers
aimed at complying with the consent orders issued in April 2011 to
correct deficient and unsafe or unsound foreclosure practices. (The two
remaining consent order recipients — GMAC/Ally and SunTrust — have not
yet finalized their terms with vendors and as a result their overseers,
Fed Chairman Bernanke and the Federal Reserve Bank, have not yet
responded to the request for full disclosure, according to the Water’s
office.)
Waters was less than impressed with what she
saw and so am I. She told me, “My letters specifically asked for
information on conflicts of interest between the banks and the
consultants — which is precisely what the OCC redacted
in the information they released last week. A cursory look into the
banks and their consultants indicates that in some cases, there are
substantial pre-existing relationships between the firms.”
Redacted is an
understatement.
Here’s what was redacted, according to OCC
spokesman Bryan Hubbard:
Limited proprietary and personal information has
been redacted from the engagement letters including, but not limited to:
- Names,titles and biographies of individuals;
- Proprietary systems information;
- References to specific bank policy;
- Fees and costs associated with the engagement;
- Specific descriptions of past work performed
by the independent consultants.
So what’s left? It’s interesting enough, as a
start, to look at which consultants and law firms were selected by which
servicers. It’s also interesting to look at the scope of services to be
performed and the time and volume estimates for project activities where
they were not redacted.
Continued in article
PwC already admitted its guilt and already apologized.
"PwC Accused of Breaking Financial Rules Again," Big Four Blog,
December 16, 2011
PwC is being probed for its reporting of client
assets held by Barclays Capital Securities Ltd. to see if the Big4 firm
broke financial rules.
The UK’s Accountancy and Actuarial Discipline Board
is investigating PwC’s reports to the Financial Services Authority on
Barclays’s compliance with rules about separating client assets from other
assets. In January, the FSA fined Barclays £1.12 million (about $1.7
million) after concluding that the bank failed to put client money in
separated and protected accounts. At issue was £752 million ($1.16 billion)
in client assets.
PwC told Business Week that they “will cooperated
fully with the AADB investigation and we will be defending our work
vigorously,” adding that “the focus of the AADB is on cases which raise
important issues affecting the public interest.”
The AADB is also seeking a fine of £1.5 million
against PwC for its role on a client-money account issue with JPMorgan Chase
& Co.’s London activities. The fine would be the highest ever levied for
such a case.
PwC lawyer Tim Dutton has previously told a London
tribunal that the fine should be capped at £1 million because the firm has
admitted its guilt and already apologized.
Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm
"European Commission Proposal will Hurt Audit Quality, says PwC," by
Michael Foster, December 1, 2011 ---
http://www.big4.com/pricewaterhousecoopers/big4-com-exclusive-european-commission-proposal-will-hurt-audit-quality-says-pwc
-
In an exclusive interview with Big4.com, PwC
Director of Global Communications Mike Davies insisted that the recent
European Commission proposal to tighten auditing restrictions would lower
auditing quality throughout the European Union.
While PwC supports some of the ideas in the
legislation proposed by EU Financial Services Commissioner Michel Barnier,
Davies suggested that the restrictions go too far. Calling some of Barnier’s
proposals “radical measures”, Davies told me that PwC is happy with the
status quo. “We believe the audit market is already pretty competitive,”
Davies said, adding that there are already “checks and safeguards in place
and provisions about what you can and can’t provide to auditing clients”.
At the same time, Davies acknowledged that steps
could be taken to allow smaller auditing firms to compete with the Big4
firms such as PwC. “There’s always more that can be done in terms of how the
market operates and how to get smaller firms to increase their share,” he
added.
However, Barnier and supporters of the EC proposal
disagree. The commissioner’s final green paper pursued new rules that would
make it illegal for firms to offer consulting services to auditing clients.
This would essentially force the Big4 firms to split into separate
consulting and auditing companies, which some believe is Barnier’s ultimate
goal.
Additionally, the new European legislation would
require accounting firms to have a “cooling-off” period of several years
before they could offer auditing services to the same clients. This
practice, known as “firm rotation”, would require companies to hire more
than one auditing company over a long period of time.
While the legislation hopes that firm rotation
would help remove conflicts of interest, Mike Davies insists that it would
lower the quality of audits performed by all firms. “It would actually be
detrimental to audit quality,” Davies said, adding that “there are quite a
number of people who support our point of view.”
Continued in article
"Big four auditors face breakup to restore trust," by Huw Jones,
Reuters, November 30, 2011 ---
http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130
The world's top four audit firms will have to split
up and rename themselves under a far-reaching draft European Union law to
crack down on conflicts of interest and shortcomings highlighted by the
financial crisis.
"Investor confidence in audit has been shaken by
the crisis and I believe changes in this sector are necessary," Internal
Market Commissioner Michel Barnier said on Wednesday.
Large auditors said the plans won't improve audit
quality, while smaller rivals accused Barnier of a climbdown.
Policymakers have questioned why auditors gave a
clean bill of health to many banks which shortly afterwards needed rescuing
by taxpayers as the financial crisis began unfolding.
Barnier said recent apparent audit failures at
AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would
strongly suggest that audit is not working as it should".
More robust supervision is needed and "more
diversity in what is an overly concentrated market, especially at the top
end", he said.
Just four audit firms -- Ernst & Young ERNY.UL,
Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL -- check the books of 85
percent of blue-chip companies in most EU states, a situation the Commission
said was "in essence an oligopoly".
UK data shows the Big Four profit margins are 50
percent higher than the next four audit firms, the commission said.
Under Barnier's plan, the four top firms will have
to separate audit activities from non-audit activities, such as tax and
other advisory services -- "to avoid all risks of conflict of interest".
REBRANDING
There would have to be legal separation of audit
and non-audit services if over a third of revenues from auditing is from
large listed companies and the network's total annual audit revenues are
more than 1.5 billion euros in the EU.
Claire Bury, one of Barnier's top officials, said
these conditions, if approved by EU states and the European Parliament,
would alter all the Big Four's business models and even one or two of the
next tier down in some member states.
Continued in article
Proof is a dangerous word in most any academic discipline except mathematics
"Proof That Auditor Rotation is a Good Idea," by David
Albrecht, Summa, December 1, 2011 ---
http://profalbrecht.wordpress.com/2011/12/01/proof-that-auditor-rotation-is-a-good-idea/
"PCAOB Chair takes aim at auditors' controls testing and says mandatory
rotation could be difficult," Reuters, November 11, 2011 ---
http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111
Auditors are not properly testing U.S. companies'
internal accounting controls, the head of the main auditor watchdog said,
while also reiterating urgent concerns about audit firm inspections in
China.
Internal controls on books and records -- a
requirement imposed on corporations by 2002's post-Enron Sarbanes-Oxley laws
to combat accounting fraud -- are not being properly tested by outside
auditors, Public Company Accounting Oversight Board (PCAOB) Chairman James
Doty said on Thursday.
"This is a very major issue for us," Doty told
Reuters on the sidelines of a securities regulation conference.
Internal control rules for ensuring the adequacy of
accounting record-keeping and checks were among the costliest changes
mandated by Sarbanes-Oxley, often requiring sophisticated electronic systems
and detailed audits.
Auditors are supposed to gain an understanding of
the controls put in place by companies and test them, but "some auditors are
just taking the business process that the company has put in place as a
control," Doty said.
Touching on another key issue for his group and
auditors, Doty said the PCAOB needs to gain entrance soon to China to
inspect firms that audit U.S.-listed companies.
"We are not talking about something that should
happen three years from now. It needs to happen now," he said.
PRESSING CHINESE REGULATORS
A meeting planned for October between U.S. and
Chinese regulators to talk about inspections was canceled by the Chinese,
possibly because of leadership changes at their regulatory body, Doty said.
Late last month, China announced the appointment of
Guo Shuqing as the new head of the China Securities Regulatory Commission,
in a reshuffle of key financial regulators.
The PCAOB and the U.S. Securities and Exchange
Commission have been encouraging the new CSRC chairman to resume talks over
inspections, Doty said.
The PCAOB negotiated agreements this year to
inspect audit firms in the United Kingdom, Switzerland and Norway, but
Chinese regulators have resisted U.S. inspections on the grounds that it
would infringe on their authority.
The PCAOB is struggling over whether audit firms in
China should lose their U.S. registration if that country does not allow
inspections of its auditors, Doty said.
"It is not something we want to have happen," he
said.
SEES PROBLEMS WITH TERM LIMITS
In a speech at a Practicing Law Institute
conference, Doty indicated a controversial proposal to require term limits
for audit firms to increase their independence could be difficult to put
into practice.
"I recognize now that audit firm rotation presents
considerable operational challenges," he said.
The PCAOB in August issued a "concept release," or
initial report, on rotation, the first step in drafting changes in auditor
standards. It is seeking comments on the proposal through December 14.
Considered as early as the 1970s, audit firm
rotation has been strongly opposed by audit firms, which would lose some of
their most lucrative clients if it went into effect.
Sarbanes-Oxley mandated that lead auditors be
switched every five years, but put no term limits on audit firms.
Continued in article
Bob Jensen's threads on professionalism and independence within auditing
firms ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"Audit Reform in the European Union -- Michel Barnier Delivers A Holiday
Turkey," by Jim Peterson, re:TheBlance, December 5, 2011 ---
Click Here
http://www.jamesrpeterson.com/home/2011/12/audit-reform-in-the-european-union-michel-barnier-delivers-a-holiday-turkey.html
. . .
What explains Barnier’s inability to grasp the
complexities of the matrix of relationships among financial statement users,
auditors and users? Perhaps it’s a simple matter of provincial bias, and
lack of vision flowing down to reach its own level.
Else it’s the basic principle taught in nursery
schools:
Give a toddler a hammer to play with, and expect
breakage in the toy room
Bob Jensen's threads on professionalism and independence within auditing
firms ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"SAS 70s: Background on the Reason for Change," by Connie Spinelli,
Knowledge Leader, August 8, 2011 ---
Click Here
http://www.knowledgeleader.com/KnowledgeLeader/Content.nsf/Web+Content/HISAS70sBackgroundontheReasonforChange!OpenDocument&ISACANewsletter
Thanks to Jerry Trites for the heads up on November 23, 2011 ---
http://uwcisa-assurance.blogspot.com/
Earlier in the year, SAS 70 was replaced with a new
standard - SSAE No. 16 “Reporting on Controls at a Service
Organization,” which provides for the issuance of SOC 1 reports, which deal
with controls at a service organization that are likely to be relevant to an
audit of a user entity’s financial statements.
Originally, SAS 70 was intended to be for the use of auditors who report on
an organization that used service organizations to administer and run their
internal control systems. However, they began to be used widely by IT
auditors to report on the IT controls in the systems, and although they
weren't intended to be used as general purpose reports, were often widely
circulated by organizations who had them carried out to demonstrate their
system was well controlled. Often this was for marketing purposes.
Now, service auditor reports for periods ending on
or after June 15, 2011are required to conform to the guidance contained
in SSAE No. 16. Reports under SSAE No. 16 are referred to as SOC 1
reports, or “Reports on Controls at a Service Organization Relevant to
User Entities’ Internal Control over Financial Reporting.”Use of these
reports is still restricted to the management of the service
organization, user entities and user auditors.
The new standards also provide for SOC 2 and SOC 3 reports. SOC 2
reports are called “Reports on Controls at a Service Organization
Relevant to Security, Availability, Processing Integrity,
Confidentiality and Privacy” and SOC 3 engagement reports are called
“Trust Services Report for Service Organizations.” The latter are
available as general purpose reports, which can therefore be released to
the public.
The three types of reports are intended to meet the needs that have been
indicated for controls based reports, and hopefully will provide IT
Auditors with a set of standards that will be useful to them while not
compromising the purpose of their reports. For an article on this
change,
see this link.
"PCAOB Chair takes aim at auditors' controls testing and says mandatory
rotation could be difficult," Reuters, November 11, 2011 ---
http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111
Bob Jensen's threads on professionalism and independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"Banks Favor Companies with Women CFOs? A female finance chief may be an
asset when pitching for bank loans, a new Rensselaer Polytechnic Institute study
suggests," by Marielle Segarra, CFO.com, December 22, 2011 ---
http://www3.cfo.com/article/2011/12/leadership_rensselaer-polytechnic-rpi-qiang-wu-bank-loans-gender
GirlGeeks ---
http://www.girlgeeks.org/
Question
Who was the first woman to be admitted as an audit partner in a Big Eight
accounting firm?
Indiana University's Photo Archives (over two million pictures) ---
http://paper.li/businessschools?utm_source=subscription&utm_medium=email&utm_campaign=paper_sub
Jensen Comment
I did a search on the term "Accounting." One hit was a 1936 photograph of an
"accounting machine room" that in some respects resembles a computing lab room
of modern times. I don't know why an "auto polo" site also showed up on the hit
list for accounting. That photograph mentions Ernie Pyle, although I'm wasn't
sure this is the famous Ernie Pyle. However, a check on Ernie Pyle showed at he
was at Indiana University at that time ---
http://en.wikipedia.org/wiki/Ernie_Pyle
It was slightly more productive to search on the word "Business".
Here's a 1957 photograph of a computing machine in the school of business ---
http://webapp1.dlib.indiana.edu/archivesphotos/results/item.do?itemId=P0023310&searchId=3&searchResultIndex=21
Various photographs of Michele Fratianni (economics professor) show how men
can truly disguise their appearances with glasses and a mustache. I wonder if
the nose was attached to the glasses.
Cartoon: Players may strut and players may fret but orators rave on
forever ---
http://webapp1.dlib.indiana.edu/archivesphotos/results/item.do?itemId=P0022845&searchId=0&searchResultIndex=52
Here's a 1945 Careers for Women photograph ---
http://webapp1.dlib.indiana.edu/archivesphotos/results/item.do?itemId=P0023302&searchId=2&searchResultIndex=20
It would be interesting to investigate what female career opportunities were
being promoted at the time by Indiana University. It was in some ways too early
to suggest CPA firm careers. Most of the large CPA firms were not yet admitting
women partners (at least not in any significant numbers), and women were not
usually allowed to travel on audits and meet with clients. How times have
changed now that CPA firms hire more women graduates than men in recent years.
In 1960 Mary Jo McCann became the first woman CPA in Kansas ---
http://www.kscpa.org/about/news/119-mary_jo_mccann_first_woman_cpa_in_kansas_passes
Fifteen years later she became Chair of the Kansas State Board of
Accountancy
In 1977 Cheryl Wilson became the first woman partner of any Big Eight
firm in Chicago (Coopers & Lybrand) ---
http://www.icpas.org/hc-media.aspx?id=7602
In the1960s Mary E. Lanigar, a Stanford University mathematics
graduate and attorney and CPA, was the arguably first U.S. female to be made
partner in any Big Eight firm (Arthur Young). She was a tax partner. In 1938
she'd worked as an accountant in the Stanford University Athletics
Department.
http://articles.sfgate.com/2007-10-24/news/17264444_1_mills-college-santa-rosa-mary
In 1973 Marianne Burge became the first Price Waterhouse female partner.
She was also a tax partner.
http://www.nytimes.com/1998/03/17/business/marianne-burge-64-expert-on-tax-issues.html
Ernst & Ernst acquired a woman partner in 1957, but I think she was
inherited as a partner in a merger with a British accounting firm (Whinney,
Murray, & Company) ---
http://www.spoke.com/info/p73cjmW/Aalso
It would be interesting to know when the first U.S. female audit partner
was admitted in a Big Eight firm.
I suspect that Dale Flesher (Ole Miss. expert on accounting history)
probably knows the answer to this one.
Bob Jensen's threads on accounting careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"A Degree of Practical Wisdom:: The Ratio of Educational Debt to Income as
a Basic Measurement of Law School Graduates’ Economic Viability," by Jim
Chen, SSRN, December 3, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1967266
Abstract:
This article evaluates the economic viability of a
student’s decision to borrow money in order to attend law school. For
individuals, firms, and entire nations, the ratio of debt to income serves
as a measure of economic stability. The ease with which a student can carry
and retire educational debt after graduation may be the simplest measure of
educational return on investment.
Mortgage lenders evaluate prospective borrowers' debt-to-income ratios. The
spread between the front-end and back-end ratios in mortgage lending
provides a basis for extrapolating the maximum amount of educational debt
that a student should incur. Any student whose debt service exceeds the
maximum permissible spread between mortgage lenders' front-end and back-end
ratios will not be able to buy a house on credit.
These measures of affordability suggest that the maximum educational
back-end ratio (EBER) should fall in a range between 8 and 12 percent of
monthly gross income. Four percent would be even better. Other metrics of
economic viability in servicing educational debt suggest that the ratio of
total educational debt to annual income (EDAI) should range from an ideal
0.5 to a marginal 1.5.
EBER and EDAI are mathematically related ways of measuring the same thing: a
student's ability to discharge educational debt through enhanced earnings.
This article offers guidance on the use of these debt-to-income ratios to
assess the economic viability of students who borrow money in order to
attend law school.
. . .
To offer good
financial viability, defined as a ratio of education debt to annual income
no greater than 0.5, post-law school salary must exceed annual tuition by a
factor of 6 to 1. Adequate financial viability is realized when annual
salary matches or exceeds three years of law school tuition. A marginal,
arguably minimally acceptable level of financial viability requires a salary
that is equal to two years’ tuition. The following table compares some
tuition benchmarks with the salary needed to ensure the good, adequate, and
marginal levels of financial viability identified in this article:
Jensen Comment
This type of study, in my viewpoint, has some relevancy for professional schools
beyond the bachelors degree. However, I would not recommend this type of
analysis for students contemplating where to go after high school. In the first
four years, students get much more out of college than career opportunities.
There are liberal education quality considerations, greatness of faculty
considerations, socialization experiences, dating, dorm living, and intimacy
often leading to marriage. Often more expensive schools have more to offer
beyond the classroom experience. By the time students are more mature after
graduation from college, the importance of some of these "extracurricular"
experiences often diminishes.
And if we look at post-graduate law, medicine, engineering, and business
schools, the job opportunities and salary expectations are not independent of
the halo effect of where the candidate graduated. Diplomas from Harvard and Yale
Law Schools add a great deal to salary expectations. And there are huge
advantages of being able to network with alumni who often pave the way for job
opportunities. What I'm saying is going to a law school having a tuition of
$60,000 may well be worth it to graduates who take full advantage of the
"extracurricular" opportunities such as networking with alumni. And for all
practical purposes you can never be a U.S. Supreme Court justice unless you
either graduated from Harvard or Yale law schools or were on the faculty at one
of those law schools.
In other words, if you can swing it go to Yale Law school rather than UCON
(sorry Amy).
EGADS. I'm a snob.
Do financial incentives improve manuscript quality and manuscript reviews?
December 12, 2011 message from Dan Stone
There seems to be a "natural experiment" in
progress at accounting journals. Two "top" journals (JAE, JAR) have
substantial fees for submission, a portion of which is paid to reviewers.
Many other journals have low or no submission fee (e.g., AOS = $0).
Research questions:
1. Do submission fees improve the quality of
manuscript submissions?
Theory - Ho yes: because authors with more
financial resources produce better work. Ho no: because submission fees are,
in relation to accounting professor salaries, still trivial.
2. Do submission fees improve the quality of
manuscript reviews?
Theory - Ho yes: because $ increases effort and the
quality of reviews is primarily a function of reviewer effort.
Ho no: because financial motivation is of "low
quality" (according to self-determination theory) and reviews require
insight and creativity. Money doesn't buy insight or creativity, it only
buys effort.
Dan's remaining questions: 1. any existing papers
on this topic? (here's a paper that argues that financial incentives will
decrease cases of reviewer's declining to review, which could improve
reviewer quality (http://jech.bmj.com/content/61/1/9.full) 2. if not, any
volunteers to get this data and run this study? :)
Thanks,
Dan Stone
December 13, 2011 reply from Zane Swanson
Consider a control variable(s):
What is the key metric(s) in an
acceptable quality review?
The reason for the
aforementioned is that some informal convention discussions have occurred
that editors preselect the acceptance by who becomes a reviewer.
Alternatively, some reviewers may reject about everything. If an editor
does not want a paper (too far off the current “research frontier”?), then
the editor selects a reviewer who will just say no.
Stone wrote:
There seems to be a "natural
experiment" in progress at accounting journals. Two "top" journals (JAE,
JAR) have substantial fees for submission, a portion of which is paid to
reviewers. Many other journals have low or no submission fee (e.g., AOS =
$0).
Research questions:
1. Do submission fees improve the
quality of manuscript submissions?
Theory -
Ho yes: because authors with more
financial resources produce better work.
Ho no: because submission fees
are, in relation to accounting professor salaries, still trivial.
2. Do submission fees improve the
quality of manuscript reviews?
Theory -
Ho yes: because $ increases
effort and the quality of reviews is primarily a function of reviewer
effort.
Ho no: because financial
motivation is of "low quality" (according to self-determination theory) and
reviews require insight and creativity.
Money doesn't buy insight or
creativity, it only buys effort.
Dan's remaining questions:
1. any existing papers on this
topic? (here's a paper that argues that financial incentives will decrease
cases of reviewer's declining to review, which could improve reviewer
quality
(http://jech.bmj.com/content/61/1/9.full)
2. if not, any volunteers to get
this data and run this study? :)
Zane Swanson
December 12, 2011 reply from Bob Jensen
Since many of the TAR, JAR, and JAE top referees are used by all three
journals, it seems unlikely that variations in remuneration for the
refereeing is going to affect the quality of the reviews. What remuneration
might affect in a particular instance is a referee's acceptance of taking on
the refereeing assignment in the first place. This might be something some
referees (certainly not all) will admit to in interviews and surveys.
Regarding the question of whether journal editors predetermine refereeing
outcomes of some manuscripts, by choice of referees, probably can only be
answered by journal editors, but they're not likely to admit to such
unethical game playing.
Certainly with respect to submissions using advanced mathematics in what are
classified as analytical submissions, there are referees who are known to
be much tougher about the realism of the foundational assumptions. Some
referees don't get hung up on assumptions and are more interested in the
quality of the mathematical derivations. Other referees are likely to be
more critical of the lack of realism in the assumptions and/or questions
about whether the resulting outcomes are truly relevant to accounting. My
suspicion is that TAR, JAR, and JAE editors are going to shy away from the
latter referees unless they themselves don't don't think in advance that the
paper should have much of a shot. But that is an unproven suspicion.
With respect to "quality of a review," much depends upon the what
constitutes "quality." To me the highest quality review demonstrates that
the referee knows as much or more about the manuscript content and research
as the authors themselves.
A high quality rejection in one sense is a rejection that lists reasons so
convincing that even the authors agree that the paper should've been
rejected. I've had some memorable rejections in this category. You won't
find them at my Website.
A low quality rejection in a sense is a terse one word "reject" or an
editor's terse note that "this piece of garbage is not worth sending to our
referees." One of the best-known editors of JAR was known for the latter
type of rejection in those words. What such rejection feedback fails to tell
us is how much time time and effort the referee/editor really put in
studying the manuscript before writing a terse and useless reply to the
authors.
A high quality acceptance or re-submit outcome is one that lists tremendous
ideas for improving the manuscript before final publication or resubmission.
It's nice if a referee really suggests helpful ways to improve the way the
paper is written (apart from content), but we should not expect referees to
rewrite papers and it's unfair to downgrade a reviewer for not doing so.
But referees can get carried away to a fault in suggesting ways to improve a
paper. I was one of two referees of a submission published a short time ago
by IAE. We both had resubmit suggestions, but mine were quite modest. The
other referee submitted about 10 pages of "conditions" that if taken
literally would've increased the size of the paper to over 200 pages and
required that the authors completely re-run the field study with more
questions to be asked in the field. As we sometimes say about some referee
reports, "the road to hell is paved with good intentions."
Fortunately the referee who really got carried away with "conditions" did
not insist upon meeting most of the original conditions after the authors
resubmitted the paper three times.
Also it was fortunate that the authors did not simply throw up their hands
in utter discouragement over all that the referee wanted in his/her first
review.
When Steve Zeff was editor of TAR, I was given the task of adjudicating
conflicting referee recommendations. I had the feeling that the adjudication
cases Steve sent to me were those where he wanted to publish the manuscripts
but needed some additional backup for his decisions. Or put another way, he
really wanted to publish some manuscripts that did not contain the requisite
equations demanded by nearly all TAR referees.
Of course when doing research on the refereeing process, it's risky to
survey authors themselves. Most of us have had referees we thought were
idiots and are likely to say so in surveys. We could easily be wrong of
course. In my case the my three "big ones" that were flatly turned down are
linked at
http://www.trinity.edu/rjensen/default4.htm
Please keep the dates of my three "big ones" in mind if you take the time
and trouble to examine my big ones that got away. Also my secretary
translated my original doc files into html files (before the MS word would
do such conversions automatically). Hence the tables and exhibits and some
other sections of the papers were degraded badly.
Only one of the papers was submitted to an accounting research journal.
Actually it was rejected by both TAR and JAR even after I took on co-authors
to improve the paper. That was Working Paper 153.
Respectfully,
Bob Jensen
December 13, 2011 reply from Bob Jensen
Bob,
That was a breath of fresh air on a touchy academic subject. There is an
endless supply of material in guides to writing and examples of award
winning publications, but little about reviewing. I do suggest that your
post is a keeper on your web site.
Regards,
Zane
When browsing some of my 8,000+ comments on the AAA Commons, I ran across this
old tidbit that relates to our more current AECM messaging on journal
refereeing.
I even liked the "Dear Sir, Madame, or Other"
beginning.
I assume that "Other" is for the benefit of Senator Boxer from
California.
Letter From Frustrated Authors,
by R.L. Glass, Chronicle of Higher
Education, May 21, 2009 ---
http://chronicle.com/forums/index.php?topic=60573.0
This heads up was sent to me by Ed Scribner at New Mexico State
Dear Sir, Madame, or Other:
Enclosed is our latest version of Ms.
#1996-02-22-RRRRR, that is the re-re-re-revised revision of our paper. Choke
on it. We have again rewritten the entire manuscript from start to finish.
We even changed the g-d-running head! Hopefully, we have suffered enough now
to satisfy even you and the bloodthirsty reviewers.
I shall skip the usual point-by-point
description of every single change we made in response to the critiques.
After all, it is fairly clear that your anonymous reviewers are less
interested in the details of scientific procedure than in working out their
personality problems and sexual frustrations by seeking some kind of
demented glee in the sadistic and arbitrary exercise of tyrannical power
over hapless authors like ourselves who happen to fall into their clutches.
We do understand that, in view of the misanthropic psychopaths you have on
your editorial board, you need to keep sending them papers, for if they were
not reviewing manuscripts they would probably be out mugging little old
ladies or clubbing baby seals to death. Still, from this batch of reviewers,
C was clearly the most hostile, and we request that you not ask him to
review this revision. Indeed, we have mailed letter bombs to four or five
people we suspected of being reviewer C, so if you send the manuscript back
to them, the review process could be unduly delayed.
Some of the reviewers’ comments we could
not do anything about. For example, if (as C suggested) several of my recent
ancestors were indeed drawn from other species, it is too late to change
that. Other suggestions were implemented, however, and the paper has been
improved and benefited. Plus, you suggested that we shorten the manuscript
by five pages, and we were able to accomplish this very effectively by
altering the margins and printing the paper in a different font with a
smaller typeface. We agree with you that the paper is much better this way.
One perplexing problem was dealing with
suggestions 13–28 by reviewer B. As you may recall (that is, if you even
bother reading the reviews before sending your decision letter), that
reviewer listed 16 works that he/she felt we should cite in this paper.
These were on a variety of different topics, none of which had any relevance
to our work that we could see. Indeed, one was an essay on the
Spanish–American war from a high school literary magazine. The only common
thread was that all 16 were by the same author, presumably someone whom
reviewer B greatly admires and feels should be more widely cited. To handle
this, we have modified the Introduction and added, after the review of the
relevant literature, a subsection entitled “Review of Irrelevant Literature”
that discusses these articles and also duly addresses some of the more
asinine suggestions from other reviewers.
We hope you will be pleased with this
revision and will finally recognize how urgently deserving of publication
this work is. If not, then you are an unscrupulous, depraved monster with no
shred of human decency. You ought to be in a cage. May whatever heritage you
come from be the butt of the next round of ethnic jokes. If you do accept
it, however, we wish to thank you for your patience and wisdom throughout
this process, and to express our appreciation for your scholarly insights.
To repay you, we would be happy to review some manuscripts for you; please
send us the next manuscript that any of these reviewers submits to this
journal.
Assuming you accept this paper, we would
also like to add a footnote acknowledging your help with this manuscript and
to point out that we liked the paper much better the way we originally
submitted it, but you held the editorial shotgun to our heads and forced us
to chop, reshuffle, hedge, expand, shorten, and in general convert a meaty
paper into stir-fried vegetables. We could not – or would not – have done it
without your input.
-- R.L. Glass
Computing Trends,
1416 Sare Road Bloomington, IN 47401 USA
E-mail address:
rglass@acm.org
December 31, 2011 reply from Steve
Kachelmeir
This letter perpetuates the sense that "reviewers"
are malicious outsiders who stand in the way of good scholarship. It fails
to recognize that reviewers are simply peers who have experience and
expertise in the area of the submission. The Accounting Review asks about
600 such experts to review each year -- hardly a small set.
While I have seen plenty of bad reviews in my
editorial experience, I also sense that it is human nature to impose a
self-serving double standard about reviewing. Too many times when we receive
a negative review, the author concludes that this is because the reviewer
does not have the willingness or intelligence to appreciate good scholarship
or even read the paper carefully. But when the same author is asked to
evaluate a different manuscript and writes a negative review, it is because
the manuscript is obviously flawed. Psychologists have long studied
self-attributions, including the persistent sense that when one experiences
a good thing, it is because one is good, and when one experiences a bad
thing, it is because others are being malicious. My general sense is that
manucripts are not as good as we sense they are as authors and are not as
bad as we sense they are as reviewers. I vented on these thoughts in a 2004
JATA Supplement commentary. It was good therapy for me at the time.
The reviewers are us.
Steve
December 31, 2011 reply from Bob Jensen
When I was a relatively young PhD and still full of myself, the Senior
Editor, Charlie Griffin, of The Accounting Review sent me a rather
large number of accountics papers to referee (there weren't many accountics
referees available 1968-1970). I think it was at a 1970 AAA Annual Meeting
that I inadvertently overheard Charlie tell somebody else that he was not
sending any more TAR submissions to Bob Jensen because "Jensen rejects every
submission." My point in telling you this is that having only one or two
referees can really be unfair if the referees are still full of themselves.
Bob Jensen
Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
"Corporate Tax Avoidance Cost States $42 Billion," by Michael Cohn,
Accounting Today, December 7, 2011 ---
http://www.accountingtoday.com/news/Corporate-Tax-Avoidance-Cost-States-Billions-61060-1.html
To say nothing about the strategies to avoid or defer Federal taxes when, often
reducing tax payments to zero or seeking negative tax refunds.
Sixty-eight of the most consistently profitable
Fortune 500 companies paid no state corporate income tax in at least one of
the last three years, and 20 of the companies averaged a tax rate of zero or
less from 2008-2010.
Nevertheless, the companies told shareholders they
made nearly $117 billion in pre-tax U.S. profits during those no-tax years,
and 16 of the companies had multiple no-tax years.
A new
study from the advocacy group Citizens for Tax
Justice and the Institute on Taxation and Economic Policy found that 265 of
the most consistently profitable U.S. corporations cost states $42.7 billion
over three years. If the 265 corporations had paid the 6.2 percent average
state corporate tax rate on the $1.33 trillion in U.S. profits that they
reported to their shareholders, they would have paid $82.6 billion in state
corporate income taxes over the 2008-10 period. Instead, they paid only
$39.9 billion.
Continued in article
Corporate Tax Dodging in the Fifty States, 2008-2010 ---
http://ctj.org/ctjreports/2011/12/corporate_tax_dodging_in_the_fifty_states_2008-2010.php
Best and Worst Run States in America — An Analysis Of
All 50
From the AICPA CPA Letter Daily on December 7, 2011
For the second year, 24/7 Wall St. ranked the 50
states according to how well they are run. Factors included the state's
financial health, standard of living, education system, employment rate, crime
rate and how efficiently the state uses its resources to provide government
services. 24/7 Wall St. determined that Wyoming is the best-run state and
California is the worst run.
24/7 Wall St.
http://247wallst.com/2011/11/28/best-and-worst-run-states-in-america-an-analysis-of-all-50/
Jensen Comment
The best-run state is Wyoming. The worst-run state is California Most of
the Top Ten best-run states have relatively low populations. Small seems to be
better in terms of state government efficiency, although social programs and
cold weather in those states tend to repel welfare and Medicaid recipients from
around the nation. It's difficult to draw liberal versus conservative
explanations for best-run states since liberal states of Vermont and Minnesota
are mixed in the Top Ten along with the conservative states of Wyoming, Utah,
and the two Dakota states.
Minnesota has the least debt per capita, but the union-run state of
Massachusetts has the most debt per capita. This is somewhat interesting because
both Minnesota and Massachusetts are viewed as liberal states (more so in the
days of Hubert Humphrey and Walter Mondale). The relatively conservative
southern states tend to be below the median on state debt per capita. The
western states are more variable. I accuse Taxachusetts of being union-run in
part because Boston refuses to allow Wal-Mart stores until Wal-Mart becomes
unionized.
When it comes to debt per capita there is less denominator effect than I
suspected beforehand, although small populations become a huge factor behind the
high debt loads per capita in Alaska, Rhode Island, and Delaware. Alaska can
also afford a higher debt load because of vast untapped natural resources.
I watched two very liberal commentators from Boston on television last night
arguing that more debt load in Taxachusetts to support increased spending for
social programs was a good investment of that state's economy. This seems to be
questionable given where Taxachusetts already stands in relation to debt per
capita.
Bob Jensen's threads on state taxation are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
You have to scroll down to find the state tax comparisons.
"GASB Plan Concerns Treasurers: NAST Members Share Qualms About Five-Year
Projections," by Joan Quigley, The Bund Buyer, December 7, 2011 ---
http://www.bondbuyer.com/issues/120_234/gasb-state-five-year-projections-1033938-1.html
State treasurers voiced concerns about a proposal
unveiled Tuesday by the Governmental Accounting Standards Board that
recommends they provide five-year projections of cash flows and information
about future financial obligations.
The concerns surfaced here at the Issues Conference
on Public Funds Management, sponsored by the National Association of State
Treasurers.
The NAST gathering coincided with GASB’s release of
so-called preliminary views in a document entitled “Economic Condition
Reporting: Financial Projections.”
The proposal, which GASB is floating for public
comment and hearings, would require issuers to provide the cash-flow
projections if they wanted a clean audit.
GASB said users of governments’ financial
statements need this information to assess an entity’s financial health.
Several state treasurers at the conference who had
not reviewed the board’s proposal and had only read about it in media
accounts expressed reservations.
“We do have a basic concern about what sort of
future fiscal projections are expected, with what detail and with what
caveats they would be presented,” said Nancy Kopp, the treasurer of
Maryland.
She noted that if such projections had been
required in 2006, they would have proven wrong after the 2008 financial
crisis.
“It’s when you get to projections and hypothetical
information, we get most concerned,” she said.
The treasurer’s office of Maryland currently posts
projections on its website based on present law and economic assumptions.
“But these are unaudited, best-guess assumptions,”
Kopp said.
Another state treasurer, who moderated the pension
panel, said she had qualms about the proposal’s impact on small
municipalities.
Continued in article
Bob Jensen's threads about the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
"529 college savings plans have their downsides The state-sponsored
programs offer a tax-advantaged way to save for college. But there are pitfalls
to 529s that even careful investors can overlook," by Walter Hamilton and
Stuart Pfeifer, Los Angeles Times, December 18, 2011 ---
http://www.latimes.com/business/la-fi-college-529-20111218,0,2693621.story
Sherri and Cliff Nitschke thought they were
planning wisely for their children's college educations when they opened a
529 savings account in 1998.
The Fresno couple saved diligently over the years in hopes of avoiding
costly student loans. But their timing couldn't have been worse.
When they needed the money a decade later, their 529 account had plunged in
value during the global financial crisis. Their portfolio sank 30% in 2008,
forcing the Nitschkes to borrow heavily to send their two sons to
UCLA.
"529s were no friend to us," Cliff Nitschke said. "Honestly, it's probably
one of the worst things we did. I could have made more money putting it in a
mayonnaise jar and burying it in the backyard."
Over the last decade, 529 savings plans have surged in popularity as parents
scramble to keep up with rapidly escalating college costs.
Similar in some ways to 401(k) retirement plans, 529s are state-sponsored
programs offering a tax-advantaged way to save for college. Parents
typically invest in stock and bond mutual funds with after-tax dollars. But
the earnings grow free of federal, and generally state, taxes.
Every state offers at least one 529 plan, and parents can invest in any
state's plan. Many states give up-front tax deductions for 529
contributions, though California does not.
Assets in 529 accounts have swelled to $135 billion today from $91 billion
five years ago, according to Financial Research Corp.
But as the Nitschkes discovered, there are downsides to 529s that even
careful investors can overlook.
"There are a number of pitfalls that can catch parents completely off
guard," said Deborah
Fox, founder of Fox
College Funding in San Diego, which advises families on how to pay for
college. "They are not a panacea."
Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
"A Political Solution for the Euro? Germany is right to demand that the
worst-run nations submit to fiscal discipline in exchange for financial aid,"
by George Melloan, The Wall Street Journal, November 30, 2011 ---
http://online.wsj.com/article/SB10001424052970204630904577062680963637586.html#mod=djemEditorialPage_t
Markets rebounded Monday on reports that the 17
euro-zone nations are negotiating a plan to impose greater fiscal discipline
on deeply indebted states. The partial recovery from last week's market
swoon was a recognition that German Chancellor Angela Merkel is right to
define Europe's crisis of confidence as primarily a political malaise.
Nothing will come right until Europe's southern tier politicians curb their
excessive borrowing.
The possible direction of the negotiations was
tipped by a leaked German memo proposing a "European Monetary Fund" that
would be the core of a "stability union" paving the way for "political
union." As a quid pro quo for financial aid, this fund would demand policy
reforms in distressed nations to facilitate a work-off of excessive debt.
Ms. Merkel, French President Nicolas Sarkozy and the new Italian premier,
Mario Monti, are promising that a plan for closer economic and political
integration will be submitted at the Dec. 9 European Union summit. If
approved, this could be a very big deal.
The Germans, strong backers of further European
union, are essentially laying out a choice: Either the governments of its
worst-run nation states submit to some form of fiscal discipline, or the
monetary union will disintegrate and they will be worse off for it. The
bailout funds that have already been granted—to Greece, Ireland and
Portugal—have done little to ease the debt crisis because they have produced
insufficient reform.
Moreover, the bailout well is running dry. The
European Financial Stability Facility (EFSF), created last year, is clearly
underfunded at €440 billion ($587 billion). Having already allotted a third
of that to Ireland and Portugal, the facility is certainly not capable of
rescuing an Italy or Spain. As for the European Central Bank (ECB), it
already is fudging on its legal limitations by buying national debt.
The latest nonstarter put forward by the bailout
lobby in Brussels would have the ECB lend money (presumably newly printed)
to the International Monetary Fund (IMF), which in turn would package those
euros with its own funds for additional European bailouts. This too-clever
idea would bypass ECB restrictions on direct loans. More importantly it
would transfer most of the bailout risks to non-European IMF members, with
the IMF's largest contributor—the United States—assuming the lion's share.
If the U.S. Congress buys into this deal, it should be fined for
sleepwalking.
Continued in article
"End-of-Term Conundrums, Part 1: Plagiarism," by Frank Donoghue,
Chronicle of Higher Education, December 2, 2011 ---
http://chronicle.com/blogs/innovations/end-of-term-conundrums-part-1-plagiarism/31005?sid=wc&utm_source=wc&utm_medium=en
As professors and students approach the end of the
academic term, I thought it appropriate to post about two items that never
fail to factor in the early winter and late spring. The first is plagiarism.
I can’t help feeling that, in recent years, academia has not kept pace with
what I see as a rapidly changing and increasingly hard-to-define concept.
Two important factors to consider: 1) plagiarism has gotten much easier to
commit in the age of the Internet; and 2) students currently in the
undergraduate pipeline either understand intellectual property imperfectly
or they simply don’t care about it.
1) Google and Wikipedia simultaneously constitute a
gold mine and a potential minefield for wannabe plagiarists. As a random
illustration, I looked up “Scarlet Letter essays” and “Scarlet Letter term
papers” on Google, and looked up The Scarlet Letter on Wikipedia. The Google
searches yielded page after page of complete essays, “study guides” which
could easily be transformed into papers with little effort, and
advertisements for paper-writing services. These last were, I must admit,
refreshing and funny. When I was an undergraduate in the late 1970s, I knew
students who bought term papers, but, to hear them talk about it, the
process sounded much like a drug deal, with everything on the QT. Now
paper-writing services are out in the open, and have clearly adopted the
advertising model used by online dating services: that is, they bill
themselves as “free,” and there is a (very) minimal amount of free material
on their sites, but if you want something you can actually turn in for a
grade (the equivalent of “show profile” and “chat” options I guess), you
have to pay. You can even order a customized essay, so that specific,
assigned paper topics pose no problem. But with so many free papers
available—and with so much thematic overlap among them that cut and paste
opportunities are everywhere—why pay money?
The Wikipedia article on The Scarlet Letter also
demonstrated that a paper on the novel was one mouse click away. After a
very detailed plot summary, the author of the article offered an analysis of
what he or she considered its two major themes: sin and the clash between
past and present.
It’s hard to imagine weak students, students
working 50 hours a week, or desperate students getting to their assignments
at the eleventh hour, not availing themselves of these resources,
particularly since they’re universal in all our daily lives. Smartphones
have made bar bets a thing of the past; my students regularly use “Google”
and “Wikipedia” as verbs; and even the new Kindle Touch has a feature that
links key terms in the books one downloads to Wikipedia.
2) Plagiarism aside, these are not bad
developments. Wikipedia in particular is a unique phenomenon, in the sense
that it is slowly but surely transforming itself from a catch-all bin of
information into a legitimate scholarly reference. It can do so in part
because the Internet allows it to be infinitely more agile than, say, the
Encyclopedia Britannica (and when, by the way, was the last time you saw a
citation in a student paper to that once august reference work?). Wikipedia
also adopts a collaborative conception of writing, blurring the notion of
writing as personal, intellectual property. Chris Anderson’s popular and
provocative recent book Free: How Today’s Smartest Businesses Profit by
Giving Something for Nothing (2010), simultaneously released as a
traditional book and as a free downloadable text, blurs that notion even
farther, giving the reader the choice either to acknowledge the book as
Anderson’s intellectual property or to decide that it doesn’t belong to
anyone.
Traditionalists would argue that we need to do a
better job of policing student work and punishing plagiarists. I counted
myself among them and have often pointed out that, unlike my university,
Ohio State, many colleges and universities require students to submit their
papers to the plagiarism-detection service Turnitin.com. I thought that was
a good idea until I began researching this post, only to discover that
(intellectual property concerns aside—Turnitin claims ownership of the
papers fed into it, as those papers make up part of its database), Turnitin
just doesn’t work. I found several articles and even, amazingly, a YouTube
video on the topic of “how to beat Turnitin.”
Continued in article
Jensen Comment
Accounting students have a harder time plagiarizing from Wikipedia vis-à-vis
finance and economics students. This is because accountants have been hugely
negligent contributing to Wikipedia relative to their other professional and
academic brethren.
But Google searches by accounting students are alive and well, and hits to my
own Website become more popular late in every semester. of course most of these
students do not plagiarize my work. But I'll bet the shirt I'm wearing that I
end up having written huge portions of term papers every semester for which I
get no credit ---
http://www.trinity.edu/rjensen/threads.htm
Bob Jensen's threads on plagiarism and cheating are at
http://www.trinity.edu/rjensen/Plagiarism.htm
Don't wash out our SOX
"Republicans for the Accounting Cartel: GOP Members block Sarbox
reform for small public companies," The Wall Street Journal, December
2, 2011 ---
http://online.wsj.com/article/SB10001424052970204262304577068723458775202.html#mod=djemEditorialPage_t
How is it that a Republican House that claims to be
pro-jobs can't pass a regulatory reform so modest that even President
Obama's jobs council endorses it? Part of the answer is that the accounting
cartel fighting reform has one of its own in the Republican ranks. A GOP
presidential candidate also can't be bothered to show up for a critical
vote.
In September we told you about Tennessee
Representative Stephen Fincher's plan to relieve small public companies from
Sarbanes-Oxley's most burdensome and duplicative accounting rules. "Useless"
might be a better description for these rules, after MF Global became the
latest company in the Sarbox era to hide catastrophic transactions outside
its balance sheet—exactly what the law was supposed to prevent.
On Tuesday night, the House Financial Services
Committee had to yank the Fincher reforms from a scheduled Wednesday vote.
With all committee Democrats expected to vote against reducing paperwork,
the Republicans would need almost all hands to send the measure to the House
floor.
But House sources say Michele Bachmann wouldn't
return from the campaign trail to vote. Meanwhile, California Republican
John Campbell has been leading an effort to water down or kill the Fincher
reforms. Mr. Campbell is an accountant carrying water for his former
industry colleagues. New Mexico Republican Steve Pearce, who styles himself
an opponent of federal regulation, is also blocking reform.
Sarbox was supposed to punish accountants, but like
much regulation in practice it guarantees a lucrative business to a cartel
dominated by four big firms. The mandate for an external audit on top of the
traditional financial audits has helped accounting fees rise as fast as the
bureaucratic burden.
Sarbox compliance runs into the billions of dollars
annually, and the market for initial public offerings of young companies has
never recovered since the law's 2002 enactment. In a report lauded by Mr.
Obama, his independent jobs panel recently recommended allowing shareholders
in companies below $1 billion in market capitalization to opt out of
Sarbox's infamous section 404. Alternatively, the council suggested
exempting all new companies from Sarbox compliance for five years after
going public.
Continued in article
Jensen Comment
For a few years John Campbell was a CPA with Ernst & Young after receiving a MS
in Tax from USC. However, he then moved on to become a successful CEO of an
automobile dealership before becoming a Congressional representative from
California ---
http://en.wikipedia.org/wiki/John_B._T._Campbell_III
The above editorial is typical of the WSJ's disdain for SarBox. The WSJ
seldom mentions the good things that SarBox did accomplish. More focus on
internal controls by auditors did result in improved internal control systems,
sometimes well in advance when corporations knew that the auditors would soon
arrive on the scene. SarBox made auditing more profitable, thereby encouraging
medium-sized CPA firms to become more competitive with the Big Four for smaller
audit clients. And Sarbox created the PCAOB that has been surprisingly rigorous
in its inspections of audit engagements and campaigns for audit reform.
From Ernst & Young on December 1, 2011
30 November 2011
FASB meeting
Insurance Contracts - The Board discussed the measurement
of cash flows of insurance contracts that depend on the performance of the
insurer or specific assets and liabilities of the insurer (i.e., the
underlying items). To eliminate accounting mismatches, the Board decided
that the liability for performance-linked participating features should be
adjusted to reflect timing differences between the current liability (i.e.,
the obligation incurred to date) and the measurement of the underlying items
in the statement of financial position. The Board also decided that any
changes in the liability for the performance-linked participating feature
would be reported in the same way as the changes in the underlying items
within the statement of comprehensive income (i.e., either in net income or
OCI).
EITF Consensuses - The Board ratified the final consensus
reached on Issue 10-E, "Derecognition of In-Substance Real Estate." The FASB
Chairman subsequently announced the addition of a research project to the
Board's agenda to address the question of whether a nonfinancial asset that
has been placed in a legal entity should be subject to recognition and
derecognition rules applicable to the asset or the consolidation literature.
She also clarified that the accounting described in the final consensus is
not required for lenders. The Board also ratified the consensus-for-exposure
reached on Issue 11-A, "Parent's Accounting for the Cumulative Translation
Adjustment (CTA) upon the Sale or Transfer of a Group of Assets that is a
Nonprofit Activity or a Business within a Consolidated Foreign Entity." The
consensus-for-exposure will be exposed for a period of 60 days.
For further detail on the consensuses, see our
EITF
Update - November 2011.
For additional detail of
the Board's decisions, see the FASB's
Action Alert.
A Lesson for Auditors: Accounting for the shadow economy
"Toxic Assets Were Hidden Assets: We can't afford to allow shadow
economies to grow this big," by Hernando de Soto, The Wall Street
Journal, March 25, 2009 ---
http://online.wsj.com/article/SB123793811398132049.html?mod=djemEditorialPage
The Obama administration has finally come
up with a plan to deal with the real cause of the credit crunch: the
infamous "toxic assets" on bank balance sheets that have scared off
investors and borrowers, clogging credit markets around the world. But if
Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global
economic crisis, his rescue plan must recognize that the real problem is not
the bad loans, but the debasement of the paper they are printed on.
Today's global crisis -- a loss on paper
of more than $50 trillion in stocks, real estate, commodities and
operational earnings within 15 months -- cannot be explained only by the
default on a meager 7% of subprime mortgages (worth probably no more than $1
trillion) that triggered it. The real villain is the lack of trust in the
paper on which they -- and all other assets -- are printed. If we don't
restore trust in paper, the next default -- on credit cards or student loans
-- will trigger another collapse in paper and bring the world economy to its
knees.
If you think about it, everything of
value we own travels on property paper.
At the beginning of the decade there was
about $100 trillion worth of property paper representing tangible goods such
as land, buildings, and patents world-wide, and some $170 trillion
representing ownership over such semiliquid assets as mortgages, stocks and
bonds. Since then, however, aggressive financiers have manufactured what the
Bank for International Settlements estimates to be $1 quadrillion worth of
new derivatives (mortgage-backed securities, collateralized debt
obligations, and credit default swaps) that have flooded the market.
These derivatives are the root of the
credit crunch. Why? Unlike all other property paper, derivatives are not
required by law to be recorded, continually tracked and tied to the assets
they represent. Nobody knows precisely how many there are, where they are,
and who is finally accountable for them. Thus, there is widespread fear that
potential borrowers and recipients of capital with too many nonperforming
derivatives will be unable to repay their loans. As trust in property paper
breaks down it sets off a chain reaction, paralyzing credit and investment,
which shrinks transactions and leads to a catastrophic drop in employment
and in the value of everyone's property.
Ever since humans started trading, lending
and investing beyond the confines of the family and the tribe, we have
depended on legally authenticated written statements to get the facts about
things of value. Over the past 200 years, that legal authority has matured
into a global consensus on the procedures, standards and principles required
to document facts in a way that everyone can easily understand and trust.
The result is a formidable property system
with rules and recording mechanisms that fix on paper the facts that allow
us to hold, transfer, transform and use everything we own, from stocks to
screenplays. The only paper representing an asset that is not centrally
recorded, standardized and easily tracked are derivatives.
Property is much more than a body of
norms. It is also a huge information system that processes raw data until it
is transformed into facts that can be tested for truth, and thereby destroys
the main catalysts of recessions and panics -- ambiguity and opacity.
To bring derivatives under the rule of law,
governments should ensure that they conform to six longstanding procedures
that guarantee the value and legitimacy of any kind of paper purporting to
represent an asset:
- All documents and the assets and
transactions they represent or are derived from must be recorded in
publicly accessible registries. It is only by recording and continually
updating such factual knowledge that we can detect the kind of overly
creative financial and contractual instruments that plunged us into this
recession.
- The law has to take into account the
"externalities" or side effects of all financial transactions according
to the legal principle of erga omnes ("toward all"), which was
originally developed to protect third parties from the negative
consequences of secret deals carried out by aristocracies accountable to
no one but themselves.
- Every financial deal must be firmly
tethered to the real performance of the asset from which it originated.
By aligning debts to assets, we can create simple and understandable
benchmarks for quickly detecting whether a financial transaction has
been created to help production or to bet on the performance of distant
"underlying assets."
- Governments should never forget that
production always takes priority over finance. As Adam Smith and Karl
Marx both recognized, finance supports wealth creation, but in itself
creates no value.
- Governments can encourage assets to
be leveraged, transformed, combined, recombined and repackaged into any
number of tranches, provided the process intends to improve the value of
the original asset. This has been the rule for awarding property since
the beginning of time.
- Governments can no longer tolerate
the use of opaque and confusing language in drafting financial
instruments. Clarity and precision are indispensable for the creation of
credit and capital through paper. Western politicians must not forget
what their greatest thinkers have been saying for centuries: All
obligations and commitments that stick are derived from words recorded
on paper with great precision.
Above all, governments should stop
clinging to the hope that the existing market will eventually sort things
out. "Let the market do its work" has come to mean, "let the shadow economy
do its work." But modern markets only work if the paper is reliable.
Continued in article
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm
Off Balance Sheet Vehicles
The Mother of All Ponzi Schemes According to Top Liberal (Progressive)
Economists
The Latest Bailout Plan’s a Disaster According to
Paul Krugman and
James K. Galbraith
And yet American policy-makers appear convinced
that more debt can rescue an economy already drowning in it. If we can just keep
the leverage party going, all will be well. $787 billion to fund “stimulus,”
another $9 trillion committed to guarantee bad debts, 0% interest rates and
quantitative easing to drive more lending, new
off balance sheet vehicles
to hide from the public the toxic assets they’ve
absorbed. All of it to be funded with debt, most of it the responsibility of
taxpayers. If I may offer just one reason this will all fail: rising interest
rates. Interest rates need only revert to their historical median in order to
hammer asset values, and balance sheets, into oblivion.
"Added Debt Won't Rescue the Great American Ponzi
Scheme," Seeking Alpha, March 23, 2009 ---
http://seekingalpha.com/article/127261-added-debt-won-t-rescue-the-great-american-ponzi-scheme?source=article_sb_picks
Bob Jensen's threads on In-Substance Defeasance
(which is related to but not the same as In-Substance Real Estate) ---
http://www.trinity.edu/rjensen/Theory02.htm
GoalScreen vs, Balanced Scorecard
November 29, 2011 Message from Jim Martin
In a recent article the author begins by stating
that surveys show 47-70 percent of executives are dissatisfied with their
balanced scorecards because they include too many irrelevant factors. He
recommends assumption-based metrics as a more powerful alternative because
it allows for testing and revising various strategies. In addition he
provides an assumption-based metric software application referred to as
GoalScreen that is available free to IMA members through 2011. The
application includes several steps. First, set a target or goal and list
every major assumption needed for a successful outcome including those that
are controllable and those that are not controllable. Second, choose a
metric or driver (root cause) for each key assumption that has high impact
and independence. Note that impact and independence make the metric or
driver predictive. Third, for each metric or driver, list the expected
outcome, a worse-case outcome, and a worse-case impact on the target or
goal. Then rank your assumptions by worst-case impact. The next set of
outcomes show if your assumptions were justified. If not, adjust them and
keep testing. For more information see Apgar, D. 2011. Assumption-based
metrics: Recipe for success. Strategic Finance (November): 26-33.
For the GoalScreen application see
http://goalscreen.com .
The IMA publications have a lot to offer. For
bibliographies that include all of their major articles from 1919-2011 see
http://maaw.info/IMAMain.htm
Bob Jensen's threads on managerial accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
"Episode 90: Growing Pains for ‘Clickers’," Jeffrey R. Young,
Chronicle of Higher Education, December 7, 2011 ---
Click Here
http://chronicle.com/blogs/techtherapy/2011/12/07/episode-90-growing-pains-for-%E2%80%98clickers%E2%80%99/?sid=wc&utm_source=wc&utm_medium=en
Classroom response systems, or “clickers,” have
been around for years, but only a small percentage of classes use them.
Competing and incompatible brands, faculty reluctance to try new
technologies, and confusion about which campus group should provide support
for the devices all contribute to a slow adoption, says Derek Bruff,
director of Vanderbilt University’s Center for Teaching and author of
Teaching With Classroom Response Systems. The Tech Therapy team looks
at how those gadgets can be seen as an example of the difficulty in moving
technology beyond the early-adopter stage.
Download this recording as
an MP3 file, or subscribe to Tech Therapy
on iTunes.
Each month, The Chronicle’s
Tech
Therapy podcast offers analysis of and advice on what the latest gadgets
and buzzwords mean for professors, administrators, and students. Join hosts
Jeff Young, a Chronicle reporter, and Warren Arbogast, a technology
consultant who works with colleges, for a lively discussion—as well as
interviews with leading thinkers in technology.
Jensen Comment
Response pads have a long history dating back over 20 years in the classroom.
HyperGraphics was one of the first companies to shift from wired to wireless
clickers using the old DOS HyperGraphics course (learning) management software.
My first dog and pony technology shows featured my managerial accounting course
in HyperGraphics. My first gig was at the University of Wisconsin.
It was October 4-5, 1990 when I made my first away-from-home dog and pony
show on featuring HyperGraphics technology --- at the University of Wisconsin.
HyperGraphics software pretty much died after Windows replaced the DOS operating
system in PCs. I then shifted my managerial accounting and accounting theory
courses to ToolBooks for the PC. My out-of-town dog and pony shows really
commenced to roll when my university hosts invested in those old three-barrel
color projectors that predated LCD projectors. I eventually made hundreds of
presentations of HyperGraphics and then ToolBooks on college campuses in the
United States, Canada, Mexico, Finland, Sweden, Germany, Holland, and the United
Kingdom (where I lugged my full PC and LCD projector between five campuses as
the European Accounting Association Visiting Professor). Many of my campus
visits and topics are listed at
http://www.trinity.edu/rjensen/Resume.htm#Presentations
Shortly thereafter Loyola's Barry Rice with his ToolBooks became a much
heavier user of clickers than me in his large accounting lectures.
I think Bill Ellis at Furman University is a current user of clickers in his
accounting courses.
You can read more about the history of clickers at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#ResponsePads
Bob Jensen's threads on Tricks and Tools of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Forensic Accounting Helper Site
December 7, 2011 message from Emma
Hi Bob,
Thanks for getting back to me!
When I graduated from college I realized that
forensic accounting was something that a lot of fellow students were really
interested in. However, people knew very little about what it was or how
their skills could be applied to a career in the field. Basically, I'm
trying to create something that acts as both an educational resource and a
primer/gateway for people who want to learn more about the academic and
professional nature of forensic accounting. The site is located here:
http://www.forensicaccounting.net , and I'd really
appreciate any feedback you might have. If you like it, I'd be great if you
could include it on your site as a resource for others.
Thanks again!
Cheers,
Emma
Jensen Comment
The University of West Virginia now has a "Graduate Certificate in Forensic
Accounting and Fraud Investigation (FAFI)" ---
http://www.be.wvu.edu/fafi/index.htm
Forensic accountants in demand
The widespread growth in white-collar crime and the
increased need for homeland security have greatly raised the demand for
forensic accountants, fraud investigators and for auditors who posses those
skills. Federal, state, and local governmental agencies, such as the
Securities and Exchange Commission, the Internal Revenue Service, and the
Offices of Inspector General all need accountants with forensic
investigation skills. In the private sector, recent legislation
(Sarbanes-Oxley Act of 2002) and auditing standards (Statement on Auditing
Standard No. 99) require companies and their auditors to be more aggressive
in detecting and preventing fraud.
A unique program to answer the need
The Division of Accounting has responded to this
demand by developing an academic program designed to prepare entry-level
accountants and others for forensic accounting and fraud investigative
careers. Although many schools have added a single graduate or undergraduate
course to their curricula, very few offer a multi-course graduate
certificate program. This program is the only one in the region.
The 12-credit graduate Certificate Program in
Forensic Accounting and Fraud Investigation (FAFI) is offered during the
summer. Students may take two paths to earn this certificate:
- Option 1: Complete a four
course stand-alone non-degree graduate certificate program curriculum,
or
- Option 2: Complete a Master
of Professional Accountancy (MPA) degree plus two additional certificate
courses.
WVU developed the National Curriculum
Drs.
Richard
Riley and Bonnie Morris led the effort to develop
national curriculum guidelines for fraud and forensic accounting programs
for the National Institute of Justice.
Journal of Forensic Accounting ---
http://maaw.info/JournalOfForensicAccounting.htm
Journal of Forensic & Investigative Accounting ---
http://maaw.info/JournalOfForensicAndInvestigativeAccounting.htm
Association of Certified Fraud Examiners ---
http://www.acfe.com/
A Simple Guide to Understanding Forensic Accounting ---
http://www.forensicaccounting.net/
Thank you Jim Martin for the heads up.
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/Fraud.htm
Faculty urged not to be “too choosy” in admitting new cash-cow graduate
students
"Not So Fast," by Lee Skallerup Bessette, Inside Higher Ed, August 29,
2011 ---
http://www.insidehighered.com/views/2011/08/29/essay_suggesting_faculty_members_should_be_dubious_of_drive_for_new_graduate_programs
Bad Habits of Misleading Prospective Students are Hard to Break
"Law Schools Pump Up Classes and Tuition, Though Jobs Remain Scarce,"
Chronicle of Higher Education, July 16, 2011 ---
http://chronicle.com/blogs/ticker/law-schools-pump-up-classes-tuition-though-jobs-remain-scarce/34657
"Law Schools Mull Whether They Are Churning Out Too Many Lawyers," by
Katherine Mangan, Chronicle of Higher Education, July 9, 2009 ---
http://chronicle.com/daily/2009/07/21755n.htm?utm_source=at&utm_medium=en
"Free to Good Homes: U. of Miami Law Grads," by Don Troop,
Chronicle of Higher Education, October 12, 2010 ---
http://chronicle.com/article/Free-to-Good-Homes-U-of/124899/
We've come to expect that lawyers lie --- it's part of their job
responsibilities in some instances
But it's a bit of a shock how much law schools themselves lie (until we make the
connection that law schools are run by lawyers)
"Coburn, Boxer Call for Department of Education to Examine Questions of
Law School Transparency," New Release from the Official Site of Senator
Barbara Boxer, October 14, 2011 ---
http://boxer.senate.gov/en/press/releases/101411.cfm
ABA Approves New Law School Placement Data Reporting Rules
From Paul Caron's TaxProf Blog on December 6, 2011 ---
http://taxprof.typepad.com/
National Law Journal,
ABA Gives Ground on Law Schools' Graduate Jobs Data Reporting:
The ABA is
changing the way it collects graduate employment information from law
schools.
The council of the
Section of Legal Education and Admissions to the Bar on
Dec. 3 approved a new annual questionnaire intended to gather more
detailed information about where recent law grads find work. The change
came as law students, graduates and three U.S. senators heaped criticism
on the ABA and law schools for not providing prospective law students
with an accurate picture of graduate employment and salary levels. ...
The updated questionnaire contains
several new elements:
- Law schools will report their graduate
employment and salary data directly to the ABA, rather than through
the NALP.
- Graduate employment information will be
made available to the public faster. Instead of being published two
years after a particular class graduates, the data will be collected
earlier in the year and will be made public approximately one year
after graduation.
- Law schools will have to report whether
graduates are in jobs funded by the schools, themselves. They will
have to stipulate whether graduates are in jobs requiring bar
passage; positions for which J.D.s are an advantage; professional
positions that do not require a J.D., non-professional positions;
and whether jobs are long-term or short-term.
- Employment and salary information must be
reported for each individual graduate rather than in the aggregate,
giving the ABA the ability to audit the figures.
The new
questionnaire does not include all the changes that transparency
advocates have been pushing for. Law School Transparency — a nonprofit
organization that seeks to improve consumer data for law students — has
called upon the ABA to publish school-specific salary data. That would
allow prospective law students to see how much graduates of each school
earn. ...
The new questionnaire is an improvement, said Law School Transparency
co-founder Kyle McEntee. But the ABA made a mistake by temporarily
eliminating some key questions from the 2011 survey, which went out to
law schools this fall, he said. That questionnaire did not ask schools
to report the number of graduates in the class of 2010 in full- and
part-time jobs or in jobs that require a J.D., meaning that less
information will be available about the class of 2010 than for previous
classes. ... "There are still questions about [the changes] took so long
and why it still falls short of providing the best consumer
information," McEntee said.
Bob Jensen's threads on Turkey Times for Overstuffed Law Schools ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#OverstuffedLawSchools
Question
How is the current Olympus scandal in Japan related to the Enron scandal?
Hint:
Think Special Purpose Vehicles (SPVs)
Accounting Fraud in Japan
Olympus Urged to Extend Purge of Executives Over Hidden Losses
At least eight Cayman Islands entities have been
linked to Olympus acquisitions that are suspected of playing a role in the
accounting scandal. Five of those no longer exist, according to a search of
the Caymans registry, which doesn’t give details on the individuals behind
the companies.
Olympus President Shuichi Takayama yesterday
said the company was looking into the role played by
special purpose funds in
hiding the losses, which date back to the 1990s.
After he was fired, Woodford went public with
his concerns over the advisory fees and writedowns on three other
transactions. All involved payments to Cayman Islands companies or
special purpose vehicles
whose beneficiaries are not known.
"Olympus Urged to Extend Purge of Executives Over Hidden Losses,"
Business Week, November 8, 2011 ---
http://www.businessweek.com/news/2011-11-08/olympus-urged-to-extend-purge-of-executives-over-hidden-losses.html
Olympus Corp.’s admission that three of its top
executives colluded to hide losses from investors fails to address the roles
played by other officials, according to the company’s biggest overseas
shareholder.
The Japanese camera maker’s shares slumped 29
percent yesterday after it reversed weeks of denials that there was any
wrongdoing in past acquisitions. The company fired Executive Vice President
Hisashi Mori over his role in covering up the losses with former Chairman
Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada
would step down.
Olympus’ biggest overseas shareholder is now
demanding investor relations head Akihiro Nambu go too because of his role
as a director of Gyrus Group Plc, the U.K. takeover target used to funnel
more than $600 million in inflated advisory fees to a Cayman Islands fund.
And after Nambu, the rest of the board must follow, said Josh Shores, a
London-based principal for Southeastern Asset Management Inc.
“Even if they didn’t know the specific details
around where payments were going and exactly why, they knew that cash was
going out the door and they also failed to raise their hands to ask
questions,” Shores said. “I don’t know who else is involved, but somebody
else is. There is a third party somewhere who received this money.”
Olympus President Shuichi Takayama yesterday said
the company was looking into the role played by special purpose funds in
hiding the losses, which date back to the 1990s.
Cayman Links
At least eight Cayman Islands entities have been
linked to Olympus acquisitions that are suspected of playing a role in the
accounting scandal. Five of those no longer exist, according to a search of
the Caymans registry, which doesn’t give details on the individuals behind
the companies.
Kikukawa, Mori and Nambu became the three directors
of Gyrus in June 2008 following the $2 billion acquisition of the U.K.
medical equipment maker in February that year. They were also directors of
three companies set up to handle the takeover, including the decision to pay
out advisory fees that amounted to more than a third of the acquisition’s
value, filings show.
Olympus declined a request to interview Kikukawa
and Mori. In six attempts to talk to Kikukawa at his home, the former
chairman didn’t appear. Mori’s home address given in U.K. filings leads to a
house under renovation in Kawasaki city, about an hour from central Tokyo.
Nobody answered the doorbell on a recent visit to Nambu’s home in a
seven-story condominium about 27 kilometers from the city center.
Japanese and U.S. regulators are probing
allegations by former chief executive officer Michael C. Woodford that more
than $1.5 billion was siphoned through offshore funds. That money may have
been used to cancel out non-performing securities that Olympus was keeping
off its books, according to a report in the Shukan Asahi magazine, which
cited people familiar with the process.
Cockroaches
Yesterday’s plunge in Olympus shares pulled other
Japanese equities lower on concerns the country hasn’t escaped corporate
governance weaknesses that have dogged it since the stock market bubble
burst at the end of 1989. Olympus shares have lost 70 percent of their value
since Woodford took his accusations public after he was axed on Oct. 14.
“Institutional investors will stay away from
Japan’s market until they confirm this is an isolated case,” said Koichi
Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors
probably think that if there’s one cockroach, there may be 10 more,” he
said.
‘Tobashi’
Olympus’ revelations echo the practice of hiding
losses known as “tobashi” that became widespread in Japan in the late 1980s
and led to the failure of Yamaichi Securities Co., according to Yasuhiko
Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used
overseas paper companies to hide problematic securities, until it failed in
1997 with 260 billion yen ($3.3 billion) in hidden impairments.
Takayama declined to comment on the involvement of
any securities firms in Olympus’ cover-up. The Topix Securities and
Commodity Futures Index fell 11 percent, the most of any industry group in
the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in
37 years.
“There is speculation in the market that Nomura may
somehow be involved in this Olympus case,” said Shoichi Arisawa, an
Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in
particular probably sold after seeing a high volume of Nomura’s shares being
traded.”
Nomura didn’t participate in Olympus’s concealment
of losses, said Hajime Ikeda, managing director of corporate communications
for the securities firm.
Nomura Unaware
“We are not aware of any involvement by Nomura in
Olympus’s hiding of losses in the 1990s, and we weren’t involved when
Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a
telephone interview in Tokyo yesterday.
Olympus plunged by its 300 yen daily limit in Tokyo
trading, closing at 734 yen. The Topix ended 1.7 percent lower, the
worst-performing Asian stock index.
The Tokyo Stock Exchange said it’s considering
moving the shares in Olympus, the world’s biggest maker of endoscopes, to a
watchlist for possible delisting. Takayama pledged to continue with the
investigation into the losses, which he said were probably inherited by
Kikukawa.
“The investigation must continue to determine how
much rot there is,” said David Herro, chief investment officer of Harris
Associates LP. “All responsible must, at a minimum, leave. Also, since the
management’s credibility is nearly nonexistent, all of what they say must be
verified.”
Bowed in Apology
Harris held 10.9 million Olympus shares as of June
30, a 4 percent stake that makes it the company’s second-biggest overseas
investor. Southeastern had a 5 percent stake as of Aug. 16, according to
data compiled by Bloomberg.
Olympus President Takayama yesterday said he was
unaware of the hidden losses until he was told by Mori and Kikukawa the
previous evening. At the press conference, he bowed three times in seven
minutes to apologize.
In the weeks running up to his dismissal, Woodford
was engaged in an exchange of letters with Kikukawa and Mori in which he
detailed the allegations and which were copied to all member of the board.
After he was fired, Woodford went public with his
concerns over the advisory fees and writedowns on three other transactions.
All involved payments to Cayman Islands companies or special purpose
vehicles whose beneficiaries are not known.
Olympus paid a total of 73.4 billion yen to
increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006
and 2008, which was also used to hide losses, it said yesterday. Olympus
wrote down 55.7 billion yen, or 76 percent of the acquisition value, in
March 2009, the company said in a statement Oct. 19.
“It’s beyond belief that Mr. Takayama claims he
only found out about it last night,” Woodford said in a telephone interview
yesterday. “If he didn’t know before I started writing my letters then he
should have known after.”
Continued in article
What's Right and What's
Wrong With SPEs, SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"ENRON: what happened and what we can learn from it,"
by George J. Benston and Al L.
Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-127
The following are excerpts only.
Abstract
Enron's accounting for its
non-consolidated special-purpose entities (SPEs), sales of its own stock and
other assets to the SPEs, and mark-ups of investments to fair value
substantially inflated its reported revenue, net income, and stockholders'
equity, and possibly understated its liabilities. We delineate six
accounting and auditing issues, for which we describe, analyze, and indicate
the effect on Enron's financial statements of their complicated structures
and transactions. We next consider the role of Enron's board of directors,
audit committee, and outside attorneys and auditors. From the foregoing, we
evaluate the extent to which Enron and Andersen followed the requirements of
GAAP and GAAS, from which we draw lessons and conclusions.
The accounting issues
The transactions involving SPEs at Enron,
and the related accounting issues are, indeed, very complex. This section
summarizes some of the key transactions and their related accounting
effects. The Powers Report, a 218-page document, provides in great detail a
discussion of a selected group of Enron SPEs that have been the central
focus of the Enron investigations. While very much less detailed than the
Powers Report, the discussion in the following section (which may seem
laborious at times), supplemented with additional material that became
available after publication of the Report, should provide the reader with
insight into how Enron sought to bend the accounting rules to their
advantage. However, even a cursory review of this section will give the
reader a sense of the complex financing structures that Enron used in an
attempt to create various financing, tax, and accounting advantages.
Six accounting and auditing issues are of
primary importance, since they were used extensively by Enron to manipulate
its reported figures: (1) The
accounting policy of not consolidating SPEs that appear to have permitted
Enron to hide losses and debt from investors.
(2) The accounting treatment of sales of Enron's merchant investments to
unconsolidated (though actually controlled) SPEs as if these were arm's
length transactions. (3) Enron's income recognition practice of recording
as current income fees for services rendered in future periods and recording
revenue from sales of forward contracts, which were, in effect, disguised
loans. (4) Fair-value accounting resulting in restatements of merchant
investments that were not based on trustworthy numbers. (5) Enron's
accounting for its stock that was issued to and held by SPEs. (6)
Inadequate disclosure of related party transactions and conflicts of
interest, and their costs to stockholders.
Continued in article at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Teaching Cases on Olympus and SPV Frauds
From The Wall Street Journal Accounting Weekly Review on December 2,
2011
Olympus Heat Rises
by:
Juro Osawa and Phred Dvorak
Nov 25, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes,
Auditor/Client Disagreements, business combinations, Business Ethics,
Fraudulent Financial Reporting
SUMMARY: The series of events leading to questions about auditing
practices at Olympus that failed to uncover a decades-long coverup of
investment losses is highlighted in this review. The company must submit its
next financial statement filing to the Tokyo Stock Exchange by December 14,
2011 for the period ended September 30, 2011 or face delisting.
CLASSROOM APPLICATION: The review focuses on auditing questions
about sufficient competent evidence, change of auditors, and ability to
provide an audit report given knowledge of the length of time this coverup
has been ongoing.
QUESTIONS:
1. (Introductory) What fraudulent accounting and reporting
practices has Olympus, the Japanese optical equipment maker, admitted to
committing?
2. (Advanced) What services is Mr. Woodford calling for to
investigate the inappropriate payments and accounting practices by Olympus?
Specifically name the type of engagement for which Mr. Woodford thinks that
Olympus should contract with outside accountants.
3. (Introductory) Refer to the related articles. What questions
have been raised about outside accountants' examinations of Olympus's
financial statements for many years?
4. (Advanced) Based only on the discussion in the article, what
evidence did Olympus's auditors rely on to resolve their questions about the
propriety of accounting for mergers and acquisitions? Again, based only on
the WSJ articles, how reliable was that audit evidence?
5. (Advanced) What happened with Olympus's engagement of KPMG AZSA
LLC as its outside auditor? What steps must be taken under U.S. requirements
when a change of auditors occurs?
6. (Introductory) What challenges will Olympus face in meeting the
deadline of December 14 to file its latest financial statements? What will
happen to the company if it cannot do so?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Olympus Casts Spotlight on Accounting
by Kana Inagaki
Nov 08, 2011
Online Exclusive
Olympus Admits to Hiding Losses
by Kana Inagaki and Phred Dvorak
Nov 08, 2011
Online Exclusive
"Olympus Heat Rises (video)," by: Juro Osawa and Phred Dvorak, The Wall
Street Journal, November 25, 2011 ---
http://online.wsj.com/video/olympus-we-hid-investment-losses-for-decades/54207106-7753-477D-9EA5-7C152AF62DF4.html
Bob Jensen's threads on the criminal activity at Olympus
Scroll down deeply at
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
What's Right and What's Wrong With
(SPEs), SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
From The Wall Street Journal Weekly Accounting Review on December 9,
2011
Panel Calls Olympus "Rotten" at Core
by:
Daisuke Wakabayashi and Phred Dvorak
Dec 07, 2011
Click here to view the full article on WSJ.com
TOPICS: Auditing, Auditor/Client Disagreements, Fair Value
Accounting, Historical Cost Accounting, Investments
SUMMARY: This review continues coverage from last week of the
accounting scandal at Olympus Corp. The Investigation Report into Olympus
Corporation and its management, written by the "Third Party Committee" hired
by the Board of Directors on October 14, 2011, is available directly online
at
http://online.wsj.com/public/resources/documents/third_party_olympus_report_english_summary.pdf
The report provides the clearest description yet of the investment loss and
accounting scandal that has brought the Japanese imaging equipment maker to
the brink of delisting from the Tokyo Stock Exchange. As described in the
opening page of the document, the Olympus Corporation Board of Directors
called for a third party review because "the shareholders and others doubted
that" payments by Olympus to a financial advisor and acquisitions by
Olympus, along with subsequent recognition of impairment losses on those
investments, were appropriate. The findings in the report essentially state
that Olympus began incurring financial losses on speculative investments
that were originally hoped to bolster corporate earnings when operating
earnings declined due to a strengthening yen in the late 1980s. "However, in
1990 the bubble economy burst and the loss incurred on Olympus by the
financial assets management increased" (p. 6). Then, in 1997 to 1998, "when
the unrealized loss was ballooning," Japanese accounting standards were
changed to require fair value reporting of financial assets, as did those in
the U.S. "In that environment, Olympus led by Yamada and Mori started
seeking a measure to avoid the situation where the substantial amount of
unrealized loss would come up to the surface..." because of this change in
accounting standards. The technique was so common in Japan that it was given
a name, "tobashi." As noted in the WSJ article, the Olympus auditors at the
time, KPMG AZSA LLC "...came across information that indicated the company
was engaged in tabshi, which recently had become illegal in Japan....[T]he
auditor pushed them...to admit to the presence of one [tobashi scheme] and
unwind it, booking a loss of 16.8 billion yen."
CLASSROOM APPLICATION: Questions relate to the accounting
environment under historical cost accounting that allows avoiding
recognition of unrealized losses and to the potential for audit issues when
management is found to have engaged in one unethical or illegal act.
QUESTIONS:
1. (Introductory) For how long were investment losses hidden by
accounting practices at Olympus Corp?
2. (Advanced) What is the difference between realized and
unrealized investment losses? How are these two types of losses shown in
financial statements under historical cost accounting and under fair value
accounting methods for investments?
3. (Introductory) What accounting change in the late 1990s led
Olympus Corp. management to search for further ways to hide their investment
losses? In your answer, comment on the meaning of the Japanese term "tobashi."
4. (Introductory) What happened in 1999 when KPMG AZSA "came across
information that indicated the company was engaged in tobashi, which
recently had become illegal in Japan"?
5. (Advanced) Given the result of the KPMG AZSA finding in 1999,
what concerns should that raise for any auditor about overall ability to
conduct an audit engagement?
Reviewed By: Judy Beckman, University of Rhode Island
"Panel Calls Olympus 'Rotten' at Core," by: Daisuke Wakabayashi and
Phred Dvorak, The Wall Street Journal, December 7, 2011 ---
http://online.wsj.com/article/SB10001424052970204083204577082163172106608.html?mod=djem_jiewr_AC_domainid
The secret held for a quarter-century, quietly
passed among senior executives. Within Olympus Corp. the goal was clear.
Hide some $1.5 billion in investment losses from public view.
The toll on Olympus mounted as time went by. "The
core part of the management was rotten, and that contaminated other parts
around it."
So concluded a 200-page reported issued Tuesday,
the most complete account yet of a scandal that routed money through more
than a dozen banks, funds and investment firms around the globe, ultimately
leading to the departure of several top executives and putting the respected
optical-equipment maker on the bubble for a stock delisting.
Starting in the mid-1980s, Olympus, along with
other Japanese exporters, turned to speculative financial investments as a
way to ease the sting of a surging yen with what they believed would be easy
profits.
At Olympus, that strategy set in motion a chain of
events that were the heart of the company's accounting scandal, according to
the report, written by a six-member outside panel appointed by the company
last month.
The document, based on 189 interviews with current
and former Olympus employees and business partners, also brought into relief
the organizational problems that plague many Japanese companies: lack of
transparency, little regard for shareholder rights and reluctance to
challenge authority.
"The situation was an epitome of the salaryman
mentality in a bad sense," said the panel, referring to Japan's culture of
corporate loyalty.
Olympus on Tuesday said it "takes very seriously
the results" of the investigation and "is considering further fundamental
measures to restore confidence."
The report identified former Vice President Hisashi
Mori, his former boss in the company's accounting department, Hideo Yamada,
and two former Olympus presidents among a "select few" with knowledge of the
original investment losses, the effort to hide the losses and then the
attempts to account for them through inflated acquisition prices and
advisory fees.
Based on the report's account, Olympus's financial
troubles started with the Plaza Accord in 1985, an agreement to devalue the
U.S. dollar.
The ensuing rise in the yen dented the company's
operating profit, and its president at the time, Toshiro Shimoyama, decided
Olympus should augment its core business with zaiteku, or financial
investments.
It didn't go well.
Read more:
http://online.wsj.com/article/SB10001424052970204083204577082163172106608.html#ixzz1g3z5Q5SY
What's Right and What's
Wrong With SPEs, SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"KPMG Scrutinized Over Handling of Olympus Accounting Fraud Scandal,"
by Kalen Smith, Big Four Blog, December 15, 2011 ---
http://www.big4.com/kpmg/kpmg-scrutinized-over-handling-of-olympus-accounting-fraud-scandal
KPMG’s auditors in Tokyo are under scrutiny after
signing off on reports issued by Olympus Corp. Auditors found several
accounting irregularities when they reviewed financial statements provided
by Olympus executives. The auditors were particularly concerned over $600
million worth of takeover advisory fees and payments on acquisitions.
Despite their concerns, auditors chose to sign off on the reports after an
outside consultant approved of the findings.
Although the consultant said the takeover costs
were justified, they were also hired from Olympus Corp. This has raised some
red flags over a possible conflict of interest in the matter.
Olympus has now been revealed to have engaged in
financial fraud for more than two decades. Following the revelation of the
accounting scandal at Olympus, regulators are looking closely at KPMG and
Ernst & Young. Regulators feel the auditors should have seen signs of the
fraud and taking measures to stop them.
According to allegations, KPMG was Olympus’s
auditor for years. They failed to catch the discrepancies and Ernst & Young
was called in as well.
According to Yuuki Sakurai of Fukoku Capital
Management, auditors work for the companies that pay them. Auditors are
going to have a hard time staying in business if they get a reputation for
being the kind of company that goes to the regulators without solid evidence
of malfeasance.
Although the manner in which KPMG handled the
Olympus case created some concern for regulators, it may signify greater
concern over the corporate culture that has created a serious conflict of
interest between auditors’ responsibilities for their clients and need to
uphold the law.
Bob Jensen's threads on KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's threads on the the decline of professionalism and
independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Question
Where did the missing MF Global $1+ billion end up?
Hint:
The the word "repo" sound familiar?
http://en.wikipedia.org/wiki/Repurchase_agreement
"MF Global and the great Wall St re-hypothecation scandal," by
Chrisopher Elias, Reuters, December 7, 2011 ---
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
A legal loophole in international brokerage
regulations means that few, if any, clients of MF
Global are
likely to get their money back. Although
details of the drama are still unfolding, it
appears that MF Global and some of its Wall Street counterparts have been
actively and aggressively circumventing U.S. securities rules at the expense
(quite literally) of their clients.
MF Global's bankruptcy revelations concerning
missing client money suggest that funds were not inadvertently misplaced or
gobbled up in MF’s dying hours, but were instead appropriated as part of a
mass Wall St manipulation of brokerage rules that allowed for the wholesale
acquisition and sale of client funds through re-hypothecation. A loophole
appears to have allowed MF Global, and many others, to use its own clients’
funds to finance an enormous $6.2 billion Eurozone repo bet.
If anyone thought that you couldn’t have your cake
and eat it too in the world of finance, MF Global shows how you can have
your cake, eat it, eat someone else’s cake and then let your clients pick up
the bill. Hard cheese for many as their dough goes missing.
FINDING FUNDS
Current estimates for the shortfall in MF Global
customer funds have now reached $1.2 billion as revelations break that the
use of client money appears widespread. Up until now the assumption has been
that the funds missing had been misappropriated by MF Global as it
desperately sought to avoid bankruptcy.
Sadly, the truth is likely to be that MF Global
took advantage of an asymmetry in brokerage borrowing rules that allow firms
to legally use client money to buy assets in their own name - a legal
loophole that may mean that MF Global clients never get their money back.
REPO RECAP
First a quick recap. By now the story of MF
Global’s demise is strikingly familiar. MF plowed money into an
off-balance-sheet maneuver known as a repo, or sale and repurchase
agreement. A repo involves a firm borrowing money and putting up assets as
collateral, assets it promises to repurchase later. Repos are a common way
for firms to generate money but are not normally off-balance sheet and are
instead treated as “financing” under accountancy rules.
MF Global used a version of an off-balance-sheet
repo called a "repo-to-maturity." The repo-to-maturity involved borrowing
billions of dollars backed by huge sums of sovereign debt, all of which was
due to expire at the same time as the loan itself. With the collateral and
the loans becoming due simultaneously, MF Global was entitled to treat the
transaction as a “sale” under U.S. GAAP. This allowed the firm to move $16.5
billion off its balance sheet, most of it debt from Italy, Spain, Belgium,
Portugal and Ireland.
Backed by the European Financial Stability Facility
(EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds
would remain default free whilst yields would continue to grow. Ultimately,
however, it proved to be MF Global’s downfall as margin calls and its high
level of leverage sucked out capital from the firm. For more information on
the repo used by MF Global please see Business
Law Currents MF
Global – Slayed by the Grim Repo?
Puzzling many, though, were the huge sums involved.
How was MF Global able to “lose” $1.2 billion of its clients’ money and
acquire a sovereign debt position of $6.3 billion – a position more than
five times the firm’s book value, or net worth? The answer it seems lies in
its exploitation of a loophole between UK and U.S. brokerage rules on the
use of clients funds known as “re-hypothecation”.
RE-HYPOTHECATION
By way of background, hypothecation is when a
borrower pledges collateral to secure a debt. The borrower retains ownership
of the collateral but is “hypothetically” controlled by the creditor, who
has a right to seize possession if the borrower defaults.
In the U.S., this legal right takes the form of a
lien and in the UK generally in the form of a legal charge. A simple example
of a hypothecation is a mortgage, in which a borrower legally owns the home,
but the bank holds a right to take possession of the property if the
borrower should default.
In investment banking, assets deposited with a
broker will be hypothecated such that a broker may sell securities if an
investor fails to keep up credit payments or if the securities drop in value
and the investor fails to respond to a margin call (a request for more
capital).
Re-hypothecation occurs when a bank or broker
re-uses collateral posted by clients, such as hedge funds, to back the
broker’s own trades and borrowings. The practice of re-hypothecation runs
into the trillions of dollars and is perfectly legal. It is justified by
brokers on the basis that it is a capital efficient way of financing their
operations much to the chagrin of hedge funds.
U.S. RULES
Under the U.S. Federal Reserve Board's Regulation T
and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value
of 140% of the client's liability to the prime broker. For example, assume a
customer has deposited $500 in securities and has a debt deficit of $200,
resulting in net equity of $300. The broker-dealer can re-hypothecate up to
$280 (140 per cent. x $200) of these assets.
But in the UK, there is absolutely no
statutory limit on
the amount that can be re-hypothecated. In fact, brokers are free to
re-hypothecate all and even more than the assets deposited by clients.
Instead it is up to clients to negotiate a limit or prohibition on
re-hypothecation. On the above example a UK broker could, and frequently
would, re-hypothecate 100% of the pledged securities ($500).
This asymmetry of rules makes exploiting the more
lax UK regime incredibly attractive to international brokerage firms such as
MF Global or Lehman Brothers which can use European subsidiaries to create
pools of funding for their U.S. operations, without the bother of complying
with U.S. restrictions.
In fact, by 2007, re-hypothecation had grown so
large that it accounted for half of the activity of the shadow banking
system. Prior to Lehman Brothers collapse, the International
Monetary Fund (IMF)
calculated that U.S. banks were receiving $4 trillion worth of funding by
re-hypothecation, much of which was sourced from the UK. With assets being
re-hypothecated many times over (known as “churn”), the original collateral
being used may have been as little as $1 trillion – a quarter of the
financial footprint created through re-hypothecation.
BEWARE THE BRITS: CIRCUMVENTING U.S. RULES
Keen to get in on the action, U.S. prime brokers
have been making judicious use of European subsidiaries. Because
re-hypothecation is so profitable for prime brokers, many prime brokerage
agreements provide for a U.S. client’s assets to be transferred to the prime
broker’s UK subsidiary to circumvent U.S. rehypothecation rules.
Under subtle brokerage contractual provisions, U.S.
investors can find that their assets vanish from the U.S. and appear instead
in the UK, despite contact with an ostensibly American organisation.
Potentially as simple as having MF Global UK
Limited, an English subsidiary, enter into a prime brokerage agreement with
a customer, a U.S. based prime broker can immediately take advantage of the
UK’s unrestricted re-hypothecation rules.
LEHMAN LESSONS
In fact this is exactly what Lehman Brothers did
through Lehman Brothers International (Europe) (LBIE), an English subsidiary
to which most U.S. hedge fund assets were transferred. Once transferred to
the UK based company, assets were re-hypothecated many times over, meaning
that when the debt carousel stopped, and Lehman Brothers collapsed, many
U.S. funds found that their assets had simply vanished.
A prime broker need not even require that an
investor (eg hedge fund) sign all agreements with a European subsidiary to
take advantage of the loophole. In fact, in Lehman’s case many funds signed
a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but
margin-lending agreements and securities-lending agreements with LBIE in the
UK (normally conducted under a Global Master Securities Lending Agreement).
These agreements permitted Lehman to transfer
client assets between various affiliates without the fund’s express consent,
despite the fact that the main agreement had been under U.S. law. As a
result of these peripheral agreements, all or most of its clients’ assets
found their way down to LBIE.
MF RE-HYPOTHECATION PROVISION
A similar re-hypothecation provision can be seen in
MF Global’s U.S. client agreements. MF Global’s Customer Agreement for
trading in cash commodities, commodity futures, security futures, options,
and forward contracts, securities, foreign futures and options and
currencies includes the following clause:
“7. Consent
To Loan Or PledgeYou hereby grant us the right, in accordance
with Applicable Law, to borrow, pledge, repledge, transfer,
hypothecate, rehypothecate,loan, or invest any of the
Collateral, including, without limitation, utilizing the Collateral to
purchase or sell securities pursuant to repurchase agreements [repos] or
reverse repurchase agreements with any party, in each case without
notice to you, and we shall have no obligation to retain a like amount
of similar Collateral in our possession and control.”
In its quarterly report, MF Global disclosed that
by June 2011 it had repledged (re-hypothecated) $70 million, including
securities received under resale agreements. With these transactions taking
place off-balance sheet it is difficult to pin down the exact entity which
was used to re-hypothecate such large sums of money but regulatory filings
and letters from MF Global’s administrators contain some clues.
According to a letter from KPMG to MF Global
clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited
had over 10,000 accounts. MF Global disclosed in March 2011 that it had
significant credit risk from its European subsidiary from “counterparties
with whom we place both our own funds or securities and those
of our clients”.
CAUSTIC COLLATERAL
Matters get even worse when we consider what has
for the last 6 years counted as collateral under re-hypothecation rules.
Despite the fact that there may only be a quarter
of the collateral in the world to back these transactions, successive U.S.
governments have softened the requirements for what can back a
re-hypothecation transaction.
Beginning with Clinton-era liberalisation, rules
were eased that had until 2000 limited the use of re-hypothecated funds to
U.S. Treasury, state and municipal obligations. These rules were slowly cut
away (from 2000-2005) so that customer money could be used to enter into
repurchase agreements (repos), buy foreign bonds, money market funds and
other assorted securities.
Hence, when MF Global conceived of its Eurozone
repo ruse, client funds were waiting to be plundered for investment in AA
rated European sovereign debt, despite the fact that many of its hedge fund
clients may have been betting against the performance of those very same
bonds.
OFF BALANCE SHEET
As well as collateral risk, re-hypothecation
creates significant counterparty risk and its off-balance sheet treatment
contains many hidden nasties. Even without circumventing U.S. limits on
re-hypothecation, the off-balance sheet treatment means that the amount of
leverage (gearing) and systemic risk created in the system by
re-hypothecation is staggering.
Re-hypothecation transactions are off-balance sheet
and are therefore unrestricted by balance sheet controls. Whereas on balance
sheet transactions necessitate only appearing as an asset/liability on one
bank’s balance sheet and not another, off-balance sheet transactions can,
and frequently do, appear on multiple banks’ financial statements. What this
creates is chains of counterparty risk, where multiple re-hypothecation
borrowers use the same collateral over and over again. Essentially, it is a
chain of debt obligations that is only as strong as its weakest link.
With collateral being re-hypothecated to a factor
of four (according to IMF estimates), the actual capital backing banks
re-hypothecation transactions may be as little as 25%. This churning of
collateral means that re-hypothecation transactions have been creating
enormous amounts of liquidity, much of which has no real asset backing.
The lack of balance sheet recognition of
re-hypothecation was noted in
Jefferies’ recent 10Q (emphasis added):
“Note 7. Collateralized Transactions
We pledge securities in connection with repurchase agreements,
securities lending agreements and other secured arrangements, including
clearing arrangements. The pledge of our securities is in connection
with our mortgage−backed securities, corporate bond, government and
agency securities and equities businesses. Counterparties generally have
the right to sell or repledge the collateral.Pledged
securities that can be sold or repledged by the counterparty are
included within Financial instruments owned and noted as Securities
pledged on our Consolidated Statements of Financial Condition. We
receive securities as collateral in connection with resale agreements,
securities borrowings and customer margin loans. In
many instances, we are permitted by contract or custom to rehypothecate
securities received as collateral. These securities maybe used to secure
repurchase agreements, enter into security lending or derivative
transactions or cover short positions. At
August 31, 2011 and November 30, 2010, the approximate fair value of
securities received as collateral by us that may be sold or repledged
was approximately $25.9 billion and $22.3 billion, respectively. At
August 31, 2011 and November 30, 2010, a substantial portion of the
securities received by us had been sold or repledged.
We engage in securities for securities
transactions in which we are the borrower of securities and provide
other securities as collateral rather than cash. As
no cash is provided under these types of transactions, we, as borrower,
treat these as noncash transactions and do not recognize assets or
liabilities on the Consolidated Statements of Financial Condition. The
securities pledged as collateral under these transactions are included
within the total amount of Financial instruments owned and noted as
Securities pledged on our Consolidated Statements of Financial
Condition.
According to Jefferies’ most recent Annual Report
it had re-hypothecated $22.3 billion (in fair value) of assets in 2011
including government debt, asset backed securities, derivatives and
corporate equity- that’s just $15 billion shy of Jefferies total on balance
sheet assets of $37 billion.
HYPER-HYPOTHECATION
With weak collateral rules and a level of leverage
that would make Archimedes tremble, firms have been piling into
re-hypothecation activity with startling abandon. A review of filings
reveals a staggering level of activity in what may be the world’s largest
ever credit bubble.
December 12, 2011 reply from Robert Walker in New Zealand
As I understand it what these financial
intermediaries (the entity) are doing is gearing on their clients’ funds by
way of a secured loan where the security is secured by a repurchasing
agreement (repo).
The principal purpose of a repo is to raise cash. I
assume what they do is acquire European sovereign debt with their clients’
money. They then sell the stock now and re-buy in the future, albeit running
through a subsidiary based in London (the greatest off-shore banking centre
on earth, no wonder Cameron is prepared to sacrifice Europe to protect it).
In exchange the entity receives cash but promises to meet margin calls in
the event of decline. Once you have the cash you can repeat the process. I
don’t know how long this can be repeated, but I would think several times.
The secured party can be confident in that they hold (a) the legal right to
the stock in question because their name is on the register and (b) they
have a right to call on margin.
It is impossible for this gearing not to be
presented on a balance sheet. If FASB says otherwise then it is badly
mistaken. There is a golden rule in accounting and it is this: if in doubt,
gross up. The silver rule is: always be in doubt.
December 12, 2011 reply from Bob Jensen
Hi Robert,
That was a nice, concise reply. I also think there were some suspicious,
possibly criminal, transactions when bankruptcy was imminent for MF Global,
transactions that improperly mixed customer funds and used them for its own
account for at least several days before the bankruptcy and even transferred
funds improperly outside the country.
Jon Corzine's testimony proves that you do not have to plead the Fifth
Amendment to say absolutely nothing in a lot of words ---
http://en.wikipedia.org/wiki/Jon_Corzine
He appears to be dumb like a fox or the most stupid dupe ever born.
Jensen Summary of Repo Fraud and Deceptive Accounting Enabled by the FASB
The word "repo" is short for "repossession" of the title back to some asset that
has been sold or used as collateral in a loan. For example, in states with lemon
warranty laws, an automobile dealer may have to take back possession of a
vehicle that turns out to be a real lemon. This is a bit different that the
majority of warranty obligations that simply contract for repair of the sold
item but not repossession of the item itself. There are also those "money back"
sales contracts such as a contractual term that reads "use for 10 days and if
you're not totally satisfied you money will be cheerfully refunded in full."
The overwhelming use of the word "repo" is the repossession of title to a
creditor where the item sold is collateral on the loan. If a dealer loans money
on a car loan, then the dealer may repossess the collateral if the customer
defaults on the loan. Movies have been made about "Repo Men" who sneak into
garages or driveways in the dead of night and drive away with repossessed cars.
If the bank loan, than the bank must repossess the collateral on the loan rather
than the dealer.
In the case of financial instruments sales such as the sale of mortgage
note/bond investments, sometimes the instruments themselves are collateral on
the loans. For example, in the famous case of Repo 105 and 108 deals by Lehman
Brothers, Lehman needed to improve its cash liquidity position for about two
weeks surrounding the year end closing of its books in order to show a better
leverage position of liquidity to debt. So Lehman really borrowed millions from
former Lehman employees (not exactly arms length transactions) using poisoned
mortgages that it could not easily sell as collateral on the very short term
borrowings (a week or two) for which Lehman contracted for either 5% or 8%
returns to its former employees who loaned the cash.
But receiving cash offset by short term borrowing does not really improve
liquidity and leverage on the balance sheet. So Lehman and its auditor, Ernst &
Young, devised a really devious ploy that was enabled by a totally stupid clause
in the FASB's
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 Bankruptcy 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. See
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.
The contracting was a bit more complicated than I will discuss here,
but the bottom line that got Ernst & Young off the hook for total
negligence (in spite of a scathing lashing out at E&Y by the Bankruptcy
Examiner) was a really obscure and stupid provision in FAS 140 that let
Lehman and E&Y get away with deceptive financial statements. Of course
it did not matter to Lehman after it imploded, but E&Y got off the hook
with only a huge blot of public perception of the firm's ethics in the
case of the Lehman audit.
More from the examiner’s report:
Lehman never publicly disclosed its use of
Repo 105 transactions, its accounting treatment for these
transactions, the considerable escalation of its total Repo 105
usage in late 2007 and into 2008, or the material impact these
transactions had on the firm’s publicly reported net leverage ratio.
According to former Global Financial Controller Martin Kelly, a
careful review of Lehman’s Forms 10-K and 10-Q would not reveal
Lehman’s use of Repo 105 transactions. Lehman failed to disclose its
Repo 105 practice even though Kelly believed “that the only purpose
or motive for the transactions was reduction in balance sheet”; felt
that “there was no substance to the transactions”; and expressed
concerns with Lehman’s Repo 105 program to two consecutive Lehman
Chief Financial Officers – Erin Callan and Ian Lowitt – advising
them that the lack of economic substance to Repo 105 transactions
meant “reputational risk” to Lehman if the firm’s use of the
transactions became known to the public. In addition to its material
omissions, Lehman affirmatively misrepresented in its financial
statements that the firm treated all repo transactions as financing
transactions – i.e., not sales – for financial reporting purposes.
I've oversimplified the Repo 105 and 105
transactions by Lehman Brothers. For a more complete explanation, see
the following:
"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."
Lehman's Ghost Has
Been Named "Debt Masking"
The initials DM, however, stand for "Deception
Manipulation"
"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
Teaching Case on Repo
105/108 "Sales" That are 100% Certain to be Returned
This is really a test of whether an audit firm should follow FASB rules
that, in a particular context, become deceptive for investors/creditors
Given a choice of choosing the client's interests versus the interests
of investors and creditors, the auditor chose the client in this case.
From The Wall Street Journal
Weekly Accounting Review on March 18, 2011
Lehman Probe Stalls; Chance of No Charges
by: Jean Eaglesham and Liz Rappaport
Mar 12, 2011
Click here to view the full article on WSJ.com
TOPICS: Advanced Financial Accounting,
Audit Report, Auditing, Bankruptcy
SUMMARY: "In
recent months, Securities and Exchange Commission officials have
grown increasingly doubtful they can prove that Lehman violated U.S.
laws by using an accounting measure to move as much as $50 billion
in assets..." and debt off of its balance sheet. One year ago, a
report by "...a U.S. bankruptcy-court examiner investigating the
collapse of Lehman Brothers Holdings Inc. blame[d] 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."
CLASSROOM
APPLICATION: The article is useful to
discuss repurchase agreements ("repos"), auditors' responsibility to
ascertain whether a client is utilizing appropriate accounting and
has internal controls in place to ensure the sue of those methods,
and the Lehman Brothers collapse that led to the financial crisis.
QUESTIONS:
1. (Introductory) Who is the firm of Lehman Brothers? What
happened to this firm? Hint: you may use related articles to answer
this question.
2. (Advanced) What are "repos" or repurchase agreements?
How can they be used to reduce debt on a balance sheet and therefore
make a firm look healthier than it really is?
3. (Advanced) What is an auditor's responsibility for
assessing whether financial statements are prepared in accordance
with generally accepted accounting standards? What steps must the
auditor take if he or she finds transactions not accounted for in
accordance with generally accepted accounting principles?
4. (Introductory) How did the Lehman Brothers auditor,
Ernst & Young, view the firm's use of repo transactions? Who has
questioned their business purpose and the accounting for them? Why
is the accounting for these transactions being questioned?
5. (Advanced) What are the potential implications for E&Y
if the SEC had found evidence that Lehman Brothers executives
intentionally misused accounting for repo transactions to improve
the overall appearance of the financial statements?
6. (Advanced) Are U.S. accounting standards establish in
U.S. law? Explain your answer.
7. (Introductory) How could Lehman Brothers executives have
violated U.S. law and therefore have acted in a way that would bring
an SEC enforcement action against them? Cite explanations in the
article specifically related to the grounds on which the SEC would
be able to bring a civil suit and perhaps lead the justice
department to bring a criminal suit against these executives.
Reviewed By: Judy Beckman, University of Rhode Island
One Auditing Firm Has Become
Better Known for Its Auditing Specialty Than Other Firms like Ernst &
Young 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
Also see Francine's update
at
http://retheauditors.com/2010/09/27/auditors-arent-forcing-full-repurchase-risk-exposure-disclosure/
Conclusion
And now we see "repo" transactions forming the basis of another enormous Wall
Street scandal --- the case of the missing $1+ billion at MF Global.
Bob Jensen's threads on repo accounting scandals ---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
"If Car Companies Were Run Like Tech Companies …," by David Pogue,
The New York Times, December 22, 2011 ---
http://pogue.blogs.nytimes.com/2011/12/22/if-car-companies-were-run-like-tech-companies/
Jensen Comment
This item focuses upon R&D in the automotive industry and failed models that
vanished from the scene. David Pogue is one of my favorite tech authors.
In an indirect way the above article may be of interest to financial
accountants in the area of R&D accounting differences between the international
(IASB) versus domestic (FASB) standards. Both standard setting bodies require
expensing of research outlays due to uncertainties about valuation on the
balance sheet. The FASB, however, requires expensing of development costs that
the IASB is more inclined to want capitalized as assets. The above article
illustrates how difficult it can be to carry development costs as assets.
Especially note the comments that follow this article. One of the main
problems with vehicles is that there are so many components. Hence,
predicting the future of a new vehicle model is like predicting the future of a
"portfolio" of components having different futures and risks. This makes R&D
accounting for "portfolios" much more complicated than R&D accounting for many
other products such as new drugs, new cat food, and even new laptop computers.
But it's less complicated than accounting for more complicated "portfolios" of
components in new aircraft, submarines, nuclear power plants, and space ships.
December 25, 2011 reply from Jagdish Gangolly
Bob,
Here's a humorous piece from the internet:
Source:
http://www.snopes.com/humor/jokes/autos.asp
At a computer expo (COMDEX), Bill Gates reportedly
compared the computer industry with the auto industry and stated: "If GM had
kept up with the technology like the computer industry has, we would all be
driving $25.00 cars that got 1,000 miles to the gallon."
In response to Bill's comments, General Motors
issued a press release (byMr. Welch himself) stating:
If GM had developed technology like Microsoft, we
would all be driving cars with the following characteristics:
1. For no reason at all, your car would crash twice
a day.
2. Every time they repainted the lines on the road,
you would have to buy a new car.
3. Occasionally, executing a manoeuver such as a
left-turn would cause your car to shut down and refuse to restart, and you
would have to reinstall the engine.
4. When your car died on the freeway for no reason,
you would just accept this, restart and drive on.
5. Only one person at a time could use the car,
unless you bought 'Car95' or 'CarNT', and then added more seats.
6. Apple would make a car powered by the sun,
reliable, five times as fast, and twice as easy to drive, but would run on
only five per cent of the roads.
7. Oil, water temperature and alternator warning
lights would be replaced by a single 'general car default' warning light.
8. New seats would force every-one to have the same
size butt.
9. The airbag would say 'Are you sure?' before
going off.
10. Occasionally, for no reason, your car would
lock you out and refuse to let you in until you simultaneously lifted the
door handle, turned the key, and grabbed the radio antenna.
11. GM would require all car buyers to also
purchase a deluxe set of road maps from Rand-McNally (a subsidiary of GM),
even though they neither need them nor want them. Trying to delete this
option would immediately cause the car's performance to diminish by 50 per
cent or more. Moreover, GM would become a target for investigation by the
Justice Department.
12. Every time GM introduced a new model, car
buyers would have to learn how to drive all over again because none of the
controls would operate in the same manner as the old car.
13. You would press the 'start' button to shut off
the engine.
Corporate Executives Just Do Not Learn From Past Disasters
"Execs to Cash In Despite Market Woes: Even companies whose investors
received a negative return this year expect to fund at least 100% of
formula-based annual bonus plans," David McCann, CFO.com, December 9,
2011 ---
http://www3.cfo.com/article/2011/12/compensation_executive-bonus-larre-towers-watson-
Are companies in denial when it comes to
executives' annual bonuses for 2011? Judge for yourself.
Among 265 companies that participated in a newly
released Towers Watson survey, 42% said their shareholders' total returns
were lower this year than in 2010. No surprise there, given the stock
markets' flat performance in 2011.
Yet among those that reported declining shareholder
value, a majority (54%) said they expected their bonus plan to be at least
100% funded, based on the plan's funding formula. That wasn't much behind
the 58% of all companies that expected full or greater funding (see chart).
"It boggles the mind. How do you articulate that to
your investors?" asks Eric Larre, consulting director and senior executive
pay consultant at Towers Watson. Noting that stocks performed excellently in
2010 while corporate earnings stagnated — the opposite of what has happened
this year — he adds, "How are you going to say to them, 'We made more money
than we did last year, but you didn't'?"
In particular, companies would have to convincingly
explain that annual bonus plans are intended to motivate executives to
achieve targets for short-term, internal financial metrics such as EBITDA,
operating margin, or earnings per share, and that long-term incentive
programs — which generally rest on stock-option or restricted-stock awards,
giving executives, like investors, an ownership stake in the company — are
more germane to investors.
But such arguments may hold little sway with the
average investor, who "doesn't bifurcate compensation that discretely," says
Larre. Rather, investors simply look at the pay packages as displayed in the
proxy statement to see how much top executives were paid overall, and at how
the stock performed.
Larre attributes much of the current, seeming
generosity to executives to complacence within corporate boards. This year,
the first in which public companies were required to give shareholders an
advisory ("say on pay") vote on executive-compensation plans, 89% received a
thumbs-up. But that came on the heels of 2010, when the S&P 500 gained some
13% and investors were relatively content with their returns. "They may not
be as content now," Larre observes. "I think the number of 'no' say-on-pay
votes will be larger during the 2012 proxy season."
Continued in article
Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/fraud001.htm#Governance
White Collar Crime Pays Even if You Get Caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
Judging the Relevance of Fair Values for Financial Statements
Since fair value accounting is arguably the hottest accounting
theory/practice topic among accounting standard setters and financial analysts
these days, I was naturally attracted to the following accountics science
research article:
"Judging the Relevance of Fair Values for Financial Statements," by Lisa Koonce,
Karen K. Nelson, and Catherine M. Shakespeare, The Accounting Review,
Volume 86, 2075-2098.November 2011, pp. 2075-2098
We conduct three experiments to test if investors'
views about fair value are contingent on whether the financial instrument in
question is an asset or liability, whether fair values produce gains or
losses, and whether the item will or will not be sold/settled soon. We draw
on counterfactual reasoning theory from psychology, which suggests that
these factors are likely to influence whether investors consider fair value
as providing information about forgone opportunities. The latter, in turn,
is predicted to influence investors' fair value relevance judgments. Results
are generally supportive of the notion that judgments about the relevance of
fair value are contingent. Attempts to influence investors' fair value
relevance judgments by providing them with information about forgone
opportunities are met with mixed success. In particular, our results are
sensitive to the type of information provided and indicate the difficulty of
overcoming investors' (apparent) strong beliefs about fair value.
. . .
Fair value proponents maintain that, no matter the
circumstance, fair value provides information about forgone opportunities
that affect the economics of the firm (Hague and Willis 1999). That is,
proponents of fair value would argue that such information is always
relevant to evaluating a firm.
To be concrete, consider the following example.
Company X issues bonds payable at par in the amount of $1,000,000. Two years
after issuing the bonds, interest rates fall and so the fair value of the
bonds is $1,200,000. From a discounted cash flow perspective, although the
cash outflows have not changed, the discount rate has decreased. This
denominator change leads to a greater negative present value associated with
Company X having debt with fixed cash outflows—that is, it leads to a fair
value loss. A fair value advocate would argue that the $200,000 loss is
always relevant to the evaluation of the firm as it represents a forgone
opportunity—that is, the present value of the additional interest cost
(i.e., above current market rates) that Company X will pay over the
remaining term of the bond, essentially because Company X did not refinance
before rates changed (Hague and Willis 1999). Accordingly, fair value
advocates would maintain that Company X's valuation should decrease as its
cash flows are higher than an otherwise identical company (say, Company Y)
that financed after the rate decrease. Stated differently, at the end of the
financing period, Company X's cash balance will be lower than Company Y's
(because X is paying a higher interest rate) and, thus, each firm's
valuation should reflect this real economic difference.4
If investors follow the logic of the fair value
advocate and consider fair value gains and losses as representing forgone
opportunities, they are essentially engaging in a process that psychologists
call counterfactual reasoning (Roese 1997). In this type of reasoning,
individuals “undo” outcomes by changing (or mutating) the cause that led to
them. For example, if only the driver had not taken an unusual route home
late at night, he would not have gotten into an accident. In the fair value
domain, the calculation of fair value is based on the same type of
simulation as counterfactual reasoning—“undoing” the actual contractual
interest rate and replacing it with the current market rate of interest that
the company would be paying if management had undertaken an alternative set
of actions (i.e., the forgone opportunity). As the above numerical example
illustrates, determining the amount of the fair value gain or loss is fairly
mechanical once an interest (or discount) rate change occurs. The more
subtle effect is whether the investor considers the fair value gain or loss
as a forgone opportunity and thus relevant to evaluating the firm. If
investors do (do not) follow a process similar to counterfactual reasoning,
they are more (are less) likely to judge fair value measurements as
relevant.
Thinking about fair value in terms of
counterfactual reasoning is helpful, as this theory suggests when investors'
fair value judgments are likely to depend on context. Prior research in
psychology indicates that counterfactual thinking is more likely when events
are seen as abnormal versus normal, when negative rather than positive
events occur, when the outcome or antecedent is mutable or changeable, or
when the outcome is close versus more distant in time (Roese and Olson
1995). Drawing on this research, we identify three fair value contexts for
financial instruments—namely, assets versus liabilities, gains versus
losses, and held to maturity versus sold/settled soon—that we posit will
cause investors to change their fair value relevance judgments.5 That is, we
predict that investors' views about the relevance of fair value will not be
unwavering, as proponents of fair value would maintain, but rather will be
contingent on context. Relevance of Fair Value Depending on Context
Fair value accounting is currently being used for
financial instruments that are either assets or liabilities (but not for
equity items). In addition, fair value accounting produces both gains and
losses. Accordingly, a natural question is whether investors reason
differently about the relevance of fair value for assets versus liabilities
and for gains versus losses. Counterfactual reasoning theory suggests that
investors treat these situations differently.
Turning first to gains and losses, prior literature
(e.g., Roese 1997) indicates that counterfactual reasoning is more likely
when undesirable outcomes occur. Here, individuals tend to evaluate the
undesirable outcome by determining how easy it is to mentally undo it. In
the fair value context, this would entail reasoning about how the fair value
loss could have been avoided. In contrast, counterfactual reasoning is less
likely with desirable outcomes like fair value gains. In the case of such
desirable outcomes, individuals have less need to understand the cause of
the gain and are unlikely to mentally undo the outcome (Roese 1997).
Accordingly, we hypothesize: H1:
Individuals will judge fair value losses as more
relevant than fair value gains.
In the context of assets versus liabilities,
counterfactual reasoning theory suggests that the more mutable an item is
(i.e., the easier an outcome can be undone), the more likely an individual
will engage in counterfactual reasoning (McGill and Tenbrunsel 2000). For
example, if a parachuter falls to his death, individuals are more likely to
consider mutable factors in considering how he could have avoided death.
That is, “if only he had rechecked the safety cord before jumping” is more
likely to be considered (i.e., it is more mutable) than “if only gravity
were not at work.”
We predict that, in the eyes of investors,
financial assets are perceived to be more mutable than financial
liabilities. In other words, it is easier to consider an alternative set of
actions for assets than for liabilities. This idea comes from the line of
reasoning that individuals generally think they can more easily sell, for
example, a bond investment than they can settle a home loan. That is, it is
easier for them to simulate an alternative set of actions for (i.e.,
counterfactually reason about) assets than liabilities.6 Accordingly, we
hypothesize: H2:
Individuals will judge the fair value of financial
assets as more relevant than the fair value of financial liabilities.
Finally, we posit that management's intent likely
influences investors' judgments about fair value relevance. Research shows
that perceived closeness to an outcome affects whether individuals engage in
counterfactual reasoning (Meyers-Levy and Maheswaran 1992). For example, a
traveler who misses his/her flight by five minutes is more likely to engage
in counterfactual reasoning (i.e., “if only I had run the yellow stop light,
I'd have made it to the gate on time”) than a traveler who misses the flight
by one hour. Drawing on this idea, we maintain that individuals will be more
inclined to think about “if only” when the financial instrument is to be
sold/settled soon as compared to when it is to be held to maturity.
Counterfactual reasoning seems particularly likely here, particularly in the
case of loss outcomes. Individuals will likely think, for example, “if only
the company had sold the investment before the fair value decreased, they
would not be in this position today.” Accordingly, we hypothesize: H3:
Individuals will judge the fair value of financial
instruments that are to be sold/settled soon as more relevant than those
that are to be held to maturity. Changing Investor Judgments about Fair
Value Relevance
Because we conjecture that investors' judgments
about fair value relevance will depend on the context, we believe it is
possible to desensitize their judgments to context (Arkes 1991). In
particular, we surmise that providing information about forgone
opportunities should influence investors' understanding of the fair value
change and, ultimately, will influence their fair value relevance judgments.
This approach of providing individuals with a summary of the information
that they may not normally consider is frequently employed as a “fix” in
various decision settings (Arkes 1991). We summarize our expectations in the
following hypothesis. H4:
Individuals will judge the relevance of fair value
for financial instruments as greater when they are given information about
forgone alternatives.
Continued in article
Jensen Comment
I like this paper in terms of it's originality and clever ideas in terms of
accounting theory, especially the concept of counterfactual reasoning.
But like nearly all accountics behavioral experiments reported over the past
four decades, I'm disappointed in how the hypotheses were actually tested. I'm
also disappointed in the virtual lack of validity testing and replication of
behavioral accounting studies, but it's too early to speculate on future
replication studies of this particular November 2011 article.
To their credit, Professors Koonce, Nelson, and Shakespeare conducted three
experiments rather than just one experiment, although from a picky point of view
these would not constitute independent replications in science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Also to their credit the sample sizes are large enough to almost make
statistical inference testing superfluous.
But I just cannot get excited about extrapolating research findings form
students as surrogates for investors and analysts in the real world. This is a
typical example of where accountics researchers tried to do their research
without having to set foot off campus.
Even if these researchers had stepped off campus to conduct their experiments
on real-world investors and analysts, I have difficulty with assigning the
research subjects artificial/hypothetical tasks even though my own doctoral
thesis entailed submitting hypothetical proxy reports to real-world security
analysts. My favorite criticism is an anecdotal experience with one banker who
was an extremely close friend when I lived in Bangor, Maine while on the faculty
of the University of Maine. I played poker or bridge with this banker at least
once a week. With relatively small stakes in a card game he was a reckless fool
in his betting and nearly always came up a money loser at the end of the night.
But in real life he was a Yankee banker who was known in the area for his
tight-fisted conservatism.
And thus I have a dilemma. Even if there are ten replications of these
experiments using real world investors and analysts I cannot get excited about
the accountics science outcomes. I would place much more faith in a protocol
analysis of one randomly selected CFA, but protocol researchers are not allowed
to publish their small sample studies in TAR, JAR, or JAE. They can, however,
find publishing outlets in social science research journals.
http://en.wikipedia.org/wiki/Protocol_analysis
The best known protocol analysis in accounting and finance was the
award-winning doctoral thesis research of Geoffrey Clarkson at Carnegie-Mellon,
although the integrity of his research was later challenged.
Protocol Analysis
"Can thinking aloud make you smarter?"
Barking Up the Wrong Tree, August 12, 2010 ---
http://www.bakadesuyo.com/can-thinking-aloud-make-you-smarter
Few studies
have examined the impact of age on reactivity to
concurrent think-aloud (TA) verbal reports.
An initial study with
30 younger and 31 older adults revealed that thinking
aloud improves older adult performance on a short form
of the Raven's Matrices (Bors & Stokes, 1998,
Educational and Psychological Measurement, 58, p. 382)
but did not affect other tasks. In the
replication experiment, 30 older adults (mean age =
73.0) performed the Raven's Matrices and three other
tasks to replicate and extend the findings of the
initial study. Once again older adults performed
significantly better only on the Raven's Matrices while
thinking aloud.
Performance gains on this task were substantial (d =
0.73 and 0.92 in Experiments 1 and 2, respectively),
corresponding to a fluid intelligence increase of nearly
one standard deviation.
Source: "How to Gain Eleven
IQ Points in Ten Minutes: Thinking Aloud Improves
Raven's Matrices Performance in Older Adults" from
Aging, Neuropsychology, and Cognition, Volume 17, Issue
2 March 2010 , pages 191 - 204
Here's an explanation of what
Raven's Matrices are.
Speaking of smarts and genius, if you haven't read it,
Dave Eggers' book
A Heartbreaking Work of Staggering
Genius
is a lot of fun. I highly
recommend the introduction, oddly enough.
Jensen Comment
Protocol Analysis ---
http://en.wikipedia.org/wiki/Protocol_analysis
This takes me back to long ago to "Protocol Analysis" when having subjects
think aloud was documented in an effort to examine what information was used and
how it was used in decision making. One of the first Protocol Analysis studies
that I can recall was at Carnegie-Mellon when Geoffrey Clarkson wrote a doctoral
thesis on a bank's portfolio manager thinking aloud while making portfolio
investment decisions for clients. Although there were belated questions about
the integrity of Jeff's study, one thing that stuck out in my mind is how
accounting choices (LIFO vs. FIFO, straight-line vs. accelerated depreciation)
were ignored entirely when the decision maker analyzed financial statements.
This is one of those now rare books that I still have in some pile in my studio:
Geoffrey Clarkson,
Portfolio Selection-A Simulation of. Trust
Investment (Englewood
Cliffs, N. J.: Prentice-Hall,. Inc., 1962)
Clarkson reached a controversial conclusion that his model could choose the same
portfolios as the live decision maker. That was the part that was later
questioned by researchers.
Another application of Protocol Analysis was the doctoral thesis of Stan
Biggs.
As cited in The Accounting Review in January, 1988 ---
http://www.jstor.org/pss/247685
By the way, this one one of those former years when TAR had a section for "Small
Sample Studies" (those fell by the board in later years)
Also see
http://onlinelibrary.wiley.com/doi/10.1002/bdm.3960060303/abstract
Bob Jensen's threads on fair value accounting and other bases of
accounting measurement are at
http://www.trinity.edu/rjensen/theory02.htm#FairValue
"On Assets and Debt in the Psychology of Perceived Wealth," by Abigail
B. Sussman and Eldar Shafir, Psychological Science, December 23, 2011 ---
http://pss.sagepub.com/content/early/2011/12/16/0956797611421484.abstract?rss=1
A Case About Cash Flow Versus Accrual Accounting
From The Wall Street Journal Accounting Weekly Review on December 16,
2011
Diamond Payments Questioned By Growers
by:
Hannah Karp
Dec 12, 2011
Click here to view the full article on WSJ.com
TOPICS: Auditing, Cash Flow, Fiscal Year, Inventory Systems,
Mergers and Acquisitions
SUMMARY: Diamond Foods, Inc., may have been attempting to reduce
its 2010 costs for nut purchases and shift them into 2011 in order to
maintain a sufficient stock price for use in purchasing the Pringles chips
product line from Procter & Gamble. The related article indicates that
Investigating the payments has led to a delay in filing the company's fiscal
quarterly financial statements with the SEC.
CLASSROOM APPLICATION: The article is useful in discussing cash
versus accrual based accounting and when cash payments subsequent to a
fiscal period may indicate that liabilities were in existence at a financial
statement date. The discussion also can be used to discuss the impact of
purchases of direct materials on the calculation of cost of goods sold.
QUESTIONS:
1. (Introductory) What is the discrepancy between Diamond Foods,
Inc.'s description of payments to walnut growers and what the farmers
themselves say the payments are for?
2. (Advanced) In this case, how does shifting the timing of cash
payments help to shift the period in which costs are expensed by Diamond
Foods, Inc.? In your answer, explain what item of cost is being paid for by
Diamond.
3. (Advanced) Does the time period for cash payouts always match
the period in which expenses for the item in question are recorded? Explain
your answer
4. (Advanced) How have questions about these payments impacted
Diamond Foods planned acquisition of Pringles snack chips from Procter and
Gamble? In your answer, address how reducing Diamond's 2010 costs would
impact the planned transaction given its structure as described in the WSJ
article.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Probe Delays Diamond Foods' Report
by Hannah Karp
Dec 13, 2011
Online Exclusive
"Diamond Payments Questioned By Growers," by: Hannah Karp, The
Wall Street Journal, December 12, 2011 ---
http://online.wsj.com/article/SB10001424052970204336104577092701009641444.html?mod=djem_jiewr_AC_domainid
Some walnut growers have challenged Diamond Foods
Inc.'s explanation of mysterious payments to them, further tangling an
accounting question that has delayed the snack maker's planned $2.35 billion
acquisition of Pringles from Procter & Gamble Co.
Diamond Foods has said a sizable payment to its
walnut growers in September was an advance on their 2011 crop.
But three growers said they told the company that
they didn't intend to deliver their 2011 crops to Diamond, yet were assured
by company representatives that they could cash the checks anyway. The three
said they were told the checks were to top up payments for their 2010 crops.
The company is the subject of shareholder suits
that claim Diamond may have used the payments to shift costs from the fiscal
year that ended July 31 into the current year, padding earnings for the
previous year.
The checks to the growers, what the company called
momentum payments, are the subject of an investigation by Diamond's board
and have become a sticking point in the company's deal to buy the Pringles
snack brand. Diamond plans to pay in part with its stock, which has dropped
56% since late September, shortly after the company reported fiscal-year
results.
Diamond said its agreements with growers are
confidential.
Many growers, who harvested their 2011 crops last
month, said they had never seen momentum payments before. Some growers also
had grumbled over what they said were insufficient payments from Diamond for
their 2010 crops.
Mark Royer, who has grown walnuts for Diamond for
the past 10 years, said he hadn't decide whether to deliver his 2011 crop to
the company when he received his momentum check in September. He said he
called his Diamond field representative to explain "what the mysterious
payment represented."
"I made the assumption it would have to be 2010
compensation, because the delivery-to-date pricing was almost 40% under
market," Mr. Royer said.
He said the representative told him Diamond
executives "were not committing" about which crop the payment was for. "He
simply said that he knew that certain growers were cashing their
momentum-payment check with the understanding that they didn't intend to
deliver in 2011."
Mr. Royer said he then decided it was safe to
deposit his check.
He said he won't deliver this year's crop to
Diamond. "I've kind of washed my hands of the matter," he says.
A grower from Sacramento, Calif., said he was
unsatisfied with his final official payment this summer for his 2010 crop.
"It was grossly under what other growers had received," he said.
He was pleased to get another check, for $90,000,
several days later, he said.
But he said he had been concerned that accepting
the payment would require him to deliver his fall harvest to Diamond. He
said field-service representative Eric Heidman, in Stockton, Calif., assured
him that the check was the last payment for the 2010 crop.
Mr. Heidman didn't return calls seeking comment.
Another grower in Northern California said his
field representative told him the momentum check was for 2010, and that he
had told Diamond he wouldn't deliver this year's crop to the company. He
said he had his lawyer send Diamond a letter, confirming that the grower
wouldn't deliver this year's crop and would cash the check.
Diamond began an investigation into its accounting
practices last month after the chairman of the board's audit committee,
Edward Blechschmidt, received complaints about the payments from someone
outside the company.
The investigation delayed Diamond's cash-and-stock
purchase of Pringles from P&G.
Continued in article
Bob Jensen's threads on cash flow versus accrual accounting analysis ---
http://www.trinity.edu/rjensen/Theory02.htm#CashVsAccrualAcctg
Question
What's a variable prepaid forward contract?
Hint
Keep in mind that forward contracts, unlike option contracts, commonly have no
initial (premium) costs. The same is true of most swaps that are simply
portfolios of forward contracts.
Answer
http://www.themargininvestor.com/2/post/2011/11/prepaid-variable-forward-strategy-takes-heat-from-irs-portfolio-margin-to-the-rescue.html
"Taxing Derivatives Gets Capitol Hill Airing," by John D. McKinnon,
The Wall Street Journal, December 6, 2011 ---
http://blogs.wsj.com/washwire/2011/12/06/taxing-derivatives-gets-capitol-hill-airing/
Some witnesses at a congressional hearing urged a
sweeping overhaul of derivatives taxation to curb abuses by big businesses
and the wealthy.
But others raised concerns that tightening the
rules too much could put the U.S. out of step with the world, and could
restrict legitimate use of derivatives for hedging. While acknowledging that
derivatives have been used to duck taxes, these experts also noted that
middle-class investors increasingly are able to make use of the same basic
strategies.
Given the chronic problems with derivatives, “we
need a fundamental rethinking of the taxation of financial products,” Alex
Raskolnikov, a Columbia University law professor, told lawmakers at a joint
hearing of the Senate Finance Committee and the House Ways and Means
Committee.
Mr. Raskolnikov estimated that hundreds and perhaps
thousands of high-income earners have used a particular technique known as a
“variable prepaid forward contract” that allows deferral of taxes on
appreciated securities. He and others urged more disclosure of
derivative-related tax avoidance by the Internal Revenue Service, so the
extent of the problems can be known.
But other experts and lawmakers said the cure could
be worse than the disease, and predicted that any overhaul would have only
limited benefit.
“Whatever changes are made, there will be new
opportunities” for tax avoidance, said Andrea Kramer, a lawyer with
McDermott Will & Emery in Chicago. “Eighteen months would be the outer
limit” before new strategies appeared.
Some lawmakers and witnesses also said that
middle-class investors increasingly are able to take advantage of the same
tax benefits of derivatives contracts, such as deferral of taxation on
investment income. Exchange-traded notes, for example, mimic the economics
of long-term securities investments, but can eliminate the need to pay taxes
in the interim on dividends or other income.
In a statement, Finance Committee Chairman Max
Baucus (D., Mont.) said that derivatives used to avoid paying taxes “aren’t
fair to taxpayers who can’t afford those high-priced lawyers and
accountants.” He called on Congress to “clarify and simplify the tax
treatment of these financial products.”
Continued in article
December 16, 2011 reply from Eliot Kamlet
If you want to know what’s wrong with our tax system, read
A Family’s Billions, Artfully Sheltered
http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?_r=1&scp=2&sq=lauder&st=cse
In the New York Times. An excerpt from it
says:
And earlier this year, Mr. Lauder used his stake in
the family business, Estée Lauder Companies, to create a tax shelter to
avoid as much as $10 million in federal income tax for years. In June,
regulatory filings show, Mr. Lauder entered into a sophisticated contract to
sell $72 million of stock to an investment bank in 2014 at a price of about
75 percent of its current value in exchange for cash now. The transaction,
known as a variable prepaid forward, minimizes potential losses for
shareholders and gives them access to cash. But because the I.R.S. does not
classify this as a sale, it allows investors like Mr. Lauder to defer paying
taxes for years.
Elliot Kamlet
Binghamton University
Bob Jensen's threads on accounting for derivatives are at
http://www.trinity.edu/rjensen/caseans/000index.htm
Below is a link to a long article about scientific misconduct and the
difficulties of investigating such misconduct. The conclusion seems to rest
mostly upon what insiders apparently knew but were unwilling to testify about in
public. Marc Hauser eventually resigned from Harvard. The most aggressive
investigator in this instance appears to be Harvard University itself.
"Disgrace: On Marc Hauser," by Mark Gross, The Nation, January
9, 2012 ---
http://www.thenation.com/article/165313/disgrace-marc-hauser?page=0,2
. . .
Although some of my knowledge of the Hauser case is
based on conversations with sources who have preferred to remain unnamed,
there seems to me to be little doubt that Hauser is guilty of scientific
misconduct, though to what extent and severity remains to be revealed.
Regardless of the final outcome of the investigation of Hauser by the
federal Office of Research Integrity, irreversible damage has been done to
the field of animal cognition, to Harvard University and most of all to Marc
Hauser.
"Bad science: The psychology behind exaggerated & false research [infographic],"
Holykaw, December 21, 2011 ---
http://holykaw.alltop.com/bad-science-the-psychology-behind-exaggerated
One in three scientists admits to using shady research practices.
Bravo: Zero accountics scientists admit to using shady research practices.
One in 50 scientists admit to falsifying data outright.
Bravo: Zero accountics scientists admit to falsifying data in the history
of accountics science.
Reports of colleague misconduct are even more common.
Bravo: But not in accountics science
Misconduct rates are highest among clinical, medical, and phamacological
researchers
Bravo: Such reports are lowest (zero) among accountics scientists
Four ways to make research more honest
- Make all raw data available to other scientists
- Hold journalists accountable
- Introduce anonymous publication
- Change from real science into accountics science where research is
unlikely to be validated/replicated except on rare occasions where no errors
are ever found
574 Shields Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
"The Man Who Busted the ‘Banksters’," Smithsonian, November 29,
2011 ---
http://blogs.smithsonianmag.com/history/2011/11/the-man-who-busted-the-%E2%80%98banksters%E2%80%99/
Three years removed from the stock market crash of
1929, America was in the throes of the Great Depression, with no recovery on
the horizon. As President Herbert Hoover reluctantly campaigned for a second
term, his motorcades and trains were pelted with rotten vegetables and eggs
as he toured a hostile land where shanty towns erected by the homeless had
sprung up. They were called “Hoovervilles,” creating the shameful images
that would define his presidency. Millions of Americans had lost their jobs,
and one in four Americans lost their life savings. Farmers were in ruin, 40
percent of the country’s banks had failed, and industrial stocks had lost 80
percent of their value.
With unemployment hovering at nearly 25 percent in
1932, Hoover was swept out of office in a landslide, and the newly elected
president, Franklin Delano Roosevelt, promised Americans relief. Roosevelt
had decried “the ruthless manipulation of professional gamblers and the
corporate system” that allowed “a few powerful interests to make industrial
cannon fodder of the lives of half the population.” He made it plain that he
would go after the “economic nobles,” and a bank panic on the day of his
inauguration, in March 1933, gave him just the mandate he sought to attack
the economic crisis in his “First 100 Days” campaign. “There must be an end
to a conduct in banking and in business which too often has given to a
sacred trust the likeness of callous and wrongdoing,” he said.
Ferdinand Pecora was an an unlikely answer to what
ailed America at the time. He was a slight, soft-spoken son of Italian
immigrants, and he wore a wide-brimmed fedora and often had a cigar dangling
from his lips. Forced to drop out of school in his teens because his father
was injured in a work-related accident, Pecora ultimately landed a job as a
law clerk and attended New York Law School, passed the New York bar and
became one of just a handful of first-generation Italian lawyers in the
city. In 1918, he became an assistant district attorney. Over the next
decade, he built a reputation as an honest and tenacious prosecutor,
shutting down more than 100 “bucket shops”—illegal brokerage houses where
bets were made on the rise and fall prices of stocks and commodity futures
outside of the regulated market. His introduction to the world of fraudulent
financial dealings would serve him well.
Just months before Hoover left office, Pecora was
appointed chief counsel to the U.S. Senate’s Committee on Banking and
Currency. Assigned to probe the causes of the 1929 crash, he led what became
known as the “Pecora commission,” making front-page news when he called
Charles Mitchell, the head of the largest bank in America, National City
Bank (now Citibank), as his first witness. “Sunshine Charley” strode into
the hearings with a good deal of contempt for both Pecora and his
commission. Though shareholders had taken staggering losses on bank stocks,
Mitchell admitted that he and his top officers had set aside millions of
dollars from the bank in interest-free loans to themselves. Mitchell also
revealed that despite making more than $1 million in bonuses in 1929, he had
paid no taxes due to losses incurred from the sale of diminished National
City stock—to his wife. Pecora revealed that National City had hidden bad
loans by packaging them into securities and pawning them off to unwitting
investors. By the time Mitchell’s testimony made the newspapers, he had been
disgraced, his career had been ruined, and he would soon be forced into a
million-dollar settlement of civil charges of tax evasion. “Mitchell,” said
Senator Carter Glass of Virginia, “more than any 50 men is responsible for
this stock crash.”
The public was just beginning to get a taste for
the retribution that Pecora was dishing out. In June 1933, his image
appeared on the cover of Time magazine, seated at a Senate table, a cigar in
his mouth. Pecora’s hearings had coined a new phrase, “banksters” for the
finance “gangsters” who had imperiled the nation’s economy, and while the
bankers and financiers complained that the theatrics of the Pecora
commission would destroy confidence in the U.S. banking system, Senator
Burton Wheeler of Montana said, “The best way to restore confidence in our
banks is to take these crooked presidents out of the banks and treat them
the same as [we] treated Al Capone.”
President Roosevelt urged Pecora to keep the heat
on. If banks were worried about the hearings destroying confidence,
Roosevelt said, they “should have thought of that when they did the things
that are being exposed now.” Roosevelt even suggested that Pecora call none
other than the financier J.P. Morgan Jr. to testify. When Morgan arrived at
the Senate Caucus Room, surrounded by hot lights, microphones and dozens of
reporters, Senator Glass described the atmosphere as a “circus, and the only
things lacking now are peanuts and colored lemonade.”
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's American History of Fraud ---
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
The Seven Deadly Sins of Student Writers
"The Elements of Clunk," by Ben Yagoda, Chronicle of Higher Education,
January 2, 2012 ---
http://chronicle.com/article/The-Elements-of-Clunk/125757/
Four years ago, I wrote an essay for The
Chronicle Review cataloging "The
Seven Deadly Sins of Student Writers"—the errors
and infelicities that cropped up most frequently in my students' work. Since
then a whole new strain of bad writing has come to the fore, not only in
student work but also on the Internet, that unparalleled source for
assessing the state of the language.
Consider:
For our one year anniversary, my girlfriend and
myself are going to a Yankees game, with whomever amongst our friends can
go. But, the Weather Channel just changed their forecast and the skies are
grey, so we might go with the girl that lives next door to see the movie,
"Iron Man 2".
Those two hypothetical sentences contain 11
instances of this new type of "mistake" (I put the word in quotes to include
usages that would almost universally be deemed errors, ones that merely
diverge from standard practice, and outposts in between). They are as
follows:
1. There should be no comma after "But."
2. The period after "Iron Man 2" should be inside
the quotation marks around the title (which would be italicized in most
publications, including The Chronicle).
3. No comma is needed after "movie."
4. "Its," not "their," is needed with "Weather
Channel."
5. "Whomever" should be "whoever."
6. "Myself" should be "I."
7. "Girl that" should be "girl who"
8. "Gray" is the correct spelling, not "grey."
9. "Amongst" should be "among."
10. "One year anniversary" should be written as
"one-year anniversary," but, really, "first anniversary."
11. It's a "Yankee," not "Yankees," game.
Are you surprised by the absence of smiley faces,
LOL-type abbreviations, and slang terms like "diss" or "phat"? A reading of
the typical lament about student writing would lead you to think all are
rampant. However, I have yet to encounter a single example in all my years
of grading. Students realize that this kind of thing is in the wrong
register for a college assignment (even an assignment for my classes, which
for the most part cover journalism, broadly defined—that is, writing for
publication in newspapers and magazines, in print or online). Maybe students
are being too careful. Slang can streamline or lend poetry to language, or
both. The new errors and changes, on the other hand, make it longer and more
prosaic. They give a new sound to prose. I call it clunk.
The leadoff hitters are Nos. 1 to 3; punctuation is
a train wreck among my students. I have no doubt as to the root of the
problem: Students haven't spent much time reading. Punctuation, including
the use of apostrophes and hyphens, is governed by a fairly complicated
series of rules and conventions, learned for the most part not in the
classroom but by encountering and subliminally absorbing them again and
again. Students have a lot of conversations and texting sessions, but that's
no help. You need to read a lot of edited and published prose.
Unfamiliarity with written English has brought
about the other mistakes and changes as well. They may not appear at first
to have much in common, but note: All except Nos. 2 and 8 lengthen the
sentence they're in. This is the opposite of the way language usually
changes. "God be with you" becomes "goodbye"; "base ball" becomes
"base-ball" and then "baseball"; "disrespect" becomes "diss." Two hundred
years ago, Jane Austen wrote, "It is a truth universally acknowledged, that
a single man in possession of a good fortune, must be in want of a wife." A
copy editor today would cut both commas.
Standard written English is a whole other language
from its spoken (and texted) counterpart, with conventions not just of
punctuation but also of many shortcuts to meaning—streamlined words and
phrases, ellipses (omitted word or words), idioms, figures of speech—that
have developed over many years. You learn them by reading. And if you
haven't read much, when you set pen to paper yourself, you take things more
slowly and apply a literal-minded logic, as you would in finding your way
through a dark house.
Thus, in No. 1, it seems natural to place a comma
after "But" because in speaking you would pause there. (So natural that
commas after "But," "And," or "Yet" at the start of a sentence now show up
frequently in Associated Press dispatches and The New York Times,
as well as in blogs and other writing on the Web.) And in No. 2, it makes
sense to put a period after the title Iron Man 2—after all, a film
title is a unit. But in both cases the rules, animated by a general urge to
make writing smooth and efficient, allow us and in fact compel us to
punctuate in an illogical and counterintuitive way.
The question in No. 3, of whether to put a comma
after the word "movie," relates to the famously difficult issue of defining
or nondefining clauses and phrases—the whole "that/which" thing. It's a slam
dunk that students would be clueless here. What I want to point out is that
they're much more likely to err by putting a comma in than by taking one
out. In other words, every day I see mistakes like "the movie, Iron Man
2" or "my friend, Steve." But rarely do I encounter something along the
lines of "We live in the richest country in the world the United States."
As for No. 4, every student of mine who is not the
child of a high-school English teacher uses the third-person plural pronoun
("they," "them," "their") to refer to companies, organizations, and rock
bands with nonplural names, such as the Clash and Arcade Fire. That is
eminently reasonable, given that these outfits consist of multiple
individuals, and in fact the plural pronoun is standard in Britain. However,
we live in the United States, where it is not.
(Even English teachers' children use "they" for the
epicene pronoun—that is, to stand for a person of indeterminate sex. Thus,
"Everyone who wants to come on the trip should bring their passport." In
that sentence, "their" is so much better a choice than "his or her," "her or
his," or "her/his" that it will almost certainly become standard in written
English in the next 10 years.)
Continued in article
Jensen Common
Along with a lot of other bloggers I admit to a lot of grammar mistakes in email
messages. The biggest problem for me is that after 40+ years as a professor I
know most of the rules of writing (like knowing not to split infinitives), but
there's a tendency among those of us who write a lot of email messages to type
phonetically and fail to proof read because we're in a hurry.
I also admit over the years to be much more tolerant of grammatical errors of
other professors and most friends who send me email messages, because we wear
the same shoes. More importantly, it's not my responsibility to correct their
grammar. Occasionally when I quote them on my Website I correct some grammar
errors that I know would embarrass them.
On the other hand, I've never been tolerant of grammatical errors of my
students. This is because it's my responsibility to correct their grammar --- at
least while they're still my students. After they graduate they become my
friends and not my students.
I'm never tolerant of bad grammar when I'm an assigned referee on a research
paper. That's because it's my responsibility to at least point out some of
the grammatical errors, although it's not my responsibility to rewrite the
submitted paper.
"Boomers Wearing Bull's-Eyes Postcrisis: Those Over 50 Targeted in
Investment Scams; Problem is 'Rampant'," by Blake Ellis, The Wall Street
Journal, December 13, 2011 ---
http://money.cnn.com/2011/12/13/real_estate/home_sales_revision/index.htm
Bob Jensen's threads on fraud reporting are at
http://www.trinity.edu/rjensen/FraudReporting.htm
In defence of the dismal science: In a guest article, Robert Lucas, the
John Dewey Distinguished Service Professor of Economics at the University of
Chicago, rebuts criticisms that the financial crisis represents a failure of
economics," The Economist, August 6, 2009 ---
http://www.economist.com/node/14165405?story_id=14165405
THERE is widespread disappointment with economists
now because we did not forecast or prevent the financial crisis of 2008. The
Economist’s articles of July 18th on the state of economics were an
interesting attempt to take stock of two fields, macroeconomics and
financial economics, but both pieces were dominated by the views of people
who have seized on the crisis as an opportunity to restate criticisms they
had voiced long before 2008. Macroeconomists in particular were caricatured
as a lost generation educated in the use of valueless, even harmful,
mathematical models, an education that made them incapable of conducting
sensible economic policy. I think this caricature is nonsense and of no
value in thinking about the larger questions: What can the public reasonably
expect of specialists in these areas, and how well has it been served by
them in the current crisis?
One thing we are not going to have, now or ever, is
a set of models that forecasts sudden falls in the value of financial
assets, like the declines that followed the failure of Lehman Brothers in
September. This is nothing new. It has been known for more than 40 years and
is one of the main implications of Eugene Fama’s “efficient-market
hypothesis” (EMH), which states that the price of a financial asset reflects
all relevant, generally available information. If an economist had a formula
that could reliably forecast crises a week in advance, say, then that
formula would become part of generally available information and prices
would fall a week earlier. (The term “efficient” as used here means that
individuals use information in their own private interest. It has nothing to
do with socially desirable pricing; people often confuse the two.)
Mr Fama arrived at the EMH through some simple
theoretical examples. This simplicity was criticised in The Economist’s
briefing, as though the EMH applied only to these hypothetical cases. But Mr
Fama tested the predictions of the EMH on the behaviour of actual prices.
These tests could have come out either way, but they came out very
favourably. His empirical work was novel and carefully executed. It has been
thoroughly challenged by a flood of criticism which has served mainly to
confirm the accuracy of the hypothesis. Over the years exceptions and
“anomalies” have been discovered (even tiny departures are interesting if
you are managing enough money) but for the purposes of macroeconomic
analysis and forecasting these departures are too small to matter. The main
lesson we should take away from the EMH for policymaking purposes is the
futility of trying to deal with crises and recessions by finding central
bankers and regulators who can identify and puncture bubbles. If these
people exist, we will not be able to afford them.
Continued in article
Bob Jensen's threads on the Efficient Market Hypothesis (EMH) and its critics
---
http://www.economist.com/node/14165405?story_id=14165405
Professor Lucas provides a brief, albeit interesting, summary of how Eugene Fama
developed the EMH from cases to models rather than vice versa as in often
advocated in journals like the TAR, JAR, and JAE that are heavily biased toward
publishing models but not cases
How did academic accounting research become a
pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
"An Asset-Pricing Model for the Contagion Age," by Nicholas G. Polson
and James G. Scott, Bloomberg News, December 7, 2011 ---
http://www.bloomberg.com/news/2011-12-08/an-asset-pricing-model-for-contagion-age-commentary-by-polson-and-scott.html
The financial crisis and the meltdown in Europe
have exposed the deficiencies of traditional asset- pricing models,
particularly their inability to account for the effect of contagion from one
market to another. The good news is that the length and the persistence of
the turmoil have given researchers a trove of data to develop new predictive
tools.
In our work, we developed an asset-pricing model to
study these market disruptions, which incorporates random shocks to
volatility that are correlated across markets. It provides a more accurate
way to evaluate contagion, defined as the extent to which shocks from one
market affect another over and above the level implied by the underlying
asset-pricing model.
As an example of the volatility and correlation
observed during the financial crisis, consider the movements in Germany’s
DAX Index (DAX) and the Standard & Poor’s 500 Index (SPX) from July through
early October 2011. The DAX fell 30 percent, to 5,216 on Oct. 4, from a high
of 7,402 at the beginning of July. Over the same period, the S&P fell 20
percent, to 1,075, from 1,340; meanwhile the Chicago Board Options Exchange
Volatility Index, known as the VIX, increased to 45.5 percent, from 15
percent.
Over the subsequent month and a half, volatility
remained persistently higher than traditional asset-pricing models would
have predicted, even though returns stabilized. The large drops in the DAX
and S&P 500 reflect increases in the underlying asset-return volatilities.
This is also directly observed in the increase in the VIX. (VIX) VIX Spike
Moreover, one can see the fat-tailed nature of the
distribution of volatility in the daily movements. For example, on Nov. 10,
after markets had stabilized somewhat, the VIX index spiked to above 36
percent, from 28 percent, an intraday move of more than 8 percent.
This episode captures the three facts about global
markets that any asset-pricing model must now address:
-- A large shock in asset returns in one market
predicts large shocks to other markets. This is cross-sectional clustering
of shocks, which some researchers call “meteor shower” volatility.
-- A large shock in asset prices today predicts
further large, mean-reverting, shocks tomorrow. This is a time-series or
self-exciting clustering effect in volatility.
-- A large shock to aggregate market volatility
predicts specific, directional clustering of country-level returns. Allowing
for the effect of directional volatility is important for measuring
contagion in markets.
Our asset-pricing model incorporates three
volatility effects: cross-sectional clustering across countries (or
markets), longitudinal clustering across time and directional clustering.
These aren’t part of traditional models.
Cross-sectional clustering accounts for the
observation that large market movements in one region seem to increase the
chances of observing a large movement in another, beyond what would be
predicted by traditional asset-pricing models.
Longitudinal clustering allows volatility shocks to
persist over time, a well-known feature of such phenomena.
Directional clustering captures the fact that
shocks in one market are often followed by shocks in a particular direction
in another. That is, the event in the first market can be used to help
predict the return in the other market. Our analysis finds that directional
clustering has the greatest impact in predicting contagion between markets.
Fat-Tails
Our analysis allows the distribution of volatility
during disruptive periods to have fat-tails. This is a characteristic that
has long been recognized in the distribution of asset returns. Fat-tailed
distributions, in contrast to a normal (or Gaussian) distribution, have
greater probability for values further away from the average; fat-tailed
distributions will have more extreme volatility movements than one would
predict with the assumption of standard normality.
The inclusion of fat-tails has implications for the
way contagion between markets is measured. Because contagion is the excess
correlation between asset returns, it can only be properly evaluated if one
begins with an asset pricing that incorporates fat-tailed volatility.
Continued in article
Modern Portfolio Theory ---
http://en.wikipedia.org/wiki/Portfolio_theory
Capital Asset Pricing Model (CAPM) ---
http://en.wikipedia.org/wiki/CAPM
This is a Must Read
Dartmouth Professor Ken French comes in for the rescue
of CAPM!
"How to use the Fama French Model," Empirical Finance Blog, August
1, 2011 ---
http://blog.empiricalfinancellc.com/2011/08/how-to-use-the-fama-french-model/
The CAPM is prolific, but doesn’t appear to work!
For example, in the figures below I’ve plotted the
Fama-French 25 (portfolios ranked on size and book-to-market) against beta.
In the first figure, I plot the average excess
return to the FF 25 against the average excess return one would expect,
given beta.
If you’d like to see how I calculated the charts
above, please reference the excel file
here.
Given such a poor track record, is anyone
still using the CAPM?
Lot’s of people, apparently…
Welch (2008) finds that ~75% of professors
recommend the use of the model when estimating the cost of capital, and
Graham
and Harvey (2001) find that ~74% of CFOs use the
CAPM in their work.
A few quotes from Graham and Harvey 2001 sum up
common sentiment regarding the CAPM:
“While the CAPM is popular, we show later that
it is not clear that the model is applied properly in practice. Of
course, even if it is applied properly, it is not clear that the CAPM is
a very good model [see Fama and French (1992)].
“…practitioners might not apply the CAPM or NPV
rule correctly. It is also interesting that CFOs pay very little
attentionto risk factors based on momentum and book-to-market-value.”
Of course, there are lots of arguments to consider
before throwing out the CAPM. Here are a few:
- Everyone learns about it and knows how to use
it (although, Graham and Harvey suggest that many practitioners don’t
even apply the CAPM theory correctly)
- Data is easy to obtain on betas.
-
Roll’s critique–maybe the CAPM isn’t a junk
theory, rather, the empirical tests showing the CAPM doesn’t work are
bogus.
Regardless, being that this blog is dedicated to
empirical data and evidence, and not about ‘mentally masturbating about
theoretical finance models,’ we’ll operate under the assumption that the
CAPM is dead until new data comes available.
The Fama French Alternative?
Given the CAPM doesn’t work that well in practice,
perhaps we should look into the Fama French model (which isn’t perfect or
cutting edge, but a solid workhorse nonetheless). And while the FF model
inputs are highly controversial, one thing is clear: the FF 3-factor model
does a great job explaining the variability of returns. For example,
according to
Fama French 1993, the 3-factor model explains over
90% of the variability in returns, whereas the CAPM can only explain ~70%!
The 3-factor model is great, but how the heck
does one estimate the FF factors?
Dartmouth Professor Ken French comes in for the
rescue!
Continued in article
Ken French's Link
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
"The Impact of Asymmetry on Expected Stock Returns: An Investigation of
Alternative Risk Measures," by Stephen P. Huffman and Cliff Moll, SSRM,
September 7, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924048
Abstract:
We
investigate the relation between various alternative risk measures and
future daily returns using a sample of firms over the 1988-2009 time period.
Previous research indicates that returns are not normally distributed and
that investors seem to care more about downside risk than total risk.
Motivated by these findings and the lack of research on upside risk, we
model the relation between future returns and risk measures and investigate
the following questions: Are investors compensated for total risk? Is the
compensation for downside risk different than the compensation for upside
risk? and which measure of risk (i.e., upside, downside, or total) is most
important to investors? We find that, although investors seem to be
compensated for total risk, measures of downside risk, such as the lower
partial moment, better explain future returns. Further, when downside and
upside risk are modeled simultaneously, investors seem to care only about
downside risk. Our findings are robust to the addition of control variables,
including prior returns, size, book-to-market ratio of equity (B/M), and
leverage. We also find evidence of short-run mean reversals in daily
returns. Our findings are important because we document a positive
risk-return relationship, using both total and downside risk measures;
however, we find that investors are concerned more with downside risk than
total risk.
Where capital market research in accounting made a huge mistake by relying on
CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Bob Jensen's threads on the EMH ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH
"My Favorite Quotes About Teaching – Number One," by Joe Hoyle,
Teaching Blog, December 9, 2011 ---
http://joehoyle-teaching.blogspot.com/2011/12/my-favorite-quotes-about-teaching.html
Jensen Comment
I like a teaching evaluation submitted to Tony Catanach in a course where Tony
was using the BAM (forced self learning) pedagogy ---
http://www.trinity.edu/rjensen/265wp.htm
The quote goes something like this:
"Everything I learned in this course I had to learn by
myself."
To which Tony replied:
"Case closed."
Advanced Accounting
Teaching case on a accounting entry has AT&T made in relation to its proposed
acquisition of T-Mobile USA?
From The Wall Street Journal Weekly Accounting Review on December 2, 2011
AT&T's T-Mobile Deal Teeters
by:
Anton Troianovski, Greg Bensinger and Amy Schatz
Nov 25, 2011
Click here to view the full article on WSJ.com
TOPICS: Contingent Liabilities
SUMMARY: 'AT&T and Deutsche Telekom insisted they weren't throwing
in the towel" on their proposed transaction for AT&T to acquire T-Mobile,
Deutsche Telekom's U.S. cellular phone operation. However, AT&T announced it
would take a charge in the fourth quarter's financial statements for a $4
billion break-up fee it agreed to in negotiations.
CLASSROOM APPLICATION: Accounting for contingent liabilities and
the link to information being signaled to the market is the focus of this
review.
QUESTIONS:
1. (Introductory) What accounting entry has AT&T made in relation
to its proposed acquisition of T-Mobile USA? When will this entry impact
AT&T's reported results?
2. (Advanced) What accounting standard requires making this entry?
3. (Introductory) Access the filing made by AT&T to the SEC
regarding this matter. It is available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/732717/000073271711000097/tmobile.htm.
Why do you think the company must make this disclosure at this time?
4. (Advanced) How does the accounting for this $4 billion become a
signal that the AT&T planned acquisition of T-Mobile "is more likely to fail
than to succeed"?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Nuggets from the FCC's Scathing Report on AT&T/T-Mobile
by Anton Troianovski
Nov 30, 2011
Online Exclusive
"AT&T's T-Mobile Deal Teeters," by: Anton Troianovski, Greg Bensinger and Amy
Schatz, The Wall Street Journal, November 25, 2011 ---
http://online.wsj.com/article/SB10001424052970204452104577057482069627186.html?mod=djem_jiewr_AC_domainid
AT&T Inc. signaled for the first time that its
planned $39 billion acquisition of T-Mobile USA is more likely to fail than
to succeed, saying Thursday it would set aside $4 billion in this year's
final quarter to cover the potential cost of the deal falling apart.
The move came after Federal Communications
Commission Chairman Julius Genachowski said this week he would seek a rare,
trial-like hearing on the merger, which would add months of arguments and
another big hurdle for the controversial deal.
AT&T and T-Mobile parent Deutsche Telekom AG
responded Thursday morning by pulling their application for merger approval
at the FCC in order to focus on their fight with the Justice Department,
which has sued to block the acquisition.
The federal agencies say a deal combining the No. 2
and No. 4 wireless carriers would damage competition and potentially raise
prices, with little offsetting benefit. AT&T needs both agencies to sign off
to get the merger through.
The moves, disclosed in the early hours of
Thanksgiving morning in the U.S. and just ahead of the market's opening in
Germany, reflect a changed internal calculus at AT&T about the deal's
chances to succeed.
AT&T and Deutsche Telekom insisted they weren't
throwing in the towel. Their strategy is to try to strike a settlement with
the Justice Department or to beat the agency in a trial that begins Feb. 13,
then reapply with the FCC for merger approval.
But it was clear that the odds have lengthened
significantly for a deal that would have created the country's largest
wireless operator. "There's a degree of giving up," said Bernstein Research
analyst Robin Bienenstock. "If you believed you could litigate your way out
of it or do something else, you wouldn't take the charge."
The developments could mean many more months of
uncertainty for the wireless industry and for consumers, particularly
T-Mobile's 33.7 million customers. T-Mobile has lost 850,000 contract
customers this year, and it failed to land the most sought-after device,
Apple Inc.'s iPhone. If the AT&T deal falls through, analysts and investors
expect Deutsche Telekom to try to find another way to exit the U.S. market.
A broken deal would send AT&T back to the drawing
board for a strategy to shore up its network and compete with larger rival
Verizon Wireless. AT&T has said it needs to buy T-Mobile to gain much-needed
rights to the airwaves. It also sees the deal as an expeditious way to shore
up its network, which has come under strain from the demands of millions of
iPhones and other devices, hurting call quality and prompting customer
complaints.
Justice Department officials were taking stock of
the developments but expected to continue preparing for trial, a person
familiar with the matter said. AT&T's move has increased the certainty felt
by many department officials that the company is unlikely to prevail in
court, this person said. A Justice Department spokesperson couldn't be
reached for comment.
For AT&T Chief Executive Officer Randall
Stephenson, the merger with T-Mobile represents the biggest gamble in a
four-year tenure that has been devoid of blockbuster deals, which were a
hallmark of his predecessor, Ed Whitacre. Mr. Whitacre created today's AT&T
over more than a decade of deal-making that pieced together fragments of Ma
Bell and rolled up several wireless companies.
Analysts had generally considered AT&T to be too
big to pull off any more mergers in the U.S. In order to persuade Deutsche
Telekom to go along, AT&T agreed to pay $3 billion in cash, and to turn over
valuable spectrum if the merger fell through, an unusually large breakup
fee.
For AT&T, the benefits of the deal are potentially
huge. T-Mobile, which uses the same network technology as AT&T, seemed to be
the answer to network constraints. Heavy overlap meant cost savings could be
huge. The deal would vault AT&T ahead of rival Verizon Wireless.
AT&T, which announced the deal on March 20, said
buying T-Mobile would allow it to extend its high-speed mobile network into
more of rural America, striking a chord in Washington. AT&T lined up
supporters among governors, members of Congress and interest groups.
Yet AT&T apparently failed to anticipate antitrust
officials' concerns about growing market concentration in the wireless
industry, already dominated by Verizon Wireless and AT&T.
On the morning of Aug. 31, Mr. Stephenson touted
the deal on CNBC. Later that day, the Justice Department filed suit to block
it on antitrust grounds.
Continued in article
Bob Jensen's neglected threads on acquisitions ---
http://www.trinity.edu/rjensen/Theory02.htm#Pooling
"ProfHacker 2011 Holiday Gift Guide," by Mark Sample, Chronicle of
Higher Education, December 8, 2011 ---
http://chronicle.com/blogs/profhacker/profhacker-2011-holiday-gift-guide/37610?sid=wc&utm_source=wc&utm_medium=en
2012 Happiness Buttons (beautiful tech futures slide show) ---
http://www.cs.trinity.edu/~rjensen/temp/TechFutures.pps
With a bit of sarcasm
"Yes, You Need More Gadgets," by Michael Schrage, The Harvard Business
Review Blog, October 20, 2011 ---
Click Here
http://blogs.hbr.org/schrage/2011/10/yes-you-need-more-gadgets.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Hooked on Gadgets, and Paying a Mental Price
You might want to examine the NYT feature while it is still free ---
http://nyti.ms/9EegB2
Bob Jensen's threads on ubiquitous computing ---
http://www.trinity.edu/rjensen/ubiquit.htm
Bob Jensen's threads on gadgets ---
http://www.trinity.edu/rjensen/Bookbob4.htm#Technology
Philosophy in Prison: Weighty Conversations about Right and Wrong ---
Click
Here
http://www.openculture.com/2011/12/philosophy_in_prison.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
"Progress but Also Insecurity: An Insider's View of Life in Today's Russia,"
Knowledge@Wharton, November 22, 2011 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2885
Russia experienced one of the largest mass
privatization efforts ever undertaken in the history of the world, says
Wharton legal studies and business ethics professor
Philip M. Nichols. "Virtually everything was at
one time controlled by the state. Now that is no longer true. Virtually all
assets in Russia have been privatized. However, some of the largest and most
valuable assets have been renationalized, or they are privatized in a way
that allows the state to continue to control them."
A prime example is the energy conglomerate,
Gazprom, Russia's biggest company and one in which the Russian government
now holds a controlling stake. Another, very highly publicized example is
the state's seizure of the petroleum company Yukos, whose former head,
Mikhail Khodorkovsky, was convicted of acquiring the company illegally and
is currently in prison.
It is against this backdrop that Nichols
recently interviewed Vitali Naishul, president of the Institute for the
Study of the Russian Economy and the Center for the Study of Russian
Socio-Political Language, and widely acknowledged as one of the creators of
the market economy in Russia. During the Soviet era, Naishul worked in the
inner circles of Gosplan, the Soviet Union's central planning agency. In
addition, he was one of the founding members of the Snakehill Group, a
gathering of economists who met regularly to study and develop strategies to
manage the future of the Soviet Union. A paper Naishul wrote for that group,
later published as the book Another Life, became the
blueprint for the Yeltsin-era economic reforms. "Essentially, he is the
architect of the modern Russian state," says Nichols.
In the interview with Nichols, Naishul talks
about privatization in Russia as well as life in Russia today --
improvements in material well-being, but also a renewed awareness of
insecurity about individual and property rights. As Nichols explains it,
"there is no sense that the state cannot take back what it gave you, no
sense that property is inviolate. As long as people still see the state as a
powerful actor that can take property, there is a feeling of unease. Will
your house be your house tomorrow? Will your car be your car tomorrow? That
is the kind of uncertainty that Vitali speaks about." In Russia today,
Nichols adds, "it's not that people worry on a daily basis that some
physical harm will come to them; it's more the sense that physical harm
could come to them."
Naishul remains a well-known figure today in
Russia, adds Nichols, who works with him on projects involving business
ethics and Russian values. He says he has seen strangers come up to Naishul
on the streets of Moscow and ask to shake his hand. "Then they giggle,"
Nichols says, "because in Russia, an intellectual is a rock star. That's how
Vitali continues to be seen in Russia today."
Continued in article
Watch the video
Bob Jensen's neglected threads on acquisitions ---
http://www.trinity.edu/rjensen/Theory02.htm#Pooling
"Undercover Researchers Expose Chinese Internet Water Army: An undercover
team of computer scientists reveals the practices of people who are paid to post
on websites," Technology Review, November 22, 2011 ---
http://www.technologyreview.com/blog/arxiv/27357/
Thank you Glen Gray for the heads up
Humor Between December 1 and December 31, 2011
Who put this thing on the snowman? ---
http://www.youtube.com/watch?v=OaSXa5KmYQw&feature=youtu.be
The New Yorker's 2011 Cartoon Contest for 2011 ---
http://www.newyorker.com/humor/caption/
ELECTILE DYSFUNCTION:
the inability to become aroused over any of the choices for President or
Congress put forth by either party.
Video: Bob Hope's Opening Comedy Lines ---
http://www.youtube.com/watch?v=ENISgdSgPBY
Forwarded by Paula
According to the Alaska Department of Fish and Game, while both male and
female reindeer grow antlers in the summer each year, male reindeer drop their
antlers at the beginning of winter, usually late November to mid-December.
Female reindeer retain their antlers till after they give birth in the spring.
Therefore, accordingly EVERY historical rendition depicting Santa's reindeer,
EVERY single one of them, from Rudolph to Blitzen, had to be a girl. We
should've known…... ONLY women would be able to drag a fat-ass man in a red
velvet suit all around the world in one night and not get lost.
Steve Bridges as Barack Obama at at Fund Raiser ---
http://www.stevebridges.com/obamavideos-promo-Aug-2011.html
Message from Bob Jensen on December 24, 2011
Erika and I are preparing to leave for a Christmas eve service in our Sugar Hill
Community Church. It warmed up to 6F in these mountains today so we should have
a good attendance tonight --- for us. All 12 worshippers who show up should have
a good time, especially when the cookies are served afterwards.
Steve
Kachelmeir
announced that he was going to be watching the
AECM for messages
on Christmas eve. I know he would be disappointed if there was not a single
message.
Firstly Steve, I want to wish you and your family (is it three daughters?) a
very happy holiday season. Given all that you do for the University of Texas
and the American Accounting Association, I suspect that they do not see as much
of you during the year as they would like. So please make this a special night
of memories for them and don't forget to take video so that you can have replays
of this night for years to come.
Secondly, for those of you who think this message is too off topic for the AECM,
I provide a link to the serious legal version of
Twas the Night Before Christmas
http://taxprof.typepad.com/taxprof_blog/2011/12/twas-the-night.html#more
Thirdly, let's not forget that this is a special season for some subscribers to
the
AECM who are
not into Christianity. I apologize if the wording below that might be somewhat
offensive to some people of the Jewish faith. I only remind you that this
message was sent by a very good friend who is very faithful to the Jewish
religion. I love it when people of all religious faith and dignity can still
laugh at themselves. We all need to laugh at ourselves more often.
Holiday wishes from
my Jewish friend
Just want to
take this moment to wish you a very happy (Chanukkah), (Chanukka), (Channukah),
(Hanukah), (Hannukah). Oh the hell with it ---
http://en.wikipedia.org/wiki/Chanukkah
A very marry
Christmas and a happy new year.
If anyone asks you what the difference is
between Christmas and Chanukah, you will know
what and how to answer!
1. Christmas is one day, same day every year,
December 25. Jews also love December 25th. It's
another paid day off work. We go to movies and
out for Chinese food and Israeli dancing.
Chanukah is 8 days. It starts the evening of the
24th of Kislev, whenever that falls. No one is
ever sure.
Jews never know until a non-Jewish friend asks
when Chanukah starts, forcing us to consult a
calendar so we don't look like idiots. We all
have the same calendar, provided free with a
donation from the World Jewish Congress, the
kosher butcher, or the local Sinai Memorial
Chapel(especially in Florida ) or other Jewish
funeral home.
2. Christmas is a major holiday. Chanukah is a
minor holiday with the same theme as most Jewish
holidays. They tried to kill us, we survived,
let's eat..
3. Christians get wonderful presents such as
jewelry, perfume, stereos....
Jews get practical presents such as underwear,
socks, or the collected works of the Rambam,
which looks impressive on the bookshelf.
4. There is only one way to spell Christmas. No
one can decide how to spell Chanukah, Chanukkah,
Chanukka, Channukah, Hanukah, Hannukah, etc.
5. Christmas is a time of great pressure for
husbands and boyfriends. Their partners expect
special gifts. Jewish men are relieved of that
burden. No one expects a diamond ring on
Chanukah.
6. Christmas brings enormous electric bills.
Candles are used for Chanukah. Not only are we
spared enormous electric bills, but we get to
feel good about not contributing to the energy
crisis.
7. Christmas carols are beautiful...Silent
Night, Come All Ye Faithful.... Chanukah songs
are about dreidels made from clay or having a
party and dancing the hora. Of course, we are
secretly pleased that many of the beautiful
carols were composed and written by our tribal
brethren. And don't Barbara Streisand and Neil
Diamond sing them beautifully?
8. A home preparing for Christmas smells
wonderful. The sweet smell of cookies and cakes
baking. Happy people are gathered around in
festive moods. A home preparing for Chanukah
smells of oil, potatoes, and onions. The home,
as always, is full of loud people all talking at
once.
9. Women have fun baking Christmas cookies.
Women burn their eyes and cut their hands
grating potatoes and onions for latkas on
Chanukah. Another reminder of our suffering
through the ages.
10. Parents deliver to their children during
Christmas. Jewish parents have no qualms about
withholding a gift on any of the eight nights.
11. The players in the Christmas story have easy
to pronounce names such as Mary, Joseph, and
Jesus. The players in the Chanukah story are
Antiochus, Judah Maccabee, and Matta whatever.
No one can spell it or pronounce it. On the plus
side, we can tell our friends anything and they
believe we are wonderfully versed in our
history.
12. Jensen deleted this line --- it must've been
written by Mel Brooks.
13. In recent years, Christmas has become more
and more commercialized. The same holds true for
Chanukah, even though it is a minor holiday. It
makes sense. How could we market a major holiday
such as Yom Kippur? Forget about celebrating.
Think observing. Come to synagogue, starve
yourself for 27 hours, become one with your
dehydrated soul, beat your chest, confess your
sins, a guaranteed good time for you and your
family. Tickets a mere $200 per person.
Better stick with Chanukah!
An Old One Forwarded by Auntie Bev
You think English is easy? It took a lot of work to put this together.
1) The bandage was wound around the wound.
2) The farm was used to produce produce.
3) The dump was so full that it had to refuse more refuse.
4) We must polish the Polish furniture.
5) He could lead if he would get the lead out.
6) The soldier decided to desert his dessert in the desert.
7) Since there is no time like the present, he thought it was time to present
the present.
8) A bass was painted on the head of the bass drum.
9) When shot at, the dove dove into the bushes.
10) I did not object to the object.
11) The insurance was invalid for the invalid.
12) There was a row among the oarsmen about how to row.
13) They were too close to the door to close it.
14) The buck does funny things when the does are present.
15) A seamstress and a sewer fell down into a sewer line.
16) To help with planting, the farmer taught his sow to sow.
17) The wind was too strong to wind the sail.
18) Upon seeing the tear in the painting I shed a tear.
19) I had to subject the subject to a series of tests.
20) How can I intimate this to my most intimate friend?
Let's face it - English is a crazy language. There is no egg in eggplant, nor
ham in hamburger; neither apple nor pine in pineapple. English muffins weren't
invented in England or French fries in France . Sweetmeats are candies while
sweetbreads, which aren't sweet, are meat. We take English for granted. But if
we explore its paradoxes, we find that quicksand can work slowly, boxing rings
are square and a guinea pig is neither from Guinea nor is it a pig..
And why is it that writers write but fingers don't fing, grocers don't groce
and hammers don't ham? If the plural of tooth is teeth, why isn't the plural of
booth, beeth? One goose, 2 geese. So one moose, 2 meese? One index, 2 indices?
Doesn't it seem crazy that you can make amends but not one amend? If you have a
bunch of odds and ends and get rid of all but one of them, what do you call it?
If teachers taught, why didn't preachers praught? If a vegetarian eats
vegetables, what does a humanitarian eat? Sometimes I think all the English
speakers should be committed to an asylum for the verbally insane. In what
language do people recite at a play and play at a recital? Ship by truck and
send cargo by ship? Have noses that run and feet that smell?
How can a slim chance and a fat chance be the same, while a wise man and a
wise guy are opposites? You have to marvel at the unique lunacy of a language in
which your house can burn up as it burns down, in which you fill in a form by
filling it out and in which, an alarm goes off by going on.
English was invented by people, not computers, and it reflects the creativity
of the human race, which, of course, is not a race at all. That is why, when the
stars are out, they are visible, but when the lights are out, they are
invisible.
PS. - Why doesn't 'Buick' rhyme with 'quick' ?
You lovers of the English language might enjoy this...
I have read this about 'up' before.
There is a two-letter word that perhaps has more meanings than any other
two-letter word, and that is 'UP.'
It's easy to understand UP, meaning toward the sky or at the top of the list,
but when we awaken in the morning, why do we wakeUP?
At a meeting, why does a topic come UP?
Why do we speak UP and why are the officers UP for election and why is it UP
to the secretary to write UP a report? We call UP our friends.
And we use it to brighten UP a room, polish UP the silver; we warm UP the
leftovers and clean UP the kitchen.
We lock UP the house and some guys fix UP the old car.
At other times the little word has real special meaning.
People stir UP trouble, line UP for tickets, work UP an appetite, and think
UP excuses.
To be dressed is one thing, but to be dressed UP is special.
A drain must be opened UP because it is stopped UP.
We open UP a store in the morning but we close it UP at night.
We seem to be pretty mixed UP about UP!
To be knowledgeable about the proper uses of UP, look the word UP in the
dictionary.
In a desk-sized dictionary, it takes UP almost 1/4th of the page and can add
UP to about thirty definitions.
If you are UP to it, you might try building UP a list of the many ways UP is
used.
It will take UP a lot of your time, but if you don't give UP, you may wind UP
with a hundred or more.
When it threatens to rain, we say it is clouding UP.
When the sun comes out we say it is clearingUP. When it rains, it wets the
earth and often messes things UP. When it doesn't rain for awhile, things dry
UP.
One could go on and on, but I'll wrap it UP,
for now my time is UP,
so........it is time to shut UP!
Now it's UP to you what you do with this email.
Forwarded by Gene and Joan
The Haircut...
A teenage boy had just passed his driving test and inquired of his father as
to when they could discuss his use of the car.
His father said he'd make a deal with his son: 'You bring your grades up from
a C to a B average, study your Bible, and get your hair cut. Then we'll talk
about the car.'
The boy thought about that for a moment, decided he'd settle for the offer,
and they agreed on it.
After about six weeks his father said, 'Son, you've brought your grades up
and I've observed that you have been studying your Bible, but I'm disappointed
you haven't had your hair cut.
The boy said, 'You know, Dad, I've been thinking about that, and I've noticed
in my studies of the Bible that Samson had long hair, John the Baptist had long
hair, Moses had long hair ~ ~ ~ and there's even strong evidence that Jesus had
long hair.'
You're going to love the Dad's reply:
'Did you also notice that they all walked everywhere they went?'
Forwarded by Paula
The following was
printed in Heloise's column on November 27, 2011:
Want to make
Christmas morning special for your little ones?
Make "Santa's Footprints."
Cut two large
foot-shaped stencils from paper or cardboard. (Or use a large pair of
shoes to draw the outline on the cardboard.)
Lay them on the
floor and sift baking soda around the edge.
Carefully lift and
repeat the process from the fireplace or window to the tree and then
toward the table with the milk and cookies (and carrots for the
reindeer).
In the morning,
your child will wake up to a nice surprise -- "evidence" that Santa
visited in the middle of the night. The baking soda is easily vacuumed
up and will deodorize the carpet.
Alternately, string
out empty beer bottles
but the kids might suspect that Dad rather than Santa drank the beer).
The World’s First Mobile Phone (1922) ---
Click Here
http://www.openculture.com/2011/12/worlds_first_mobile_phone_1922.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
One Ringing Dingy ---
http://www.youtube.com/watch?v=k9e3dTOJi0o
|
WOMAN'S
PERFECT
BREAKFAST
She's
sitting at
the table
with her
gourmet
coffee.
Her son is
on the cover
of the
Wheaties
box.
Her daughter
is on the
cover of
Business
Week.
Her
boyfriend is
on the cover
of Playgirl.
And her
husband is
on the back
of the milk
carton.
Keep
reading-they
get
better!!!
WOMEN'S
REVENGE
'Cash, check
or charge?'
I asked,
after
folding
items the
woman wished
to
purchase.
As she
fumbled for
her wallet, I
noticed a
remote
control for
a television
set in her
purse.
'So, do you
always carry
your TV
remote?' I
asked.
'No,' she
replied,
'but my
husband
refused to
come
shopping
with me,
and I
figured this
was the most
evil thing I
could do to
him
legally.'
UNDERSTANDING
WOMEN
(A MAN'S
PERSPECTIVE)
I know I'm
not going to
understand
women.
I'll never
understand
how you can
take boiling
hot wax,
pour it onto
your upper
thigh, rip
the hair out
by the root,
and still be
afraid of a
spider.
WIFE VS.
HUSBAND
A couple
drove down a
country road
for several
miles, not
saying a
word.
An earlier
discussion
had led to
an argument
and
neither of
them wanted
to concede
their
position.
As they
passed a
barnyard of
mules,
goats, and
pigs,
the husband
asked
sarcastically,
'Relatives
of yours?'
'Yep,' the
wife
replied,
'in-laws.'
|
|
|
|
|
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Memory --- A Spoof ---
http://www.youtube.com/embed/HzSaoN2LdfU?fs=1
Political quotations forwarded by Eileen
Those who are too smart to engage in politics
are punished by being governed by those who are dumber.
~Plato
The problem with political jokes is they get
elected.
~Henry Cate, VII
We hang the petty thieves and appoint the great
ones to public office.
~Aesop
If we got one-tenth of what was promised to us
in these campaign speeches there wouldn't be any inducement to go to heaven.
~Will Rogers
Politicians are the same all over. They promise
to build a bridge even where there is no river.
~Nikita Khrushchev
When I was a boy I was told that anybody could
become President. I'm beginning to believe it.
~Clarence Darrow
If God wanted us to vote, he would have given us
candidates.
~Jay Leno
I offer my opponents a bargain: if they will
stop telling lies about us, I will stop telling the truth about them.
~Adlai Stevenson, campaign speech, 1952
A politician is a fellow who will lay down your
life for his country.
~Texas Guinan
Any American who is prepared to run for
president should automatically, by definition, be disqualified from ever
doing so.
~Gore Vidal
I have come to the conclusion that politics is
too serious a matter to be left to the politicians.
~Charles de Gaulle
Politics is supposed to be the second-oldest
profession. I have come to realize that it bears a very close resemblance to
the first.
~Ronald Reagan
Politics: [Poly "many" + tics "blood-sucking
parasites"]
~Larry Hardiman
Instead of giving a politician the keys to the
city, it might be better to change the locks.
~Doug Larson
Don't vote, it only encourages them.
~Author Unknown
There ought to be one day - just one - when
there is open season on senators and congressmen.
~Will Rogers
Jensen Comment
The above Will Rogers' quote is no longer politically correct since
Gabby
Giffords was gunned down in her home district. But don't you wish, down
deep, that
Dick
Cheney would invite
Newt
Gingrich on a hunting trip.
Balancing Act
Forwarded by Eileen
Jan, Sue and Mary haven't seen each other since leaving School. They
rediscover each other via a reunion website and arrange to meet for lunch in a
wine bar.
Jan arrives first, wearing a beige Versace dress. She orders a bottle of
Pinot Grigio. Sue arrives shortly afterward, wearing a grey Chanel number. After
the initial hugs and kisses she joins Jan in a glass of wine. Then Mary walks
in, wearing a faded old tee-shirt, blue jeans and boots. She too shares the
wine.
Jan explains that after leaving school and attending Oxford University, she
met and married Timothy, with whom she has a beautiful daughter. Timothy is a
partner in one of London's leading law firms. They live in a 4000 sq ft
apartment on Park Lane, where Susanna, the daughter, attends drama school. They
have a second home in Portugal.
Sue relates that she graduated from Cambridge University, studied to become a
doctor and became a surgeon. Her husband, Clive, is a leading financial
investment banker in the City. They live in the Surrey stockbroker belt and have
a second home in Italy.
Mary explains that after she left school at 17 she ran off with her boyfriend
Mark. They run a tropical bird park in Essex and grow their own vegetables. Mark
can stand five parrots, side by side, on his erect penis.
Halfway down the third bottle of wine and several hours later, Jan blurts out
that her husband is really a cashier at Tesco's. They live in a small apartment
in Bromley and have a caravan parked on the front drive.
Sue, chastened and encouraged by her old friend's honesty, explains that she
and Clive are both nursing care assistants in an old peoples home. They live in
Peckham and take camping holidays in Kent.
Mary admits that the fifth parrot has to stand on one leg.
Forwarded by Maureen
What
Starts with F and ends with k
A first-grade
teacher, Ms Brooks, was having trouble with one of her students. The teacher
asked,
'Harry, what's your
problem?'
Harry answered, 'I'm
too smart for the 1st grade. My sister is in the 3rd grade and I'm
smarter than she is! I think I should be in the 3rd grade too!'
Ms.. Brooks had had enough. She took Harry to the principal's office.
While Harry waited in the outer office, the teacher explained to the principal
what the situation was. The principal told Ms. Brooks he would give the boy a
test. If he failed to answer any of his questions he was to go back to the 1st
grade and behave. She agreed.
Harry was brought in and the conditions were explained to him and he agreed
to take the test.
Principal:
'What is 3 x 3?'
Harry:
'9.'
Principal:
'What is
6 x 6?'
Harry:
'36.'
And so it went with every question the principal thought a 3rd grader should
know.
The principal looks at Ms. Brooks and tells her, 'I think Harry
can go to the 3rd
grade'
Ms.. Brooks says to the principal,
'Let me ask him some questions..'
The principal and Harry both agreed.
Ms. Brooks asks,
'What does a cow have four of that I have only two
of?'
Harry, after a moment:
'Legs.'
Ms Brooks:
'What is in your pants that you have but I do not
have?'
The principal wondered why would she ask such a question!
Harry replied:
'Pockets.'
Ms. Brooks:
'What does a dog do that a man steps into?'
Harry:
'Pants.'
The principal sat forward with his mouth hanging open.
Ms. Brooks:
'What goes in hard and pink then comes out soft and sticky?'
The principal's eyes opened really wide and before he could stop the answer,
Harry replied,
'Bubble gum.'
Ms. Brooks:
'What does a man do standing up, a woman does
sitting down and a
dog does on three legs?'
Harry:
'Shake hands .'
The principal was trembling.
Ms.. Brooks:
'What word starts with an 'F' and ends in 'K' that
means a lot of heat and
excitement?'
Harry:
'Firetruck.'
The principal breathed a sigh of relief and told the
teacher,
'Put Harry in the fifth-grade, I got the last seven questions wrong..
Forwarded by Gene and Joan
This is an article submitted to a 1999 Louisville Sentinel contest to find
out who had the wildest Christmas dinners. It won first prize.
As a joke, my brother Jay used to hang a pair of panty hose over his
fireplace before Christmas. He said all he wanted was for Santa to fill them.
What they say about Santa checking the list twice must be true because every
Christmas morning, although Jay's kids' stockings overflowed, his poor pantyhose
hung sadly empty.
One year I decided to make his dream come true. I put on sunglasses and went
in search of an inflatable love doll. They don't sell those things at Wal-Mart.
I had to go to an adult bookstore downtown.
If you've never been in an X-rated store, don't go, you'll only confuse
yourself. I was there an hour saying things like, 'What does this do?' 'You're
kidding me!' 'Who would buy that?' Finally, I made it to the inflatable doll
section.
I wanted to buy a standard, uncomplicated doll that could also substitute as
a passenger in my truck so I could use the car pool lane during rush hour.
Finding what I wanted was difficult. 'Love Dolls' come in many different
models. The top of the line, according to the side of the box, could do things
I'd only seen in a book on animal husbandry. I settled for 'Lovable Louise.' She
was at the bottom of the price scale.
To call Louise a 'doll' took a huge leap of imagination.
On Christmas Eve and with the help of an old bicycle pump, Louise came to
life.
My sister-in-law was in on the plan and let me in during the wee morning
hours. Long after Santa had come and gone, I filled the dangling pantyhose with
Louise's pliant legs and bottom. I also ate some cookies and drank what remained
of a glass of milk on a nearby tray. I went home, and giggled for a couple of
hours.
The next morning my brother called to say that Santa had been to his house
and left a present that had made him VERY happy, but had left the dog confused.
She would bark, start to walk away, then come back and bark some more.
We all agreed that Louise should remain in her pantyhose so the rest of the
family could admire her when they came over for the traditional Christmas
dinner.
My grandmother noticed Louise the moment she walked in the door. 'What the
hell is that?' she asked.
My brother quickly explained, 'It's a doll.'
'Who would play with something like that?' Granny snapped.
I kept my mouth shut.
'Where are her clothes?' Granny continued.
'Boy, that turkey sure smells nice, Gran,' Jay said, to steer her into the
dining room.
But Granny was relentless. 'Why doesn't she have any teeth?'
Again, I could have answered, but why would I? It was Christmas and no one
wanted to ride in the back of the ambulance saying, 'Hang on Granny, hang on!'
My grandfather, a delightful old man with poor eyesight, sidled up to me and
said, 'Hey, who's the naked gal by the fireplace?' I told him she was Jay's
friend.
A few minutes later I noticed Grandpa by the mantel, talking to Louise. Not
just talking, but actually flirting. It was then that we realized this might be
Grandpa's last Christmas at home.
The dinner went well. We made the usual small talk about who had died, who
was dying, and who should be killed, when suddenly Louise made a noise like my
father in the bathroom in the morning. Then she lurched from the mantel, flew
around the room twice, and fell in a heap in front of the sofa. The cat
screamed. I passed cranberry sauce through my nose, and Grandpa ran across the
room, fell to his knees, and began administering mouth-to-mouth resuscitation.
My brother fell back over his chair and wet his pants.
Granny threw down her napkin, stomped out of the room, and sat in the car.
It was indeed a Christmas to treasure and remember. Later in my brother's
garage, we conducted a thorough examination to decide the cause of Louise's
collapse. We discovered that Louise had suffered from a hot ember to the back of
her right thigh.
Fortunately, thanks to a wonder drug called duct tape, we restored her to
perfect health..
I can't wait until next Christmas.
Forwarded by Ed Scribner
A touching Christmas story.
A couple was Christmas shopping at the mall on Christmas Eve and the mall was
packed.
Walking through the mall the surprised wife look up and noticed her husband
was nowhere around and she was very upset because they had a lot to do.
She used her cell phone to call her husband to ask him where he was because
she was so upset.
The husband in a calm voice said, "Honey, remember the jewelry store we went
into 5 years ago where you fell in love with that diamond necklace that we could
not afford and I told you that I would get it for you one day?"
His wife said, crying, "Yes, I remember that jewelry store."
He said, "Well, I'm in the bar right next to it."
Forwarded by Tina
Church Bulletin Bloopers
The Fasting & Prayer Conference includes meals.
---------------------
The sermon this morning: 'Jesus Walks on the Water.' The sermon tonight:
'Searching for Jesus.'
---------------------
Ladies, don't forget the rummage sale. It's a chance to get rid of those things
not worth keeping around the house. Bring your husbands.
---------------------
Remember in prayer the many who are sick of our community. Smile at someone who
is hard to love. Say 'Hell' to someone who doesn't care much about you.
---------------------
Don't let worry kill you off - let the Church help.
---------------------
Miss Charlene Mason sang 'I will not pass this way again,' giving obvious
pleasure to the congregation.
---------------------
For those of you who have children and don't know it, we have a nursery
downstairs.
---------------------
Next Thursday there will be tryouts for the choir. They need all the help they
can get.
---------------------
Scouts are saving aluminum cans, bottles and other items to be recycled.
Proceeds will be used to cripple children.
--------------------
Irving Benson and Jessie Carter were married on October 24 in the church. So
ends a friendship that began in their school days.
---------------------
A
bean supper will be held on Tuesday evening in the church hall. Music will
follow.
---------------------
At
the evening service tonight, the sermon topic will be 'What Is Hell?' Come early
and listen to our choir practice.
---------------------
Eight new choir robes are currently needed due to the addition of several new
members and to the deterioration of some older ones.
---------------------
Please place your donation in the envelope along with the deceased person you
want remembered.
---------------------
The church will host an evening of fine dining, super entertainment and gracious
hostility.
---------------------
Potluck supper Sunday at 5:00 PM - prayer and medication to follow.
---------------------
The
ladies of the Church have cast off clothing of every kind. They may be seen in
the basement on Friday afternoon.
---------------------
This
evening at 7 PM there will be a hymn singing in the park across from the Church.
Bring a blanket and come prepared to sin.
---------------------
Ladies Bible Study will be held Thursday morning at 10 AM. All ladies are
invited to lunch in the Fellowship Hall after the B.S. is done.
---------------------
The pastor would appreciate it if the ladies of the Congregation would lend him
their electric girdles for the pancake breakfast next Sunday.
---------------------
Low Self Esteem Support Group will meet Thursday at 7 PM . Please use the back
door.
---------------------
The
eighth-graders will be presenting Shakespeare's "Hamlet" in the Church basement
Friday at 7 PM. The congregation is invited to attend this tragedy.
---------------------
Weight Watchers will meet at 7 PM at the First Presbyterian Church. Please use
large double door at the side entrance.
---------------------
The Associate Minister unveiled the church's new campaign slogan last Sunday: 'I
Upped My Pledge - Up Yours.'
Forwarded by Maureen
Story from a Kansas State
Highway Patrol officer :
I made a traffic stop on an elderly lady the other day for speeding on
U.S.
166 Eastbound at Mile Marker 73 just East of Sedan, KS. I asked for her
driver's license, registration, and proof of insurance. The lady took out
the required information and handed it to me. In with the cards I was
somewhat surprised (due to her advanced age) to see she had a conceal
carry
permit. I looked at her and ask if she had a weapon in her possession at
this time.
She responded that she indeed had a 45 automatic in her glove box.
Something---body language, or the way she said it---made me want to ask if
she had any other firearms. She did admit to also having a 9mm Glock in
her
center console. Now I had to ask one more time if that was all. She
responded once again that she did have just one more, a .38 special in her
purse. I then asked her what was she so afraid of.
"Not a f'**king thing,"
she replied
Forwarded by Katie
Milk and eggs
>>
>> This is a story which is perfectly logical to all males:
>>
>> A wife asks her husband, "Could you please go shopping for me and
>> buy one carton of milk, and if they have eggs, get 6."
>>
>> A short time later the husband comes back with 6 cartons of milk.
>> The wife asks him, "Why did you buy 6 cartons of milk?"
>>
>> He replied, "They had eggs."
Forwarded by Dr. Wolff
Comments made in the year 1955!
I'll tell you one thing, if things keep going the way they are, it's going to
be impossible to buy a week's groceries for $10.00.
Have you seen the new cars coming out next year? It won't be long before
$2,000.00 will only buy a used one.
Did you hear the post office is thinking about charging 7 cents just to mail
a letter.
If they raise the minimum wage to $1.00, nobody will be able to hire outside
help at the store.
When I first started driving, who would have thought gas would someday cost
25 cents a gallon. Guess we'd be better off leaving the car in the garage.
I'm afraid to send my kids to the movies any more. Ever since they let Clark
Gable get by with saying DAMN in GONE WITH THE WIND, it seems every new movie
has either HELL or DAMN in it.
I read the other day where some scientist thinks it's possible to put a man
on the moon by the end of the century. They even have some fellows they call
astronauts preparing for it down in Texas .
Did you see where some baseball player just signed a contract for $50,000 a
year just to play ball? It wouldn't surprise me if someday they'll be making
more than the President.
I never thought I'd see the day all our kitchen appliances would be electric.
They're even making electric typewriters now.
It's too bad things are so tough nowadays. I see where a few married women
are having to work to make ends meet.
It won't be long before young couples are going to have to hire someone to
watch their kids so they can both work.
I'm afraid the Volkswagen car is going to open the door to a whole lot of
foreign business.
Thank goodness I won't live to see the day when the Government takes half our
income in taxes. I sometimes wonder if we are electing the best people to
government.
The fast food restaurant is convenient for a quick meal, but I seriously
doubt they will ever catch on.
There is no sense going on short trips anymore for a weekend. It costs nearly
$2.00 a night to stay in a hotel.
No one can afford to be sick anymore. At $15.00 a day in the hospital, it's
too rich for my blood.
Forwarded by a close friend
ATTORNEY: Now doctor, isn't
it true that when a person dies in his sleep, he doesn't know about it until the
next morning?
WITNESS: Did you actually pass the bar exam?
____________________________________
ATTORNEY: The youngest son, the 20-year-old, how old is he?
WITNESS: He's 20, much like your IQ.
___________________________________________
ATTORNEY: Were you present when your picture was taken?
WITNESS: Are you crapping me?
_________________________________________
(My Favorite)
ATTORNEY: So the date of conception (of the baby) was August 8th?
WITNESS: Yes.
ATTORNEY: And what were you doing at that time?
WITNESS: Getting laid
____________________________________________
(Another favorite)
ATTORNEY: She had three children, right?
WITNESS: Yes.
ATTORNEY: How many were boys?
WITNESS: None.
ATTORNEY: Were there any girls?
WITNESS: Your Honor, I think I need a different attorney. Can I get a new
attorney?
____________________________________________
ATTORNEY: How was your first marriage terminated?
WITNESS: By death!
ATTORNEY: And by whose death was it terminated?
WITNESS: Take a guess.
____________________________________________
ATTORNEY: Can you describe the individual?
WITNESS: He was about medium height and had a beard
ATTORNEY: Was this a male or a female?
WITNESS: Unless the Circus was in town I'm going with male.
_____________________________________
ATTORNEY: Is your appearance here this morning pursuant to a deposition notice
which I sent to your attorney?
WITNESS: No, this is how I dress when I go to work.
______________________________________
ATTORNEY: Doctor, how many of your autopsies have you performed on dead people?
WITNESS: All of them... The live ones put up too much of a fight.
_________________________________________
ATTORNEY: ALL your responses MUST be oral, OK? What school did you go to?
WITNESS: Oral...
_________________________________________
ATTORNEY: Do you recall the time that you examined the body?
WITNESS: The autopsy started around 8:30 PM
ATTORNEY: And Mr. Denton was dead at the time?
WITNESS: If not, he was by the time I finished.
____________________________________________
And last:
(Well OK, this is the best)
ATTORNEY: Doctor, before you performed the autopsy, did you check for a pulse?
WITNESS: No.
ATTORNEY: Did you check for blood pressure?
WITNESS: No.
ATTORNEY: Did you check for breathing?
WITNESS: No!
ATTORNEY: So, then it is possible that the patient was alive when you began the
autopsy?
WITNESS: No.
ATTORNEY: How can you be so sure, Doctor?
WITNESS: Because his brain was sitting on my desk in a jar.
ATTORNEY: I see, but could the patient have still been alive, nevertheless?
WITNESS: Yes, it is possible that he could have been alive and practicing
law.
Paula's Recipe for Fruitcake
Ingredients:
* 2 cups flour
* 1 stick butter
* 1 cup of water
* 1 tsp baking soda
* 1 cup of sugar
* 1 tsp salt
* 1 cup of brown sugar
* Lemon juice
* 4 large eggs
* Nuts * 2 bottles wine
* 2 cups of dried fruit
Sample the wine to check quality. Take a large bowl, check the wine again. To
be sure it is of the highest quality, pour one level cup and drink. Repeat. Turn
on the electric mixer. Beat one cup of butter in a large fluffy bowl. Add one
teaspoon of sugar Beat again. At this point it's best to make sure the wine is
still OK. Try another cup... Just in case. Turn off the mixerer thingy. Break 2
eggs and add to the bowl and chuck in the cup of dried fruit.
Pick the frigging fruit up off floor. Mix on the turner.. If the fried druit
gets stuck in the beaterers just pry it loose with a drewscriver. Sample the
wine to check for tonsisticity. Next, sift two cups of salt. Or something. Check
the wine. Now shift the lemon juice and strain your nuts. Add one table. Add a
spoon of sugar, or some fink. Whatever you can find. Greash the oven. Turn the
cake tin 360 degrees and try not to fall over. Don't forget to beat off the
turner. Finally, throw the bowl through the window Finish the wine and wipe
counter with the cat. Go to WALMART and buy cake.
Bingle Jells!
Humor Between
December 1-31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor123111
Humor Between November 1 and November 30, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor113011
Humor Between October 1 and October 31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor103111
Humor Between September 1 and September 30, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor093011
Humor Between August 1 and August 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor083111
Humor Between July 1 and July 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor073111
Humor Between May 1 and June 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor063011
Humor Between April 1 and April 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor043011
Humor Between February 1 and March 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor033111
Humor Between January 1 and January 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor013111
And that's
the way it was on December 31, 2011 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 ---
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Bob
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Bob
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For an elaboration on the reasons you should join a ListServ (usually for
free) go to http://www.trinity.edu/rjensen/ListServRoles.htm
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which started
out as an accounting education technology Listserv. It has mushroomed
into the largest global Listserv of accounting education topics of all
types, including accounting theory, learning, assessment, cheating, and
education topics in general. At the same time it provides a forum for
discussions of all hardware and software which can be useful in any way
for accounting education at the college/university level. Hardware
includes all platforms and peripherals. Software includes spreadsheets,
practice sets, multimedia authoring and presentation packages, data base
programs, tax packages, World Wide Web applications, etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
|
CPAS-L
(Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions of all
aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just
monitoring the list. You qualify for a free subscription if you are
either a CPA or a professional accountant in public accounting,
private industry, government or education. Others will be denied
access. |
Yahoo
(Practitioners)
http://groups.yahoo.com/group/xyztalk
This
forum is for CPAs to discuss the activities of the AICPA. This can be
anything from the CPA2BIZ portal to the XYZ initiative or
anything else that relates to the AICPA. |
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
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Bob Jensen's Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
November 30, 2011
Bob
Jensen's New Bookmarks November 1-30, 2011
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
Bob Jensen's Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Hasselback Accounting Faculty
Directory ---
http://www.hasselback.org/
Humor Between November 1 and November 30, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor113011
Humor Between October 1 and October 31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor103111
Humor Between September 1 and September 30, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor093011
Humor Between August 1 and August 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor083111
Humor Between July 1 and July 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor073111
Humor Between May 1 and June 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor063011
Humor Between April 1 and April 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor043011
Humor Between February 1 and March 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor033111
Humor Between January 1 and January 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor013111
Some of Bob Jensen's Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
"I don't want to be a police officer, firefighter,
jet pilot, pro quarterback, or President of the United States. I would rather be
a tax accountant."
Parents having a fantasy conversation with their little kid.
"Here’s a Bunch of Cute Kids Explaining Why They Want to Be Tax
Accountants," by Caleb Newquist, Going Concern, November 4, 2011 ---
http://goingconcern.com/2011/11/heres-a-bunch-of-cute-kids-explaining-why-they-want-to-be-tax-accountants/#more-51244
Why are these kids given scripts to read?
The answer is that they don't even know what a tax accountant is or does.
Police officers, on the other hand, get to carry real guns, have cars with
flashing lights. live on donuts, and never get speeding tickets.
Does anybody under the age of 19-20 really want to become a tax accountant?
The question is why do young people eventually change their minds about
becoming accounting majors?
In my opinion, parents are the main source of inspiration, followed by older
accounting students who explain why they chose this major.
Accounting teachers in college can also play a huge role if they explain career
alternatives in a truthful (no hard sell) manner.
Bob Jensen's threads on what makes young people change their minds to major
in accounting?
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"Big four auditors face breakup to restore trust," by Huw Jones,
Reuters, November 30, 2011 ---
http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130
The world's top four audit firms will have to split
up and rename themselves under a far-reaching draft European Union law to
crack down on conflicts of interest and shortcomings highlighted by the
financial crisis.
"Investor confidence in audit has been shaken by
the crisis and I believe changes in this sector are necessary," Internal
Market Commissioner Michel Barnier said on Wednesday.
Large auditors said the plans won't improve audit
quality, while smaller rivals accused Barnier of a climbdown.
Policymakers have questioned why auditors gave a
clean bill of health to many banks which shortly afterwards needed rescuing
by taxpayers as the financial crisis began unfolding.
Barnier said recent apparent audit failures at
AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would
strongly suggest that audit is not working as it should".
More robust supervision is needed and "more
diversity in what is an overly concentrated market, especially at the top
end", he said.
Just four audit firms -- Ernst & Young ERNY.UL,
Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL -- check the books of 85
percent of blue-chip companies in most EU states, a situation the Commission
said was "in essence an oligopoly".
UK data shows the Big Four profit margins are 50
percent higher than the next four audit firms, the commission said.
Under Barnier's plan, the four top firms will have
to separate audit activities from non-audit activities, such as tax and
other advisory services -- "to avoid all risks of conflict of interest".
REBRANDING
There would have to be legal separation of audit
and non-audit services if over a third of revenues from auditing is from
large listed companies and the network's total annual audit revenues are
more than 1.5 billion euros in the EU.
Claire Bury, one of Barnier's top officials, said
these conditions, if approved by EU states and the European Parliament,
would alter all the Big Four's business models and even one or two of the
next tier down in some member states.
Continued in article
December 1, 2011 reply from Robert Bruce Walker in New Zealand
What is set out below is a simulated scenario which
discusses audit in New Zealand. I prepared the question for one of my staff
who was doing the NZICA foundation course for admission. It just so happens
that one of the topical issues she was preparing for arose from the recent
enactment of the Audit Regulation Act.
Interestingly the last issue of the Chartered
Accountants Journal discussed this law change. The head of assurance a NZ EY
(Simon O’Connor) wrote a very thoughtful piece in which he said, not in so
many words: The big four will not even notice the change as they are already
dealing with similar pieces of legislation overseas. He then said that all
other firms will struggle, leaving the field open to the Big 4 in all
spheres of audit. Essentially the cartel is complete – no other practitioner
will be able to offer audit. Simon then went on to discuss the ‘audit
expectation gap’ – the idea that an audit is much more modest in its
ambition than the market expects – and makes a plea for proportionate
sharing of responsibility upon failure. But he would say that, wouldn’t he?
I have based my model answer on Simon’s analysis.
As you will see it is very pessimistic. I consider audit a core skill of the
accountant. Whilst it may be immodest of me to say so, I consider I could
audit any entity providing I could build a team big enough.
As I keep saying the fracture lines in our
discipline are readily apparent. It reminds me of the engineer, being
questioned yesterday at a commission of inquiry into the Christchurch
earthquake, who said he didn’t think that the cracks in the building were
very significant when he examined the building between the first earthquake
and the killer. It fell down and killed 18 people.
Question
You are the technical director for a small to
medium sized firm of accountants. The firm has 20 partners. Most of the
services its sells is business advisory services. However, there is one full
time audit partner and two other part time auditors who have a mix of
government, not for profit and issuer audit clients. The issuers are about
four in number, none of which is a listed company. They are involved in the
wine and forestry industries. The firm does not have an international
relationship with a global firm.
About 50% of your workload is directly associated
with the provision of auditing and financial reporting advice to the audit
practice.
You have told the managing partner that there are
significant changes in the practice of audit. Having told her she becomes
concerned about the firm’s involvement in the provision of audit services.
She asks you to prepare a memorandum for the firm’s partners explaining the
nature of the changes with a recommendation of what should be the strategic
focus of the firm in this regard.
The memorandum must contain the following:
§ An outline of the changes taking place.
§ The impact on the firm of those changes.
§ A recommendation as to what the firm should do.
Memorandum
To the Partners of XYZ
Audit regulation and the future of auditing in the
firm
Introduction
The purposes of this memorandum are to:
§ Provide a briefing on legislative changes that
have taken place in the respect to audit and related matters.
§ Outline the implications for the firm and what
its strategic response should be.
Background
In the field of auditing there have been two
developments that will fundamentally change the practice of audit.
Firstly, it became clear in the aftermath of the
finance company collapses that audit has not performed the role which is
expected of it. This is not really attributable to the so called
‘expectation gap’. There was true failure. The finance companies had taken
enormous and unsustainable risks, and with the rotten balance sheets that
ensued, continued to raise money from the public. Unfortunately, most, but
not all, finance companies were audited by mid-tier and small accounting
practices.
Secondly, there has been a trend, since the failure
of Enron, for overseas jurisdictions to establish quasi- governmental bodies
to regulate audit and, in doing so, the responsibility for this regulation
has been wrested away from the professional accounting bodies. The most
obvious example is the Public Company Accounting Oversight Board created
under the Sarbanes Oxley Act in the US. Other countries have followed this
model.
A related development has been the foundation of
the External Reporting Board (XRB) under the Financial Reporting Act 1993.
With the introduction of IFRS the Government established this organisation
to ensure that New Zealand’s voice is heard in global standard setting
process. XRB’s remit is not restricted to financial reporting standards. It
also has responsibility for developing and giving legal effect to auditing
standards as well.
Legislative change
The Government has perceived the need to respond to
the crisis in auditing caused by the finance company collapses by enacting
the Audit Regulation Act 2011 (ARA). This piece of legislation also has the
added advantage, from the Government’s perspective, of aligning New Zealand
practice with that of Australia. Those who practice audit will be
inter-changeable across the Tasman, an objective consistent with long term
policy to ensure the Australian and New Zealand markets operate as one.
The ARA will establish a system of licensing of
auditors under the auspices of the newly established Financial Markets
Authority (FMA). It is important to understand that licensing will only
apply to the audit of issuers. However, as will be seen below, the mere fact
of licensing will have implications beyond the audit of issuers.
The ARA does not specify the details of the
licensing regime to be implemented. This has been delegated to the FMA and
consultation is about to take place. Currently, the proposal is that
enforcement, in respect to New Zealand chartered accountants at least, will
remain with NZICA’s practice review process. The FMA will retain oversight
and check on NZICA’s process to ensure the necessary standard of quality.
The ARA envisages three possible punitive measures
in the event of audit failure. These are licence restriction, suspension or
cancellation.
For any firm wishing to be licensed it will need to
overcome two hurdles:
§ The grant of licence in the first instance.
§ The maintenance of licence across time as tested
by the practice review process.
The exact criteria have not yet been established.
However, it is a safe bet that the criteria will be based on the principles
in the Code of Ethics. Our firm is not likely to have difficulty with most
of these principles. We will generally be able to demonstrate independence
and integrity. Where I believe we may encounter difficulty is in the area of
competence, or at least the perception of competence.
As you will all be aware the Institute’s practice
review has cast a very critical eye over our audit practice in the last two
visits. The Institute seems to believe that unless a member is fully engaged
in audit, he or she cannot ensure they have the necessary technical
knowledge to effectively conduct audit. Further, the Institute seems to
believe that there is a need for a critical mass of auditors to ensure the
requisite internal oversight.
A second factor that we would need to consider is
that we will be compared, if only by implication, to the representatives of
large international audit firms. These organisations benefit by having audit
systems developed in much larger jurisdictions where the firms have the
critical mass to develop more and more sophisticated audit approaches to
align with developments in audit standards. These systems are transferred
into New Zealand at basically no cost to the local firms.
A third factor is the continuing development of
audit standards themselves. With the advent of the XRB a new set of audit
standards is being introduced, based on international models. To illustrate
the level of complexity that entails it is to be noted that the number of
‘black letter’ standards under the NZICA audit standards is about 200, yet
the new audit standards have over 500.
A fourth factor that needs to be considered is the
fracture line that has opened up or will open up in the financial reporting
framework. With the introduction of IFRS there has been a realisation that
these standards are too complex for general application amongst the closely
held companies that are the mainstay of our practice. It seems to be
official policy that differential adjustment is not possible. In consequence
it is proposed that there be an entirely new framework of standards for
application to the closely held company. In other words, it may gradually be
the case that the opportunities for ‘cross-fertilisation’ from knowledge of
full IFRS to financial statements of the bulk of clientele will diminish to
a significant degree.
Implications for our firm
Our firm will, in short order, be confronted by a
stark choice: do we attempt to continue to provide audit services to issuers
or do we make a strategic decision to abandon this service?
It first needs to be noted that licensing applies
only the audit of issuers. Our audit clientele extends beyond the audit of
issuers to delegated audit from Government and to the audit of
not-for-profit entities such as charities, incorporated societies and the
like. It will still be possible to provide audit services to organisations
of that ilk. However, to practice without the benefit of a license will
eventually limit our ability to compete in all audit markets. For example,
how long will it take for the Auditor-General to restrict sub-contract to
those with a licence even if that does not become official policy?
The more immediate problem becomes whether or not
we attempt to secure licences for some or all of our partners engaged in the
provision of audit. To secure a licence it is clear that we will need to
take steps to demonstrate competence. This matter has two dimensions to it.
First, it is likely that there may be more issuer
clients that become available as firms similar to ours abandon audit. There
must, therefore, be a strategic opportunity available. However, we will have
to compete with large firms for this market and there is no doubt that they
will price keenly or the reasons given above – that is, they already have
the systems in place. It is my calculation that unless we expand the number
of issuers we audit, we will not be able to satisfy the Institute that we
have the necessary continuing experience to prove competence.
Second, if we were to take that strategic decision
we will need to acquire the necessary audit systems to enable competence to
be demonstrated. We can acquire such systems in one of two ways:
§ By developing them ourselves.
§ By joining some sort of co-operative that enables
us to acquire those systems relatively cheaply.
Whilst I have not scoped it out, my instinct is
that the investment necessary to develop and continually up-grade an
appropriate audit system is beyond us. And if it is not beyond us, it is
likely to be a poor investment choice given the competitive nature of the
audit market.
The only alternative, therefore, is to join some
international organisation and get the benefit of overseas developments in
audit method and in overseas work opportunities for our partners and staff.
Again, even if such opportunities are available, I doubt that it would be a
costless decision. More importantly, if we did take that strategic decision
we would need to be very careful about the company we would keep. There
would be potential for reputational risk and, more importantly, financial
risk that it would be difficult for us to manage.
The only other matter that I think relevant is that
at some point in the future there will be a realisation that ‘one size does
not fit all’ with respect to audit such as prevails now in respect to
financial reporting. If we abandon audit now we may not be in a position to
re-enter the market if and when a ‘cut down’ audit process is developed for
the smaller organisations that our practice currently specialises in.
However, as no such regime is even proposed we would have to wait too long
for such an opportunity even if it arises.
Conclusion
On balance I do not think it is cost effective for
our firm to continue to offer audit services. My reasons for arriving at
this conclusion are:
§ Audit practice, as expressed through audit
standards, has become extremely complicated.
§ As matters stand, our firm would have difficulty
demonstrating the necessary competence to obtain and maintain a licence to
audit issuers.
§ Without a licence our ability to persuade
existing and future non-issuer audit entities that we have the necessary
skill and reputation will diminish significantly.
§ To maintain a licence we would need, one way or
the other, to invest heavily in audit systems.
§ The market is not likely to be sufficiently
lucrative to justify this investment as we would be competing with much
larger organisations which have a better ‘economies of scale’ than we are
likely to have.
§ The benefits to ‘corporate knowledge’ of practice
of audit, in terms of financial reporting, might cease to exist in the near
future.
§ There may come a time when there will be a
differential audit regime suitable to our firm but this has not been mooted
and we may need to wait too long for it to happen.
Recommendation
It is recommended that:
1. The firm make a decision to not apply for an
issuer audit licence under the Audit Regulation Act.
2. The firm gradually disengage from its audit
practice across all types of entity.
Robert B Walker
National Technical Director
"European Commission Proposal will Hurt Audit Quality, says PwC," by
Michael Foster, December 1, 2011 --
http://www.big4.com/pricewaterhousecoopers/big4-com-exclusive-european-commission-proposal-will-hurt-audit-quality-says-pwc
-
In an exclusive interview with Big4.com, PwC
Director of Global Communications Mike Davies insisted that the recent
European Commission proposal to tighten auditing restrictions would lower
auditing quality throughout the European Union.
While PwC supports some of the ideas in the
legislation proposed by EU Financial Services Commissioner Michel Barnier,
Davies suggested that the restrictions go too far. Calling some of Barnier’s
proposals “radical measures”, Davies told me that PwC is happy with the
status quo. “We believe the audit market is already pretty competitive,”
Davies said, adding that there are already “checks and safeguards in place
and provisions about what you can and can’t provide to auditing clients”.
At the same time, Davies acknowledged that steps
could be taken to allow smaller auditing firms to compete with the Big4
firms such as PwC. “There’s always more that can be done in terms of how the
market operates and how to get smaller firms to increase their share,” he
added.
However, Barnier and supporters of the EC proposal
disagree. The commissioner’s final green paper pursued new rules that would
make it illegal for firms to offer consulting services to auditing clients.
This would essentially force the Big4 firms to split into separate
consulting and auditing companies, which some believe is Barnier’s ultimate
goal.
Additionally, the new European legislation would
require accounting firms to have a “cooling-off” period of several years
before they could offer auditing services to the same clients. This
practice, known as “firm rotation”, would require companies to hire more
than one auditing company over a long period of time.
While the legislation hopes that firm rotation
would help remove conflicts of interest, Mike Davies insists that it would
lower the quality of audits performed by all firms. “It would actually be
detrimental to audit quality,” Davies said, adding that “there are quite a
number of people who support our point of view.”
Continued in article
Bob Jensen's threads on professionalism and independence within auditing
firms ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"PCAOB Sees Decline in Audit Quality," by Michael Cohn, Accounting
Today, November 5, 2011 ---
http://www.accountingtoday.com/news/PCAOB-Sees-Decline-Audit-Quality-60375-1.html?CMP=OTC-RSS
. . .
Investors are demanding changes in the audit report
to provide more disclosures. In many cases during the financial crisis,
investors were surprised that within months of receiving an unqualified
audit opinion, many financial institutions either went out of business or
would have gone out of business if not for the bailout money they received
from the federal government. Investors have questioned the value of the
audit and why there wasn’t better disclosure of problems such as the many
mortgage loans that lacked proper documentation.
“The bottom line is
that investors are clamoring for changes in the audit report,” said Baumann.
“It’s just not working.”
Where Were the Auditors Before the 2007-2008 failure of thousands of
businesses that were audited?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
In case you missed it, note how cheaply some Big Four auditing firms wiggled
out of some major bank failure litigation. What could have been billions were
settled for pennies on the dollar.
"The Big Four Accounting Firms' Financial Tipping Point -- Time for a
Fresh Look," by Jim Peterson, re:TheBalance, November 30, 2011 ---
Click Here
http://www.jamesrpeterson.com/home/2011/11/the-big-four-accounting-firms-financial-tipping-point-time-for-a-fresh-look-.html
. . .
Latest available figures for the Big Four indicate
total annual global revenues of some $ 102 billion.
Applied to those figures, the model indicates that
the break-up threshold for any one of the Big Four firm’s litigation
“worst-cases” would be in the range from a maximum of $ 6 billion down to $
2.2 billion, if viewed at the global level.
That is a considerable increase from the earlier
numbers, owing to the great leap in total big-firm revenues in the
intervening years.
But cautions remain. Most importantly, cohesion of
the international networks under the strain of death-threat litigation, or
the extended availability of collegial cross-border financial support,
cannot be assumed. Arthur Andersen’s rapid disintegration in 2002 with the
flight of its non-US member firms is illustrative.
So it is necessary to look at the bust-up range
based on figures alone from the Americas, the most hazardous region. If left
to their local resources, as was Andersen’s US firm, the disintegration
range shrinks, from a maximum of less than $ 3 billion down to a truly
frightening $ 675 million.
Amounts at that level compare ominously with the
litigation settlements recently extracted from the larger debacles of the
last decade – examples led by Bank of America’s post-Countrywide
mortgage-securities settlement of $8.5 billion (here)
and including such investor settlements as Enron ($7.2
billion), WorldCom ($6.2 billion) and Tyco ($3.2 billion) (here).
But those amounts were only available because
inflicted on the investor-funded balance sheets of the corporations
contributing to the settlements – resources not available to the private
accounting partnerships. And they are even more darkly comparable with the
exposures looming in the pending claims inventory.
True, in recent months the large accounting
firms have enjoyed remarkable success in disposing of large litigations for
modest sums – examples include KPMG resolving Countrywide for $ 24 million
(here)
and New Century for $ 45 million (here),
and Deloitte settling Washington Mutual for $ 18.5
million (here).
However, hope for the indefinite continuation of
such forbearance on the part of the plaintiffs is not a strategy, but only a
wish.
As the catastrophic impact of “black swan” events
makes clear, it only takes one. And at that tipping point, all the marginal
fiddling by Barnier, Doty and their ilk becomes academic.
The auditors were giving out going concern opinions and hugely
underestimating loan loss reserves when thousands of banks faiiled ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
If audit reform swaggered into a Luckenbach, Texas saloon, it would be "all
hat and no horse"
The ladies of the night would die laughing at that "itty-bitty thang" that
walked in
And it would need a ladder to peek over the top of the spittoon
"FTSE-100 audit chairs question audit market reform," by Rachel Singh,
Accountancy Age, November 1, 2011 ---
http://www.accountancyage.com/aa/news/2121514/ftse-100-audit-chairs-question-audit-market-reform
FTSE-100 audit committee chairs have questioned the
rationale behind proposals currently being considered by the European
Commission (EC) to reform the audit market.
Many of the chairs believe that given the lack of
evidence that failings in audit either caused or helped to speed up the
credit crisis, means no case for reform has been made, according to research
commissioned by the ICAEW.
However, the research suggested that the current
level of market concentration is not ideal, with BDO the only firm outside
the Big Four to audit the FTSE-100.
The research also made a number of recommendations,
including increased competition and choice, continuing focus and reassurance
on auditor independence and greater use of third-party and peer review of
audit practices.
ICAEW chief executive Michael Izza (pictured),
said: "When considering its proposals, the European Commission cannot ignore
the voice of business. As this research shows, there is scepticism over the
rationale for these proposals, but a recognition that change is needed in a
number of areas to ensure UK audit quality remains world leading."
Continued in article
"Recent Comments On European and U.S. Audit Reform," by Francine
McKenna, re:TheAuditors, October 4, 2011 ---
http://retheauditors.com/2011/10/04/recent-comments-on-european-and-u-s-audit-reform/
Why did the auditors not question going concern issues when thousands of
banks failed ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Bob Jensen's threads on audit firm independence and professionalism ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Chicken Feed in Bank Auditing Oopsie
"PwC defends 'honest mistake' in JP Morgan audit disciplinary, By Rose
Orlik, Accountancy Age, November 29*, 2011 ---
http://www.accountancyage.com/aa/news/2128350/pwc-defends-honest-mistake-jp-morgan-audit-disciplinary
PWC FOUGHT for minimal sanctions yesterday after it
admitted audit failures in the case of JP Morgan Securities Limited.
Appearing before a disciplinary panel, it argued
JPMSL shortcomings were to blame as it omitted to flag up non-segregation of
client assets for the seven years to 2008, not systemic audit failure.
PwC committed an "honest error" as it "strove to
test segregation and reconciliation of client assets", argued Tim Dutton of
law firm Herbert Smith.
Dutton said the firm's penalty should be in the
region of £500,000 to £1m, saying it would be "appropriate to keep the fine
at the lower end due to mitigating reasons".
"Although the un-segregated sum of client assets
was large, the real risk was modest," he added, noting no individuals were
diversely affected by the failure.
The Accountancy and Actuarial Discipline Board's
counsel, Simon Browne-Williamson, said the "crystallisation of risk is
irrelevant" and "serious misconduct will attract serious consequences"
whether or not disaster struck.
He argued the potential for loss of un-segregated
funds -at times as much as $23bn (£14.8bn) - if JPMSL became insolvent was
so great that the strictest penalties must apply.
AADB executive counsel, Cameron Scott, said in his
opinion, the repeated failure to flag up this infringement of asset rules
amounted to institutional failure.
When questioned by the panel, Browne-Williamson was
unwilling to recommend a sum for the fine, and Scott said this was because
the AADB queried whether it was "right for the prosecutor to suggest a
penalty", calling it "a very difficult question".
Instead, Browne-Williamson insisted upon
"transparency", saying this was the best way to restore public confidence in
the accounting profession and fulfil the AADB's mandate.
The Financial Services Authority fined JPMSL £33.2m
for the breach, equivalent to 1% of the average amount of client assets at
risk over the eight years in question.
Browne-Williamson urged the tribunal to adopt a
similar tack, suggesting it might consider sums such as the £6.5m fees JPMSL
paid to PwC during the period in question.
PwC said: "We acknowledge that we did not maintain
our usual high standards. PwC takes very seriously its reporting
requirements to the FSA. We hope that the regulatory response will be
proportionate to the issue."
Continued in article
"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.
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
Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm
"A Case for Mandatory Auditor Rotation? Sharp-Eyed Students Have a Look,"
by Jim Peterson, re:TheBalance, November 14, 2011 ---
http://www.jamesrpeterson.com/home/2011/11/a-case-for-mandatory-auditor-rotation-sharp-eyed-students-have-a-look.html
With comments due next month, the concept release
on mandatory auditor rotation, issued by the Public Company Accounting
Oversight Board on August 16 (here), provided an irresistible mid-term
assignment for my class in Risk Management.
It’s been stimulating this fall, to be with a group
of students from the law and policy schools of the University of Chicago. We
examine the sources of bias, misperception and flawed analysis in the
behavior of those charged with governance and leadership – in business,
politics and regulation. PCAOB chairman James Doty’s promotion and affection
for auditor rotation was a natural.
Ask a group of inquisitive students to find the
three central themes in an assignment, and collectively they will find all
six – but in this exercise, their insights are on target.
Continued in article
November 15, 2011 reply from Bob Jensen
Hi Jim,
This was a most interesting post.
I would like to repeat my earlier concern that the
PCAOB and
other advocates of auditor rotation are
not picking up on
externalities
as well as direct costs.
Forcing auditors to become nomads has many
externalities
as well as direct costs to be taken into consideration. I think many of our
best auditors will leave the profession before 40 years of service and many
prospective auditors will never enter the profession because of having to
become nomads.
The problem is
that as firms trade clients, local offices may be very disrupted since big
clients being traded are often in different cities or even countries.
I'm reminded of the time when
KPMG was
fired from the Fannie Mae audit. I don't know how many
KPMG auditors
had to be terminated and/or relocated to other cities, but my guess is that
it was over 1,000.
When Deloitte
took over for
KPMG
on the Fannie Mae audit,
Deloitte
moved over 1,500 auditors into the city, although in this case the move for
some was only temporary to clean up the mess left behind by
KPMG. Over a
million journal entries had to be made to revise the financial statements
for one year --- the errors and fraudulent manipulations were primarily in
accounting for derivative financial instruments and hedging activities. You
can read more about the changing of the audit guard at Fannie Mae at
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Also scroll deeply down at
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
This moving about of Fannie Mae auditors was not only costly to
KPMG and
Deloitte,
there were
externalities such as the impact on the lives of the families to say
nothing of the transactions costs of selling homes and buying new homes.
Deloitte
auditors must've
had sticker shock when faced with the prices of homes in Washington DC area.
And if they moved into the city itself their children encountered one of the
worst K-12 school systems in the United States.
My point here, as mentioned in my earlier posts, is that the Big Four might
on a macro level trade big clients back and forth in what seems like fair
trades under a mandatory audit rotation requirement. But the big clients are
often not located in the same cities such that thousands of local auditors
and their families will have to be frequently relocated much like family
life is like in the U.S. military. My wife was an Army brat who, after
immigrating from Germany at Age 13 with her German mother and American
soldier stepfather, had four years high school in four separate states ---
Atlanta, Fort Knox, Yuma, and Tacoma.
Many soldiers, sailors, marines, and air force men and women end their
military careers before retirement age primarily because their families can
no longer tolerate the constant moving about from base-to-base around the
world. Similarly, if mandatory rotation of auditors is required, many
auditors will leave the profession because of family pressures to cease
moving about like nomads and incurring huge transactions costs of selling
homes, buying homes, finding new schools, finding new friends, etc.
In the 40 years of my career I moved my family from California to Michigan
to Maine back to California (temporary for two think-tank years) back to
Maine to Florida to Texas and lastly to New Hampshire (our children were
grown up when we retired to New Hampshire). Some of these moves created all
sorts of problems for some of our children. I do not recommend the nomadic
life and would move less often if I could live my career over again.
Actually the nomad analogy is probably misleading. Nomads on the dessert
move in groups of permanent family and friends. Nomadic soldiers and
auditors move as individual families and thus must seek new friends and
support groups wherever they roam.
Forcing auditors to become nomads has many
externalities
as well as direct costs to be taken into consideration. I think many of our
best auditors will leave the profession before 40 years of service and many
prospective auditors will never enter the profession because of having to
become nomads.
Respectfully,
Bob Jensen
The response of Ernst & Young to proposed audit firm rotation ---
Click Here
http://www.ey.com/Publication/vwLUAssets/CommentLetter_BB2219_FirmRotation_18November2011/%24FILE/CommentLetter_BB2219_FirmRotation_18November2011.pdf
November 21, 2011 reply from Dennis Beresford
The 64 letters submitted to date are all posted on the PCAOB website. E&Y
is the only major firm that has responded to date. Of particular interest to
me, a large number of the letters are from audit committee chairs.
Denny Beresford
As a follow up to my earlier message, if you’d like to read a very
insightful and practical comment letter, look at number 35 from Jim
Fuehrmeyer of the University of Notre Dame. Jim is a former Andersen and
Deloitte partner who discusses many of the issues involved with the changes
that took place when Andersen went down and so many auditor switches were
made. He paints a pretty ugly picture of the accounting profession under
mandatory rotation.
My letter on the Concept Release is number 29.
Denny Beresford
PCAOB Docket 037 : Concept Release on Auditor Independence and Audit Firm
Rotation
Comment letters on these audit reform independence and rotation issues must be
submitted to the PCAOB before December 14, 2011 ---
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx
To view the comment letters, click on the hot words
View Comment Letters
As Denny Beresford mentioned, his letter is Number 29
James L. Fuehrmeyer's letter in Number 35
Ernst & Young's letter is Number 63
Remember when the 2007/2008 severe economic collapse was caused by "street
events":
Fraud on Main Street ---
issuance of "poison" mortgages (many
subprime)
that lenders knew could never be repaid by borrowers.
Lenders didn't care about loan defaults because they sold the poison mortgages
to suckers like Fannie and Freddie.
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
For low income borrowers the Federal Government forced Fannie and Freddie to buy
up the poisoned mortgages ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble
Math Error on Wall Street --- issuance of CDO portfolio
bonds laced with a portion of healthy mortgages and a portion of poisoned
mortgages.
The math error is based on an assumption that risk of poison can be diversified
and diluted using a risk diversification formula.
The risk diversification formula is called the
Gaussian copula function
The formula made a fatal assumption that loan defaults would be random events
and not correlated.
When the real estate bubble burst, home values plunged and loan defaults became
correlated and enormous.
Fraud on Wall Street
--- all the happenings on Wall Street were not merely
innocent math errors
Banks and investment banks were selling CDO bonds that they knew were
overvalued.
Credit rating agencies knew they were giving AAA high credit ratings to bonds
that would collapse.
The banking industry used powerful friends in government to pass its default
losses on to taxpayers.
Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster: The Formula That Killed Wall Street ---
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html
Some highlights:
"For five years, Li's formula, known as a
Gaussian copula function, looked like an unambiguously positive
breakthrough, a piece of financial technology that allowed hugely
complex risks to be modeled with more ease and accuracy than ever
before. With his brilliant spark of mathematical legerdemain, Li made it
possible for traders to sell vast quantities of new securities,
expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond
investors and Wall Street banks to ratings agencies and regulators. And
it became so deeply entrenched—and was making people so much money—that
warnings about its limitations were largely ignored.
Then the model fell apart." The article goes on to show that correlations
are at the heart of the problem.
"The reason that ratings agencies and investors
felt so safe with the triple-A tranches was that they believed there was
no way hundreds of homeowners would all default on their loans at the
same time. One person might lose his job, another might fall ill. But
those are individual calamities that don't affect the mortgage pool much
as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and
tranching still hadn't solved all the problems of mortgage-pool risk.
Some things, like falling house prices, affect a large number of people
at once. If home values in your neighborhood decline and you lose some
of your equity, there's a good chance your neighbors will lose theirs as
well. If, as a result, you default on your mortgage, there's a higher
probability they will default, too. That's called correlation—the degree
to which one variable moves in line with another—and measuring it is an
important part of determining how risky mortgage bonds are."
I would highly recommend reading the entire thing that gets much more
involved with the
actual formula etc.
The
“math error” might truly be have been an error or it might have simply been a
gamble with what was perceived as miniscule odds of total market failure.
Something similar happened in the case of the trillion-dollar disastrous 1993
collapse of Long Term Capital Management formed by Nobel Prize winning
economists and their doctoral students who took similar gambles that ignored the
“miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM
History
(Long Term
Capital Management and CDO Gaussian Coppola failures)
Repeats Itself in Over a Billion Lost in MF Global
"Models
(formulas) Behaving Badly Led to MF’s Global Collapse – People Too,"
by Aaron Task, Yahoo Finance, November 21, 2011 ---
http://finance.yahoo.com/blogs/daily-ticker/models-behaving-badly-led-mf-global-collapse-people-174954374.html
"The entire system has been utterly destroyed by
the MF Global collapse," Ann Barnhardt, founder and CEO of Barnhardt Capital
Management, declared last week in a letter to clients.
Whether that's hyperbole or not is a matter of
opinion, but MF Global's collapse — and the inability of investigators to
find about $1.2 billion in "missing" customer funds, which is twice the
amount previously thought — has only further undermined confidence among
investors and market participants alike.
Emanuel Derman, a professor at Columbia University
and former Goldman Sachs managing director, says
MF Global was undone by
an over-reliance on short-term funding, which dried up as revelations of its
leveraged bets on European sovereign debt came to light.
In the accompanying video, Derman says MF Global
was much more like Long Term Capital Management than Goldman Sachs, where he
worked on the risk committee for then-CEO John Corzine.
A widely respected expert on risk management,
Derman is the author of a new book
Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to
Disaster, on Wall Street and in Life.
As discussed in the accompanying video, Derman says
the "idolatry" of financial models puts Wall Street firms — if not the
entire banking system — at risk of catastrophe. MF Global was an extreme
example of what can happen when the models — and the people who run them --
behave badly, but if Barnhardt is even a little bit right, expect more
casualties to emerge.
Jensen Comment
MF Global's auditor (PwC) will now be ensnared, as seems appropriate in this
case, the massive lawsuits that are certain to take place in the future ---
http://www.trinity.edu/rjensen/Fraud001.htm
New in Paperback!
GLOBAL DERIVATIVE DEBACLES ---
http://www.worldscibooks.com/economics/7141.html
From Theory to Malpractice
by Laurent L Jacque (Tufts University, USA & HEC School of Management,
France)
336pp
978-981-4366-19-9(pbk): US$29 / £19 US$20.30 /
£13.30
978-981-283-770-7: US$54 / £36 US$37.80 / £25.20
978-981-283-771-4(ebook): US$70 US$49
Table of Contents (80k)
Preface (61k)
Chapter 1: Derivatives and the Wealth of Nations (173k)
Contents:
- Derivatives and the Wealth of Nations
- Forwards:
- Futures:
- Options:
- Swaps:
- Long-Term Capital Management
- From Theory to Malpractice: Lessons Learned
Bob Jensen's Timeline
of Derivative Financial Instruments Frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Question
How would you gild a horrible audit inspection report from the PCAOB?
Hint
Recall how MSNBC's infamous Keith Olbermann (before he resigned under pressure)
would only interview members of his liberal choir when he had a MSNBC show.
Deloitte adopted the same tactic presumably to avoid embarrassing questions
about its awful PCAOB inspection report.
"We Read This Awful Interview with Deloitte’s Joe Echevarria So You Don’t
Have To," by Caleb Newquist, Going Concern, November 21, 2011 ---
http://goingconcern.com/2011/11/we-read-this-awful-interview-with-deloittes-joe-echevarria-so-you-dont-have-to/
"Auditing Watchdog's Audit of PwC and KPMG Find Weaknesses," by
Michael Rapoport, The Wall Street Journal, November 21, 2011 ---
http://online.wsj.com/article/SB10001424052970203710704577052713862019288.html?mod=googlenews_wsj
The government's auditing regulator found
deficiencies in 28 audits conducted by PricewaterhouseCoopers LLP and 12
audits by KPMG LLP in its annual inspections of the Big Four accounting
firms.
The Public Company Accounting Oversight Board
(PCAOB) said many of the deficiencies it found in its 2010 inspection
reports of the two firms, released Monday, were significant enough that it
appeared the firms didn't obtain sufficient evidence to support their audit
opinions. The regulator hasn't yet issued its yearly reports on its
inspections of the other Big Four firms, Ernst & Young LLP and Deloitte LLP.
The 28 deficient PwC audits the inspectors found
were out of 75 audits and partial audits reviewed, and were an increase from
nine deficient audits found in the previous year's report. The deficiencies
inspectors found in various audits concerned, among other areas, testing of
"fair value" of the firm's assets, testing of revenue and receivables,
derivatives accounting and asset impairments. In two cases, the companies
involved later restated their financial statements; in a third case, the
company later made "substantial adjustments."
The board didn't identify the audit clients
involved, in accordance with its practice.
PwC is "focused on the increase" in the number of
deficiencies reported over past years, and is "working to strengthen and
sharpen the firm's audit quality, including making investments designed to
improve our performance over both the short and long term," Robert Moritz,
PwC's head partner and chairman, said in a statement.
KPMG's 12 deficient audits were out of 54 audits
and partial audits reviewed, and were an increase from eight deficient
audits found the previous year. The accounting watchdog said the areas in
which deficiencies were found included fair-value testing, receivables
testing, goodwill and testing of loan-loss allowances. None of the
deficiencies resulted in restatements, though one led to a "substantial
adjustment" in an aspect of the company's financial statements.
KPMG "shares a common objective with the PCAOB" to
make sure high-quality audits are provided, and the board's inspectors "have
measurably helped KPMG as we work to continuously improve our audit
performance and strengthen our system of audit quality control," George
Ledwith, a KPMG spokesman, said in a statement.
The accounting watchdog conducts annual inspections
of the biggest accounting firms, examining a sample of each firm's audits to
assess their performance and make sure they're complying with auditing
standards. Only part of the report is made public; a section in which the
board assesses the firm's quality controls is sealed and never made public
as long as the firm addresses any criticisms to the board's satisfaction
within a year.
Jensen Comment
PCAOB Inspection Reports ---
http://pcaobus.org/Pages/default.aspx
Bob Jensen's threads on KPMG and PwC ---
http://www.trinity.edu/rjensen/Fraud001.htm
The Accounting Review 2011 Annual Report
Hi Steve,
Thank you so much for providing such a detailed and permanent 2011 TAR fiscal
year annual report ended May 31, 2011 ---
http://aaajournals.org/
You are commended during your service as TAR Senior Editor for having to deal
with greatly increased numbers of submissions. This must've kept you up late
many nights in faithful service to the AAA. And writing letters of rejections to
friends and colleagues must've been a very painful chore at times. And having to
communicate repeatedly with so many associate editors and referees must've been
tough for so many years. I can understand why some TAR editors acquired health
problems. I'm grateful that you seem to still be healthy and vigorous.
I'm also grateful that you communicate with us on the AECM. This is more than
I can say for other former TAR editors and most AAA Executive Committee members
who not only ignore us on the AECM, but they also do not communicate very much
at all on the AAA Commons.
I'm really not replying to start another round of debate on the AECM using
your fine annual report. But I can't resist noting that I just do not see the
trend increasing for acceptance of papers that are not accountics science papers
appearing in TAR.
One of the tables of greatest interest to me is Panel D of Table 3 which is
shown below:
What you define as "All Other Methods" comprises 7% leaving 93% for
Analytical, Empirical Archival, and Experimental. However, this does not
necessarily mean that 7% of the acceptances did not contain mathematical
equations and statistical testing such that what I would define as accountics
science acceptances for 2011 constitute something far greater than 93%. For
example, you've already pointed out to us that case method and field study
papers published in TAR during 2011 contain statistical inference testing and
equations. They just do not meet the formal tests as having random samples.
Presidential scholar papers are published automatically (e.g., Kaplan's March
2011) paper, such that perhaps only 15 accepted Other Methods papers passed
through the refereeing process. Your July 2011 Editorial was possibly included
in the Other Methods such that possibly only 13 Other Methods papers passed
through the refereeing process. And over half of these were "Managerial" and
most of those contain equations such that 2011 was a typical year in which
nearly all the published TAR papers in 2011 meet my definition of accountics
science (some of which do not have scientific samples) ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
We can conclude that in 2011 that having equations in papers accepted by
referees was virtually a necessary condition for acceptance by referees in 2011
as has been the case for decades.
Whatever happened to accounting history publications in TAR? Did accounting
historians simply give up on getting a TAR hit?
Whatever happened to normative method papers if they do not meet the
mathematical tests of being Analytical?
Whatever happened to scholarly commentary?
November 22, 2011 reply from Steve Kachelmeier
First, Table 3 in the 2011 Annual Report
(submissions and acceptances by area) only includes manuscripts that went
through the regular blind reviewing process. That is, it excludes invited
presidential scholar lectures, editorials, book reviews, etc. So "other"
means "other regular submissions."
Second, you are correct Bob that "other" continues
to represent a small percentage of the total acceptances. But "other" is
also a very small percentage of the total submissions. As I state explicitly
in the report, Table 3 does not prove that TAR is sufficienty diverse. It
does, however, provide evidence that TAR acceptances by topical area (or by
method) are nearly identically proportional to TAR submissions by topical
area (or by method).
Third, for a great example of a recently published
TAR study with substantial historical content, see Madsen's analysis of the
historical development of standardization in accounting that we published in
in the September 2011 issue. I conditionally accepted Madsen's submission in
the first round, backed by favorable reports from two reviewers with
expertise in accounting history and standardization.
Take care,
Steve
November 23, 2011 reply from Bob Jensen
Hi Steve,
Thank you for the clarification.
Interestingly, Madsen's September 2011 historical study (which came out
after your report's May 2011 cutoff date) is a heavy accountics science
paper with a historical focus.
It would be interesting to whether such a paper would've been accepted by
TAR referees without the factor (actually principal components) analysis.
Personally, I doubt any history paper would be accepted without equations
and quantitative analysis. Once again I suspect that accountics science
farmers are more interested in their tractors than in their harvests.
In the case of Madsen's paper, if I were a
referee I would probably challenge the robustness of the principal
components and loadings ---
http://en.wikipedia.org/wiki/Principle_components_analysis
Actually factor analysis in general like nonlinear multiple regression and
adaptive versions thereof suffer greatly from lack of robustness. Sometimes
quantitative models gild the lily to a fault.
Bob Kaplan's Presidential Scholar historical study was published, but
this was not subjected to the usual TAR refereeing process.
The History of The Accounting Review paper written by Jean Heck and Bob
Jensen which won a best paper award from the Accounting Historians Journal
was initially flatly rejected by TAR. I was never quite certain if the main
reason was that it did not contain equations or if the main reason was that
it was critical of TAR editorship and refereeing. In any case it was flatly
rejected by TAR, including a rejection by one referee who refused to put
reasons in writing for feed\back to Jean and me.
“An Analysis of the Evolution of Research Contributions by The
Accounting Review: 1926-2005,” (with Jean Heck), Accounting
Historians Journal, Volume 34, No. 2, December 2007, pp. 109-142.
I would argue that accounting history papers, normative methods papers,
and scholarly commentary papers (like Bob Kaplan's plenary address) are not
submitted to TAR because of the general perception among the AAA membership
that such submissions do not have a snowball's chance in Hell of being
accepted unless they are also accountics science papers.
It's a waste of time and money to submit papers to TAR that are not
accountics science papers.
In spite of differences of opinion, I do thank you for the years of
blood, sweat, and tears that you gave us as Senior Editor of TAR.
And I wish you and all U.S. subscribers to the AECM a very Happy
Thanksgiving. Special thanks to Barry and Julie and the AAA staff for
keeping the AECM listserv up and running.
Respectfully,
Bob Jensen
"SEC releases reports on IFRS in practice and US GAAP-IFRS differences,"
IAS Plus, November 17, 2011 ---
http://www.iasplus.com/index.htm
The staff of the United States Securities
and Exchange Commission (SEC)
have released two additional Staff Papers as part of
the SEC's work plan for the consideration of incorporating IFRSs into the
Financial Reporting System for U.S. Issuers.
Analysis of IFRS in Practice
The first paper, An analysis of IFRS
in Practice, presents the Staff's observations regarding the application
of IFRS in practice, based on an analysis of the most recent annual
consolidated financial statements of 183 companies across 36 industries
which prepare financial statements in accordance with IFRSs. The companies
were selected from the Fortune Global 500 (the top 500 companies by revenue)
and represented all those which prepared financial statements in accordance
with IFRS in English. The 183 companies were domiciled in 22 countries, with
the majority (approx 80%) being domiciled in the European Union, but with
China and Australia also being represented with more than five companies.
The Staff Paper summarises the research
as follows:
|
The Staff found that company
financial statements generally appeared to comply with IFRS
requirements. This observation, however, should be considered in
light of the following two themes that emerged from the Staff’s
analysis:
- First, across topical areas, the
transparency and clarity of the financial statements in the
sample could be enhanced. For example, some companies did not
provide accounting policy disclosures in certain areas that
appeared to be relevant to them. Also, many companies did not
appear to provide sufficient detail or clarity in their
accounting policy disclosures to support an investor’s
understanding of the financial statements, including in areas
they determined as having the most significant impact on the
amounts recognized in the financial statements... In some cases,
the disclosures (or lack thereof) also raised questions as to
whether the company’s accounting complied with IFRS....
- Second, diversity in the application
of IFRS presented challenges to the comparability of financial
statements across countries and industries. This diversity can
be attributed to a variety of factors. In some cases, diversity
appeared to be driven by the standards themselves, either due to
explicit options permitted by IFRS or the absence of IFRS
guidance in certain areas. In other cases, diversity resulted
from what appeared to be noncompliance with IFRS... While
country guidance and carryover tendencies may promote
comparability within a country, they may diminish comparability
on a global level.
|
IFRS - U.S. GAAP comparison
A second paper, A Comparison of U.S.
GAAP and IFRS, to provide an assessment of whether there is "sufficient
development and application of IFRS for the U.S. domestic reporting system"
by inventorying areas in which IFRS does not provide guidance or where it
provides less guidance than U.S. GAAP. The Staff reviewed U.S. GAAP
accounting requirements and compared those requirements to equivalent or
corresponding IFRS requirements, as applicable. The Staff omitted from its
review any U.S. GAAP requirements and the IFRS equivalents that are subject
to the ongoing joint standard-setting efforts either through the Memorandum
of Understanding (MoU) joint standard-setting projects of the FASB and the
IASB, or other areas where the FASB and IASB had agreed to work together.
Continued in article
Click for:
Bob Jensen's threads on accounting standard setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Comparisons
of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm
More Detailed
Differences (Comparisons) between FASB
and IASB Accounting Standards
2011 Update
"IFRS and US GAAP: Similarities and Differences"
according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities
and differences mentioned in the booklet are not comprehensive of all
similarities and differences. The document is, however, a valuable addition
to students of FASB versus IASB standard differences and similarities.
It's not easy keeping track of what's
changing and how, but this publication can help. Changes for 2011
include:
- Revised introduction reflecting
the current status, likely next steps, and what companies should be
doing now
(see page 2);
- Updated convergence timeline,
including current proposed timing of exposure drafts, deliberations,
comment periods, and final standards
(see page 7);
- More current analysis of the
differences between IFRS and US GAAP -- including an assessment of
the impact embodied within the differences
(starting on page 17); and
- Details incorporating
authoritative standards and interpretive guidance issued through
July 31, 2011
(throughout).
This continues to be one of PwC's
most-read publications, and we are confident the 2011 edition will
further your understanding of these issues and potential next steps.
For further exploration of the
similarities and differences between IFRS and US GAAP, please also visit
our
IFRS Video Learning Center.
To request a hard copy of this publication, please
contact your PwC engagement team or
contact us.
Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly
downplays the importance of these differences. It may well be that IFRS is
more restrictive in some areas and less restrictive in other areas to a
fault. This is one topical area where IFRS becomes much too subjective such
that comparisons of derivatives and hedging activities under IFRS can defeat
the main purpose of "standards." The main purpose of an "accounting
standard" is to lead to greater comparability of inter-company financial
statements. Boo on IFRS in this topical area, especially when it comes to
testing hedge effectiveness!
One key quotation is on Page 165
IFRS does not specifically discuss the
methodology of applying a critical-terms match in the level of detail
included within U.S. GAAP.
Then it goes yatta, yatta, yatta.
Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail"
and more importantly fails to provide "implementation guidance" comparable
with the FASB's DIG implementation topics and illustrations.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
Bob Jensen's threads on accounting standards setting
controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
"Canadian regulator decides against allowing early adoption of recent
IFRSs by certain entities," IAS Plus, November 1, 2011 ---
http://www.iasplus.com/index.htm
. . .
In making its decision, the OSFI considered a
number of factors such as industry
consistency, OSFI policy positions on
accounting and capital, operational capacity and resource constraints of
Federally Regulated Entities (FREs), the ability to benefit from improved
standards arising from the financial crisis and the
notion of a level playing field with other Canadian
and international financial institutions.
OSFI concluded that FREs should not early adopt the following new or amended
IFRSs, but instead should adhere to their mandatory effective dates:
Continued
Jensen Comment
The clients, auditors, and the AICPA clamoring that U.S. firms should be able to
voluntarily choose IFRS instead of U.S. GAAP even before it has not been decided
that IFRS will ever replace FASB standards seem to ignore the problems that
voluntary choice of IFRS might cause for investors and analysts. The above
reasoning by the OSFI makes sense to me.
But then outfits like the AICPA have a self-serving interest in earning
millions of dollars selling IFRS training courses and materials.
November 2, 2011 reply from Patricia Walters
Does that mean you oppose options to early adopt standards in general,
not just IFRSs?
Pat
November 2, 2011 reply from Bob Jensen
Hi Pat,
It's hard to say regarding early adoption of a particular national or
international standard, because there can be unique circumstances. For
example, FAS 123R simply altered how to make disclosures rather than alter
the disclosures themselves since employee option expenses had to be
disclosed before the FAS 123R adoption date. But even here early adoption of
FAS 123R by Company A versus late adoption by Company B made simple
comparisons of eps and P/E ratios between these companies less easy.
There's a huge difference between early adoption of a particular standard
and early adoption of an entire system of standards like switching from FASB
accounting standards to IFRS.
I think the Canadian position of early adoption of IFRS is probably correct
because of the mess early adoption of IFRS makes with comparisons of
companies using different accounting standards and the added costs of
regulation of more than one set of standards. Also think of the added burden
placed upon the courts to adjudicate disputes when differing sets of
standards are being used.
Even though we allow IFRS for SEC registered foreign companies, I think it
would be a total mess for the SEC, the PCAOB, investors, analysts,
educators, trainers, auditing, and even the IRS (where tax and reporting
treatments must sometimes be reconciled) if our domestic corporations could
choose between FASB versus IASB standards.
There are hundreds of differences between FASB and IASB standards. Allowing
companies domestic companies to cherry pick which system they choose before
it is even known if there will ever be official replacement of FASB
standards by IASB standards would be very, very confusing. What if there
never is a decision to replace FASB standards? Do want to simply allow
companies to choose to bypass FASB standards at their own discretion?
Of course, if information were costless it might be ideal to require
financial reporting where FASB and IASB outcomes are reconciled. But clients
and auditors generally contend that the cost of doing this greatly exceeds
benefits. And teaching financial accounting would become exceedingly
complicated if we had to teach two sets of standards on an equal basis.
I would certainly hate to face a CPA examination that had nearly equal
coverage of both FASB and IASB standards simultaneously. I say this
especially after viewing the hundreds of pages of complicated differences
between the two standards systems.
Respectfully,
Bob Jensen
Bob Jensen's threads on accounting standard setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Teaching Case on Fair Value Measurement and Financial Statement Analysis
Here's a pop quiz: Bank of America in the third quarter generated:
a) 56 cents a share in earnings,
b) 27 cents,
c) a loss of two cents, or
d) all of the above.
From The Wall Street Journal Accounting Weekly Review on November 4,
2011
Wall Street Reaps Profit Volatility It Sowed
by:
David Reilly
Oct 31, 2011
Click here to view the full article on WSJ.com
TOPICS: Banking, Fair Value Accounting, Fair-Value Accounting
Rules, Financial Accounting Standards Board, SEC, Securities and Exchange
Commission
SUMMARY: Author David Reilly uses Bank of America's recent
disclosures highlighting the impact of special items to say that analysts
and others cannot clearly identify what results banks are achieving. He
highlights the bank's use of the fair value option for structured notes-bank
debt that was issue with an embedded derivative so that "the ultimate payout
to the holder typically depends on changes in some other instrument such as
the S&P 500...." Mr. Reilly expresses concern with comparability across bank
financial statements because of differing disclosures about the effects of
using the fair value option to account for structured debt. He calls for the
SEC to "issue guidance so that all banks label these changes similarly and
present them in the same way."
CLASSROOM APPLICATION: The article is useful in advanced
undergraduate or graduate level financial reporting classes to cover the
qualitative characteristic of comparability and to discuss the fair value
option banks are using in accounting for their own debt.
QUESTIONS:
1. (Introductory) On what basis does the author of this article,
David Reilly, argue that Bank of America's fourth quarter results could be
measured in three ways?
2. (Advanced) Define the terms "mark-to-market accounting" and
"fair value option". What authoritative accounting guidance defines how to
use these accounting methods?
3. (Introductory) Why are banks opting to use fair value reporting
for their structured notes even when not being required to do so? In your
answer, define the term "structured notes" on the basis of the description
in the article.
4. (Advanced) What are the primary and supporting qualitative
characteristics of financial information? Where are they found in
authoritative accounting literature?
5. (Advanced) Which qualitative characteristic does Mr. Reilly
indicate is being violated in reporting by from big banks such as Citigroup,
J.P. Morgan Chase, Morgan Stanley, and Goldman Sachs Group?
6. (Introductory) What entity does Mr. Reilly indicate should solve
the reporting issues highlighted in the article? Is this the only entity
responsible for establishing financial reporting standards in this U.S.?
Reviewed By: Judy Beckman, University of Rhode Island
"Wall Street Reaps Profit Volatility It Sowed," by: David Reilly, The Wall
Street Journal, October 31, 2011 ---
http://online.wsj.com/article/SB10001424052970204505304577004223202476152.html?mod=djem_jiewr_AC_domainid
Here's a pop quiz: Bank of America in the third
quarter generated:
a) 56 cents a share in earnings,
b) 27 cents,
c) a loss of two cents, or
d) all of the above.
The answer is "d," thanks to a dozen special items
investors can include or exclude when trying to figure out how the bank
actually performed. Chief among them were $6.2 billion in gains due to falls
in the value of the bank's own debt.
And investors may have to brace for more of the
same in the current quarter. With the European crisis off the boil, debt
values for big banks have regained some ground. The cost of protecting
against default at Bank of America has fallen about 26% since Sept. 30,
following a 170% increase in the third quarter. If the decline continues,
last quarter's gains could reverse, resulting in fourth-quarter hits to
profit.
Confused? Plenty of investors are. Even analysts
and bankers have had a tough time figuring out how to compare results at big
banks like Bank of America, Citigroup, J.P. Morgan Chase, Morgan Stanley and
Goldman Sachs Group. That's due to the counterintuitive nature of these
gains. Since banks book them as their own debt loses value, a firm would
theoretically mint money while going bankrupt. Making matters worse,
individual banks often use different terms to describe these gains—and
disclose them in different ways.
This is spurring debate about whether
accounting-rule changes are needed. But there's a little-known irony: The
problem is largely of Wall Street's own making. And it highlights how big
banks repeatedly play for short-term advantages that often end up working
against them.
To understand why, consider that banks aren't
actually required to record most gains or losses due to changes in the value
of their debt. (Unlike with derivatives, which must be marked.) They choose
to do so. And when banks do mark debt, it tends to affect only small
portions of their total liabilities. In the second quarter, Bank of America
marked to market $60.7 billion out of $427 billion in long-term debt. That
was equal to only about 3% of the bank's total liabilities, which totaled
$2.04 trillion.
Plus, banks that mark portions of their debt often
do so because they issue so-called structured notes. These notes are bonds
with a twist—the ultimate payout to the holder typically depends on changes
in some other instrument such as the S&P 500 index or a basket of
commodities.
Big banks like these instruments because they
generally result in a cheaper cost of funding. By embedding a derivative in
the instrument, they can also generates fees and may lead to more trading
business. There was a catch, though. For accounting purposes, banks couldn't
hedge that embedded derivative.
So in the mid-2000s, Wall Street pushed for an
accounting-rule change that allowed them to use market prices for almost
anything on their balance sheet. This made it easier to avoid accounting
mismatches. But it also meant Wall Street could mark these structured notes
to market prices, allowing them to hedge the derivative for accounting
purposes.
At the time, banks weren't worried about big
changes in the value of their own debt coming into play. Bonds were pretty
stable, and the credit-default-swap market was nascent. The financial crisis
changed that. As banks teetered, their bonds and default swaps moved
sharply. This led to the kind of outsize gains and losses now whipsawing
bank results.
Continued in article
Financial Reporting for Financial Institutions is an Exercise in Distortion
and Deception
"Distortions In Baffling Financial Statements," by Floyd Norris, The
New York Times, November 10, 2011 ---
http://www.nytimes.com/2011/11/11/business/accounting-for-financial-institutions-is-a-mess.html?_r=1
Frank Partnoy and Lynn Turner contend that Wall Street bank
accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
Bob Jensen's threads on fair value accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Bob Jensen's threads on financial statement analysis ---
http://www.trinity.edu/rjensen/roi.htm
"Citigroup Finds Obeying the Law Is Too Darn Hard: Jonathan Weil," by
Jonothan Weil, Bloomberg News, November 2 , 2011 ---
http://www.bloomberg.com/news/2011-11-02/citigroup-finds-obeying-the-law-is-too-darn-hard-jonathan-weil.html
Thank you David Albrecht for the heads up.
Five times since 2003 the Securities and Exchange
Commission has accused Citigroup Inc. (C)’s main broker-dealer subsidiary of
securities fraud. On each occasion the company’s SEC settlements have
followed a familiar pattern.
Citigroup neither admitted nor denied the SEC’s
claims. And the company consented to the entry of either a court injunction
or an SEC order barring it from committing the same types of violations
again. Those “obey-the-law” directives haven’t meant much. The SEC keeps
accusing Citigroup of breaking the same laws over and over, without ever
attempting to enforce the prior orders. The SEC’s most recent complaint
against Citigroup, filed last month, is no different.
Enough is enough. Hopefully Jed Rakoff will soon
agree.
Rakoff, the U.S. district judge in New York who was
assigned the newest Citigroup case, is saber-rattling again, threatening to
derail the SEC’s latest wrist-slap. The big question is whether he has the
guts to go through with it. Twice since 2009, Rakoff has put the SEC through
the wringer over cozy corporate settlements, only to give in to the agency
later.
That the SEC went easy on Citigroup again is
obvious. The commission last month accused Citigroup of marketing a $1
billion collateralized debt obligation to investors in 2007 without
disclosing that its own traders picked many of the assets for the deal and
bet against them. The SEC’s complaint said Citigroup realized “at least $160
million” in profits on the CDO, which was linked to subprime mortgages. For
this, Citigroup agreed to pay $285 million, including a $95 million fine --
a pittance compared with its $3.8 billion of earnings last quarter. Looking
Deliberate
On top of that, the agency accused Citigroup of
acting only negligently, though the facts in the SEC’s complaint suggested
deliberate misconduct. The SEC named just one individual as a defendant, a
low-level banker who clearly didn’t act alone. Plus, the SEC’s case covered
only one CDO, even though Citigroup sold many others like it.
Here’s what makes the SEC’s conduct doubly
outrageous: The commission already had two cease-and-desist orders in place
against the same Citigroup unit, barring future violations of the same
section of the securities laws that the company now stands accused of
breaking again. One of those orders came in a 2005 settlement, the other in
a 2006 case. The SEC’s complaint last month didn’t mention either order, as
if the entire agency suffered from amnesia.
The SEC’s latest allegations also could have
triggered a violation of a court injunction that Citigroup agreed to in
2003, as part of a $400 million settlement over allegedly fraudulent
analyst-research reports. Injunctions are more serious than SEC orders,
because violations can lead to contempt-of-court charges.
The SEC neatly avoided that outcome simply by
accusing Citigroup of violating a different fraud statute. Not that the SEC
ever took the prior injunction seriously. In December 2008, the SEC for the
second time accused Citigroup of breaking the same section of the law
covered by the 2003 injunction, over its sales of so-called auction-rate
securities. Instead of trying to enforce the existing court order, the SEC
got yet another one barring the same kinds of fraud violations in the
future.
It gets worse: Each time the SEC settled those
earlier fraud cases, Citigroup asked the agency for waivers that would let
it go about its business as usual. (This is standard procedure for big
securities firms.) The SEC granted those requests, saying it did so based on
the assumption that Citigroup would comply with the law as ordered. Then,
when the SEC kept accusing Citigroup of breaking the same laws again, the
agency granted more waivers, never revoking any of the old ones. Legal
Standard
Rakoff seems aware of the problem, judging by the
questions he sent the SEC and Citigroup last week. Noting that the SEC is
seeking a new injunction against future violations by Citigroup, he asked:
“What does the SEC do to maintain compliance?” Additionally, he asked: “How
many contempt proceedings against large financial entities has the SEC
brought in the past decade as a result of violations of prior consent
judgments?” We’ll see if the SEC finds any. A hearing is set for Nov. 9.
The legal standard Rakoff must apply is whether the
proposed judgment is “fair, reasonable, adequate and in the public
interest.” Among Rakoff’s other questions: “Why should the court impose a
judgment in a case in which the SEC alleges a serious securities fraud but
the defendant neither admits nor denies wrongdoing?” And this: “How can a
securities fraud of this nature and magnitude be the result simply of
negligence?”
A Citigroup spokeswoman, Shannon Bell, said, “Citi
has entered into various settlements with the SEC over the years, and there
is no basis for any assertion that Citi has violated the terms of any of
those settlements.” I guess it depends on the meaning of the words
“settlement” and “violated.”
Rakoff gained fame in 2009 when he rejected an SEC
proposal to fine Bank of America Corp. (BAC) $33 million for disclosure
violations related to its $29.1 billion purchase of Merrill Lynch & Co.
Rakoff said the settlement punished Bank of America shareholders for the
actions of its executives, none of whom were named as defendants.
Months later, though, Rakoff approved a $150
million fine for the same infractions, on the condition that the money would
be redistributed to Bank of America stockholders who supposedly were harmed.
The stipulation was classic window dressing. Even so, Rakoff became
something of a folk hero, simply for daring to question an SEC settlement.
Most other judges are rubber stamps.
Continued in article
Bob Jensen's threads on Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
“As I look at
the deficiencies cited in the letter, taken as a whole, it appears that
Citigroup had a material weakness with respect to valuing these financial
instruments,” said Ed Ketz, an accounting professor at Pennsylvania State
University, who reviewed the OCC’s letter to Pandit at my request. “It just
is overwhelming by the time you get to the end of it."
"How Did Citigroup’s Internal Controls
Cut the Mustard with KPMG?" by Caleb Newquist, Going Concern,
February 24, 2011 ---
http://goingconcern.com/2011/02/how-did-citigroups-internal-controls-cut-the-mustard-with-kpmg/#more-25882
Jonathan
Weil writes in his column today about Citigroup and their “acceptable
group of auditors,” (aka KPMG)
and he’s having trouble connecting the dots on a few things.
Specifically, how a love letter (it was sent on February 14, 2008, after
all)
sent by the Office of the Comptroller of the Currency
to Citigroup CEO Vikram Pandit:
The
gist of the
regulator’s findings: Citigroup’s
internal controls were a mess. So were its valuation methods for
subprime mortgage bonds, which had spawned record losses at the
bank. Among other things, “weaknesses were noted with model
documentation, validation and control group oversight,” the letter
said. The main valuation model Citigroup was using “is not in a
controlled environment.” In other words, the model wasn’t reliable.
Okay, so
the bank’s internal controls weren’t worth the paper they were printed
on. Ordinarily, one could reasonably expect management and perhaps
their auditors to be aware of such a fact and that they were handling
the situation accordingly. We said, “ordinarily”:
Eight
days later, on Feb. 22, Citigroup filed its
annual report to shareholders, in
which it said “management believes that, as of Dec. 31, 2007, the
company’s
internal control over financial
reporting is effective.” Pandit
certified
the report personally, including the
part about Citigroup’s internal controls. So did Citigroup’s chief
financial officer at the time,
Gary Crittenden.
The
annual report also included a Feb. 22 letter from KPMG LLP,
Citigroup’s outside auditor,
vouching
for the effectiveness of the company’s
financial-reporting controls. Nowhere did Citigroup or KPMG mention
any of the problems cited by the OCC. KPMG, which earned $88.1
million in fees from Citigroup for 2007, should have been aware of
them, too. The lead partner on KPMG’s Citigroup audit, William
O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.
Huh. There
has to be an explanation, right? It’s just one of the largest banks
on Earth audited by one of the largest audit firm on Earth.
You’d think these guys would be more than willing to stand by their
work. Funny thing – no one felt compelled to return JW’s calls. So, he
had no choice to piece it together himself:
[S]omehow
KPMG and Citigroup’s management decided they didn’t need to mention
any of those weaknesses or deficiencies. Maybe in their minds it was
all just a difference of opinion. Whatever their rationale, nine
months later Citigroup had taken a $45 billion taxpayer bailout,
[Ed. note: OH, right. That.] still sporting a balance sheet
that made it seem healthy.
Actually,
just kidding, he ran it by an expert:
“As I
look at the deficiencies cited in the letter, taken as a whole, it
appears that Citigroup had a material weakness with respect to
valuing these financial instruments,” said Ed Ketz, an accounting
professor at Pennsylvania State University, who reviewed the OCC’s
letter to Pandit at my request. “It just is overwhelming by the time
you get to the end of it."
"What Vikram Pandit Knew, and When
He Knew It: Jonathan Weil," by Jonathon Weil, Bloomberg News,
February 23, 2011 ---
http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html
Yet somehow
KPMG and Citigroup’s management decided they didn’t need to mention any
of those weaknesses or deficiencies. Maybe in their minds it was all
just a difference of opinion. Whatever their rationale, nine months
later Citigroup had taken a $45 billion taxpayer bailout, still sporting
a balance sheet that made it seem healthy.
“As I look
at the deficiencies cited in the letter, taken as a whole, it appears
that Citigroup had a material weakness with respect to valuing these
financial instruments,” said Ed Ketz, an accounting professor at
Pennsylvania State University, who reviewed the OCC’s letter to Pandit
at my request. “It just is overwhelming by the time you get to the end
of it.”
One company
that did get a cautionary note from its auditor that same quarter was
American International Group Inc. In February 2008,
PricewaterhouseCoopers LLP warned of a material weakness related to
AIG’s valuations for credit-default swaps. So at least investors were
told AIG’s numbers might be off. That turned out to be a gross
understatement.
At
Citigroup, there was no such warning. The public deserves to know why.
Continued in article
Bob Jensen's threads on the good things and
not-so-good things done by KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Barclays Bank Criticizes 'Fair Value'
Accounting," SmartPros, November 14, 2011 ---
http://accounting.smartpros.com/x73021.xml
LONDON - The finance
director of Barclays Bank has called for the abolition of an accounting
rule that he believes distorts the profitability of banks.
In a letter published
Monday in the Financial Times, Chris Lucas criticized the "fair value
accounting of own debt" which boosted the third-quarter results of
several major banks, including Barclays. The gain is based on the
deteriorating market value of debt, a price at which a bank could
theoretically buy back the debt.
Lucas wrote that this
accounting rule "misrepresents actual business profitability," and he
urged the European Commission and other regulators to move quickly to
adopt a revised rule proposed by the International Accounting Standards
Board.
Bob Jensen's threads on fair value
accounting are at
http://www.trinity.edu/rjensen/theory02.htm#FairValue
Don't Blame Fair Value Accounting
Standards (except in terms of executive bonus payments)
This includes a bull crap case based on an article by
the former head of the FDIC
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue
"Could Apprenticeships Replace College
Degrees?" by Liz Sawyer, Good Education in Partnership with The
University of Phoenix, November 16, 2011 ---
http://www.good.is/post/could-apprenticeships-replace-the-college-degree/
Thank you Ramesh Fernando for the heads up
Apprenticeship
With college costs skyrocketing and the number of jobs for new grads on
the decline, it’s no wonder that students are questioning whether a
degree is worth the investment. But given that the jobs of the future
are projected to require some form of post-secondary education, a key
question is how to provide academic knowledge and industry-specific
training that will prepare students for the future. The answer might
come from a throwback to the Middle Ages: apprenticeships.
Traditionally, we think
of interning as the way for students to get on-the-job experience. But
internships vary in quality and often aren’t paid, which means that
students from low-income backgrounds are unable to take advantage of the
opportunity. Apprenticeships offer a new model, combining paid
on-the-job training with college or trade school classes.
The demand for
apprenticeships is particularly acute in the United Kingdom, where a
recent BBC survey of high schoolers revealed that two-thirds say they'd
forgo attending college in favor of entering an apprenticeship.
Businesses there also support the apprenticeship revival. Adrian Thomas,
head of resourcing for Network Rail, a company that maintains the U.K.’s
rail infrastructure told The Independent that "the investment that we
make in our apprentices is driven by needing people with the right
skills coming in to support our maintenance teams." Thomas says
organizing an apprenticeship program makes "both economic and safety
sense," because without the trainees, his company would be in the
position of having to look outside the country for employees, or retrain
workers from other industries.
Here in the United
States, the Department of Labor is trying to expand apprenticeship
models in high-demand fields like health care, green jobs,
transportation, and information technology. One obstacle to the success
of such programs is the need for students to commit to a field at a
young age. It’s tough for a teenager, especially one from a low-income
urban neighborhood, to sign up for a health care track if she doesn’t
know whether the sight of blood will make her sick, or a computer
apprenticeship if she’s never had any exposure to technology. And
there's no easy way for students to figure out which employers are
accepting apprentices or get in contact with them.
That’s where tweaking
the apprenticeship model to better align schools and employers could
help. For example, a place like "P-Tech", a new high school in New York
City that's the result of a partnership between IBM and the City
University of New York, could prove to be a viable apprenticeship model.
P-Tech students have the option of enrolling for six years of study—by
graduation, they have hands-on experience, an associate’s degree in
computer science, and a possible job offer from IBM.
Continued in article
Jensen Comment
This is not a completely new idea, although in most cases at the
undergraduate level it's typically a combination of semesters on campus and
apprenticeship/internship semesters on the job. Probably the best known (and
now defunct) internship/apprenticeship degree program was that of Antioch
College where students spent a term on campus and a term or more in
apprenticeship during each year college ---
http://en.wikipedia.org/wiki/Antioch_College
A new Antioch College has been conceived with mostly new faculty and must
seek new accreditations. It's not really a revival of the historic
accredited Antioch College that ceased operations in bankruptcy.
There are a lot of speculations as to why
Antioch College eventually failed, one being that it became a liberal hotbed
of faculty that hated businesses supplying many of the apprenticeships.
However, what led to its fall is that Antioch was failing to attract enough
students to break even with expenses. The new Antioch College refuses to
take on most of the faculty losing jobs in the former Antioch College.
There are, I think, various schools,
sometimes African American colleges, that have some programs that are quite
similar to Antioch College. Florida A&M University, for example, years ago
made extensive use of corporate internships in undergraduate accounting and
business programs where students spent a term on campus and them an
internship term in a major corporation such as IBM and GE every other
semester. FAMU today is emerging from some deep financial fraud scandals and
has such an inadequate Website that it's hard to find updated information on
its current apprenticeship/internship model.
Schools like Antioch and FAMU try to attract
students who cannot afford traditional degree programs without having
substantial on-the-job financial support. The key difference between
being a part-time student an most any college and an apprenticed student at
Antioch and FAMU is that the job training is for college credit and must
have qualified academic content, including the writing of papers about the
internship experiences.
In accounting, however, there can be serious
drawbacks. Must full-time campus accounting programs are geared toward
passage of the CPA examination. It becomes much more difficult for students
getting half their college credits in internships to pass the CPA
examination. The CPA examination is an academic examination and not an
examination on practical experience.
I would contend that the early PhD programs
in Europe, particularly in Germany, were essentially apprenticeship programs
more than education and research programs as we know them today. Instead of
having today's core courses and major courses, a doctoral student at
Humboldt University was largely a slave doing the grunt work, including
teaching, for Herr Professor Takingadvantageberg. The Herr Professor would
assign research projects and even request that books be written that, when
published, sometimes did not even give credit to the doctoral student
authors of the books. A doctoral student's work was considered the work and
property of his (I don't think there were many women doctoral students in
those historic days) Herr Professor until that professor decided to confer a
doctorate upon his slave that was required to write a final dissertation
contributing to new knowledge (research). The route to becoming one of those
Herr Professors was, and still is, a very lengthy process that can take
upwards of 18 years after obtaining an undergraduate degree.
One of the highlights of my life was an
invitation to speak at a conference in Humboldt University in formerly East
Berlin. I think Humboldt University is credited with being the first
"university" in the world to depart from Medieval Europe ---
http://en.wikipedia.org/wiki/Humboldt_University_of_Berlin
You can read the following at
http://en.wikipedia.org/wiki/PhD
In the
universities of Medieval Europe, study was
organized in four faculties: the basic faculty of arts, and the three
higher faculties of theology, (canonical and civil) law and medicine.
All of these faculties awarded intermediate degrees (bachelor of arts,
of theology, of laws, of medicine) and final degrees. Initially the
titles of master and doctor were used interchangeably for the final
degrees, but by the late Middle Ages the terms master of arts and doctor
of theology/divinity, doctor of laws and doctor of medicine had largely
become standard. The doctorates in the higher faculties were quite
different from the current Ph.D. degree in that they were awarded for
advanced scholarship, not original research. No dissertation or original
work was required, only lengthy residency requirements and examinations
This situation
changed in the early nineteenth century through the educational reforms
in Germany, most strongly embodied in the model of the Humboldt
University. The arts faculty, which in Germany was labeled the faculty
of philosophy, started demanding contributions to research, attested by
a dissertation, for the award of their final degree, which was labeled
Doctor of Philosophy (abbreviated as Ph.D.). Whereas in the Middle Ages
the arts faculty had a set curriculum, based upon the
trivium and the
quadrivium, by the nineteenth century it had
come to house all the courses of study in subjects now commonly (sic)
referred to as sciences and humanities.
These reforms
proved extremely successful, and fairly quickly the German universities
started attracting foreign students, notably from the United States. The
American students would go to Germany to obtain a Ph.D. after having
studied for a bachelor's degrees at an American college. So influential
was this practice that it was imported to the United States, where in
1861
Yale University started granting the Ph.D.
degree to younger students who, after having obtained the bachelor's
degree, had completed a prescribed course of graduate study and
successfully defended a thesis/dissertation containing original research
in science or in the humanities.. The current triple structure of
bachelor-master-doctor degrees in one discipline was therefore created
on American soil by fusing two different European traditions - the
medieval B.A. and M.A. degrees, awarded after a course of study and
inherited from the British Universities, and the research based Ph.D.
taken over from the early nineteenth century German educational reforms.
Even though in Germany the name of the doctorate was adapted accordingly
after the philosophy faculty started being split up - e.g. Dr. rer. nat.
for doctorates in the faculty of natural sciences - in the Anglo-Saxon
world the name of Doctor of Philosophy was retained for research
doctorates in all disciplines.
Continued in article
Jensen Comment
One of the major problems with apprenticeship/internship programs lies in
maintaining consistent academic standards across all internships. Some are
really academic learning experiences. I would imagine most computer science
apprenticeships might be wonderful where students are required to become
sophisticated programmers and systems analysts. Other internships might be
more like part-time clerical jobs with deficient learning experiences.
Maintaining academic standards across
multiple companies and non-profit agencies is really, really difficult and
sensitive. Accounting internship programs in place at most universities
these days face problems of varying academic quality of those programs. But
poor quality is not such a serious matter since the typical accounting
internship these days is only for one semester or only a half semester (in
the Texas CPA firm internship model). These internships are vastly different
from the Antioch College alternating semester model. There's a huge
difference between graduating with eight internship credits versus 60
internship credits.
Teaching Case of Bank Asset Valuation
From The Wall Street Journal Accounting Weekly Review on November 18,
2011
Bank Quandary: Valuing the Assets
by: Liz Rappaport
Nov 10, 2011
Click here to view the full article on WSJ.com
TOPICS: Banking, Fair Value Accounting, Fair-Value
Accounting Rules, Historical Cost Accounting
SUMMARY: Goldman Sachs Group, Inc., and Morgan Stanley
became bank holding companies in September 2008 during the financial
crisis in order to have access to liquidity provided by the Federal
Reserve System. Now they are considering whether to reduce
mark-to-market accounting and rely more heavily on traditional
historical cost methods in their financial reporting. Goldman Sachs and
Morgan Stanley executives are reported to hold widely varied opinions on
the proposed change. Previously, during Congressional testimony on the
causes of the financial crisis, Goldman Sachs Chairman Lloyd Blankfein
lauded mark-to-market accounting which he said "...is better for
investors...because they are 'better served with information that more
closely reflects the judgment of the market.'" The last part of the
article describes the impact of mark-to-market accounting on loans
offered by Goldman and Morgan Stanley. "Morgan Stanley...has been making
more long-term loans in conjunction with Japanese bank Mitsubishi UFJ
Financial Group, Inc....Those loans are value using the historical-cost
method...because the firms intend to hold most of these loans until they
are repaid...." The related article is offered as another perspective
questioning the use of fair value methods for regulating banks through
financial reporting that was given by Warren Buffet during the financial
crisis.
CLASSROOM APPLICATION: The article is useful for
discussing measurement methods in accounting in general, banks' use of
fair value and historical-cost methods for investments, and comparison
to historical cost methods for loans.
QUESTIONS:
1. (Advanced) Where in U.S. authoritative accounting literature
can you find guidance on using the measurement methods discussed in this
article? Cite all major sources for this guidance.
2. (Introductory) "Banks...typically value more than half their
assets using the historical-cost method...." Why do banks have assets
measured with a mixture of valuation techniques? What methods other than
historical-cost are used?
3. (Advanced) Name two types of bank assets, one measured at
historical-cost and the other valued using an alternative measurement
method.
4. (Introductory) Goldman Sachs Chairman Lloyd Blankfein is
quoted in the article from Congressional testimony as arguing for the
benefits of fair value reporting. Consider also the related article
about Warren Buffet's perspective on using that method for regulating
banks. How might the issues in these statements form the basis for the
banks considering this switch of accounting methods?
5. (Introductory) How might the return to historical-cost basis
reporting help Goldman Sachs and Morgan Stanley meet the objective of
financial reporting in the converged conceptual framework in U.S. GAAP
and IFRS?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Buffett's Unmentionable Bank Solution
by Holman W. Jenkins Jr.
Mar 11, 2009
Page A13
"Bank Quandary: Valuing the Assets,"
by: Liz Rappaport, The Wall Street Journal, November 10, 2011 ---
http://online.wsj.com/article/SB10001424052970203537304577028422145660162.html?mod=djem_jiewr_AC_domainid
Goldman Sachs Group Inc.
and Morgan Stanley, which became bank-holding companies to help them
survive the financial crisis, are considering an accounting change that
would make them look even more like a traditional bank.
Goldman Sachs Group Inc.
and Morgan Stanley, which became bank-holding companies to help them
survive the financial crisis, are considering an accounting change that
would make them look even more like a traditional bank.
If executives go through
with the change, the two companies would increase their use of so-called
historical-cost accounting, where assets generally are held at their
original value or purchase price, these people said. Experience WSJ
professional Editors' Deep Dive: Goldman Sachs Watch
DOW JONES NEWS SERVICE
Lehman Subpoenas Goldman Funds In Bankruptcy Probe The Guardian Uncut
Aims To Recoup Goldmans' Pounds 10m Tax Dow Jones International News
What Does Goldman See In ICBC?
Access thousands of
business sources not available on the free web. Learn More
A decision by Goldman
and Morgan Stanley officials isn't imminent, and there are wide
differences of opinion among executives, people familiar with the matter
said. Regulatory approval isn't required for such a move.
Still, the fact that
both companies are considering a tiptoe away from mark-to-market
accounting shows how much has changed since the financial crisis. Banks
such as J.P. Morgan Chase & Co. and Wells Fargo & Co. typically value
more than half their assets using the historical-cost method, leaving
them far less vulnerable to swings in asset values. In comparison,
Goldman values about 97% of its assets using mark-to-market accounting.
Goldman Chairman and
Chief Executive Lloyd C. Blankfein has been a staunch defender of
mark-to-market accounting, contending that wider use of the method might
have stemmed the worst of the crisis by forcing financial firms to
reckon with declining values of mortgages, loans and other assets on
their balance sheets.
"If more institutions
had been required to recognize their exposures promptly and value them
appropriately, they would have been likely to curtail the worst risks,"
Mr. Blankfein told the Financial Crisis Inquiry Commission in testimony
last year. Mark-to-market accounting is better for investors, he said,
because they are "better served with information that more closely
reflects the judgment of the market."
During the financial
crisis, many banks avoided taking losses on loans and other assets until
they were forced to sell them. By then, though, some assets were nearly
worthless.
Goldman and Morgan
Stanley executives have grown increasingly frustrated that their
dependence on mark-to-market accounting puts them at a competitive
disadvantage. The problem is even more acute now that the securities
firms' once-highflying trading businesses are being dragged down to
earth by volatile financial markets and tighter regulations.
Goldman and Morgan
Stanley became bank-holding companies in 2008, giving them access to
emergency funds from the Federal Reserve's discount window. In return,
banking regulators now walk the halls of their offices and burrow into
their books. Goldman and Morgan Stanley also must obtain approval for
stock buybacks and dividends to shareholders.
Since the financial
crisis, Goldman and Morgan Stanley have put more emphasis on
slower-growth but steadier businesses such as wealth management and
investment banking.
Morgan Stanley has
openly embraced its banking operations, making more loans and bulking up
on deposits, though executives have little or no interest in
brick-and-mortar branches or most consumer-banking businesses.
Goldman and Morgan
Stanley had the option before the crisis to move away from
mark-to-market accounting for certain loans but didn't, partly because
other revenues offset the impact of any markdowns.
Continued in article
What Vikram Pandit Knew, and When
He Knew It: Jonathan Weil," by Jonathon Weil, Bloomberg News,
February 23, 2011 ---
http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html
Jensen Comment
One of the chronic problems of bank asset valuation is the long-time
tendency to underestimate loan loss reserves and bad debt expenses. This is
a problem excaderbated by CPA auditors who tend to go along with these
underestimation of loss accruals
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
"Make
Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
Bob Jensen's threads on valuation of
assets and liabilities ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Bob Jensen's threads on valuation of
entire companies ---
http://www.trinity.edu/rjensen/roi.htm
|
From Ernst & Young |
![AccountingLink Alerts]()
|
From Ernst & Young on November 10, 2011
Technical Line:
AICPA health care audit and accounting guide undergoes major surgery
The American Institute of Certified Public Accountants (AICPA) issued a
comprehensive revision of its Audit and Accounting Guide, Health Care
Entities, for the first time in 15 years. The new Guide, issued last
month, contains incremental health care accounting guidance from the
Codification, addresses health care industry implementation practices and
provides illustrative interpretations of auditing considerations. It also
includes recommendations from the Financial Reporting Executive Committee (FinREC)
on accounting, reporting and disclosure treatment of some transactions or
events that are not included in the Codification and FinREC's preferences
for certain practices when authoritative guidance is subject to
interpretation. Our
Technical Line publication
highlights the major changes and
recommendations.
That link is ---
Click Here
http://www.ey.com/Publication/vwLUAssets/TechnicalLine_BB2208_AICPAAAG_7November2011/%24FILE/TechnicalLine_BB2208_AICPAAAG_7November2011.pd
That some bankers have ended up in
prison is not a matter of scandal, but what is outrageous is the fact that all
the others are free.
Honoré de Balzac
Bankers bet with their bank's capital, not their own. If the bet goes right,
they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by
Avital Louria Hahn, "Missing: How Poor Risk-Management Techniques Contributed
to the Subprime Mess," CFO Magazine, March 2008, Page 53 ---
http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to
bail out these crooks with taxpayer funds makes it all the worse.
Wall Street
Remains Congress to the Core
The boom in corporate mergers
is creating concern that illicit trading ahead of deal announcements is becoming
a systemic problem. It is against the law to trade on inside information about
an imminent merger, of course. But an analysis of the nation’s biggest mergers
over the last 12 months indicates that the securities of 41 percent of the
companies receiving buyout bids exhibited abnormal and suspicious trading in the
days and weeks before those deals became public. For those who bought shares
during these periods of unusual trading, quick gains of as much as 40 percent
were possible.
Gretchen Morgenson, "Whispers of Mergers Set Off Suspicious Trading," The New
York Times, August 27, 2006 ---
Click Here
"Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank
Partnoy, New York Review of Books, November 10, 2011 ---
http://www.nybooks.com/articles/archives/2011/nov/10/should-some-bankers-be-prosecuted/
Thank you Robert Walker for the heads up!
More than three years have passed since the
old-line investment bank Lehman Brothers stunned the financial markets by
filing for bankruptcy. Several federal government programs have since tried
to rescue the financial system: the $700 billion Troubled Asset Relief
Program, the Federal Reserve’s aggressive expansion of credit, and President
Obama’s additional $800 billion stimulus in 2009. But it is now apparent
that these programs were not sufficient to create the conditions for a full
economic recovery. Today, the unemployment rate remains above 9 percent, and
the annual rate of economic growth has slipped to roughly 1 percent during
the last six months. New crises afflict world markets while the American
economy may again slide into recession after only a tepid recovery from the
worst recession since the Great Depression.
n our article in the last issue,1 we showed that,
contrary to the claims of some analysts, the federally regulated mortgage
agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis.
Rather, private financial firms on Wall Street and around the country
unambiguously and overwhelmingly created the conditions that led to
catastrophe. The risk of losses from the loans and mortgages these firms
routinely bought and sold, particularly the subprime mortgages sold to
low-income borrowers with poor credit, was significantly greater than
regulators realized and was often hidden from investors. Wall Street bankers
made personal fortunes all the while, in substantial part based on profits
from selling the same subprime mortgages in repackaged securities to
investors throughout the world.
Yet thus far, federal agencies have launched few
serious lawsuits against the major financial firms that participated in the
collapse, and not a single criminal charge has been filed against anyone at
a major bank. The federal government has been far more active in rescuing
bankers than prosecuting them.
In September 2011, the Securities and Exchange
Commission asserted that overall it had charged seventy-three persons and
entities with misconduct that led to or arose from the financial crisis,
including misleading investors and concealing risks. But even the SEC’s
highest- profile cases have let the defendants off lightly, and did not lead
to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide
Financial, the nation’s largest subprime mortgage underwriter, settled SEC
charges that he misled mortgage buyers by paying a $22.5 million penalty and
giving up $45 million of his gains. But Mozilo had made $129 million the
year before the crisis began, and nearly another $300 million in the years
before that. He did not have to admit to any guilt.
The biggest SEC settlement thus far, alleging that
Goldman Sachs misled investors about a complex mortgage product—telling
investors to buy what had been conceived by some as a losing proposition—was
for $550 million, a record of which the SEC boasted. But Goldman Sachs
earned nearly $8.5 billion in 2010, the year of the settlement. No
high-level executives at Goldman were sued or fined, and only one junior
banker at Goldman was charged with fraud, in a civil case. A similar suit
against JPMorgan resulted in a $153.6 million fine, but no criminal charges.
Although both the SEC and the Financial Crisis
Inquiry Commission, which investigated the financial crisis, have referred
their own investigations to the Department of Justice, federal prosecutors
have yet to bring a single case based on the private decisions that were at
the core of the financial crisis. In fact, the Justice Department recently
dropped the one broad criminal investigation it was undertaking against the
executives who ran Washington Mutual, one of the nation’s largest and most
aggressive mortgage originators. After hundreds of interviews, the US
attorney concluded that the evidence “does not meet the exacting standards
for criminal charges.” These standards require that evidence of guilt is
“beyond a reasonable doubt.”
This August, at last, a federal regulator launched
sweeping lawsuits alleging fraud by major participants in the mortgage
crisis. The Federal Housing Finance Agency sued seventeen institutions,
including major Wall Street and European banks, over nearly $200 billion of
allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie
Mac, which it oversees. The banks will argue that Fannie and Freddie were
sophisticated investors who could hardly be fooled, and it is unclear at
this early stage how successful these suits will be.
Meanwhile, several state attorneys general are
demanding a settlement for abuses by the businesses that administer
mortgages and collect and distribute mortgage payments. Negotiations are
under way for what may turn out to be moderate settlements, which would
enable the defendants to avoid admitting guilt. But others, particularly
Eric Schneiderman, the New York State attorney general, are more
aggressively pursuing cases against Wall Street, including Goldman Sachs and
Morgan Stanley, and they may yet bring criminal charges.
Successful prosecutions of individuals as well as
their firms would surely have a deterrent effect on Wall Street’s deceptive
activities; they often carry jail terms as well as financial penalties.
Perhaps as important, the failure to bring strong criminal cases also makes
it difficult for most Americans to understand how these crises occurred. Are
they simply to conclude that Wall Street made well- meaning if very big
errors of judgment, as bankers claim, that were rarely if ever illegal or
even knowingly deceptive?
What is stopping prosecution? Apparently not public
opinion. A Pew Research Opinion survey back in 2010 found that three
quarters of Americans said that government policies helped banks and
financial institutions while two thirds said the middle class and poor
received little help. In mid-2011, half of those surveyed by Pew said that
Wall Street hurts the economy more than it helps it.
Many argue that the reluctance of prosecutors
derives from the power and importance of bankers, who remain significant
political contributors and have built substantial lobbying operations. Only
5 percent of congressional bills designed to tighten financial regulations
between 2000 and 2006 passed, while 16 percent of those that loosened such
regulations were approved, according to a study by the International
Monetary Fund.2 The IMF economists found that a major reason was lobbying
efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby
Congress during the passage of the Dodd-Frank Act. The financial
reregulation legislation was weakened in such areas as derivatives trading
and shareholder rights, and is being further watered down.
Others claim federal officials fear that punishing
the banks too much will undermine the fragile economic recovery. As one
former Fannie official, now a private financial consultant, recently told
The New York Times, “I am afraid that we risk pushing these guys off of a
cliff and we’re going to have to bail out the banks again.”
The responsibility for reluctance, however, also
lies with the prosecutors and the law itself. A central problem is that
proving financial fraud is much more difficult than proving most other
crimes, and prosecutors are often unwilling to try it. Congress could fix
this by amending federal fraud statutes to require, for example, that
prosecutors merely prove that bankers should have known rather than actually
did know they were deceiving their clients.
But even if Congress does not, it is not too late
for bold federal prosecutors to try to bring a few successful cases. A
handful of wins could create new precedents and common law that would set a
higher and clearer standard for Wall Street, encourage more ethical
practices, deter fraud—and arguably prevent future crises.
Continued in article
"How Wall Street Fleeced the World: The Searing New doc Inside Job
Indicts the Bankers and Their Washington Pals," by Mary Corliss and Richard
Corliss, Time Magazine, October 18, 2010 ---
http://www.time.com/time/magazine/article/0,9171,2024228,00.html
Like some malefactor being grilled by Mike Wallace
in his 60 Minutes prime, Glenn Hubbard, dean of Columbia Business School,
gets hot under the third-degree light of Charles Ferguson's questioning in
Inside Job. Hubbard, who helped design George W. Bush's tax cuts on
investment gains and stock dividends, finally snaps, "You have three more
minutes. Give it your best shot." But he has already shot himself in the
foot.
Frederic Mishkin, a former Federal Reserve Board
governor and for now an economics professor at Columbia, begins stammering
when Ferguson quizzes him about when the Fed first became aware of the
danger of subprime loans. "I don't know the details... I'm not sure
exactly... We had a whole group of people looking at this." "Excuse me,"
Ferguson interrupts, "you can't be serious. If you would have looked, you
would have found things." (See the demise of Bernie Madoff.)
Ferguson—whose Oscar-nominated No End in Sight
analyzed the Bush Administration's slipshod planning of the Iraq
occupation—did look at the Fed, the Wall Street solons and the decisions
made by White House administrations over the past 30 years, and he found
plenty. Of the docufilms that have addressed the worldwide financial
collapse (Michael Moore's Capitalism: A Love Story, Leslie and Andrew
Cockburn's American Casino), this cogent, devastating synopsis is the
definitive indictment of the titans who swindled America and of their pals
in the federal government who enabled them.
With a Ph.D. in political science from MIT,
Ferguson is no knee-jerk anticapitalist. In the '90s, he and a partner
created a software company and sold it to Microsoft for $133 million. He is
at ease talking with his moneyed peers and brings a calm tone to the film
(narrated by Matt Damon). Yet you detect a growing anger as Ferguson digs
beneath the rubble, and his fury is infectious. If you're not enraged by the
end of this movie, you haven't been paying attention. (See "Protesting the
Bailout.")
The seeds of the collapse took decades to flower.
By 2008, the financial landscape had become so deregulated that homeowners
and small investors had few laws to help them. Inflating the banking bubble
was a group effort—by billionaire CEOs with their private jets, by agencies
like Moody's and Standard & Poor's that kept giving impeccable ratings to
lousy financial products, by a Congress that overturned consumer-protection
laws and by Wall Street's fans in academe, who can earn hundreds of
thousands of dollars by writing papers favorable to Big Business or sitting
on the boards of firms like Goldman Sachs.
Who's Screwing Whom? In the spasm of moral
recrimination that followed the collapse, some blamed the bright kids who
passed up careers in science or medicine to make millions on Wall Street and
charged millions more on their expense accounts for cocaine and prostitutes.
After the savings-and-loan scandals of the late-'80s, according to Inside
Job, thousands of executives went to jail. This time, with the economy
bulking up on the steroids of derivatives and credit-default swaps, the only
person who has done any time is Kristin Davis, the madam of a bordello
patronized by Wall Streeters. Davis appears in the film, as does disgraced
ex--New York governor Eliot Spitzer; both seem almost virtuous when compared
with the big-money men. (See "The Case Against Goldman Sachs.")
The larger message of both No End in Sight and
Inside Job is that American optimism, the engine for the nation's expansion,
can have tragic results. The conquest of Iraq? A slam dunk. Gambling
billions on risky mortgages? No worry—the housing market always goes up.
Ignoring darker, more prescient scenarios, the geniuses in charge
constructed faith-based policies that enriched their pals; they stumbled
toward a precipice, and the rest of us fell off.
The shell game continues. Inside Job also details
how, in Obama's White House, finance-industry veterans devised a "recovery"
that further enriched their cronies without doing much for the average Joe.
Want proof? Look at the financial industry's fat profits of the past year
and then at your bank account, your pension plan, your own bottom line.
Video: Watch Columbia's Business School Economist and Dean Hubbard rap his
wrath for Ben Bernanke
The video is a anti-Bernanke musical performance by the Dean of Columbia
Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks)
---
http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)
"Cheat
Sheet: What’s Happened to the Big Players in the Financial Crisis?" by
Braden Goyette, Publica, October 26, 2011 ---
http://www.propublica.org/article/cheat-sheet-whats-happened-to-the-big-players-in-the-financial-crisis
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!
The greatest swindle in the history of the world ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Bob Jensen's threads on how the banking system is rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
"Fraud Scandal Fuels Debate Over Practices of Social Psychology:
Even legitimate researchers cut corners, some admit," by Christopher Shea,
Chronicle of Higher Education, November 13, 2011 ---
http://chronicle.com/article/As-Dutch-Research-Scandal/129746/
Jensen Comment
This leads me to wonder why in its entire history, there has never been a
reported scandal or evidence of data massaging in accountics (accounting)
science. One possible explanation is that academic accounting researchers are
more careful and honest than academic social psychologists. Another explanation
is that accountics science researchers rely less on teams of student assistants
who might blow the whistle, which is how Professor Diederik A. Stapel got caught
in social psychology.
But there's also a third possible reason there have been no scandals in the
last 40 years of accountics research. That reason is that the leading accountics
research journal referees discourage validity testing of accountics research
findings ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Yet a fifth and more probable explanation is that there's just not enough
interest in most accountics science findings to inspire replications and active
debate/commentaries in either the academic journals or the practicing
profession's journals.
There also is the Steve Kachelmeir argument that there are indirect
replications taking place that do not meet scientific standards for replications
but nevertheless point to consistencies in some of the capital markets studies
(rarely the behavioral accounting studies). This does not answer the question of
why nearly all of the indirect replications rarely point to inconsistencies.
It follows that accountics science researchers are just more accurate and honest
than their social science colleagues.
Yeah Right!
Accountics scientists "never cut corners" except where fully disclosed in their
research reports.
We just know what's most important in legitimate science.
Why can't real scientists be more like us --- ever honest and ever true?
Billings for Services Never Rendered
"SEC Charges Morgan Stanley Investment Management for Improper Fee
Arrangement," SEC, November 14, 2011 ---
http://sec.gov/news/press/2011/2011-244.htm
Morgan Stanley settled the charges for $3.3 million fine
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"The 50 Most Influential Management Gurus," by Clayton Christensen,
Harvard Business Review Blog, November 2011 ---
http://hbr.org/web/slideshows/the-50-most-influential-management-gurus/1-christensen
Of course there's no Harvard bias whispering into this selection --- no it's
shouting!
Watch the video ---
http://www.thinkers50.com/
Bloomberg Business Week loves to rank business education programs ---
http://www.businessweek.com/business-schools/special-reports/best-parttime-business-schools-2011.html
-
With MBA students no longer assured of getting a better job at
graduation, part-time and executive programs are thriving
-
For the first time in 20 years, there's a new winner atop Bloomberg
Businessweek's rankings of the world's top EMBA programs
-
A look inside the five top part-time MBA programs in six geographical
regions
-
Tuition, enrollment, class size, and more at the 40 best executive
MBA programs
-
The top 30 U.S. programs from 2010, when Chicago, Harvard, and
Wharton dominated the list
-
Find out how top part-time MBA programs fare on post-degree salary
increases and more
-
Drill down into our data on top executive MBA programs to find out
which B-schools meet your needs
-
How do part-time MBA students rate teaching quality, classmates,
curriculum, and more? Use this tool to find out
-
Students rate top programs on how well (or poorly) they met
expectations, helped their careers, and more
-
Use this interactive table to sort 76 ranked programs on cost,
academic quality, post-MBA salary increase, and more
-
The complete ranking of 66 executive MBA programs, with details on
each program’s class profile and student evaluations of teaching
quality, curriculum, and support services
-
Track the ups and downs in the executive MBA rankings since Bloomberg
Businessweek began ranking the programs in 1991
-
IESE, Columbia, and ESADE all surged ahead on our list of the 20 top
non-degree executive education programs
-
Duke Corporate Education held on to the No. 1 spot , but there was a
reshuffling of the top 20 custom programs, with MIT falling to last
place
-
Our methodologies for ranking part-time MBA, executive MBA, and
executive education programs differ in detail but share a focus on the
end user
-
More than 1,000 in-depth statistical profiles on full-time,
part-time, executive, and distance MBA programs, non-degree executive
education programs, and undergraduate business programs
-
See how programs stack up against each other on dozens of data points
and search for those that meet your needs
-
In a recent online chat, <em>Bloomberg Businessweek</em> editors
Louis Lavelle and Geoff Gloeckler fielded questions from readers on
trends, methodology, and more
Jensen Comment
Media rankings of colleges, universities, and degree programs (like accounting)
are heavily influenced by both attributes selected as important for the
rankings, the weightings of those attributes, and the people themselves who do
the rankings. The above Bloomberg Business Week rankings are based
heavily upon opinions of alumni.
The US News rankings are based upon responses presidents, deans, or
other administrators on selected criteria. The US New Rankings probably
the rankings influenced based heavily upon research reputations of universities
and programs within universities. The non-media rankings of university programs
and faculty based upon academic studies of journal hits such as the BYU (David
Wood) studies are even more heavily based upon research publications.
The Wall Street Journal Rankings of business and accounting programs
are based upon opinions of recruiters.
The Economist rankings are based upon opinions of student applicants
based upon why they chose to apply to particular programs.
Various ranking outcomes and controversies are summarized
at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
Updated BYU Study (especially David
Wood): Universities Ranked According
to Accounting Research ---
Issues in Accounting
Education, November 2010, Volume 25,
Issue 4, pp. 613-xv
http://www.byuaccounting.net/rankings/univrank/rankings.php
The
rankings presented via the links . .
. are based on the research
paper Accounting Program Research
Rankings By Topic and Methodology,
forthcoming in Issues In Accounting
Education . These rankings are based
on classifications of peer reviewed
articles in 11 accounting journals
since 1990. To see the set of
rankings that are of interest to
you, click on the appropriate title.
Each
cell contains the ranking and the
(number of graduates) participating
in that ranking. The colors
correspond to a heat map (see legend
at bottom of table) showing the
research areas in which a program
excels. Move your mouse over the
cell to see the names of the
graduates that participated in that
ranking
Jensen
Comment
I'm impressed by the level of detail in
the above BYU study,
I repeat
my cautions about rankings that I
mentioned previously about the earlier
study. Researchers sometimes change
affiliations two, three, or even more
times over the course of their careers.
Joel Demski is now at Florida. Should
Florida get credit for research
published by Joel when he was a tenured
professor at Stanford and at Yale before
moving to Florida?
There is
also a lot of subjectivity in the choice
of research journals and methods. Even
though the last cell in the table is
entitled "Other Topic, Other Material,"
there seems to me to be a bias against
historical research and philosophical
research and a bias for accountics
research. This of course always stirs me
up ---
http://www.trinity.edu/rjensen/Theory01.htm#WhatWentWrong
In
future updates I would like to see more
on accounting history and applied
accounting research. For example, I
would like to see more coverage of the
Journal of Accountancy. An example
article that gets overlooked research on
why the lattice model for valuing
employee stock options has key
advantages over the Black-Scholes Model:
"How to
“Excel” at Options Valuation,"
by Charles P. Baril, Luis Betancourt,
and John W. Briggs, Journal of
Accountancy, December 2005 ---
http://www.aicpa.org/pubs/jofa/dec2005/baril.htm
The
Journal of Accountancy and many
other applied research/professional
journals are not included in this BYU
study. Hence professors who publish
research studies in those excluded
journals are not given credit for their
research, and their home universities
are not given credit for their research.
Having
said all this, the BYU study is the best
effort to date in terms of accounting
research rankings of international
universities, accounting researchers,
and doctoral student research.
574 Shields Against Validity Challenges in Plato's Cave
An Appeal for Replication and Other Commentaries/Dialogs in an Electronic
Journal Supplemental Commentaries and Replication Abstracts
http://www.trinity.edu/rjensen/TheoryTAR.htm
Various ranking outcomes and controversies are summarized
at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
Hoopla is the German translation for Oops!
"Germany Discovers Extra $78 Billion On Major Accounting Error,"
Reuters via Huffington Post, October 29. 2011 ---
http://www.huffingtonpost.com/2011/10/29/germany-accounting-error_n_1065158.html
Germany is 55.5 billion euros ($78.7 billion)
richer than it thought due to an accountancy error at the bad bank of
nationalized mortgage lender Hypo Real Estate (HRE), the finance ministry
said.
Europe's largest economy now expects its ratio of
debt to gross domestic product to be 81.1 percent for 2011, 2.6 percentage
points less than previously forecast, it said.
The HRE-linked bad bank FMS Wertmanagement FMSWA.UL
was set up after HRE was nationalized in 2009, so that HRE could transfer
the worst non-performing assets to an off-balance sheet bank guaranteed by
the German state.
"Apparently it was due to sums incorrectly entered
twice," said a ministry spokesman on Friday, adding the reason for the error
still needed to be clarified.
The government nonetheless welcomed the news which
pointed to a further reduction of Germany's debt mountain, which remains
above the European Union's Maastricht requirement for 60 percent of GDP.
However, the opposition Social Democrats (SPD)
expressed astonishment at the extent of the accountancy error, for which
they see the government as responsible.
"This is not a sum that the Swabian housewife hides
in a biscuit tin and forgets," said SPD parliamentary leader Thomas
Oppermann. "To overlook such a sum is completely irresponsible."
Swabians, from the south-west of Germany, are
renowned for their savings skills.
Of the total sum uncovered at FMS, 24.5 billion
euros is for 2010 and 31 billion euros is for 2011.
Continued in article
From the IFAC: Public Sector/Sovereign
Debt Crises Point to Accounting Weaknesses
http://www.ifac.org/issues-insights/public-sector/sovereign-debt
The financial
and sovereign debt crises have brought to light the need for
better financial reporting by governments worldwide, and the
need for improvements in the management of public sector
resources.
Many governments operate on a cash-basis and do not account for
many significant items, such as liabilities for public sector
pensions and financial instruments. Accrual accounting is a
fundamental tenet of strong accounting and reporting for public
companies, and so it should be for governments as well. IFAC
advocates the adoption of accrual accounting in the public
interest—which will result in a more comprehensive and accurate
view of financial position, and help ensure that governments and
other public sector entities are transparent and accountable.
A fundamental way to protect the public interest is to develop,
promote, and enforce internationally recognized standards as a
means of ensuring the credibility of information upon which
investors and other stakeholders depend.
The
International Public Sector Accounting Standards Board (IPSASB),
an independent standard-setting board supported by IFAC, has
developed and issued a suite of
31 accrual standards, and a cash-basis standard for
countries moving toward full accrual
accounting.
Bob Jensen's threads on the sad state of
governmental accounting and Accountability are at
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Human Resource Accounting for Financial Statements
The value of human resource employees in a business is currently not booked
and usually not even disclosed as an estimated amount in footnotes. In general a
"value" is booked into the ledger only when cash or explicit contractual
liabilities are transacted such as a bonus paid for a professional athlete or
other employee. James Martin provides an excellent bibliography on the academic
literature concerning human resource accounting ---
http://maaw.info/HumanResourceAccMain.htm
Bob Jensen's threads on human resource accounting are at
http://www.trinity.edu/rjensen/theory02.htm#TripleBottom
What turned into a sick joke was the KPMG Twist applied to valuing the
executives of Worldcom who later went to prison:
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.
Early experiments to book human resource values into the ledger usually were
abandoned after a brief experiment. Investors and analysts placed little, if any
faith, in human resource value estimates such as the R.G. Barry experiments
years ago.
There are many problems with assigning an estimated value to human resources.
Aside from being able to unattribute future cash flow streams to particular
employees, there's the enormous problem that employees are no longer slaves
that can be bought, sold, and traded without their permission. And employees
may simply resign at will outside the control of their employers, although in
some cases they do so by paying contractual penalties that they agreed to when
signing employment contracts.
Another problem is bifurcation of the value of a valuable employee from the
subset of other employees and circumstances such as group esprit de corps ---
http://en.wikipedia.org/wiki/Esprit_de_corps_%28disambiguation%29
A great pitcher needs a great catcher and seven other players on the field that
can make great defensive plays. The President of the United States may be less
important than the staff surrounding that President. A bad staff can do a lot to
bring down a President. This had a lot to do with the downfall of President
Carter.
Another problems is that greatness of an employee may vary dramatically with
circumstances. Winston Churchill was a great leader and inspiration in the
darkest days of World War II. But his value should've been subject to very rapid
accelerated depreciation. He was a lousy leader after the end of the war,
including making some awful choices such as chemical weapons use on some tribes
in Iraq.
"Power From the People: Can human Capital Financial Statements Allow
Companies to Measure the Value of Their Employees?," by David McCann, CFO
Magazine, November 2011, pp. 52-59 ---
http://www.cfo.com/article.cfm/14604427?f=search
If a company's most important assets are indeed its
people, as corporate executives parrot endlessly, that's news to investors,
analysts, and even, as it turns out, many companies.
It is hardly a secret that the industrial economy
that prevailed for two centuries has evolved into a talent-driven,
knowledge-based economy. Still, extant accounting standards define "assets"
mostly in terms of cash, receivables, and hard goods like property,
equipment, and inventory, even though the value of many companies lies
chiefly in the experience and efforts of their employees.
Public companies are required to disclose virtually
nothing about their human capital other than the compensation packages of
top executives, and most are happy to report only that. The furthest most
companies will go in reporting on human capital within their public filings
is to mention "key-man" risks and executive succession plans.
More than two decades ago, Jac Fitz-enz and Wayne
Cascio separately pioneered the idea that metrics could shine a light on
human-capital value. From their work grew the notion that formal reporting
of such metrics could add value to financial statements. That discussion
simmered quietly for many years, but recently it has grown more bubbly, as
some of the best minds in human-capital management and workforce analytics
work hard to influence the acceptance of such reporting.
Some are crafting detailed structures for what they
generally refer to as human-capital financial statements or reports, which
would complement (but not replace) traditional financial reporting. Their
goal is to quantify a company's financial results as a return on
people-related expenditures, and express a company's value as a measure of
employee productivity.
To be sure, finance and human-resources executives
alike have long considered many important aspects of human-capital value to
be unquantifiable. That's why an effort by the Society for Human Resource
Management, less-granular than some similar efforts but very well organized,
shows promise to have a sizable impact. SHRM's Investor Metrics Workgroup,
in conjunction with American National Standards Institute (ANSI), is
developing recommendations for broad standards on human-capital reporting.
The group plans to release its recommendations for public comment early in
2012. Should ANSI certify the standards, the next phase would be a marketing
campaign aimed at investor groups and analysts, encouraging them to demand
that companies provide the information.
If demand for that data were to reach a critical
mass, then presumably accounting-standards setters would eventually look at
adopting some type of human-capital reporting, and the Securities and
Exchange Commission and other regulators would subsequently get involved. Of
course, that's a grand vision, and even its most optimistic proponents admit
that it will take at least a decade, and probably twice that long, to fully
materialize.
But the SHRM group's chair, Laurie Bassi, is
confident that the effort will succeed, however long it may take. "It's
going to serve as a catalyst for change," says Bassi, a labor economist and
human-capital-management consultant. "When investors start to demand this
information, it's going to be a wake-up call for many, many companies. For
some well-managed, well-run firms it won't be a stretch, but others will be
hard-pressed to produce the information in a meaningful way."
Bassi says that the driving forces behind the
effort boil down to two things: "supply and demand, or, you might say,
opportunity and necessity."
On the supply/opportunity side, advancing
technology and lower computing costs have greatly eased the collection and
crunching of people-related data, enabling companies to get their arms
around what's going on with their human capital in a much more analytic,
metrics-driven way than was possible a few years ago. The demand/necessity
side is that, driven by macroeconomic forces, human-capital management is
emerging as a core competency for employers, particularly those in
high-wage, developed nations.
Something for (Almost) Everyone Investors and
analysts aren't demanding human-capital reporting yet, but they might not
need much prodding. Upon hearing for the first time about SHRM's project,
Matt Orsagh, director of capital-markets policy for the CFA Institute, says
that "it sounds fabulous. I want all the transparency and inputs I can have.
Quantifying the worth of human capital would be fantastic, because right now
you have to take it on faith, and I don't know if I can trust it."
Predictably, some CFOs are less enthusiastic. "It's
a fair point that the balance sheet doesn't recognize the value of human
capital, and certainly not the full value of your intellectual property,"
says John Leahy, finance chief at iRobot, a publicly traded, $400 million
firm. "For a high-growth technology company like ours, there is significant
intrinsic value in the know-how and innovation of our people, which is why
we've traded over the last couple of years at a fairly attractive multiple.
Continued in article
"The 50 Most Influential Management Gurus," by Clayton Christensen,
Harvard Business Review Blog, November 2011 ---
http://hbr.org/web/slideshows/the-50-most-influential-management-gurus/1-christensen
Of course there's no Harvard bias whispering into this selection --- no it's
shouting!
Watch the video ---
http://www.thinkers50.com/
Bob Jensen's threads on human resource accounting are included at
http://www.trinity.edu/rjensen/theory02.htm#TripleBottom
Question
Why did Joe Paterno sell his relatively modest home to his wife for $1?"
"Paterno Passed On Home to His Wife for $1," by Mark Viera and Pete
Thamel, The New York Times, November 15, 2011 ---
http://www.nytimes.com/2011/11/16/sports/ncaafootball/in-july-paterno-transferred-ownership-of-home-to-his-wife-for-1.html?_r=3
Joe Paterno transferred full ownership of his house
to his wife, Sue, for $1 in July, less than four months before a sexual
abuse scandal engulfed his Penn State football program and the university.
Documents filed in Centre County, Pa., show that on
July 21, Paterno’s house near campus was turned over to “Suzanne P. Paterno,
trustee” for a dollar plus “love and affection.” The couple had previously
held joint ownership of the house, which they bought in 1969 for $58,000.
¶ According to documents filed with the county, the
house’s fair-market value was listed at $594,484.40. Wick Sollers, a lawyer
for Paterno, said in an e-mail that the Paternos had been engaged in a
“multiyear estate planning program,” and the transfer “was simply one
element of that plan.” He said it had nothing to do with the scandal.
¶ Paterno, who was fired as the football coach at
the university last week, has been judged harshly by many for failing to
take more aggressive action when he learned of a suspected sexual assault of
a child by one of his former top assistants.
¶ Some legal experts, in trying to gauge the legal
exposure of the university and its top officials to lawsuits brought by
suspected victims of the assistant, Jerry Sandusky, have theorized that
Paterno could be a target of civil actions. On Nov. 5, Sandusky, Penn
State’s former defensive coordinator, was charged with 40 counts related to
the reported sexual abuse of eight boys over 15 years. Paterno, 84, was
among those called to give testimony before a grand jury during the
investigation, which began in 2009.
¶ Experts in estate planning and tax law, in
interviews, cautioned that it would be hard to determine the Paternos’
motivation simply from the available documents. It appears the family house
had been the subject of years of complex and confusing transactions.
¶ Lawrence A. Frolik, a law professor at the
University of Pittsburgh who specializes in elder law, said that he had
“never heard” of a husband selling his share of a house for $1 to his spouse
for tax or government assistance purposes.
¶ “I can’t see any tax advantages,” Frolik said.
“If someone told me that, my reaction would be, ‘Are they hoping to shield
assets in case if there’s personal liability?’ ” He added, “It sounds like
an attempt to avoid personal liability in having assets in his wife’s name.”
¶ Two lawyers examined the available documents in
recent days. Neither wanted to be identified because they were not directly
involved in the case or the property transaction. One of the experts said it
appeared to be an explicit effort to financially shield Joe Paterno. The
other regarded the July transaction, at least on its face, as benign.
Continued in article
Jensen Comment
Ruth Madoff was not allowed to keep assets in her name except for assets that
were not gifts from her husband or passed through her husband's financial
transactions. For example, I think she was allowed to keep her family
inheritance.
This kind of "fraud" is extremely common, albeit illegal, where home titles
and other assets of a parent are passed on to children in anticipation of having
Medicaid pay for the parent's eventual nursing home care. Medicare does not pay
for long-term nursing home care, and Obamacare just eliminated this extremely
expensive benefit that would've greatly driven up the price of medical
insurance.
Question
How can a company that's "technically insolvent" have any sort of IPO success?
"GROUPON IS TECHNICALLY INSOLVENT,"
by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants,
October 21, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362
Two Update Teaching Cases on Groupon: IPO, Working Capital, and Cash
Flow
From The Wall Street Journal Weekly Accounting Review on November 11,
2011
Case 1
Exclusive Deal Floats Groupon
by:
Rolfe Winkler
Nov 05, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: business combinations, Financial Analysis, Goodwill,
Impairment
SUMMARY: Groupon filed its initial public offering (IPO) on Friday,
November 4, 2011, selling only a total of 6.4% of the company's total
shares. The IPO proceeds brought in $805 million, the third smallest total
for all IPOs since 1995, only larger than the IPOs of Vonage Holdings and
Orbitz in total proceeds. In terms of the percent of outstanding shares
sold, only Palm has sold a smaller percentage in that same time frame.
Quoting from the related article, "Silicon Valley and Wall Street took
Groupon's stock market debut as a sign that investors are still willing to
make risky bets on fast-growing but unprofitable young Internet
companies....Groupon shares rose from their IPO price of $20 by 40% in early
trading, and ended at the 4 p.m. market close at $26.11, up 31%. The closing
price valued Groupon at $16.6 billion...."
CLASSROOM APPLICATION: Questions focus on measuring the implied
fair value of an entire business from the value of only a portion. The
concept is used in accounting for business combinations and in goodwill
impairment testing.
QUESTIONS:
1. (Introductory) Summarize the Groupon initial public offering
(IPO). How many shares were sold? At what price?
2. (Introductory) Describe the market activity of the stock on its
first day of trading. How does that activity show that "investors
are...willing to make risky bets on...young Internet companies"?
3. (Advanced) How has the Groupon stock fared to the date you write
your answer to this question?
4. (Advanced) Define the term "implied fair value". How did sale of
only 6.3% of the shares outstanding translate into an overall firm valuation
of $12.8 billion? Show your calculation.
5. (Advanced) Given the range of trading reported in the article
and your answer to question 3 above, what is the range of total firm value
shown during this short time of public trading of Groupon stock? Again, show
your calculations. How does the small percentage of shares contribute to the
size of this range?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Groupon IPO Cheers Valley
by Shayndi Raice and Randall Smith
Nov 05, 2011
Page: B3
"Exclusive Deal Floats Groupon," by: Rolfe Winkler, The Wall Street
Journal, November 5, 2011 ---
http://online.wsj.com/article/SB10001424052970203716204577017892088810560.html?mod=djem_jiewr_AC_domainid
Even by dot-com standards, Groupon's initial public
offering is puny in terms of the number of shares it actually sold to the
public. According to Dealogic, dating back to 1995 just three U.S. tech
companies floated a smaller percentage of their shares in their IPOs. Palm
sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2%
in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million
offering. Then comes Groupon, which sold 6.3% this week as part of its $805
million offering.
That is well below the median of 21% for the 50
largest technology IPOs dating back to 1995, according to Dealogic.
Groupon's limited float strategy isn't new. Two of
this year's other big Internet IPOs, LinkedIn and Pandora Media also sold a
limited number of shares, just 9.4% of the total outstanding for both
companies. Those deals were also led by Morgan Stanley.
Considering doubts about Groupon's business model,
in order to ensure a strong first day's trading, the underwriters not only
limited the free-float, but they also scaled back their original valuation
target.
At Friday's close of trading, Groupon shares were
at $26.11 apiece, 31% above the IPO price. That puts Groupon's market
capitalization at about $17 billion, or roughly eight times next year's
likely revenue. That is steep, considering that the daily-deals Internet
company is still unprofitable and that growth appears to be slowing quickly.
Case 2
Groupon Holds Cash Tight
by:
Sarah E. Needleman and Shayndi Raice
Nov 10, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Cash Flow, Cash Management, Financial Statement Analysis
SUMMARY: Groupon finally completed its IPO on Friday, November 4,
2011, and interest in the company is therefore naturally high. Competitors
to Groupon attempt to obtain market share from the newly public company by
offering quicker payment terms to the small business which provide the
merchant benefits offered by Groupon. Small businesses need their working
capital as fast as possible and therefore some complain about the Groupon
terms. Groupon argues that its terms are designed to ensure that merchant
suppliers cannot use Groupon for a quick infusion of cash just prior to
closing operations.
CLASSROOM APPLICATION: Questions ask students to analyze Groupon's
financial statements-particularly its working capital components-to assess
the issues with the company's payment terms.
QUESTIONS:
1. (Introductory) What are Groupon's payment terms? How do those
terms help Groupon's customers, the buyers of its electronic coupons?
2. (Introductory) How do Groupon's payment terms help Groupon's own
financial position and operating results? In your answer, define the
financial concepts of cash flow and working capital mentioned in the
article.
3. (Advanced) Groupon issued its initial public offering of stock
(IPO) on Friday, November 4, 2011. Access the S-1 registration statement
filed with the SEC for this offering on June 2, 2011. It is available on the
SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm
Click on the link to the Table of Contents, then on Index to Consolidated
Financial Statements, then on Consolidated Balance Sheets. As of December
31, 2010, how much working capital did the company have? Did this amount
improve through the quarter ended March 31, 2011?
4. (Advanced) Given your measurement of Groupon's working capital,
how easy do you think it would be for Groupon to address its competition by
changing its payment terms? Support your answer.
5. (Advanced) Continue working with the Groupon audited
consolidated financial statements as of December 31, 2010 and the unaudited
quarterly statements. What items comprise Groupon's Accounts Receivable? How
collectible are these amounts?
6. (Advanced) What items comprise Groupon's Accounts Payable,
accrued Merchants Payable, and Accrued Expenses? Given your knowledge of
Groupon's payment terms, can you identify how soon each of these payments
must be made?
7. (Advanced) Consider how you would schedule a detailed estimate
of the timing of Groupon's cash flows for the three current liabilities
discussed above.
Reviewed By: Judy Beckman, University of Rhode Island
"Groupon Holds Cash Tight by: Sarah E. Needleman and Shayndi Raice, The
Wall Street Journal, November 10, 2011 ---
http://online.wsj.com/article/SB10001424052970204358004577027992169046500.html?mod=djem_jiewr_AC_domainid
Rivals of Groupon Inc. are threatening the daily
deal site leader by offering quicker payment to merchants, possibly
jeopardizing a key part of Groupon's business model.
Groupon keeps itself in cash by collecting money
immediately when it sells its daily coupons to consumers while extending
payments to the merchants over 60 days. For instance, a hair salon might run
a deal offering $100 of services for just $50 on Groupon's website, which
then keeps as much as half of the total collected and sends the remainder to
the salon in three installments about 25 to 30 days apart.
"The payment timing is so erratic you can't count
on any of that money helping to pay your bills," says Mark Grohman, owner of
Meridian Restaurant in Winston-Salem, N.C.
After running three Groupon promotions this year
and last, Mr. Grohman says he won't use the service again in part because it
puts too big a strain on his cash flow. "With smaller margins in
restaurants, you need that capital in the bank as fast as possible," he
says.
Heissam Jebailey, co-owner of two Menchie's
frozen-yogurt franchises in Winter Park, Fla., says he also has begun to
view Groupon's installment payments as too slow.
Enlarge Image SBGROUPON SBGROUPON
"You want to get paid in full as quickly as
possible," says Mr. Jebailey, who has run deals with both Groupon and its
rival LivingSocial Inc. offering customers $10 of frozen yogurt for $5. He
says both promotions were successful but that he'd only use Groupon again if
the service promises to pay faster. "We're the ones that have to cover the
cost of goods for giving away everything at half price," he says. "I will
not do another deal with Groupon unless they agree to my terms."
Groupon executives have no plans to change payments
terms, said a person familiar with the matter. Because Groupon has a backlog
of 49,000 merchants in line to offer a deal with the site, executives feel
confident that they don't need to make any changes to payment terms, said
another person.
While Groupon pays merchants in installments of 33%
over a period of 60 days, LivingSocial and Amazon.com Inc.'s Amazon Local
pay merchants their full share in 15 days. Google Inc.'s Google Offers
promises 80% of the merchant's cut within four days, and the remainder over
90 days.
Groupon pays in installments for a reason,
according to a person familiar with the matter: It has seen some merchants
try to use Groupon to get a quick infusion of cash before going out of
business, leaving customers with vouchers that can't be redeemed.
The Chicago-based start-up has a policy of offering
refunds to customers who aren't satisfied, and as a result it is cautious
about doing deals with merchants who may not carry through on their end,
says the person familiar with the matter.
Groupon also says it pays merchants before they
provide services to customers and will accelerate payments if merchants
experience unusually fast consumer redemption.
"We believe Groupon's payment terms are fair to
merchants and important to protect consumers," says Julie Mossler, director
of communications for Groupon.
It also is in Groupon's best interest to stretch
out payments to its customers for as long as possible, says John Hanson, a
certified public accountant and executive director at Artifice Forensic
Financial Services LLC in Washington, D.C. "It makes their cash position
look stronger on their books."
Steady cash flow has helped fuel the valuation of
Groupon, which first sold shares to the public last week. Groupon's stock
was down nearly 4% Wednesday, bringing its share price of $23.98 closer to
the company's IPO price of $20 a share. Based on the 5.5% of shares that
trade, the company has a valuation of about $15 billion. But its
working-capital deficit has ballooned to $301.1 million as of Sept. 30, and
the amount it owes its merchants is also way up.
Groupon's "accrued merchant payable" balance
increased to $465.6 million as of Sept. 30, from $4.3 million at year-end
2009, its filings say. This merchant payable balance exceeded Groupon's cash
and contributed to the company's working capital deficit, according to the
company's filing.
Offering merchants faster payment terms could hurt
its cash flow and force it to raise funds to cover its day-to-day cash
needs, Groupon said in a recent securities filing. In international markets,
the company pays merchants only once a coupon has been redeemed.
Every one-day reduction in Groupon's merchant
payables represents a risk of about $14 million in free cash flow, according
to estimates by Herman Leung, a Susquehanna analyst. "It's a key driver of
cash flow dollars and a key assumption in the Groupon model," he says of the
60-day payment period. "It's highly sensitive."
To be sure, Groupon has faced waves of competition
for more than a year, and many of those challengers already have come and
gone.
Continued in article
Teaching cases on the accounting scandals at Groupon (especially
overstatement of revenues) and its auditor (Ernst & Young) ---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
Accounting Career Network ---
http://www.searchaccountingjobs.com/
Bob Jensen's threads on accounting careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud
Note that most of these particular workers retire long before age 65 and are
fraudulently collecting full Social Security and Medicare benefits intended for
truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers
(fraudulently) retire with disability benefits," by Philip K. Howard,
The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t
The indictment of seven Long Island Rail Road
workers for disability fraud last week cast a spotlight on a troubled
government agency. Until recently, over 90% of LIRR workers retired with a
disability—even those who worked desk jobs—adding about $36,000 to their
annual pensions. The cost to New York taxpayers over the past decade was
$300 million.
As one investigator put it, fraud of this kind
"became a culture of sorts among the LIRR workers, who took to gathering in
doctor's waiting rooms bragging to each [other] about their disabilities
while simultaneously talking about their golf game." How could almost every
employee think fraud was the right thing to do?
The LIRR disability epidemic is hardly unique—82%
of senior California state troopers are "disabled" in their last year before
retirement. Pension abuses are so common—for example, "spiking" pensions
with excess overtime in the last year of employment—that they're taken for
granted.
Governors in Wisconsin and Ohio this year have led
well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing]
the collective bargaining rights of public employees." What are these
so-called "rights"? The dispute has focused on rich benefit packages that
are drowning public budgets. Far more important is the lack of productivity.
"I've never seen anyone terminated for
incompetence," observed a long-time human relations official in New York
City. In Cincinnati, police personnel records must be expunged every few
years—making periodic misconduct essentially unaccountable. Over the past
decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a
cost of $3.5 million.
Collective-bargaining rights have made government
virtually unmanageable. Promotions, reassignments and layoffs are dictated
by rigid rules, without any opportunity for managerial judgment. In 2010,
shortly after receiving an award as best first-year teacher in Wisconsin,
Megan Sampson had to be let go under "last in, first out" provisions of the
union contract.
Even what task someone should do on a given day is
subject to detailed rules. Last year, when a virus disabled two computers in
a shared federal office in Washington, D.C., the IT technician fixed one but
said he was unable to fix the other because it wasn't listed on his form.
Making things work better is an affront to union
prerogatives. The refuse-collection union in Toledo sued when the city
proposed consolidating garbage collection with the surrounding county.
(Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts
eliminated funding to mow the grass along the roads, the union sued to stop
the county executive from giving the job to inmates.
No decision is too small for union micromanagement.
Under the New York City union contract, when new equipment is installed the
city must reopen collective bargaining "for the sole purpose of negotiating
with the union on the practical impact, if any, such equipment has on the
affected employees." Trying to get ideas from public employees can be
illegal. A deputy mayor of New York City was "warned not to talk with
employees in order to get suggestions" because it might violate the "direct
dealing law."
How inefficient is this system? Ten percent? Thirty
percent? Pause on the math here. Over 20 million people work for federal,
state and local government, or one in seven workers in America. Their
salaries and benefits total roughly $1.5 trillion of taxpayer funds each
year (about 10% of GDP). They spend another $2 trillion. If government could
be run more efficiently by 30%, that would result in annual savings worth $1
trillion.
What's amazing is that anything gets done in
government. This is a tribute to countless public employees who render
public service, against all odds, by their personal pride and willpower,
despite having to wrestle daily choices through a slimy bureaucracy.
One huge hurdle stands in the way of making
government manageable: public unions. The
head of the American Federation of State, County and Municipal Employees
recently bragged that the union had contributed $90 million in the 2010
off-year election alone. Where did the
unions get all that money? The power is imbedded in an artificial legal
construct—a "collective-bargaining right" that deducts union dues from all
public employees, whether or not they want to belong to the union.
Some states, such as Indiana, have succeeded in
eliminating this requirement. I would go further: America should ban
political contributions by public unions, by constitutional amendment if
necessary. Government is supposed to serve the public, not public employees.
America must bulldoze the current system and start
over. Only then can we balance budgets and restore competence, dignity and
purpose to public service.
Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm
Audit Failure: The GAO Reported No Problems
Amidst All This Fraud
This is what a union site claims about the Long Island Rail Road workers for
disability ---
http://www.railroad.net/forums/viewtopic.php?f=63&t=55668&start=300
What you won't read in Newsday or the New York
Times from non-copyrighted labor source:
GAO Audit Gives Railroad Occupational Disability
Program a Clean Bill of Health
The United States Government Accountability Office
(GAO) just issued its second review of the Railroad Retirement Board
Occupational Disability Program. And once again it found no problems.
“This was a major accomplishment for rail labor,”
says TCU President Bob Scardelletti. “Occupational Disability is a vitally
important program for members who need it. It’s the best in the country, and
this Report will help keep it that way.”
The increased government attention on Occupational
Disability began when New York politicians and newspapers began a full scale
campaign targeting Long Island Rail Road workers’ alleged abuse of the
program. After extensive scandalous press reports, public hearings, wild
allegations, and a congressionally requested GAO investigation, no
improprieties were found.
The Railroad Retirement Board did institute some
oversight measures specific to Long Island Rail Road to make sure that no
abuses were occurring, reflecting the fact that the rate of applications for
occupational disability were higher than on any other railroad. But these
oversight procedures wound up finding that all Long Island applications that
were approved were properly reviewed, legitimate and in accordance with
existing law and regulations. And that fact was endorsed by the first GAO
audit of Long Island Rail Road claims in a report released in September,
2009.
Not satisfied with the GAO’s findings, two
Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on
March 18, 2009 formally requested the GAO to “conduct a systematic review of
RRB’s occupational disability program”, not just limited to Long Island Rail
Road.
The Congressmen’ request prompted yet another GAO
review of the occupational disability program. In their just-issued response
to the two Congressmen, the GAO reported they found no improprieties and
made no recommendations.
“Once again efforts to
find fault with the occupational disability have come up empty,” says
President Scardelletti. “That’s because the program is functioning as it
was intended – to be a last resort for rail workers who because of
illness or injury can no longer perform their jobs. It is a necessary
benefit and it is not abused by those who unfortunately must apply for it.
We will continue to do everything in our power to preserve it as is.”
Jensen Comment
The program seems to be "working as intended." Either 90% of all the railroad's
workers are becoming disabled on the job or the system is "intended" to defraud
the taxpayers. One sign of that it was a fraud is that the same doctor (now
indicted) was receiving millions of dollars from the union to sign phony
disability claims.
And there are some who advocate that the GAO take over the private sector
auditing because there will be less fraud, greater independence, and more
competent auditors than anything the Big Four and other auditing firms can come
up with. Baloney!
Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm
Audit Failure: The GAO Reported No Problems
Amidst All This Fraud
This is what a union site claims about the Long Island Rail Road workers for
disability ---
http://www.railroad.net/forums/viewtopic.php?f=63&t=55668&start=300
What you won't read in Newsday or the New York
Times from non-copyrighted labor source:
GAO Audit Gives Railroad Occupational Disability
Program a Clean Bill of Health
The United States Government Accountability Office
(GAO) just issued its second review of the Railroad Retirement Board
Occupational Disability Program. And once again it found no problems.
“This was a major accomplishment for rail labor,”
says TCU President Bob Scardelletti. “Occupational Disability is a vitally
important program for members who need it. It’s the best in the country, and
this Report will help keep it that way.”
The increased government attention on Occupational
Disability began when New York politicians and newspapers began a full scale
campaign targeting Long Island Rail Road workers’ alleged abuse of the
program. After extensive scandalous press reports, public hearings, wild
allegations, and a congressionally requested GAO investigation, no
improprieties were found.
The Railroad Retirement Board did institute some
oversight measures specific to Long Island Rail Road to make sure that no
abuses were occurring, reflecting the fact that the rate of applications for
occupational disability were higher than on any other railroad. But these
oversight procedures wound up finding that all Long Island applications that
were approved were properly reviewed, legitimate and in accordance with
existing law and regulations. And that fact was endorsed by the first GAO
audit of Long Island Rail Road claims in a report released in September,
2009.
Not satisfied with the GAO’s findings, two
Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on
March 18, 2009 formally requested the GAO to “conduct a systematic review of
RRB’s occupational disability program”, not just limited to Long Island Rail
Road.
The Congressmen’ request prompted yet another GAO
review of the occupational disability program. In their just-issued response
to the two Congressmen, the GAO reported they found no improprieties and
made no recommendations.
“Once again efforts to
find fault with the occupational disability have come up empty,” says
President Scardelletti. “That’s because the program is functioning as it
was intended – to be a last resort for rail workers who because of
illness or injury can no longer perform their jobs. It is a necessary
benefit and it is not abused by those who unfortunately must apply for it.
We will continue to do everything in our power to preserve it as is.”
Jensen Comment
The program seems to be "working as intended." Either 90% of all the railroad's
workers are becoming disabled on the job or the system is "intended" to defraud
the taxpayers. One sign of that it was a fraud is that the same doctor (now
indicted) was receiving millions of dollars from the union to sign phony
disability claims.
And there are some who advocate that the GAO take over the private sector
auditing because there will be less fraud, greater independence, and more
competent auditors than anything the Big Four and other auditing firms can come
up with. Baloney!
"Europe's Entitlement Reckoning From Greece to Italy to France, the
welfare state is in crisis," The Wall Street Journal, November 9,
2011 ---
In the European economic crisis, all roads lead
through Rome. The markets have raised the price of financing Italy's mammoth
debt to new highs, and on Tuesday Silvio Berlusconi became the second
euro-zone prime minister, after Greece's George Papandreou, to resign this
week. His departure may keep the world's eighth largest economy solvent for
the time being, but it hardly addresses the root of the problem.
In Italy, as in Greece, Spain and Portugal and
eventually France, the welfare-entitlement state has hit a wall. Successive
governments on the Continent, right and left, have financed generous
entitlements with high taxes and towering piles of debt. Their economies
have failed to grow fast enough to keep up, and last year the money started
to run out. The reckoning has arrived.
If the first step in curing an addiction is to
acknowledge it, there is little sign of that in Europe. The solutions on
offer are to spend still more money, to have the Germans bail out everybody
else, or to ditch the euro so bankrupt countries can again devalue their own
currencies. France's latest debt solution includes raising corporate,
capitals gains and sales taxes.
Yet Europe's problem isn't the euro. If it were,
Hungary, Iceland and Latvia—none of which use the euro—would have been
spared their painful days of reckoning. The same applies for Britain. Europe
is in a debt spiral brought about by spendthrift, overweening and
inefficient governments.
This is a crisis of the welfare state, and Italy is
a model basket case. Mario Monti, who is tipped to lead a new government of
technocrats, once described the Italian economy as a case of "self-inflicted
strangulation." Government debt is 120% of GDP, making Italy the world's
third largest borrower after the U.S. and Japan. Its economy last grew at
more than 2% a year in 2000.
An aging and shrinking population is a symptom, but
not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million
people are 65 or older and make increasingly expensive claims on state-paid
pensions and other benefits. In fast-growing Turkey, only 6.3% fit that
demographic. Italian women have on average 1.2 children, putting the
country's birth rate at 207th out of 221 countries.
But the bulk of the responsibility lies with
politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each
time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the
longest serving premier in post-war Italy, from 2001 to 2006, controlled
parliament and could have pushed through reforms. He didn't. Promises to
lower taxes and hack away at regulations and protections for Italy's
powerful guilds—from taxi drivers to pharmacists to journalists—were broken.
"It is not difficult to rule Italy," Benito
Mussolini once said, "it is useless." The so-called concertazione, or
concert, of Italian coalition politics that brings together numerous parties
in the Parliament makes for unstable and indecisive governments. So does the
fear prominent in many European countries that any serious reform will
provoke street protests. An unhappy byproduct of a welfare state is that it
creates powerful interests that will fight to the last to preserve their
free lunch, no matter the cost to the country.
But now hard choices can no longer be postponed.
And the solution to Europe's debt crisis must begin with reforming, if not
dismantling, the welfare state. Europe rose from the economic grave in the
1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the
1980s-'90s, and it can grow again. A decade ago, Germany was called the
"sick man of Europe," bedeviled by Italian-like economic problems. But a
center-left coalition, supported by trade unions and German society,
overhauled labor and welfare codes and set the stage for the current (if
still modest) export-led revival in Germany.
The road from Rome may now lead to Paris, Madrid
and other debt-ridden European countries. But this is no cause for U.S.
chortling, because that same road also leads to Sacramento, Albany and
Washington. America's federal debt was 35.7% of GDP in 2007, but it was
61.3% last year and is rising on an Italian trajectory. The lesson of Italy,
and most of the rest of Europe, is never to become a high-tax, slow-growth
entitlement state, because the inevitable reckoning is nasty, brutish and
not short.
Japan Adopted the Worst Entitlements Practices of the United States (and
the same baby boomer mistakes following WW II)
"The Italy of Asia: Japan's entitlement dilemmas are a warning to
Washington," The Wall Street Journal, January 6, 2011 ---
http://online.wsj.com/article/SB10001424052748704723104576061332542456172.html#mod=djemEditorialPage_t
Japanese politics is once again in turmoil, with
the government's approval ratings around 20%. Prime Minister Naoto Kan is
trying to force out his rival within the Democratic Party of Japan, Ichiro
Ozawa, which might boost his own popularity but would probably cause enough
defections to destroy a precarious majority. And he has chosen as his New
Year initiative an increase in the consumption tax—a hugely unpopular policy
that cost him the upper house election last year and would surely harm the
economy.
Looks like it's almost time for another change of
leader in Tokyo, which is becoming the Italy of Asia. Whoever it is, he will
have to tackle Japan's problems before unpleasant outcomes are forced upon
it. Without cuts to entitlements and tax cuts to promote growth, Tokyo will
continue turning into Athens.
Mr. Kan's claims to fiscal rectitude are belied by
the draft fiscal 2011 budget released late last month. It calls for another
year of near-record addition to a national debt already approaching 200% of
GDP. The budget includes $867 billion of spending, though total government
revenue amounts to just $501 billion. The budget proposes trimming
discretionary spending only marginally, cuts that are overwhelmed by the
uncontrolled growth of entitlement programs, which make up 53% of total
spending.
Japan is foundering
on the promises made by past generations of politicians that are coming due
in a rapidly aging society. These include
unfunded pensions and medical care for the elderly. And it will only get
worse—2012 is expected to be a watershed year when the biggest wave of baby
boomers begins to retire.
As two lost decades since the bursting of the
bubble show, Japan's consensus-based political system seizes up when it
comes to allocating societal losses. In the 1990s, that meant that the
government encouraged banks to sit on bad loans rather than undergo the kind
of cathartic restructuring the U.S. is now undergoing, at least in some
parts of the economy. That made Japan appear more stable, but without
creative destruction the economy was unable to return to growth. This time
the leverage is spread across generations, with the lack of growth making
the promises to the old a bigger burden, which in turn makes it impossible
to pursue pro-growth policies.
Payments on the national debt next year are
projected at an already substantial $263 billion, but this assumes a payout
of no more than 2% on 10-year bonds. Yields may remain well below this level
for now, but in recent auctions signs have emerged that investors are losing
their appetite for government bonds. The national debt is forecast to exceed
household savings in the next year, as retirees continue to spend down
savings. As long as growth remains slow, corporations will probably continue
to save. But if Tokyo is forced to look abroad for funding, it will have to
pay much higher rates.
That has the potential to blow out the budget in
spectacular fashion. With central and local government debt now estimated at
over $11 trillion, each one percentage point increase in yields will cost
$110 billion. Adding in its unfunded liabilities, Japan has already reached
the point at which its debt load will continue to increase regardless of how
much it cuts spending or raises taxes.
In other words, Japan is about to run into the late
economist Herb Stein's obvious but oft-overlooked law, which states that if
something cannot continue it won't. The crunch is coming in one form or
another.
Continued in article
Bob Jensen's threads on entitlements are at
http://www.trinity.edu/rjensen/Entitlements.htm
An Inquiry from John Anderson on November 7, 2011
On Mon, Nov 7,
2011 at 4:18 PM, John Anderson <jcanderson27@comcast.net>
wrote:
I know the CPA List Serve has been shut-down. Therefore I am
looking for help and direction from the members of this AECM List
Serve.
My question is completely US-based, but I would be very interested
in learning about billing models and conventions used in other
countries as well.
Back in the 1980’s I had the privilege of participating in the
creation of the Environmental Industry. My company was involved
with Hazardous Waste, which is Chemical Waste; not radioactive waste
and not simple trash. Therefore my colleagues and I are very well
versed in DOT Regulations for Transportation, OSHA and of course the
RCRA Act. We are also very savvy when it comes to CERCLA/Superfund
and Superfund’s independent definition of its “Dangerous
Materials.”
Now I am involved with a very exciting Start-up involving some old
friends and new friends, which is channeling me into some areas
which are new to me.
I need to identify the Controlling Rules and Regulations governing
these areas or else have a discussion with people who are experts in
any of the following areas:
·
US Medical Third Party Billing to Insurance Carriers
·
Processes for Qualifying new Medical Services for Reimbursement in
this system (Specifically approval of additional procedures under
the auspices of “Improvement in Patient Care”)
1.
Medicare Approval?
2.
Legal Requirement?
3.
What other means?
·
Oncology Billing and how Oncology Medications are billed differently
in the follow instances:
1.
Hospitalized patients who are infused and remain in the hospital
2.
Versus, Outpatient services where a patient is infused by
appointment at the hospital and then immediately sent home;
3.
Versus, purely Home Infusion administered by a Visiting Infusion
Technician or Oncology Nurse and the patient never goes to the
hospital for the infusion.
4.
Doctor ordered for patient administration (those in oral or topical
applications).
Any help and insight in understanding any of these areas and
processes would be greatly appreciated!
As we are also actively talking to Angel Groups and Venture Funds
interested in these areas, if anyone knows of an Environmental Fund
looking to identify companies addressing new, untapped Environmental
Markets, the timing is certainly right … and we would be very happy
to talk to those Funds as well!
Thanks!
Best Regards!
John
John Anderson, CPA, CISA, CISM, CGEIT, CITP
Financial & IT Business Consultant
14
Tanglewood Road
Boxford, MA
01921
November 7, 2011 reply from Bob Jensen
Hi John,
You provided a lot of help over the years to subscribers on the CPAS-L
listserv.
On your question of claims filing:
You might take a shot in the dark and contact Tennessee Rep. Jim Cooper.
http://www.owen.vanderbilt.edu/vanderbilt/faculty-and-research/faculty-directory/faculty-profile.cfm?id=185
Jim Cooper, Adjunct Professor, Health Care
Management at Vanderbilt University
U.S. Congressman, Tennessee (1982-1994, 2002-present) - Elected as
youngest congressman in America - Budget, Armed Services, Energy &
Commerce, Financial Services, and Small Business Committees - Authored
chief rival to Clinton Health Care Plan (see, e.g. "The System: The
Death of Health Care Reform, 1993-1994" by Haynes Johnson and David
Broder (Little Brown, 1997) - Unsuccessful U.S. Senate race, 1994
Investment Banker (1995-2002) - Equitable Securities, and co-founder of
Brentwood Capital Advisors - Public offerings and private placement of
institutional equity Corporate Board Member of several public and
private companies (1995-2002) - Chaired the Audit Committee of three
public companies Attorney (1980-1982) - Waller Lansden Dortch & Davis -
$80 million Subordinated Convertible Eurodollar Debenture Offering for
HCA Recent Publications: - "Don't Give Up on Markets Yet," a book review
of "Toward a Twenty-First Century Health Care System: The Contributions
and Promise of Prepaid Group Practice," edited by Alain C. Enthoven and
Laura A. Tollen (Jossey-Bass, 2004), Health Affairs, July/August, 2004.
- "Is American Ready for Rationing?" a book review of "Can We Say No?
The Challenge of Rationing Health Care," by Henry J. Aaron and William
B. Schwartz with Melissa Cox (Brookings Institution Press, 2005), Health
Affairs, November/December, 2005. Recently won the 2006 Judge Edward R.
Finch Law Day Speech Award, top award in an annual competition sponsored
by the American Bar Association.
Jensen Comment
My old friend Germain Boer is an accounting professor in the MBA Program
at Vanderbilt. Much of Germain's research in recent years has been on
health care accounting and management. I've been out of touch with
Germain in recent years, but he is a cool professor and a good teacher.
Here are some sites that might help:
This may be a very good site to look at
http://www.rmlibrary.com/lib/claimsmanagement/claimsfiling.php
A U.S. Department of Labor Sites
http://www.dol.gov/ebsa/publications/filingbenefitsclaim.html
For the EBSA regional office
nearest you or a copy of any EBSA publications, call toll free:
1.866.444.EBSA (3272), or visit EBSA’s Web site at: www.dol.gov/ebsa
This publication has been
developed by the U.S. Department of Labor, Employee Benefits Security
Administration. For a complete list of the agency's publications,
call our toll free number at 1.866.444.EBSA (3272). This material
will be made available in alternate format upon request: Voice phone:
202.693.8664, TTY: 202.501.3911.
This booklet constitutes a
small entity compliance guide for purposes of the Small Business
Regulatory Enforcement Act of 1996.
Also see
http://www.cms.gov/ElectronicBillingEDITrans/08_HealthCareClaims.asp
Also see Health Benefits Advisor ---
http://www.dol.gov/elaws/ebsahealth.htm
U.S. Department of Health and Human Services Site
http://www.cms.gov/ElectronicBillingEDITrans/08_HealthCareClaims.asp
This has some discussion of hazardous waste exposure ---
http://www.fdmny.com/pdf/GuidetoFilingClaims.pdf
AARP ---
http://answers.healthinsurancefinders.com/What-steps-filing-AARP-health-insurance-claim-form-q1520.aspx
Medicaid ---
http://assistedliving.about.com/od/runningyourbusiness/a/Filing-A-Claim-With-Medicaid.htm
The Veteran's Survival Guide: How to File and Collect on VA Claims
[Paperback] ---
http://www.amazon.com/Veterans-Survival-Guide-Collect-Claims/dp/1574884158
Also note the Tricare guide at
http://www.mytricare.com/internet/tric/tri/mtc_nprov.nsf/sectionmap/ElctrncClmsFlng_ElctrncClmsFlng?Opendocument&dispPage=yes
This looks like a good site for health care providers ---
http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0050-health/healthcareguidecomplaintprocess.cfm
Fema ---
http://www.fema.gov/rebuild/recover/claim.shtm
A great site for 2011 Health Statistics ---
http://www.census.gov/prod/2011pubs/11statab/health.pdf
Bob Jensen's helpers for small businesses ---
http://www.trinity.edu/rjensen/Bookbob1.htm#SmallBusiness
Scott Bonacker
suggested ---
http://www.healthlawyers.org/hlresources/Pages/default.aspx
Ernst & Young
Practical matters for
the c-suite: Financial instruments convergence project moves forward in fits and
starts
Our latest issue of Practical matters for the c-suite,
Financial
instruments convergence project moves forward in fits and starts,
explores in more detail how the deliberations regarding last year's exposure
draft on financial instruments would affect an organization's finance, tax, IT
systems and business processes. The Practical matters for the c-suite series is
produced by our Financial Accounting Advisory Services (FAAS) group and is
intended to help companies assess the potential effect of proposals on their
organizations. This issue complements other recent Ernst & Young publications on
the potential changes to financial instruments accounting standards including:
Jensen Comment
You can also read about financial instruments accounting standard differences
between IASB and FASB standards at
"IFRS and US GAAP: Similarities and Differences" according
to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and
differences mentioned in the booklet are not comprehensive of all similarities
and differences. The document is, however, a valuable addition to students of
FASB versus IASB standard differences and similarities.
To the Point: Consolidation
models may move closer together
The Financial Accounting
Standards Board (FASB) issued an exposure draft that would affect how
all reporting entities evaluate whether they should consolidate another
entity. For VIEs and voting partnerships, a reporting entity’s decision
maker would evaluate three qualitative factors to determine whether it
is using its power as a principal or an agent. Principals would be
required to consolidate. The proposal also would align the consideration
of participating rights in the Voting Model with the Variable Interest
Model.
This To the Point publication is
available online. ---
http://lyris.ey.com/t/566832/1613618/3813/0/ |
Bob Jensen's threads on SPEs, SPVs, and VIES are at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"FASB CHAIRMAN DISCUSSES KEY ACCOUNTING ISSUES IN NASBA ADDRESS,"
Accounting Education News, October 26, 2011 ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151744
On October 24, 2011, FASB Chairman Leslie Seidman
gave a speech to the National Association of State Boards of Accountancy (NASAB)
in Nashville, Tennessee, in which she addressed three major accounting
issues: (1) the status of convergence between IFRS and US GAAP; (2) the
condorsement approach discussed in a recent SEC staff paper; and (3) the
setting of accounting standards for private companies.
Ms. Seidman began by noting that the opinions expressed in the speech were
her own rather than an official position of the FASB. She then proceeded to
review the status of the various completed and ongoing convergence projects.
She concluded this portion of her speech by offering her opinion of why some
convergence projects under the Memorandum of Understanding (MOU) have been
more successful than others. She stated these factors were conducive to
success:
(1) Agreed-upon, clear objectives;
(2) Fully integrated staff teams from both sides;
(3) Conducting deliberations and outreach jointly; and
(4) Coordinated timing.
Regarding the condorsement framework outlined in an SEC staff paper issued
in May 2011, Ms. Seidman said that it had "many positive aspects" and stated
that it:
(1) Shows U.S. support for the ongoing development of global accounting
standards.
(2) Adopts the very practical approach of retaining the label “U.S. GAAP.”
(3) Calls for some level of U.S. involvement in the establishment of any new
standards.
(4) Recognizes that there should be a gradual approach to dealing with the
remaining differences between U.S. GAAP and IFRS.
Finally, with respect to standards-setting for private companies, Ms.
Seidman recognized that the
recent proposal of the FAF Trustees had
"...generated heated criticism in some quarters, largely because the
Trustees felt it was important to maintain the FASB’s role as the sole
standard-setting board for U.S. GAAP through the ratification mechanism."
But she emphasized that "that the Trustees adopted virtually every other
recommendation that the
Blue-Ribbon Panel made" and stated "...It is hard
enough to get the FASB members to agree; trying to get two independent
organizations to agree is demonstrably difficult, despite strong commitment
to the goal; adding a third organization to the mix makes it even harder,
and adds unnecessary complexity, in my opinion."
Full Text of Her Speech ---
Click Here
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175823158680&blobheader=application%2Fpdf
Bob Jensen's threads on accounting standard setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
"Teaching Carnival 5.03," by Delaney Kirk, Chronicle of Higher
Education, November 1, 2011 ---
http://chronicle.com/blogs/profhacker/teaching-carnival-5-04/37021?sid=wc&utm_source=wc&utm_medium=en
[October’s Teaching Carnival was compiled by Delaney Kirk, a
management professor at the University of South Florida Sarasota-Manatee.
You can reach her via
email or on
Twitter . Delaney is
both an educator and an edublogger--ask her a question or check out her tips
on teaching effectiveness at
Ask Dr. Kirk. This month she gathers tips on teaching, advice
to share with our students, ways to utilize technology in the classroom, and
suggestions for personal development, along with a challenge to write that
academic book you’ve been putting off. –Billie Hara]
Know of a blog post (perhaps your own) that should be included in the
next Teaching Carnival…?
- Email the next host directly with the address to the permalink of
your blog post, and/or
- Tag your post in
Delicious (or
Diigo or other
bookmarking service) with teaching-carnival.
Tips on Teaching
Tips on Using Technology
Tips for Our Students
Tips on Personal Development
♦ ♦ ♦ ♦ ♦
And if you’ve been putting off writing that academic book or
dissertation, Charlotte Frost invites us all to participate
in the first Academic
Book Writing Month challenge (tweet about it using hash tag #AcBoWriMo).
You can also join NaNoWriMo to start
that novel you’ve been telling people you plan to write someday. Both
challenges begin on November 1st.
Continued in article
Bob Jensen's threads on previous Teaching Carnival articles ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Ideas
Scroll down to the Teaching Carnival links and quotations
"Sex Matters: Gender and Prejudice in the Mutual Fund Industry," by Stefan
Ruenzi and Alexandra Niessen-Ruenzi, SSRN, October 13, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1943576
Abstract:
We suggest customer based discrimination as one potential explanation for
the low fraction of females in the mutual fund industry. Consistent with
investors being prejudiced and stereotyping female fund managers as less
skilled, we find that female managed funds experience significantly lower
inflows. This result is obtained using market data as well as experimental
data. While we document some behavioral differences between male and female
fund managers, performance is virtually identical. This shows that rational
statistical discrimination can not explain the lower inflows into female
managed funds. Evidence based on an implicit association test conducted in a
laboratory setting supports the notion that there is prejudice against
females in finance.
"Gender Gaps in Higher Ed Around the World," Inside Higher Ed,
November 7, 2011 ---
http://www.insidehighered.com/quicktakes/2011/11/07/gender-gaps-higher-ed-around-world
Bob Jensen's threads on Controversial Issues in Affirmative Action ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#AffirmativeAction
Also search the AAA Commons for "Gender" ---
http://commons.aaahq.org/pages/home
AAA Members Only
Specialized Programs in Graduate Business (SPGB forums run by selected
private universities) ---
http://www.msbusinessdegrees.com/about
Thank you Eliot Kamlet for the heads up
Jensen Comment
This consortium features forums for prospective students to graduate programs in
a selected subset of well-known universities.
It would be helpful is the online degree programs were linked at this site.
Most of these universities probably do not have fully online masters programs,
although some of the schools have more online course offerings than other
schools. Some also have partnerships with foreign universities where some of the
courses taught are online and some are onsite. Of course distance education can
be discussed in the forums.
Question
What should a public accounting firm do when it discovers that it's client is
operated by mobsters in organized crime?
Are your knee caps and fingers in jeopardy if you drop a mobster-run client?
Japan's Olympus Corp replaced its KP:MG audit firm in 2009 after a
disagreement over how to account for criminal offshore Enron-like SPVs, but
Olympus decided not to
reveal the dispute to investors, an internal document shows.
We're grateful that the fired KPMG auditors still have all their fingers,
toes, and kneecaps. The motto in Japan may be to go quickly and quietly when
fired as a fired auditor!
"Buffett May Be No Match for Mobsters With Tattoos: William Pesek," by
William Pesek, Bloomberg News, November 22, 2011 ---
http://www.bloomberg.com/news/2011-11-22/buffett-may-be-no-match-for-mobsters-with-tattoos-william-pesek.html
News that
Warren Buffett is looking for opportunities in
Japan is as good as it gets for a nation that has had an awful year.
All Japan needs to do is convince the most famous
value investor that it’s deserving of his money. Yet a curious juxtaposition
involved in Buffett’s first-ever
Japan visit showed why that’s easier said than
done.
Buffett was touring a tool plant in Fukushima
prefecture, where a nuclear-power plant damaged by the tsunami in March has
contaminated the surrounding area. There, he was asked about another
calamity putting Japan in a harsh and negative spotlight: the
Olympus Corp. scandal. The Berkshire Hathaway Inc.
chairman said: “The fact that Olympus happens here or Enron happens in the
U.S. doesn’t affect our attitudes at all.”
Think about it, though. The most-watched market
guru is standing near one crisis caused by political corruption and being
queried about another involving corporate malfeasance. At the heart of
both storylines are growth-killing dynamics that have long given Buffett and
his ilk pause. While different in their details and magnitude they show how
Japan may be too wedded to the past to thrive in a
world of intensifying competition.
The Yakuza Question
Olympus, as venerable a name as there is in Japan,
demonstrates the point. Investigators want to know what happened to at least
$4.9 billion they say is unaccounted for at the camera maker. Of all the
bizarre questions surrounding this sordid tale, the role of organized crime
groups, or yakuza, is the most tantalizing. Police are looking into how much
of the missing cash went into the pockets of these gangs.
“No one can be sure what will be found until the
digging is done,” says Jake Adelstein, author of the 2009 book “Tokyo Vice”
and a well-known crime reporter in Japan.
With their full-body tattoos and amputated fingers,
the yakuza have long held a unique place in the public imagination.
Unfortunately, that goes for Japan’s economy, too. Adelstein calls the
yakuza “Goldman Sachs with guns” because of the prowess with which their
groups’ roughly 80,000 members infiltrate companies through extortion and
intimidation.
Olympus is the latest reminder of the extent to
which the yakuza is intertwined with the corporate culture, and it’s hardly
the only household name to get ensnared. In 2009,
Fujitsu Ltd. (6702) ousted its president for
alleged ties to “antisocial forces,” a euphemism in Japan for organized
crime. The question is this: If Olympus was mixed up with such sinister
forces, which other Nikkei 225 Stock Average companies are?
Mysterious Payoffs
Prime Minister
Yoshihiko Noda is worried that Olympus will sully
Japan’s reputation as a well-regulated market economy.
Michael Woodford’s
travel schedule shows why it may be too late. The former Olympus chief
executive-turned-whistleblower forwarded to the whole Olympus board some
letters detailing his concerns about mysterious payoffs before he was fired
last month. Then Woodford left Japan, fearing for his safety. This week, he
will be under police protection as he returns for the first time to meet
with investigators.
Seriously? In a Group of Seven nation? Yes, these
things can still happen in Japan thanks to a corporate and political
aversion to digging to weed out nefarious interests. A compliant media can
only make that worse.
A similar conclusion can be drawn from events in
Fukushima more than eight months after a record earthquake. It was
incestuous ties between government bureaucrats and the power industry that
left high-tech Japan so vulnerable to the low-tech ways of
Tokyo Electric Power Co., the owner of the damaged
Fukushima reactor.
Organized Corruption
When we think of the mob, we don’t tend to think of
publicly traded utilities like Tepco. But how can anyone look at the ways
politicians enabled Tepco and its shocking safety lapses over the years and
not call it organized corruption? How can the government, knowing what it
does now, rally around the nuclear industry?
Woodford’s soul mate in politics, former Prime
Minister
Naoto Kan, was shown the door in August for asking
hard questions. Kan wanted to hold Tepco accountable for the radiation
leaking into Tokyo’s food supply. Noda quietly let matters return to the
status quo ante for the nuclear-industrial complex that Tepco represents.
The losers are the Japanese people who worry about another Chernobyl when
the next giant earthquake hits.
All this shows how Japan is shunning the change
needed to compete in an age when
China sets the pace. Just as illustrative is the
ability of rice farmers to imperil passage of international-trade deals. And
then there’s corporate Japan with its poison pills, takeover defenses and
protection of inefficiencies.
Continued in article
Bob Jensen's threads on Olympus and KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm
Now the new Olympus auditors from Ernst & Young must worry about their
fingers, toes, and kneecaps!
"Olympus removed auditor after accounting," by Nathan Layne and Kirstin
Ridley, Reuters, November 4, 2011 ---
http://www.reuters.com/article/2011/11/04/us-olympus-auditor-idUSTRE7A32VR20111104
Olympus has lost 55 percent of its market value
since its former chief executive blew the whistle on a series of strange
deals over the past five years, including the payment of a massive $687
million advisory fee.
In May 2009, Tsuyoshi Kikukawa, the then president
of the camera-maker and medical equipment firm, announced that the contract
for its then auditor, KPMG, had ended and that another global accounting
firm, Ernst & Young, would take over.
Kikukawa made no mention of any row with KPMG,
although Japanese disclosure rules require companies to notify investors of
"any matters concerning the opinions" of an outgoing auditor.
In a confidential internal document, Kikukawa wrote
to executives in the United States and Europe, revealing that there had been
a disagreement with KPMG which he did not plan to disclose to the stock
market.
"The release to be published today says that the
reason of this termination is due simply to expiry of accounting auditors'
terms of office," Kikukawa said in the letter dated May 25, 2009, which was
written in English.
"I, however, would like to personally tell both of
you about the circumstances behind this decision for your understanding."
Kikukawa outlined a rift between management and
KPMG over the goodwill impairment of some consolidated firms and over its
$2.2 billion purchase of UK medical device firm Gyrus in 2008.
That acquisition is central to the scandal
engulfing Olympus because of the huge advisory fee, the biggest in M&A
history.
"There are the substantial difference of views on
the below mentioned issues between us including the (internal) company
auditors and KPMG AZSA; the view of impairment test on goodwill of some
consolidated companies, the view of purchase price allocations and
impairment test of Gyrus acquisition."
The discovery of incomplete or improper disclosure
about a changing of auditors would prompt disciplinary action from the Tokyo
Stock Exchange, such as being placed on a watchlist or being required to
submit an improvement plan.
But that infraction alone would not trigger a
delisting, said bourse spokesman Naoya Takahashi.
It would likely draw the attention of Japan's
securities industry regulator, which has started looking into past Olympus
acquisitions, and has made disclosure a key focus of the probe, sources have
told Reuters.
JAPAN ACCOUNTING IN SPOTLIGHT
Yoshiaki Yamada, manager of Olympus' public and
investor relations department, said he could not comment on the letter
because it was not something that had been disclosed by the company. He
reiterated that Olympus changed auditors because KPMG's term had ended.
KPMG's Japan practice, KPMG AZSA LLC, declined to
comment, as did Ernst & Young ShinNihon LLC, citing its duty of
confidentiality as auditor.
The confidential letter was given to Reuters by
former Olympus CEO Michael Woodford who was ousted after just two weeks in
the job on October 14 for what he says was his persistent questioning over
the Gyrus advisory fee and other odd-looking acquisitions.
Woodford says the letter was addressed to him in
his role as head of Olympus Europe at the time and to Mark Gumz, then head
of Olympus Corp America.
"I want you to understand our decision and
cooperate for smooth transition of accounting auditor," Kikukawa concluded
in the letter.
Woodford, a Briton who spent most of his 31-year
Olympus career outside Japan, went on to replace Kikukawa as group president
in April this year, a rare foreigner in charge of a Japanese blue chip, and
Kikukawa became executive chairman.
But last week, after Woodford's sacking had sparked
a firestorm and led to a meltdown in the shares of the 92-year-old Japanese
firm, Kikukawa quit as chairman and Olympus launched its own independent
inquiry into the affair.
Continued in article
Bob Jensen's threads on both KPMG and Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm
Question
How is the current Olympus scandal in Japan related to the Enron scandal?
Hint:
Think Special Purpose Vehicles (SPVs)
Accounting Fraud in Japan
Olympus Urged to Extend Purge of Executives Over Hidden Losses
At least eight Cayman Islands entities have been
linked to Olympus acquisitions that are suspected of playing a role in the
accounting scandal. Five of those no longer exist, according to a search of
the Caymans registry, which doesn’t give details on the individuals behind
the companies.
Olympus President Shuichi Takayama yesterday
said the company was looking into the role played by
special purpose funds in
hiding the losses, which date back to the 1990s.
After he was fired, Woodford went public with
his concerns over the advisory fees and writedowns on three other
transactions. All involved payments to Cayman Islands companies or
special purpose vehicles
whose beneficiaries are not known.
"Olympus Urged to Extend Purge of Executives Over Hidden Losses,"
Business Week, November 8, 2011 ---
http://www.businessweek.com/news/2011-11-08/olympus-urged-to-extend-purge-of-executives-over-hidden-losses.html
Olympus Corp.’s admission that three of its top
executives colluded to hide losses from investors fails to address the roles
played by other officials, according to the company’s biggest overseas
shareholder.
The Japanese camera maker’s shares slumped 29
percent yesterday after it reversed weeks of denials that there was any
wrongdoing in past acquisitions. The company fired Executive Vice President
Hisashi Mori over his role in covering up the losses with former Chairman
Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada
would step down.
Olympus’ biggest overseas shareholder is now
demanding investor relations head Akihiro Nambu go too because of his role
as a director of Gyrus Group Plc, the U.K. takeover target used to funnel
more than $600 million in inflated advisory fees to a Cayman Islands fund.
And after Nambu, the rest of the board must follow, said Josh Shores, a
London-based principal for Southeastern Asset Management Inc.
“Even if they didn’t know the specific details
around where payments were going and exactly why, they knew that cash was
going out the door and they also failed to raise their hands to ask
questions,” Shores said. “I don’t know who else is involved, but somebody
else is. There is a third party somewhere who received this money.”
Olympus President Shuichi Takayama yesterday said
the company was looking into the role played by special purpose funds in
hiding the losses, which date back to the 1990s.
Cayman Links
At least eight Cayman Islands entities have been
linked to Olympus acquisitions that are suspected of playing a role in the
accounting scandal. Five of those no longer exist, according to a search of
the Caymans registry, which doesn’t give details on the individuals behind
the companies.
Kikukawa, Mori and Nambu became the three directors
of Gyrus in June 2008 following the $2 billion acquisition of the U.K.
medical equipment maker in February that year. They were also directors of
three companies set up to handle the takeover, including the decision to pay
out advisory fees that amounted to more than a third of the acquisition’s
value, filings show.
Olympus declined a request to interview Kikukawa
and Mori. In six attempts to talk to Kikukawa at his home, the former
chairman didn’t appear. Mori’s home address given in U.K. filings leads to a
house under renovation in Kawasaki city, about an hour from central Tokyo.
Nobody answered the doorbell on a recent visit to Nambu’s home in a
seven-story condominium about 27 kilometers from the city center.
Japanese and U.S. regulators are probing
allegations by former chief executive officer Michael C. Woodford that more
than $1.5 billion was siphoned through offshore funds. That money may have
been used to cancel out non-performing securities that Olympus was keeping
off its books, according to a report in the Shukan Asahi magazine, which
cited people familiar with the process.
Cockroaches
Yesterday’s plunge in Olympus shares pulled other
Japanese equities lower on concerns the country hasn’t escaped corporate
governance weaknesses that have dogged it since the stock market bubble
burst at the end of 1989. Olympus shares have lost 70 percent of their value
since Woodford took his accusations public after he was axed on Oct. 14.
“Institutional investors will stay away from
Japan’s market until they confirm this is an isolated case,” said Koichi
Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors
probably think that if there’s one cockroach, there may be 10 more,” he
said.
‘Tobashi’
Olympus’ revelations echo the practice of hiding
losses known as “tobashi” that became widespread in Japan in the late 1980s
and led to the failure of Yamaichi Securities Co., according to Yasuhiko
Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used
overseas paper companies to hide problematic securities, until it failed in
1997 with 260 billion yen ($3.3 billion) in hidden impairments.
Takayama declined to comment on the involvement of
any securities firms in Olympus’ cover-up. The Topix Securities and
Commodity Futures Index fell 11 percent, the most of any industry group in
the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in
37 years.
“There is speculation in the market that Nomura may
somehow be involved in this Olympus case,” said Shoichi Arisawa, an
Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in
particular probably sold after seeing a high volume of Nomura’s shares being
traded.”
Nomura didn’t participate in Olympus’s concealment
of losses, said Hajime Ikeda, managing director of corporate communications
for the securities firm.
Nomura Unaware
“We are not aware of any involvement by Nomura in
Olympus’s hiding of losses in the 1990s, and we weren’t involved when
Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a
telephone interview in Tokyo yesterday.
Olympus plunged by its 300 yen daily limit in Tokyo
trading, closing at 734 yen. The Topix ended 1.7 percent lower, the
worst-performing Asian stock index.
The Tokyo Stock Exchange said it’s considering
moving the shares in Olympus, the world’s biggest maker of endoscopes, to a
watchlist for possible delisting. Takayama pledged to continue with the
investigation into the losses, which he said were probably inherited by
Kikukawa.
“The investigation must continue to determine how
much rot there is,” said David Herro, chief investment officer of Harris
Associates LP. “All responsible must, at a minimum, leave. Also, since the
management’s credibility is nearly nonexistent, all of what they say must be
verified.”
Bowed in Apology
Harris held 10.9 million Olympus shares as of June
30, a 4 percent stake that makes it the company’s second-biggest overseas
investor. Southeastern had a 5 percent stake as of Aug. 16, according to
data compiled by Bloomberg.
Olympus President Takayama yesterday said he was
unaware of the hidden losses until he was told by Mori and Kikukawa the
previous evening. At the press conference, he bowed three times in seven
minutes to apologize.
In the weeks running up to his dismissal, Woodford
was engaged in an exchange of letters with Kikukawa and Mori in which he
detailed the allegations and which were copied to all member of the board.
After he was fired, Woodford went public with his
concerns over the advisory fees and writedowns on three other transactions.
All involved payments to Cayman Islands companies or special purpose
vehicles whose beneficiaries are not known.
Olympus paid a total of 73.4 billion yen to
increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006
and 2008, which was also used to hide losses, it said yesterday. Olympus
wrote down 55.7 billion yen, or 76 percent of the acquisition value, in
March 2009, the company said in a statement Oct. 19.
“It’s beyond belief that Mr. Takayama claims he
only found out about it last night,” Woodford said in a telephone interview
yesterday. “If he didn’t know before I started writing my letters then he
should have known after.”
Continued in article
What's Right and What's
Wrong With SPEs, SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"ENRON: what happened and what we can learn from it,"
by George J. Benston and Al L.
Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-127
The following are excerpts only.
Abstract
Enron's accounting for its
non-consolidated special-purpose entities (SPEs), sales of its own stock and
other assets to the SPEs, and mark-ups of investments to fair value
substantially inflated its reported revenue, net income, and stockholders'
equity, and possibly understated its liabilities. We delineate six
accounting and auditing issues, for which we describe, analyze, and indicate
the effect on Enron's financial statements of their complicated structures
and transactions. We next consider the role of Enron's board of directors,
audit committee, and outside attorneys and auditors. From the foregoing, we
evaluate the extent to which Enron and Andersen followed the requirements of
GAAP and GAAS, from which we draw lessons and conclusions.
The accounting issues
The transactions involving SPEs at Enron,
and the related accounting issues are, indeed, very complex. This section
summarizes some of the key transactions and their related accounting
effects. The Powers Report, a 218-page document, provides in great detail a
discussion of a selected group of Enron SPEs that have been the central
focus of the Enron investigations. While very much less detailed than the
Powers Report, the discussion in the following section (which may seem
laborious at times), supplemented with additional material that became
available after publication of the Report, should provide the reader with
insight into how Enron sought to bend the accounting rules to their
advantage. However, even a cursory review of this section will give the
reader a sense of the complex financing structures that Enron used in an
attempt to create various financing, tax, and accounting advantages.
Six accounting and auditing issues are of
primary importance, since they were used extensively by Enron to manipulate
its reported figures: (1) The
accounting policy of not consolidating SPEs that appear to have permitted
Enron to hide losses and debt from investors.
(2) The accounting treatment of sales of Enron's merchant investments to
unconsolidated (though actually controlled) SPEs as if these were arm's
length transactions. (3) Enron's income recognition practice of recording
as current income fees for services rendered in future periods and recording
revenue from sales of forward contracts, which were, in effect, disguised
loans. (4) Fair-value accounting resulting in restatements of merchant
investments that were not based on trustworthy numbers. (5) Enron's
accounting for its stock that was issued to and held by SPEs. (6)
Inadequate disclosure of related party transactions and conflicts of
interest, and their costs to stockholders.
Continued in article at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"ENRON’S TENTH ANNIVERSARY: THE CRIMES," by Anthony H. Catanach and J.
Edward Ketz, Grumpy Old Accountants, November 7, 2011
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/357#more-357
Bob Jensen's threads on the Enron, Worldcom, and Andersen scandals ---
http://www.trinity.edu/rjensen/FraudEnron.htm
"Cattles Claims ‘Gross Misstatement’ of Debt in PwC Audits,"
Bloomberg Business Week, by Eric Larson and Kit Challet, November 2, 2011
---
http://www.businessweek.com/news/2011-11-02/cattles-claims-gross-misstatement-of-debt-in-pwc-audits.html
Cattles Plc, the U.K. subprime lender sold this
year to creditors including Royal Bank of Scotland Group Plc, accused
PricewaterhouseCoopers Plc of accounting failures before its shares were
suspended in 2009.
Cattles has claims against PwC tied to the firm’s
audits of its finances from 2005 through 2007 that could result in
“substantial damages,” according to an outline of the case by Judge Henry
Bernard Eder in London, who ruled yesterday on preliminary issues. The
company said PwC’s audit led to a “gross misstatement” of the company’s bad
debt.
While an official complaint hasn’t yet been filed,
Cattles was awarded some legal costs against PwC in an evidentiary dispute.
Cattles claims groups of loans that were “ostensibly” set aside for debt
collection were in reality just buckets for bad debt, Eder said in the
ruling, which didn’t address the merits of the case. “Once the misstatements
became clear, the group could not continue trading and became worthless.”
The company, based in Batley, England, lent to
customers with poor credit histories and is winding down its loan book after
recording an extra 700 million pounds ($1.12 billion) of writedowns
following the audit irregularities.
Britain’s accounting regulator has been probing
PwC’s handling of the disputed audits since 2009 and the U.K. Financial
Services Authority started an investigation of Cattles the same year, a
person familiar with the situation said at the time. FSA spokesman
Christopher Hamilton declined to comment in a phone interview today.
Deferred Loans
Cattles alleges PwC rewrote or deferred loans that
were in long-term arrears instead of listing them as impaired, Eder said.
When the problem was discovered, Cattles said it was forced to report a loss
in 2008 of 745 million pounds and restate its earnings from the previous
year to a loss of 98.5 million pounds, from a profit of 165.3 million
pounds.
PwC spokesman David Jetuah PwC said the firm wasn’t
aware of a claim against it and will vigorously defend its work.
Paul Marriott, a spokesman for Cattles, declined to
say how much the company may seek in damages.
The financial troubles at Cattles led to a ruling
by the U.K. Supreme Court in July 2010 that the company’s bondholders can
only be repaid once the subprime lender has honored its debts to banks,
including RBS, its biggest lender.
Continued in article
Jensen Comment
PwC is a former U.S. Big Four auditing firms that is now headquartered in the
United Kingdom
Bob Jensen's threads on the recent woes of PwC ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Popular Pearson Tutoring Programs Revamp by Offering ‘Adaptive Learning’,"
by Josh Fischman, Chronicle of Higher Education, November 1, 2011 ---
http://chronicle.com/blogs/wiredcampus/popular-pearson-tutoring-programs-revamp-by-offering-adaptive-learning/33970?sid=wc&utm_source=wc&utm_medium=en
MyLabs and Mastering, tutoring software packages
from Pearson Education that are used in hundreds of college courses, are
getting their guts ripped out and replaced.
The company announced today that it was replacing
its own software with
new adaptive-learning programs that adjust the course to the student.
The new software, from a company called Knewton, has
interactive tutors that lead students through mastery of each skill, giving
short quizzes and offering additional help, such as explanatory text or
videos, tailored to each student’s needs. In large classes, students get
such help—or can skip concepts they know well—without asking the instructor
to intervene. And instructors get constant feedback on how particular
students are doing compared to the rest of the class, or even similar
classes at other institutions.
Pearson provides the content, and Knewton’s program
will control how it is delivered. (Instructors have the ability to set their
own priorities and add their own material.) The two companies plan to begin
beta testing this fall and to have programs ready for the fall semester of
2012.
Instructors greeted the news with a mix of
enthusiasm and concern that changes would harm a product that they already
like. “I’ve been very pleased with MyWritingLab,” said David A. Webster,
coordinator of development education at Marion Technical College, in Ohio.
“I hope they don’t break it!”
He teaches a course called “Preparation for College
Writing” and says his students do much better after working with the
software. But he also said that Knewton’s ability to customize help choices
sounded like a real improvement over the existing product.
Gary S. Buckley, a professor of physical sciences
at Cameron University, in Oklahoma, uses Pearson’s Mastering Chemistry and
Mastering Physics in introductory courses, and said that “now the software
doesn’t really pay attention to the individual student. Everyone gets the
same problems. So this sounds like a good change.”
Continued in article
Learning Management System (LMS) ---
http://en.wikipedia.org/wiki/Learning_management_system
"Freeing the LMS," by Steve Kolowich, Inside Higher Ed, October
13, 2011 ---
http://www.insidehighered.com/news/2011/10/13/pearson_announces_free_learning_management_system
Last year, the media conglomerate Pearson
controlled a shade over 1 percent of the market for learning management
systems (LMS) among traditional colleges, according to the Campus
Computing Project.
This year, Pearson is
taking aim at the other 99 percent.
In a move that could shake the e-learning
industry, the company today
unveiled a new learning management system that
colleges will be able to use for free, without having to pay any of the
licensing or maintenance costs normally associated with the technology.
Pearson’s new platform, called
OpenClass, is only in beta phase; the company does
not expect to take over the LMS market overnight. But by moving to turn the
learning management platform into a free commodity — like campus e-mail has
become for many institutions — Pearson is striking at the foundation of an
industry that currently bills colleges for hundreds of millions per year.
“I think that the announcement really marks
another, and important, nail in the coffin of the proprietary
last-generation learning management system,” says Lev Gonick, CIO of Case
Western Reserve University.
By providing complimentary customer support and
cloud-based hosting, OpenClass purports to underprice even the nominally
free open-source platforms that recently have been
gaining ground in the LMS market.
Hundreds of colleges have defected from Blackboard
-- whose full-service, proprietary platform has ruled the market for more
than a decade -- in favor of open-source alternatives that cost nothing to
license. But while the source code for these systems is free, colleges have
had to pay developers to modify the code and keep the system stable.
OpenClass can be used “absolutely for free,” says
Adrian Sannier, senior vice president of product at Pearson. “No licensing
costs, no costs for maintenance, and no costs for hosting. So this is a freehttp://www.trinity.edu/rjensen/290wp/290wp.htm
r offer than Moodle is. It’s a freer offer than any other in the space.”
Outflanking the Market
Pearson, which sells a variety of higher-education
products and services, including textbooks, e-tutoring software and online
courseware, has had
success selling its own proprietary learning
management system, LearningStudio (formerly known as eCollege), to
for-profit colleges. But the company has made fewer inroads with the much
larger nonprofit sector. With OpenClass, Sannier says Pearson is taking aim
at “traditional institutions around the country where professors are the
ones making the decisions about what’s happening in their classrooms” — a
demographic that has long been Blackboard’s stronghold.
“Our intention is to serve every corner of that
instructor-choice marketplace,” says Sannier.
Pearson says it is taking a strategic cue from
Google, which offers its cloud-based e-mail and applications suite to
colleges for free in an effort to secure “mind share” among the students and
professors who use it. Like Google with its Apps for Education — with which
Pearson has partnered for its beta launch — the media conglomerate is hoping
to use OpenClass as a loss leader that points students and professors toward
those products that the company’s higher ed division sees as the future of
its bottom line: e-textbooks, e-tutoring software, and other “digital
content” products.
Continued in article
Bob Jensen's threads on the history of Learning Management Systems (also
called Course Management Systems) ---
http://www.trinity.edu/rjensen/290wp/290wp.htm
"Jack Welch Moves His Online M.B.A. Program to Strayer U.," by Marc
Parry, Chronicle of Higher Education, November 11, 2011 ---
http://chronicle.com/blogs/wiredcampus/jack-welch-moves-his-online-m-b-a-program-to-strayer-u/34231?sid=wc&utm_source=wc&utm_medium=en
Jack Welch’s online M.B.A. program began with a
bang two years ago, heralded as an
unprecedented venture that could shake up online
education.
Now Mr. Welch is shaking up his own program.
The former CEO of General Electric
said
on Friday that his management institute would move to
Strayer University from its current home at a struggling Ohio for-profit
institution called Chancellor University. The Wall Street Journal
reports that Strayer is paying about $7-million
for the program, with Mr. Welch kicking in $2-million of his own.
In an interview with The Chronicle, Mr.
Welch sounded like a baseball player who had been traded to a wealthier team
with a better chance of making the playoffs.
“We needed a bigger game,” he said. “We’re going
from 500 students with limited resources to 55,000 students with 82 campuses
and much more reach.” Strayer’s advertising and technology budgets were part
of the appeal, he added.
The Jack Welch Management Institute offers
executive M.B.A.’s as well as certificates in subjects like “becoming a
leader.” For students, part of the attraction is weekly Webcam sessions with
Mr. Welch, who weighs in on current events like the situations in Greece and
Italy.
Or baseball: One discussion focused on the umpire
whose botched
call spoiled a perfect game for the Detroit Tigers
pitcher Armando Galarraga. The umpire, Jim Joyce, admitted his error. ”We
use that as a wonderful teaching tool about coming forward when you make a
mistake,” Mr. Welch said.
Mr. Welch doesn’t call his deal with Chancellor a
mistake, saying he is “pleased as hell” with a venture that has attracted
200 students in its first 20 months. He described those students as
“high-ambition middle managers” in companies that include Microsoft, Merck,
and ESPN. Seventy percent of them either pay full tuition or have the cost
covered by their employers, he said.
Robert S. Silberman, chairman and CEO of Strayer
Education, said Mr. Welch raised the idea of a purchase to him in a
telephone call in April: “He was looking for a new academic home.”
In the course of evaluating the institute, Strayer
also looked into acquiring all of Chancellor, which was once a nonprofit
university and is now owned by private investors. But Mr. Silberman said his
company determined that the only part of the university it wanted was Mr.
Welch’s institute.
Strayer was attracted to the curriculum of the
executive-M.B.A. program and the short leadership courses. Strayer now
offers similar courses on a limited basis but is looking to offer more of
them, said Mr. Silberman. Such courses, typically paid for by students’
employers, help Strayer University keep its proportion of revenues from
federal student-aid programs well below the 90-percent maximum allowed.
The purchase will very likely be a plus for Strayer.
Unlike some of its for-profit competitors, the university has not been
tarnished by allegations of wrongdoing. And its recent declines in
enrollment—it has just reported that new-student enrollment fell by 21
percent—have been smaller than those of many other providers.
But at a time when many students are becoming
increasingly conscious of colleges’ academic reputations and averse to
high-cost educational programs, some analysts have questioned whether
Strayer’s brand is strong enough to outweigh the competitive challenges it
faces from for-profit and nonprofit colleges alike. The Welch institute
could add some luster.
"Jack Welch Launches Online MBA: The legendary former GE CEO says he
knows a thing or two about management, and for $20,000 you can, too," by Geoff
Gloeckler, Business Week, June 22, 2009 ---
http://www.businessweek.com/bschools/content/jun2009/bs20090622_962094.htm?link_position=link1
A corporate icon is diving into the MBA world, and
he's bringing his well-documented management and leadership principles with
him. Jack Welch, former CEO at General Electric (GE) (and Business Week
columnist), has announced plans to start an MBA program based on the
business principles he made famous teaching managers and executives in GE's
Crotonville classroom.
The Jack Welch Management Institute (JWMI) will officially
launch this week, with the first classes starting in the fall. The MBA will
be offered almost entirely online. Compared to the $100,000-plus price tag
for most brick-and-mortar MBA programs, the $600 per credit hour tuition
means students can get an MBA for just over $20,000. "We think it will make
the MBA more accessible to those who are hungry to play," Welch says. "And
they can keep their job while doing it."
To make the Jack Welch Management Institute a
reality, a group led by educational entrepreneur Michael Clifford purchased
financially troubled Myers University in Cleveland in 2008, Welch says.
Welch got involved with Clifford and his group of investors and made the
agreement to launch the Welch Management Institute.
Popularized Six Sigma For Welch, the new
educational endeavor is the latest chapter in a long and storied career. As
GE's longtime chief, he developed a management philosophy based on
relentless efficiency, productivity, and talent development. He popularized
Six Sigma, wasn't shy about firing his worst-performing managers, and
advocated exiting any business where GE wasn't the No. 1 or No. 2 player.
Under Welch, GE became a factory for producing managerial talent, spawning
CEOs that included James McNerney at Boeing (BA), Robert Nardelli at
Chrysler, and Jeff Immelt, his successor at GE.
Welch's decision to jump into online education
shows impeccable timing. Business schools in general are experiencing a rise
in applications as mid-level managers look to expand their business acumen
while waiting out the current job slump. The new program's flexible
schedule—paired with the low tuition cost—could be doubly attractive to
those looking to move up the corporate ladder as the market begins to
rebound.
Ted Snyder, dean of the University of Chicago's
Booth School of Business, agrees. "I think it's a good time for someone to
launch a high-profile online degree," Snyder says. "If you make the
investment in contentthat allows for a lot of interaction between faculty
and students and also among students, you can get good quality at a much
more reasonable tuition level."
Welch's Secret Weapon That being said, there are
challenges that an online MBA program like Welch's will have a difficult
time overcoming, even if the technology and faculty are there. "The
integrity and quality of engagement between faculty and students is the most
precious thing we have," Snyder says. "Assuming it's there, it dominates.
These things are hard to replicate online."
But Welch does have one thing that differentiates
his MBA from others: himself. "We'll have all of the things the other
schools have, only we'll have what Jack Welch believes are things that work
in business, in a real-time way," he says. "Every week I will have an online
streaming video of business today. For example, if I was teaching this week,
I would be putting up the health-care plan. I'd be putting up the financial
restructuring plan, talking about it, laying out the literature, what others
are saying, and I'd be talking about it. I'll be doing that every week."
Welch and his wife Suzy are also heavily involved
in curriculum design, leaning heavily on the principles he used training
managers at GE.
Continued in Article
Jensen Comment
There are enormous obstacles standing in the way of the
super-confident Jack Welch on this one. I should mention that I've never been a
Jack Welch fan and am especially disturbed that he is the world's leader in
platinum retirement perks that, in my opinion, go way beyond his value in the
past and future to GE. But I will try to not let my prejudices bias my remarks
below.
- This raises the question of why students choose one MBA program over
another after being admitted to several. For example, suppose a student has
not yet made a decision about accepting MBA program offers at Harvard,
Wharton, Stanford, Claremont, or the Jack (and Suzi) Welch Management
Institute. Assume location and climate are of no concern in this choice.
Some years back the relatively new Claremont MBA program assumed that the
worldwide reputations of faculty were the most important draw for new
students. So they hired at least one big name in each of the business
disciplines, the most notable of which was the famous Peter Drucker.
I won't go into details here and Claremont has a very respected MBA program,
but it has had huge problems attracting enough top students. The reason
quite simply, in my viewpoint, is that students choose MBA programs for
reasons other than reputations of faculty. Of course they assume that a top
MBA program has hired top faculty, but reputations of individual faculty are
not why they choose Stanford over Harvard or Wharton over Claremont. The
choose MBA programs for many of the reasons that led to top MBA programs in
U.S. News or the WSJ. They want high paying opportunities for
fast track wealth, and they assume the last five decades of established
success in that regard makes an MBA program the best for them. They also
want to be among the best students and alumni in the world, because they
feel that networking with current students and active alumni is a leading,
if not the leading, factor for career advancement opportunity.
Having a few big names on the faculty just does not cut it relative to the
more important factors when top students seek out an MBA program. The same
can be said to a somewhat lesser extent when choosing a doctoral studies
program. In the latter case, an applicant is often heavily influenced by a
current or former Professor X who recommends the doctoral program at
University Y because Professor Z happens to be a leading research advisor at
University Y. This is not the case for MBA students in most instances.
- If you're starting up an MBA program, an online MBA program is probably
a good idea. This will attract some high GMAT applicants who, for whatever
reason, just cannot leave town to become a full-time student in another
locale. But at the same time, an online MBA program is a turn off to other
top prospects. Some of the reasons were mentioned above. In addition, online
degree programs still have a stigma that online degrees are inferior (even
though many studies, such as the SCALE Experiment at Illinois, suggest that
online learning may be better if online instruction is excellent. Equally
important is that potential employers generally recruit more aggressively in
reputable onsite MBA programs. Jack Welch will have more success if he can
get inside tracks for his graduates to roll into the top jobs. Somehow I
doubt that he can do this for more than a handful of graduates vis-a-vis the
competition from the top 50 MBA programs ranked by U.S. News and the
WSJ.
- The timing could not be worse for starting a MBA Program. Top programs
at Harvard, Stanford, Wharton, etc. are having trouble placing their
students, including their top students after Wall Street virtually imploded
and we're in probably the worst job market since the 1930s. This June, 80%
of the nation's undergraduates seeking employment could not find jobs for
which a college education is required. I suspect the situation is even worse
for the nation's MBA programs in terms of graduates who did not already have
satisfactory jobs before entering an MBA program. Some enter such programs
with jobs such as when a career military officer decides to go for an MBA on
the side.
- It is hard to compete without accreditation with MBA programs that are
accredited. Hundreds of MBA programs around the world have struggled
desperately to get AACSB accreditation. I doubt that the Jack Welch name
trumps accreditation.
In any case it will be interesting to track the progress of the Jack Welch
Management Institute. I would applaud if it becomes one of the best online
degree programs in the world, because I highly support the development of more
and better online training and education programs in the world ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm
The Official Website of the Jack (and Suzi) Welch Management Institute is at
http://www.welchway.com/
The competition is listed at
http://www.trinity.edu/rjensen/Crossborder.htm
"Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis?"
by Braden Goyette, Publica, October 26, 2011 ---
http://www.propublica.org/article/cheat-sheet-whats-happened-to-the-big-players-in-the-financial-crisis
Widespread demonstrations in support of
Occupy Wall Street have put the financial crisis back into the national
spotlight lately.So here’s a
quick refresher on what’s happened to some of the main players, whose
behavior, whether merely reckless or downright deliberate, helped cause
or worsen the meltdown. This list isn’t exhaustive -- feel welcome to
add to it.
Mortgage originators
Mortgage lenders contributed to the
financial crisis by issuing or underwriting loans to people who
would have a difficult time paying them back, inflating a housing
bubble that was bound to pop.
Lax regulation allowed banks to stretch their mortgage lending
standards and use aggressive tactics to rope borrowers into complex
mortgages that were more expensive than they first appeared. Evidence
has also surfaced that
lenders were filing fraudulent documents to push some of these mortgages
through, and, in some cases, had been doing so as early as the
1990s. A 2005 Los Angeles Times
investigation of Ameriquest – then the nation’s largest
subprime lender – found that “they forged documents, hyped
customers' creditworthiness and ‘juiced’ mortgages with hidden rates and
fees.” This behavior was reportedly typical for the subprime mortgage
industry. A similar culture existed at
Washington Mutual, which went under in 2008 in the
biggest bank collapse in U.S. history.
Countrywide, once the nation’s
largest mortgage lender, also pushed customers to sign on for
complex and costly mortgages that boosted the company’s profits.
Countrywide CEO Angelo Mozilo was
accused of misleading investors about the company’s mortgage lending
practices, a charge he denies. Merrill
Lynch and
Deutsche Bank both purchased subprime mortgage lending
outfits in 2006 to get in on the lucrative business. Deutsche Bank has
also been accused of
failing to adequately check on borrowers’ financial status before
issuing loans backed by government insurance. A lawsuit filed by U.S.
Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s
mortgage received audits on the quality of their mortgages from an
outside firm, they
stuffed them in a closet without reading them. A Deutsche Bank
spokeswoman said the claims being made against the company are
“unreasonable and unfair,” and that most of the problems occurred before
the mortgage unit was bought by Deutsche Bank.
Where they are now: Few
prosecutions have been brought against subprime mortgage lenders.
Ameriquest
went out of business in 2007, and Citigroup bought its mortgage
lending unit. Washington Mutual was bought by JP Morgan in 2008. A
Department of Justice investigation into alleged fraud at WaMu
closed with no charges this summer. WaMu also recently
settled a class action lawsuit brought by shareholders for $208.5
million. In an ongoing lawsuit, the FDIC is accusing former
Washington Mutual executives Kerry Killinger, Stephen Rotella and David
Schneider of going on a "lending
spree, knowing that the real-estate market was in a 'bubble.'" They
deny the allegations.
Bank of America purchased Countrywide in January of 2008, as
delinquencies on the company’s mortgages soared and investors began
pulling out. Mozilo left the company after the sale. Mozilo
settled an SEC lawsuit for $67.5 million with no admission of
wrongdoing, though he is now banned from serving as a top executive at a
public company. A criminal investigation into his activities fizzled out
earlier this year. Bank of America invited several senior Countrywide
executives to stay on and run its mortgage unit. Bank of America Home
Loans does not make subprime mortgage loans. Deutsche Bank is still
under investigation by the Justice Department.
Mortgage securitizers
In the years before the crash, banks
took subprime mortgages, bundled them together with prime mortgages and
turned them into collateral for bonds or securities, helping to seed the
bad mortgages throughout the financial system. Washington Mutual,
Bank of America, Morgan Stanley and others were
securitizing mortgages as well as originating them. Other companies,
such as Bear Stearns, Lehman Brothers, and Goldman Sachs,
bought mortgages straight from subprime lenders, bundled them into
securities and sold them to investors including pension funds and
insurance companies.
Where they are now: This spring,
New York’s Attorney General launched a
probe into mortgage securitization at Bank of America, JP Morgan,
UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing
boom. Morgan Stanley
settled with Nevada’s Attorney General last month following an
investigation into problems with the securitization process.
As part of a proposed settlement with
the 50 state attorneys general over foreclosure abuses, several big
banks were
offered immunity from charges related to improper mortgage
origination and securitization. California and New York have
withdrawn from those talks.
The people who created and
dealt CDOs
Once mortgages had been bundled into
mortgage-backed securities, other bankers took groups of them and
bundled them together into new financial products called Collateralized
Debt Obligations. CDOs are composed of tiers with different levels of
risk. As we’ve reported,
a hedge fund named Magnetar worked with banks to fill CDOs
with the riskiest possible materials, then used credit default swaps to
bet that they would fail. Magnetar says that the majority of its short
positions were against CDOs it didn’t own. Magnetar also says it didn’t
choose what went its own CDOs, though people involved in the deals who
spoke to ProPublica
contradict this account.
American International Group’s
London-based financial products unit was among the entities that
provided credit default swaps on CDOs. Though the business of
insuring the risky securities made AIG large short-term profits, it
eventually brought the company to the brink of collapse, prompting an
$85 billion government bailout.
Merrill Lynch, Citigroup, UBS,
Deutsche Bank, Lehman Brothers and JPMorgan all made
CDO deals with Magnetar. The hedge fund invested in 30 CDOs from the
spring of 2006 to the summer of 2007. The bankers who worked on these
deals almost always reaped hefty bonuses. From
our story:
Even today, bankers and managers
speak with awe at the elegance of the Magnetar Trade. Others have
become famous for betting big against the housing market. But they
had taken enormous risks. Meanwhile, Magnetar had created a largely
self-funding bet against the market.
When banks found CDOs hard to sell, some
of them, notably Merrill Lynch and Citibank,
bought each other’s CDOs, creating the illusion of true investors
when there were almost none. That was one way they kept the market for
CDOs going longer than it otherwise would have. Eventually CDOs began
purchasing risky parts of other CDOs created by the same bank. Take a
look at our
comic strip explaining self-dealing, and our chart detailing
which banks bought their own CDOs.
Goldman Sachs and
Morgan Stanley also made similar deals in which they created,
then bet against, risky CDOs. The hedge fund
Paulson & Co helped decide which assets to put inside Goldman’s
CDOs.
Where they are now: Overall, the
banks and individuals involved in CDO deals haven’t been convicted on
criminal charges. The civil suits against them have produced fines that
aren’t very big compared to the profits they made in the leadup to the
financial crisis.
JP Morgan paid $153.6 million to settle an SEC suit alleging they
hadn’t disclosed to investors that Magnetar was betting against Morgan’s
CDO.
Citigroup just agreed to pay a $285 million fine to the SEC for
betting against one of its mortgage-related CDOs. The lawsuit
doesn’t mention dozens of similar deals made by Citi.
Magnetar is still thriving (the deals
they made weren’t illegal according to the rules at the time). In 2007,
Magnetar’s
founder took home $280 million, and the fund had $7.6 billion under
management. The SEC is considering banning hedge funds and banks from
betting against securities of their own creation. As of May 2010,
federal prosecutors were investigating
Morgan Stanley over their CDO deals, and
Goldman Sachs paid $550 million last year to settle a lawsuit
related to one of theirs. Only
one Goldman employee, Fabrice Tourre, has been charged criminally in
connection to the deals.
Though recorded phone calls suggest that
former AIG CEO Joseph Cassano misled investors about the credit default
swaps that contributed to his company’s troubles, the evidence wasn’t
airtight, and federal probes against him fell apart in 2010. Cassano’s
lawyers deny any wrongdoing.
The ratings agencies
Standard and Poor’s, Moody’s
and Fitch gave their highest rating to investments based on
risky mortgages in the years leading up to the financial crisis.
A Senate investigations panel found that S&P and Moody’s continued
doing so even as the housing market was collapsing. An SEC report also
found failures at 10 credit rating agencies.
Where they are now: The SEC is
considering suing Standard and Poor’s over one particular CDO deal
linked to the hedge fund Magnetar. The agency had previously
considered suing Moody’s, but instead issued a report
criticizing all of the rating agencies generally. Dodd-Frank created
a regulatory body to oversee the credit rating agencies, but its
development has been
stalled by budgetary constraints.
The regulators
The
Financial Crisis Inquiry Commission [PDF] concluded that the
Securities and Exchange Commission failed to crack down on risky
lending practices at banks and make them keep more substantial capital
reserves as a buffer against losses. They also found that the Federal
Reserve failed to stop the housing bubble by setting prudent
mortgage lending standards, though it was the one regulator that had the
power to do so.
An internal SEC audit
faulted the agency for missing warning signs about the poor
financial health of some of the banks it monitored,
particularly Bear Stearns. [PDF] Overall, SEC enforcement actions
went down under the leadership of Christopher Cox, and a 2009 GAO
report found that he
increased barriers to launching probes and levying fines.
Cox wasn’t the only regulator who
resisted using his power to rein in the financial industry. The former
head of the Federal Reserve, Alan Greenspan, reportedly
refused to heighten scrutiny of the subprime mortgage market.
Greenspan later said before Congress that
it was a mistake to presume that financial firms’ own rational
self-interest would serve as an adequate regulator. He has also said he
doubts the financial crisis could have been prevented.
The Office of Thrift Supervision,
which was tasked with overseeing savings and loan banks, also helped to
scale back their own regulatory powers in the years before the financial
crisis. In 2003 James Gilleran and John Reich, then heads
of the OTS and Federal Deposit Insurance Corporation
respectively,
brought a chainsaw to a press conference as an indication of how
they planned to cut back on regulation. The OTS was known for being so
friendly with the banks -- which it referred to as its “clients” -- that
Countrywide
reorganized its operations so it could be regulated by OTS. As we’ve
reported, the regulator failed to recognize serious
signs of trouble at AIG, and
didn’t disclose key information about IndyMac’s finances in the
years before the crisis. The Office of the Comptroller of the
Currency, which oversaw the biggest commercial banks, also
went easy on the banks.
Where they are now: Christopher
Cox
stepped down in 2009 under
public pressure. The OTS was dissolved this summer and its duties
assumed by the OCC. As we’ve noted, the
head of the OCC has been advocating to weaken rules set out by the
Dodd Frank financial reform law. The Dodd Frank law
gives the SEC new regulatory powers, including the ability to bring
lawsuits in administrative courts, where the rules are more favorable to
them.
The politicians
Two bills supported by Phil Gramm
and signed into law by Bill Clinton created many of the
conditions for the financial crisis to take place. The
Gramm-Leach-Bliley Act of 1999 repealed all the remaining parts of
Glass-Steagall, allowing firms to participate in traditional banking,
investment banking, and insurance at the same time. The Commodity
Futures Modernization Act, passed the year after, deregulated
over-the-counter
derivatives – securities like CDOs and credit default swaps, that
derive their value from underlying assets and are traded directly
between two parties rather than through a stock exchange. Greenspan and
Robert Rubin, Treasury Secretary from 1995 to 1999, had both
opposed regulating derivatives. Lawrence Summers, who went
on to succeed Rubin as Treasury Secretary, also
testified before the Senate that derivatives shouldn’t be regulated.
Continued in article
Jensen Comment
This is a well-researched summary article of what happened between 2008 and 2011
to the "Major Players" in the enormous economic crisis, subprime mortgage, CDO,
and other scandals.
My criticism is that the article seems to let CPA auditors off the hook in
terms of being "Big Players" which, in my viewpoint is an enormouse oversight.
For example, it mentions the huge WaMu settlement without mentioning the lawsuit
against Deloitte. It mentions the Lehman Bros. scandal without mentioning Ernst
& Young. Nor does it mention the other dereliction of duty of all the
large international audit firms and the small audit firms who never warned the
public about pending failures of thousands of small banks and mortgage companies
on Main Street as well as Wall Strett. The large and small CPA audit firms fell
flat on their faces as important watchdogs over the Bigger Players and Smaller
Players ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Here are the only tidbits about audits and auditors in the above article:
U.S. Attorney Preet Bharara claimed that, when
employees at Deutsche Bank’s mortgage received audits on the quality of
their mortgages from an outside firm, they
stuffed them in a closet without reading them. A
Deutsche Bank spokeswoman said the claims being made against the company are
“unreasonable and unfair,” and that most of the problems occurred before the
mortgage unit was bought by Deutsche Bank
. . .
An internal SEC audit
faulted the agency for missing warning signs about
the poor financial health of some of the banks it monitored,
particularly Bear Stearns.
[PDF] Overall, SEC enforcement actions went down under the leadership of
Christopher Cox, and a 2009 GAO report found that he
increased barriers to launching probes and levying fines.
.
So my conclusion is that Braden Goyette did a pretty good job summarizing
what happened to what he called the "Big Players" in the economic crisis. He
just did not include all of the Big Players ---
http://www.trinity.edu/rjensen/2008Bailout.htm
A Frightening Tale of Gmail
"Hacked!" by James Fellows, "The Atlantic, November 2011 ---
http://www.theatlantic.com/magazine/archive/2011/11/hacked/8673/?single_page=true
Thank you Robert Walker for the heads up.
As email, documents, and almost every aspect of our
professional and personal lives moves onto the “cloud”—remote servers we
rely on to store, guard, and make available all of our data whenever and
from wherever we want them, all the time and into eternity—a brush with
disaster reminds the author and his wife just how vulnerable those data can
be. A trip to the inner fortress of Gmail, where Google developers recovered
six years’ worth of hacked and deleted e‑mail, provides specific advice on
protecting and backing up data now—and gives a picture both consoling and
unsettling of the vulnerabilities we can all expect to face in the future.
. . .
“I see that you’ve got it!” he said. “The zeal of
the convert. People in the business think about the risks all the time, but
normal people don’t, until they’ve gotten a taste of the consequences of
failure.”
I have now had that taste and am here to share the
experience. As with so many other challenges in modern life, responding with
panic or zealotry doesn’t get us anywhere. But a few simple self-protective
steps can save a lot of heartache later on.
October 31, 2011 message from John Howland
Bob, the Mike Jones in this article is a Trinity CS
grad. He has helped provide Google internships for our students.
Sent from my iPad
John E. Howland
url:
http://www.cs.trinity.edu/~jhowland /
Computer Science email:
jhowland@ariel.cs.trinity.edu
Trinity University voice: (210) 999-7364
One Trinity Place fax: (210) 999-7477 San Antonio, Texas 78212-7200
October 29, 2011 reply from Linda Phingst
One of my main clients was subjected to this just
this past summer. Really read the emails coming to you, and be suspect of
anything that is not ‘good’ grammar. Yes, we all miss spell things, but
‘broken’ English is easy to spot. Main countries of origin are Russia and
Nigeria. FBI/Homeland Security is not even the little bit interested if the
scam is not Over 100K, they want the big fish. So it is up to us to be
smarter and more diligent.
Thankfully, it ‘only’ cost the client my time (n/c)
and about 7K in lost funds. They are working on retrieving that. My advice,
write it off to the experience account.
But Pay Pal is not all it’s is cracked up to be.
Forget the ‘safest, easiest way to pay’ it’s a joke. You have to buy more
‘security’ from Pay Pal, it does not come with the account. Unless you buy
additional security Pay Pal does not even check the name against the card
holder account. And they don’t tell you that when you sign up.
And there is no insurance offered for commercial
shopping cart scams.
If you come across a scam or are scammed report it
to the FBI at: https://tips.fbi.gov/ or http://www.ic3.gov/default.aspx
Educate yourself on the latest scams at: http://www.fbi.gov/scams-safety/fraud
And they will aggregate them for $$/occurrence and
try to go after them.
Linda Pfingst, CPA
November 1, 2011 reply from Steve Hornik
Thanks Robert and Linda for bringing this up on our
list.
It's my belief that we need to be educating our students on this issue and
in that regard I've completely changed by Grad AIS course this semester.
For the first time the course is basically an IT Security course and
believe me the hacking article is just a little scary compared to other
issues once you start looking into this area. I used to go over with my
class the AICPA Top Technology Trends that they do each year, and if you
look at them,
http://www.aicpa.org/InterestAreas/InformationTechnology/Resources/TopTechnologyInitiatives/Pages/2011TopTechInitiatives.aspx
You see that each year for over a decade Security is
the #1 issue (or something related to security). Also of course compliance
with SOX, etc. makes this an important issue and knowledge that accounting
students should have. Of course I've always been a bit odd in what I've
taught and maybe a bit contrarian - I mean what's more important, that these
students know how to design an Access database or know where IT/Network
vulnerabilities exist, why they exist, and what can be in put in place to
help prevent hacks. As was clear in the article, a lot of protections,
starting with passwords, can be simple if only they are used properly. But
its amazing how often the simple stuff is just not done. During the 1st day
of the class I go over the HB Gary case with my students. This is a top
security firm, with government contracts that got hacked. Now you would
think that security companies are under attack all the time, and I expect
they are but this top security firm got hacked because they employed
incredibly weak to non-existent security - so if the one's being paid to
protect us, are not "drinking their own kook-aid" what are mere mortals
supposed to do? Here's a link to a great article explaining the whole sad
affair:
http://arstechnica.com/tech-policy/news/2011/02/anonymous-speaks-the-inside-story-of-the-hbgary-hack.ars/
By the way, if there are other crazy one's like me teaching this - let me
know. In my first crack at this I'm tending to do a lot of lecturing but
want to eventually move towards case studies and projects. So if anyone has
anything they'd like to share please do.
_________________________
Dr. Steven Hornik
University of Central Florida
Dixon School of Accounting
407-823-5739
http://about.me/shornik
Second Life: Robins Hermano
Twitter: shornik
http://mydebitcredit.com
yahoo ID: shornik
Bob Jensen's neglected threads on computer and networking security are at
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection
"Three Traps Facing New Global
Leaders," by Saj-nicole Jon, BusinessSchools, November
7, 2011 ---
http://paper.li/businessschools?utm_source=subscription&utm_medium=email&utm_campaign=paper_sub
"MF Global : 99 Problems And Auditor
PwC Warned About None," by Francine McKenna, re:The Auditors,
October 28, 2011 ---
http://retheauditors.com/2011/10/28/mf-global-99-problems-and-pwc-warned-about-none-of-them/
Update October 31:
I’m putting updates over at Forbes.
My latest column is
up at American Banker, “Are Cozy Ties Muzzling S&P on MF Global
Downgrade?”
You may recall the
last time I wrote about MF Global. That story was about the “rogue”
trader that cost them $141 million. In the meantime we’ve seen
another “rogue” trader scandal and PwC has given MF Global clean
opinions on their financial statements and internal controls over
financial reporting since the firm went public in mid-2007.
I’m sure PwC thought
everything was peachy as recently as this past May when the annual
report came out for their year end March 30. Instead we’re seeing
another sudden, unexpected, calamitous, black-swan event that no one
could have predicted let alone warn investors about.
Right….
Also see
http://www.forbes.com/sites/francinemckenna/2011/10/30/mf-global-99-problems-and-auditor-pwc-warned-about-none/
Jensen Comment
I prefer "Yeah right!" to just plain "Right!"
MF Global also has some ocean front property for sale in Arizona that's
been attested to by PwC.
"MF Global Shares Halted; News
Pending," The Wall Street Journal, October 31, 2011 ---
http://blogs.wsj.com/deals/2011/10/31/mf-global-shares-halted-news-pending/
As stock markets
open in New York on Monday, MF Global shares remain halted. The only
news the company has released so far is a one-line press release
confirming the suspension from the Federal Reserve Bank of New York.
Pre-market trading
in MF Global Holdings has been halted since about 6 a.m. ET as news
is expected to be released about Jon Corzine’s ailing brokerage.
Meanwhile, the
global exchange and trading community is moving to lock-down mode on
MF Global as the U.S. broker continues efforts to forge a
restructuring that could include a sale and bankruptcy filing.
The U.S. clearing
unit of ICE said it is limiting MF Global to liquidation of
transactions, while the Singapore Exchange won’t enter into new
trades. Floor traders said Nymex has halted all MF Global-created
trading. Some MF traders are restricted from the entering the floor
of the Chicago Board of Trade, and the Federal Reserve Bank of New
York said it had suspended doing business with MF Global.
The New York Fed
said in its brief statement: “This suspension will continue until MF
Global establishes, to the satisfaction of the New York Fed, that MF
Global is fully capable of discharging the responsibilities set out
in the New York Fed’s policy…or until the New York Fed decides to
terminate MF Global’s status as a primary dealer.”
The Wall Street
Journal reported Sunday night that MF Global is working on a deal to
push its holding company into bankruptcy protection as soon as
Monday, and to sell its assets to Interactive Brokers Group in a
court-supervised auction.
Continued in article
Jensen Comment
Francine may be singing
'99 bottles of negligence on the wall, 99 bottles of negligence,
if one of the bottles should happen to fall, 98 bottles of negligence on
the wall, . . . "
"MF GLOBAL GOES BELLY UP, SO WHERE WAS THE GOING CONCERN OPINION?" by
Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, November 1,
2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/368
Poor Jon Corzine! What a pity his firm declared
bankruptcy on Halloween. Because he no more tricks to play, he will be
receiving few treats.
Last week Francine McKenna must have had
premonition of what was to come, for she asked us whether PwC should have
issued a going concern opinion. Ok, maybe she was well connected with all
the movers and shakers and was on top of the news about the firm. Or maybe
she read the SEC filings. At any rate, she has discussed MF Global in “Are
Cozy Ties Muzzling S&P on MF Global Downgrade?” and “MF Global: 99 Problems
and PwC Warned About None of Them.”
To answer the question, yes, we do think PwC
probably should have issued a going concern opinion. There were plenty of
breadcrumbs to reveal the cupboard was bare.
SAS No. 59 (AU section 341) seems reasonably clear
about the principles. It says in paragraph 2: “The auditor has a
responsibility to evaluate whether there is substantial doubt about the
entity’s ability to continue as a going concern for a reasonable period of
time, not to exceed one year beyond the date of the financial statements
being audited.” Paragraph 6 goes on to say the auditor should consider such
things as negative trends in key financial metrics, indications of possible
financial difficulties, and external matters that have occurred.
We wonder what is meant by this pronouncement and
what evidence must be present to conclude that a going concern opinion is
appropriate. Might that include four years (2008-2011) of massive losses, as
occurred at MF Global? Might that include severely negative free cash flows
for three of the last four years? Might that include an exposure to European
sovereign debt that will lead to greater future losses? Might that include
several downgrades in the credit ratings?
Unfortunately, our experience with Big Four
practice suggests a myopic and unreasonable focus on the ability of the
entity to pay its bills for the coming year is often the primary criteria
driving the opinion. Indeed, the number of going concern opinions is
decreasing when they likely should be increasing.
Continued in article
Why didn't auditors question going concern assumptions when thousands of
banks failed?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
"Why I No Longer Teach Online," by Nancy Bunge, Chronicle of Higher
Education, November 6, 2011 ---
http://chronicle.com/article/Why-I-No-Longer-Teach-Online/129615/#disqus_thread
I had no interest in online teaching until a
colleague who shared my literary background told me he used it to encourage
students to engage more deeply with texts.
Since I teach general-education courses that
require challenging readings, I thought having students write analyses and
submit them online would give them more involvement with the text and me a
sharper sense of what they understood. So I signed up for multiple
online-teaching workshops, and the following year I substituted a weekly
online lesson for about a fourth of my classes.
I thought the courses went well. During the fall
semester in 2008, students who were asked to evaluate the online work
responded positively, maintaining a tactful silence about my technological
ineptitude. I might ask them to analyze specific passages from Immanuel
Kant's Groundwork of the Metaphysics of Morals, then articulate their own
perspectives on his ideas, providing evidence for their claims. I also asked
them to list a number of central ideas from Martin Buber's I and Thou, to
cite supporting passages from the text, and to arrange these ideas into a
logical sequence. The following semester I participated in a seminar on
building blended courses and found it invigorating. By the end of that
academic year, I expected to gradually increase the online component of my
classes.
Over the summer of 2009, I attended the Conference
on Distance Teaching & Learning at the University of Wisconsin at Madison. I
learned that scholars had started looking critically at online instruction
to tease out the approaches that genuinely work. Those comments made me
realize that although I had enjoyed experimenting in my class, I had little
confidence that my innovations generated better work.
My students responded with mildly encouraging
remarks, not spectacular results. But their generous reactions the previous
fall to my old-fashioned online assignments (such as asking them to analyze
a passage of literature using an idea from a philosophic work we read)
persuaded me that it made sense to use online work to coax students to think
through texts on their own.
I continued to teach a quarter of my course
material online, but primarily I had my students write analyses. But a
troubling pattern emerged in my two "Philosophy in Literature" sections:
Students who attended class, did the reading, and completed the online
assignments seemed to enjoy the course and found the online assignments
useful. But too many students struggled to complete the course requirements.
I wondered if adding the online material had pushed students away. So I
dropped the online component the following academic year.
I told my classes I could add online work if
students requested it, but not a single student of the 147 enrolled in all
my classes asked for it. The same "Philosophy in Literature" classes that
had left me wondering the previous semester whether students could handle
essential conceptual work went well. Both years, students filled out online
evaluations. Since many more filled them out the second year, and the
surveys posed different questions, they fall far short of a scientific
sample. But the vastly different results are interesting.
I began teaching online because I thought students
would be more challenged writing about the texts on their own than talking
about them in class. But in fact they thought they learned more and were
more challenged intellectually when the course had no online component, even
though the online work involved substantial analysis.
Some 74 percent of those who took the course
without any regular online assignments rated it as offering a
higher-than-average intellectual challenge, compared with 58 percent of
those in a course with an online component. Both years, another question
asked students how much they had learned. Only 42 percent of those who had
done online work evaluated their learning in the course as above average,
compared with 63 percent in the course with no online component.
The most interesting contrast shows up in the
comments: Those who liked my course with the online modules praised its
organization, while students in the course with no online component talked
about my enthusiasm, respect for their opinions, and obsession with making
sure they understood the texts and assignments—all traits beyond a
computer's reach.
Studying my students' reactions reminds me that
teaching well means participating in a relationship with them. Apparently,
turning over a fourth of the course to a computer weakened the bond between
us, even though every week I wrote individual responses to their online
work. I wondered why students gave me good evaluations the first time I
attempted online teaching. Perhaps my blundering won them over. I made many
mistakes as I learned to use the technology, so I e-mailed them frequently
and anxiously monitored their reactions. They may have appreciated the same
thing that students in my traditional classes liked: my concern for their
learning.
Continued in article
Bob Jensen added the following comment to Professor Bunge's article
---
http://chronicle.com/article/Why-I-No-Longer-Teach-Online/129615/#disqus_thread
You seem to have avoided the usual pitfall of differences between
students in on-campus degree programs versus students in onsite programs ---
the student effects.
However, your research does not eliminate instructor effects since you are
only studying yourself as an instructor --- the instructor effects.
Your evidence is anecdotal and fails to mention some of the more scientific
experiments between online versus onsite learning. My favorite example is
the SCALE program at the University of Illinois that tracked 30 courses for
five years in various disciplines where the same instructors taught online
and onside sections using the same course materials.
The SCALE experiments found that many B students onsite became A students
online and C students onsite became B students online. There was no
significant difference between D and F students online or onsite. It's
important to note the SCALE research effort to eliminate instructor effects
and student effects.
The SCALE experiments and somewhat similar research studies are summarized
at
http://www.trinity.edu/rjensen/255wp.htm#Illinois
The advantages and limitations of asynchronous learning are summarized at
http://www.trinity.edu/rjensen/255wp.htm
The biggest problem with online education is instructor burnout. This arises
in great measure due to intensity of one-on-one communications with
students.
One of the great onsite teachers (all-university teaching awards at three
universities) discusses her experiences shifting to online teaching ---
http://www.cs.trinity.edu/~rjensen/002cpe/Dunbar2002.htm
Bob Jensen
"Finding more flaws in HUD’s accounting of HOME program," by Debbie
Cenziper, The Washington Post, November 7, 2011 ---
http://www.washingtonpost.com/investigations/finding-more-flaws-in-huds-accounting-of-home-program/2011/10/13/gIQAkTlctM_story.html
The calls started in mid-May, two weeks before a
looming congressional hearing.
Staff members across the vast U.S. Department of
Housing and Urban Development were racing to check in with hundreds of local
agencies to determine the status of housing construction projects for the
poor.
Within days, the massive scramble came to a
conclusion: HUD told Congress that its $32 billion HOME Investment
Partnerships Program was doing just fine.
Those findings followed reports by The Washington
Post that HUD had routinely failed to track the progress of its
affordable-housing projects and that hundreds of deals involving hundreds of
millions of dollars showed signs of delay or appeared to be in limbo. HUD
officials defended the program, saying most projects are successfully
completed.
But HUD’s attempt to demonstrate that success to
Congress resulted in reports to lawmakers that, to judge by federal records
and interviews with dozens of local housing agencies in charge of the
projects, contain discrepancies and contradictions that suggest continuing
problems with the program.
Indeed, the delays vexing the HOME program are
larger than previously reported. In recent weeks, local housing agencies
have confirmed that about 75 construction projects drew and spent $40
million in HOME funds with little or nothing built. That is in addition to
the nearly 700 potentially delayed projects The Post identified earlier this
year.
“The data that HUD has provided to this committee
is completely unreliable,” said Rep. Randy Neugebauer (R-Tex.), chairman of
the House Financial Services subcommittee on oversight and investigations,
which has been probing the HOME program. “HUD has almost no way of knowing
whether taxpayer dollars have been wasted or used for their intended
purpose.”
In its recent accounts to Congress, HUD reported as
complete at least 17 construction projects that did not deliver all of the
units that had been promised. One was in Newark, where a developer received
nearly $700,000 in HOME funding but completed only four of 11 units, leaving
behind partially completed houses and barren lots, records and interviews
show.
“We would not have characterized it as
satisfactorily completed,” said Newark housing chief Michael Meyer.
HUD also reported that at least 16 projects were
completed months or even years before low-income buyers purchased the units,
local housing officials said. HUD’s regulations state that homeowner
projects are complete only after the homes are sold.
Members of Congress have found similar
inconsistencies. At a hearing last week, several Republican members of the
House Financial Services Committee said they had tracked down reportedly
completed projects in their districts and found, among other things, a
vacant lot and a shuttered building.
“Where’s the money? Where are the units that were
promised? Has HUD demanded repayments for units that were not built?” said
Rep. Judy Biggert (R-Ill.), who chairs the Financial Services subcommittee
on insurance, housing and community opportunity.
Bob Jensen's threads on the sad state of governmental accounting and
accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
"Lessons in Risk Management: A Broken Clock is Never Right -- It's Just
Broken," by Jim Peterson, re:TheBalance, November 7, 2011 ---
Click Here
http://www.jamesrpeterson.com/home/2011/11/lessons-in-risk-management-a-broken-clock-is-never-right-its-just-broken.html
And on a global scale since 2007, the road to
financial ruin has been littered with the reputational corpses of those who
mistakenly believed that the quants’ “value-at-risk” models and their
off-spring sufficed to support their portfolios of exotic financial products
– among them, Jimmy Cayne of Bear Stearns, Chuck Prince of Citi, Dick Fuld
of Lehman Brothers and most lately, Jon Corzine at MF Global.
Which is not to say that there is nothing at all to
learn from a clear-eyed acknowledgement of the limits on the knowable. But
more likely than an unexamined repetition of a maxim that is both
conventional and therefore probably wrong, let the inquiry seek wisdom from
the more humble perspective of the counsels of caution.
Continued in article
From CBS Sixty Minutes segment on November 6, 2011
"Jack Abramoff: The lobbyist's playbook" ---
Click Here
http://www.cbsnews.com/8301-18560_162-57319075/jack-abramoff-the-lobbyists-playbook/?tag=contentMain;cbsCarousel
Jack Abramoff, the notorious former lobbyist at the
center of Washington's biggest corruption scandal in decades, spent more
than three years in prison for his crimes. Now a free man, he reveals how he
was able to influence politicians and their staffers through generous gifts
and job offers. He tells Lesley Stahl the reforms instituted in the wake of
his scandal have had little effect.
The following is a script of "The Lobbyist's
Playbook" which aired on Nov. 6, 2011.
Jack Abramoff may be the most notorious and crooked
lobbyist of our time. He was at the center of a massive scandal of brazen
corruption and influence peddling.
As a Republican lobbyist starting in the mid 1990s,
he became a master at showering gifts on lawmakers in return for their votes
on legislation and tax breaks favorable to his clients. He was so good at
it, he took home $20 million a year.
Jack Abramoff: Inside Capitol corruption How
corrupt is lobbying in Washington, DC? Enough to get "60 Minutes"
correspondent Lesley Stahl angry when she hears how Jack Abramoff bribed and
influenced legislators.
It all came crashing down five years ago, when Jack
Abramoff pled guilty to corrupting public officials, tax evasion and fraud,
and served three and a half years in prison.
Today he's a symbol of how money corrupts
Washington. In our interview tonight, he opens up his playbook for the first
time.
And explains exactly how he used his clients' money
to buy powerful friends and influence legislation.
Jack Abramoff: I was so far into it that I couldn't
figure out where right and wrong was. I believed that I was among the top
moral people in the business. I was totally blinded by what was going on.
Jack Abramoff was a whiz at influencing legislation
and one way he did that was to get his clients, like some Indian tribes, to
make substantial campaign contributions to select members of Congress.
Abramoff: As I look back it was effective. It
certainly helped the people I was trying to help, both the clients and the
Republicans at that time.
Lesley Stahl: But even that, you're now saying, was
corrupt?
Abramoff: Yes.
Stahl: Can you quantify how much it costs to
corrupt a congressman?
Abramoff: I was actually thinking of writing a book
- "The Idiot's Guide to Buying a Congressman" - as a way to put this all
down. First, I think most congressmen don't feel they're being bought. Most
congressmen, I think, can in their own mind justify the system.
Stahl: Rationalize.
Abramoff: --rationalize it and by the way we wanted
as lobbyists for them to feel that way.
Abramoff would provide freebies and gifts - looking
for favors for his clients in return. He'd lavish certain congressmen and
senators with access to private jets and junkets to the world's great golf
destinations like St. Andrews in Scotland. Free meals at his own upscale
Washington restaurant and access to the best tickets to all the area's
sporting events; including two skyboxes at Washington Redskins games.
Abramoff: I spent over a million dollars a year on
tickets to sporting events and concerts and what not at all the venues.
Stahl: A million dollars?
Abramoff: Ya. Ya.
Stahl: For the best seats?
Abramoff: The best seats. I had two people on my
staff whose virtual full-time job was booking tickets. We were Ticketmaster
for these guys.
Stahl: And the congressman or senator could take
his favorite people from his district to the game--
Abramoff: The congressman or senator uh, could take
two dozen of his favorite people from their district.
Stahl: Was all that legal?
Continued
Jensen Comment
Firstly, I was not aware that Jack Abramoff was such a mixed bag. Few lobbyists
wind up in prison, so Abramoff was among the worst of the bad influence peddlers
in Washington DC. And yet he claims, before getting caught, to be a deeply
religious man who gave 80% of his earnings each year to charity.
Secondly, like many con men (yes he did con/extort Representatives and
Senators to vote the way his clients paid him to get their votes), he claims
after being released from prison that he's hell bent on reforming both himself
and the system that he exploited.
What I found interesting is Abrarnoff's Number 1 recommendation for cleaning
up the system: Don't allow former Representatives and Senators to be
lobbyists. I might extrapolate a bit myself by not allowing former government
employees to work for government contractors such as when to executives in the
Department of Agriculture become highly paid employees or consultants to
agribusiness corporations.
What's sad is that nothing can probably stop the inbreeding and influence
peddling in Washington DC or the 50 state capitols --- whether it's influence
peddling for the right by megabanks or the left by megaunions.
Government is a piñata holding gifts for everybody with
a stick.
PS
In addition to your analogy, Jim, about a clock face with broken arrows being
correct twice a day, you might consider the arrow on a directional sign in the
middle of nowhere. The directional arrow always points toward somewhere as long
as the arrow is visible. When twisted, however, it points somewhere else. It can
either point toward the correct place or toward lots of incorrect places
depending on where you really want to go..
Also, you and I have both previously noted that recidivism is very high among
reformed fraudsters, perhaps almost as high as recidivism of pedophiles. Exhibit
A is Barry Minkow ---
http://en.wikipedia.org/wiki/Barry_Minkow#Release_and_Short_Selling
"Foreign Tax Profile of Top 50 U.S. Companies," by Martin A. Sullivan,
Tax Analysis 2011 ---
http://taxprof.typepad.com/files/132tn0330.pdf
"Apple's 'high' tax rate may be deceiving," by Kathleen Pender, San
Francisco Chronicle, November 22, 2011 ---
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/11/21/BUIJ1M2635.DTL&ao=all
Does Apple really pay its fair share of U.S. taxes?
In a Nov. 3 report, Citizens for Tax Justice
estimated that Apple paid an average effective U.S. tax rate of 31 percent
between 2008 and 2010. That is close to the ostensible corporate income tax
rate of 35 percent. Out of 280 companies in the study, only 49 had a higher
effective tax rate than Apple.
Various bloggers and columnists seized on the
report to put Apple on another pedestal, praising it as one of the few tech
giants paying its fair share of U.S. taxes.
But in an overlooked report published in the
journal Tax Notes in August, economist Martin Sullivan said Apple is no
better than other multinationals that have been "painted as corporate tax
dodgers by major media outlets."
He said that "despite outward appearances, Apple
enjoys enormous foreign tax benefits, just as GE and Google do. By taking
advantage of lax U.S. and foreign tax laws, Apple has been able to book a
large share of its foreign profits in low-tax jurisdictions and greatly
reduce its tax liability in the United States and other major countries
where it conducts most of its real business activity."
He estimated that by shifting profits overseas,
Apple is costing the U.S. government more than $1 billion a year.
Can both of these reports be right? The answer is
yes and no.
Remember that companies keep one set of books for
shareholders and another for the Internal Revenue Service. The books can be
quite different and only the shareholder reports are made public.
The Citizens for Tax Justice report looked only at
Apple's U.S. tax rate, which it had to estimate because Apple does not break
it out. It only reports a worldwide effective rate, which was 24.4 percent
in 2010.
CTJ took Apple's current federal income tax
expense, made a couple of adjustments for items such as employee stock
option expenses, and divided that number by what Apple reported as its U.S.
profits. The result was the lofty-sounding 31 percent average U.S. tax rate.
Sullivan says that number is misleading because
Apple books a relatively small percentage of its worldwide profits in the
United States, even though most of its profit-making operations take place
here.
Like many multinationals, it takes advantage of lax
transfer pricing rules to book a disproportionately large and growing
portion of its profits overseas. Most of these overseas profits are booked
not in the foreign countries where Apple has major operations but in
countries with ultra-low or no corporate taxes.
Even if its effective U.S. tax rate is high, it is
applied to a disproportionately small percentage of Apple's worldwide
income. "If Apple paid 50 percent U.S. tax on 1 percent of its worldwide
profit, that does not make it a good corporate citizen," Sullivan says.
The numbers are not that dramatic; Sullivan is
trying to illustrate his point. Shifting profits
In reality, Apple booked 70 percent of its
worldwide profits overseas in 2010, even though 75 percent of its retail
stores, 44 percent of its sales and 86 percent of its long-term assets (such
as property, plants and equipment) were in the United States, Sullivan said
in his report. (It also booked 70 percent of its profit overseas in 2011,
according to its recently filed annual report.)
More importantly, Sullivan notes that most of
Apple's intellectual property - the real source of its profits - is created
in the United States. Apple does not break out research and development by
country. Sullivan based this assertion on several outside sources. He noted,
for example, that in late July, 86 percent of the job openings for hardware
engineers on Apple's website were in the United States.
Sullivan argues that if most of Apple's product
development takes place in the United States, it ought to book a lot more
than 30 percent of its profits in the United States and pay tax on it here.
He adds that Apple is not booking most of its
overseas profits in foreign countries where it has a large physical
presence. Its European headquarters are in Ireland and its Asian
headquarters are in Singapore, where the corporate tax rates are 12.5
percent and 17 percent, respectively. But he calculates that Apple's foreign
effective tax rate was only 1.2 percent in 2010 and 2.5 percent in 2011.
Apple does not disclose its foreign income and
taxes by country, but this low number has to mean Apple is booking most of
its overseas profits in countries with zero or near-zero corporate tax
rates.
Sullivan stresses that Apple is not doing anything
illegal. "It demonstrates how messed up the transfer pricing rules are," he
says. Transfer pricing tricks
These rules give companies a lot of leeway in
allocating profits across borders. Most multinationals have armies of
accountants and lawyers figuring out how they can legally shift profits from
high-tax to low-tax countries.
One way a company can do this is by placing its
intellectual property - such as patents, trademarks and trade names - in a
subsidiary in a tax haven country. When the company's U.S. subsidiary makes
a sale, it pays a royalty to the subsidiary in the tax haven. The tax haven
subsidiary reports the royalty payment as income, but it is taxed very
lightly or not at all. Meanwhile the U.S. subsidiary deducts the payment as
an expense, which reduces its U.S. tax.
CTJ knew this when it wrote its report. It said it
omitted some companies, such as Google and Microsoft, because almost all of
their pretax profits were reported as foreign, even though most of their
revenue and assets were in the United States. It called such geographic
allocations ridiculous.
CTJ said in a footnote that it included, "with
grave reservations," some companies that also seemed to be shifting a
disproportionate share of their profits overseas, including Apple, Amgen,
Gilead Sciences and EMC. "We urge our readers to treat these companies' true
'effective U.S. income tax rates' as possibly much lower than what we
reluctantly report," it said.
CTJ President Robert McIntyre told me he agrees
with Sullivan's analysis and regrets keeping Apple in the report. "I
shouldn't have reported it," he said. "I stand by almost all the report
except for Apple, EMC, Amgen, etc." Apple's foreign tax
Sullivan's report focused on Apple's worldwide
effective tax rate, which is also inflated because Apple does something
almost no other U.S. multinational does - it recognizes a deferred U.S. tax
expense on some of the profits it has parked overseas.
This is a hot issue as Congress debates pleas from
U.S. companies to give them another giant tax break on repatriated profits,
like it did in 2004.
U.S. companies are required to pay U.S. tax on all
of their worldwide profits, not just those generated here, although they can
deduct from U.S. taxes any foreign taxes paid. For example, if a firm pays
12.5 percent on a dollar earned in Ireland, it typically owes 22.5 percent
in U.S. tax on that dollar (that's the U.S. rate of 35 percent minus 12.5
percent).
Companies don't actually have to pay this 22.5
percent tax until they repatriate the profit or bring it back to the United
States. But they generally must deduct it as a deferred tax expense on the
financial statements they provide shareholders.
Companies can avoid recognizing this deferred U.S.
tax expense if they declare that their foreign earnings are permanently
invested overseas. In this case, "they only book the foreign tax, not the
additional U.S. tax," Sullivan says.
Continued in article
"Game Theory 101: an excellent introduction to game theory, and interview
with William Spaniel," Mind Your Decisions, 2011 ---
Click Here
http://mindyourdecisions.com/blog/2011/11/02/game-theory-101-an-excellent-introduction-to-game-theory-and-interview-with-william-spaniel/
Game Theory 101: an excellent introduction to game
theory, and interview with William Spaniel
People often ask me to recommend a book that gives
an introduction to game theory. Up until now I strangely did not have a
proper answer. Most books either have too little math and miss out on the
theory aspect, or they have way too much math and were just boring.
But today I am thrilled to say there is finally a
great game theory introduction that I can recommend. The e-book is called:
Game Theory 101: The Basics & Extensive Form
The book covers the basics of game theory,
including the Prisoner’s Dilemma, mixed strategy equilibrium, and it also
covers extensive form games (game trees) in which players move in sequence,
like the ultimatum game. There are tons of diagrams and lengthy discussions
to help you understand the concepts.
One of the remarkable things is how cheap the book
is. This ebook which has over 100 pages is selling for a mere $2.99 on
Amazon (there is also a lite version for $0.99 called Game Theory 101: The
Basics, but I would suggest the $2.99 version as it is more comprehensive
and suited for readers of this site).
Very important: while the book says it’s available
for Kindle, you don’t need a Kindle to read it. You can read the book on
your PC, Mac, iPhone, Android phone, or virtually any device by downloading
an appropriate Kindle reading app
Jensen Question
Is this $0.99 lite version a new feature from Amazon?
Hardly seems like a big savings on a $2.99 full text version.
In doctoral programs where game theory is only one module in a quant course,
this $2.99 book might be a good choice.
Yawn!
"The Best States For Business," by Kurt Badenhausen, Forbes,
November 22, 2011 ---
http://www.forbes.com/special-report/2011/best-states-11_land.html
Jensen Comment
These rankings are very misleading in part because they seem to ignore twp of
the most important reasons why businesses locate plants and corporate offices in
a given location --- public schools and non-hostile unions. Given the high
rankings of militant union states like Washington (Rank 7), Iowa (Rank 10),
Massachusetts (Rank 18), and New York (Rank 22) points to the possibility that
union hostility was somewhat overlooked.
There is a "Quality of Life" factor in these rankings, but in my viewpoint
this does not correlate with quality of public schools. For example, South
Dakota is ranked in the middle (for Quality of Life) while having one of the
best K-12 school systems in the nation. New Hampshire has Rank 5 in terms of
Quality of Life as compared with Vermont at Rank 15 and Maine at Rank 17. I
think that both Vermont and Maine probably have better schools that New
Hampshire that has no sales tax or income tax for funding better schools. Ohio
at Rank 13 comes in higher than Maine and Vermont on Quality of Life. I don't
see a lot of folks in New England headed for Cleveland, Akron, Dayton, etc. for
better schools or a better Quality of Life in Ohio.
My point here is that when locating factories and office buildings, I think
companies want to locate where there are excellent school systems. Hence placing
Vermont at a very low rank of 45 and Maine on the bottom at Rank 50 really
puzzles me.
In terms of overall rank, the states of New York (Rank 22), Taxachussets
(Rank 18), and California (Rank 39) ahead of so many other states since
businesses now in those states are leaving in droves for states that are lower
ranked by Forbes. Delaware at Rank 33 seems to me to have a much
lower rank that this state should be ranked.
But then nobody asked me. I think Forbes overlooked quality of public schools
completely when making out these rankings. Give me the Maine, New Hampshire, and
Vermont any day for K-12 schools relative to Louisiana, Texas, Georgia, New
Mexico, Arkansas, Alabama, and Arizona.
Ranking states, colleges. and most anything else faces the same problem as
ranking vegetables in terms of nutrition ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews
Companies are not going to relocate based upon this Forbes ranking any
more than a single vegetable is the most nutritious. The best vegetable varies
with nutrition needs in terms of an overall diet and body factors. The best
state for locating a business depends upon a few factors and constraints that
are probably not well correlated with the overall Forbes ranking of
states. Oil companies are going to locate new operations where the new oil
is located, especially in North Dakota, Pennsylvania, Texas, and Oklahoma. They
might locate in Florida if Florida was more open to off-shore rigs.
High tech companies are going to locate in parts of the nation with
outstanding universities nearby, which gives Silicon Valley, the Research
Triangle, and Cambridge, Mass. an edge. Agribusiness will build plants near
where the food sources are raised. High labor companies will avoid states with
hostile unions which gives the southern states an edge over Michigan, Wisconsin,
Illinois, New York, Ohio, Washington, Massachusetts, and most of the rest of
New England.
Humor Between November 1 and November 30, 2011
Irish Ladies on Cheap Flights ---
http://www.youtube.com/watch?v=HPyl2tOaKxM
Forwarded by Paula
Irish Dreaming
Paddy was waiting at the bus stop with his mate when a lorry went by loaded
up with rolls of turf.
Paddy said, 'I gonna do that when I win the lottery.'
'What's dat?' says his mate.
'Send me lawn away to be cut,' says Paddy.
Forwarded by Gene and Joan
SENIOR MOMENT
Sitting on the side of the road waiting to catch
speeding drivers, a Massachusetts state trooper sees a car puttering along at 24
mph. He thinks to himself, "This driver is as dangerous as a speeder!" So he
turns on his lights and pulls the driver over.
Approaching the car, he notices that there are five
elderly ladies – two in the front seat, and three in the back, wide-eyed and
white as ghosts. The driver, obviously confused, says to him, "Officer, I don't
understand. I was going the exact speed limit. What seems to be the problem?"
The trooper, trying to contain a chuckle, explains to
her that "24" was the Route number, not the speed limit. A bit embarrassed, the
woman grinned and thanked the officer for pointing out her error.
"But before you go, Ma'am, I have to ask, "is everyone
in this car OK? These women seem awfully shaken."
"Oh, they'll be all right in a minute, officer. We just
got off Route 128 and are now headed down Route 45."
Forwarded by Eileen
Subject…WHERE I HAVE AND HAVE NOT BEEN
*I have been in many places, but I've never been in Cahoots. Apparently, you
can't go alone. You have to be in Cahoots with someone.*
*I've also never been in Cognito. I hear no one recognizes you there.*
*I have, however, been in Sane. They don't have an airport; you have to be
driven there. I have made several trips there, thanks to my friends, family and
work.*
*I would like to go to Conclusions, but you have to jump, and I'm not too
much on physical activity anymore.*
*I have also been in Doubt. That is a sad place to go, and I try not to visit
there too often.*
*I've been in Flexible, but only when it was very important to stand firm.*
*Sometimes I'm in Capable, and I go there more often as I'm getting old. *
*One of my favorite places to be is in Suspense! It really gets the adrenalin
flowing and pumps up the old heart! At my age I need all the stimuli I can get!*
*I may have been in Continent, but I don't remember what country I was in.
It's an age thing.*
Silent Monks singing the Hallelujah Chorus (humor) ---
http://voxvocispublicus.homestead.com/Index.html
Forwarded by Paula
Actual writings from hospital charts.
1. The patient refused autopsy.
2. The patient has no previous history of suicides.
3. Patient has left white blood cells at another hospital.
4. She has no rigours or shaking chills, but her husband states she was very hot
in bed last night.
5. Patient has chest pain if she lies on her left side for over a year.
6. On the second day the knee was better, and on the third day it disappeared.
7. The patient is tearful and crying constantly. She also appears to be
depressed.
8. The patient has been depressed since she began seeing me in 1993.
9. Discharge status: Alive but without permission.
10. Healthy appearing decrepit 69-year old male, mentally alert but forgetful
11. Patient had waffles for breakfast and anorexia for lunch.
12. She is numb from her toes down.
13. While in ER , she was examined, x-rated and sent home.
14. The skin was moist and dry.
15. Occasional, constant infrequent headaches.
16. Patient was alert and unresponsive.
17. Rectal examination revealed a normal size thyroid.
18. She stated that she had been constipated for most of her life, until she got
a divorce.
19. I saw your patient today, who is still under our car for physical therapy.
20. Both breasts are equal and reactive to light and accommodation.
21. Examination of genitalia reveals that he is circus sized.
22. The lab test indicated abnormal lover function.
23. Skin: somewhat pale but present.
24. The pelvic exam will be done later on the floor.
25. Patient has two teenage children, but no other abnormalities.
I especially like Number 01 and 26 below
Quotations forwarded by Maureen
01. In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a congress.
- John Adams
My favorite
02. If you don't read the newspaper you are uninformed, if you do read the newspaper you are misinformed.
- Mark Twain
03. Suppose you were an idiot. And suppose you were a member of Congress, but then I repeat myself.
- Mark Twain
04. I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
- Winston Churchill
05. A government which robs Peter to pay Paul can always depend on the support of Paul.
- George Bernard Shaw
06. A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money.
- G. Gordon Liddy
7. Democracy must be something more than two wolves and a sheep voting on what to have for dinner.
- James Bovard, Civil Libertarian (1994)
8. Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries.
- Douglas Casey, Classmate of Bill Clinton at Georgetown University
9. Giving money and power to government is like giving whiskey and car keys to teenage boys.
- P.J. O'Rourke, Civil Libertarian
10. Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.
- Frederic Bastiat, French economist(1801-1850)
11. Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
- Ronald Reagan (1986)
12. I don't make jokes. I just watch the government and report the facts.
- Will Rogers
13. If you think health care is expensive now, wait until you see what it costs when it's free!
- P.J. O'Rourke
14. In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other.
- Voltaire (1764)
15. Just because you do not take an interest in politics doesn't mean politics won't take an interest in you!
- Pericles (430 B.C.)
16. No man's life, liberty, or property is safe while the legislature is in session.
- Mark Twain (1866)
17. Talk is cheap...except when Congress does it.
- Anonymous
18. The government is like a baby's alimentary canal, with a happy appetite at one end and no responsibility at the other.
- Ronald Reagan
19. The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
- Winston Churchill
20. The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.
- Mark Twain
21. The ultimate result of shielding men from the effects of folly is to fill the world with fools.
- Herbert Spencer, English Philosopher (1820-1903)
22. There is no distinctly Native American criminal class...save Congress.
- Mark Twain
23. What this country needs are more unemployed politicians.
- Edward Langley, Artist (1928-1995)
24. A government big enough to give you everything you want, is strong enough to take everything you have.
- Thomas Jefferson
25. We hang the petty thieves and appoint the great ones to public office.
- Aesop
26. Politicians who arrive in Washington as men and women of modest means leave as millionaires. Why?
Sarah Palin, "How Congress Occupied Wall Street," The Wall Street Journal, November 18, 2011 ---
http://online.wsj.com/article/SB10001424052970204323904577040373463191222.html
Quotations forwarded by Auntie Bev
The are bar room or bathroom signs that are often not politically correct
If life is a waste of time, And time is a waste
of life, Then let's all get wasted together And have the time of our lives.
Armand's Pizza, Washington , DC
No matter how good she looks, Some other guy is
sick and tired Of putting up with her shit.
Men's Room Linda's Bar and Grill, Chapel Hill, NC
You're too good for him.
Sign over mirror in Women's restroom Ed Debevic's, Beverly Hills, CA
It's hard to make a comeback When you haven't
been anywhere.
Written in the dust on the back of a bus, Wickenburg , AZ
Make love, not war. Hell, do both GET MARRIED!
Women's restroom The Filling Station, Bozeman, MT
If voting could really change things, It would
be illegal.
Revolution Books New York, New York.
If pro is opposite of con, then what is the
opposite of progress? Congress!
Men's restroom House of Representatives, Washington, DC
Express Lane: Five beers or less.
Sign over one of the urinals Ed Debevic's, Phoenix, AZ
No wonder you always go home alone.
Sign over mirror in Men's restroom, Ed Debevic's, Beverly Hills, CA
A Woman's Rule of Thumb: If it has tires or
testicles, You're going to have trouble with it.
Women's restroom Dick's Last Resort, Dallas
HAPPINESS
To be happy with a man, you must understand him a lot and love him a little.
To be happy with a woman, you must love her a lot and not try to understand
her at all.
LONGEVITY
Married men live longer than single men do, but married men are a lot more
willing to die.
Old aunts used to come up to me at weddings, poking
me in the ribs and cackling, telling me, "You're next." They stopped after I
started doing the same thing to them at funerals.
Humor Between November 1 and November 30, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor113011
Humor Between October 1 and October 31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor103111
Humor Between September 1 and September 30, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor093011
Humor Between August 1 and August 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor083111
Humor Between July 1 and July 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor073111
Humor Between May 1 and June 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor063011
Humor Between April 1 and April 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor043011
Humor Between February 1 and March 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor033111
Humor Between January 1 and January 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor013111
And that's
the way it was on November 30, 2011 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
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http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Accounting and Taxation News Sites ---
http://www.trinity.edu/rjensen/AccountingNews.htm
For an elaboration on the reasons you should join a ListServ (usually for
free) go to http://www.trinity.edu/rjensen/ListServRoles.htm
AECM
(Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
AECM is an email Listserv list which
provides a forum for discussions of all hardware and software
which can be useful in any way for accounting education at the
college/university level. Hardware includes all platforms and
peripherals. Software includes spreadsheets, practice sets,
multimedia authoring and presentation packages, data base
programs, tax packages, World Wide Web applications, etc |
CPAS-L
(Practitioners)
http://pacioli.loyola.edu/cpas-l/ (Closed
Down)
CPAS-L provides a forum for discussions of
all aspects of the practice of accounting. It provides an
unmoderated environment where issues, questions, comments,
ideas, etc. related to accounting can be freely discussed.
Members are welcome to take an active role by posting to CPAS-L
or an inactive role by just monitoring the list. You qualify for
a free subscription if you are either a CPA or a professional
accountant in public accounting, private industry, government or
education. Others will be denied access. |
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the activities of the AICPA.
This can be anything from the CPA2BIZ portal to the XYZ
initiative or anything else that relates to the AICPA. |
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as
accounting software, consulting, financial planning, fixed
assets, payroll, human resources, profit on the Internet, and
taxation. |
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
FEI's Financial Reporting Blog
Smart Stops on the Web, Journal of Accountancy, March 2008 ---
http://www.aicpa.org/pubs/jofa/mar2008/smart_stops.htm
FINANCIAL REPORTING PORTAL
www.financialexecutives.org/blog
Find news highlights from the SEC, FASB
and the International Accounting
Standards Board on this financial
reporting blog from Financial Executives
International. The site, updated daily,
compiles regulatory news, rulings and
statements, comment letters on
standards, and hot topics from the Web’s
largest business and accounting
publications and organizations. Look for
continuing coverage of SOX requirements,
fair value reporting and the Alternative
Minimum Tax, plus emerging issues such
as the subprime mortgage crisis,
international convergence, and rules for
tax return preparers. |
|
|
|
The CAlCPA Tax Listserv September 4, 2008 message from Scott Bonacker
[lister@bonackers.com]
Scott has been a long-time contributor to the AECM listserv (he's a techie as
well as a practicing CPA)
I found another listserve
that is exceptional -
CalCPA maintains
http://groups.yahoo.com/taxtalk/
and they let almost anyone join it.
Jim Counts, CPA is moderator.
There are several highly
capable people that make frequent answers to tax questions posted there, and
the answers are often in depth.
Scott
Scott forwarded the following message from Jim
Counts
Yes you may mention info on
your listserve about TaxTalk. As part of what you say please say [... any
CPA or attorney or a member of the Calif Society of CPAs may join. It is
possible to join without having a free Yahoo account but then they will not
have access to the files and other items posted.
Once signed in on their Yahoo account go to
http://finance.groups.yahoo.com/group/TaxTalk/ and I believe in
top right corner is Join Group. Click on it and answer the few questions and
in the comment box say you are a CPA or attorney, whichever you are and I
will get the request to join.
Be aware that we run on the average 30 or move emails per day. I encourage
people to set up a folder for just the emails from this listserve and then
via a rule or filter send them to that folder instead of having them be in
your inbox. Thus you can read them when you want and it will not fill up the
inbox when you are looking for client emails etc.
We currently have about 830 CPAs and attorneys nationwide but mainly in
California.... ]
Please encourage your members
to join our listserve.
If any questions let me know.
Jim Counts CPA.CITP CTFA
Hemet, CA
Moderator TaxTalk
|
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
|
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 Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
October 31, 2011
Bob
Jensen's New Bookmarks October 1-31, 2011
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
Bob Jensen's Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Hasselback Accounting Faculty
Directory ---
http://www.hasselback.org/
Humor Between October 1 and October 31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor103111
Humor Between September 1 and September 30, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor093011
Humor Between August 1 and August 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor083111
Humor Between July 1 and July 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor073111
Humor Between May 1 and June 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor063011
Humor Between April 1 and April 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor043011
Humor Between February 1 and March 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor033111
Humor Between January 1 and January 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor013111
Some of Bob Jensen's Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
We'll Miss You Chuck
Charles T. Horngren, Edmund W. Littlefield
Professor of Accounting, Emeritus, passed away peacefully October 23. He was
not only a well-loved member of the GSB community, he was regarded with the
same admiration by his professional peers beyond Stanford.
Tributes to Chuck Horngren ---
http://alumni.gsb.stanford.edu/horngrentestimonials.html
It is with
great sadness the GSB must inform you that Charles T. (Chuck) Horngren,
Edmund W. Littlefield Professor of Accounting, Emeritus, passed away
peacefully October 23, 2011. He was not only a well-loved member of the
GSB community, he was regarded with the same admiration by his
professional peers beyond Stanford.
In 1990 he
was inducted into the Accounting Hall of Fame and was honored repeatedly
for his contributions to the American Accounting Association, for which
he served as President and Director of Research. He is credited with
pioneering the field of management accounting and his textbook, Cost
Accounting: A Managerial Emphasis is in its 14th edition today. It is
just one of several of his books that have molded the education of
generations of accounting students worldwide. We have lost a well-loved
member of our community. His contributions and his spirit will be fondly
remembered.
A memorial
service is planned for 10 am, Saturday, November. 12, at St. Thomas
Aquinas Church, 751 Waverley Street, Palo Alto. A reception will follow
at the Garden Court Hotel, 520 Cowper, Palo Alto (free valet parking
will be provided for those attending the memorial reception.)
Jensen Comment
The first time I ever met Chuck was in 1963 (as I recall) when he asked me
for help in finding his presentation room at the AAA Annual Meetings that
were held that year on the sprawling campus of Stanford University. Chuck
was then at Chicago University and had not yet made his memorable move to
Stanford.
During my first Stanford think tank years
(1970-71) I rented a geology professor's house less than a block from where
Chuck had built a house on the Stanford campus. My daughter Lisl was about
the same age as Chuck's daughter Cathy, and they played and went to school
together.
Bill Beaver (now retired) was the first
holder of the endowed chair funded by Chuck and his wife Joan. Chuck was
well known due to the success of his textbooks, especially those in Cost and
Managerial Accounting. But he was also known for other accomplishments
mentioned in his Charles Thomas Horngren Accounting Hall of Fame citation
---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/charles-thomas-horngren/
Congratulations to auditing professor Ted Mock ---
http://soba.ucr.edu/directory/faculty.html?netid=tmock
Also see
http://soba.ucr.edu/about/faculty_profiles/mock.html
I want to congratulate my long-time friend Ted Mock who, at the 2011 Annual
Meetings in Denver, received the American Accounting Association's 2011
Outstanding Accounting Educator Award. Over the years Ted built up an impressive
record of research, publication, and teaching, especially in the guidance of
doctoral students ---
http://aaahq.org/awards/awrd4win.htm
Although Ted is now at the University of California at Riverside, much of his
career was spent at the University of Southern California after obtaining his
accounting PhD at UC Berkeley. In 2003 he received the American Accounting
Association's Auditing Section Outstanding Auditing Educator award, and in 2006
the AAA Accounting and Behavior and Organization Section's Notable [Lifetime]
Contribution Award. Ted has traveled extensively to do research and make
presentations around the world. He's truly a global auditing professor and
researcher.
I suspect that Ted will play an important role in the new PhD program in
UCR's A. Gary Andersen Graduate School of Management.
Life Legacy --- Dr. William Breit, age 78 of San Antonio, died
Thursday, August 25, 2011 ---
http://porterloring.com/sitemaker/sites/Porter1/obit.cgi?user=1368_WBreit6281
Years earlier Bob Jensen wrote a tribute to Bill Breit and Ken Elzinga ---
http://www.trinity.edu/rjensen/acct5341/speakers/muppets.htm
Scroll down to find the tribute.
Educational Resources and Exams to Become an Accountant or CPA ---
http://www.accountingedu.org/
"IFRS and US GAAP: Similarities and Differences" according to PwC
(2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and
differences mentioned in the booklet are not comprehensive of all similarities
and differences. The document is, however, a valuable addition to students of
FASB versus IASB standard differences and similarities.
It's not easy keeping track of what's changing and
how, but this publication can help. Changes for 2011 include:
- Revised introduction reflecting the current
status, likely next steps, and what companies should be doing now
(see page 2);
- Updated convergence timeline, including
current proposed timing of exposure drafts, deliberations, comment
periods, and final standards
(see page 7);
- More current analysis of the differences
between IFRS and US GAAP -- including an assessment of the impact
embodied within the differences
(starting on page 17); and
- Details incorporating authoritative standards
and interpretive guidance issued through July 31, 2011
(throughout).
This continues to be one of PwC's most-read
publications, and we are confident the 2011 edition will further your
understanding of these issues and potential next steps.
For further exploration of the similarities and
differences between IFRS and US GAAP, please also visit our
IFRS Video Learning Center.
To request a hard copy of this publication, please contact your PwC
engagement team or
contact us.
Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly
downplays the importance of these differences. It may well be that IFRS is more
restrictive in some areas and less restrictive in other areas to a fault. This
is one topical area where IFRS becomes much too subjective such that comparisons
of derivatives and hedging activities under IFRS can defeat the main purpose of
"standards." The main purpose of an "accounting standard" is to lead to greater
comparability of inter-company financial statements. Boo on IFRS in this topical
area, especially when it comes to testing hedge effectiveness!
One key quotation is on Page 165
IFRS does not specifically discuss the methodology
of applying a critical-terms match in the level of detail included within
U.S. GAAP.
Then it goes yatta, yatta, yatta.
Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail" and
more importantly fails to provide "implementation guidance" comparable with the
FASB's DIG implementation topics and illustrations.
I have a
huge beef with the lack of illustrations in IFRS versus the many illustrations
in U.S. GAAP.
I have a
huge beef with the lack of illustrations in IFRS versus the many illustrations
in U.S. GAAP.
I have a huge beef with the lack of illustrations in
IFRS versus the many illustrations in U.S. GAAP.
Bob Jensen's threads on accounting standards setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
The latest Onion blog by Tom Selling
"More SEC Reports on IFRS Coming: Will they be Genuine Analysis or Just More
Dithering?"
The Accounting Onion
October 31, 2011
Click Here
http://accountingonion.typepad.com/theaccountingonion/2011/10/more-sec-reports-on-ifrs-coming-will-they-be-genuine-analysis-or-just-more-dithering.html
. . .
No future SEC Staff report can controvert the
reality on the ground that IASB accounting standard setting and convergence
are in a state of chaos, with nothing like "principles" or consistent
"objectives" to orient them. The prospects for anything approaching a
"single, high quality set of standards that are applied consistently on a
global basis" in any of our lifetimes are dim to nonexistent.
Tom Selling made a plenary session presentation at the Northeast Regional AAA
meetings and received boisterous ovation for his presentation
October 28, 2011 message from Harry Howe
We had a blizzard of skepticism on IFRS adoption
courtesy of Tom Selling's outstanding plenary address at the Northeast AAA
meeting today - drifts of trenchant objections accumulating to a very
considerable depth, local rolling thunderous applause and icy blasts of
logic headed southward on I-95. In short, some of the best NE weather I can
ever remember.
Harry
The link to Tom's plenary address is
http://grovesite.com/GSLibrary/Downloads/download.ashx?file=sites%2f4%2f7280%2f212568%2fWhitherIFRSAdoptionintheUS.pdf
The title is "Whither
IFRS Adoption: the Answer is in the Details"
October 28, 2011
Bob Jensen's threads on accounting standards controversies are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
"Business Degrees Skyrocket in Popularity in Asia," FINS
Asia-Pacific, October 7, 2011 ---
Click Here
http://asia-jobs.fins.com/Articles/SBB0001424053111903285704576560832111849732/Business-Degrees-Skyrocket-in-Popularity-in-Asia
Hi Barry, Dave, and others interested in blogging history,
(I hope Roger Debreceny reads this posting)
There's a country song lyric that goes something like this:
"I was country when country wasn't cool"
The term "blog" emerged by dropping the first two letters from what started as
the term "Weblog" or "We blog"
I can honestly say:
"I was 'We blog' when 'We blog' wasn't cool"
The longest serving Weblog/Blog in accounting is my New Bookmarks "blog"
that dates back to before 1998 ---
http://www.trinity.edu/rjensen/Bookurl.htm
To be honest I cannot recall when New Bookmarks commenced as an email
service, and I no longer have any record of my New Bookmarks "Blog
Postings" before 1998. Those early 1994 or 1995 "Blog Postings" on the AECM were
mostly about education technology, especially my work and the work of Barry Rice
in HyperGraphics and later ToolBooks. Barry Rice also posted emails about his
use of HyperGraphics Response Pads in his enormous lecture halls.
The term "Weblog" commenced in 1997, although I don't think I heard the term
used until around 1999.
Weblog History ---
http://en.wikipedia.org/wiki/Weblog
The term "weblog" was
coined by
Jorn Barger on 17 December 1997. The
short form, "blog," was coined by
Peter Merholz, who jokingly broke the
word weblog
into the phrase we blog
in the sidebar of his blog Peterme.com in April or May 1999. Shortly
thereafter,
Evan Williams at
Pyra Labs used "blog" as both a noun
and verb ("to blog," meaning "to edit one's weblog or to post to one's
weblog") and devised the term "blogger" in connection with Pyra Labs'
Blogger
product, leading to the popularization of the terms.
In the very early days of the AECM I sometimes strayed a bit too far off the
accounting-topic path. I recall being chewed out royally by Barry because I
posted a link to the early history of commodes. "What does that have to do with
accounting?" Barry asked. In reality I think commodes are where a lot of
accounting theory and research should be flushed!
An early international accounting education "blog" was called
AccountingEducation.com.. I think this was commenced by Roger Debreceny when he
was still living in either New Zealand or Australia. AE still is a great
international accounting blogging service. It's a commercial site with many free
services ---
http://accountingeducation.com/
Perhaps Roger can fill us in more about the
history of AccountingEducation.com which in email form might have even
preceded my New Bookmarks in 1996. I cannot find a database of the AE
archive of postings from AE's early years.
Is there an archive Roger?
Petrea Sandlin and I wrote an early history of education technology in 1995 that
was updated in 1997 ---
http://www.trinity.edu/rjensen/245cont.htm
This included a survey of accounting education programs back when there were
almost no applications of education technology in accounting education programs.
Respectfully,
Bob Jensen
October 14, 2011 message from Barry Rice
AECMers,
Today’s AECM transition
was certainly much easier than the last time. The last, and only other
significant transition process for AECM, was in March, 1998. We moved it
from a Loyola VAX mini-mainframe computer to a Loyola Microsoft server and
continued using the L-Soft
LISTSERV®
software. Some of you are “old enough” to remember that we started AECM in
in February, 1994 as “AECM-L” and changed it to “AECM” during that
transition. At least subscribers didn’t have to re-subscribe
this time! I guess 13 1/2 years
has made a difference in technology.
J
For many years, I have
thought I should share my personally-archived posts from the first four
years with current subscribers and just never got around to it. Today’s
change has motivated me to put online my personal .TXT file that I used to
manually archive them on the VAX. I’m leaving it as a .TXT file rather than
convert it to an .HTML file for now because the latter format makes the file
size enormous by comparison. You can click on the following link and
download the entire 2,023 posts in your browser in just seconds, since the
file size is only 6,691 KB:
http://pacioli.loyola.edu/aecm/AECM_Manual_Archive-2,023_Postings_1994-1998.txt.
Unfortunately, there are a lot of old-time mail
headers that really clutter the file and make the messages harder to read.
Maybe someone will have a suggestion for how to fix that without having to
do so manually.
While I’m sure I failed to manually archive
some interesting and important messages, this is all we have from the
VAX/AECM-L days. By the way, the first post you will see in the file (some
earlier posts were lost) is from Dan Stone, who is still a subscriber!
When I started AECM-L in 1994, I never
dreamed in my wildest imagination that it would become what it has today.
Enjoy!
Barry Rice
AECM Founder
October 14. 2011 reply from Bob Jensen
Many thanks Barry,
It was interesting to read some of the very early messages in this AECM
archive.
One of the early messages was from Dan Stone on April 2, 1994 when he was
still on the faculty at the University of Illinois. I might note that in
those days the first AIS course varied greatly between colleges that offered
such a course. Even fewer colleges required AIS in those days. Some
instructors treated AIS as a computer skills course in those days. Others
integrated it more conceptually with auditing courses.
April 2, 1994 message from Dan Stone:
Greetings. I like Barry's question and
would like to broaden it a bit as follows. I've taught AIS and MIS for
the past 5 year and am now questioning whether AIS should be a required
class in the curriculum. I agree that all undergrads and grad students
should learn some basic computing skills. However, what does a basic AIS
class contribute to the development of accounting students? What is the
conceptual and theoretical basis for such a class? Given that we are
forced to make tradeoffs about what students are required to take, is
the AIS class the best possible use of their time?
Let me emphasize that I don't believe I
have strong positive or negative answers to these questions. However, I
am interested in exploring whether an AIS class is the best possible use
of time of accounting undergrads.
Dan Stone
U of Illinois
April 2, 1994 reply from Bruce Rollier
This is in response to
Dan Stone's question about the value of an AIS class for accounting
undergrads. I don't currently teach accounting though I did teach it a
number of years ago. My current teaching is in MIS, but I have some
opinions about this question:
I think it depends to a
large extent how the course is taught, but if we are using class time to
teach students the basics of word processing and spreadsheets, it is
probably not a very effective use of the time. There is not much point
in "teaching" them that the F4 key in Word Perfect is for indenting (but
it's the F7 key if you're using Windows), or that to print a Lotus graph
you have to use PrintGraph while in Quattro Pro or Excel there's a
different procedure. None of these have any long term value because by
the time they graduate we'll be doing it differently. They don't really
learn it anyway because we make it so easy for them that they have to
expend very little mental effort and consequently it doesn't go into
long term memory. Another point is that if they have documentation they
can always look these things up.
If your AIS class
teaches audit software, tax software, etc., I know nothing about those
and it probably is valuable. I think the emphasis, though, should be on
teaching them how to learn a new software package. Since the one they
need to learn for their job will undoubtedly be different than the one
they learn in school, teach them to be self-reliant; give them the
confidence to break open the shrink wrap, figure out how to install it,
and then how to use it, using their own resources or in pairs. Don't
spend valuable class time saying things like "OK, class, now everyone
press the Enter key".
Bruce Rollier
University of Baltimore
Information & Quant. Sciences Dept.
Jensen Comment
I those early days most messaging was in the AECM's context of education
technology. I'm not sure when we opened up the AECM to most any topic in
accountancy, but I'm probably the first one to create off-topic branching.
Zane Swanson's XBRL Blog ---
http://blog.askaref.com/
Zane Swanson's Website ---
www.askaref.com
October 14, 2011 Message from Zane Swanson
I started a blog
http://blog.askaref.com/
this week to support my website
www.askaref.com .
Four user groups are targeted: professors, students,
statement preparers and analysts.
www.askaref.com is designed for mobile
devices with the intent to help broaden the usage of XBRL. However, in
order to do so I thought it necessary to address situations why the users
will want XBRL information in mobile devices. A blog is a great way of
communicating that type of application solution. For example, professors
may want to give mini case examples to students to introduce XBRL. Students
may want to know the definitions of accounting terms and reference ASC
standards wherever and whenever. And so on.
I will be including scenario situations on the blog using the mobile
device applications with screen shot walkthroughs. I encourage anyone to
visit the blog and post requests for XBRL mobile device needs that can be
used in the classroom, business meeting, financial analyst session, etc.
Zane Swanson
A Tidbit from
http://www.trinity.edu/rjensen/XBRLandOLAP.htm
XBRL Home ---
http://www.xbrl.org/Home/
www.xbrl.org
is XBRL International.
www.xbrl.us
is the U.S.
jurisdiction.
Financial Reporting
Using XBRL (maintained by Charles Hoffman) ---
http://xbrl.squarespace.com/journal/?currentPage=2
XBRL Canada Blog
(maintained by Jerry Trites) ---
http://www.zorba.ca/xbrlblog.html
XBRL Networking ---
http://xbrlnetwork.ning.com/
Hitachi
interactive data blog on XBRL ---
http://hitachidatainteractive.com/
TryXBRL ---
http://www.tryxbrl.org/
Bryant
University
Resource
Center ---
http://www.xbrl.org/Home/
Rivet XBRL
Markup Software (Proprietary) ---
http://www.rivetsoftware.com/
UB Matrix Enterprise Applications Suite (Proprietary) ---
http://www.ubmatrix.com/products/enterprise_application_suite.htm
"Make Sense of Financial Reporting with XBRL,"
Pennsylvania CPA Journal via SmartPros, April 4, 2009, ---
http://accounting.smartpros.com/x66163.xml
April 14, 2009 reply from Eric E. Cohen/RBJ
[cybercpa@SPRYNET.COM]
A few more links:
FREE XBRL
software for use by academics/consortium:
http://www.fujitsu.com/global/services/software/interstage/xbrltools/
FREE (and royalty free) XBRL Validation engine and (not free) XML/XBRL
tooling:
http://www.altova.com
Important
webcasts and learning resources for one of the NON-financial reporting
sides of XBRL - the XBRL Global Ledger Framework (XBRL GL) -
http://gl.iphix.net
October 20, 2011 reply from Tom Hood
Bob,
Thanks for aggregating the
great resources on XBRL.
Here is one more for your
list on XBRL resources:
While our blog CPA Success
is not dedicated to XBRL, Bill Sheridan and I have been writing
extensively about the developments in XBRL and you can get all of our
posts here:
Our most recent post may be
of interest wit the advent of several pieces of federal legislation
moving with XBRL and the interview Bill did with the Chief Counsel to
the House Government Oversight Committee (Chairman Issa), Hudson
Hollister. We think this is significant development in the use and
adoption of XBRL and more specifically XBRL GL (Global Ledger). See Eric
Cohen's resources from his earlier response.
You can view our
presentation on XBRL for non-profits done by our CFO and accounting
intern from Salisbury University and presented at the XBRL US Conference
last month
Tom
Bob Jensen's threads on blogs ---
http://www.trinity.edu/rjensen/ListservRoles.htm
"Longing for the Days of the Big Eight," by Agnes T. Crane, The New
York Times, October 27, 2011 ---
http://www.nytimes.com/2011/10/28/business/longing-for-the-days-of-the-big-eight.html?_r=1&src=rechp
Ten years ago this week, the accounting firm Arthur
Andersen sealed its fate when a few partners in its Houston office decided
to shred documents related to the collapse of one of its clients, Enron.
The ensuing prosecutorial zeal, however, created
another problem whose effects are becoming apparent today — moral hazard in
the audit industry. With just four big firms left to comb through the
accounts of the world’s multinationals, watchdogs are justifiably worried
that they cannot afford to lose another firm. If unchecked, this could lead
to shoddy auditing.
Andersen’s criminal indictment sent a simple,
deterrent message: help cook the books and your business is toast. Yet
Andersen’s demise led to a concentration of the might of Deloitte & Touche,
Ernst & Young, KPMG and PricewaterhouseCoopers. They scour the books of 98
percent of American companies with revenues over $1 billion, according to
the Government Accountability Office. The industry qualifies as
superconsolidated as measured by the Justice Department’s preferred gauge of
competitiveness, the Herfindahl-Hirschman index.
This lock on auditing hasn’t necessarily resulted
in price gouging. While audit fees have risen substantially since Andersen
went out of business, much of that can be attributed to the passage of new
rules, like the Sarbanes-Oxley Act, rather than competitive dynamics. That
legislation, passed shortly after the Enron debacle, required accountants to
simply do more work before they, and the executives at their client
companies, signed off on company financials. Fees in 2004 jumped more than
45 percent, according to Audit Analytics.
But that makes it all the more perplexing that in
the years after the corporate world adjusted to the changes forced upon it
by Sarbanes-Oxley, audit fees actually started trending down.
In 2009, fees averaged $569 per million dollars of
revenue, down 6 percent from where they stood four years before, even though
the workload required under Sarbanes-Oxley and other new regulations
increased. If auditors aren’t raising rates in line with more laborious
fact-checking, it raises the question of whether corporate accounts are
getting the full treatment they deserve.
Cutting corners is a surefire way to make a lower
fee structure work. And though professional pride should keep auditors
honest, there is no appetite among regulators, or indeed investors and audit
clients, to see the Big Four firms become the Even Bigger Three. A belief
that none of the remaining giant audit firms will ever be put out of
business like Andersen could undermine effective risk management.
In this context, it’s worth noting last week’s
public censure of Deloitte & Touche. The Public Company Accounting Oversight
Board, a watchdog set up after Enron’s collapse to police the audit
industry, told the firm privately in 2008 that its quality controls weren’t
adequate.
The firm had 12 months to rectify the situation. It
didn’t, so the oversight board went public with previously undisclosed
findings. Among these, the board said Deloitte hadn’t done enough homework
to give an opinion on some of its clients’ books.
Public shaming is one thing. But in a highly
consolidated, quasi-monopolistic, business there’s a hazard that members of
the Big Four don’t have to worry as much about whether their actions will
sink their company. The 2008 banking panic painfully exhibited the risk of
creating institutions perceived as too big to fail. The European Commission
could propose a new law in November that would ban the Big Four’s ability to
audit while providing consulting services to their clients or face being
broken up. The accounting oversight board is weighing mandatory auditor
rotations to fend off complacency. These are starts.
The optimal solution for companies and investors
would be to encourage an increase in the number of firms capable of auditing
big companies. More than two decades ago there were eight. Of course, as
corporations become more global, the need for economies of scale may require
fewer larger firms. Still, the right number is probably more than four.
Continued in article
Jensen Comment
Since I'm a believer in capitalism and the wonders of competition, I certainly
agree with Agnes and think there should be more than four giant international
accounting firms.
However, what Agnes does not get into is the magical "Number
of Three" as capitalism gobbles up the competition.
Rule of Three ---
http://en.wikipedia.org/wiki/Rule_of_three_%28economics%29
Under this rule we can expect that one of the Big Four will fall by the
wayside. Francine and I differ as to which firm we're betting on to bite the
dust. Of course neither one of us has a crystal ball. But we differ with respect
to the firm that we think has been the least professional in recent years of
lapses in professionalism of all the Big Four in recent years following the
implosion of Andersen ---
http://www.trinity.edu/rjensen/Fraud001.htm
Perhaps I'm just out of it, but I wasn't aware that only one of the Big Four
firms is headquartered in the United States ---
http://en.wikipedia.org/wiki/Big_Four_%28audit_firms%29
I wonder how many top accounting graduates realize that they're going to work
for foreigners.
The Big Eight became international largely through a succession of mergers
prior to 1989 such as the merger of Ernst & Ernst with the U.K.'s Whinney Murray
in 1979. In 1989, Ernst & Whinney merged with Arthur Young, thereby resulting in
the Big Seven. Although the merger process got complicated for Deloitte, Haskins
& Sells and Touche Ross, it eventually transpired such that the Big Seven
quickly was reduced to the Big Six. In 1995 Price Waterhouse merged with Coopers
& Lybrand, thereby resulting in the Big Five. And we all know what happened to
Andersen just after the turn of the century.
There were, however, many more mergers taking place with smaller firms and
the Big Eight, Seven, Five, Four! There's an informative outline of some of the
major mergers (most of them international) at
http://en.wikipedia.org/wiki/Big_Four_%28audit_firms%29
Although suing accounting firms became a game lawyers liked to play since the
1970s, in those earlier days the Big Eight was tougher about fighting lawsuits
with hired pit bulls. As a result, accounting firms could still get malpractice
insurance at reasonable prices as long as they maintained their kennel of legal
dogs. I'm not sure when it happened, but eventually the numbers of lawsuits and
the costs of litigation became so high that accounting firms began to settle
more and more lawsuits out of court. Malpractice insurance accordingly became so
expensive that the largest accounting firms were forced into self insurance
schemes of various types (some pooled).
David mentioned that clients sometimes "opinion shopped." No doubt there was
some of that, but the risks of lawsuits and adverse publicity made this more
worry than reality for the auditing profession. What was more of a threat to
clients was the reduced competition by having four large international
accounting firms in place of eight. Having larger firms did not bring about
economies of scale in terms of audit fees and audit expenses. For example, the
increased flow of auditors on airplanes between countries became very expensive
relative to the good old days when the auditors resided much closer to their
clients. And clients are billed for the millions of hours international auditors
are sleeping and watching movies in airliners.
The GAO issued a report on the effects
of consolidation in the auditing profession, resulting in the Big Four firms
which audit the majority of public companies. The GAO has issued a supplemental
report, providing views of CEOs and CFOs on the consolidation of the industry.
http://www.accountingweb.com/item/98020
The GAO report can be downloaded from
http://www.gao.gov/new.items/d031158.pdf
Audit firms commenced replacing detailed testing with "analytical reviews"
that in turn were making audits less and less professional and reliable. Exhibit
A is the Waste Management audit by Andersen followed by increasingly sloppy
audits such as Exhibit W (Worldcom) and Exhibit Y (Enron) ---
http://www.trinity.edu/rjensen/Fraud001c.htm
And then came the scandals where auditing firms were caught padding their
expense billings to clients ---
http://www.trinity.edu/rjensen/Fraud001.htm#BigFirms
"Travel-Billing Probe Has a Bigger
Scope," Jonathan Weil, The Wall Street Journal, September 26, 2003 ---
http://online.wsj.com/article/0,,SB106452493527358700,00.html?mod=todays%255Fus%255Fmoneyfront%255Fhs
A Justice
Department investigation that started two years ago with questions about
PricewaterhouseCoopers LLP's travel-related billing practices as a
government contractor also is focusing on possible overbillings by the other
Big Four accounting firms, as well as several other companies.
Some details of the
probe's scope are contained in a previously unreported November 2002
memorandum that the Justice Department filed with a Texarkana, Ark., state
circuit court in connection with a separate civil lawsuit into
travel-related billing practices. The lawsuit accuses
PricewaterhouseCoopers, Ernst & Young LLP and KPMG LLP of fraudulently
padding the travel-related expenses they billed to clients by hundreds of
millions of dollars over a 10-year period starting in 1991.
In its memo to the
court, the Justice Department said it is investigating each of the suit's
defendants, "focusing on whether they have submitted false claims to the
government, because they have failed to credit government contracts with
amounts they have received as rebates from travel providers."
The Texarkana
lawsuit originally was filed in October 2001 by closely held shopping-mall
operator Warmack-Muskogee LP and had proceeded without publicity until
reported last week in The Wall Street Journal. It alleges that the
accounting firms systematically billed their clients for the full face
amount of certain travel expenses, including airline tickets, hotel rooms
and car-rental expenses, while pocketing undisclosed rebates they received
under contracts with various travel-service providers.
The defendants have
acknowledged retaining rebates on various travel expenses for which they had
billed clients at their pre-rebate amounts. However, they deny that their
conduct was fraudulent, saying that the proceeds offset amounts that
otherwise would have been billed to clients. They say they have discontinued
the practice.
Other defendants in
the Texarkana lawsuit include the U.S. unit of Cap Gemini Ernst & Young, a
French consulting company that purchased Ernst & Young's consulting practice
in 2000, and BearingPoint Inc., a former KPMG unit previously known as KPMG
Consulting Inc. that now is an independent public company. The Justice
Department memo further disclosed that the defendants "are aware of" the
investigation, which "concerns the same issues presented in the" Texarkana
civil lawsuit, and that the government had obtained documents from each of
the defendants in the Texarkana case through subpoenas.
According to a
person familiar with the investigation, the Justice Department's overbilling
probe also includes the travel-related billing practices of Deloitte &
Touche LLP, as well as four other large government contractors. This person
declined to identify the other four contractors under investigation, but
said they are not professional-services firms. Federal contracts, this
person explained, typically state that government contractors will bill the
government for actual travel costs -- often referred to as "out-of-pocket"
or "incurred" costs -- which the government interprets to mean the amount
that a contractor actually paid for, say, an airline ticket, including any
rebates.
Continued in the article.
"Audit Firms Overbilled Clients For
Travel, Arkansas Suit Alleges," by Jonathan Weil and Cassell Bryan-Low, The
Wall Street Journal, September 17, 2003 ---
http://online.wsj.com/article/0,,SB106376088299612400,00.html?mod=todays%255Fus%255Fpageone%255Fhs
Three of the
nation's four biggest accounting firms have been accused in a lawsuit of
fraudulently overbilling clients by hundreds of millions of dollars for
travel-related expenses, and the Justice Department has been conducting an
investigation of the billing practices of at least one of the firms,
PricewaterhouseCoopers LLP.
Documents
describing the government's investigation are contained in the previously
unpublicized lawsuit filed here in October 2001 that could pose both a
public-relations embarrassment and a big legal challenge to the firms. The
industry has been under intense scrutiny for its audit work following the
2001 collapse of Enron Corp., which brought down another big accounting
firm, Arthur Andersen LLP, and for its perceived lack of oversight at other
companies, including Tyco International Ltd., Xerox Corp. and others.
The suit, pending
in an Arkansas state circuit court, accuses PricewaterhouseCoopers, KPMG LLP
and Ernst & Young LLP of padding the travel-related expenses they billed
thousands of clients over a 10-year period dating back to 1991.
The suit alleges
that the firms systematically billed their clients for the full face amount
of certain travel expenses, including airline tickets, hotel rooms and
car-rental expenses, while pocketing undisclosed rebates and volume
discounts they received under contracts with various airline, car-rental,
lodging and other companies. At times, the rebates retained by the various
firms were for up to 40% of the purchase price of travel-related services,
the suit has alleged, citing internal firm documents filed with the court.
The lawsuit shines
a light on how some professional-services firms, including law firms and
medical practices, in recent years have turned reimbursable out-of-pocket
expenses, such as bills for travel and meals, into profit centers, which
itself isn't illegal or improper. As big accounting, law and other firms
have grown over the past decade, they increasingly have used their size in
negotiations with travel companies, credit-card companies and others to
secure significant rebates of upfront costs. Such rebates don't generate
disputes between firms and their clients when fully disclosed. But any that
aren't fully disclosed, as alleged in the Texarkana suit, could open firms
up to potential liability.
The suit, filed by
closely held Warmack-Muskogee Limited Partnership, a shopping-mall operator,
also accuses the accounting firms of colluding with each other to secure
favorable deals with various travel vendors. It also alleges the firms
operated under an agreement not to disclose the existence of the rebates to
clients or credit clients fully for the rebates.
The defendants in
the suit, all of which deny the lawsuit's allegations, have filed motions
seeking to dismiss the case as groundless and to defeat requests that the
lawsuit be certified as a class action, the class for which could include a
majority of the nation's publicly held corporations. Still, the lawsuit, for
which no trial date has been set, already has proved costly to the firms. In
an affidavit last month, a PricewaterhouseCoopers partner estimated the
firm's partners and staff had spent 125,000 hours, valued at $10.3 million
at the firm's billing rates, gathering and analyzing information to be
produced for discovery. KPMG in a July court filing estimated that its
discovery expenses could approach $26 million.
Continued in the article
"Large Size of Travel Rebates Adds to
Questions on Ernst," by Jonathan Weil, The Wall Street Journal, November
20, 2003 ---
http://online.wsj.com/article/0,,SB106928498427833800,00.html?mod=mkts_main_news_hs_h
Ernst & Young was
awarded $98.8 million of undisclosed rebates on airline tickets from 1995
through 2000, mostly on client-related travel for which the accounting firm
billed clients at full fare, internal Ernst records show.
The
rebates are at the crux of a civil lawsuit here in a state circuit court, in
which Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP are accused
of fraudulently overbilling clients for travel expenses by hundreds of
millions of dollars since the early 1990s. The tallies are the first precise
annual airline-rebate figures to emerge in the case for any of the three
accounting firms.
Ernst
and the other defendants, in the lawsuit brought by closely held
shopping-mall operator Warmack-Muskogee LP, have acknowledged retaining
large rebates from travel companies without disclosing their existence to
clients. But they deny that their conduct was fraudulent, saying they used
the proceeds to offset costs they otherwise would have billed to clients
through higher hourly rates. Confidentiality provisions in the firms'
contracts, standard in the airline industry, barred parties from disclosing
the contracts' existence or terms.
Court
records show that Ernst had rebate agreements with three airlines: American
Airlines' parent
AMR Corp.,
Continental Airlines, and
Delta Air Lines. The airline rebates soared to $36.7 million in 2000,
compared with $21.2 million in 1999 and $5.2 million in 1995, reflecting a
trend among major accounting firms to structure their volume discounts with
select airlines as rebates rather than upfront price reductions.
A May
2001 chart by Ernst's travel department shows the firm estimated that its
2001 rebates would be $39.8 million to $44 million, including at least $21.2
million from AMR and $8.3 million from Continental.
Of
Ernst's three "preferred carriers," two -- AMR and Continental -- are audit
clients of the firm. Some investors say the large dollar figures, combined
with a reference in one Ernst document to the firm's arrangements with AMR,
Continental and seven other travel companies as "strategic partnering
relationships," raise questions about how such payments mesh with Securities
and Exchange Commission requirements that auditors be independent. The
reference was contained in a 2001 presentation outlining the travel
department's goals and objectives for the following year.
Audit
firms generally aren't allowed to have partnership arrangements with clients
in which the auditor would appear to be a client's advocate, rather than a
watchdog for the public. SEC rules bar auditors from having direct business
relationships with audit clients, with one exception: if the auditor is
acting as "a consumer in the normal course of business."
The
rules don't clearly spell out the full range of business relationships that
would fall under that category. Ernst says its relationships with AMR and
Continental qualified for the exception. Generally, auditors can buy goods
and services from audit clients at volume discounts, if the prices are fair
market and negotiations are arm's length. Ernst, American and Continental
say theirs were. Ernst's terms with American and Continental were similar to
those with Delta, which wasn't an audit client.
In a
January 2000 e-mail to an Ernst consultant, Ernst's travel director
explained that, within the airline industry, "point-of-sale discounts are
the industry norm, not back-end rebates." Many large professional-services
firms tended to prefer back-end rebates, however. A September 2000
presentation by Ernst's travel department said "the back-end rebate
structure is consistent with practices in other large professional-services
firms," including the other four major accounting firms and investment banks
Credit Suisse First Boston and Morgan Stanley. It also said an outside
consulting firm, Caldwell Associates, had deemed the competitiveness of
Ernst's travel contracts "to be above average," compared with those of the
other four major accounting firms.
In a
statement, Ernst says: "There is no independence rule of any sort that would
prohibit our receipt of rebates for volume travel in the normal course of
business. As is the case with any large airline customer, we receive
discounts on tickets purchased from American based on the volume of our
business. ... It is entirely unrelated to our audit work for the airline."
"Pricewaterhouse's Records
Indicate Some Partners Opposed Keeping Payments," by Johathan Weil, The Wall
Street Journal, September 19, 2003 ---
http://online.wsj.com/article/0,,SB106391830284530300,00.html?mod=mkts_main_news_hs_h
PricewaterhouseCoopers LLP's practice of retaining undisclosed rebates on
client-related travel expenses generated internal dissent within the
accounting firm, some of whose partners complained it was improper to keep
the payments rather than passing them on to clients, internal records of the
firm show.
The records,
including internal e-mails and slide-show presentations to top executives of
the firm, were filed this year with a Texarkana, Ark., state circuit court
as exhibits to a deposition of PricewaterhouseCoopers Chairman Dennis Nally.
The deposition of Mr. Nally was conducted in February in connection with a
continuing lawsuit against PricewaterhouseCoopers and four other accounting
and consulting firms that accuses them of fraudulently overbilling clients
for travel-related expenses by hundreds of millions of dollars.
Continued in the article.
"PricewaterhouseCoopers Partners
Criticized the Firm's Travel Billing," by Jonathan Weil, The Wall Street
Journal, September 30, 2003, Page C1 ---
http://online.wsj.com/article/0,,SB106487258837700200,00.html?mod=mkts_main_news_hs_h
Attorneys alleging
that PricewaterhouseCoopers LLP overbilled its clients for travel expenses
have released a flurry of the accounting firm's e-mails, including one from
April 2000 in which the head of its ethics department described the firm's
practices as "a bit greedy."
The e-mails and
other internal records, filed Friday with a state circuit court here, mark
the broadest display yet of evidentiary material in the lawsuit by a closely
held shopping-mall operator, Warmack-Muskogee LP, against three of the
nation's Big Four accounting firms. The records include complaints by more
than a dozen PricewaterhouseCoopers partners and other personnel about the
firm's billing practices, as well as case logs for three separate internal
ethics-department investigations into the practices since 1999. The firm
halted the practices in question in October 2001.
PricewaterhouseCoopers has acknowledged that it retained rebates on various
travel expenses for which the firm had billed clients at their prerebate
prices, including rebates from airlines, hotels, rental-car companies and
credit-card issuers. It also has acknowledged that it didn't disclose the
rebates to clients and that most of its partners had been unaware of them.
The firm, however, has denied Warmack-Muskogee's allegations that the rebate
arrangements constituted fraud, saying the proceeds offset amounts it
otherwise would have billed to clients through higher hourly rates.
In her April 2000
e-mail, the top partner in PricewaterhouseCoopers's ethics department,
Boston-based Barbara Kipp, scolded Albert Thiess, the New York-based partner
responsible for overseeing the firm's infrastructure, including its travel
department. "Al, in general, while I appreciate the importance of managing
as tight a fiscal ship as we can, I somehow feel that we are being a bit
greedy here," she wrote. "I think that, in most of our clients' and
partners'/staff's minds, when we say [in our engagement letters] that 'we
will bill you for our out-of-pocket expenses, including travel ...', they
don't contemplate true overhead types of items being included in that cost."
Continued in the article.
Where do we go from here?
And now mounting scandals much bigger than those mentioned above are leading
regulators like the PCAOB to consider more drastic reforms of the audit
industry. Some of the suggestions I think are dysfunctional such as forcing
clients to rotate among the Big Four for audit services.
What the regulators are shying away from is audit reform that might work ---
breaking up the Big Four into something like the Big 10. These things are never
locked in stone, however, as can be seen by the breakup of Big Bell into Baby
Bells than in turn eventually got re-adopted by Big Bell. But after the breakup
of Big Bell competition became more intense in the telecommunications industry
which is something we're not seeing in the assurance services industry.
Course Management Systems/Learning Management Systems (CMS/LMS) ---
http://en.wikipedia.org/wiki/Learning_management_system
From the 2011 EDUCAUSE Annual Meetings
"Educause Video Archive; Why You Hate Your CMS," by Josh Keller,
Chronicle of Higher Education, October 21, 2011 ---
http://chronicle.com/blogs/wiredcampus/crosstalk-educause-video-archive-why-you-hate-your-cms/33885?sid=wc&utm_source=wc&utm_medium=en
Educause Archive: Higher ed’s
biggest tech conference is over, but Educause has posted a
video archive of selected sessions. For those who
missed them, be sure to check out Danah Boyd’s presentation on
students and online privacy,
a Pew presentation on
trends in mobile learning, and The Chronicle’s
panel on the
challenges of the unbundled university.
Mobile Growth: Mary Meeker, a
former Morgan Stanley analyst who is one of the most perceptive thinkers on
the future of technology, made her annual presentation on how the Internet
is changing on Tuesday (slides, video).
The presentation emphasizes the rapid growth of mobile
devices and global Internet usage.
The Hated CMS: Content-management
systems, which typically help people organizations their Web sites, are
typically among the least liked pieces of software. Among other faults, they
age poorly, says Michael Fienen at .eduGuru. Mr. Fienen offers some advice
for colleges to
choose a CMS more intelligently and for CMS
vendors to serve as better members of the higher-ed community.
Question
What was the first computer-based CMS/LMS system?
Hint
It went "hoot."
In the early days of CMS/LMS software there was no Internet available to the
general public. The earliest commercial CMS/LMS software came in boxes of floppy
disks. The earliest software was developed with funding for the U.S. military
training. It later became available to the public in computer stores. Colleges,
however, were long delayed in adopting this software in computing centers.
Professors like me of course were experimenting on our own. In the early years I
used DOS-based HyperGraphics CMS and later Windows-based Toolbook CMS.
The history of CMS/LMS systems can be investigated at the following two
links:
http://www.trinity.edu/rjensen/290wp/290wp.htm
http://www.trinity.edu/rjensen/245cont.htm
By being an early adopter, I was invited to hundreds of campuses to
demonstrate CMS software ---
http://www.trinity.edu/rjensen/Resume.htm#Presentations
Now I'm a has-been with tons of old floppy disks and old CDs!
Tries to Please to a Fault: Three Steps Forward in a Swamp and Two
Backwards
"SEC Head Struggles to Turn Agency Around," SmartPros, October 8,
2011 ---
http://accounting.smartpros.com/x72854.xml
You can read about media rankings of accounting and business programs
(undergraduate and graduate) at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
Rankings different somewhat as to criteria and who performs the rankings. The
best-known ranking comes from US News where the rankings are based upon
multiple criteria (especially research and faculty reputations) where the
rankings are done by deans and other administrators. The Wall Street Journal
rankings of MBA programs rely heavily upon recruiters of graduates. The
Business Week rankings of undergraduate and graduate business programs rely
heavily upon alumni. An the newer rankings of MBA programs in The Economist
are based upon what students enrolled in programs want from those programs.
"The Top Thirty (Global MBA) Programs," The Economist, October
15, 2011, Page 73 ---
http://www.economist.com/node/21532270
DARTMOUTH COLLEGE’S Tuck School of Business takes
first place in The Economist’s ninth annual ranking of full-time MBA
programmes. The New Hampshire school has moved up from second position last
year. Virtually all of its students—who went into a wide range of
industries—found work within three months of graduating. Its MBAs could
expect a basic salary of $107,000, a 65% increase on their pre-degree
earnings. Tuck students also graded the quality of their alumni the best in
the world—an important consideration given the often-repeated claim that who
you meet on an MBA programme is just as important as what you learn.
Chicago drops to second, having come top last year,
while the world’s most famous school, Harvard, also drops a place to fifth.
Europe’s top programme is IMD, a Swiss school, which ranks third. Though
INSEAD has campuses in both France and Singapore, no purely Asian school
makes our top 30. Hong Kong University, at 36th, is the highest-placed. The
China Europe International Business School is the only school from the
mainland to make our top 100. The Indian Institute of Management in
Ahmedabad, India’s sole representative, and the toughest business school in
the world to get into (see article), is 78th.
Continued in article
MBA Programs at the (Expensive and Cheap) Extremes are Doing Well Whereas
Those in the Middle are Struggling for Students and Placements of Graduates
"Trouble in the Middle: Is time running out for business schools that aren't
quite elite," The Economist, October 15, 2011, pp. 71-72 ---
http://www.economist.com/node/21532269
IN 2009, when the American economy was beset by
recession, interest in MBA programmes hit a record high. No one was much
surprised: applications to business schools often rise during the first
years of a recession as people seek shelter from the storm. So perhaps no
one should be surprised that in both succeeding years applications have
fallen. That’s what prolonged doldrums do.
Yet, privately at least, some business schools are
worried that a two-year decline, along with a level of applications from
American students lower than it has been this century, is more than just a
response to the economy. They fear that the established model of business
education may be in trouble, if not for all schools, then definitely for
mid-ranking American institutions offering a traditional two-year MBA.
Two-thirds of schools which offer long, residential programmes saw
applications drop in 2011.
Data taken from The Economist’s latest
ranking of full-time MBA programmes (see article) show that an MBA from a
mid-ranking school is no longer the investment it once was. In 2010 the
average tuition fee charged by American institutions ranked within our top
100, but outside of the top 15, was $81,911 for the full two years. The
average basic salary of those schools’ freshly-minted MBAs was $81,178 a
year. Five years ago tuition at the same cohort of schools was nearly
$22,000 cheaper—$60,247—while the average salary, $78,442, was barely less
than today’s. This price rise comes at a time when enrolment is falling; for
American mid-level schools it is down 20% over the decade.
In comparison, the schools at the ends of the
spectrum look more appealing. Lower-level programmes, which harbour no
ambitions to be international players and are not covered in our ranking,
are seeing applications rise. They are much cheaper to attend and often
offer a discount for local students. For those taking the increasingly
popular part-time or online programmes, there is no reason even to leave
their jobs. (Disclosure: The Economist has an online business-education
business, but not one that offers an MBA.)
Elite business schools still look like a fair deal.
MBA students attending a top-15 institution may be charged an average of
$92,262 for their tuition, but they can expect a basic salary of $110,879
once they graduate. Payscale, a company that collects pay data, claims that
graduates from Harvard’s MBA programme will earn $3.6m over a 20-year career
(although it is not able to compare this with the rewards that go to equally
smart cookies who haven’t bothered with an MBA).
. . .
High Costs of New and Pampered Faculty
Schools with names that send a less sexy signal,
though, may be in trouble. For one thing,
wages have become a huge drain on their resources. An AACSB survey of 503
American business schools found that a newly-hired academic can expect a
salary of $169,000. At a mid-ranking
school, salaries of $250,000 and above are common. That’s just for nine
months: plenty of time for books, consulting and visiting professorships
during the long summer vacation.
Another strain is that
pampered faculty and
high-paying students expect to be housed in posh buildings with nice
gardens. Few schools enjoy the resources of Stanford, which recently opened
a $345m campus. But many feel the need to splurge millions on new facilities
in the hope of poaching applicants from their peers.
Continued in article
Lake Wobegone (Illusory
superiority) Rankings of European Universities --- All of Them are Above
Average
It's like a kids' fair where everybody earns a blue ribbon
"A New European Ranking: Prizes for All!" by Ben Wildavsky, Chronicle of
Higher Education, June 13, 2011 ---
http://chronicle.com/blogs/worldwise/a-new-european-ranking-prizes-for-all/28377
Bob Jensen's threads on Higher Education Controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
Hi XXXXX,
These are among the toughest requests for advice that I receive. I get these
questions now and then from new faculty and faculty who find themselves rejected
for tenure. Second I get these questions from faculty who find themselves
treading water as tenured associate professors lost at sea.
First, my answer is contingent upon your own credentials and skills.
Accounting professors with doctorates who have great quantitative skills for
accountics science will have an easier time getting those all-important hits in
top accounting research journals. For them my advice is to make friends with
lots of potential co-authors (the journals don't care if an article has ten
authors) and carefully read my paper on how to play the game:
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)
Second, my answer is contingent upon your particular college or
university.
As long as you get a few refereed publications (even in obscure journals), some
colleges will bend every which way to keep you if you are both a good teacher
among your students and a good team player among your colleagues. However, this
can be a mixed blessing. I know of some liberal arts universities where the
Department of Business gave glowing recommendations for tenure/promotion of a
faculty member weak on publications only to have the college-wide P&T Committee
object because of a feeling that the same standards for research and publication
that apply to chemists and psychologists should also apply to accountants. There
are also envy objections if the accounting assistant professor has twice as much
salary as a full professor in chemistry and psychology.
Third, my answer is contingent upon the value your university may place
upon innovation and teaching evaluations.
Some faculty have discovered how to build worldwide reputations as innovators in
edutainment and/or technology. Read about some of the faculty that won the
Innovations in Accounting Education Award at
http://aaahq.org/awards/awrd6win.htm
Winning this award can go a long way toward tenure and promotion. However, the
odds of winning such an award are small. You might spend a great deal or time
and effort being an innovator that is not particularly appreciated by students
or colleagues. Sadly most students want to be spoon fed from textbooks as long
as they can also have an easy time getting A and B grades in this era of grade
inflation:
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation
Sadly, most colleges evaluate teaching on the basis of student evaluations. And
students often demand high grades for glowing evaluations.
Fourth, beware of being viewed as too soft and easy.
When instructors are trying too hard to please students with grades and gut
courses, this effort to win over students and colleagues can backfire. Some
professors earn stellar reputations for teaching tough courses with high
standards. Be prepared, however, to read damning student evaluations and/or
four-letter words about yourself on RateMyProfessor.com.
Fifth, work, work, work
Sadly, some faculty don't get tenured/promoted because they set priorities in
life that detract from job performance. I know more than one accounting
associate professor who earned a PhD from a top-ten research university, got
enough TAR, JAR, and JAE hits to make tenure at an R1 research university, and
then has not been heard from since earning tenure. In most instances that
associate professor changed priorities in life, including parenthood to a fault,
chasing around after a divorce, taking on hobbies like building a real
airplane/yacht in a barn, building harps accords, building violins, performing
in string quartets, etc. Some just plain burn out and become diseased with
depression and alcoholism.
Six, become a quality administrator and or servant of your profession
There's no shame in burning out at research and/or teaching if you have skills
and ambitions for other alternatives in a college. There's no honor in becoming
a lousy dean if you've been a lousy researcher or teacher. However, if you're a
good researcher/teacher who just wants other challenges in life, there are some
terrific challenges when becoming a serious administrators. Being a good
administrator also takes a different kind of skill set and dedication. There are
extensions of this concept in the field of public and professional service.
Exhibit A is the quality reputation that Dan Deines (Kansas State University)
built over a lifetime of dedication of promoting accountancy among K-12 students
and their advisors and parents.
Seven, become a researcher/publisher and consultant in a small niche
Sometimes earning a worldwide reputation in research takes dedication toward
research in a small niche. For example, accounting professors in the past have
found niches in such things as oil and gas accounting, accounting history, or
accounting for interest rate swaps (like me). Few, however, have explored
becoming accounting experts in synthetic leasing, XBRL, securitizations ,
casualty insurance, or in managerial accounting for specific industries like
funeral parlors, QVC, or Avon.
Eight, take other roads less traveled
I know quite a few accounting and business faculty who became totally dedicated
to NACRA and other case writing associations. Unable or unwilling to build
accountics science reputations, they built international reputations for writing
both teaching and research cases. My threads on case writing are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
This route sometimes becomes popular for lawyers who do not have PhD-level
research training.
Nine, consider the possibility of becoming a special needs student expert
It's rare for an accounting professor to become an expert for special needs
students such as students who are hearing impaired, vision impaired, paralyzed,
hyperactive, bipolar, etc. I think there's a real niche here. My threads on this
topic are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped
Ten, remember that respect for scholarship is depth and
content
It can be dysfunctional to become a superficial blogger or a maintain a
superficial Website. Reputations are not built on publishing, blogging, social
networking, or Websites alone. Reputations are built upon the content of
publishing, blogging, social networking, or Websites.
And reputable content can take a lifetime of blood, sweat, and tears!
My threads on Tools and Tricks of the Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm
There really is no easy way out in terms of a quality long-term professional
reputation. Too many failed professors tried to do too many things superficially
and failed to build a quality reputation that stands out when the Great Scorer
comes to write against their names. Good guys often finish last.
Bookkeeping Tutorials and Accounting Research for the Developing World
Cooperatives
Last week I generated an AECM message about accounting academic career
development in which I mentioned the need for accounting educators and
researchers to develop more niche tutorials and niche research much like natural
scientists and social scientists for years have been developing niche
specialties.
As an illustration, I can't recall stumbling upon anything in the academic
accounting literature regarding bookkeeping tutorials and research in the
developing world cooperative (in truth, however, I've never done an
extensive search on this topic). For example, there are some books and research
papers on farm accounting and taxation, but these are focused mainly on farming
in North America.
I did stumble upon the following ACDI-VOCA site of resources for the
developing world in general ---
http://www.acdivoca.org/
Mission
To promote economic opportunities for cooperatives,
enterprises and communities through the innovative application of sound
business practice.
ACDI/VOCA Values
ACDI/VOCA strives to promote positive economic
and social change worldwide. It is distinguished by commitment to its
overseas beneficiaries, wise stewardship of development resources and a
knowledgeable, experienced, diverse and effective team.
Commitment to Beneficiaries
ACDI/VOCA is dedicated to poverty alleviation and
broad-based economic growth. Our respect for host societies and our
commitment to the involvement of beneficiaries as true partners in
development projects result in improved local capacities, enhanced
opportunities, and vibrant, sustainable communities, cooperatives and
enterprises. ACDI/VOCA's business model of development is designed to
increase incomes and wealth, permitting beneficiaries to fully participate
in the global economy.
Stewardship of Development Resources
High-quality work and strict standards of
accountability characterize ACDI/VOCA’s programs. We take pride in being a
technical leader, but with a human focus. Projects are based on a clear
focus on development goals, proven approaches and a results-orientation.
ACDI/VOCA adopts for its own management the same enlightened business tools
and techniques that we promote abroad. To maximize the effective use of
public resources and sustainable impact, we favor expandable, replicable
methods, local ownership, an emphasis on broad-based participation and
alliances with the private sector and other partners.
Qualified, Empowered and Diverse Staff
ACDI/VOCA’s effectiveness depends largely on the
quality of its staff. Our organization values communication, teamwork and
enlightened leadership. We believe in fair hiring and promotion practices,
which contribute to a healthy diversity. We are committed to the empowerment
of all employees and to a rewarding quality of life in the workplace. We
emphasize technical proficiency, staff development and a participative
culture. To learn more,
click
here.
Jensen Comment
I did a search on "accounting" and got 45 hits at the ACDI-VOCA site.
I did a search on "bookkeeping" and got 4 hits.
The point is that for accounting professors who are finding it difficult to
find a niche for accounting tutorial development (training), research, and
publication, this developing world niche is certainly a great opportunity to
investigate.
October 28, 2011 reply from James Martin
Bob,
I developed a section on the MAAW site I refer to as "Accounting For...You
Name It". That bibliography includes about 100 pages of articles related to
accounting for something specific, e.g., railway accounting, construction
accounting, dairy accounting, pig iron accounting, hospital accounting,
lumber accounting, flour mill accounting, cotton mill accounting, accounting
for meat packing, etc.. Most of these papers are from older issues of
accounting journals like The Journal of Accountancy, NACA Bulletin, NAA
Bulletin, and Management Accounting. Although that kind of article is rarely
published today, I think most of these papers did serve as bookkeeping
tutorials for U.S. industries and could serve the same purpose for
developing countries today - and its all available on the
web.
The link for that bibliography is
http://maaw.info/AccountingForArticles.h
Jim Martin
October 28, 2011 reply from Bob Jensen
Thank you so much Jim.
This historical bibliography shows how TAR once served and is no longer
serving a niche market by industry. Actually, I don't think any of the AAA
journals are serving such a niche market in modern times. Accounting
educators and researchers are out of touch with the real world of industry.
Bob Jensen
Global Executive MBA Program Rankings
"EMBA Rankings 2011," as ranked by the Financial Times, 2011 ---
http://rankings.ft.com/businessschoolrankings/emba-rankings-2011
Bob Jensen's threads on media rankings controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
From Paul Caron's TaxProf Blog, October 30, 2011 ---
http://taxprof.typepad.com/
This week's list of the
Top 5 Recent Tax Paper (SSRN) Downloads is the same as last week's, with
the #1 paper #5 in
all-time downloads among 7,913 tax papers:
1. [3501 Downloads]
Herman Cain's 9-9-9 Tax Plan, by
Edward D. Kleinbard (USC)
2. [318 Downloads]
Rethinking Roth IRA Conversions in 2011 and 2012, by
Christopher R. Hoyt (Missouri-Kansas City)
3. [206 Downloads]
Excluding Expert Valuation Testimony, by
Wendy C. Gerzog (Baltimore)
4. [279 Downloads]
Charitable Gifts by S Corporations and Their Shareholders: Two Worlds of
Law Collide, by
Christopher R. Hoyt (Missouri-Kansas City)
5. [238 Downloads]
Charitable Gifts by S Corporations: Opportunities and Challenges, by
Christopher R. Hoyt (Missouri-Kansas City)
"Real estate investment properties could be moving to fair value,"
Ernst & Young, ToThePoint, October 21, 2011 ---
Click Here
http://www.ey.com/global/assets.nsf/United%20Accounting/TothePoint_BB2200_InvestmentPropertyEntities_21October2011/%24file/TothePoint_BB2200_InvestmentPropertyEntities_21October2011.pdf
Jensen Comment
I think real estate asset fair values should be disclosed as notes to financial
statements whether or not they are operating or investment assets. However,
reporting real estate fair values of operating assets where liquidation is
highly unlikely in a going concern may not pass a cost-benefit test since real
estate appraisals can be very expensive.
What I object to most is the aggregation of unrealized changes in fair value
(properties that are unsold and may not even be yet available for sale) with
realized changes in fair values for properties that have been sold. Investors
and analysts might track eps and P/E ratios of firms without properly
distinguishing realized versus unrealized portions of eps and P/E ratios.
There's a tremendous leap in complexity and subjectivity when moving from
fair value changes in financial instruments (most of which are fungible issues
traded in bond and equities markets) to real estate investments. Real estate
parcels are not fungible. Each parcel is unique even within the same community.
For example, identical buildings and lots may very greatly when located on Exit
147 versus Exit 148. And buildings and lots are seldom identical in terms of all
attributes (an hence not fungible).
Once again this leads me to my broken-record advocation of multi-column
financial statements beginning with a traditional historical cost column (not a
valuation column) followed by columns of differing degrees of realization and
attestation.
Bottom line aggregations of precise realized earnings with highly imprecise
unrealized earnings are nonsensical aggregations that can mislead investors.
Auditors should not be part and parcel to such pie-in-the-sky aggregations.
One huge problem of real estate fair value adjustments on an annual basis is
the huge cost of relatively accurate appraisals. See my Days Inn illustration at
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Now consider real estate fair value re-measurement:
Levels of "Value" of an Entire Company
| General
Theory |
Days Inns
of America
(As Reported September 30, 1987) |
Market Value
of the Entire Block of Common Shares at Today's Price Per Share
(Ignoring Blockage Factors) |
Not
Available
Day Inns of America
Was Privately Owned |
Exit Value of Firm if Sold As a Firm
(Includes synergy factors and unbooked intangibles) |
Not Available for
Days Inns of America |
Sum of
Exit Values of Booked Assets Minus Liabilities & Pref. Stock
(includes unbooked and unrealized gains and
losses) |
$194,812,000
as Reported by Days Inns |
|
Book Value of the Firm as Reported in Financial Statements |
$87,356,000 as Reported |
| Book Value of the Firm
as Reported in the Financial Statements After General Price Level
Adjustments |
Not
Available for Days Inns |
Neither $87,356,000 book value is the residual historical cost nor the
$194,812,000 is a reliable estimate of "value in use" of the net assets of Days
Inns in 1987. At that time Days Inns was very much a private and highly
successful going concern contemplating an initial public offering (IPO). FAS 157
excludes $197,812,000 as an estimate of "value in use" since piecemeal
liquidation of the hotels is most likely the "worst possible use" of these
hotels. Their values also have high covariance valuation components, especially
the covariance of the real estate values with the goodwill value and human
capital values of Days Inns. Furthermore, value in use of these properties will
greatly change if the sign on each hotel is changed from Days Inn to Holiday
Inn. The reason is that phantasmagoric summation of all the first order to n-th
order covariance terms.
Among the various reasons Days Inn never went to the trouble of having
Landhauer Associates or any other real estate appraisal firm appraise the exit
(sales) value of each of its hundreds of hotels is that the cost of getting
these appraisals updated each year is prohibitive as well as being subject to
huge margins of error. Days Inns went to considerable expense having its exit
values appraised this one time in 1987 for purposes of improving the proceeds of
an IPO. Obtaining these appraisals annually is far too costly for financial
reporting purposes alone. Furthermore it is highly unlikely that these hotels
will ever be sold piecemeal. If they will ever be sold, it is more likely that
all the hotels or large subsets of these properties will be sold in block, and
the block value is much different the sum of the appraisals of each property in
the set. Value in use differs greatly from summations of piecemeal exit values
It is useful to supplement historical cost allocation values with exit value
estimates as well as other possible fair value estimates at a given point in
time, but balance sheets summing component values as if no covariances exist is
absurd except in the case of historical cost book values and passive financial
investments and liabilities. Another problem is that realistic estimates of exit
values of such things as the value of each of over 300 hotels is very costly to
obtain on a periodic basis such as an annual basis.
April 3, 2009 message from Tom Selling
[tom.selling@GROVESITE.COM]
Bob,
There are two sources of covariance that need to be
dealt with: (1) covariances among assets recognized, and (2) covariances
between recognized and non-recognized assets. I think replacement cost rules
can easily cope with (1) without sacrificing additivity – i.e., that total
assets on the balance sheet will represent the total minimum current cost of
replacing the recognized assets of the business entity, assuming (for the
moment) that there are no unrecognized assets. There may be issues of
allocating the replacement cost among asset categories, but I don’t see that
as a big problem, because everything adds up to the desired number.
Since the nature of the assets we don’t recognize
are very different in nature from the ones we recognize, I don’t see
anything irrational (you may be able to enlighten me here) about having an
expectation that the covariances of the second type, above, are 0. An
expectation is different from a “declaration” or an “assumption.”
I feel like a greased pig trying to escape your
clutches! But unlike the pig, I’m learning a lot.
Best,
Tom
April 4, 2009 reply from Bob Jensen
Hi Tom,
I agree with what you state about
covariances of replacement cost estimates, but it is important to note
that replacement cost accounting is really a cost allocation process
rather than a valuation process for non-financial items subject to
depreciation and amortization. Depreciation and amortization allocation
formulas use such arbitrary estimates of economic lives, salvage values,
and cost allocation patterns that it’s not clear why additive
aggregation is any more meaningful under replacement cost aggregations
than it is under historical cost aggregations. Neither one aggregates to
anything we can meaningfully call value in use.
Companies are no longer required to generate FAS 33-type comparisons.
The primary basis of accounting in the U.S. is unadjusted historical
cost with numerous exceptions in particular instances. For example,
price-level adjustments may be required for operations in hyperinflation
nations. Exit value accounting is required for firms deemed highly
likely to become non-going concerns. Exit value accounting is required
for personal financial statements (whether an individual or a personal
partnership such as two married people). Economic (discounted cash
flow) valuations are required for certain types of assets and
liabilities such as pension liabilities. Exit value accounting is
required for impaired items such as damaged inventories and inoperable
machinery.
Hence in the United States and virtually every other nation, accounting
standards do not require or even allow one single basis of accounting.
Beginning in January 2005, all nations in the European Union adopted the
IASB's international standards that have moved closer and closer each
year to the FASB/SEC standards of the United States.
The FASB and the IASB state that "value in use" is the ideal valuation
measure if it can be measured reliably at realistic estimation costs.
Exit value and economic (discounted cash flow) generally do not meet
these two criteria for value in use of non-financial items. There is
nearly always no practical means of estimating higher order covariances.
and additivity aggregations are meaningless without such covariances.
In the case of economic valuation, estimation of future cash flows and
discount rates enters the realm of fantasy for long-lived items.
Alsoreliable exit value estimation of some items like all the hotel
properties of Days Inns can be very expensive, which is a major reason
Days Inns only did it once for financial reporting purposes in 1987.
Accordingly, "value in use" is an ideal which cannot be practically
achieved under either exit or economic valuation methods.
The FASB and the IASB state that "value in use" is the ideal valuation
measure, but this ideal can never be achieved with cost allocation
methods. Both historical cost and replacement (current, entry) value
"valuation" methods are not really valuation methods at all. These are
cost allocation methods that for items subject to depreciation or
amortization in value are reliant upon usually arbitrary estimates of
non-financial item useful lives, value decline assumptions such as
straight line or double declining balance declines, and salvage value
estimates. Under historical cost, the book value thus becomes an
arbitrary residual of the rationing of original cost by arbitrary cost
allocation formulas. Under replacement (current, entry) cost allocation
the estimated current replacement costs are subjected to n arbitrary
residual of the rationing of replacement cost by arbitrary cost
allocation formulas.
Although both historical and replacement cost allocations over time
avoid covariance problems in additive aggregations of book values, the
meanings of such aggregations are of very dubious utility to investors
and other decision makers. For example suppose the $10 million 2008 book
value of a fleet of passenger vans is added to the $200 million 2008
book value of Days Inn hotel properties, what does the $210 million
aggregation mean to anybody?
Both the passenger vans and hotel buildings have been subjected to
arbitrary estimates of economic lives, salvage values, and depreciation
patters such as double declining balance depreciation for vans and
straight-line depreciation for hotel buildings. This is the case whether
historical cost or current replacement costs have been allocated by
depreciation formulas.
Hence it is not clear that for going concern companies that have heavy
investments in non-financial assets that any known addition of
individual items makes any sense under economic, exit, entry, or
historical cost book value estimation process. Aggregations might make
some sense for financial items with negligible covariances, but for
non-financial items. Attempts to estimate total value itself basted upon
stock market marginal trades are misleading since marginal trades of a
small proportion of shares ignores huge blockage factors valuations,
especially blockage factors that carry managerial control along with the
blockage purchase. Countless mergers and acquisitions repeatedly
illustrate that estimations of total values of companies are generally
subject to huge margins of error, especially when intangibles play an
enormous part of the value of an enterprise.
Both the FASB and the IASB require in many instances that exit value
accounting be used for financial items. In part that is because for
financial items it is often more reasonable to assume zero covariances
among items. The recent banking failures caused by covariance among
toxic mortgage investments lends some doubt to this assumption, but the
issue of David Li’s faltering and infamous Gaussian copula function is
being ignored by both the IASB and the FASB in recommending exit value
accounting for many (most) financial items ---
http://en.wikipedia.org/wiki/Gaussian_copula#Gaussian_copula
For how the defect in this formula contributed to the 2008 fall of many
banks see ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html
I might add that Bob Herz and the FASB
as a whole recognize that additive aggregation in financial statement
items is probably more misleading than helpful. This is why a very
radical proposal is underway in the FASB to do away with aggregations,
including the presentation of net income and earnings-per-share bottom
liners ---
http://www.trinity.edu/rjensen/Theory01.htm#ChangesOnTheWay
The above link also discusses the
vehement disagreement between Bob Herz and the financial community on
the proposal to do away with the bottom line.
This bottom line aggregation problem is
also bound up in the “quality of earnings” controversy ---
http://www.trinity.edu/rjensen/Theory01.htm#CoreEarnings
However, the concept of reporting core earnings is not nearly as
controversial as the proposal not to report any bottom lines.
Bob Jensen's threads on
fair value accounting are at various other links:
Fair Value Accounting
Controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
Return on Investment
Theory ---
http://www.trinity.edu/rjensen/roi.htm
Interest Rate Swap
Valuation, Forward Rate Derivation, and Yield Curves for FAS 133 and IAS
39 on Accounting for Derivative Financial Instruments ---
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
Bob Jensen's threads on Fair Value
accounting, including FAS 157 guidelines, are at
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Also see my "Fair Value" slide show at
(previously used in my dog and pony shows) ---
http://www.cs.trinity.edu/~rjensen/Calgary/CD/JensenPowerPoint/
October 21, 2011 reply from a real estate CPA
auditor who prefers to remain anonymous
Fair value in real estate for investment properties
is a intellectual exercise. First, you generally do not get appraisals. You
audit managements assumptions and models (and appraisal or not, your point
regarding the uniqueness of each property is correct). But the first issue
is the usefulness and accuracy of the data and to whom. Let's eliminate for
the moment publically traded reits, mlps etc where one might have alternate
arguments.
Most users of real estate financial statements can
make their own assumptions as to value based on operating income and cap
rates. Fair value statements for real estate investment properties hide most
of the real operating data that would be disclosed in historical cost basis
statements (see the Investment Company Guide which much of this morphed from
when it was originally intended for mutual funds) and use assumptions and
estimates with wide ranges of acceptable answers, none of which are terribly
useful to the users (remember I eliminated publically traded investment
vehicles temporarily from the discussion).
What is the user looking for in these instances?
It is certainly not management's estimate of value opinined upon by an
auditor. It is generally operating income and free cash flow (if the user
were a mortgage lender, investor or buyer they would reach their own
opinion). Most owners of investment property are careful to negotiate when
financials are required that they be tax basis since current gaap is viewed
as too costly (ie impairment, straight line rents, 141R purchase price
allocations) unless they need to use gaap (sec requirements or similar).
Now when you get to the traded vehicles you can
argue that fair value is important to investors, but you have always had the
option to include fair value disclosure. How do the traded vehicles trade?
Certainly not on the basis the REIT will sell all of its properties and
liquidate. Usually on cash flow and dividend yield. If the users were
clamoring for fair value information, the issuers would furnish it.
This is another intellectual exercise of some
people in CT to increase the cost of gaap financials with no increase in
usefulness to a significant majority of the users.
XXXXX
"End the Religion of ROE," by Chris Meyer & Julia Kirby, Harvard
Business Review Blog, October 20, 2011 ---
http://paper.li/businessschools?utm_source=subscription&utm_medium=email&utm_campaign=paper_sub
There is no more powerful question in a U.S.
corporation than "what's the ROE on that?" Social media spending? Wellness
checkups? Better working conditions? Return-on-equity hurdles threaten them
all. Conversely, why market cigarettes? ROE justifies the means.
We think there's more to business success — and
that something as straightforward as a simple equation could put capitalism
on a better path.
To an extent not widely recognized, it was an
equation in the first place that gave ROE the power to dominate not just
investment decisions, but an entire business culture. A hundred years ago,
the focus on squeezing every drop of return out of equity capital made great
sense. As the industrial revolution progressed, society was enjoying
enormous benefits from mass production, which brought former luxuries within
middle class reach. Just as electronic commerce would later sweep business,
mass production came to one industry after another. But unlike websites,
factories were capital intensive. The revolution ran on equity capital,
which was in short supply. Anyone would have concluded that allocating
capital according to expected return on equity would be optimal for growth.
The ability to do that rose to a new level in 1917,
when General Motors was in financial difficulty and DuPont took a major
position in the company. (GM represented an important channel for Dupont's
lacquer, artificial leather, and other products, and Pierre du Pont was on
GM's Board.) DuPont sent Donaldson Brown, a promising
engineer-turned-finance staffer, to Detroit to sort things out, and sort
them out he did.
Brown noted a simple fact: Return on equity can be
broken down into a three-part equation. It is logically the product of
return on sales times the ratio of sales to assets times the ratio of assets
to equity. By parsing ROE into the DuPont Equation (very rapidly to become a
business school mainstay), he provided the basis for organizations divided
into functions with their own objectives. He reasoned that if marketers
worked on maximizing return on sales, production managers were rewarded for
the sales they squeezed out of their physical plant, and finance managers
focused on minimizing the amount of equity capital they needed, ROE would
take care of itself.
Thus Brown not only sowed the seeds of the today's
hated silos, he also set three "runaways" in motion. That is to say, he
created objectives with such strong feedback loops that they were pursued
single-mindedly, even to unhealthy excess.
Biologists use the term "runaway" to describe what
happens when a single criterion dominates the mating choices of a species to
the exclusion of other valuable traits. Among peacocks, large tails so charm
the peahens that the male tail has grown to the point where the males are
stressed by the nutritional burdens of growing and carrying the stupendous
appendage, and are more subject to predation because of its weight. Even as
the population of peacocks declines, peahens persist in their preferences.
Runaway feedback reduces the fitness of the species. (And here's a simpler
version, courtesy of lab experiments in the 1950s: given a lever to
stimulate the pleasure centers in their brains, rats will allow themselves
to die of starvation and exhaustion. The feedback from pressing the lever
overwhelms the positive sensation they would experience from eat or sleep.)
In the case of ROE, spurred on by the DuPont
equation, society came to suffer from similarly entrenched corporate
runaways. In their pursuit of margin, marketers sought market power even to
the point of monopoly, requiring antitrust laws to cry stop at the last
moment of the end game. Similarly, production engineers treated their
factories royally and their labor as expendable, until unions and labor laws
intervened. Financial managers, supported by their bankers, increased their
debt-to-equity ratios until capital requirements were imposed—oops, we mean
until there was a catastrophic financial crash and a depression. Then
banking regulations were imposed. (Apparently unconvinced of the causal
link, in the 1980s we re-ran the experiment. Once again, stimulating the
financial pleasure center proved irresistible and near-fatal.)
The lesson: Return on Equity, like peacock tail
splendor, is a very poor guide for allocating resources. It fails for two
reasons. First, fixating on ROE fails to maximize the benefit of business to
society because it measures value in terms of returns to only one
stakeholder; second, it allocates human resources as if maximizing the
efficiency of financial capital were critical to growth of social welfare.
So it's time to address our measurement system
seriously at the firm level. It would help to have a new equivalent of the
DuPont Equation that propels individuals and organizations forward just as
powerfully but does not send capitalism off the rails. What might that look
like? Most fundamentally, the objective of business must be broadened beyond
ROE. Structurally, too narrow an objective function leads to runaways, in
particular the fetishizing of financial return and measurements. And
functionally, there is no longer a need to ration financial resources;
there's more money available than can be productively invested—which is why
the financial industry is only minimally about investing, and all about
flipping, swapping, hedging, engineering, and other forms of lever-pressing.
Instead, the measure of value creation should take
into account the benefits perceived by all stakeholders, not just equity
holders. (Note that this means accounting for negative externalities like
health effects on neighboring populations, as well as positive ones like
contributions to education.)
In addition, the measures should be broad enough to
take into account variations in valuation around the world. As Richard
Dickinson and Kate Pickett show in Spirit Level, a value like equality, for
example, is prized more highly in Norway than in the U.S.
And in terms of its effects on managerial
decision-making, the new system should create feedback and incentives that
nudge managers toward innovating for tomorrow's world, not optimizing for
today's. When ROE holds sway, a more or less certain return on a
cost-reduction investment nearly always trumps a speculative bet on a new
business model. That only makes sense if you are operating in a state of
equilibrium—which might have been close enough to the truth in some
sepia-toned time. Now we need managers to shift from a mindset of optimizing
an equilibrium to adapting to and capitalizing on a dynamic business
ecology. New measures can help reverse that priority, creating incentive
systems that encourage enterprises to invest in the growth of their
ecologies.
So here's our candidate: we believe that
corporations would do better for all their stakeholders and avoid the risks
of runaways by focusing on Return on Innovation. An innovation-based measure
would lead to an acceleration in investment with positive benefits for
growth.
Continued in article
Jensen Comment
Actually this paper is a recommendation to derive Return on Innovation which we
might call ROX since ROI is ready taken for Return on Investment. Use of X to
stand for the denominator "Innovation" since that term is ambiguous and not well
understood in the markets relative to ROE and ROI.
Also ROX has many of the same limitations of ROE and ROI apart from the
problem of defining "Innovation."
Teaching Case About Return on Investment (ROI)
From The Wall Street Journal Accounting Weekly Review on October 8,
2010
CEO Redux Not Always
a Hit
by: Joe Light
Oct 04, 2010
Click here to view
the full article on
WSJ.com
TOPICS: Corporate
Governance,
Executive
Compensation
SUMMARY: This
short article
focuses on work by
researchers from the
IE Business School
in Madrid, Spain,
and Rouen Business
School, France.
These management
professors compared
rates of return on
assets for the three
years following
initial appointment
of the company's CEO
who was at the helm
in 2005. They
examined differences
in this performance
metric according to
whether the CEO had
prior experience as
CEO versus those who
had not; they found
consistently poorer
results for those
CEOs who had prior
experience. However,
one aspect of the
research that is
more fully discussed
in the online
version of the
article indicates
that the findings
may simply serve as
a marker of another
result: the negative
effect of being an
ex-CEO disappeared
if the CEO spent at
least two years with
the new firm before
being promoted.
Ex-CEOs also
performed better if
they had a long
break between CEO
positions or
repeated as CEO more
than twice.
CLASSROOM
APPLICATION: The
article may be used
to identify an
unusual use for ROA,
a financial
statement ratio
typically studied in
financial accounting
and MBA classes. The
article also is
useful to help
students understand
the nature of
academic research.
QUESTIONS:
1. (Introductory)
What were the
overall findings in
the study that is
being reported in
this article?
2. (Advanced)
How is return on
assets calculated?
How do you think
these researchers
could control for
industry performance
so that "CEOs
wouldn't get an
unfair advantage
from a soaring
sector"?
3. (Introductory)
How do the
researchers explain
their results?
4. (Advanced)
Are you surprised by
these research
results? Explain
your response,
considering the
expertise that
should be used in
searching for and
hiring a CEO
Reviewed By: Judy
Beckman, University
of Rhode Island
|
|
|
|
|
"CEO Redux Not Always a Hit," by: Joe Light. The Wall Street
Journal, October 4, 2010 ---
http://online.wsj.com/article/SB10001424052748703431604575522362723091490.html?mod=djem_jiewr_AC_domainid
For chief executives, past experience doesn't
necessarily lead to future success.
A new study found that CEOs who have previously
held other CEO posts actually perform worse than people who have never
been CEO, judging by a key metric.
The study looked at chief executives who led
S&P 500 companies in 2005 and analyzed their companies' returns on
assets in the first three years after their appointments. It was
conducted by Professors Monika Hamori of IE Business School in Madrid
and Burak Koyuncu of Rouen Business School in Rouen, France.
To measure CEO performance, Mr. Koyuncu and Ms.
Hamori focused on companies' returns on assets—the ratio of net income
divided by total assets, which is commonly used to compare company
performance in academia. In theS&P 500 sample, 98 CEOs had prior CEO
experience. Those repeat CEOs earned a median annual average return on
assets of 3.92% in the first three years of the CEO's tenure.
Companies with a CEO who hadn't been a chief
executive before saw a 5.4% return. The negative effect gets even worse
if the CEO transitioned from a similar-sized company or one in the same
industry. Same-industry repeat CEOs saw a median return on assets of
3.1%, and CEOs from similar-sized companies had a median return of
2.94%.
Ms. Hamori and Mr. Koyuncu factored in how well
their industries as a whole performed so CEOs wouldn't get an unfair
advantage from a soaring sector.
The findings don't necessarily mean that prior
CEO experience hurts performance. A second-time CEO is generally someone
who is coming from outside the company, while first-time CEOs are a mix
of both insiders and outsiders. Other research has shown that internally
promoted CEOs tend to outperform outsiders. So the problem may be that
the person is an outsider, not that he or she has been CEO previously.
"When you bring in CEOs from the outside, they
think outside the box but are less familiar with what works and what
doesn't work within the firm," says Nandini Rajagopalan, a business
management professor at the University of Southern California, who has
researched the insider-outsider phenomenon.
Mr. Koyuncu found that the negative effect of
being an ex-CEO disappeared if the CEO spent at least two years with the
new firm before being promoted. Ex-CEOs also performed better if they
had a long break between CEO positions or repeated as CEO more than
twice.
Still, Mr. Koyuncu thinks repeat CEOs might
underperform because they mistakenly think they can apply many of the
methods they used in their former job to their new one.
"Every CEO job and company is different from
the previous one," he said. "You can't just transfer learning between
the two."
"Decoding Business Profitability," by Lyn Denend
quoting Mark Soliman, Stefan Reichelstein, and Madhav Rajan, Stanford
Business Magazine, November 2007 ---
http://www.gsb.stanford.edu/news/bmag/sbsm0711/kn-decoding.html
Bob Jensen's threads on the controversies surrounding ROI and ROE are at
http://www.trinity.edu/rjensen/roi.htm
"What Would You Have Done? Last week, I (Joe Hoyle) encountered a
problem with one of my students. I wasn’t sure what I ought to do so I turned to
my colleagues here at the Robins School of Business and emailed them a cry for
guidance," by Joe Hoyle, Joe Hoyle's Teaching Blog, October 28, 2011
---
http://joehoyle-teaching.blogspot.com/2011/10/what-would-you-have-done.html
Jensen Comment
I would probably not have sympathy for this student who overslept,
although there are problems for which I might be more sympathetic. What if the
student in question had instead had a car accident while driving to campus? What
if his wife decided to have her baby an hour before the scheduled examination?
What if there really was a freeway accident that caused an hour of gridlock?
Similar excuses and reasons that I listened to for 40 years go on and on and on.
An instructor can have similar reasons for not showing up for his/her
examination.
Instructors can allow for virtually all such excuses by giving make-up
examinations, but these can be unfair if gaming students are really just making
up excuses to get more time to study. I generally give make-up examinations with
an announced proviso that these examinations would probably be somewhat more
difficult. Life is tough!
I hate to make the retelling of an event at Michigan State sound humorous,
but many of my students and colleagues found it somewhat humorous at the time.
Firstly I should note that this was a very large tiered lecture room where I had
well over 100 students in managerial accounting during my first year as an
assistant professor (newly-graduated PhD and rather full of myself in terms of
what I expected from students). I gave a mid-term examination, and the student
in question was seated in the back row. There was a bit of commotion, early in
the examination, after one of my my teaching assistants unknowingly slipped out
of the room to call EMS. The Campus Police arrived very quickly with stretcher.
The ill student in question apparently scanned through my examination and
passed out. In the hallway the campus police apparently revived her and decided
that she had only fainted upon reading my examination. She was, however, in no
emotional condition to go back into the classroom and was later examined in the
Student Health Center. To make matters more complicated, she was a first-term
foreign graduate student from Turkey. She soon afterwards dropped my course.
I did give extra time for the remainder of this examination in case some
other students were distracted by the event in question.
I then faced the dilemma of what to do about factoring in this examination
into grades. I decided to give a make up examination that any student in the
course could elect to take on condition that the make-up examination would take
the place of the original examination. Students did not know their original exam
grades until after the make-up examination was given.
I became known for a time as a professor whose examinations were so shocking
that students passed out.
So what would I advise for s student who missed the examination entirely?
My advice is to give a make-up examination that is bit harder than the original
examination (if this warning was posted in the syllabus in advance for
no-shows).
Then there's another problem of students who sleep or otherwise pass out
during examinations.
The fundamental problem in the classroom is in the proctoring process. No
examination proctor should allow s student to sleep through the entire
examination. Attempts should've been made to see if the student had a problem
greater than mere sleeping such as an epileptic incident, a hyperglycemia
attack, or whatever beyond merely waking up from sleep.
If the examination disruption is one of merely waking the student up, then
the examination should probably proceed --- "full speed ahead." If there is more
of a problem then a decision has to be made whether the incident has corrupted
the entire examination process, in which case a substitute examination may have
to be given later on. Of course this would he an even bigger problem during a
final examination where it becomes much more difficult to schedule substitute
examinations during final examination week.
I cannot recall having a really serious problem in 40 years of giving final
examinations. There were, of course, 40 years of problems with the students who
came in days later complaining about their final grades. But these are chronic
problems that I generally handled by being hard-nosed about grade changes unless
I had made an error in the grading process. An operations research professor
colleague, Fred Dorner, at Trinity University always kept a sign on his office
door after final examinations. The sign in huge letters simply read "NO"!
It 's very difficult to generalize a resolution of Joe Hoyle's problem
without setting a precedent for gaming students. It's best to put examination
rules into the course syllabus, but no professor can anticipate every possible
contingency in advance. I once had a student arrive very late for a final
examination. She'd gone to mass before the examination (to pray), and her Jeep
was stolen. In that case I stayed on late and let her take the examination. I
felt sorry for her afterwards. Firstly, her Jeep was never recovered (most
stolen vehicles in San Antonio are south of the Rio Grande in less than three
hours). Secondly her final examination did not in the least help save her from
the final grade.
A New Era for Governance of the American Accounting Association?
September 26, 2011 message from Paul Williams
Dear AECMers,
I am honoring a
promise I made to Tracey Sutherland to report to the listserve
about the AAA Council meeting held in Chicago this past
weekend. Having served on AAA Council in the past when every
minute was orchestrated by the executive committee hiding behind
the curtain I can attest that this Council meeting was vastly
different. Sue Haka and her Governance Committee have worked
exceedingly hard and carefully (with a substantial assist from
Larry Crumbley) to produce a watershed change in the governance
of AAA.
I encourage all
AAA members to visit the Commons and read carefully the new
bylaws with particular attention to the dramatic uplifting of
the Council as a participant in the decision making process at
AAA. The Governance Committee studied the procedures of
numerous professional/academic organizations, e.g., American
Library Association, American Psychological Assoc., NACAC (can't
remember what all the Cs stand for, but is an organization of
counselors), and have culled the best from these that work for
AAA to make it more democratic (or less autocratic).
We had the most
energized, engaged, and positive couple of days. I don't
suggest we abandon some skepticism, but, for my part, I think we
need to jettison our cynicism. When yours' truly can be elected
as chair of anything involving AAA (the new Ballot Committee of
Council), then it truly is a new day!! The new governance
structure provides an avenue for every AAA member to participate
in the affairs of the AAA.
So ... when the
call comes out for nominees, etc. members have to step up and
put the money where the mouth is. Every group of people
ultimately needs to labor to make the group successful (life
depends ultimately on labor -- all of us got the life we have
not when our mothers went into trade, but went into "labor").
The only way the new governance structure will result in a more
responsive AAA that serves the ambitions of all of its members
is if they step up to do the work.
Sign up, run for
an office (you have a chance to win now), join a section (you
are already part of a region), volunteer to pull an oar.
Institutions change slowly, but at least now the bylaws provide
mechanisms for doing that that did not exist before.
Paul
Jensen Comment
I urge AECM members to volunteer or to nominate people they feel represent
voices other than accountics scientist voices. I say this based upon past
experience serving on awards committees and the AAA Executive Committee. My
experience is that accountics scientists are better organizers when it comes to
nominating other accountics scientists for important awards and power
committees. The initiatives that Paul Williams is talking about will fail to
change the AAA if accountics scientists simply take over the expanded
power centers.
By way of illustration I mention my recent years on the Notable Contributions
to the Accounting Literature Awards.
http://aaahq.org/awards/awrd3win.htm
Accountics scientists actively nominate each other for this award. We literally
had zero nominations for any contributions other than accountics science ---
with the exception of a book written by that Brian West that was nominated
belatedly by one of our committee members. \
I was not on the 2011 Committee that selected Joni Young's winning
contribution, but I fantasize that my loud protests about lack of diversity
among literature items nominated for this award may have played at least a small
part in Joni's nomination.
The videos of the lead Speakers at the American Accounting Association 2011
Annual Meetings in Denver are available at the AAA Commons ---
http://commons.aaahq.org/hives/629d926370/summary
I don't think these videos can be downloaded by non-AAA members
For members like me who were unable to attend the Denver meetings, these videos
are a lot of value added on the AAA Commons Website
Gregory Waymire—Video
Justin Fox—Video
Kevin D. Stocks—Video
Robert H. Herz—Video
Ruth McCartney—Video
Stephen A. Zeff—Video
I've still not viewed all of them, but I'm working on it. Only the Greg
Waymire received much action to date on the AECM with respect to the shortage of
accounting PhD graduates in light of high demand over the past two decades.
Interestingly, commentators who were present in the audience came away with
differing evaluations of Greg's presentation. I have not yet viewed his video.
It would be interesting to see more commentaries on the other videos on the
AECM.
Tribute to Bob Anthony from Jake Birnberg and Bob Jensen and Others
Bob Anthony is probably best known as an extremely successful accounting
textbook author ---
http://www.amazon.com/Robert-N.-Anthony/e/B001IGJT5W
But there were many other career highlights of the great professor and my
personal friend.
"Robert N. Anthony: A Pioneering Thinker in Management Accounting," by Jacob
G. Birnberg, Accounting Horizons, 2011, Vol. 25, No. 3, pp. 593–602 ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACHXXX000025000003000593000001&idtype=cvips&prog=normal
(not a free article to non-subscribers)
By any measure, Robert Newton Anthony (1916–2006)
was a giant among 20th century academic accountants. After obtaining a
Bachelor’s degree from Colby College, he matriculated to the Harvard
Business School (HBS), where he earned his M.B.A. and D.B.A. degrees. Bob
spent his entire academic career at HBS, retiring in 1983. He is best known
as a prolific writer of articles, textbooks, and research reports. He was
inducted as a member of the Accounting Hall of Fame (1986), was a recipient
of the American Accounting Association’s (AAA) Outstanding Accounting
Educator Award (1989), and then was the second recipient of the AAA
Management Accounting Section’s Lifetime Contribution to Management
Accounting Award (2003), as well as serving as President of the American
Accounting Association (1973–1974). In addition, he was elected a Fellow of
the Academy of Management (1970). These honors indicate that he was, indeed,
a significant contributor to the development of his chosen field of
management accounting for over 50 years, and highly respected by his peers.
They do not indicate why. My intention is to answer that question.
Bob Anthony was the ideal person to be a leader in
the post-World War II movement that changed cost accounting into management
accounting. He possessed broad interests and not only was an academic, but
also was interested in solving problems found in the real world. He was
equally comfortable working as an academic and as a manager. He served as
Under Secretary (Comptroller) in the Department of Defense for his old
friend and fellow Harvard Business School graduate, Robert S. McNamara, from
1965 to 1968. While at the Department, Anthony earned the Defense Department
Award for Public Service for developing a system of cost management and
control for the Department (Harvard University Gazette 2006)...
Continued in article
Jensen Comment
The takeover of the academic accounting research by accountics scientists was
fought off in the 1920s but commenced again in earnest in the 1960s as
documented by Heck and Jensen along a timeline at
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
"We
fervently hope that the research pendulum will soon swing back from the narrow
lines of inquiry that dominate today's leading journals to a rediscovery of the
richness of what accounting research can be. For that to occur, deans and the
current generation of academic accountants must
give it a push."
"Research
on Accounting Should Learn From the Past," by Michael H. Granof and Stephen
A. Zeff , Chronicle of Higher Education, March 21, 2008
http://www.trinity.edu/rjensen/TheoryTAR.htm#Appendix01
Although it's common among various recent Presidents of the American
Accounting Association (e.g.,
Judy Rayburn and
Greg Waymire) and AAA Presidential Address Scholars, e.g., Tony Hopwood ("Whither
Accounting Research?" The Accounting Review 82(5), 2007, pp.1365-1374
)and Bob Kaplan (Accounting Scholarship that Advances
Professional Knowledge and Practice," The Accounting Review, March 2011,
Volume 86, Issue 2) , perhaps the earliest and most scathing lament
accountics scientist takeover of AACSB doctoral programs and the top tier
academic accounting research journals came from former AAA President Bob Anthony
in his1989 AAA membership as that years Outstanding Educator Award
recipient. This was an oral address, and I don't think there is any record of
Bob's scathing lament in front of the AAA membership. Nor is there a record to
my knowledge of the subsequent lament on the same matters by AAA's 1990
President Al Arens year later.
In some ways I was a guinea pig for Bob Anthony. In the late 1960s and into
the 1990s, Bob lacked the mathematical background to understand the exploding
interest by accounting researchers in accountics, particularly mathematical
programming, management science, decision science, and operations research in
the years that Herb Simon were achieving worldwide fame at Carnegie-Mellon
University that in some ways was leaving venerable old Harvard in the dust. Bob
Anthony followed my career as an accounting PhD graduate from Stanford who had
been teaching mathematical programming at Michigan State University and the
University of Maine. Bill Kinney and Bob May and other accounting doctoral
candidates at MSU in the late 1960s probably recall my mathematical programming
doctoral seminars.
Bob Anthony invited me to make accountics science presentations at the
Harvard Business School and at an alumni-day programs that he organized for his
Colby College alma mater following my seven TAR publications 1967-1979 ---
http://maaw.info/TheAccountingReview2.htm
I remember that he was particularly skeptical of my praise of shadow pricing
in linear programming, which was also at the core of a doctoral thesis by Joel
Demski in those days. I was always careful to point out the limitations of
mathematical programming when solutions spaces were not convex. But Bob Anthony
had a deeper suspicion, which he had trouble articulating in those days, that
accounting information played a vital role in systems that were too complex and
too non-stationary to model in the real world, especially model to a point where
we could declare solutions "optimal" for the real and ever-changing world of
complicated human beings and their organizations. Anthony Hopwood built upon
this same theme when he founded a successful journal called Accounting,
Organizations, and Society (AOS).
It's not that Bob Anthony opposed our accountics science research. What he
opposed is accountics science (read that positivism) takeover of the
doctoral programs and academic research journals. What he felt down deep that
accountics science was just too easy. We could build our analytical models and
devise "optimal" solutions without having to set foot from the campus into a
real world. We could build ever-increasingly sophisticated data analysis models
using the CRSP and Compustat database without having to sweat buckets collecting
financial data first-hand in the real world. We could conduct accounting
behavioral research models pretending that student subjects were adequate
surrogates making pretend that they were real-world managers and accountants.
I suspect that Bob Anthony followed Bob Kaplan's career with great interest.
In those early years, Bob Kaplan was an accountics faculty member and eventually
Dean at Carnie-Mellon in the years that Professor and Dean Kaplan was heavy into
mathematics and decision science. Then Bob Kaplan became more interested in the
real world and eventually traveled between Harvard and Carnegie as a joint
accounting professor. I suspect Bob Anthony influenced Bob Kaplan into taking up
more and more case-method research and the eventual decision of Kaplan to become
a full-time accounting professor at Harvard (the case method school in those
days) in place of Carnegie-Mellon (the quantitative-methods school in those
days). Of course in recent years the difference between the Harvard versus
Carnegie schools is not demarked so clearly as it was in the 1970s.
In any case Bob Anthony and I corresponded intermittently throughout most of
my career. He was particularly pleased when I became more and more skeptical of
the accountics science takeover of accounting doctoral programs and top-tier
academic accounting research journals. Once again, however, I stress that it was
not so much that we were disappointed in accountics science that was becoming
increasingly sophisticated and respectable. Rather Bob Anthony, Bob Kaplan, and
Bob Jensen along with Bob Sterling, Paul Williams, Anthony Hopwood, and others
became increasingly disturbed about the takeover by Zimmerman and Watts and
their positivism disciples. In those same years Demski and Feltham were
rewriting the quantitative information economics standards of what constitutes
scholarly research in accounting.
On January 3, 2007 I wrote a Tidbit that reads as follows:
http://www.trinity.edu/rjensen/tidbits/2007/tidbits070103.htm
We will greatly miss Bob Anthony
December 20, 2006
message from Bill McCarthy
[mccarthy@bus.msu.edu]
The following appeared
on Boston.com:
Headline: Robert Anthony; reshaped Pentagon budget process
Date: December 20, 2006
"At the behest of Robert
S. McNamara, his longtime friend, Robert N.Anthony set aside scholarly
pursuits at Harvard Business School in the mid-1960s to take a key role
reshaping the budget process for the Defense Department."
____________________________________________________________
To see this
recommendation, click on the link below or cut and paste it into a Web
browser:
http://www.boston.com/news/globe/obituaries/articles/2006/12/20/robert_anthony_reshaped_pentagon_budget_process?p1=email_to_a_friend
December 20, 2006 reply
from Bob Jensen
Hi Bill,
Thank you! Bob has
been a longtime great friend. His obituary is at
http://www.hbs.edu/news/120506_anthonyobit.html
What is really amazing is the wide range of long-time service to at very
high levels, including serving on the FASB as well as being Defense
Department's Assistant Secretary (Comptroller) during the Viet Nam War.
He also received the Defense Department's Medal for Distinguished Public
Service. The FASB requested that Bob focus on accounting for nonprofit
organizations. He also served as President of the American Accounting
Association.
Bob was one of the
most distinguished professors of the Harvard Business School It saddens
me greatly to see him pass on. His Hall of Fame link is at
http://fisher.osu.edu/Departments/Accounting-and-MIS/Hall-of-Fame/Membership-in-Hall/Robert-Newton-Anthony/
Or
Click Here
I
don't know if you were present when Bob Anthony gave his 1989
Outstanding Educator Award Address to the American Accounting
Association. It was one of the harshest indictments I've ever heard
concerning the sad state of academic research in serving the accounting
profession.
Bob never held back on his punches.
Bob Jensen
December 20, 2006 reply from Denny Beresford
[DBeresfo@TERRY.UGA.EDU]
(Denny was Chairman of the FASB when Bob was a special consultant to the
FASB)
Bob,
Yesterday's New York Times also included an
obituary for Bob Anthony . . . Bob wasn't the easiest person to get
along with, but I considered him to be one of the very brightest people
I ever associated with. He was a wonderful writer and I always enjoyed
the letters and other things he sent me at the FASB and later - even
when I disagreed completely with his ideas. His work with the government
made him one of the most generally influential accountants of the 20th
century, I believe.
Denny
His accounting concepts ranged from the global
to the provincial. In a 1970 letter to The New York Times, he proposed that
the United States create a tax surcharge to cover damages to the Soviet
Union in the event of an accidental American nuclear strike. The tax burden
would be “the smallest consequence of maintaining a nuclear arsenal,” he
wrote. “An all-out nuclear exchange would probably mean the end of
civilization.” In the late 1980s, Professor Anthony moved to Waterville
Valley, N.H., where for 10 years he was the town’s elected auditor. “I got
24 votes last year; that’s all there were,” he once said.
<http://www.nytimes.com/pages/business/index.html>
Added Jensen Comment
I often suspected that Bob Anthony's 1980s move to New Hampshire (that created
an extremely long commute to Cambridge, Taxachusetts) was motivated in large
part by the huge financial successes of his book royalties. I would not blame
him for this move since there's nothing criminal or immoral about taking
advantage of tax law opportunities. Then again he may simply wanted to be closer
to our mountains and forests ---
http://www.trinity.edu/rjensen/Pictures.htm
"Case Study Research in Accounting," by David J. Cooper and Wayne
Morgan, Accounting Horizons 22 (2), 159 (2008) ---
http://link.aip.org/link/ACHXXX/v22/i2/p159/s1
SYNOPSIS: We describe case study research and
explain its value for developing theory and informing practice. While
recognizing the complementary nature of many research methods, we stress the
benefits of case studies for understanding situations of uncertainty,
instability, uniqueness, and value conflict. We introduce the concept of
phronesis—the analysis of what actions are practical and rational in a
specific context—and indicate the value of case studies for developing, and
reflecting on, professional knowledge. Examples of case study research in
managerial accounting, auditing, and financial accounting illustrate the
strengths of case studies for theory development and their potential for
generating new knowledge. We conclude by disputing common misconceptions
about case study research and suggesting how barriers to case study research
may be overcome, which we believe is an important step in making accounting
research more relevant. ©2008 American Accounting Association
References citing The Accounting Review (3 references out of 89)
---
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=ACHXXX000022000002000159000001&idtype=cvips&gifs=yes
Case
Chow, C. W. 1983. The impacts of accounting
regulation on bondholder and shareholder wealth: The case of the securities
acts. The Accounting Review 58 (3): 485–520.
Critical Comments About Accountics Science Dominance of Accounting
Research (not a case)
Hopwood, A. G. 2007. Whither accounting
research?
The Accounting Review 82 (5): 1365–1374.
Field Study
Merchant, K., and J-F. Manzoni. 1989. The
achievability of budget targets in profit centers: A field study. The
Accounting Review 64 (3): 539–558.
Jensen Comment
Firstly, I think this article is living proof of how slow the process can be in
accounting research between the submission of an article and its eventual
publication:
Submitted January 2005; accepted January 2008; published 12 June 2008
Of course delays can be caused by the authors as well as the referees.
Secondly, the above article demonstrates that case researchers must be very
discouraged about submitting case research to The Accounting Review
(TAR). The 89 references to the Cooper and Morgan article are mostly to
published accounting cases and occasional field studies. From TAR they cite only
one 1983 case and one 1989 field study. There have been some cases and field
studies published in TAR since the Cooper and Morgan paper was published by
Accounting Horizons in 2008. The following outcomes are reported by TAR
Senior Editor Steve Kachelmeier 2009-2010:
2009: Seven cases and field studies were submitted to TAR and Zero were
published by TAR
2010: Steve stopped reporting on cases and field study submissions, but he did
report that 95% accepted submissions were analytical, empirical-archival, and
experimental. The other 5% are called "Other" and presumably include accounting
history, normative, editorial, death tributes, cases, field studies, and
everything else.
I think it is safe to conclude that there's epsilon incentive for case
researchers to submit their cases for publication in TAR, a sentiment that seems
to run throughout Bob Kaplan's 2010 Presidential Address to the AAA membership:
Accounting Scholarship that Advances Professional Knowledge and Practice
Robert
S. Kaplan
The Accounting Review 86 (2), 367 (2011) Full Text: [ PDF (166
kB) ] Order
Document
In October 2011 correspondence on the AECM, Steve Kachelmeier wrote the
following in response to Bob Jensen's contention that case method research is
virtually not acceptable to this generation of TAR referees:
A "recent TAR editor's" reply:
Ah, here we go again -- inferring what a journal
will publish from its table of contents. Please understand that this is
inferring a ratio by looking at the numerator. One would hope that academics
would be sensitive to base rates, but c'est la vie.
To be sure, The Accounting Review receives (and
publishes) very few studies in the "case and field research" category. Such
researchers may well sense that TAR is not the most suitable home for their
work and hence do not submit to TAR, despite my efforts to signal otherwise
by appointing Shannon Anderson as a coeditor and current Senior Editor Harry
Evans' similar efforts in appointing Ken Merchant as a coeditor. Moreover,
we send all such submissions to case and field based experts as reviewers.
So if they get rejected, it is because those who do that style of research
recommend rejection.
That said, to state that "the few cases that are
submitted to TAR tend to be rejected" is just plain erroneous. Our Annual
Report data consistently show that TAR's percentage of field and case-based
research acceptances (relative to total acceptances) consistently exceeds
TAR's percentage of field and case submissions (relative to total
submissions). To find a recent example, I grabbed the latest issue
(September 2011) and noted the case study on multiperiod outsourcing
arrangements by Phua, Abernethy, and Lillis. They conduct and report the
results of "semi-structured interviews across multiple field sites" (quoted
from their abstract). Insofar as they also report some quantitative data
from these same field sites, you might quibble with whether this is a "pure"
study in this genre, but the authors themselves characterize their work as
adopting "the multiple case study method" (p. 1802).
Does Phua et al. (2011) qualify? My guess is that
Bob would probably answer that question with some reference to replications,
as that seems to be his common refrain when all else fails, but I would hope
for a more substantive consideration of TAR's supposed bias. Now that I
think about it, though my reference to replications was sarcastic (couldn't
help myself), it just struck me that site-specific case studies are perhaps
the least replicable form of resaerch in terms of the "exacting" replication
that Bob Jensen demands of other forms of scientific inquiry. What gives?
Another interesting case/field study is coming up
in the November 2011 issue. It is by Campbell, Epstein, and Martinez-Jerez,
and it uses case- based resaerch techniques to explore the tradeoffs between
monitoring and employee discretion in a Las Vegas casino that agreed to
cooperate with the researchers. Stay tuned.
Best,
Steve
Firstly, I could not find evidence to support Steve's claim that " field and
case-based research acceptances (relative to total acceptances) consistently
exceeds TAR's percentage of field and case submissions (relative to total
submissions). " Perhaps he can enlighten us on this claim.
The Phua et al. (2011) paper says that it is a "multiple case study," but I
view it as an survey study of Australian companies. I would probably call it
more of a field survey using interviews. More importantly, what the authors call
"cases" do not meet what I consider cases method research cases. No "case" is
analyzed in depth beyond questions about internal controls leading to the
switching of suppliers. The fact that that statistical inferences could not be
drawn does not turn a study automatically into a case research study. For more
details about what constitutes case method research and teaching go to
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
As to replications, I'm referring to accountics science studies of the
empirical-archival and experimental variety where the general inference that
these are "scientific studies." There are very few accountics science research
studies are replicated according to The IAPUC Gold Book standards.
Presumably a successful replication "reproduces" exactly the same outcomes
and authenticates/verifies the original research. In scientific research, such
authentication is considered extremely important. The IAPUC Gold Book
makes a distinction between reproducibility and repeatability at
http://www.iupac.org/goldbook/R05305.pdf
For purposes of this message, replication, reproducibility, and repeatability
will be viewed as synonyms.
This message does not make an allowance for "conceptual replications" apart
from "exact replications," although such refinements should be duly noted ---
http://www.jasnh.com/pdf/Vol6-No2.pdf
This message does have a very long quotation from a study by Watson et al.
(2008) that does elaborate on quasi-replication and partial-replication. That
quotation also elaborates on concepts of
external versus
internal validity grounded in the book:
Cook, T. D., & Campbell, D. T. (1979).
Quasi-experimentation: Design & analysis
issues for field settings. Boston:
Houghton Mifflin Company.
I define an "extended study" as one which may have similar hypotheses but
uses non-similar data sets and/or non-similar models. For example, study of
female in place of male test subjects is an extended study with different data
sets. An extended study may vary the variables under investigation or change the
testing model structure such as changing to a logit model as an extension of a
more traditional regression model.
Extended studies that create knew knowledge are not replications in terms of
the above definitions, although an extended study my start with an exact
replication.
Case and Field Studies
Replication is not a major issue in studies that do not claim to be scientific.
This includes case studies that are generally a sample of one that can hardly be
deemed scientific.
ROBERT S. KAPLAN and DAVID P. NORTON , The Execution Premium: Linking
Strategyto Operations for Competitive Advantage Boston, MA: Harvard Business
Press, 2008,ISBN 13: 978-1-4221-2116-0, pp. xiii, 320.
If you are an academician who believes in empirical
data and rigorous statistical analysis, you will find very little of it in
this book. Most of the data in this book comes from Harvard Business School
teaching cases or from the consulting practice of Kaplan and Norton. From an
empirical perspective, the flaws in the data are obvious. The sample is
nonscientific; it comes mostly from opportunistic interventions. It is a bit
paradoxical that a book which is selling a rational-scientific methodology
for strategy development and execution uses cases as opposed to a matched or
paired sample methodology to show that the group with tight linkage between
strategy execution and operational improvement has better results than one
that does not. Even the data for firms that have performed well with a
balanced scorecard and other mechanisms for sound strategy execution must be
taken with a grain of salt.
Bob Jensen has a knee jerk, broken record reaction to accountics scientists
who praise their own "empirical data and rigorous statistical analysis." My
reaction to them is to show me the validation/replication of their "empirical
data and rigorous statistical analysis." that is replete with missing variables
and assumptions of stationarity and equilibrium conditions that are often
dubious at best. Most of their work is so uninteresting that even they don't
bother to validate/replicate each others' research ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
In fairness to Steve and previous TAR editors over the past three decades, I
think it is not usually the editors themselves that are rejecting the case
submissions. Instead we've created a generation of "accountics scientist"
referees who just do not view case method research as legitimate research for
TAR. These referees fail to recognize that the purpose of case method research
is more one of discovery than hypothesis testing.
The following is a quote from the 1993 American Accounting
Association President’s Message by Gary Sundem,
Although empirical
scientific method has made many positive contributions to accounting
research, it is not the method that is likely to generate new theories,
though it will be useful in testing them. For example, Einstein’s theories
were not developed empirically, but they relied on understanding the
empirical evidence and they were tested empirically. Both the development
and testing of theories should be recognized as acceptable accounting
research.
"President’s Message," Accounting Education News 21 (3). Page 3.
Case method research is one of the non-scientific research methods intended
for discovery of new theories. Years ago case method research was published in
TAR, but any cases appearing in the past 30 years are mere tokens that slipped
through the refereeing cracks.
My bigger concern is that accountics scientists (including most TAR referees)
are simply ignoring their scholarly critics like Joni Young, Greg Waymire,
Anthony Hopwood, Bob Kaplan, Steve Zeff, Mike Granof, Al Arens,
Bob Anthony, Paul Williams, Tony Tinker, Dan Stone, Bob Jensen, and probably
hundreds of other accounting professors and students who agree with the claim
that "There's an absence of dissent in the publication of TAR articles?"
We
fervently hope that the research pendulum will soon swing back from the narrow
lines of inquiry that dominate today's leading journals to a rediscovery of the
richness of what accounting research can be.
For that to occur, deans and the current generation of academic accountants must
give it a push.
"Research
on Accounting Should Learn From the Past"
by Michael H. Granof and Stephen A. Zeff
Chronicle of Higher Education, March 21, 2008
I will not attribute the above conclusion to Mike Granof since Steve Kachelmeier
contends this is not really the sentiment of his colleague Mike Granof. Thus we
must assume that the above conclusion to the above publication is only the
sentiment of coauthor Steve Zeff.
October 17. 2011 reply
from Steve Kachelmeier
Bob said that TAR stopped reporting case and field
study data in 2010, but that is not accurate. For 2010, please see Table 3,
Panel B of TAR's Annual Report, on p. 2183 of the November 2010 issue. The
2011 Report to be published in the November 2011 issue (stay tuned) also
reports comprehensive data for the three-year period from June 1, 2008 to
May 31, 2011. Over this period, TAR evaluated 16 unique files that I
categorized as "case or field studies," comprising 1.0% of the 1,631 unique
files we considered over this period. TAR published (or accepted for future
publication) 5 of the 16. As a percentage of the 222 total acceptances over
this period, 5 case/field studies comprise 2.3% of the accepted articles. So
this variety of research comprises 1.0% of our submissions and 2.3% of our
acceptances. The five acceptances over my editorial term are as follows:
Hunton and Gold, May 2010 (a field experiment)
Bol, Keune, Matsumura, and Shin, November 2010
Huelsbeck, Merchant, and Sandino, September 2011
Phua, Abernethy, and Lillis, September 2011
Campbell, Epstein, and Martinez-Jerez, forthcoming November 2011
I categorized these five as case/field studies
because they are each characterized by in-depth analysis of particular
entities, including interviews and inductive analysis. Bob will likely
counter (correctly) that these numbers are very small, consistent with his
assertion that many field and case researchers likely do not view TAR as a
viable research outlet. However, my coeditor Shannon Anderson's name (an
accomplished field researcher) has been on the inside cover of each issue
over the course of my editorial term, and current Senior Editor Harry Evans
has similarly appointed Ken Merchant as a coeditor. I am not sure how much
more explicit one can be in providing a signal of openness, save for
commissioning studies that bypass the regular review process, which I do not
believe is appropriate. That is, a "fair game" across all submissions does
not imply a free ride for any submission.
I must also reiterate my sense that there is a
double standard in Bob's lament of the lack of case and field studies while
he simultaneously demands "exacting" (not just conceptual) replications of
all other studies. It is a cop out, in my opinion, to observe that case and
field studies are not "scientific" and hence should not be subject to
scientific scrutiny. The field researchers I know, including those of the
qualitative variety, seem very much to think of themselves as scientists. I
have no problem viewing case and field research as science. What I have a
problem with is insisting on exact replications for some kinds of studies
but tolerating the absence of replicability for others.
Best,
Steve
October 18, 2011 reply from Bob Jensen
Thank you Steve,
It appears that in the forthcoming November 2011 where the next TAR
Annual Report written by you will appear there will be marked improvement in
publishing five case and field studies relative to the virtual zero
published in recent decades. Thanks for this in the spirit of the Granof and
Zeff appeal:
We fervently hope that the research pendulum will soon
swing back from the narrow lines of inquiry that dominate today's
leading journals to a rediscovery of the richness of what accounting
research can be. For that to occur,
deans and the current generation of academic accountants must give it a
push.
Research on Accounting Should Learn From the Past"
by Michael H. Granof and Stephen A. Zeff
Chronicle of Higher Education, March 21, 2008
Thank you for making TAR "swing back from the narrow lines of inquiry" that
dominated its research publications in the past four decades ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
Leading accounting
professors lamented TAR’s preference for rigor over relevancy [Zeff, 1978;
Lee, 1997; and Williams, 1985 and 2003]. Sundem [1987] provides revealing
information about the changed perceptions of authors, almost entirely from
academe, who submitted manuscripts for review between June 1982 and May
1986. Among the 1,148 submissions, only 39 used archival (history) methods;
34 of those submissions were rejected. Another 34 submissions used survey
methods; 33 of those were rejected. And 100 submissions used traditional
normative (deductive) methods with 85 of those being rejected. Except for a
small set of 28 manuscripts classified as using “other” methods (mainly
descriptive empirical according to Sundem), the remaining larger subset of
submitted manuscripts used methods that Sundem [1987, p. 199] classified
these as follows:
292 General Empirical
172 Behavioral
135 Analytical modeling
119 Capital Market
97 Economic modeling
40 Statistical modeling
29 Simulation
It is clear that by 1982,
accounting researchers realized that having mathematical or statistical
analysis in TAR submissions made accountics virtually a necessary, albeit
not sufficient, condition for acceptance for publication. It became
increasingly difficult for a single editor to have expertise in all of the
above methods. In the late 1960s, editorial decisions on publication shifted
from the TAR editor alone to the TAR editor in conjunction with specialized
referees and eventually associate editors [Flesher, 1991, p. 167]. Fleming
et al. [2000, p. 45] wrote the following:
The big change was in
research methods. Modeling and empirical methods became prominent
during 1966-1985, with analytical modeling and general empirical
methods leading the way. Although used to a surprising extent,
deductive-type methods declined in popularity, especially in the
second half of the 1966-1985 period.
Hi again Steve on October 18, 2011,
As to replication, there's more to my criticisms of accountics science
than replications as defined in the natural and social sciences. I view
the lack of exacting replication as a signal of both lack of interest
and lack of dissent in accountics science harvests relative to the
intense interest and dissent that motivates exacting replications in
real science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
And there's one piece of evidence
about accountics science that stands out like a beacon of disgrace if
you can call lack of scandal a disgrace. Since reputations,
tenure, and performance evaluations are so dependent in real science
upon research and publication, there is an intense effort to test the
validity of scientific research harvests and relatively frequent
discovery of researcher scandal and/or error. This is a mark of
interest in the harvests of real science.
Over the entire history of accountics science, I cannot think of one
genuine scandal. And discovery of error by independent accountics
scientist is a rare event. Is it just that accountics scientists are
more accurate and more honest than real scientists? Or is it that
accountics science harvests are just not put through the same validity
testing in a timely manner that we find in real science?
Of course I do not expect small sample studies, particularly case
studies, to be put through the same rigorous scientific testing.
Particularly troublesome in case studies is that they are cherry picked
and suffer the same limitations as any anecdotal evidence when it comes
to validity checking.
The purpose of case studies is often limited to education and training,
which is why case writers sometimes even add fiction with some type of
warning that these are fictional or based only loosely on real world
happenings.
The purpose of case studies deemed research (meaning contributing to new
knowledge) is often discovery. The following is a quote from an earlier
1993 President’s Message by Gary Sundem,
Although empirical scientific method
has made many positive contributions to accounting research,
it is not the method that is likely to generate new theories,
though it will be useful in testing them. For example,
Einstein’s theories were not developed empirically, but they
relied on understanding the empirical evidence and they were
tested empirically. Both the development and testing of theories
should be recognized as acceptable accounting research.
"President’s Message," Accounting Education
News 21 (3). Page 3.
TAR, JAR, and JAE need to encourage more
replication and open dissent regarding the findings they publish. I
provide some examples of how to go about this, particularly the
following approach ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#TARversusAMR
TAR currently does not
solicit or publish commentaries and abstracts of replications, although
to do so is not outside its operational guidelines. It is sad that TAR
does not publish such guidelines or give consideration to needs of the
practicing profession.
Happily, the Academy of Management Review has a Dialogue Section
---
http://www.aom.pace.edu/AMR/info.html
Dialogue
Dialogue is a forum for readers who wish to comment briefly on material
recently published in AMR. Readers who wish to submit material
for publication in the Dialogue section should address only AMR
articles or dialogues. Dialogue comments must be timely, typically
submitted within three months of the publication date of the material on
which the dialogue author is commenting. When the dialogue comments
pertain to an article, note, or book review, the author(s) will be asked
to comment as well. Dialogue submissions should not exceed five
double-spaced manuscript pages including references. Also, an Abstract
should not be included in a Dialogue. The Editor will make publishing
decisions regarding them, typically without outside review.
My good friend Jason Xiao
[xiao@Cardiff.ac.uk]
pointed out that the Academy of Management Review (AMR) is a
theory journal and the Academy of Management Journal (AMJ) is the
empirical-article Academy of Management.
He’s correct, and I would like to now
point out a more technical distinction. The Dialogue section of the AMR
invites reader comments challenging validity of assumptions in theory
and, where applicable, the assumptions of an analytics paper. The AMJ
takes a slightly different tack for challenging validity in what is
called an “Editors’ Forum,” examples of which are listed in the index at
http://journals.aomonline.org/amj/amj_index_2007.pdf
One index had some academic vs. practice
Editors' Forum articles that especially caught my eye as it might be
extrapolated to the schism between academic accounting research versus
practitioner needs for applied research:
Bartunek, Jean M. Editors’ forum (AMJ
turns 50! Looking back and looking ahead)—Academic-practitioner
collaboration need not require joint or relevant research: Toward a
relational
Cohen, Debra J. Editors’ forum
(Research-practice gap in human resource management)—The very
separate worlds of academic and practitioner publications in human
resource management: Reasons for the divide and concrete solutions
for bridging the gap. 50(5): 1013–10
Guest, David E. Editors’ forum
(Research-practice gap in human resource management)—Don’t shoot the
messenger: A wake-up call for academics. 50(5): 1020–1026.
Hambrick, Donald C. Editors’ forum (AMJ
turns 50! Looking back and looking ahead)—The field of management’s
devotion to theory: Too much of a good thing? 50(6): 1346–1352.
Latham, Gary P. Editors’ forum
(Research-practice gap in human resource management)—A speculative
perspective on the transfer of behavioral science findings to the
workplace: “The times they are a-changin’.” 50(5): 1027–1032.
Lawler, Edward E, III. Editors’
forum (Research-practice gap in human resource management)—Why HR
practices are not evidence-based. 50(5): 1033–1036.
Markides, Costas. Editors’ forum
(Research with relevance to practice)—In search of ambidextrous
professors. 50(4): 762–768.
McGahan, Anita M. Editors’ forum
(Research with relevance to practice)—Academic research that matters
to managers: On zebras, dogs, lemmings,
Rousseau, Denise M. Editors’ forum
(Research-practice gap in human resource management)—A sticky,
leveraging, and scalable strategy for high-quality connections
between organizational practice and science. 50(5): 1037–1042.
Rynes, Sara L. Editors’ forum
(Research with relevance to practice)—Editor’s foreword—Carrying
Sumantra Ghoshal’s torch: Creating more positive, relevant, and
ecologically valid research. 50(4): 745–747.
Rynes, Sara L. Editors’ forum
(Research-practice gap in human resource management)—Editor’s
afterword— Let’s create a tipping point: What academics and
practitioners can do, alone and together. 50(5): 1046–1054.
Rynes, Sara L., Tamara L. Giluk, and
Kenneth G. Brown. Editors’ forum (Research-practice gap in human
resource management)—The very separate worlds of academic and
practitioner periodicals in human resource management: Implications
More at
http://journals.aomonline.org/amj/amj_index_2007.pdf
Also see the index sites for earlier years ---
http://journals.aomonline.org/amj/article_index.htm
Jensen Added Comment
I think it is misleading to imply that there's been enough validity
checking in accountics science and that further validity checking is
either not possible or could not possibly have more benefit than cost.
Conclusion
But I do thank you and your 500+ TAR referees for going from virtually
zero to five case and field study publications in fiscal 2011. That's
marked progress. Perhaps Harry will even publish some dialog about
previously-published accountics science articles.
Respectfully,
Bob Jensen
"High Demand for Science Graduates Enables Them to Pick Their Jobs, Report
Says," by Paul Basken, Chronicle of Higher Education, October 20.
2011 ---
http://chronicle.com/article/High-Demand-for-Science/129472/
A couple of years ago, a pair of researchers at
Georgetown University and Rutgers University concluded that, contrary to
widespread perception, the United States
produces plenty of scientists and engineers.
The problem, wrote Harold Salzman of Rutgers and B.
Lindsay Lowell of Georgetown, is that fewer than half of all college
graduates in science and engineering actually take jobs in those fields. So
instead of pressing colleges to produce more science graduates,
they wrote, the country needed only to persuade
new graduates to take the right jobs.
A
study released on
Wednesday by another Georgetown research team suggests, however, that lot of
persuasion may be necessary.
Among its findings, the study, from the Georgetown
University Center on Education and the Workforce, shows that science and
engineering graduates enjoy high demand in a variety of fields, with a
bachelor's degree in a science major commanding a greater salary than a
master's degree in a nonscience major.
And, the new report says, English-speaking science
graduates are much less likely than foreign-born science graduates to take a
job in a traditional science career, which American graduates often view as
too socially isolating.
"It sort of fits the stereotype, frankly," said the
report's lead author, Anthony P. Carnevale, a research professor at
Georgetown who serves as director of the Center on Education and the
Workforce.
In recent months, the center has also issued
reports that analyzed
students' future earnings based on
their undergraduate majors, and that tied
lifetime earnings as
much to
students' choice of occupation as to their
degrees.
The 2009 study by Mr. Salzman, a professor of
public policy on Rutgers's New Brunswick campus, and Mr. Lowell, director of
policy studies at Georgetown's Institute for the Study of International
Migration, used 30 years of federal job data to show that American colleges
produce far more talented graduates in the sciences than is required by the
industry for which they've been specifically trained. But there is a labor
shortfall, the professors said, because so many science graduates take jobs
in areas such as sales, marketing, and health care.
The training and expertise of science graduates
give them that flexibility, Mr. Carnevale found in his study. Sixty-five
percent of students earning bachelor's degrees in science or engineering
fields earn more than master's-degree holders in nonscience fields do, the
report says. And 47 percent of bachelor's-degree holders in science fields
earn more than do those holding doctorates in other fields.
Continued in article
Jensen Comment
This article begs some questions.
- If "science" is such a hot undergraduate degree, why do other studies
conclude that for students not going on to graduate or professional schools,
most science undergraduate degrees are "useless?" And why would some major
universities be contemplating dropping physics as an undergraduate major due
to lack of students electing to major in physics?
Answer
I think Salzman and Lowell confound engineering with science, thereby making
science degrees more attractive than undergraduates perceive them to be as
majors.
"Texas May Cut Almost Half of Undergrad
Physics Programs," Inside Higher Ed, September 27, 2011 ---
http://www.insidehighered.com/news/2011/09/27/qt#271341
Note that "useless" in context means an oversupply of graduates relative to
job opportunities in a discipline. The jobs themselves may be high paying,
but 300 may apply for a single opening such that the 299 that got turned
away wish they'd majored in some other discipline.
As college
seniors prepare to graduate, The Daily Beast crunches the
numbers to determine which majors—from journalism to psychology
—didn’t pay.
Some
cities are better than others for
college graduates. Some college courses are
definitely hotter than others. Even
some iPhone apps are
better for college
students than others. But when it comes down to it, there’s only
one question that rings out in dormitories, fraternities, and
dining halls across the nation: What’s your major?
Slide Show
01.Journalism
02. Horticulture
03. Agriculture
04. Advertising
05. Fashion Design
06. Child and Family Studies
07. Music
08. Mechanical Engineering Technology
09. Chemistry
10. Nutrition
11. Human Resources
12. Theatre
13. Art History
14. Photography
15. Literature
16. Art
17.Fine Arts
18. Psychology
19. English
20. Animal Science
- There are more opportunities for those that go on to earn their PhD
degrees in science, but even here opportunities are limited. When a college
gets a tenure track opening in science it will probably get hundreds of
highly qualified PhD applicants, including those who earned their doctorates
at very prestigious universities like Cal Tech or MIT. More scientists will
go into industry, but even here there is not a shortage of supply like there
is in some engineering specialties and medicine. This is why some
undergraduates choose to go on to professional programs like medical, law,
business and education graduate programs.
- Even though there are opportunities in industry for both science and
engineering graduates, some choose professional undergraduate degrees like
premed, prelaw, accounting, finance, marketing, and management because they
view these degrees as having faster tracks to high paying medical doctor
careers or managerial jobs and partnerships in corporations, accounting
firms, and law firms.
- To compete in the global economy where science and engineering
specialists are prized, the U.S. job market does not place a high enough
premium on opportunities in those disciplines to attract many of the
brightest and best who opt for alternatives like those mentioned above. The
Salzman and Lowell study outcomes suggests this by noting that science and
engineering undergraduates often track into nonscientific careers.
Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
"The Problem is Beyond Psychology: The Real World is More Random than
Regression Analyses," by Nassim Nicholas Taleb and Daniel G. Goldstein, SSRN,
October 10, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1941792
Abstract:
Where the
problem is not expert underestimation of randomness, but more: the tools
themselves used in regression analyses and similar methods underestimate fat
tails, hence the randomness in the data. We should avoid imparting
psychological explanations to errors in the use of statistical methods.
Bob Jensen's discussion of black swans and fat tails is at
http://www.trinity.edu/rjensen/theory01.htm#EMH
"MF Global : 99 Problems And Auditor PwC Warned About None," by
Francine McKenna, re:The Auditors, October 28, 2011 ---
http://retheauditors.com/2011/10/28/mf-global-99-problems-and-pwc-warned-about-none-of-them/
Update October 31: I’m putting updates over at
Forbes.
My latest column is up at American Banker, “Are
Cozy Ties Muzzling S&P on MF Global Downgrade?”
You may recall the last time I wrote about MF
Global. That story was about the “rogue” trader that cost them $141 million.
In the meantime we’ve seen another “rogue” trader scandal and PwC has given
MF Global clean opinions on their financial statements and internal controls
over financial reporting since the firm went public in mid-2007.
I’m sure PwC thought everything was peachy as
recently as this past May when the annual report came out for their year end
March 30. Instead we’re seeing another sudden, unexpected, calamitous,
black-swan event that no one could have predicted let alone warn investors
about.
Right….
Also see
http://www.forbes.com/sites/francinemckenna/2011/10/30/mf-global-99-problems-and-auditor-pwc-warned-about-none/
Jensen Comment
I prefer "Yeah right!" to just plain "Right!"
MF Global also has some ocean front property for sale in Arizona that's been
attested to by PwC.
"MF Global Shares Halted; News Pending," The Wall Street Journal,
October 31, 2011 ---
http://blogs.wsj.com/deals/2011/10/31/mf-global-shares-halted-news-pending/
As stock markets open in New York on Monday, MF
Global shares remain halted. The only news the company has released so far
is a one-line press release confirming the suspension from the Federal
Reserve Bank of New York.
Pre-market trading in MF Global Holdings has been
halted since about 6 a.m. ET as news is expected to be released about Jon
Corzine’s ailing brokerage.
Meanwhile, the global exchange and trading
community is moving to lock-down mode on MF Global as the U.S. broker
continues efforts to forge a restructuring that could include a sale and
bankruptcy filing.
The U.S. clearing unit of ICE said it is limiting
MF Global to liquidation of transactions, while the Singapore Exchange won’t
enter into new trades. Floor traders said Nymex has halted all MF
Global-created trading. Some MF traders are restricted from the entering the
floor of the Chicago Board of Trade, and the Federal Reserve Bank of New
York said it had suspended doing business with MF Global.
The New York Fed said in its brief statement: “This
suspension will continue until MF Global establishes, to the satisfaction of
the New York Fed, that MF Global is fully capable of discharging the
responsibilities set out in the New York Fed’s policy…or until the New York
Fed decides to terminate MF Global’s status as a primary dealer.”
The Wall Street Journal reported Sunday night that
MF Global is working on a deal to push its holding company into bankruptcy
protection as soon as Monday, and to sell its assets to Interactive Brokers
Group in a court-supervised auction.
Continued in article
Jensen Comment
Francine may be singing
'99 bottles of negligence on the wall, 99 bottles of negligence, if one of
the bottles should happen to fall, 98 bottles of negligence on the wall, . . . "
Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm
Great Nova Video: Can a market of irrational people be a "rational
market?"
PBS Nova Video: "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
"Rational Markets: Yes or No? The Affirmative Case,": by Mark
Rubinstein, University of California, Berkeley - Haas School of Business, SSRN,
September 8, 2000 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=242259
Taking a Second Look at Rubinstein's Paper
"Markets are rational even if they're irrational," by Mark Buchanan , The
Physics of Finance, October 18, 2011 ---
http://physicsoffinance.blogspot.com/2011/10/markets-are-rational-even-if-theyre.html
Just one further point. I’ve pointed out before that
defenders of the EMH in their arguments often switch between two meanings of the
idea. One is that the markets are unpredictable and hard to beat, the other is
that markets do a good job of valuing assets and therefore lead to efficient
resource allocations. The trick often employed is to present evidence for the
first meaning — markets are hard to predict — and then take this in support of
the second meaning, that markets do a great job valuing assets. Rubinstein
follows this pattern as well, although in a slightly modified way. At the
outset, he begins making various definitions of the “rational market”:
Miguel, Founder of SimoleonSense
Video
Quantitative versus Fundamental Value–Let’s get ready to RUMMMBLE!
May 8, 2011
http://blog.empiricalfinancellc.com/2011/05/quantitative-versus-fundamental-value-lets-get-ready-to-rummbbbllle/
Bob Jensen's threads on the EMH ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH
Question
What do the 2011 Wall Street protests have in common with the assassination of
President William McKinley, Jr. in 1901?
October 172 2011 message from Robert Bruce Walker in New Zealand
Here are a couple of articles
that relate, directly or indirectly, to the current protests against Wall
Street. I think they are vaguely related to accounting.
The first article is a straight
forward account of the intellectual origins of the protest. It is
reasonably interesting but the second is far more interesting because the
subject matter is identical albeit located in time about 110 years ago. It
is a discussion of the assassination of President McKinley. I did not know
this, but perhaps I should have, that the assassination was carried out by
an anarchist. The article describes McKinley’s association to big business
(principally a man named Hanna). It is the time that the Republicans became
strongly associated with business and Wall Street. The parallels are
uncanny.
The article also briefly touches
upon the consequence of the assassination which led to the presidency of
Roosevelt (version 1). It is Roosevelt of course that was one of the
principal authors of the idea that the government should intervene to curb
the excesses of capitalism.
I have been re-reading R A
Bryer’s article on the origins of fair value accounting which I found on
Bob’s website. His thesis is, if can do him an injustice, that fair value
accounting has its origins in the acrimonious relations between labour and
business in the US at the turn of the last century.
http://chronicle.com/article/Intellectual-Roots-of-Wall/129428/
http://www.nybooks.com/articles/archives/2011/oct/13/anarchists-capitalists/
Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory
The International Ethics Standards Board for Accountants (IESBA)
has released its 2011-2012 IESBA Strategy and Work Plan, which sets the
direction and priorities for the activities of the IESBA.---
http://www.ifac.org/news-events/2011-10/iesba-2011-2012-strategy-and-work-plan-approved
Library of Online Technology Articles ---
http://www.techcast.org/Library.aspx
Bob Jensen's threads on education technology ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm
Bob Jensen's threads on tools and tricks of the trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Audit Reform Nonsense
"The PCAOB Wants to Name Audit Engagement Partners: Would Its "Red A" Really
Matter?" by Jim Peterson, reBalance, October 17, 2011 ---
http://www.jamesrpeterson.com/home/2011/10/the-pcaob-wants-to-name-audit-engagement-partners-would-its-red-a-really-matter.html
"Executive Overconfidence and the Slippery Slope to Financial Misreporting,"
Catherine Schrand, Professor of Accounting at the University of Pennsylvania,
and Sarah Zechman of the accounting group at the University of Chicago Booth
School of Business, The Harvard Law School Forum on Corporate Governance and
Financial Regulation, October 14, 2011 ---
http://blogs.law.harvard.edu/corpgov/2011/10/14/executive-overconfidence-and-the-slippery-slope-to-financial-misreporting/
In the paper, Executive Overconfidence
and the Slippery Slope to Financial Misreporting, forthcoming
in the Journal of Accounting and Economics as published by
Elsevier, our detailed analysis of a sample of 49 firms subject to SEC
Accounting and Auditing Enforcement Releases (AAERs) suggests two distinct
explanations for the misstatements. Just over one quarter of the cases
represent many of the well-publicized examples of corporate fraud including
Adelphia, Enron, Healthsouth, and Tyco. The nature of the misstatements,
their timing, and an analysis of the executives suggest that the activities
are consistent with a strong inference of intent on the part of the
respondent and consistent with the legal standards necessary to establish
fraud.
However, perhaps more surprising, we find that the
actions by the executives in the remaining three quarters of the cases are
not consistent with the pleading standards required to establish an intent
to defraud. Rather, our analysis of the 49 AAER firms suggests that
optimistic bias on the part of executives can explain these AAERs. We show
that the misstatement amount in the initial period of alleged misreporting
is relatively small, and possibly unintentional. Subsequent period earnings
realizations are poor, however, and the misstatements escalate. Using a
matched sample of non-AAER firms, we show that the misreporting firms did
not simply get a bad draw on earnings. Nor does it appear that weaker
monitoring relative to the matched sample explains why the misreporting
manager’s optimistic bias affects the financial statements.
We further examine whether the optimistic bias for
the misreporting firms is associated with the character trait of
overconfidence. The evidence from the analysis of the 49 AAER sample is
mixed on this question. However, we find evidence of a positive association
between proxies for overconfidence and the propensity for AAERs in two
larger samples that use alternative measures of overconfidence. The
association between overconfidence and AAERs is consistent with the slippery
slope explanation in which greater optimistic bias makes it more likely that
a manager is in the position that significant misreporting is an optimal
choice.
An interesting question raised by the analysis is
the importance of monitoring the optimistic bias of executives. Various
models predict that overconfidence has desirable effects on the executive’s
performance (Goel and Thakor, 2000; Gervais and Goldstein, 2007; Gervais et
al., 2010). Our analysis indicates overconfidence can be associated with
financial reporting concerns and prior work has documented an association
between overconfidence and distorted investment and financing decisions
(e.g., Malmendier and Tate, 2005 and 2008 among others). For firms who value
the positive aspects of overconfidence, a plausible response is to put
mechanisms in place to monitor the executive’s decision-making biases
associated with this trait. This response is feasible only if the Board
recognizes executive overconfidence. Our evidence indicating that the
misreporting firms and matched sample of non-AAER firms have different
compensation arrangements suggests that the Board is able to do so at some
level. However, our corresponding analysis of monitoring does not indicate
that the overconfident managers were better monitored, which explains why
they were more likely to end up misreporting. The potential for monitoring
to moderate the optimistic bias that characterizes executives remains an
interesting open question. Is it that our analysis does not adequately
capture the specific mechanisms that would control optimistic bias? Or, is
the cost of better monitoring higher than the expected benefits from
mitigating the risk of misreporting, which is a significant but unusual
event?
The full paper is available for download at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1919729
Download it while it's free.
Bob Jensen's threads on creative accounting and earnings management are at
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Bob Jensen's threads on Enron are at
http://www.trinity.edu/rjensen/FraudEnron.htm
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm
Jensen Comment
Once again this illustrates how the IASB and FASB are overly focused on assets
and liabilities without even being able to define net income on anything other
than a residual leftover basis. As a result, things like unrealized fair value
changes get blended in with realized operational earnings in eps and P/E ratio
calculations that are the major focal points of company management and
investors. This supports my previous appeal for multi-column financial
statements that vary according to degree of realization and attestation by CPA
auditors.
"BIG 4 AUDITS: A THING OF THE PAST?" by Anthony H. Catanach Jr. and J.
Edward Ketz, Grumpy Old Accountants, October 25, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/342
As the Public Company Accounting Oversight Board
considers
changes to the audit reporting model, we must ask:
is the report really the problem, or is it
the audit behind that report.
The accountant’s job is not easy, and it’s even
tougher in the largest accounting firms. The “up or out” promotion policy
in these firms creates huge pressures for client development and retention,
not to mention stresses to generate and maintain bonuses for managers and
partners. The result: major incentives for accountants to “bend” the rules
for clients.
Recently, we learned that
KPMG let Motorola record revenue in the third
quarter of 2006 even though the contract that originated the sale was not
signed until the early hours of the 4th quarter. Without the deal, Motorola
would have missed its third-quarter earnings target.
As we learn more about the large accounting firms’
role in the financial crisis of 2008, the news is not good:
- A
KPMG audit partner apparently ignored bank
regulatory reports in order to give Citigroup clean internal control
opinions. KPMG issued a “clean” internal control report on Citicorp on
February 22, 2008, despite the engagement partner’s knowledge on
February 14, 2008 of material weaknesses found by bank examiners. We
are anxious to see how KPMG explains this “oversight.”
- Or how about the case of
Ernst & Young approving “Repo 105”
transactions to keep debt of the books of Lehman Brothers right before
the financial crisis started.
And even more recently, we have Ernst & Young
blessing Groupon’s aggressive “gross revenue” recognition policy despite its
complete violation of generally accepted accounting principles. Apparently,
the Securities and Exchange Commission agreed with us (see
Groupon Finally Restates Its Numbers), as they
required Groupon to restate their financial statements for this “accounting
error,” and amend their S-1 yet again.
All of these are clear cases of “rule bending” to
help the client! Apparently, the new regulations put in place after Enron
that were supposed to make it easier for accountants to do the right thing
are not working. Evidently, those laws just aren’t tough enough to deter
large accounting firms from siding with their “paying” client, rather than
their “real” client, the investing public.
Could inadequate governmental funding and political
influence be exacerbating the problem? Consider the following:
- Often, it takes two to three years for the SEC
to review in detail the most recently filed financial statements of
publicly traded companies. With limited resources, the regulators
simply cannot keep pace with the volumes of corporate securities
filings. In short, timely oversight of financial reporting
irregularities isn’t happening, unless perhaps a whistleblower steps
forward.
- Since inception the
PCAOB has issued fewer than 40 actions against
auditors for violating generally accepting auditing standards despite
numerous post Sarbanes-Oxley accounting failures. Particularly
noteworthy is the fact that of the Big Four accounting firms that audit
the vast majority of exchange listed firms, only a handful have been
cited despite the numerous cases of malpractice that the marketplace has
witnessed. Could political influence be contributing to this
“preferential treatment?” How else can you explain the application of
“too few to fail” treatment to the large accounting firms? They don’t
really audit anymore, so who really cares if they fail?
So how much of this “rule bending” is related to
lobbying clout? According to the Center for Responsible Politics (www.opensecrets.org)
in an article entitled “Wall Street’s Campaign
Contributions and Lobbyist Expenditures,” accounting firms spent $81 million
on campaign contributions and $122 million on lobbying between 1998 and
2008. Accounting giants Deloitte & Touche, Ernst & Young, KPMG and
PricewaterhouseCoopers spent, respectively, $32 million, $37 million, $27
million, and $55 million. In 2007 alone, accounting firms employed 178
lobbyists.
Continued in article
Jensen Comment
It seems absurd to think that lobbying power will decrease if auditing is
shifted from the private sector to the public sector. Dream on!
If those who regulate private sector auditing are failing it seems absurd to
turn more auditing responsibility to the failing regulators. Dream on!
It's much harder to sue the public sector, so let's greatly increase investor
protection by shifting responsibility for auditing from the public sector to the
private sector. Dream on!
It's unfair to conclude that Professors Catanach and Ketz are advocating
shifting of auditing responsibility from the private sector to the public
sector.
It's fair to conclude that they really aren't saying what they want to
substitute in place of present private sector auditing or more narrowly Big Four
auditing?
What Catanach and Ketz are concluding is that Big Brother should start to
pound and pound and pound on the Big Four until their audits get better. But
what happens if the Big Four get overly caught in the vice between the power of
regulators (who are concerned less with costs of auditing than performance)
versus the power of the big business firms they audit (who want less costly
audits even if these audits are less effective). If both ends of this vice
take the profitability of auditing out of the Big Four or out of the private
sector entirely, what do these ends of the vice want to take over the auditing
responsibilities?
Don't look to Catanach, Ketz, Selling, Peterson, Mckenna, Jensen, Albrecht,
or the PCAOB for an answer! They're all too busy criticizing to propose really
viable alternatives in terms of cost versus benefit solutions.
What is clear to me is that all the above critics have not been giving credit
to the unheralded private sector auditing successes that never make the media
headlines like the auditing failures.
Hi Honey,
"I'll show you mine (insider news about My Nookie) if you show me
yours (insider news about Deloitte's audit clients),"
"Former Deloitte Employee Swings to Settlement with SEC Over Insider
Trading Charges," by Calib Newquist, Going Concern, October 18, 2011
---
http://goingconcern.com/2011/10/former-deloitte-employee-swings-to-settlement-with-sec-over-insider-trading-charges/
Remember Annabel McClellan? She’s the wife of
former
Deloitte
partner Arnold McClellan who sorta got wrapped up into
an insider trading mess with her sister and brother-in-law
last fall. Annabel is also a former Deloitte
employee who gave up the glamorous life of a Salzberg solider to be a
stay-at-home mom. Oh! and she was working on
swingers app called My Nookie that was on the
verge of taking the scene by storm. The whole insider trading thing put
those ambitions on hold due to the fact that Annabel may be
looking at some jail time and she
settled civil charges with the SEC yesterday for $1 million.
The good news for Arnie is that if judge gives the
settlement the thumbs-up, he’ll be off the hook who, prosecutors say, had no
clue that the Mrs. was engaging in extracurricular activities:
Bob Jensen's threads about Deloitte ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Deloitte Faulted by PCAOB Over Unresolved Audit Deficiencies," by
esse Hamilton, Business Week, October 17, 2011 ---
http://www.businessweek.com/news/2011-10-17/deloitte-faulted-by-pcaob-over-unresolved-audit-deficiencies.html
Deloitte & Touche LLP repeatedly failed to support
assumptions in audits examined in a 2007 inspection, the Public Company
Accounting Oversight Board said in the first public report of unresolved
deficiencies involving one of the so-called Big Four accounting firms.
The firm’s quality controls and independence
systems give “cause for concern,” the PCAOB said in its report, which was
released today. The Washington-based nonprofit, created in 2002 to oversee
audits of public companies after the collapses of Enron Corp. and WorldCom
Inc., gives audit firms at least a year to fix deficiencies and only
releases the reports in cases where auditors fail to make sufficient
improvements.
“These deficiencies may result, in part, from a
Firm culture that allows, or tolerates, audit approaches that do not
consistently emphasize the need for an appropriate level of critical
analysis,” the PCAOB said in the Deloitte report, which didn’t name the
clients involved in the cited audits.
The PCAOB in 2007 looked at Deloitte’s practices
through inspections at the company’s New York headquarters and 18 other
offices. The report made public today lays out instances in which the firm
insufficiently weighed clients’ valuation of assets and income-tax
assumptions. The watchdog also faulted Deloitte’s independence procedures,
saying it “has no formal system in place to monitor the services its foreign
affiliates actually perform.”
“In our drive for continuous improvement, we have
been making a series of investments focused on strengthening and improving
our practice,” Deloitte Chief Executive Officer Joe Echevarria said in a
statement. Echevarria, who has been with the firm since 1978, was elected to
the top job in April.
The disclosure isn’t a disciplinary action, said
Colleen Brennan, a PCAOB spokeswoman. Dozens of smaller registered public
accounting firms have had similar criticisms made public and have retained
their registration, she said.
The 2007 Inspection Report is at
http://pcaobus.org/Inspections/Reports/Documents/2008_Deloitte.pdf
Bob Jensen's threads about Deloitte ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Accused of Deception, Citi Agrees to Pay $285 Million," by Edward
Wyatt, The New York Times, October 19, 2011 ---
http://www.nytimes.com/2011/10/20/business/citigroup-to-pay-285-million-to-settle-sec-charges.html?hp
Citigroup agreed to pay $285 million to settle
charges that it misled investors in a $1 billion derivatives deal tied to
the United States housing market, then bet against investors as the housing
market began to show signs of distress, the Securities and Exchange
Commission said Wednesday.
The S.E.C. also brought charges against a Citigroup
employee who was responsible for structuring the transaction, and brought
and settled charges against the asset management unit of Credit Suisse and a
Credit Suisse employee who also had responsibility for the derivative
security.
¶ The S.E.C. said that the $285 million would be
returned to investors in the deal, a collateralized debt obligation known as
Class V Funding III. The commission said that Citigroup exercised
significant influence over the selection of $500 million of assets in the
deal’s portfolio.
¶ Citigroup then took a short position against
those mortgage-related assets, an investment in which Citigroup would profit
if the assets declined in value. The company did not disclose to the
investors to whom it sold the collateralized debt obligation that it had
helped to select the assets or that it was betting against them.
¶ The S.E.C. also charged Brian Stoker, the
Citigroup employee who was primarily responsible for putting together the
deal, and Samir H. Bhatt, a Credit Suisse portfolio manager who was
primarily responsible for the transaction. Credit Suisse served as the
collateral manager for the C.D.O. transaction.
¶ “The securities laws demand that investors
receive more care and candor than Citigroup provided to these C.D.O.
investors,” said Robert Khuzami, director of the S.E.C.’s division of
enforcement. “Investors were not informed that Citigroup had decided to bet
against them and had helped choose the assets that would determine who won
or lost.”
¶ Citigroup received fees of $34 million for
structuring and marketing the transaction and realized net profits of at
least $126 million from its short position. The $285 million settlement
includes $160 million in disgorgement plus $30 million in prejudgment
interest and a $95 million penalty, all of which will be returned to
investors.
¶ The companies and individuals who settled the
charges neither admitted nor denied the charges.
Continued in article
Bob Jensen's Timeline of Derivatives Frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Bob Jensen's threads on the derivatives scandals in 2007 and 2008 ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Why Do Accounting Academics Blog Less Than Other Academics?" by Tom
Selling, The Accounting Onion, October 11, 2011 ---
http://accountingonion.typepad.com/theaccountingonion/2011/10/why-do-accounting-academics-blog-less-than-other-academics.html
Continued in article
Jensen Comment
The phrase "blog less" has two meanings. One is that there are fewer accounting
professor/student bloggers than in other disciplines. This is largely due to the
fact that accounting is a smaller academic discipline than many of our brethren
in humanities, mathematics, and science.
Second is that there might be comparable number of academic accounting
bloggers who post less frequently than their brethren in humanities and science.
At first blush this is a bit surprising to me since accounting is a dynamic
discipline with many things taking place globally every day in media fraud
articles, news from international and national accounting standard setting
bodies, etc. It could be that we, as academic accountants, tend to rely on a
small number of commercial blogs such as those of the Big Four, the AICPA,
SmartPros, AccountingWeb, GoingConcern, re:TheAuditors, etc. These popular
commercial blogs may reduce the need for more accounting professors to blog or
to post multiple messages daily.
Many academic accountants have come to rely on blog aggregators and filters.
For example, I suspect that the AECM listserv has a larger daily audience
reading a larger number of AECM postings than readings of any accounting
professor who blogs. Also intense debates on the AECM reveal more intense and
enduring debates on issues than the commentaries at accounting professor
blogging sites.
The AAA Commons is also becoming increasingly popular among accounting
academics. For example, it could be that more people frequent the postings of
Rick Lillie via the AAA Commons than frequent his blog. I do not, however, know
this for a fact.
We also must consider the fact that social networkings (e.g., Twitter and
Facebook) reduce the blogging traffic.
Be that as it may, I think there are quite a few blogging professors who have
relatively small audiences. The small audiences tend to discourage new entrants
into the blogging arena. For a listing of some of the academic accounting
bloggers go to
http://www.trinity.edu/rjensen/ListservRoles.htm
There are too many for me to monitor even on a weekly basis.
October 14, 2011 reply from Paul Polinski
Bob and Tom:
I took a relatively unique policy-related position with a large accounting
firm for a while after earning my Ph.D. (Part of my own Frostian 'road less
traveled.') Based on that experience, I witnessed a few factors that seemed
to contribute to the unwillingness and/or inability of accounting faculty to
maintain blogs, submit comment letters to standards-setters, and participate
in policy discussions with members of the profession:
1) There are no formal incentives to do so, whereas
there are clear formal incentives to continue to publish in journals to
enhance the reputations of the school and the faculty member (i.e., many
perceive it's a non-value added time sink). Faculty view their time as
better spent on activities that have direct and well understood benefits to
them. 2) The already discussed fear of being branded as 'anti-profession' by
colleagues and professionals, and potential loss of reputation for the
department and the faculty member. 3) 'The market for excuses.' I was
somewhat taken aback by the attitude shift towards me when I left a
tenure-track faculty spot to work for the firm. Almost immediately, many
faculty treated me as if I was incapable of thinking independently and
objectively because I worked for a firm, and my views and work would
therefore (by assumption) be influenced singularly by firm management's
viewpoints. Most all research-active faculty with which I talked maintained
an attitude that they must remain completely neutral in policy debates, lest
they poison the well of objectivity. They view their sole duty as conducting
research that would inform policy makers about the consequences of their
policy choices, without making normative prescriptions or judgments. This
made any discussion of policy with faculty difficult because of their
unwillingness to engage in the debate itself.
Paul
The Pathetic Nobel Prize in Economics
You must watch this video to the end because Peter Schiff's commentaries
are way too long
The video really speaks for itself without Peter's sarcasm
Peter Schiff by the way called the 2007-2008 economic meltdown before it really
happened
Video: How to silence Nobel Prize winning economists: Ask them about
the economy ---
http://www.youtube.com/watch?v=mFdnA5UNmVw&feature=feedu
October 17, 2011 reply from Jagdish Gangolly
Bob,
This is pathetic. The Nobel committee ought to be
red-faced. In my humble opinion, this was inevitable. Perhaps starting such
a prestigious prize in an immature discipline was a bad idea. It would have
made sense to have a prize for social sciences in general so that they did
not have to reach bottom of the barrel to grant prizes.
Feynman once called economics a "cargo-cult
science" in that, filled with complicated mathematical mumbo-jumbo that, to
the uninitiated, it looked like Physics but had nothing to do with the real
world.
The great geneticist JBS Haldane once said that in
science, an ounce of algebra is worth a ton of verbal argument. Feynman, on
the other hand, said that one clear concept is worth more than a thousand
pages of mathematics. Economists would do well to pay heed to both. They
also need to pay heed to what some one described as the Feynman Principle:
Use no more math than necessary.
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
"Economics has met the enemy, and it is economics," by Ira Basen,
Globe and Mail, October 15, 2011 ---
http://www.theglobeandmail.com/news/politics/economics-has-met-the-enemy-and-it-is-economics/article2202027/page1/
Thank you Jerry Trites for the heads up.
After Thomas Sargent learned on Monday morning that
he and colleague Christopher Sims had been awarded the Nobel Prize in
Economics for 2011, the 68-year-old New York University professor struck an
aw-shucks tone with an interviewer from the official Nobel website: “We're
just bookish types that look at numbers and try to figure out what's going
on.”
But no one who'd followed Prof. Sargent's long,
distinguished career would have been fooled by his attempt at modesty. He'd
won for his part in developing one of economists' main models of cause and
effect: How can we expect people to respond to changes in prices, for
example, or interest rates? According to the laureates' theories, they'll do
whatever's most beneficial to them, and they'll do it every time. They don't
need governments to instruct them; they figure it out for themselves.
Economists call this the “rational expectations” model. And it's not just an
abstraction: Bankers and policy-makers apply these formulae in the real
world, so bad models lead to bad policy.
Which is perhaps why, by the end of that interview
on Monday, Prof. Sargent was adopting a more realistic tone: “We experiment
with our models,” he explained, “before we wreck the world.”
Rational-expectations theory and its corollary, the
efficient-market hypothesis, have been central to mainstream economics for
more than 40 years. And while they may not have “wrecked the world,” some
critics argue these models have blinded economists to reality: Certain the
universe was unfolding as it should, they failed both to anticipate the
financial crisis of 2008 and to chart an effective path to recovery.
The economic crisis has produced a crisis in the
study of economics – a growing realization that if the field is going to
offer meaningful solutions, greater attention must be paid to what is
happening in university lecture halls and seminar rooms.
While the protesters occupying Wall Street are not
carrying signs denouncing rational-expectations and efficient-market
modelling, perhaps they should be.
They wouldn't be the first young dissenters to call
economics to account. In June of 2000, a small group of elite graduate
students at some of France's most prestigious universities declared war on
the economic establishment. This was an unlikely group of student radicals,
whose degrees could be expected to lead them to lucrative careers in
finance, business or government if they didn't rock the boat. Instead, they
protested – not about tuition or workloads, but that too much of what they
studied bore no relation to what was happening outside the classroom walls.
They launched an online petition demanding greater
realism in economics teaching, less reliance on mathematics “as an end in
itself” and more space for approaches beyond the dominant neoclassical
model, including input from other disciplines, such as psychology, history
and sociology. Their conclusion was that economics had become an “autistic
science,” lost in “imaginary worlds.” They called their movement
Autisme-economie.
The students' timing is notable: It was the spring
of 2000, when the world was still basking in the glow of “the Great
Moderation,” when for most of a decade Western economies had been enjoying a
prolonged period of moderate but fairly steady growth.
Some economists were daring to think the
unthinkable – that their understanding of how advanced capitalist economies
worked had become so sophisticated that they might finally have succeeded in
smoothing out the destructive gyrations of capitalism's boom-and-bust cycle.
(“The central problem of depression prevention has been solved,” declared
another Nobel laureate, Robert Lucas of the University of Chicago, in 2003 –
five years before the greatest economic collapse in more than half a
century.)
The students' petition sparked a lively debate. The
French minister of education established a committee on economic education.
Economics students across Europe and North America began meeting and
circulating petitions of their own, even as defenders of the status quo
denounced the movement as a Trotskyite conspiracy. By September, the first
issue of the Post-Autistic Economic Newsletter was published in Britain.
As The Independent summarized the students'
message: “If there is a daily prayer for the global economy, it should be,
‘Deliver us from abstraction.'”
It seems that entreaty went unheard through most of
the discipline before the economic crisis, not to mention in the offices of
hedge funds and the Stockholm Nobel selection committee. But is it ringing
louder now? And how did economics become so abstract in the first place?
The great classical economists of the late 18th and
early 19th centuries had no problem connecting to the real world – the
Industrial Revolution had unleashed profound social and economic changes,
and they were trying to make sense of what they were seeing. Yet Adam Smith,
who is considered the founding father of modern economics, would have had
trouble understanding the meaning of the word “economist.”
What is today known as economics arose out of two
larger intellectual traditions that have since been largely abandoned. One
is political economy, which is based on the simple idea that economic
outcomes are often determined largely by political factors (as well as vice
versa). But when political-economy courses first started appearing in
Canadian universities in the 1870s, it was still viewed as a small offshoot
of a far more important topic: moral philosophy.
In The Wealth of Nations (1776), Adam Smith
famously argued that the pursuit of enlightened self-interest by individuals
and companies could benefit society as a whole. His notion of the market's
“invisible hand” laid the groundwork for much of modern neoclassical and
neo-liberal, laissez-faire economics. But unlike today's free marketers,
Smith didn't believe that the morality of the market was appropriate for
society at large. Honesty, discipline, thrift and co-operation, not
consumption and unbridled self-interest, were the keys to happiness and
social cohesion. Smith's vision was a capitalist economy in a society
governed by non-capitalist morality.
But by the end of the 19th century, the new field
of economics no longer concerned itself with moral philosophy, and less and
less with political economy. What was coming to dominate was a conviction
that markets could be trusted to produce the most efficient allocation of
scarce resources, that individuals would always seek to maximize their
utility in an economically rational way, and that all of this would
ultimately lead to some kind of overall equilibrium of prices, wages, supply
and demand.
Political economy was less vital because government
intervention disrupted the path to equilibrium and should therefore be
avoided except in exceptional circumstances. And as for morality, economics
would concern itself with the behaviour of rational, self-interested,
utility-maximizing Homo economicus. What he did outside the confines of the
marketplace would be someone else's field of study.
As those notions took hold, a new idea emerged that
would have surprised and probably horrified Adam Smith – that economics,
divorced from the study of morality and politics, could be considered a
science. By the beginning of the 20th century, economists were looking for
theorems and models that could help to explain the universe. One historian
described them as suffering from “physics envy.” Although they were dealing
with the behaviour of humans, not atoms and particles, they came to believe
they could accurately predict the trajectory of human decision-making in the
marketplace.
In their desire to have their field be recognized
as a science, economists increasingly decided to speak the language of
science. From Smith's innovations through John Maynard Keynes's work in the
1930s, economics was argued in words. Now, it would go by the numbers.
Continued in a long article
October 17, 2011 message from Paul Williams
It isn't all economists who are to blame, but a
particular species (the one that has infected accounting) that is the
problem. A growing number of economists are expressing increasingly brazen
disaffection with the "conventional wisdom." A recent book by Ha-Joon Chang,
an economist at Cambridge University, titled 23 Things They Don't Tell You
About Capitalism, debunks 23 significant myths, all of which US accounting
scholars, for the most part, believe with all of their hearts and souls.
Notable for an economist he is honest enough to proclaim the unthinkable
among that crowd:
"Recognizing that the boundaries of the market are
ambiguous and cannot be determined in an objective way lets us realize that
economics is not a science like physics or chemistry, but a political
exercise. Free-market economists may want you to believe that the correct
boundaries of the market can be scientifically determined, but this is
incorrect. If the boundaries of what you are studying cannot be
scientifically determined, what you are doing is not a science."
What Chang means by this is illustrated with his
example of labor markets. At one time child labor was ubiquitous so the
boundary of the labor market included children (in some parts of the world,
it still does). But those boundaries can be changed; they are, all of the
time, by value judgments enacted via the political process. Much of the US
scholarly enterprise in the US is erected on such value judgments. Harken
back to Anthony Hopwood's Presidential address: Accounting is not a science,
but a practice. As a practice we are free to speak about it anyway we want,
including (especially including) critical examination of the myths and value
judgments that it enacts in the world. (Speaking of ironies neither John
Locke nor Adam Smith thought limited liability corporations were a good
idea; Smith was adamantly opposed to them because they absolved people of
their moral responsibilities. But Karl Marx saw in them their great
potential to unleash productive possibilities. The free marketers who regard
accounting as the handmaiden of corporate values are more Marxian than
Smithian in their thinking about the institution of limited liability
corporations.).
Paul
Mathematical Analytics in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics
October 21, Message from Bob Jensen to the AECM
Hi Jagdish,
Intellectual Capital: Forty Years of the Nobel Prize in Economics by Tom
Karier ---
http://www.amazon.com/Intellectual-Capital-Forty-Years-Economics/dp/0521763266/ref=sr_1_1?s=books&ie=UTF8&qid=1319104060&sr=1-1
Years ago Paul Williams carefully explained to AECMers that the Nobel Prize
in Economics was funded by the Swedish central bank
rather than the Nobel Trust. However, that's probably not nearly as
important as the use of prestigious term "Nobel Prize" in Sweden.
Trinity University funded travel to campus and
generous stipends for presentations by all former Nobel Prize in Economics
winners. Their presentations, however, were to be biographical about their
lives rather than technical presentations about their discoveries. The late
economist Bill Breit conceived this idea and Trinity Funded the project over
the years ---
http://porterloring.com/sitemaker/sites/Porter1/obit.cgi?user=1368_WBreit6281
I think all living winners made presentations on campus except for two that
are severely mentally ill --- John Nash and John Hicks. Bill actually
traveled to England to search out the mysterious John Nash. Bill told this
story to me one day over lunch. I doubt that it will ever be put on paper,
but if it were ever written down it would read like a mystery novel about
searching out a hermit.
The most memorable campus presentation to me was the presentation of Franco
Modigliani.
Professor Modigliani is one of my all time heroes, and what stood out in his
presentation about his life is that when doing research in the 1960s and
before how much we did not pamper our research professors like we do today.
In modern times our research professors, especially in accountancy, bargain
for something like having to teach two or three courses in a year (across
two semesters), although one of my former students bargained for one a year
some time back at UC Berkeley. When producing his best early research,
Professor Modigliani was teaching nine or ten courses per year (some with
repeat preps in the second semester).
What we don't properly appreciate is that sometimes teaching stimulates
creative ideas, and sometimes hard sweat stimulates our Adrenalin beyond
normal levels.
Respectfully,
Bob Jensen
There's gold in them thar dividends
Teaching Case from The Wall Street Journal Accounting Weekly Review on October
14, 2011
Miner Gets Physical with Payout
by:
David Fickling
Oct 08, 2011
Click here to view the full article on WSJ.com
TOPICS: Dividends, Financial Accounting
SUMMARY: Gold Resource Corp. plans to make its dividend payment in
gold bullion instead of cash. Some instructors may find that their textbook
chapter section covering property dividends includes an earlier example of
Ranchers Exploration and Development Corp. planning to distribute dividends
in gold bullion.
CLASSROOM APPLICATION: The article is useful in intermediate
financial accounting classes covering dividend distributions. The questions
ask students to offer the basic journal entries to record the gold bullion
distribution-these should include and entry to accumulate the cost of
producing the gold bullion, an adjustment to fair value at date of
declaration, and then the dividend declaration and payment entries.
Instructors may discuss the use of the accounts in a depository vault to
discuss date of record issues with this dividend distribution.
QUESTIONS:
1. (Advanced) What is a dividend-in-kind, otherwise known as a
property dividend?
2. (Introductory) How is Gold Resource Corp. planning to distribute
dividends in property-gold bullion-rather than in cash? That is, what steps
must the company take to make this distribution?
3. (Advanced) Without using numbers, what general journal entries
do you think Gold Resource will have to make to record this dividend
distribution?
4. (Introductory) What are the reasons that Gold Resource wants to
distribute dividends in gold?
5. (Introductory) What are the arguments against distributing
dividends in gold?
6. (Advanced) What does the analyst Laurie McGuirk mean when he
says that "gold-mining stocks are now seen as leveraged plays on the price
of gold" and that "anyone who's looking at gold for dividend flows at the
moment is probably not looking at it in the right way"?
Reviewed By: Judy Beckman, University of Rhode Island
"Miner Gets Physical with Payout," by: David Fickling, The Wall Street
Journal, October 8, 2011 ---
http://online.wsj.com/article/SB10001424052970204294504576616853174753570.html?mod=djem_jiewr_AC_domainid
SYDNEY—Some banks are accepting gold as collateral
for loans, and developer Donald Trump will take it as a security deposit in
his new skyscraper in Manhattan. Now, a Colorado gold mining company has
another idea: make dividend payments in bullion instead of cash.
Jason Reid, president of Gold Resource Corp., whose
Colorado Springs, Colo., company is developing projects in southern Mexico,
said Gold Resource plans to make the first dividend payments within months.
To prepare for the novel payout, the company in
August began exchanging $1 million of its cash into metal with the idea of
minting one troy ounce gold and silver coins to be distributed monthly.
"Many investors would rather hold physical gold or
silver rather than fiat currencies that will continue to be debased," said
Mr. Reid.
Some think the idea of paying bullion instead of
cash just might catch on. Ian Lawrence, managing director of in Cobar
Consolidated Resources Ltd. in Melbourne, said he has had discussions with
several investors about getting dividends in physical metal and personally
thinks it is a "great idea."
"There's been a lot of interest from shareholders,"
he said.
Dividends in gold are another example of the
metal's new allure as an alternative currency. Hedge funds have allowed
investors to denominate holdings in gold, and exchange-traded funds backed
by physical gold have become some of the most popular investment vehicles.
Although gold is down 13% from its August record
settlement of $1,888.70 a troy ounce, prices are up sixfold from 2001.
Front-month gold for October delivery on Friday fell $17.40, or 1.1%, to
$1,634.50, up 0.9% on the week.
Chris Mancini, an analyst with the Gamco Gold Fund,
said Gold Resource approached the fund about its plans for a gold dividend.
"We said, 'Yes, it's potentially a good idea,' " he
said, adding that it probably would be a positive for the stock.
Behind the desire to hold gold are concerns that
central banks' monetary easing and countries' fiscal woes will undermine
faith in currencies like the euro and dollar.
But paying out a dividend in bullion comes with a
unique set of logistical challenges that could scare off many companies. It
would be cost-effective only for shareholders holding tens of thousands of
shares, limiting the appeal for individual investors.
"There'd be too many complications" to such a move,
said Ross Smyth-Kirk, chairman of Kingsgate Consolidated Ltd., a producer
with mines in Thailand and Australia. "It's a bit gimmicky."
Continued in article
Teaching Case on How to Convince Students That Treasury Stock is Not an
Asset (in spite of when Andy Fastow used it as an asset in SPEs)
From The Wall Street Journal Accounting Weekly Review in October 14, 2011
Buying Shares, Buying Trouble
by:
Maxwell Murphy
Oct 12, 2011
Click here to view the full article on WSJ.com
TOPICS: Financial Accounting, Stock Options, Dilution
SUMMARY: Stock repurchase programs in the 30 companies in the Dow
Jones Industrial Average--and specifically IBM, H-P, Travelers and Walt
Disney-are discussed and assessed in this article. The assessment views
these programs' performance as one would an investment asset. Questions ask
students to clearly understand the accounting for the treasury stock-that it
is not an asset even if companies and their analysts may view performance
assessment in this light.
CLASSROOM APPLICATION: The article is useful to cover treasury
stock transactions-and tangential dividend policies-in a financial reporting
class.
QUESTIONS:
1. (Introductory) Why do companies repurchase their own stock? You
may cite reasons from your classroom or textbook study and compare those
reasons to comments made in the article.
2. (Advanced) Describe the process of a company buying back its own
stock, or making treasury stock purchases. Include in your answer summary
journal entries to record this process.
3. (Advanced) In this article the author assesses the performance
of the 30 companies in the Dow Jones industrial average as having incurred a
3.8% investment loss. Does this mean that those companies recorded treasury
stock as investment assets? Explain.
4. (Introductory) Consider the case of IBM. How have this company's
share repurchases impacted the market price of its stock? What has happened
to the company's overall dividend distribution amount?
Reviewed By: Judy Beckman, University of Rhode Island
"Buying Shares, Buying Trouble," by: Maxwell Murphy, The Wall Street
Journal, October 12, 2011 ---
http://online.wsj.com/article/SB10001424052970203499704576622980752831562.html?mod=djem_jiewr_AC_domainid
The 30 companies in the Dow Jones Industrial
Average have spent a combined total of about $70.6 billion this year to buy
back their stock. Through Friday they had lost 7.5% on their investment, far
outstripping the industrial average's 3.9% decline over the same period.
Those dismal results show how difficult buybacks
can be. In theory, such programs not only return cash to shareholders who
sell back their stock, they also reward holders who don't sell by shrinking
the pool of outstanding shares, thereby boosting their value.
But things don't always work that way, for reasons
that can be as simple as bad timing. Since the start of 2007, the peak year
for buybacks, the 30 Dow Jones industrials have shelled out nearly $614.2
billion to buy back stock worth $590.8 billion as of Friday. Though that
3.8% investment loss isn't as steep as the corresponding 10.8% drop in the
DJIA, it is still a negative return.
While many big companies have turned to stock
repurchases as a way to goose shareholder returns and satisfy vocal
investors, some corporate-finance experts argue that companies should
rarely, if ever, resort to buybacks. They say the money can almost always be
better used to make acquisitions or pumped back into the business to finance
expansion.
"I find it hard to believe I couldn't generate more
value for shareholders through strategic acquisitions or deploying capital
within the company toward growth or to improve projects, as compared to
merely repurchasing stock," says the chief financial officer of one company
in the DJIA.
But both supporters and skeptics agree there are
efficient buybacks and inefficient ones, and that inefficient ones can
destroy, rather than create, shareholder value.
Buybacks can work when companies don't overpay, and
when they materially reduce the number of their shares on the market.
Finding the right time to strike can be tough. When companies are flush with
cash, as many are these days, their stocks can reach short-term peaks.
Conversely, stocks often hit their nadirs as companies are trying to hold a
lid on spending.
The case of International Business Machines Corp.
shows how buybacks can be a boon to both a company and its investors. Since
the end of 2006, according to regulatory filings, IBM has repurchased $60.3
billion of shares that would be worth more than $91 billion today. More than
60% of those 504 million shares remain off the company's books; that means
they haven't been replaced, for example, by shares issued as part of
executive pay packages.
Partly as a result, IBM's shares outstanding have
declined by a fifth over that period and its stock price has nearly doubled.
While it has increased its per-share dividend by 150%, its overall dividend
costs have increased just 100%.
Continued in article
Bob Jensen's threads on Andy Fastow's SPEs (at Enron) are at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm
"U.S. Expected to Charge Executive Tied to Galleon Case," by Azam
Ahmed, Peter Lattman, and Ben Protess, The New York Times, October 25,
2011 ---
http://dealbook.nytimes.com/2011/10/25/gupta-faces-criminal-charges/?nl=todaysheadlines&emc=tha2
Federal prosecutors are expected to file criminal
charges on Wednesday against Rajat K. Gupta, the most prominent business
executive ensnared in an aggressive insider trading investigation, according
to people briefed on the case.
The case against Mr. Gupta, 62, who is expected to
surrender to F.B.I. agents on Wednesday, would extend the reach of the
government’s inquiry into America’s most prestigious corporate boardrooms.
Most of the defendants charged with insider trading over the last two years
have plied their trade exclusively on Wall Street.
The charges would also mean a stunning fall from
grace of a trusted adviser to political leaders and chief executives of the
world’s most celebrated companies.
A former director of Goldman Sachs and Procter &
Gamble and the longtime head of McKinsey & Company, the elite consulting
firm, Mr. Gupta has been under investigation over whether he leaked
corporate secrets to Raj Rajaratnam, the hedge fund manager who was
sentenced this month to 11 years in prison for trading on illegal stock
tips.
While there has been no indication yet that Mr.
Gupta profited directly from the information he passed to Mr. Rajaratnam,
securities laws prohibit company insiders from divulging corporate secrets
to those who then profit from them.
The case against Mr. Gupta, who lives in Westport,
Conn., would tie up a major loose end in the long-running investigation of
Mr. Rajaratnam’s hedge fund, the Galleon Group. Yet federal authorities
continue their campaign to ferret out insider trading on multiple fronts.
This month, for example, a Denver-based hedge fund manager and a chemist at
the Food and Drug Administration pleaded guilty to such charges.
A spokeswoman for the United States attorney in
Manhattan declined to comment.
Gary P. Naftalis, a lawyer for Mr. Gupta, said in a
statement: “The facts demonstrate that Mr. Gupta is an innocent man and that
he acted with honesty and integrity.”
Mr. Gupta, in his role at the helm of McKinsey, was
a trusted adviser to business leaders including Jeffrey R. Immelt, of
General Electric, and Henry R. Kravis, of the private equity firm Kohlberg
Kravis Roberts & Company. A native of Kolkata, India, and a graduate of the
Harvard Business School, Mr. Gupta has also been a philanthropist, serving
as a senior adviser to the Bill & Melinda Gates Foundation. Mr. Gupta also
served as a special adviser to the United Nations.
His name emerged just a week before Mr.
Rajaratnam’s trial in March, when the Securities and Exchange Commission
filed an administrative proceeding against him. The agency accused Mr. Gupta
of passing confidential information about Goldman Sachs and Procter & Gamble
to Mr. Rajaratnam, who then traded on the news.
The details were explosive. Authorities said Mr.
Gupta gave Mr. Rajaratnam advanced word of Warren E. Buffett’s $5 billion
investment in Goldman Sachs during the darkest days of the financial crisis
in addition to other sensitive information affecting the company’s share
price.
At the time, federal prosecutors named Mr. Gupta a
co-conspirator of Mr. Rajaratnam, but they never charged him. Still, his
presence loomed large at Mr. Rajaratnam’s trial. Lloyd C. Blankfein, the
chief executive of Goldman, testified about Mr. Gupta’s role on the board
and the secrets he was privy to, including earnings details and the bank’s
strategic deliberations.
The legal odyssey leading to charges against Mr.
Gupta could serve as a case study in law school criminal procedure class. He
fought the S.E.C.’s civil action, which would have been heard before an
administrative judge. Mr. Gupta argued that the proceeding denied him of his
constitutional right to a jury trial and treated him differently than the
other Mr. Rajaratnam-related defendants, all of whom the agency sued in
federal court.
Mr. Gupta prevailed, and the S.E.C. dropped its
case in August, but it maintained the right to bring an action in federal
court. The agency is expected to file a new, parallel civil case against Mr.
Gupta as well. It is unclear what has changed since the S.E.C. dropped its
case in August.
An S.E.C. spokesman declined to comment.
Continued in article
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
"Taking Better Notes in Zotero," by Lincoln Mullen, Chronicle of
Higher Education, October 10, 2011 ---
http://chronicle.com/blogs/profhacker/taking-better-notes-in-zotero/36561?sid=wc&utm_source=wc&utm_medium=en
I’ve used
Zotero for four years
or so, and it’s extraordinarily useful software for research. I’m
not the only one at ProfHacker who likes Zotero.
Alex recently wrote about
Scanner for Zotero,
Mark wrote about
Zotero and Android, and Brian wrote a comparison
of
Zotero and Endnote. There are
a great many more posts about Zotero in
our archives.
But there is one thing about Zotero that has
bothered me. The problem is that the most intuitive way to take notes on a
source is to attach the note to the source. For example, see the screenshot
below, where I have a summary and a few topical notes about one book.
This is all well and good for certain types of
notes, such as summaries of books that I read for exams. It’s kind of like
scribbling marginalia in a book. But this method is not so good for other
types of notes, such as pieces of evidence or quotations. The problem is
that attaching notes to the source forces you to think about the source
first and then the idea encapsulated in the note, rather than the other way
round.
I first learned how to take scholarly notes on
index cards: one thought per card, with carefully marked keys to subjects
and sources. I still think that index cards have some virtues that digital
note-taking can’t beat. What I wanted from Zotero was a way to think about
notes that was more like the model of index cards and less like the model of
marginalia.
Lo and behold, Zotero had the necessary
functionality for years. The problem was not the capabilities of the
software, but the way I was thinking about taking notes.
What I do now is make a standalone note for each
thought or piece of evidence. But I also make the note a related item of the
source from which I got the idea. You can see in the screenshot below that
this standalone note is related to a book.
Continued in article
"Zotero vs. EndNote," by Brian Croxall, Chronicle of Higher
Education, May 3, 2011 ---
http://chronicle.com/blogs/profhacker/zotero-vs-endnote/33157
We here at ProfHacker are
big fans of
Zotero.
Some of our earliest posts covered
teaching with Zotero groups and
making your WordPress blog Zotero-able (although
we can’t control whether it’s “zo terrible” <rimshot>).
And of course, there’s Amy’s fantastic two-part series
on getting started with Zotero (parts
one and
two). The folks at the
Roy Rosenzweig Center for
History and New Media (who make Zotero) are
friends of ProfHacker, and we got one of our earliest boosts from their Digital
Campus podcast. That’s why I feel a little
sheepish about making the following confession: while I admire and
proselytize for Zotero, I actually use
EndNote
for my own research.
A few weeks ago, ProfHacker got a request asking us
if we could compare the two platforms, which gave me a great opportunity to
try to figure out why I prefer EndNote. In many ways, it comes down to the
fact that I’m very, very comfortable with EndNote. I started playing around
with it in my last year of undergraduate work (as a way to procrastinate
rather than actually writing papers), and I purchased a copy of the software
before starting graduate school (only to find out that my school had a site
license). I fastidiously created bibliographic entries for the reading I did
in seminars. I wrote abstracts for the articles. I learned how to create my
own styles. I took library workshops on the tool. So when it came time to
write my dissertation, EndNote was already well integrated into my workflow.
I began experimenting with Zotero in the fall of 2007 (a year after its
first release) and while I very much appreciated what it did, it wasn’t
enough to make me a convert.
Apart from my own level of comfort, however, I
wanted to know what the differences were between the two tools. In my
postdoc I regularly teach classes on both EndNote and Zotero, which means
that I think I’ve got a pretty good perspective on both tools. It must of
course be said that both tools work very well at their primary purposes:
managing references and creating citations and bibliographies within
documents. With that, then, I want to cover what I see to be the strengths
and key features of each platform. A couple of caveats: First, I’m not going
to cover everything that each tool does. My goal is to just touch on some
key differences that I’ve found for preferring one program over another.
Second, while I’m doing my best to represent the features of both EndNote
and Zotero, if I’ve missed something or gotten something just plain wrong,
please let me know in the comments!
- Cost: Perhaps the strongest
selling point for Zotero is that it’s free. EndNote costs more than $100
for an educational license, and while in the grand scheme of things that
might not be too much, it’s certainly an impediment for grad students or
schools with limited resources. Winner? Zotero.
- Collecting sources online: For
many academic databases, library catalogs, and even sites like Amazon or
The New York Times,
adding a resource to your Zotero library simply takes a single click. It
feels like magic the first time you do it, and it never stops feeling
like magic. In response, EndNote created
EndNote Web, which allows you install a
bookmarklet to capture sources. It works across all browsers, but it’s
nowhere near as robust nor does it capture information as well. Many
academic databases allow you to export search results directly into
EndNote, however. While it’s not quite as easy and simple as Zotero’s
implementation, it works just as well and takes only a few seconds
more. Winner? Zotero, by a hair.
- Syncing:
With Zotero 2.0, it became possible to keep your entire library in sync
across all the computers you use. For many people, this is the most
important feature, since it means you can do your work wherever you are,
as long as you can install the Zotero plugin. EndNote Web is Thomson
Reuters’s response; along with the bookmarklet, there’s an entire
website where your sources are stored and which you can access wherever
you have an Internet connection. The problem is that EndNote Web does
not sync easily or well with your desktop library. So while you
can create citations from either EndNote Web or EndNote proper, you can
accidentally create differences between the two libraries. What’s more,
I find EndNote Web to be slow and to have an unintuitive user interface.
Zotero is just plain simpler for keeping everything together—plus since
the Zotero library is stored locally, it’s accessible even when you’re
not online. EndNote Web doesn’t do this. It’s worth mentioning that I’ve
created my own solution for syncing my EndNote library: ProfHacker fave Dropbox.
By storing my EndNote library files in Dropbox,
they are kept in sync on all my computers and are stored locally. I just
have to make sure that I exit the program on one computer before
starting on another. Still, I have to give the edge to Zotero since its
syncing solution is native to the application. Winner?
Zotero.
- Speed, overall: When I’m
writing, flow is really important. Getting the thoughts down as quickly
as they come is important, otherwise they’ll be long gone. Of course, I
also need to cite things as I go, since figuring out what needs
citations after the fact would be impossible. So the speed of the
application I’m using matters a lot to me. When it comes to simply
interacting with EndNote and Zotero, EndNote is just plain faster. Being
a stand-alone application rather than based in Firefox—even Firefox 4
(see
Amy’s quick review)—means that EndNote doesn’t
have to depend on other things. Zotero
Standalone is a possible solution
(and
Mark’s review praises it), but for now…Winner?
EndNote.
- Speed, inserting citations:
Getting citations added into your document is a big part of the speed of
using a tool. Both EndNote and Zotero have shortcut keys for inserting
citations. Zotero then opens a window which allows you to search for
your source, control how it appears, and then inserts the citation.
EndNote has a similar option to Find Citations, but it also has a
shortcut key that inserts whatever reference you currently have selected
in EndNote. By not having to go through a pop-up window, you can drop a
citation into EndNote much faster than you can with Zotero. Winner?
EndNote.
- Speed, editing citations: Not
all citation styles require the use of page numbers, but my primary
one—MLA—does. When I choose to insert citations into a document with
either Zotero or EndNote, then, I have to make sure that I add in page
numbers. Zotero includes an option to add page numbers in its Find/Add
Citation dialog. EndNote does not give you this option. It immediately
inserts and formats the citation, and you have to right-click and choose
to edit it to add a page number. When used conventionally, then, Zotero
is faster for adding page numbers. However, I’ve already said that I
hate the pop-up box. EndNote gives me the option of turning off instant
formatting. The result is that it drops snippets of code into the
document like this: {Breuer, 1955 #81}. It’s not as pretty, but it’s
super easy to add page numbers to this code: adding an “@” symbol plus
the page number(s) is all it takes, {Breuer, 1955 #81@27-31}.
Upon finishing the document, EndNote will convert this code into
citations. Admittedly, working with EndNote this way is a level of
citation ninja-ery that you might avoid. But it allows me to add in
citations and page numbers quickly while avoiding the pop-up box.
Winner? Zotero, for standard users; EndNote for advanced users.
- Sharing sources with others:
It’s not uncommon for scholars to be protective of their sources while
writing, but there comes a point at either pre- or post-publication
where we want to share what we’ve discovered. Zotero makes it easy to
share sources with its
groups
feature. Adding sources to the group library is as
easy as dragging them from your library into the group folder. And since
groups can be private or public, you can even make the sources visible
online for people who don’t want to join a group. EndNote allows you to
share sources with others through EndNote Web. You can organize your
sources into groups and then share groups with different people. There
is no option to share sources publicly, and you have to manually add
users to share groups by email address. It’s not terribly difficult, but
it’s not implemented as well as Zotero’s sharing options. Winner?
Zotero.
- Writing with others: While
most of us most often do our writing by ourselves, there are projects
that require you to collaborate with one or more coauthors. Managing
bibliographies when working on the same document can be difficult.
EndNote and Zotero have very different solutions. EndNote creates a
“traveling
library” (scroll down after the link) embedded
in each Word document that contains all of your collaborator’s
bibliographic data and that can be imported into your own library. In
other words, the bibliography and citations can be formatted correctly
even if you don’t have access to the original records. Zotero’s groups,
on the other hand, allows you to cite from your group libraries and it’s
as easy as citing any other source with Zotero. Since I haven’t
actually done a large project using either tool, I’m going to resist
declaring a winner here.
- Finding Full Text for Your Sources:
EndNote and Zotero can both help you manage your PDFs as well as your
citations. You can attach PDFs to source records, and the files then
live in your library. However, when you create records, you often do not
have the PDFs at hand. Zotero has a setting that directs it to
“automatically attach associated PDFs and other files when saving
items,” which always makes me think that it will download PDFs for me
when saving sources from databases. Since it never does this, I’m quite
sure that I misunderstand this setting; or perhaps it just doesn’t work
with the databases I frequent. EndNote, on the other hand, has a
built-in tool for finding full text versions of your sources. To have it
work most effectively, you will need to
configure it to go through your university’s database structure.
But once you’ve done that and authenticated, it
will scan your whole library to find either PDFs or URLs for your
sources. In my highly non-scientific tests, EndNote finds full text for
about 40% of the items I have in my library. It’s a whole lot better
than downloading them yourself, although the process is pretty slow.
Winner? EndNote.
- Creating Sources from PDFs:
On the other hand, sometimes you have a folder full of PDFs that you’ve
collected and no metadata to go with them. Sure, you could enter that in
by hand, but can Zotero or EndNote help you out here? Both applications
have the ability to extract metadata from PDFs. For EndNote, you simply
choose to Import, point it at a folder, and choose the “PDF File or
Folder” import option. For Zotero, you can drag a PDF into your library,
right-click, and choose “Retrieve metadata for PDF.” In my experience,
EndNote has a hard time finding the metadata, but that very likely has
to do with my field of study, since EndNote depends here on
DOIs. Zotero, on the other hand,
works with Google Scholar and gets better
results for me. Aaron Tay, a librarian in Singapore,
ran some tests onPDF metadata extraction for
EndNote and Zotero (as well as two other reference managers)` and also
found that Zotero came out on top. Winner? Zotero.
- Customizability: Both Zotero
and EndNote ship with most of what you need built-in, including the
most-used styles and more fields for information than most people will
ever need. If you find that you need to add a new type of source or some
new fields for specific information that you need for your sources
(unique identifiers for your project, etc.), EndNote is much better
equipped to handle these needs: it has space for three new reference
types and eight fields of custom information. Winner? EndNote.
To sum up, then, here are what I see as the
different strengths of the two platforms:
Continued in article
Bob Jensen's technology bookmarks are at
http://www.trinity.edu/rjensen/Bookbob4.htm
"With New Google Docs Presentations, Why Use PowerPoint?" by Jon
Mitchell, ReadWriteWeb, October 18, 2011 ---
http://www.readwriteweb.com/archives/with_new_google_docs_presentations_why_use_powerpo.php
Google Docs takes another bite out of expensive
Microsoft Office software today with a complete do-over of Presentations.
Google Docs slideshows can now be edited live and simultaneously with a
team. It enables viewing of revision history, so any team member can go back
and see changes made by others. The update also features live chat alongside
the editing tools.
In addition to the collaboration features, Docs has
added new transitions, animations and themes, with which PowerPoint users
have been fluffing up their posts for years. The new features are only
supported on
modern
browsers.
Continued in article
Jensen Comment
One of the strongest statements in favor of using Google Docs for interactive
accounting distance education came from Amy Dunbar ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#GoogleApps
Jensen Question
What presentation software preceded PowerPoint?
My guess is that you don't remember the various presentation software that is
now defunct for one reason or another because of Microsoft.
Answers go way back to the Jensen and Sandlin book of 1994 ---
http://www.trinity.edu/~rjensen/215ach04.pdf
Free eBooks
"How to Download Free Ebooks With just a little searching, you can find and
download free, legal ebooks for your e-reader, smartphone, or tablet," by
Michael King, PC World, Oct 15, 2011 ---
http://www.pcworld.com/article/241717/how_to_download_free_ebooks.html#tk.nl_wbx_t_crawl2
Free Textbooks
Hi Glen,
Thank you for informing me about the Bookboon free textbook site ---
http://bookboon.com/uk/textbooks
I added it to my listing of free electronic textbooks. The problem with free
electronic textbooks is that there's not a whole lot of incentive for keeping
them current. This is not so much of a problem with basic textbooks in
slow-changing disciplines like mathematics, but it's a huge problem in
fast-changing disciplines like financial accounting and law.
Bob Jensen's threads on free books (including textbooks) ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm
Bob Jensen's threads on free lectures, courses, videos, and course
materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Popular High School Books Available as Free eBooks & Audio Books ---
Click Here
http://www.openculture.com/2011/09/popular_high_school_books_available_as_free_ebooks_audiobooks.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
Jensen Comment
Perhaps the best open sharing alternative for a free textbook in a a rapidly
changing discipline like intermediate accounting or a CPA review textbook would
be to model it after Wikipedia where the entire world is able to contribute new
and revised modules, including problem wikis and problem solution wikis.
Online vendors of products like monthly unlimited downloads of movies from
Netflix and downloads of eBooks into an Amazon Kindle present interesting
challenges to CVP analysis where variable costs are minimal compared to fixed
costs. In comparison, however the rental movie disks from Netflix and the sale
of new hardcopy books from Amazon present more traditional CVP cases where
contribution margins are considerably lower than the price.
A Case on Relatively Large Fixed Costs in CVP Analysis
From The Wall Street Journal Accounting Weekly Review on October 27, 2011
High Fixed Costs Are Makings of Steel Trap
by:
Kelly Evans
Oct 25, 2011
Click here to view the full article on WSJ.com
TOPICS: Cost Accounting, Cost Management, Fixed Costs, Fixed
Pricing, Managerial Accounting, Variable Costing, Variable Costs
SUMMARY: Prices for hot-rolled steel dropped from about $900 a ton
in April to about $670 a ton during the week of October 17 to 21, 2011.
Columnist Kelly Evans compares the difficulty faced by two traditionally
organized steel companies with high fixed costs-U.S. Steel and AK Steel-to
Nucor which "operates smaller mills that it can more easily move on or
off-line as the market fluctuates", i.e. turning those fixed costs into a
step function, if not a true variable cost.
CLASSROOM APPLICATION: The article is useful to introduce cost
behaviors in managerial accounting courses.
QUESTIONS:
1. (Introductory) Define the terms fixed cost and variable cost.
2. (Advanced) Author Kelly Evans writes that "the trouble for U.S.
Steel and AK Steel Holding...is that they have high fixed costs." Why do
certain industries such as steelmaking have high fixed costs while other
industries do not?
3. (Introductory) How significant was this year's price drop for
hot-rolled steel? How is the price for this product set?
4. (Advanced) Why do high fixed cost make it difficult to manage a
business during times of fluctuating prices for its end product?
5. (Introductory) Is the "trouble" from high fixed costs avoidable?
Explain the case of Nucor having "fared relatively better of late than U.S.
Steel and AK Steel."
6. (Introductory) Based on the description you've given above,
define the type of cost structure that Nucor Steel has used to produce its
steel end products.
Reviewed By: Judy Beckman, University of Rhode Island
"High Fixed Costs Are Makings of Steel Trap," by: Kelly Evans, The Wall
Street Journal, October 25, 2011 ---
http://online.wsj.com/article/SB10001424052970203911804576651580445851722.html?mod=djem_jiewr_AC_domainid
The steel market is still awaiting its second-half
blastoff.
The U.S. has, for the moment, managed to cast off
recession fears, and Chinese manufacturing activity apparently rebounded in
October. Yet the price of steel—on whose skeleton these economies are
built—remains depressed. Benchmark hot-rolled steel had dropped in price
from about $900 a ton in April to about $670 a ton as of last week. On
Tuesday, earnings from a pair of American steelmakers may underscore the
market's duress.
The larger of the two, U.S. Steel, is expected to
post third-quarter earnings of about 52 cents a share, according to analysts
polled by Thomson Reuters. While an improvement from the company's loss a
year earlier, that is well below the $1.17 a share analysts were expecting
just three months ago. Moreover, the view among analysts may still be too
rosy: Steel Market Intelligence, a research firm, predicts the company will
post earnings of just 36 cents a share, and lower its fourth-quarter
earnings target, too.
The trouble for U.S. Steel, and AK Steel Holding,
which is expected to report a one-cent loss, is that they have high fixed
costs. That makes them especially vulnerable to steel-price declines. The
result has been a more-than-50% drop in the share prices of both companies
this year, as steel prices have sold off. By contrast, steelmaker Nucor
operates smaller mills that it can more easily move on- or off-line as the
market fluctuates. This has offered it and other "mini-mills" some cushion
as prices collapse.
Continued in article
Bob Jensen's threads on managerial and cost accounting (including CVP
analysis) ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
"Netflix Drops Most Since 2004 After Losing 800,000 Customers,"
Business Week, October 25, 2011 ---
http://www.businessweek.com/news/2011-10-25/netflix-drops-most-since-2004-after-losing-800-000-customers.html
Jensen Comment
This illustration (case?) offers quite a lot for class discussion or possibly
even a term paper on the topic of CPV Analysis in cost/managerial Accounting
courses. What should be the optimal price of a product that has a very high
fixed cost and almost no variable cost, as is the case for online video
downloads when the royalty costs are fixed?
Variable royalty costs are quite another matter, and I really do not know how
Netflix contracts with copyright holders.
Also movie disk rentals are quite another matter since there are variable
costs for postage, disk recording, disk purchase, disk handling, etc.
What is interesting is the implication for CPV analysis of most any online
product for which the variable cost is epsilon, including Kindle books,
eTextbooks, etc.
Remind students of what happens to pricing analysis and breakeven analysis
when the contribution margin (p-v) approaches p.
"Kahneman: Bias, Blindness and How We Truly Think," by Daniel Kahneman,
Bloomberg, October 24, 2011 ---
http://www.bloomberg.com/news/2011-10-24/bias-blindness-and-how-we-truly-think-part-1-daniel-kahneman.html
Most of us view the world as more benign than it
really is, our own attributes as more favorable than they truly are, and the
goals we adopt as more achievable than they are likely to be. We also tend
to exaggerate our ability to forecast the future, which fosters
overconfidence.
In terms of its consequences for decisions, the
optimistic bias may well be the most significant cognitive bias. Because
optimistic bias is both a blessing and a risk, you should be both happy and
wary if you are temperamentally optimistic.
Optimism is normal, but some fortunate people are
more optimistic than the rest of us. If you are genetically endowed with an
optimistic bias, you hardly need to be told that you are a lucky person --
you already feel fortunate.
Optimistic people play a disproportionate role in
shaping our lives. Their decisions make a difference; they are inventors,
entrepreneurs, political and military leaders -- not average people. They
got to where they are by seeking challenges and taking risks. They are
talented and they have been lucky, almost certainly luckier than they
acknowledge.
A survey of founders of small businesses concluded
that entrepreneurs are more sanguine than midlevel managers about life in
general. Their experiences of success have confirmed their faith in their
judgment and in their ability to control events. Their self-confidence is
reinforced by the admiration of others. This reasoning leads to a
hypothesis: The people who have the greatest influence on the lives of
others are likely to be optimistic and overconfident, and to take more risks
than they realize. Optimistic Bias
The evidence suggests that an optimistic bias plays
a role -- sometimes the dominant role -- whenever people or institutions
voluntarily take on significant risks. More often than not, risk-takers
underestimate the odds they face and, because they misread the risks,
optimistic entrepreneurs often believe they are prudent, even when they are
not. Their confidence sustains a positive mood that helps them obtain
resources from others, raise the morale of their employees and enhance their
prospects of prevailing. When action is needed, optimism, even of the mildly
delusional variety, may be a good thing.
An optimistic temperament encourages persistence in
the face of obstacles. But this persistence can be costly. A series of
studies by Thomas Astebro shed light on what happens when optimists get bad
news. (His data came from Canada’s Inventor’s Assistance Program -- which
provides inventors with objective assessments of the commercial prospects of
their ideas. The forecasts of failure in this program are remarkably
accurate.)
In Astebro’s studies, discouraging news led about
half of the inventors to quit after receiving a grade that unequivocally
predicted failure. However, 47 percent of them continued development efforts
even after being told that their project was hopeless, and on average these
individuals doubled their initial losses before giving up.
Significantly, persistence after discouraging
advice was relatively common among inventors who had a high score on a
personality measure of optimism. This evidence suggests that optimism is
widespread, stubborn and costly.
In the market, of course, belief in one’s
superiority has significant consequences. Leaders of large businesses
sometimes make huge bets in expensive mergers and acquisitions, acting on
the mistaken belief that they can manage the assets of another company
better than its current owners do. The stock market commonly responds by
downgrading the value of the acquiring firm, because experience has shown
that such efforts fail more often than they succeed. Misguided acquisitions
have been explained by a “hubris hypothesis”: The executives of the
acquiring firm are simply less competent than they think they are. Risk
Takers
The economists Ulrike Malmendier and Geoffrey Tate
identified optimistic chief executive officers by the amount of company
stock that they owned personally and observed that highly optimistic leaders
took excessive risks. They assumed debt rather than issue equity and were
more likely to “overpay for target companies and undertake value-destroying
mergers.” Remarkably, the stock of the acquiring company suffered
substantially more in mergers if the CEO was overly optimistic by the
authors’ measure. The market is apparently able to identify overconfident
CEOs.
Continued in article
Jensen Comment
Things like this give mathematical economists, finance professors, and
accountics scientists nightmares that they tend to ignore by day. Personally, I
don't remember my dreams very often, although I'm almost always thrust into
frustrating situations like moving cars that lose their brakes, being lost at
night in a big city, being naked at a church wedding, and looking at a final
examination in a course that I forgot to attend during the entire semester.
Bob Jensen's threads on Accounting for the Shadow Economy
---
http://www.trinity.edu/rjensen/Theory01.htm#ShadowEconomy
Some of the older links below may be broken:
"Video: Daniel Kahneman - The Psychology of Large Mistakes and Important
Decisions" Simoleon Sense, July 27, 2009 ---
http://www.simoleonsense.com/daniel-kahneman-psychology-of-large-mistakes-and-decisions/
Speaker Background (Via Wikipedia)
Daniel Kahneman is an Israeli psychologist and
Nobel laureate, notable for his work on the psychology of judgment and
decision-making, behavioral economics and hedonic psychology.With Amos
Tversky and others, Kahneman established a cognitive basis for common human
errors using heuristics and biases , and developed Prospect theory . He was
awarded the 2002 Nobel Memorial Prize in Economics for his work in Prospect
theory. Currently, he is professor emeritus of psychology and public affairs
at Princeton University’s Woodrow Wilson School.
Watch the video ---
Click Here
Video 1: "Nobelist Daniel Kahneman On Behavioral Economics (Awesome)!"
Simoleon Sense, June 5, 2009 ---
http://www.simoleonsense.com/video-nobelist-daniel-kahneman-on-behavioral-economics-awesome/
Introduction (Via Fora.Tv)
Nobel
Prize-winning psychologist Daniel Kahneman addresses the
Georgetown class of 2009 about the merits of behavioral
economics.
He deconstructs the assumption that people always act
rationally, and explains how to promote rational
decisions in an irrational world.
Topics Covered:
1. The
Economic Definition Of Rationality
2.
Emphasis on Rationality in Modern Economic Theory
3. Examples of Irrational Behavior (watch this part)
4. How
to encourage rational decisions
Speaker Background (Via Fora.Tv)
Daniel
Kahneman - Daniel Kahneman is Eugene Higgins Professor
of Psychology and Professor of Public Affairs Emeritus
at Princeton University. He was educated at The Hebrew
University in Jerusalem and obtained his PhD in
Berkeley. He taught at The Hebrew University, at the
University of British Columbia and at Berkeley, and
joined the Princeton faculty in 1994, retiring in 2007.
He is best known for his contributions, with his late
colleague Amos Tversky, to the psychology of judgment
and decision making, which inspired the development of
behavioral economics in general, and of behavioral
finance in particular. This work earned Kahneman the
Nobel Prize in Economics in 2002 and many other honors
Video 2: Nancy Etcoff is part of a new vanguard of cognitive researchers
asking: What makes us happy? Why do we like beautiful things? And how on earth
did we evolve that way?
Simoleon Sense, June 10, 2009
http://www.simoleonsense.com/science-of-happiness/
Video 3: Yale's Robert Shiller (slightly over one hour of video lecture)
Behavioral Finance: The Role of Psychology ---
http://www.youtube.com/watch?v=0ZLNbxWH8Lc
"Countries and Culture in Behavioral Finance," by Meir Statman ---
http://www.scu.edu/business/finance/research/upload/Countries-and-cultures-in-BF.pdf
Behavioral finance has made important contributions
to the field of investing by focusing on the cognitive and emotional aspects
of the investment decision-making process. Although it is tempting to say
that people are the same everywhere, the collective set of common
experiences that people of the same culture share will influence their
cognitive and emotional approach to investing. In this article, the author
discusses the many cultural differences that may influence investor behavior
and how these differences may influence the recommendations of a financial
advisor.
"Must Read: Why People Fall Victim To Scams," Simoleon Sense,
March 18, 2009 ---
http://www.simoleonsense.com/must-read-why-people-fall-victim-to-scams/
The paper is at
http://www.oft.gov.uk/shared_oft/reports/consumer_protection/oft1070.pdf
"Behavioral Finance: Theories and Evidence," by Alistair Byrne, CFA
University of Edinburgh Mike Brooks Baillie Gifford & Co. The Research
Foundation of the CFA Literature Review Institute ---
http://www.cfapubs.org/doi/pdfplus/10.2470/rflr.v3.n1.1?cookieSet=1
That behavioral finance has revolutionized the way
we think about investments cannot be denied. But its intellectual appeal may
lie in its cross-disciplinary nature, marrying the field of investments with
biology and psychology. This literature review discusses the relevant
research in each component of what is known collectively as behavioral
finance.
This review of behavioral finance aims
to focus on articles with direct relevance to practitioners of investment
management, corporate finance, or personal financial planning. Given the
size of the growing field of behavioral finance, the review is necessarily
selective. As Shefrin (2000, p. 3) points out, practitioners studying
behavioral finance should learn to recognize their own mistakes and those of
others, understand those mistakes, and take steps to avoid making them. The
articles discussed in this review should allow the practitioner to begin
this journey.
Traditional finance uses models in
which the economic agents are assumed to be rational, which means they are
efficient and unbiased processors of relevant information and that their
decisions are consistent with utility maximization. Barberis and Thaler
(2003, p. 1055) note that the benefit of this framework is that it is
“appealingly simple.” They also note that “unfortunately, after years of
effort, it has become clear that basic facts about the aggregate stock
market, the cross-section of average returns, and individual trading
behavior are not easily understood in this framework.”
Behavioral finance is based on the
alternative notion that investors, or at least a significant minority of
them, are subject to behavioral biases that mean their financial decisions
can be less than fully rational. Evidence of these biases has typically come
from cognitive psychology literature and has then been applied in a
financial context.
Examples of biases include
•
Overconfidence and overoptimism—investors overestimate their ability and
the accuracy of the information they have.
•
Representativeness—investors assess situations based on superficial
characteristics rather than underlying probabilities.
•
Conservatism—forecasters cling to prior beliefs in the face of new
information.
•
Availability bias—investors overstate the probabilities of recently
observed or experienced events because the memory is fresh.
•
Frame
dependence and anchoring—the form of presentation of information can
affect the decision made.
•
Mental
accounting—individuals allocate wealth to separate mental compartments
and ignore fungibility and correlation effects.
•
Regret
aversion—individuals make decisions in a way that allows them to avoid
feeling emotional pain in the event of an adverse outcome.
Behavioral finance also challenges the
use of conventional utility functions based on the idea of risk aversion.
For example, Kahneman and Tversky
(1979) propose prospect theory as a descriptive theory of decision making in
risky situations. Outcomes are evaluated against a subjective reference
point (e.g., the purchase price of a stock) and investors are loss averse,
exhibiting risk-seeking behavior in the face of losses and risk-averse
behavior in the face of gains.
Continued in article
Jim Mahar (a huge fan of Ayn Rand) uses some interesting behavioral finance
videos in his finance class ---
http://financeprofessorblog.blogspot.com/2010/10/some-videos-we-will-be-using-in.html
We are covering the idea of charity or
altruism as rational or irrational. Now clearly
this idea of helping others is irrational is well established in some
circles. To start what is altruism? Let's
ask Google.
Now many economists have argued for years that it is
bad. For instance,
Ayn Rand in her writings and more recently from
the
Ayn Rand Institute.
Last week we ended class talking about
this video where the monkeys shared their gains
and acted in a manner that would be seen as uneconomic (giving away nuts,
caring about "fairness" etc). If you have not seen that video, I highly
recommend it. (oh and
please give me a juicy grape
:) ) So
cooperation
may be useful for the species.
Here is an
example not in an artificial setting.
The videos can be seen at
http://financeprofessorblog.blogspot.com/2010/10/some-videos-we-will-be-using-in.html
Bob Jensen's threads on Accounting for the Shadow Economy ---
http://www.trinity.edu/rjensen/Theory01.htm#ShadowEconomy
"Will JK Harris and TaxMasters Join the Tax Lady in the
Late-Night-Tax-Problem-Solver Body Count?" by Joe Kristan, Going Concern,
October 13, 2011 ---
http://goingconcern.com/2011/10/will-jk-harris-and-taxmasters-join-the-tax-lady-in-the-late-night-tax-problem-solver-body-count/
“Pennies on the dollar” may be a great pitch on
cable television, but it’s not a surefire business plan. Desperate taxpayers
who have paid money up front to
JK Harris
to resolve their tax debts at a discount are joining
the IRS as potential “pennies on the dollar” creditors now that this leader
in the tax settlement industry
is filing for bankruptcy protection.
This is the second major blow this year to cable TV
ad revenues. Earlier this year “Tax Lady”
Roni
Deutch gave up her law license in the face of
charges that she took fees up front to resolve tax debts and failed to
follow through.
Tax nerds see the late night ads when we get home
and wonder how these outfits manage to get such great deals out of the IRS
when getting the Service to actually forgive tax debts is like pulling teeth
from a grumpy rhino for the rest of us.
TaxMasters
now stands as the biggest remaining player in the TV
tax settlement business, but they have their own problems. They were
de-listed last month
from
the OTC Bulletin Board to the pink sheets for
failing to file their 10-Q due August 15. The last reported trade for
Taxs.pk is at 13 cents. They have also been sued by the Minnesota Attorney
General for allegedly deceptive practices.
ABC News reported on the suit:
Continued in article
"KMPG: 'Cloud is Now'; Technology Spend to Leap Next Year,"
SmartPros, October 6, 2011 ---
http://accounting.smartpros.com/x72834.xml
The vast majority of senior executives globally say
their organizations have already moved at least some business activities to
the Cloud and expect 2012 investment to skyrocket, with some companies
planning to spend more than a fifth of their IT budget on Cloud next year,
according to a report by KPMG International.
“Clearly, these findings proclaim, ‘the Cloud is
now,’” said Bryan Cruickshank, KPMG head of Global IT Advisory, Management
Consulting. “Clearly Cloud is transcending IT and widely impacting business
operations, as a full third of survey respondents said it would
fundamentally change their business, which is significant considering many
organizations are still developing their Cloud strategies.”
In a KPMG global survey of organizations that will
use the Cloud, as well as companies that will provide Cloud services,
economic factors were cited by 76 percent of both groups as an important
driver for Cloud adoption. However, a number of other considerations were
equally or more important: 80 percent said the switch to Cloud was driven by
efforts to improve processes, offering more agility across the enterprise;
79 percent of users and 76 percent of providers said they saw it as having
technical benefits, in some cases improvements that they otherwise could not
gain from their own data centers; and, 76 percent said the use of Cloud
would have strategic benefits, possibly including transforming their
business models to gain a competitive advantage.
Most user respondents to the KPMG survey (81
percent) said they were either evaluating Cloud, planned a Cloud
implementation, or had already adopted a Cloud strategy and timeline for
their organization, with almost one-quarter of them saying their
organization already runs all core IT services on the Cloud (10 percent) or
is in transition to do so (13 percent). Fewer than one in 10 executives say
their company has no immediate plans to enter the Cloud environment.
“Cloud adoption is quickly shifting from a
competitive advantage to an operational necessity, enabling innovation that
can create new business models and opportunities,” said Steve Hasty, head of
Global IT Advisory, Risk Consulting. “As this rapid adoption curve continues
to gain momentum amid a struggling global economy, it is important for
corporate leadership, directors and boards to be informed and engaged in
strategic discussions about Cloud’s impact on their long-term growth
opportunities and competitiveness.”
Hasty pointed out that the role of the corporate
Cloud leader remained contentious. IT executives see migration to the Cloud
as their initiative, while operations executives believe the CEO should lead
the change. “Enter the Chief Integration Officer, as the traditional CIO’s
role expands to break down potential silos and integrate internal and
external business needs, systems and partners,” said Hasty.
KPMG previewed the survey findings this week during
Oracle Open World, Oracle Corp.’s global conference in San Francisco.
IT-Business Executives Differ Moderately on
Cloud Expectations
Executives whose companies would use a Cloud
strategy agree that spending will rise significantly in 2012.
According to the KPMG survey, 17 percent of
corporate executives said Cloud spending would exceed 20 percent of the
total IT budget in 2012.
Continued in article
Blog Entry from Jerry Trites on October 7, 2011 ---
http://uwcisa-assurance.blogspot.com/
Web Application Security: Business and Risk
Considerations
ISACA has a White Paper on its website with the above title. The paper is an
excellent resource for those interested in cloud risks and how to address
them. That includes a lot of people!
One of the interesting parts of the paper is the table listing the various
types of vulnerabilities encountered in the cloud. These include SQL
Injection, Cross-site scripting and Insecure Direct Object Reference, among
others. The paper goes on to list some areas of security to focus on,
including some specific guidance on the old stand-by's of executive support,
training and support.
The paper concludes with assurance considerations, including the use of
Cobit to strengthen controls.
An excellent paper.
You can download it through this link.
Bob Jensen's threads on computing and network security ---
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection
Case Method in Science
The Accounting Review no longer considers case method research to be
suitable for publication in TAR and discourages both submissions of field
studies and cases ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Case method in considered very relevant to teaching accounting and
well-suited for publication in Issues in Accounting Education.(IAE).
Case method also has a central place in both teaching and research in
science.
A Case Study of Memory Loss in Mice (a teaching case) ---
http://sciencecases.lib.buffalo.edu/cs/collection/detail.asp?case_id=194&id=194
National Center for Case Study Teaching in Science ---
http://sciencecases.lib.buffalo.edu/cs/
Bob Jensen's threads on case method research and teaching ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Accounting History
The September 2011 edition of The Accounting Review has some really
interesting biographical book reviews and tributes to historical scholars ---
Anthony Hopwood (Deceased)
Gerhard G. Mueller
George J. Benston (Deceased)
CHRISTOPHER S. CHAPMAN, DAVID J. COOPER, and PETER B. MILLER (editors),
Accounting, Organizations, and Institutions: Essays in Honour of Anthony Hopwood
(Oxford, U.K.: Oxford University Press, 2009, ISBN 978-0-19-954635-0, pp. xi,
441) ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000005001835000001&idtype=cvips&prog=normal&bypassSSO=1
This collection of essays memorializes the life and
work of Anthony Hopwood, a thought leader in management accounting research
who was renowned for developing communities of accounting scholars. These
essays, written by his students, co-authors, and colleagues, were presented
to Anthony in a conference of international researchers. Thus, they have
benefited from the counsel of the editors, from vigorous discussion among
conference participants, and from reactions by Anthony himself. Consistent
with Anthony’s distinguished career, in what may be his final research
endeavor he contributed to the creation of a collection of serious scholarly
works, worthy of consideration by all accounting researchers.
The volume is comprised of 18 chapters that
collectively cover themes that animated Anthony’s work. Chief among these is
the importance of studying accounting in the organizational and social
contexts in which it operates, with an aim of understanding how accounting
shapes and is shaped by its environment. In the introductory chapter, the
editors delineate a tripartite schema of accounting, organizations, and
institutions that guided their commissioning of pieces for the volume. Given
the title of the journal that Anthony founded and edited for decades,
Accounting, Organizations and Society (AOS), I wondered why the authors
chose ‘‘institutions’’ over ‘‘societies’’ as the third element of the
framework. In particular, I was curious about whether Anthony might in
hindsight have preferred this, acknowledging the growing importance and use
of institutional theory in accounting research. While the authors
acknowledge the limitations of adhering too literally to the framework in
light of indistinct conceptual boundaries (i.e., ‘‘to what extent is
accounting itself an ‘institution’?’’, p. 2), they nonetheless argue
convincingly for the usefulness of the framework in understanding a
significant body of research that has been published in journals such as:
AOS, Critical Perspectives on Accounting, and Accounting, Auditing and
Accountability Journal. In Chapter 1, the editors provide a nice history and
synthesis of these works. Although Anthony clearly played a major part in
the genesis and intellectual development of the literature, the chapter is
not a biographical sketch. It locates Anthony’s contributions in relation to
other management scholars and in the context of current events and
influential practitioner-led studies.
The editors conclude their history by reiterating
Anthony’s concern: that much of the current-day neglect of accounting by
social scientists stems from new modes of accountability in higher education
that have been made operational through simplified, standardized performance
metrics. Their hope is that these essays from ‘‘within and beyond’’ the
discipline of accounting will reinvigorate research on accounting in its
social context, and thereby address Anthony’s apprehension that ‘‘the only
consumers of accounting research are other accounting researchers’’ (p. 22).
Opting for a mix of ‘‘depth’’ strategy and ‘‘breadth’’ strategy for this
review, I have selected one of the 17 contributed chapters for extensive
comment and two others for brief summary.
Continued in article
DALE L. FLESHER,
Gerhard
G. Mueller: Father of International Accounting Education
(Bingley, U.K.: Emerald Group Publishing Limited,
2010, ISBN 978-0-85724-333-1, pp. x, 222).
Scroll Down to Page 1838
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A biography, the title of which anoints its subject
as the ‘‘Father of International Accounting Education,’’ raises two
immediate questions. First, what exactly is international accounting and,
second, what does it mean to be a ‘‘father’’ of an educational discipline?
The first question arises because it is not obvious
as to what is international about international accounting. After all, the
underlying concepts of accounting, like those of physics, are universal. The
principles of accounting articulated by Fr. Luca Pacioli (often referred to
as the ‘‘father of accounting’’) are no more confined to the boundaries of
Italy than are the principles of physics described by Galileo. Yet it is
doubtful that any academic physicists consider themselves specialists in
‘‘international physics.’’ ‘‘International accounting’’ is, at best, an
ill-defined sub-discipline of accounting. To many—and probably to most U.S.
accountants—international accounting is mainly a description of accounting
practices in countries other than the United States. Needless to say, that
definition would be unlikely to be embraced by our colleagues in those
‘‘other’’ countries. To others, international accounting deals primarily
with measurement and reporting issues involving currency translation and
related issues of consolidation. To still others, it pertains to the unique
problems of controlling and auditing the accounting systems of multinational
enterprises.
In his biography of Gerhard G. Mueller, Professor
Dale L. Flesher never explicitly answers that first question. Yet it is
apparent from the extraordinary length and breadth of Mueller’s publications
that international accounting incorporated almost anything that involved
entities outside of the United States. Indeed, he himself defined
international accounting as ‘‘the producing, exchanging, using, and
interpreting of accounting data across national borders’’ (p. 45).
As for the second question, what it means to be the
‘‘father’’ of international accounting education, Flesher concedes that
Mueller was certainly not its biological father; others both wrote about and
taught international accounting prior to him. But he leaves no doubt that
Mueller adopted the discipline and can take credit for nurturing it up to
adulthood.
. . .
Book review author Mike Granof states the following on Page 1841:
Flesher’s treatise leaves one significant question unanswered: Why has
Gerhard Mueller not yet been elected to the Accounting Hall of Fame?
Continued in article
JAMES D. ROSENFELD (editor), The Selected Works of George J. Benston: Volume
2, Accounting and Finance (New York, NY: Oxford University Press, 2010, ISBN:
978- 0-19-538902-9, Vol. 2, pp. xviii, 426).
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This volume, which is edited by James D. Rosenfeld,
the late George Benston’s friend and colleague at Emory University, consists
of 16 articles arranged consecutively in two parts: nine accounting articles
and seven finance articles. I will discuss all nine accounting articles in
chronological order. I will then discuss two accounting articles that were
omitted from the volume that were more highly cited than eight of the nine
accounting articles included in the volume (source of citations:
scholar.google.com as of February 10, 2011). Before beginning my discussion
of the 11 articles, I opine that George Benston (hereafter, George) was one
of the few and last Renaissance men of our profession, making numerous
contributions to the accounting, finance, economics, and banking
literatures.1 Indeed, while I focus on his contributions to accounting,
George was best known for his expertise in banking, an area in which he was
often cited by The Economist. As additional evidence of his expertise in
banking, George was an Associate Editor of The Journal of Money, Credit, and
Banking.2
Volume 1 of this two-volume collection covers
George’s contributions to banking and financial services.
Continued in article
Jensen Comment
It saddens me that my friends Tony Hopwood and George Benston passed on. It
thrills me, however, to still correspond with Gary Mueller. I was honored to
serve on the Executive Committee when Gary was President of the American
Accounting Association. The task fell upon Gary's shoulders to set up the
Accounting Education Change Commission that received $4 million from the Big
Eight to fund change in accounting education. We chose Gary's then colleague
Gary Sundem to serve as CEO of the AECC.
Before I begin, I would like to mention an old theory case that I taught
years ago that for students concisely explains the difference between financial
statements prepared under historical costs, price-level adjustments, replacement
costs, and exit values ---
www.cs.trinity.edu/~rjensen/temp/wtdcase2a.xls
This was almost always considered one of the best take aways from my theory
course even though students worked on it the first day of the course.
"Is Inflation a Problem for Accounting?" by David Albrecht, The
Summa, September 25, 2011 ---
http://profalbrecht.wordpress.com/2011/09/25/is-inflation-a-problem-for-accounting/
Firstly, I would like to thank David for making both a timely and scholarly
blog posting. I agree with David's criticisms of the FASB and IASB for not
requiring PLA statements at lower trigger points for inflation.
One article that I really like concerning inflation is
"Inflation and Delusion," by Edward Jaffe, dshort.com, May 26,
2010 ---
http://dshort.com/articles/guest/inflation-and-delusion.html
This ties directly into David's blog post.
I don't think David's reference to the defunct FAS 33 has much bearing other
than to point out that price level adjustments (general or current cost) are not
worth much if they are poorly done to save the cost of generating more accurate
numbers. So much leeway for error was allowed in FAS 33 that I'm in sympathy
with analysts who purportedly ignored the supplementary FAS 133 statements in
annual reports ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Consideration must also be given to the fact that in nations having higher
inflation contracts are generally written/indexed to make inflation no longer
such a big risk in terms of the contracts themselves. Of course changes in
inflation rates might indirectly affect business revenues and costs apart from
the inflation adjustments in contracts. For example, inflation rates can affect
export and imports even if they do not affect demand deposits in banks.
And students should definitely keep in mind that neither general PLA
adjustments nor replacement cost adjustments are surrogates for "value"
accounting. Both are simply adjustments to historical costs to allow for changes
in either general purchasing power or relative price changes in different
economic sectors.
The real economic problem becomes when longer-term contracts are not indexed
to inflation as often happens when inflation is considered relatively modest (as
in the U.S.) rather than extreme (as in Israel). Present FASB accounting
standards are not doing a good job in isolating monetary-item gains and losses.
Don't forget to take a look at
www.cs.trinity.edu/~rjensen/temp/wtdcase2a.xls
"Mortgage Defaults Drive 88% Jump in Suspected Fraud," Journal of
Accountancy, September 28, 2011 ---
http://www.journalofaccountancy.com/Web/20114624.htm
From The Economist, October 8-14, Page 12
America's Justice Department and New York State's
attorney general filed separate civil lawsuits against BNY Mellon for
allegedly defrauding clients by systematically using the foreign exchange
rate on transactions that best suited the bank.
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Deloitte Touche sued for $7.6bn in mortgage fraud case," BBC,
September 26, 2011 ---
http://www.bbc.co.uk/news/business-15069976
Thank you Hossein Nouri for the heads up.
Giant accounting and consulting firm Deloitte
Touche Tohmatsu has been accused of failing to detect fraud during audits of
a mortgage firm which failed during the US housing crash.
A trust overseeing now-defunct Taylor, Bean &
Whitaker (TBW), and one of the company's subsidiaries, have filed complaints
in a Florida court.
They are claiming a combined $7.6bn (£4.9bn) in
losses.
TBW shut down after federal agents raided its
headquarters in August 2009.
Deloitte spokesman Jonathan Gandal said the firm
rejected the court claims, and that they were "utterly without merit". 'Red
flags'
The fraud at Ocala-based TBW began in 2002 and
continued until its collapse two years ago.
Seven TBW executives were convicted of federal
criminal charges, with former chairman Lee B Farkas sentenced to 30 years in
jail.
The lawsuits claim Deloitte's certifications of the
TBW books were essential in giving it the appearance of a legitimate
mortgage business.
However the lawsuits say TBW was selling false or
highly overvalued mortgages, mis-stating its liabilities and hiding
overdrawn bank accounts.
"They [Deloitte Touche Tohmatsu] certainly did not
do their job," said attorney Steven Thomas, who represents those suing
Deloitte.
"This is one of those cases where the red flags are
staring you in the face, and you've got to do a lot, and they did not."
Bob Jensen's threads on Deloitte are at
http://www.trinity.edu/rjensen/Fraud001.htm
If audit reform swaggered into a Luckenbach, Texas saloon, it would be "all
hat and no horse"
The ladies of the night would die laughing at that "itty-bitty thang" that
walked in
And it would need a ladder to peek over the top of the spittoon
"Recent Comments On European and U.S. Audit Reform," by Francine
McKenna, re:TheAuditors, October 4, 2011 ---
http://retheauditors.com/2011/10/04/recent-comments-on-european-and-u-s-audit-reform/
The topic of audit industry reform is hot again.
OK, that’s relative to where you stand on what’s hot. But in the world of
legal and regulatory compliance and auditors the only thing hotter would be
a significant development in the
New York Attorney General’s case against Ernst & Young.
Here in the U.S. the PCAOB has been busy. I’ll
give them – mostly Chairman James Doty and the Investor Advisory Group led
by Board Member Steve Harris – credit for that. The Investor Advisory Group
– rather, the boldest amongst them – recently sent
a letter to the PCAOB to provide comments on the
PCAOB’s June 21, 2011 Concept Release entitled Possible Revisions to
PCAOB Standards Related to Reports on Audited Financial Statements and
Related Amendments to PCAOB Standards.
It is worth noting that a number of other
parties agree that the current form of the auditor’s report fails to
meet the legitimate needs of investors. First, the U.S. Treasury
Advisory Committee on the Auditing Profession (ACAP) called for the
PCAOB to undertake a standard-setting initiative to consider
improvements to the standard audit report. The ACAP members support “…
improving the content of the auditor’s report beyond the current
pass/fail model to include a more relevant discussion about the audit of
the financial statements.”
Second, surveys conducted by the CFA Institute
in 2008 and 2010 indicate that research analysts want auditors to
communicate more information in their reports.
Finally, even leaders of the accounting
profession have acknowledged that the audit report needs to become more
relevant. In testimony before ACAP, Dennis Nally, Chairman of PwC
International stated, “It’s not difficult to imagine a world where the …
trend to fair value measurement — lead one to consider whether it is
necessary to change the content of the auditor’s report to be more
relevant to the capital markets and its various stakeholders.”
Finally, leaders of the accounting profession
have previously stated that changes to the audit report should reflect
investor preferences. In their 2006 White Paper, the CEOs of the six
largest accounting firms stated, “The new (reporting) model should be
driven by the wants of investors and other users of company
information …” (their emphasis).
Before we turn to a discussion of the IAG
investor survey, we believe it is important to underscore the
fundamental but often overlooked fact that the issuer’s investors,
not its audit committee or management team or the company itself, are
the auditor’s client. It is therefore not only appropriate, but
essential, that investors’ views and preferences take center stage as
the PCAOB considers possible changes to the format and content of the
audit report.
In the meantime, I’ve written two articles about
the proposals on auditor regulation before the European Commission.
In Forbes, I told you not to count on
Europe to reform the audit model or auditors, in general.
The audit industry is reportedly under siege in
Europe and on the verge of being broken up, restrained, and rotated
until all the good profit is spun out.
This is neither a foregone conclusion nor
highly likely.
The European Commission’s internal markets
commissioner Michel Barnier is talking tough, but the rhetoric should be
no surprise to those who have been following the European response to
the financial crisis closely…
Please read the rest at Forbes.com,
“Don’t Count On Europe To Reform Auditors And Accounting”.
In American Banker, I focused on the
impact of auditor reforms on financial services. Why is the European
Commission taking such strong action now? Why is the U.S. lagging so far
behind?
The clamor for accountability from the auditors
for financial crisis failures and losses has been much louder, much
stronger, and going on much longer in the U.K. and Europe, than in the
United States. Barnier’s most dramatic proposals are viewed by most
commenters as a reaction to the bank failures. “Auditors play an
essential role in financial markets: financial actors need to be able to
trust their statements,” Barnier told the Financial
Times. “There are weaknesses in the way
the audit sector works today. The crisis highlighted them.”
There’s is a concern on both sides of the
Atlantic over long-standing auditor relationships.
The average auditor tenure for the largest 100
U.S. companies by market cap is 28 years. The U.S. accounting regulator,
the PCAOB, highlighted the auditor tenure trap in its recent Concept
Release on Auditor Independence and Auditor Rotation. According to The
Independent, quoting a recent House of
Lords report, only one of the FTSE 100 index’s members uses a non-Big
Four firm and the average relationship lasts 48 years. Some of the U.S.
bailout recipients — General Motors, AIG, Goldman Sachs, Citigroup — and
crisis failure Lehman had as
long or longer relationships with their
auditors…
Please read the rest at American Banker,
“Bank Debacles Drive Europe to Raise the Bar on Audits”.
Continued in article
Bob Jensen's threads on
auditor professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001c.htm
The Fed Audit
Socialist Bernie Sanders is probably my least favorite senator alongside Barbara
(mam) Boxer. But he does make some important revelations in the posting below.
The first ever GAO audit of the Federal Reserve was conducted in early 2011
due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed
last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent
Senator, led the charge for a Federal Reserve audit in the Senate, but watered
down the original language of the house bill (HR1207), so that a complete audit
would not be carried out. Ben Bernanke, Alan Greenspan, and various other
bankers vehemently opposed the audit and lied to Congress about the effects an
audit would have on markets. Nevertheless, the results of the first audit in the
Federal Reserve nearly 100 year history were posted on Senator Sanders webpage
in July.
The list of
institutions that received the most money from the Federal Reserve can be found
on page 131 of the GAO Audit and is as follows:
Citigroup: $2.5
trillion($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America : $1.344 trillion ($1,344,000,000,000)
Barclays PLC ( United Kingdom ): $868 billion* ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank ( Germany ): $354 billion ($354,000,000,000)
UBS ( Switzerland ): $287 billion ($287,000,000,000)
Credit Suisse ( Switzerland ): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland ( United Kingdom ): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)
"The Fed Audit," by Bernie Sanders, Independent Senator from Vermont, July
21, 2011 ---
http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3
The first top-to-bottom audit of the Federal
Reserve uncovered eye-popping new details about how the U.S. provided a
whopping $16 trillion in secret loans to bail out American and foreign banks
and businesses during the worst economic crisis since the Great Depression.
An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one
year ago this week directed the Government
Accountability Office to conduct the study. "As a
result of this audit, we now know that the Federal Reserve provided more
than $16 trillion in total financial assistance to some of the largest
financial institutions and corporations in the United States and throughout
the world," said Sanders. "This is a clear case of socialism for the rich
and rugged, you're-on-your-own individualism for everyone else."
Among the investigation's key findings is that the
Fed unilaterally provided trillions of dollars in financial assistance to
foreign banks and corporations from South Korea to Scotland, according to
the GAO report. "No agency of the United States government should be allowed
to bailout a foreign bank or corporation without the direct approval of
Congress and the president," Sanders said.
The non-partisan, investigative arm of Congress
also determined that the Fed lacks a comprehensive system to deal with
conflicts of interest, despite the serious potential for abuse. In fact,
according to the report, the Fed provided conflict of interest waivers to
employees and private contractors so they could keep investments in the same
financial institutions and corporations that were given emergency loans.
For example, the CEO of JP Morgan Chase served on
the New York Fed's board of directors at the same time that his bank
received more than $390 billion in financial assistance from the Fed.
Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's
emergency lending programs.
In another disturbing finding, the GAO said that on
Sept. 19, 2008, William Dudley, who is now the New York Fed president, was
granted a waiver to let him keep investments in AIG and General Electric at
the same time AIG and GE were given bailout funds. One reason the Fed did
not make Dudley sell his holdings, according to the audit, was that it might
have created the appearance of a conflict of interest.
To Sanders, the conclusion is simple. "No one who
works for a firm receiving direct financial assistance from the Fed should
be allowed to sit on the Fed's board of directors or be employed by the
Fed," he said.
The investigation also revealed that the Fed
outsourced most of its emergency lending programs to private contractors,
many of which also were recipients of extremely low-interest and then-secret
loans.
The Fed outsourced virtually all of the operations
of their emergency lending programs to private contractors like JP Morgan
Chase, Morgan Stanley, and Wells Fargo. The same firms also received
trillions of dollars in Fed loans at near-zero interest rates. Altogether
some two-thirds of the contracts that the Fed awarded to manage its
emergency lending programs were no-bid contracts. Morgan Stanley was given
the largest no-bid contract worth $108.4 million to help manage the Fed
bailout of AIG.
A more detailed GAO investigation into potential
conflicts of interest at the Fed is due on Oct. 18, but Sanders said one
thing already is abundantly clear. "The Federal Reserve must be reformed to
serve the needs of working families, not just CEOs on Wall Street."
To read the GAO report, click here
http://sanders.senate.gov/imo/media/doc/GAO Fed Investigation.pdf
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
The IFRS Version of Unconsolidated Special Purpose Entities (SPEs, SPVs,
VIEs)
"Investment Entities proposals could have far-reaching impacts," Australian
Accounting Standards Board, October 4, 2011 ---
http://www.aasb.gov.au/News/Media-releases.aspx?newsID=58270
In September 2011 the Australian Accounting
Standards Board (AASB) issued
ED 220, which
incorporates International Accounting Standards Board (IASB) ED/2011/4
Investment Entities.
ED/2011/4 proposes that investment entities meeting
particular criteria should be required to account for investments in their
controlled entities at fair value through profit or loss, rather than by
consolidating them. ED/2011/4 also proposes changing the availability of
the fair value option for investments in associates and joint ventures by
limiting the measurement of associates and joint ventures at fair value
through profit or loss to investment entities only.
The AASB Chairman, Kevin Stevenson expressed a
number of concerns about the proposals.
It is unusual for a member of the AASB such as
myself to express concerns about an exposure draft before submissions are
received. But I do so on this occasion because this draft raises
fundamental questions about existing requirements. In my view it could lead
to increased use of off-balance-sheet accounting, see us depart from the
concept of control and lead to unjustified changes in requirements
accounting for associates and joint ventures. The exposure draft seeks to
include in IFRS accounting practices previously used in North America and
would be a step back from the universal consolidation model that we have
followed. In this regard, I note that three IASB members have expressed
alternative views on ED/2011/4.
Until now our stance has been that if an entity controls one or more
entities, it should present consolidated financial statements because they
are most likely to provide useful information about the economic entity to
the greatest number of users. The exposure draft would replace that
information with the fair value for the investment in a certain type of
subsidiary. Will that be an improvement in Australian reporting? If fair
value of the investment provides information, would not a better answer be
disclosure of the fair value of the investment as well as consolidation?
Even if the proposals have merit, is the definition of an investment entity
robust enough to avoid exploitation?
Some might find the proposals superficially appealing because they might
reduce the task of financial reporting for a group, but respondents need to
be aware that the proposals would, as well as raising the spectre of
creative structuring, also change the exemptions from applying equity
accounting. Some entities that presently elect to fair value their
investments in associates and joint ventures would find they can no longer
do so, and this would potentially include, for example, insurers with assets
held to back investment-linked insurance contracts.
The AASB needs to hear very clearly from constituents whether this proposed
standard is in the interest of Australian reporting and if it is not
considered to be, we need to respond strongly to the IASB. I would
encourage very active consideration of the proposals.
Comments are due to the AASB by 30 November 2011 and to the IASB by 5
January 2012 and Australian constituents are strongly encouraged to
carefully review the proposals and make their views known to the AASB and
the IASB.
Background
ED/2011/4 proposes ‘investment entities’ be
required to measure investments in controlled entities at fair value through
profit or loss (rather than consolidate them). However, a non-investment
entity parent of an investment entity would be required to consolidate the
investment entity subsidiary and its controlled entities.
Continued in article
At the 2011 AAA Annual Meetings in Denver, former FASB Chairman Bob Herz
claims that unconsolidated Qualified SPEs was a good idea that became mired down
in atrocious implementations that included errors and fraud, thereby ruining the
concept of having such entities remain unconsolidated as long as fair values of
assets exceeded the fair values of the debts in the QSPEs. CFO Andy Fastow set
up over 3,000 unconsolidated SPEs and committed fraud by claiming Enron's own
equity shares were assets in those SPEs.
AAA members may view the Bob Herz video
Robert H. Herz—Video ---
http://commons.aaahq.org/posts/4217ebd350
What's Right and What's
Wrong With SPEs, SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Trust No one, Particularly Not Groupon's Accountants and Auditors (Ernst &
Young)
From The Wall Street Journal Weekly Accounting Review on September 30,
2011
Groupon Unsure on IPO Time
by:
Shayndi Raice and Randall Smith
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Accounting Changes and Error Corrections, Audit Report,
Auditing, Disclosure, Disclosure Requirements, Financial Accounting,
Financial Reporting, SEC, Securities and Exchange Commission
SUMMARY: This article presents financial reporting and auditing
issues stemming from the Groupon planned IPO. Groupon originally filed for
an initial public offering in June 2011. At the time, the filing contained a
measure Adjusted Consolidated Segment Operating Income that is a non-GAAP
measure of performance. The SEC at the time required the company to change
its filing to use GAAP-based measures of performance. The SEC has continued
to scrutinize the Groupon financial statements and has required the company
to report revenue based only on the net receipts to the company from sales
of its coupons after sharing proceeds with the businesses for which it makes
the coupon offers.
CLASSROOM APPLICATION: The article is useful in financial
accounting and auditing classes. Instructors of financial accounting classes
may use the article to discuss reporting of the change in measuring revenues
and related costs. Instructors of auditing classes may use the article to
discuss non-standard audit reports. Links to SEC filings are included in the
questions. The video is long; discussion of Groupon's issues stops at 5:30.
QUESTIONS:
1. (Introductory) According to the article, what accounting and
disclosure issues have delayed the initial public offering of shares of
Groupon, Inc.? What overall economic and financial factors are also
affecting this timing?
2. (Introductory) What was the problem with Groupon CEO Andrew
Mason's letter to Groupon employees? Do you think Mr. Mason intended for
this letter to be made public outside of Groupon? Should he have reasonably
expected that to happen?
3. (Advanced) What accounting change forced restatement of the
financial statements included in the Groupon IPO filing documents? You may
access information about this restatement directly at the live link included
in the online version of the article.
http://online.wsj.com/public/resources/documents/grouponrestatement20110923.pdf
4. (Introductory) According to the article, by how much was revenue
reduced due to this accounting change?
5. (Introductory) Access the full filing of the IPO documents on
the SEC's web site at
http://sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm
Proceed to the Consolidated Statements of Operations on page F-5. How are
these comparative statements presented to alert readers about the revenue
measurement issue?
6. (Advanced) Move back to examine the consolidated balance sheets
on page F-4. Do you think this accounting change for revenue measurement
affected net income as previously reported? Support your answer.
7. (Advanced) Proceed to footnote 2 on p. F-8. Does the disclosure
confirm your answer? Summarize the overall impact of these accounting
changes as described in this footnote.
8. (Advanced) What type of audit report has been issued on the
Groupon financial statements in this IPO filing? Explain the wording and
dating of the report that is required to fulfill requirements resulting from
the circumstances of these financial statements.
Reviewed By: Judy Beckman, University of Rhode Island
Groupon's Fast-growing Business Faces a Churning Point
by:
Rolfe Winkler
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Cost Accounting, Cost Management, Disclosure, Financial
Statement Analysis, Managerial Accounting
SUMMARY: This article focuses on financial statement analysis of
the Groupon IPO filing documents including some references to cost measures.
"Forget the snappy 'adjusted consolidated segment operating income.' That
profit measure...was rightly rejected by regulators. It is the complete
absence of details on subscriber churn that is more problematic. How often
are folks unsubscribing from Groupon's daily emails?...The issue is
important since...the cost of adding new subscribers has increased quickly."
CLASSROOM APPLICATION: The article may be used in a financial
statement analysis or managerial accounting class.
QUESTIONS:
1. (Introductory) What is the overall concern about Groupon's
business condition that is expressed in this article?
2. (Advanced) The author states that the cost of adding new
subscribers has increased. How was this cost determined? How does this
calculation make the cost assessment comparable from one period to the next?
3. (Advanced) What does Groupon CEO Andrew Mason say about the
company's cost of acquiring customers? What income statement expense item
shows this cost? How does the increasing unit cost discussed in answer to
question 2 above bring the CEO's assertion into question?
4. (Advanced) In general, how does the author of this assess the
quality of the filing by Groupon for its initial public offering? Why should
that assessment impact the thoughts of an investor considering buying the
Groupon stock when it is offered?
Reviewed By: Judy Beckman, University of Rhode Island
"Groupon: Comedy or Drama?" by Grumpy Old Accountants Anthony H.
Catanach Jr. and J. Edward Ketz, SmartPros, July 2011 ---
http://accounting.smartpros.com/x72233.xml
"Trust No one, Particularly Not Groupon's Accountants," by Anthony H.
Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, August 24,
2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/
"Is Groupon "Cooking Its Books?" by Grumpy Old Accountants Anthony
H. Catanach Jr. and J. Edward Ketz, SmartPros, September 2011 ---
http://accounting.smartpros.com/x72233.xml
Teaching Case
When Rosie Scenario waved goodbye "Adjusted Consolidated Segment Operating
Income"
From The Wall Street Journal Weekly Accounting Review on August 19,
2011
Groupon Bows to Pressure
by:
Shayndi Raice and Lynn Cowan
Aug 11, 2011
Click here to view the full article on WSJ.com
TOPICS: Advanced Financial Accounting, SEC, Securities and Exchange
Commission, Segment Analysis
SUMMARY: In filing its prospectus for its initial public offering
(IPO), Groupon has removed from its documents "...an unconventional
accounting measurement that had attracted scrutiny from securities
regulators [adjusted consolidated segment operating income]. The unusual
measure, which the e-commerce had invented, paints a more robust picture of
its performance. Removal of the measure was in response to pressure from the
Securities and Exchange Commission...."
CLASSROOM APPLICATION: The article is useful to introduce segment
reporting and the weaknesses of the required management reporting approach.
QUESTIONS:
1. (Introductory) What is Groupon's business model? How does it
generate revenues? What are its costs? Hint, to answer this question you may
access the Groupon, Inc. Form S-1 Registration Statement filed on June 2,
011 available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm
2. (Advanced) Summarize the reporting that must be provided for any
business's operating segments. In your answer, provide a reference to
authoritative accounting literature.
3. (Advanced) Why must the amounts disclosed by operating segments
be reconciled to consolidated totals shown on the primary financial
statements for an entire company?
4. (Advanced) Access the Groupon, Inc. Form S-1 Registration
Statement filed on June 2, 011 and proceed to the company's financial
statements, available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data
Alternatively, proceed from the registration statement, then click on Table
of Contents, then Selected Consolidated Financial and Other Data. Explain
what Groupon calls "adjusted consolidated segment operating income" (ACSOI).
What operating segments does Groupon, Inc., show?
5. (Introductory) Why is Groupon's "ACSOI" considered to be a
"non-GAAP financial measure"?
6. (Advanced) How is it possible that this measure of operating
performance could be considered to comply with U.S. GAAP requirements? Base
your answer on your understanding of the need to reconcile amounts disclosed
by operating segments to the company's consolidated totals. If it is
accessible to you, the second related article in CFO Journal may help answer
this question.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Groupon's Accounting Lingo Gets Scrutiny
by Shayndi Raice and Nick Wingfield
Jul 28, 2011
Page: A1
CFO Report: Operating Segments Remain Accounting Gray Area
by Emily Chasan
Aug 15, 2011
Page: CFO
"Groupon Bows to Pressure," by: Shayndi Raice and Lynn Cowan, The Wall
Street Journal, August 11, 2011 ---
https://mail.google.com/mail/?shva=1#inbox/131e06c48071898b
Groupon Inc. removed from its initial public
offering documents an unconventional accounting measurement that had
attracted scrutiny from securities regulators.
The unusual measure, which the e-commerce had
invented, paints a more robust picture of its performance. Removal of the
measure was in response to pressure from the Securities and Exchange
Commission, a person familiar with the matter said.
In revised documents filed Wednesday with the SEC,
the company removed the controversial measure, which had been highlighted in
the first three pages of its previous filing. But Groupon's chief executive
defended the term Wednesday. [GROUPON] Getty Images
Groupon, headquarters above, expects to raise about
$750 million.
Groupon had highlighted something it called
"adjusted consolidated segment operating income", or ACSOI. The measurement,
which doesn't include subscriber-acquisitions expenses such as marketing
costs, doesn't conform to generally accepted accounting principles.
Investors and analysts have said ACSOI draws
attention away from Groupon's marketing spending, which is causing big net
losses.
The company also disclosed Wednesday that its loss
more than doubled in the second quarter from a year ago, even as revenue
increased more than ten times.
By leaving ACSOI out of its income statements, the
company hopes to avoid further scrutiny from the SEC, the person familiar
with the matter said. The commission declined comment.
Groupon in June reported ACSOI of $60.6 million for
last year and $81.6 million for the first quarter of 2011. Under generally
accepted accounting principles, the company generated operating losses of
$420.3 million and $117.1 million during those periods.
Wednesday's filing included a letter from Groupon
Chief Executive Andrew Mason defending ACSOI. The company excludes marketing
expenses related to subscriber acquisition because "they are an up-front
investment to acquire new subscribers that we expect to end when this period
of rapid expansion in our subscriber base concludes and we determine that
the returns on such investment are no longer attractive," the letter said.
There was no mention of when that expansion will
end, but the person familiar with the matter said the company reevaluates
the figures weekly.
Groupon said it spent $345.1 million on online
marketing initiatives to acquire subscribers in the first half and that it
expects "to continue to expend significant amounts to acquire additional
subscribers."
The latest SEC filing also contains new financial
data. Groupon on Wednesday reported second-quarter revenue of $878 million,
up 36% from the first quarter. While the company's growth is still rapid,
the pace has slowed. Groupon's revenue jumped 63% in the first quarter from
the fourth.
The company's second-quarter loss was $102.7
million, flat sequentially and wider than the year-earlier loss of $35.9
million.
Groupon expects to raise about $750 million in a
mid-September IPO that could value the company at $20 billion.
The path to going public hasn't been easy. The
company had to file an amendment to its original SEC filing after a Groupon
executive told Bloomberg News the company would be "wildly profitable" just
three days after its IPO filing. Speaking publicly about the financial
projections of a company that has filed to go public is barred by SEC
regulations. Groupon said the comments weren't intended for publication.
Continued in article
"Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter,
Townhall, September 2011 ---
http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations
Jensen Comment
In the 1990s, high tech companies resorted to various accounting gimmicks to
increase the price and demand for their equity shares ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Bob Jensen's threads about cooking the books
---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
September 29, 2011 message from Barbara Scofield
One of the 2011 MacArthur Fellows is a historian,
one of whose specialties is the history of accounting:
Barbara W. Scofield, PhD, CPA
Chair of Graduate Business Studies
Professor of Accounting
The University of Texas of the Permian Basin
4901 E. University Dr.
Odessa, TX 79762
Jacob Soll, European Historian ---
http://www.macfound.org/site/c.lkLXJ8MQKrH/b.7731011/k.1A2A/Jacob_Soll.htm
Jacob Soll is a historian whose meticulously
researched studies of early modern Europe are shedding new light on the
origins of the modern state. Drawing on intellectual, political, cultural,
and institutional history, Soll explores the development of political
thought and criticism in relation to governance from the sixteenth to the
eighteenth centuries in Western Europe. Soll's first book, Publishing
"The Prince" (2005), examines the role of commentaries, editions, and
translations of Machiavelli produced by the previously little-studied figure
Amelot de La Houssaye (1634-1706), who became the most influential writer on
secular politics during the reign of Louis XIV. Grounded in extensive
analysis of archival, manuscript, and early printed sources, Soll shows how
Amelot and his publishers arranged prefaces, columns, and footnotes in a
manner that transformed established works, imbuing books previously
considered as supporting royal power with an alternate, even revolutionary,
political message. In The Information Master (2009), he
investigates the formation of a state-information gathering and classifying
network by Louis XIV's chief minister, Jean-Baptiste Colbert (1619-1683),
revealing that Colbert's passion for information was both a means of control
and a medium for his own political advancement: his systematic and
encyclopedic information collection served to strengthen and uphold Louis
XIV's absolute rule. With these and other projects in progress — including
an intellectual and practical history of accounting and its role in
governance in the modern world and a study of the composition of library
catalogues during the Enlightenment — Soll is opening up new fields of
inquiry and elucidating how modern governments came into being.
Jacob Soll received a B.A. (1991) from the
University of Iowa, a D.E.A. (1993) from the École des Hautes Études en
Sciences Sociales, and a Ph.D. (1998) from Magdalene College, Cambridge
University. He has been affiliated with Rutgers University, Camden, since
1999, where he is currently a professor in the Department of History.
Also see
The
information master: Jean-Baptiste Colbert's secret state intelligence system -
By Jacob Soll ---
http://ideas.repec.org/a/bla/ehsrev/v63y2010i1p261-262.html
Or go directly to
The Economic History Review
Volume 63, Issue 1, pages 261–262, February 2010
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0289.2009.00511_20.x/full
Bob Jensen's thread on clawbacks in history followed by a new blog posting
by Francine
From Encylopedia Britannica ---
http://www.britannica.com/EBchecked/topic/124928/Jean-Baptiste-Colbert
(which in part provides early history of clawback return of gains to government,
something the SEC is avoiding in the early 21st Century fraud convictions)
Also note the stress on manufacturing regulation and quality controls.
Colbert was born of a merchant family. After
holding various administrative posts, his great opportunity came in 1651,
when Cardinal
Mazarin, the dominant political figure in France,
was forced to leave Paris and take refuge in a provincial city—an episode in
the Fronde, a period (1648–53) of struggle between the crown and the French
parlement. Colbert became Mazarin’s agent in Paris, keeping him
abreast of the news and looking after his personal affairs. When Mazarin
returned to power, he made Colbert his personal assistant and helped him
purchase profitable appointments for both himself and his family. Colbert
became wealthy; he also acquired the barony of Seignelay. On his deathbed,
Mazarin recommended him to
Louis XIV, who soon gave Colbert his confidence.
Thenceforth Colbert dedicated his enormous capacity for work to serving the
King both in his private affairs and in the
general administration of the kingdom.
The struggle with Fouquet.
For 25 years Colbert was to be concerned with the
economic reconstruction of France. The first necessity was to bring order
into the chaotic methods of financial administration that were then under
the direction of
Nicolas Fouquet, the immensely powerful
surintendant des finances. Colbert destroyed Fouquet’s reputation with
the King, revealing irregularities in his accounts and denouncing the
financial operations by which Fouquet had enriched himself. The latter’s
fate was sealed when he made the mistake of receiving the King at his
magnificent chateau at Vaux-le-Vicomte; the Lucullan festivities, displaying
how much wealth Fouquet had amassed at the expense of the state, infuriated
Louis. The King subsequently had him arrested. The criminal proceedings
against him lasted three years and excited great public interest. Colbert,
without any rightful standing in the case, interfered in the trial and made
it his personal affair because he wanted to succeed Fouquet as finance
minister. The trial itself was a parody of justice. Fouquet was sent to
prison, where he spent the remaining 15 years of his life. The
surintendance was replaced by a council of finance, of which Colbert
became the dominant member with the title of intendant until, in 1665, he
became controller general.
Financiers and
tax farmers had made enormous profits from
loansand advances to the state treasury, and Colbert established tribunals
to make them give back (clawbacks)
some of their gains. This was well received by
public opinion, which held the financiers
responsible for all difficulties; it also lightened the
public debt, which
was further reduced by the repudiation of some
government bonds and the repayment of others
without interest. Private fortunes suffered, but no disturbances ensued, and
the King’s credit was restored.
Financial and economic affairs.
Colbert’s next efforts were directed to reforming
the chaotic system of taxation, a heritage of medieval times. The King
derived the major part of his revenue from a tax called the
taille, levied in some districts on individuals
and in other districts on land and businesses. In some districts the taille
was apportioned and collected by royal officials; in others it was voted by
the representatives of the province. Many persons, including clergy and
nobles, were exempt from it altogether. Colbert undertook to levy the taille
on all who were properly liable for it and so initiated a review of titles
of nobility in order to expose those who were
claiming
exemption falsely; he also tried to
make the tax less oppressive by a fairer distribution. He reduced the total
amount of it but insisted on payment in full over a reasonable period of
time. He took care to suppress many abuses of collection (confiscation of
defaulters’ property, seizure of peasants’ livestock or bedding,
imprisonment of collectors who had not been able to produce the due sums in
time). These reforms and the close supervision of the officials concerned
brought large sums into the treasury. Other taxes were increased, and the
tariff system was revised in 1664 as part of a system of protection. The
special dues that existed in the various provinces could not be swept away,
but a measure of uniformity was obtained in central France.
Colbert devoted endless energy to the reorganization
of industry and commerce. He believed that in order to increase French power
it would be essential to increase France’s share of
international trade and in particular to reduce
the commercial hegemony of the Dutch. This necessitated not only the
production of high-quality goods that could compete with foreign products
abroad but also the building up of a merchant fleet to carry them. Colbert
encouraged foreign workers to bring their trade skills to France. He gave
privileges to a number of private industries and foundedstate manufactures.
To guarantee the standard of workmanship, he made regulations for every sort
of manufacture and imposed severe punishments (fines and the pillory) for
counterfeiting and shortcomings. He encouraged the formation of companies to
build ships and tried to obtain monopolies for French commerce abroad
through the formation of trading companies. The French East India and West
India companies, founded in 1664, were followed by others for trade with the
eastern Mediterranean and with northern Europe; but Colbert’s propaganda for
them, though cleverly conducted, failed to attract sufficient capital, and
their existence was precarious. The protection of national industry demanded
tariffs against foreign produce, and other countries replied with tariffs
against French goods. This tariff warfare was one of the chief causes of the
Dutch War of 1672–78.
Colbert’s system of control was resented by traders
and contractors, who wanted to preserve their freedom of action and to be
responsible to themselves alone. Cautious and thrifty people, moreover,
still preferred the old outlets for their
money (land, annuities, moneylending) to investing in industry. The
period, too, was one of generally falling prices throughout the world.
Colbert’s success, therefore, fell short of his expectation, but what he did
achieve seems all the greater in view of the obstacles in his way: he raised
the output of manufactures, expanded trade, set up new permanent industries,
and developed communications by road and water across France (Canal
du Midi, 1666–81).
Continued in article
Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/Theory01.htm
"A Closer Look At Clawbacks," by Francine Mckenna, re:TheAuditors,
October 23, 2011 ---
http://retheauditors.com/2011/10/23/a-closer-look-at-clawbacks/
On September 11, 2011, The New York Times
published,
“Clawbacks Without Claws,” by Gretchen Morgenson.
The article meant to highlight a lackluster enforcement record by the
Securities and Exchange Commission (SEC) on executive pay “clawbacks”. Under
limited circumstances, the SEC can step in and force CEOs and CFOs to repay
unearned bonuses and incentives – something those executives are supposed to
do voluntarily if it turns out they were paid erroneously because of an
accounting error or accounting manipulation.
Section 304 of the Sarbanes-Oxley Act of 2002,
which covers clawbacks, is, on its face, a strict liability provision but
the SEC has been exercising “prosecutorial discretion” when applying the
statute.
The Dodd-Frank Act will expand the population of
those potentially liable for clawbacks and the time period used to calculate
the paybacks. The new law also drops the prerequisite under Sarbanes-Oxley
that there has to be misconduct before paybacks are expected.
I covered this, and other provisions of Dodd-Frank
that expand, retract, or revise Sarbanes-Oxley statutes, in
a recent OpEd at Boston Review.
John White,
a partner with law firm Cravath, Swaine & Moore LLP
and a former Director of the SEC’s Division of Corporation Finance, believes
the public and the media should focus on Dodd-Frank’s new Section 954
clawback provisions, not the SEC’s enforcement record under Sarbanes-Oxley:
“Dodd-Frank is much broader than SOX 304 and
it’s mandatory. All listed companies will have to have clawback policies
and enforce them. No misconduct is required — just an accounting error
and a restatement. All present and former officers are covered. This
could have a big impact and alter how incentive compensation is
structured.”
As long as there’s a mismatch between what an
executive should have earned under restated financial results and what they
got based on errors or fraud, Dodd-Frank says they’re supposed to give back
the excess to their companies. If not, the SEC can litigate to force them to
return it. Although there is no private cause of action under Section 304 –
only the SEC can bring a claim – under Dodd-Frank companies or shareholders
could potentially sue a present or former officer to recoup compensation
based on employment contracts that stipulate compliance with new mandatory
company policies and procedures.
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"A Better Way Forward for State Taxation of E-Commerce," by David S.
Gamage and Devin J. Heckman, SSRN, October 25, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1948792
Abstract:
We propose a novel solution for states that wish to
tax interstate e-commerce – based on fully and adequately compensating
remote vendors for all tax compliance costs. We argue that our proposed
solution is compatible with the Quill framework for when states can
constitutionally impose burdens on remote vendors. We argue that unlike our
proposed solution, the recent state attempts to tax interstate e-commerce
through so-called “Amazon laws” are unconstitutional, ineffective, or both.
We thus urge the states to adopt our proposed approach as the best way
forward for state taxation of interstate e-commerce.
Jensen Comment
This sounds more equitable at first blush, but it really is a complicated issue
for vendors like Amazon and LL Bean facing so many taxing jurisdictions and
having little say in the politics of states where they have no employees and
physical presence.
Firstly, it's complicated when a single decision to opt for collecting
out-of-state or out-of-country sales tax is a commitment for all customers for
all time. Online vendors will probably not choose this option on their own
accord.
Secondly, it's complicated since all the negotiating power appears to shift
from the online vendors to the state governments. State governments might set
very attractive "come on" rates of compensation that are very hard for vendors
to refuse like 50% of the sales tax collected. Then five years later after all
the software for collecting the sales taxes for 45 states and 147 other
countries is up and running, and without warning, the reimbursement becomes 40%.
then 30%, and eventually 0.00001%.
Most vendors like Amazon and LL Bean will probably see through the state
comeon tricks and will only capitulate when the U.S. Supreme Court declares that
they no longer have a choice. All it will take is one more Supreme Court
appointment by President Obama to make this a reality (in my opinion). I'm not
at all certain that state courts have the power to overturn the infamous LL Bean
case decided by the U.S. Supreme Court.
The problem for states is deciding when to have the U.S. Supreme Court take
up this vital case. I think they may be waiting for another liberal appointment
to replace a conservative U.S. Supreme Court justice. Of course there are a lot
of other cases awaiting that replacement. And with a more liberal Supreme Court
they may not have to share a penny of the collected tax with the online vendors.
"Are Claims Of Transparency All They Are Cracked Up To Be?" by Philip
J. Grossmana, Mana Komaib and Evelyne Beniec, Monash University, ISSN 1441-5429,
2011 ---
http://www.buseco.monash.edu.au/eco/research/papers/2011/2711areclaimsoftransparencygrossmankomaibenie.pdf
Abstract
The current "buzzword" among leaders is "transparency." Hardly a day goes
by that a group leader (politician, manager, or administrator) doesn’t state
that he values transparency and will provide full disclosure of his
information and actions. This project tests experimentally whether or not
leaders, when given a choice, actually reveal a preference for transparency.
Our experiment is based on a theoretical model by Komai, Stegeman, and
Hermalin (2007). Fifteen subjects are randomly assigned to five groups of
three. Each group separately participates in an investment game with three
possible return scenarios (high, average, and low) that are equally likely
to happen. Investing in the low-return scenario is not profitable to either
individual group members or the whole group. In the average-return scenario,
group well-being is maximized if all the group members invest in the
project, but full cooperation may not be achieved simply because the
dominant strategy of the individuals is to free ride on others. In the
high-return scenario full cooperation is also optimal for the group, but
subjects may or may not coordinate on full cooperation because they may fail
to coordinate their efforts with the others. We consider a leader-follower
setting. Only one member of the group (the leader) observes the scenario.
The leader moves before the rest of the group members and first decides
whether or not to invest in the project. The leader then chooses between two
information regimes: revealing his decision and the return scenario to the
rest of the group or revealing his decision but not the return scenario.
Absent any information provided by their leader, followers know only the
possible return scenarios and their likelihoods. They do not know which
scenario is assigned to their group. Given the leaders’ information choices
and investment decisions, the relevant information will be conveyed to the
followers. The followers then will separately and simultaneously decide
whether or not to invest in the project (followers do not know anything
about the different information regimes). This is realistic in many
real-world circumstances because in many business or political environments
the leaders have exclusive access to critical information and are in charge
of deciding whether or not to reveal the details of their information and
actions to their potential followers; in many circumstances it is
practically difficult for the followers to verify the real information or
the leaders’ actions.
Keywords:
Transparency, leading by example, free-riding, cooperation.
Bob Jensen's threads on standard setting controversies are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
"ACCOUNTANTS BEHAVING BADLY," by Anthony H. Catanach, Jr. and J.
Edward Ketz, Grumpy Old Accountants, October 3, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/332
Cheating is all around us. Athletics provide a
never ending series of ethical disappointments whether it be the use of
performance enhancing drugs in bicycling, baseball, and football, the bout
fixing in Sumo wrestling, or the recent NCAA rule violations by Ohio State’s
football program.
David Callahan in his controversial book
The Cheating
Culture, states:
When “everybody does it,” or imagines that
everybody does it, a cheating culture has emerged.
However, not everyone feels this way. Warren Buffet
opines on ethics and protecting reputation in the
2010 Berkshire
Hathaway Annual Report (pages 104 and 105), and
states:
Sometimes your associates will say “Everybody
else is doing it.” This rationale is almost always a bad one if it is the
main justification for a business action. It is totally unacceptable when
evaluating a moral decision. Whenever somebody offers that phrase as a
rationale, in effect they are saying that they can’t come up with a good
reason. If anyone gives this explanation, tell them to try using it with a
reporter or a judge and see how far it gets them.
But why are so many accountants cheating today?
How could this happen with the continuing education ethics hours requirement
for licensing? Aren’t accountants supposed to be our first line of defense
against financial reporting fraud? Twenty years ago Eli Mason, one of the
acknowledged leaders of the accounting profession, clearly defined the
ethical responsibilities of accountants in his CPA Credo:
- To serve the public from whom my
authority is derived.
- To serve my profession and
contribute to its institutions.
- To practice at the highest
professional level.
- To maintain an ethical posture
characteristic of a learned profession.
- To maintain my technical skills as
that the public is served with competence.
- To maintain a state of
independence at all times so that decisions are reached with
objectivity.
- To work with my colleagues – for
the practice of a profession is an experience in human behavior and
mutual respect.
This is how accountants and auditors are supposed
to behave: public service, ethics, and independence.
Unfortunately, these three key attributes appear to have been abandoned by
many in the profession.
Just look at what we have recently seen from the
senior leadership of large accounting firms?
- The
Securities and Exchange Commission charged
Deloitte’s former vice chair, Thomas P. Flanagan, with insider trading,
and violating auditor independence rules in August 2010, and
simultaneously settled. Deloitte itself sued Flanagan and received a
summary judgment in January 2010 on charges of breach of fiduciary duty,
breach of contract, common law fraud, and equitable fraud after filing
suit in November 2008.
- And if that is not bad enough, several senior
leaders from
BDO Seidman were convicted this May (2011) of
conspiracy to defraud the Internal Revenue Service, tax evasion, and
perjury related to fraudulent tax shelter schemes offered to clients.
Those convicted included charged Denis Field, who previously served as
BDO Seidman’s CEO, Chairman, head of the national tax practice, and
leader of the “Tax Solutions Group.” Robert Greisman, a tax partner in
BDO’s Chicago office previously pled guilty.
Unbelievable for accountants, but is any of this
new? No, not really, the history of accounting is filled with cases of
accountants misbehaving, but it sure does seem like it’s getting worse in
the recent past. Behind each and every one of the many recent corporate
reporting failures is a major accounting and auditing firm that has
committed “malpractice.” And it seems that despite increased scrutiny by
the press and investment community, as well as required ethics training,
these “accounting meltdowns” are becoming more frequent, and more costly to
investors.
Continued in article
Bob Jensen's threads on professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Social Accounting Links from James Martin ---
http://maaw.info/SocialAccountingLinks.htm
Bob Jensen's neglected threads on triple-bottom reporting are at
http://www.trinity.edu/rjensen/theory02.htm#TripleBottom
The iPad Decision
Some CPAs swear by the iPad, calling it an
indispensable business tool. Other CPAs believe Apple's tablet is about as
useful as a legless table. This article examines the iPad's strengths and
weaknesses, introduces the top apps and accessories, and gives guidelines for
deciding if the iPad is right for you and your business.
http://email.aicpa.org/cgi-bin15/DM/t/eit20bAne80GTt0Bpwt0Ea
"Higher-Ed Gadget-Watchers React to Amazon’s New ‘Kindle Fire’ Tablet,"
by Jeffrey R. Young, Chronicle of Higher Education, September 28, 2011
---
http://chronicle.com/blogs/wiredcampus/higher-ed-gadget-watchers-react-to-amazons-new-kindle-fire-tablet/33433?sid=wc&utm_source=wc&utm_medium=en
Today Amazon unveiled a new tablet computer, the
company’s long-awaited competitor to Apple’s iPad. Though it won’t go on
sale until November, some gadget-happy college professors and administrators
are already speculating about the impact it will have on campuses.
The big surprise in today’s announcement was the
tablet’s price: $199. That’s far less than the lowest-cost iPad, which sells
for $499. Amazon named its new gadget the Kindle Fire, and it is smaller
than the iPad, measuring about 7 inches (compared with the iPad’s 10-inch
screen), so it more easily fits in one hand. It is powered by a processor on
par with the chip in Apple’s iPad 2, and it runs a modified version of
Google’s Android-tablet operating system. Amazon’s offering is missing some
features of the iPad, though. For instance, it has no camera (there are two
on the iPad 2) and no 3G antenna (which is an option on the iPad).
Previous iPad competitors have failed to win
substantial fan bases, but the Kindle Fire has one key advantage over
previous entrants. The new tablet seamlessly links to Amazon’s extensive
marketplace of books, software apps, movies, and television shows, letting
users access content (and spend money) with a simple tap of the finger.
Many education-technology officials have been
enthusiastic about tablet computers, hoping the lightweight devices might
work better in classroom settings than do laptops. Textbook publishers
have also cheered tablet computers, hoping they
will lift e-textbook sales.
Here are some reactions by education-technology
leaders posted today on Twitter and on blogs:
- “Finally, college students have a cheaper iPad
alternative. Finally, at long last, something to appease the student
market.” —Zack Whittaker, ZD Net (reposted by Ray Schroeder, director of
the University of Illinois at Springfield’s Center for Online Learning,
Research, and Service,
on his Online Learning Update blog).
- “Great price and form factor. Will it support
PDF’s and annotations is the question.” —Jeremy D. Franklin, a graduate
student at the University of Utah studying the sociology of higher
education,
on Twitter.
- “Use of Fire for e-textbooks is an obvious
plus. Seems a little limited beyond that—a lot depends on what their
browser will do.” —Robert Talbert, a mathematician and educator
affiliated with the mathematics department at Grand Valley State
University, and
a Chronicle Network blogger,
on Twitter.
- “Kindles are going to be more common on
campuses than cheap beer… I really think it has the potential to make
tablet computing a mainstream activity on college campuses.” —Shep
McAllister,
on the blog Hack College.
Bob Jensen's threads on Tricks and Tools of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Learning Management System (LMS) ---
http://en.wikipedia.org/wiki/Learning_management_system
"Freeing the LMS," by Steve Kolowich, Inside Higher Ed, October
13, 2011 ---
http://www.insidehighered.com/news/2011/10/13/pearson_announces_free_learning_management_system
Last year, the media conglomerate Pearson
controlled a shade over 1 percent of the market for learning management
systems (LMS) among traditional colleges, according to the Campus
Computing Project.This year, Pearson is
taking aim at the other 99 percent.
In a move that could shake the e-learning
industry, the company today
unveiled a new learning management system that
colleges will be able to use for free, without having to pay any of the
licensing or maintenance costs normally associated with the technology.
Pearson’s new platform, called
OpenClass, is only in beta phase; the company does
not expect to take over the LMS market overnight. But by moving to turn the
learning management platform into a free commodity — like campus e-mail has
become for many institutions — Pearson is striking at the foundation of an
industry that currently bills colleges for hundreds of millions per year.
“I think that the announcement really marks
another, and important, nail in the coffin of the proprietary
last-generation learning management system,” says Lev Gonick, CIO of Case
Western Reserve University.
By providing complimentary customer support and
cloud-based hosting, OpenClass purports to underprice even the nominally
free open-source platforms that recently have been
gaining ground in the LMS market.
Hundreds of colleges have defected from Blackboard
-- whose full-service, proprietary platform has ruled the market for more
than a decade -- in favor of open-source alternatives that cost nothing to
license. But while the source code for these systems is free, colleges have
had to pay developers to modify the code and keep the system stable.
OpenClass can be used “absolutely for free,” says
Adrian Sannier, senior vice president of product at Pearson. “No licensing
costs, no costs for maintenance, and no costs for hosting. So this is a freehttp://www.trinity.edu/rjensen/290wp/290wp.htm
r offer than Moodle is. It’s a freer offer than any other in the space.”
Outflanking the Market
Pearson, which sells a variety of higher-education
products and services, including textbooks, e-tutoring software and online
courseware, has had
success selling its own proprietary learning
management system, LearningStudio (formerly known as eCollege), to
for-profit colleges. But the company has made fewer inroads with the much
larger nonprofit sector. With OpenClass, Sannier says Pearson is taking aim
at “traditional institutions around the country where professors are the
ones making the decisions about what’s happening in their classrooms” — a
demographic that has long been Blackboard’s stronghold.
“Our intention is to serve every corner of that
instructor-choice marketplace,” says Sannier.
Pearson says it is taking a strategic cue from
Google, which offers its cloud-based e-mail and applications suite to
colleges for free in an effort to secure “mind share” among the students and
professors who use it. Like Google with its Apps for Education — with which
Pearson has partnered for its beta launch — the media conglomerate is hoping
to use OpenClass as a loss leader that points students and professors toward
those products that the company’s higher ed division sees as the future of
its bottom line: e-textbooks, e-tutoring software, and other “digital
content” products.
Continued in article
Bob Jensen's threads on the history of Learning Management Systems (also
called Course Management Systems) ---
http://www.trinity.edu/rjensen/290wp/290wp.htm
Student Financial Aid Fraud
"Hitting Hard on Fraud," by Paul Fain, Inside Higher Ed, October
11, 2011 ---
http://www.insidehighered.com/news/2011/10/11/community_colleges_push_back_on_proposed_regulations_targeting_fraud_rings
A fast-moving effort by the U.S. Education
Department to crack down on financial aid fraud faces a common dilemma in
higher education: how to protect the integrity of government aid coffers
without harming students.
Fraud rings that use “straw students” to pilfer
federal financial aid are a growing problem, particularly in online programs
at largely open-access community colleges and for-profit institutions. But
proposed regulatory fixes, even if well-meaning, could create layers of red
tape for colleges and make it harder for some students to receive financial
aid.
“It’s a balancing act,” said Evan Montague, dean of
students for Lansing Community College. Montague said the fraud rings are a
threat, but that his college has adequate safeguards in place, thanks to a
recent upgrade. He worries that the proposed federal policies would be an
added “regulatory burden.”
The department’s Office of the Inspector General
has seen a dramatic increase in online education scams, according to a
report released last month. The crimes typically feature a ringleader and
phony students who enroll, receive federal aid and split the proceeds with
the ringleader. Community colleges may be targeted more often than
for-profits because they typically charge less in tuition, leaving more of a
leftover aid balance for thieves to pocket.
Continued in article
Jensen Comment
Much of the student financial aid fraud takes place amongst for-profit
universities operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud
But there is substantial fraud among the non-profit universities as well. One
recent example is Chicago State University that clung to students who never
passed a course.
"Chicago State Let Failing Students Stay," Inside Higher Ed, July 26,
2011 ---
http://www.insidehighered.com/news/2011/07/26/qt#266185
Chicago State University officials have been
boasting about improvements in retention rates. But an investigation by
The Chicago Tribune found that part of the
reason is that students with grade-point averages below 1.8 have been
permitted to stay on as students, in violation of university rules. Chicago
State officials say that they have now stopped the practice, which the
Tribune exposed by requesting the G.P.A.'s of a cohort of students. Some of
the students tracked had G.P.A.'s of 0.0.
Question
How does the government use fraudulent accounting to hide the cost of student
loan defaults?
"Washington's Quietest Disaster Student loan defaults are growing, and the
worst is still to come," The Wall Street Journal, September 30, 2011
---
http://online.wsj.com/article/SB10001424053111903703604576587103028334580.html#mod=djemEditorialPage_t
When critics warned about rising defaults on
government-backed student loans two years ago, the question was how quickly
taxpayers would feel the pain. The U.S. Department of Education provided
part of the answer this month when it reported that the default rate for
fiscal 2009 surged to 8.8%, up from 7% in 2008.
This rising default rate doesn't even tell the
whole story. The government allows various "income contingent" and
"income-based" repayment options, so the statistics don't count kids who
were given permission to pay less than they owed. Taxpayers shouldn't expect
relief any time soon. Thanks to policy changes in recent years and
fraudulent government accounting, the pain could be excruciating.
Readers who followed the Congressional birth of
ObamaCare in 2010 may recall that student lending was the other industry
takeover that came along for the legislative ride. Private lenders used to
originate federally guaranteed loans, but the new law required all such
loans to come directly from the feds. Combined with earlier changes that
discouraged private loans sold without a federal guarantee, the result is a
market dominated by Washington.
The 2010 changes did not happen simply because
President Obama and legislators like Rep. George Miller and Sen. Tom Harkin
distrust profit-making enterprises. The student-loan takeover also advanced
the mirage that ObamaCare would save money.
Thanks to only-in-Washington accounting, making the
Department of Education the principal banker to America's college students
created a "savings" of $68 billion over 11 years, certified by the
Congressional Budget Office. Even CBO Director Douglas Elmendorf admitted
that this estimate was bogus because CBO was forced to use federal rules
that ignored the true cost of defaults. But Mr. Miller had earlier laid the
groundwork for this fraud by killing amendments in the House that would have
required honest accounting and an audit.
Armed in 2010 with their CBO-certified "savings,"
Democrats decided they could finance a portion of ObamaCare, as well as an
expansion of Pell grants. But as Bernie Madoff could have told them, frauds
break down when enough people show up asking for their money. That's
happening already, judging by recent action in the Senate Appropriations
Committee, where lawmakers apparently realize that the federal takeover
isn't going to deliver the promised riches.
To preserve Team Obama's priority of maintaining a
maximum Pell grant of $5,550 per year and doubling the total annual funding
to $36 billion since President Obama took office, Democrats recently decided
to make student-loan borrowers pay interest on their loans for their first
six months out of college. Washington used to give the youngsters an
interest-free grace period. Taxpayers might cheer this change if the money
wasn't simply being transferred to another form of education subsidy. But it
seems almost certain to raise default rates as it puts recent grads under
increased financial pressure.
None of these programs has anything to do with
making it easier to afford college. Universities have been efficient in
pocketing the subsidies by increasing tuition after every expansion of
federal support. That's why education is a rare industry where prices have
risen even faster than health-care costs.
This is also the rare market where the recent trend
of de-leveraging doesn't apply. An August report from the Federal Reserve
Bank of New York found that Americans cut their household debt from a peak
of $12.5 trillion in the third quarter of 2008 to a recent $11.4 trillion.
Consumers have reduced their debt on houses, cars, credit cards and nearly
everything except student loans, where debt has increased 25% in the three
years.
Perhaps this is because most federal student loans
are made without regard to income, assets or credit history. Much like the
federal obsession to finance a home for every American regardless of ability
to pay, the obsession to finance higher education for every high school
student ignores inconvenient facts. These include the certainty that some of
these kids will take jobs that don't require college degrees and may not
support timely repayment.
For this school year, even the loans that pay on
time aren't necessarily winners for the taxpayer. That's because of a 2007
law that Mr. Miller and Nancy Pelosi pushed through Congress—and George W.
Bush signed—that cut interest rates on many federally backed student loans.
Stafford loans, the most common type, have been available since July at a
fixed rate of 3.4%, barely above the historically low rates at which the
Treasury is currently borrowing for the long term. The student loan rates
are scheduled to rise back to 6.8% next year. But if our spendthrift
government ends up borrowing money above 7% and lending it to kids at 6.8%,
taxpayers will suffer even before the youngsters go delinquent.
Efforts to clean up this debacle are stirring on
Capitol Hill, with House Republicans moving to limit Pell grants to students
who have a high school diploma or GED. Oklahoma Sen. Tom Coburn would go
further and have government leave the business of subsidizing the education
industry via student loans and let private lenders finance college. That may
be too radical at the moment, but it won't be if taxpayers ever figure out
how much subsidized loans will cost them
The fact is, some schools represent terrific
investments. At Caltech, financial aid recipients can expect to spend $91,250
for a degree that over 30 years will allow them to repay that investment and
out-earn a high school graduate by more than $2 million. But schools like
Caltech are the exception that proves the rule: most students would be better
off investing their college nest eggs in the S&P 500 rather than a college
education. So if you are going to choose college, it pays to choose wisely.
Louis Lavelle, Business Schools Editor Bloomberg Business Week,
April 14, 2011
"The New Math: College
Return on Investment," Bloomberg Business Week Special Report, April 2011
---
http://www.businessweek.com/bschools/special_reports/20110407college_return_on_investment.htm?link_position=link1
The Case Against College
Education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CaseAgainst
From The Wall Street Journal on October 7, 2011
U.S.-Chinese Progress on Accounting Is Dealt Setback
by:
Michael Rapoport
Oct 04, 2011
Click here to view the full article on WSJ.com
TOPICS: Auditing, Fraud, Fraudulent Financial Reporting,
International Auditing, PCAOB
SUMMARY: The Public Company Accounting Oversight Board (PCAOB) had
previously announced that negotiations to allow U.S. auditing inspectors
into Chinese accounting firms-those which audit U.S.-traded companies-would
continue with a meeting in Washington this month. The talks began in Beijing
in July and were to have continued with visitors from China's regulatory
agencies coming to Washington. "No reason was given for the delay, [but
it]...comes only a few weeks after the Securities and Exchange Commission's
move to bypass Chinese regulators and take action directly against the
Chinese arm of accounting giant Deloitte Touche Tohmatsu...." Chinese
regulators have cited concerns over maintaining sovereignty as a reason for
not allowing the U.S. regulators in for inspections. The article follows
PCAOB issuance of a Staff Audit Practice Alert No. 8, Audit Risks in Certain
Emerging Markets, on Monday, October 3, 2011. The link to this audit alert
is given below and also in the questions.
http://pcaobus.org/Standards/QandA/2011-10-03_APA_8.pdf
CLASSROOM APPLICATION: The article is useful in auditing classes to
cover the role of the PCAOB, international issues, and/or fraud concerns in
financial statement audits.
QUESTIONS:
1. (Introductory) What is the role of the Public Company Accounting
Oversight Board (PCAOB) in the U.S.? When was this organization established?
2. (Introductory) How does the PCAOB execute oversight
responsibilities over the auditing profession in the U.S?
3. (Introductory) Why does the PCAOB visit auditing firms in other
countries? What limitations does the PCAOB face in doing so in China?
4. (Advanced) Access the PCAOB Staff Audit Practice Alert issued
Monday, October 3, 2011 (http://pcaobus.org/Standards/QandA/2011-10-03_APA_8.pdf).
What is the purpose of an audit alert in general and of this audit alert in
particular?
5. (Advanced) What circumstances has the PCAOB observed that
indicate risks of fraud in an audit? From what U.S. regulatory filings has
the PCAOB observed these circumstances?
6. (Introductory) What is the auditor's responsibility for
detecting fraud in an engagement to audit financial statements? How does
this information in this practice alert help auditors to fulfill that
responsibility?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Norway and U.S. Strike Deal on Accounting Oversight
by Michael Rapoport
Sep 14, 2011
Online Exclusive
"U.S.-Chinese Progress on Accounting Is Dealt Setback," by: Michael Rapoport,
The Wall Street Journal, October 4, 2011 ---
http://online.wsj.com/article/SB10001424052970204524604576609183570744552.html?mod=djem_jiewr_AC_domainid
U.S.-Chinese negotiations to allow American
audit-firm inspectors into China suffered a setback Monday, as U.S.
regulators indicated that a planned visit to Washington by their Chinese
counterparts to continue the talks has been postponed.
Regulators previously said the Chinese were slated
to visit Washington this month for a second round of the talks, which began
in Beijing in July. The two countries are negotiating on whether to allow
inspectors from the Public Company Accounting Oversight Board, the U.S.'s
auditing regulator, into China to scrutinize the work of Chinese accounting
firms which audit U.S.-traded companies.
But dates for the meeting "are not set," a
spokeswoman for the accounting board said Monday. No new meeting date was
disclosed. "We remain hopeful that we will be able to meet with the Chinese
regulators in the near future," the spokeswoman said.
No reason was given for the delay, and officials
from the China Securities Regulatory Commission, one of the agencies that
was to have participated in the talks this month, couldn't be immediately
reached for comment.
The delay comes only a few weeks after the
Securities and Exchange Commission's move to bypass Chinese regulators and
take action directly against the Chinese arm of accounting giant Deloitte
Touche Tohmatsu to seek documents related to a former Deloitte client the
SEC is investigating.
Joseph Carcello, a University of Tennessee
professor who serves on two advisory panels for the accounting watchdog,
said he didn't know whether the delay was China's way of retaliating for the
Deloitte matter. But he said "there has been great hesitation on the part of
the Chinese to allow the PCAOB to do inspections. I think this is further
indication a resolution of this issue is not close."
Jacob Frenkel, a former SEC enforcement attorney
now in private practice, said that because the SEC had "thrown down the
gauntlet" against Deloitte, the Chinese may have decided it's better for
them not to meet in the U.S. right now. From their perspective, "this is not
a time when they want to be meeting and negotiating," he said.
An SEC spokesman declined to comment.
The accounting board's chairman, James Doty, has
made it a priority to negotiate a China-inspection agreement, saying it is
critical to protection of U.S. investors. Inspectors for the watchdog
conduct regular evaluations of accounting firms that audit companies listed
on U.S. markets, even if the firms and their clients are based overseas, but
Chinese authorities haven't allowed U.S. inspectors into China, citing
sovereignty concerns.
Continued in article
"Games in the Classroom (part 3)," by Anastasia Salter, Chronicle of
Higher Education, September 30, 2011 ---
http://chronicle.com/blogs/profhacker/games-in-the-classroom-part-3/36217?sid=wc&utm_source=wc&utm_medium=en
The challenge of finding
a game for the classroom can be difficult,
particularly when the games you’ve imagined doesn’t exist. And if you wait
for a particular challenge or topic to make its way into game form, it might
be a while. Educational games and “serious” games haven’t always kept up
with the rest of video gaming, in part because there’s no high return.
Modern game development tends towards large teams and impressive budgets,
and these resources are rarely used on explicitly educational productions.
While efforts like the
STEM Video Game Challenge provide incentives for
new learning games, and commercial titles can often be
adapted for the classroom, there’s still more
potential than games have yet reached.
But if you have a new concept for playful learning,
you can still bring it to life for your classroom. There are two ways to
start thinking about making games in the classroom: the first is to build a
game yourself, and the second is to engage students in making games as a way
to express their own understanding.
You’re probably not
a game designer, although there’s a game for that:
Gamestar Mechanic
can help you “level up” from player to designer. But
it’s also important to remember building games rarely happens alone: as with
digital humanities projects, games lend themselves to collaboration. If you
have a game design program (or even a single course) at your university or a
neighboring school, there might be an opportunity to partner your students
with them towards creating valuable content-based educational games.
Similarly, there may be other faculty who are interested in collaborating on
grant-funded projects to build new educational experiences, or collective
and expanding projects like Reacting
to the Past (which many readers cited as a
classroom game system of choice). You might also find collaborators,
inspiration and games in progress through communities such as
Gameful,
a “secret HQ for making world-changing games”–and community manager Nathan
Maton has a few things to say about
building serious games for education.
There’s also a difference between making a game or
asking your students to make a game as an expression of content for
pedagogical purposes and making a game in the industry. Even a flawed game
can provide an opportunity for learning and discussion. And your students
will often bring a wealth of their own experiences with games to the
process, offering them a chance to make new connections with your course
material.
Ready to try making games? Here are a few tools for
getting started.
- Board and card games can be a
great first project, particularly for students. Digital games are
flashy, but board and card games offer the advantages of structured play
with a lower barrier to entry. They can also be good practice for
learning the mechanics and structure of games
without getting bogged down in programming and logic. We’ve all played
some version of classroom jeopardy before, and it remains an example of
taking game-like mechanics and applying them to any content–but when
content guides the way, board games can transcend these roots.
-
Inform 7
is a modern heir to text-based games, and it’s a
free development tool that’s perfect for interpreting and building
worlds without needing visual elements. Aaron Reed’s Creating
Interactive Fiction with Inform 7 is a
thorough guide to the system. The
Voices of
Spoon River IF offers one example of literary
instruction through the form, while Nick Montfort’s
Book
and Volume demonstrates the potential for
systematic logic. There’s even the
ECG Paper Chase
IF for a meta-experience on the origin of gaming
and educational technology. (Curveship,
a newer interactive narrative platform, is less friendly to
non-programmers than Inform 7 but offers some impressive possibilities.)
-
GameMaker
(with a free
lite version)
allows for building games on two levels: at the surface is an easy to
manipulate, graphical interface for building games. Beneath that, an
advanced scripting language allows for the possibility of delving
further. The
GameMaker’s Apprentice textbook goes
step-by-step through making a variety of basic games drawn from arcade
genre standbys, many of which could serve as the basis for more creative
projects while also offering the tools to build procedural literacy and
digital skills.
-
GameSalad
is a free tool for building simple
games. While GameSalad is only available for Macs, it offers a code-free
way to create graphical games for both mobile platforms and HTML5. It’s
relatively new, and most of the educational games created for it aim at
the younger crowd of kid-friendly mobile apps, but it definitely offers
the chance for experience with logic and rapid
prototyping.
"Games in the Classroom (part 4)," by Anastasia Salter, Chronicle
of Higher Education, October 6, 2011 ---
http://chronicle.com/blogs/profhacker/games-in-the-classroom-part-4/36294?sid=wc&utm_source=wc&utm_medium=en
Throughout this series, we’ve talked about
why you might want to use games in the classroom,
how you can find them, and
how to start making your own.
But games can also inspire us to
rethink our classrooms at a structural level, and
particularly as sites for collaboration and playful learning that can extend
long beyond a single lesson plan. Game designers are pointing out the
similarities between games and the classroom.
Extra Credits, a video series by game designers
taking a deeper look at the form, recently did an episode on
Gamifying Education that provides a great starting
point for a conversation on game-inspired classroom design.
For ideas on getting started, I recently spoke with
Lee Sheldon, author of the recently released The Multiplayer
Classroom: Designing Coursework as a Game (Cengage
Learning 2011), whose book chronicles both his own
and others’ experiments with taking the structures, terminology, and
concepts of a massive multiplayer role-playing game and applying them to the
classroom. You can check out Lee Sheldon’s syllabus at his blog on Gaming
the Classroom, along with more of his reflections
on the experiment, which divided his students into guilds and encouraged
them to “level up” through the semester. After using the course model in its
latest iteration, he reported perfect attendance. He also notes the value in
his system of “grading by attrition”—students are not being punished for
failing, but instead rewarded for progressing and thus less likely to be
defeated early.
As a professional game designer teaching courses on
game design, Lee Sheldon has a natural environment for innovation–but his
concepts open the door for a conversation across disciplines. Lee Sheldon
describes his model as “designing the class as a game”—so not just focusing
on extrinsic rewards (the typical focus of gamification), but instead trying
to promote “opportunities for collaboration” and “intrinsic rewards from
helping others.” As game designers, like teachers, are focused on creating
an experience, many of the strategies for building a class as game are
similar to more traditional preparation. And he advises that these ideas can
work for anyone: “You don’t have to a be a game designer…you can prep like
putting together a lesson plan, but learn the terminology.” Lee Sheldon
explains that one of the benefits of using games as a model is that a game
is abstracted—it has to “feel real”, but you get to “take out the stuff
that isn’t fun.” He also notes that “You can do just about anything in a
game that you can do in real life,” and the wealth of games today is a
testament to that range of possibilities.
Lee Sheldon and his team at RPI are now working on
an experiment with their new
Emergent Reality Lab that offers a possible future
for courses as games. He explained their current project, teaching Mandarin
Chinese as an alternate reality game, as a “Maltese Falcon-esque mystery”
narrative—the class will start out as usual, in a normal classroom, but it
will be interrupted and move into the lab as the students take a virtual
journey across China aided by motion-aware Kinect interfaces in an immersive
environment. Lee Sheldon said that his ideal outcome would be for students
to learn more Chinese than they would in a traditional class.
Continued in article
Bob Jensen's threads on edutainment are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Smile! You're on Candid Class Camera!
"Nudity, Pets, Babies, and Other Adventures in Synchronous Online Learning,"
by Marc Parry, Chronicle of Higher Education, October 20, 2011 ---
Click Here
http://chronicle.com/blogs/wiredcampus/nudity-pets-babies-and-other-adventures-in-synchronous-online-learning/33846?sid=wc&utm_source=wc&utm_medium=en
The University of Southern California places a
premium on synchronous online education. Students fire up their Webcams and
participate in live virtual classes.
But those live video feeds are opening a debate
about classroom decorum, pushing the university to create new guidelines for
“Netiquette.”
Barking dogs, wailing babies, a naked spouse—all
have made cameo appearances in USC online classes, said Jade Winn, head of
library services for USC’s education and social work schools, during a talk
about online education at the Educause conference here.
Ms. Winn recalled one pajama-clad student who
rolled over in bed, turned on a Webcam, and tried to attend class lying on a
pillow. Another distraction: students crunching bowls of cereal.
“It’s just a whole level of being in someone’s
home, that you don’t take into consideration,” Ms. Winn said in an interview
after her talk.
The university plans to start taking it into
consideration with a new Netiquette guide. The goal is to spell out up front
what USC won’t tolerate. A spouse parading naked behind a student clearly
isn’t kosher—but where else do you draw the line?
Continued in article
Bob Jensen's threads about the dark side of education technology ---
http://www.trinity.edu/rjensen/000aaa/theworry.htm
With a bit of sarcasm
"Yes, You Need More Gadgets," by Michael Schrage, The Harvard Business
Review Blog, October 20, 2011 ---
Click Here
http://blogs.hbr.org/schrage/2011/10/yes-you-need-more-gadgets.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Everyone heard the rising panic in her voice. The
irritating chatterbox nattering away on her cell phone while in line to
board our flight suddenly realized that her boarding pass was — surprise! —
in the Smartphone she was talking on. She'd have to disconnect the call in
order to wave her device before the optical reader. The impatient queue
behind her burst into laughter, smirks and chortles as her call abruptly
ended. I'm not ashamed to say I was among them.
The (brief) era of single and serial mobile devices
is over. The age of multiple and parallel devices has begun. An impromptu
survey of CIOs revealed that the typical executive already has roughly three
devices connected to the enterprise network. Our traveling companion should
have known better. She could have continued irritating everyone as she
boarded if only she'd remembered to put her boarding pass on her other
iPhone, Android, Kindle, iPad or latest tablet. As Smartphones become
significantly smarter —
Siri?
Watson? Is that you? — the combined cognitive and
coordinative challenge of juggling three or four devices becomes more like
supervising a small team than managing a personal assistant.
Treating phones, tablets, BlackBerries and laptops
as distinct technical entities is pragmatically anachronistic. In the
twinkling of fewer than two Moore's Law generations, the central personal
productivity question has shifted from, "How do I get more value from my
mobile device?" to "How should I get more value from my device ensemble?"
The notion that you might need a Smartphone
to manage your Smartphones may seem mildly funny and ironic. The
simpler reality is that smart ensembles of smarter devices require smarter
networking. Syncing — simply making sure your devices have the same
up-to-date data — is the sterile path to convergence. What you need to do is
both more demanding and more rewarding. Pay attention. Pay attention to
those moments when you wish you had another phone. Observe seatmates who
aren't merely multitasking but multi-device multitasking. Who is chatting on
their phone while retrieving email on an iPad while highlighting an HBR
article on their Kindle? Then ask yourself: are they doing this because
they're inefficient? Or because this improvised arrangement makes them more
efficient?
Utilizing two or three devices doesn't inherently
make you two or three times more effective. Diminishing returns exist. But
there are frequently times when having two or three devices working with,
and for, you concurrently can make you an order of magnitude more
productive. For example, the ability to have your phone conduct searches on
your tablet and allow you to compare competing results sent by a colleague
as you virtually chat with and text each other could turn a task that takes
a typical day into one requiring less than an hour. It's not the total
bandwidth that matters; it's how that bandwidth is split up and shared.
Productivity/creativity/effectiveness breakthroughs
will increasingly come not from greater data sharing between devices but
enabling devices to collectively offer integrated user experiences. A single
tablet or phone is — Microsoft should excuse the expression — a window or a
lens. But three or four devices becomes a productivity "cockpit" that allows
you to have multiple views. In other words, your phone will "know" to put
the boarding pass on your tablet if you're on the phone at boarding time.
Your two tablets will "know" to display the synchronized "bird's eye" and
"walkthrough" views of a site you're planning to visit. Siri will "know" to
send the Facebook and Flickr imagery to your tablet — and the reference
materials to your Kindle — of the two couples you and your spouse are
supposed to meet at a party in an hour. Every mobile device will have a
"stick
shaker" capability to alert their user that "must
see/must respond" information must be accessed.
Continued in article
Hooked on Gadgets, and Paying a Mental Price
You might want to examine the NYT feature while it is still free ---
http://nyti.ms/9EegB2
"Hooked on Gadgets and Happy About It," by Alexandra Samuel,
Harvard Business Review Blog, June 8, 2010 ---
Click Here
http://blogs.hbr.org/cs/2010/06/hooked_on_gadgets_and_happy_ab.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE
Bob Jensen's threads on gadgets ---
http://www.trinity.edu/rjensen/Bookbob4.htm#Technology
Dennis Kozlowski Talks Jail, Pay (no mention that he cost PwC $225 million
for negligence)
"Dennis Kozlowski Talks Jail, Pay," by Joann S. Lublin, The Wall
Street Journal, October 21, 2011 ---
Click Here
http://online.wsj.com/article/SB10001424052970203752604576643093882076826.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsTop
As convicted hedge-fund manager Raj Rajaratnam gets
ready to enter the prison system, L. Dennis Kozlowski, a poster child for
the last wave of corporate scandals, is hoping he'll soon get out.
The former chief executive of Tyco International
Ltd. was found guilty in 2005 of looting his employer and sentenced to as
much as a quarter century behind bars. Now, he's suing New York state to win
work release and awaiting his first parole hearing in April.
Meanwhile, Mr. Kozlowski looks out—across razor
wire made by Tyco—at a world where the stumbling economy and scorn heaped on
big business have a familiar feel.
Once one of America's highest paid CEOs, the
64-year-old felon acknowledges he got "piggy" when it came to his pay. And
he says he shares the outrage over corporate greed expressed by the Occupy
Wall Street protesters, many of whom wonder why the recent financial crisis
didn't send as many executives to prison as the scandals of a decade ago. "I
understand their frustration," Mr. Kozlowski said in an interview in a
visitors' room here at the Mid-State Correctional Facility. Kozlowski On:
Jail food: "Everything is bad about the food. It's
mysterious. By the time it gets to us, it's cold.'' His expected salary
during work-release: "I would be satisfied with minimum wage.'' Why rich
men's toys no longer appeal to him: "I have learned how little I can live
with…. There are no shower curtains here.''
The former executive, who pulled in a pay package
worth more than $105 million in fiscal 2000, criticized ailing financial
firms for paying out sizable executive bonuses after they were helped by
taxpayer bailouts. "That's indefensible," he said.
Mr. Kozlowski also discussed his post-prison plans,
his meetings with General Electric Co. CEO Jeff Immelt about possibly
combining their companies, and the missteps that led him to prison.
Mr. Kozlowski was found guilty in June 2005 on 22
of 23 counts, including grand larceny, conspiracy and securities fraud,
stemming from giant bonuses and other improper compensation he got as Tyco's
CEO.
He received a sentence of 8 1/3 years to 25 years,
compared with 25 years for former WorldCom CEO Bernard J. Ebbers and 24 for
former Enron President Jeffrey Skilling. In seeking the maximum sentence,
Assistant District Attorney Owen Heimer called Mr. Kozlowski's crimes
"unprecedented" and said he made Tyco a "symbol of kleptocratic management."
Mr. Kozlowski hopes to take a work-release job with
Access Technologies Group Inc., a small company in New Canaan, Conn., whose
services include job-search training for ex-convicts. But New York state has
turned down his request for work release four times.
He's suing to overturn the decision and chafes that
Mark H. Swartz, the former Tyco finance chief convicted of similar crimes,
already has such a job. The New York Department of Corrections and Community
Supervision confirmed that Mr. Swartz started a Manhattan work-release
assignment in late September but declined to comment on Mr. Kozlowski's
request. An attorney for Mr. Swartz declined to comment.
Continued in article
Jensen Comment
Unlike many of these executive "Go to Jail" events that take place for companies
that have crashed and burned (like Enron and Worldcom), Kozlowski and Swartz
were sent to prison for stealing from a company (Tyco) that was actually in good
shape and made much better with the fast wheeling and dealing of L. Dennis
Kozlowski.
Certainly Dennis lived very high on the hog on his Tyco expense account,
including his multi-million dollar wedding in Cyprus that he put on a Tyco
credit card. Dennis had a weakness for women and high living, but he also was
pretty shrewd about finding and negotiating acquisitions for Tyco.
And the Dennis and Swartz cover ups of fraud resulted in PwC paying out one
of the largest audit-malpractice settlements in the history of CPA firm
auditing.
"PwC Sets Accord in Tyco Case: Pact
for $225 Million Settles Claims Involving Auditing Malpractice," by David
Reilly and Jennifer Levitz, The Wall Street Journal, July 7, 2007 ---
Click Here
Accounting titan
PricewaterhouseCoopers LLP agreed to pay $225 million to settle
audit-malpractice claims arising from the criminal misdeeds of top
executives at Tyco International Ltd., marking the largest single legal
payout ever made by that firm and one of the biggest ever by an auditor.
The settlement
applies to claims from both Tyco investors, who had filed a class-action
lawsuit against the accounting firm in federal court in New Hampshire, and
Tyco itself. The agreement was disclosed Friday by PwC, Tyco and the
class-action investors.
Tyco's involvement
in the PwC deal followed on its agreement in May to settle for $2.98 billion
claims brought against it by the same class-action plaintiffs -- removing a
cloud of liability that shadowed the conglomerate as it split into three
publicly traded companies. As part of that agreement, Tyco allowed investors
to pursue its own claims against PricewaterhouseCoopers, while Tyco would
pursue claims on behalf of shareholders against former executives, including
former Chief Executive L. Dennis Kozlowski.
Attorneys for Tyco
investors said the settlement marked a victory for shareholders. The $225
million payout "sends a message to accounting firms" and will act as a
"deterrent to future situations like this," according to Jay Eisenhofer of
Grant & Eisenhofer PA, who represented investors in the case. Tyco declined
to comment beyond saying that the agreement had been filed.
The PwC settlement
ranks among the top 10 legal payouts made by accounting firms related to
work on behalf of one company. Ernst & Young LLP's $335 million settlement
in 1999 related to work for Cendant Corp. remains the biggest-ever payout by
an auditor.
As a percentage of
the overall settlement reached by the company and other parties -- an
important metric looked at by accounting firms -- the PwC deal represented a
payout on its end of about 7% of the total. That is generally in line with
payouts by accounting firms, which tend to range from 5% to 15% of total
payouts.
While the Tyco case
was one of several corporate scandals that rocked markets earlier this
decade, it is somewhat unusual in that the malfeasance revolved around
compensation issues involving top executives. That contrasted with the kind
of bankruptcy-inducing fraud seen in many other scandals such as those at
Enron Corp. and WorldCom Inc. In June of 2005, a jury convicted Mr.
Kozlowski, and Mark Swartz, Tyco's former chief financial officer, of grand
larceny, conspiracy and securities fraud. Both are serving prison sentences
in New York.
While PwC stood by
its work, the firm's position was potentially undermined when the Securities
and Exchange Commission in 2003 barred Richard P. Scalzo, the firm's lead
partner on Tyco's audits from 1997 to 2001, from audits of publicly listed
companies. The SEC didn't accuse him of deliberately covering up faulty
accounting at Tyco, but said he was "reckless" for not heeding warning signs
regarding the integrity of the company's management. Mr. Scalzo didn't admit
or deny wrongdoing.
Although the PwC
settlement with Tyco will have to be approved by class-action investors, and
some could drop out to pursue claims individually, the deal mostly brings to
a close one of the biggest legal issues for PwC. Other high-profile cases
the firm has outstanding are suits related to its work for insurance titan
American International Group Inc. and computer maker Dell Inc.
Bob Jensen's threads on PwC lawsuits ---
http://www.trinity.edu/rjensen/Fraud001.htm
"GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J.
Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362
Today (October 21) Groupon issued
amendment Number 6 to its S-1 filing. The most
interesting data are on page 9 of the report, which we repeat below.
What stands out to us is that stockholders’ equity
on September 30 is negative—the
firm has become technically insolvent!
Our prediction that Groupon has a high probability of failure remains
intact.
Continued in article
Jensen Comment
This illustrates that on occasion insolvent firms may have value depending upon
the net value of all the things that don't get posted to the balance sheet under
GAAP. Common examples include contingency assets/liabilities that are not yet
booked, intangibles such as the value of employees, and a boatload of other
items that accountants just cannot measure with enough confidence and stability
to put into the general ledger.
One of the best examples is the early years of Amazon.com that every year
incurred relatively large losses in the income statement but managed to continue
to sell equity shares because investors sniffed out huge value in the air
surrounding the net assets.
Groupon of course is another matter, Catenach and Ketz, the grumps, have
never liked the stench surrounding the air over Groupon as if it was a pile of
something that smells very bad.
Trust No one, Particularly Not Groupon's
Accountants and Auditors (Ernst & Young)
From The Wall Street Journal Weekly
Accounting Review on September 30, 2011
Groupon Unsure on IPO Time
by:
Shayndi Raice and Randall Smith
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Accounting
Changes and Error Corrections, Audit Report, Auditing, Disclosure,
Disclosure Requirements, Financial Accounting, Financial Reporting, SEC,
Securities and Exchange Commission
SUMMARY: This
article presents financial reporting and auditing issues stemming from the
Groupon planned IPO. Groupon originally filed for an initial public offering
in June 2011. At the time, the filing contained a measure Adjusted
Consolidated Segment Operating Income that is a non-GAAP measure of
performance. The SEC at the time required the company to change its filing
to use GAAP-based measures of performance. The SEC has continued to
scrutinize the Groupon financial statements and has required the company to
report revenue based only on the net receipts to the company from sales of
its coupons after sharing proceeds with the businesses for which it makes
the coupon offers.
CLASSROOM
APPLICATION: The article is useful in financial accounting and
auditing classes. Instructors of financial accounting classes may use the
article to discuss reporting of the change in measuring revenues and related
costs. Instructors of auditing classes may use the article to discuss
non-standard audit reports. Links to SEC filings are included in the
questions. The video is long; discussion of Groupon's issues stops at 5:30.
QUESTIONS:
1. (Introductory) According to the article, what accounting and
disclosure issues have delayed the initial public offering of shares of
Groupon, Inc.? What overall economic and financial factors are also
affecting this timing?
2. (Introductory) What was the problem with Groupon CEO Andrew
Mason's letter to Groupon employees? Do you think Mr. Mason intended for
this letter to be made public outside of Groupon? Should he have reasonably
expected that to happen?
3. (Advanced) What accounting change forced restatement of the
financial statements included in the Groupon IPO filing documents? You may
access information about this restatement directly at the live link included
in the online version of the article.
http://online.wsj.com/public/resources/documents/grouponrestatement20110923.pdf
4. (Introductory) According to the article, by how much was revenue
reduced due to this accounting change?
5. (Introductory) Access the full filing of the IPO documents on
the SEC's web site at
http://sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm
Proceed to the Consolidated Statements of Operations on page F-5. How are
these comparative statements presented to alert readers about the revenue
measurement issue?
6. (Advanced) Move back to examine the consolidated balance sheets
on page F-4. Do you think this accounting change for revenue measurement
affected net income as previously reported? Support your answer.
7. (Advanced) Proceed to footnote 2 on p. F-8. Does the disclosure
confirm your answer? Summarize the overall impact of these accounting
changes as described in this footnote.
8. (Advanced) What type of audit report has been issued on the
Groupon financial statements in this IPO filing? Explain the wording and
dating of the report that is required to fulfill requirements resulting from
the circumstances of these financial statements.
Reviewed By: Judy Beckman, University of Rhode Island
Groupon's Fast-growing Business Faces a Churning Point
by:
Rolfe Winkler
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Cost
Accounting, Cost Management, Disclosure, Financial Statement Analysis,
Managerial Accounting
SUMMARY: This
article focuses on financial statement analysis of the Groupon IPO filing
documents including some references to cost measures. "Forget the snappy
'adjusted consolidated segment operating income.' That profit measure...was
rightly rejected by regulators. It is the complete absence of details on
subscriber churn that is more problematic. How often are folks unsubscribing
from Groupon's daily emails?...The issue is important since...the cost of
adding new subscribers has increased quickly."
CLASSROOM
APPLICATION: The article may be used in a financial statement
analysis or managerial accounting class.
QUESTIONS:
1. (Introductory) What is the overall concern about Groupon's
business condition that is expressed in this article?
2. (Advanced) The author states that the cost of adding new
subscribers has increased. How was this cost determined? How does this
calculation make the cost assessment comparable from one period to the next?
3. (Advanced) What does Groupon CEO Andrew Mason say about the
company's cost of acquiring customers? What income statement expense item
shows this cost? How does the increasing unit cost discussed in answer to
question 2 above bring the CEO's assertion into question?
4. (Advanced) In general, how does the author of this assess the
quality of the filing by Groupon for its initial public offering? Why should
that assessment impact the thoughts of an investor considering buying the
Groupon stock when it is offered?
Reviewed By: Judy Beckman, University of Rhode Island
"Groupon: Comedy or Drama?" by Grumpy
Old Accountants Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros,
July 2011 ---
http://accounting.smartpros.com/x72233.xml
"Trust No one, Particularly Not Groupon's
Accountants," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old
Accountants Blog, August 24, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/
"Is Groupon "Cooking Its Books?" by
Grumpy Old Accountants Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros,
September 2011 ---
http://accounting.smartpros.com/x72233.xml
Teaching Case
When Rosie Scenario waved goodbye "Adjusted Consolidated Segment Operating
Income"
From The Wall Street Journal Weekly
Accounting Review on August 19, 2011
Groupon Bows to Pressure
by:
Shayndi Raice and Lynn Cowan
Aug 11, 2011
Click here to view the full article on WSJ.com
TOPICS: Advanced
Financial Accounting, SEC, Securities and Exchange Commission, Segment
Analysis
SUMMARY: In
filing its prospectus for its initial public offering (IPO), Groupon has
removed from its documents "...an unconventional accounting measurement that
had attracted scrutiny from securities regulators [adjusted consolidated
segment operating income]. The unusual measure, which the e-commerce had
invented, paints a more robust picture of its performance. Removal of the
measure was in response to pressure from the Securities and Exchange
Commission...."
CLASSROOM
APPLICATION: The article is useful to introduce segment reporting
and the weaknesses of the required management reporting approach.
QUESTIONS:
1. (Introductory) What is Groupon's business model? How does it
generate revenues? What are its costs? Hint, to answer this question you may
access the Groupon, Inc. Form S-1 Registration Statement filed on June 2,
011 available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm
2. (Advanced) Summarize the reporting that must be provided for any
business's operating segments. In your answer, provide a reference to
authoritative accounting literature.
3. (Advanced) Why must the amounts disclosed by operating segments
be reconciled to consolidated totals shown on the primary financial
statements for an entire company?
4. (Advanced) Access the Groupon, Inc. Form S-1 Registration
Statement filed on June 2, 011 and proceed to the company's financial
statements, available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data
Alternatively, proceed from the registration statement, then click on Table
of Contents, then Selected Consolidated Financial and Other Data. Explain
what Groupon calls "adjusted consolidated segment operating income" (ACSOI).
What operating segments does Groupon, Inc., show?
5. (Introductory) Why is Groupon's "ACSOI" considered to be a
"non-GAAP financial measure"?
6. (Advanced) How is it possible that this measure of operating
performance could be considered to comply with U.S. GAAP requirements? Base
your answer on your understanding of the need to reconcile amounts disclosed
by operating segments to the company's consolidated totals. If it is
accessible to you, the second related article in CFO Journal may help answer
this question.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
Groupon's Accounting Lingo Gets Scrutiny
by Shayndi Raice and Nick Wingfield
Jul 28, 2011
Page: A1
CFO Report: Operating Segments Remain Accounting Gray Area
by Emily Chasan
Aug 15, 2011
Page: CFO
"Groupon Bows to Pressure," by: Shayndi Raice
and Lynn Cowan, The Wall Street Journal, August 11, 2011 ---
https://mail.google.com/mail/?shva=1#inbox/131e06c48071898b
Groupon Inc. removed from
its initial public offering documents an unconventional accounting
measurement that had attracted scrutiny from securities regulators.
The unusual measure, which
the e-commerce had invented, paints a more robust picture of its
performance. Removal of the measure was in response to pressure from the
Securities and Exchange Commission, a person familiar with the matter said.
In revised documents filed
Wednesday with the SEC, the company removed the controversial measure, which
had been highlighted in the first three pages of its previous filing. But
Groupon's chief executive defended the term Wednesday. [GROUPON] Getty
Images
Groupon, headquarters above,
expects to raise about $750 million.
Groupon had highlighted
something it called "adjusted consolidated segment operating income", or
ACSOI. The measurement, which doesn't include subscriber-acquisitions
expenses such as marketing costs, doesn't conform to generally accepted
accounting principles.
Investors and analysts have
said ACSOI draws attention away from Groupon's marketing spending, which is
causing big net losses.
The company also disclosed
Wednesday that its loss more than doubled in the second quarter from a year
ago, even as revenue increased more than ten times.
By leaving ACSOI out of its
income statements, the company hopes to avoid further scrutiny from the SEC,
the person familiar with the matter said. The commission declined comment.
Groupon in June reported
ACSOI of $60.6 million for last year and $81.6 million for the first quarter
of 2011. Under generally accepted accounting principles, the company
generated operating losses of $420.3 million and $117.1 million during those
periods.
Wednesday's filing included
a letter from Groupon Chief Executive Andrew Mason defending ACSOI. The
company excludes marketing expenses related to subscriber acquisition
because "they are an up-front investment to acquire new subscribers that we
expect to end when this period of rapid expansion in our subscriber base
concludes and we determine that the returns on such investment are no longer
attractive," the letter said.
There was no mention of when
that expansion will end, but the person familiar with the matter said the
company reevaluates the figures weekly.
Groupon said it spent $345.1
million on online marketing initiatives to acquire subscribers in the first
half and that it expects "to continue to expend significant amounts to
acquire additional subscribers."
The latest SEC filing also
contains new financial data. Groupon on Wednesday reported second-quarter
revenue of $878 million, up 36% from the first quarter. While the company's
growth is still rapid, the pace has slowed. Groupon's revenue jumped 63% in
the first quarter from the fourth.
The company's second-quarter
loss was $102.7 million, flat sequentially and wider than the year-earlier
loss of $35.9 million.
Groupon expects to raise
about $750 million in a mid-September IPO that could value the company at
$20 billion.
The path to going public
hasn't been easy. The company had to file an amendment to its original SEC
filing after a Groupon executive told Bloomberg News the company would be
"wildly profitable" just three days after its IPO filing. Speaking publicly
about the financial projections of a company that has filed to go public is
barred by SEC regulations. Groupon said the comments weren't intended for
publication.
Continued in article
"Groupon, Zynga and Krugman's Frothy
Valuations," by Jeff Carter, Townhall, September 2011 ---
http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations
Jensen Comment
In the 1990s, high tech companies resorted to various accounting gimmicks to
increase the price and demand for their equity shares ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Bob Jensen's threads about cooking the books
---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
From The Wall Street Journal Accounting Weekly Review on August 7,
2011
Panel Plans Private-Firm Accounting Changes
by:
Michael Rapoport
Oct 04, 2011
Click here to view the full article on WSJ.com
TOPICS: Financial Accounting, Financial Accounting Standards Board,
Standard Setting
SUMMARY: On Tuesday, October 4, 2011, the Financial Accounting
Foundation (FAF)-the board that oversees FASB and GASB operations-issued a
Request for Comment on its Plan to Establish the Private Company Standards
Improvement Council. The new Council's purpose as described by the author of
the article is to "...try to enact exceptions to generally accepted
accounting principles for private companies." Better said in the executive
summary of the Request for Comment, the Council's objective is "to improve
the standard-setting process for private companies....The PCSIC would
determine whether exceptions or modifications to nongovernmental US
Generally Accepted Accounting Principles (US GAAP) are required to address
the needs of users of private company financial statements." The Request for
Comment is available on the FASB web site at
http://www.accountingfoundation.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175823024715&blobheader=application%2Fpdf.
CLASSROOM APPLICATION: The article is useful to cover issues
related to small to medium sized entities (SMEs) and adoption of new
accounting standards in any financial reporting class.
QUESTIONS:
1. (Advanced) What is the Financial Accounting Foundation (FAF)?
(Hint: you may find links to this organization by accessing the FASB web
site at
www.fasb.org and
clicking on the tab "About FASB").
2. (Introductory) What problems has the FASB faced in establishing
accounting standards for both large and small firms alike?
3. (Introductory) According to the wording in the article, what is
the purpose of the newly proposed Private Company Standards Improvement
Council?
4. (Introductory) Access the Request for Comment on the Plan to
Establish the Private Company Standards Improvement Council available at
http://www.accountingfoundation.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175823024715&blobheader=application%2Fpdf
What is the difference in the objective of this Council as described in this
document rather than the WSJ article?
5. (Advanced) What board currently serves to assist the FASB in
considering issues facing SMEs when establishing new accounting standards?
According to the article, why is the new Council needed to replace the
current system?
Reviewed By: Judy Beckman, University of Rhode Island
"Panel Plans Private-Firm Accounting Changes," by: Michael Rapoport, The
Wall Street Journal, October 4, 2011 ---
http://online.wsj.com/article/SB10001424052970203791904576609290657572226.html?mod=djem_jiewr_AC_domainid
The Financial Accounting Foundation, an overseer of
rule making for accounting, is set to propose Tuesday a new panel aimed at
making it simpler and less costly for the nation's 28 million privately held
companies to follow accounting standards.
The Norwalk, Conn., group administers the Financial
Accounting Standards Board, which writes the accounting rules followed by
U.S. companies. Under Tuesday's proposal, a new Private Company Standards
Improvement Council would try to enact exceptions to generally accepted
accounting principles for private companies.
GAAP is the system of accounting rules used by
major U.S. corporations, but privately held companies have long complained
that the rules are too burdensome and expensive.
Many private firms don't have the financial and
management resources of larger, publicly traded companies, and some
accounting rules aren't relevant to private companies. But they still must
abide by GAAP when preparing financial statements for lenders, regulators
and some companies. Some of those costs are unnecessary, some private
companies complain.
The new panel would be "very responsive to what
we've heard from the private-company community," said FAF Chairman
John Brennan.
The FAF is seeking public comment on its proposal
through Jan. 14 and plans to hold public discussions on the proposal early
next year. If the FAF ultimately decides to set up the panel, the process of
reviewing and creating potential modifications for private companies is
expected to be in operation by mid-2012.
Tuesday's proposal could face opposition from
critics who think it doesn't go far enough, such as the American Institute
of Certified Public Accountants, the nation's major accountants' trade
group.
Under the FAF's proposal, the new panel's decisions
would be subject to ratification by FASB. In January, a panel backed by
AICPA recommended creation of a similar standards-revision process for
private companies, but the trade group wanted it to have the final say on
such changes, though it would work closely with FASB.
Barry Melancon, president and chief executive of
AICPA, said in a May speech that an independent panel for private firms is
needed to improve the current system. Unless that happens, "there may be
some bells and whistles that are added, but it's still a veto of the same
people, the same process we've had for 35-plus years," he said.
FAF President and CEO Terri Polley said the group's
new panel could carve out accommodations for private firms in areas that
include how such companies measure the fair value of assets and obligations,
as well as requirements to bring off-the-books entities onto their balance
sheet.
Already, FASB has simplified the rules on testing
the value of goodwill, an intangible asset that results from mergers and
acquisitions. That change was intended to address concerns expressed by
private companies.
FASB already has an advisory committee that
suggests rule changes to benefit private companies, though FAF and AICPA
officials have said the process hasn't worked well enough.
FAF's new panel would replace the FASB advisory
committee and be led by a FASB member. Ms. Polley said the new panel will
have more authority and be more directly involved in enacting accounting
changes.
Continued in article
Bob Jensen's threads on accounting standard setting are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Teaching Case on Accounting for Intangibles
From The Wall Street Journal Accounting Weekly Review on October 21, 2011
Liz Claiborne Must Say Adieu to Liz
by:
Dana Mattioli
Oct 13, 2011
Click here to view the full article on WSJ.com
TOPICS: Intangible Assets
SUMMARY: Liz Claiborne, Inc., is selling is namesake brand to J.C.
Penney Co. "Claiborne also agreed to sell off other brands to Kohl's Corp.
[the Dana Buchman brand] and Bluestar Alliance [the Kensie, Kensiegirl and
Mac & Jac brands] in deals that are expected to close in the next 30 days
and net the company $308 million in proceeds." These brands had been built
or acquired over the 30 years since "the company...popularized fashions for
working women in the 1980s...." These sales were consummated to eliminate
significant amounts of debt and leave the company with three remaining
brands-Kate Spade, Lucky Brands and Juicy Couture. The company will rename
itself to better represent these three remaining brands.
CLASSROOM APPLICATION: The article is useful to discuss the value
of intangible assets--brand names and trademarks-versus their recorded
amounts. The amounts of intangible asset carrying values that were sold will
not be evident until the transactions close, so likely will be shown in the
4th quarter financial statements. Some disclosure may be shown in the
upcoming third quarter financials for the period ended October 1 or 2, 2011,
but those are not yet filed as of the date of this writing.
QUESTIONS:
1. (Introductory) Based on the discussion in the article, describe
why Liz Claiborne, Inc., is selling the rights to its namesake brand.
2. (Introductory) Access the related article, an opinion page
letter of response from the Liz Claiborne, Inc., General Counsel Nicholas
Rubino. What is Mr. Rubino's concern with the WSJ description of the Liz
Claiborne strategy? Does Mr. Rubino's response change any of your
description in answer to question #1 above?
3. (Advanced) What category of asset is Liz Claiborne selling? In
general, describe the accounting requirements for these assets including
initial recognition and subsequent measurement. Cite your sources from
authoritative accounting literature.
4. (Advanced) Access the Liz Claiborne, Inc., financial statements
for the 6 months ended July 2, 2011 available on the SEC web site at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=352363&accession_number=0001104659-11-041399&xbrl_type=v#
How much is shown on the company's balance sheet for brand names?
5. (Advanced) Refer again to the Liz Claiborne SEC filing of the
2nd quarter financial statement for 2011. Click on Goodwill and Intangibles
under Notes to Financial Statements on the left hand side of the page. What
categories of intangible assets does the company have? Which category(ies)
do you think include(s) the carrying values of the brands that have been
sold? Support your answer.
6. (Advanced) According to the article, these sales will close
within 30 days. Once the company files its financial statements for the 3rd
and 4th quarters of 2011, how will you be able to determine the carrying
values of the brands that were sold?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
McComb Played a Bad Hand Well
by Nicholas Rubino
Oct 20, 2011
Online Exclusive
"Liz Claiborne Must Say Adieu to Liz," by: Dana Mattioli, The Wall Street
Journal, October 13, 2011 ---
http://online.wsj.com/article/SB10001424052970203914304576626711202553884.html?mod=djem_jiewr_AC_domainid
Here's
Liz Claiborne Inc.'s latest big move: It's selling
off Liz Claiborne.
The cash-strapped apparel maker said Wednesday that
it has agreed to let J.C. Penney Co. buy its namesake brand as the company
looks to reduce its debt. Claiborne also agreed to sell off other brands to
Kohl's Corp. and Bluestar Alliance in deals that are expected to close in
the next 30 days and net the company $308 million in proceeds.
The moves are Claiborne's latest attempt to get out
from under a strategy gone awry. Under Chief Executive William McComb, the
company that popularized fashions for working women in the 1980s gambled
that it could grow faster by ditching sluggish older brands and focusing on
lines aimed at younger consumers.
In the process, however, it hurt relationships with
core customers and increasingly powerful department stores, shed revenue,
and has posted annual losses since 2006, leaving it struggling to support a
large debt load.
Claiborne said the cash it raises from the sales
will let it cut its net debt to between $270 million and $290 million at the
end of the year, from $548 million in long-term debt at the end of its most
recent quarter. That will give the company some financial flexibility, a
person familiar with the matter said.
"The huge debt load on the horizon scared people,''
this person said. "That bomb has been deactivated.'' The company's moves
also could help shore up Mr. McComb's position following protracted
criticism of his tenure. "This is kind of Day One for him again,'' the
person said.
In a sign of the scale of the change, the company
founded by Liz Claiborne in 1976 now has to find a new name, one it says
will be a better fit with its remaining brands—Kate Spade, Lucky Brands and
Juicy Couture. Under the terms of its deal with Penney, the company has 12
months to find one.
Claiborne officials didn't return repeated requests
for comment. In a statement, Mr. McComb said, "Over the past few years, we
have worked diligently to turn this into a more efficient, dynamic,
brand-centric, retail-based company, and today marks the culmination of
these efforts."
As part of the transaction, Kohl's is buying the
Dana Buchman brand, and affiliates of Bluestar Alliance will receive the
Kensie, Kensiegirl and Mac & Jac Brands.
At its height in the early 1990s, the Liz Claiborne
brand generated $2 billion in annual sales. But it began to lose momentum as
its core customers aged and department stores pushed their own private-label
brands.
Mr. McComb joined the company from Johnson &
Johnson in 2006 and decided to focus on the company's contemporary brands in
an effort to attract a younger audience. In the process, he sold,
discontinued or licensed brands aimed at older audiences that weren't
performing well but still brought in lots of sales.
The result has been a shrinking of the company. In
2005, Claiborne posted $4.8 billion in sales. In its most recent fiscal
year, the total had fallen to $2.5 billion—and sales for Kate Spade, Lucky
Brands and Juicy Couture totaled $1.13 billion.
Investors have been fleeing Claiborne, and its
shares have fallen from about $43 when Mr. McComb became CEO to $6.84 in 4
p.m. composite trading Wednesday on the New York Stock Exchange.
Margaret Mager, a retail industry strategy
consultant at Broadview Advisors LLC, said shedding the brands will help the
company focus on remaining brands that have better growth prospects. "The
businesses provided profit and cash flow but they weren't growing much," Ms.
Mager said.
The acquisition of the Liz Claiborne brand, which
includes lines such as Claiborne, Liz, and Liz & Co., is a coup for J.C.
Penney, which sees the lines as a key growth area. The department-store
chain has been paying Claiborne royalties since landing its exclusive deal
for the brand in August 2010. Penney was originally given the option to buy
the U.S. rights to the brand after five years. The sale comes early,
underscoring Claiborne's cash needs.
J.C. Penney is paying Liz Claiborne $288 million
for the Claiborne and Monet Brands. It's also paying a $20 million advance
for Claiborne to develop additional brands for Penney.
Continued in article
Bob Jensen's threads on accounting for contingencies and intangibles ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
In the future operating leases will be capitalized more and more under newer
accounting standards. Here's an investigation on what to expect in terms of
impact on cost of capital, although the study suggests that the impact will not
be as abrupt as some might expect given the increased attention on operating
leases in capital markets.
"The Impact of Operating Leases on Firm Financial and Operating Risk,"
by Dan Dhaliwal, Hye Seung (Grace) Lee, and Monica Neamtiu, Journal of
Accounting Auditing and Finance, 2011 ---
http://jaf.sagepub.com/content/26/2/151
Abstract
This study uses ex ante cost-of-equity capital measures based on accounting
valuation models to assess the risk relevance of off-balance sheet operating
leases. We investigate whether off-balance sheet operating leases have the
same risk-relevance for explaining ex ante measures of risk as a firm’s
on-balance sheet capital leases. We also investigate how investors’ risk
perception of operating leases has changed in recent years when off-balance
sheet transactions in general and operating leases in particular have been
facing increased regulatory and investor scrutiny. This study finds that a
firm’s ex ante cost-of-equity capital is positively associated with
adjustments in its financial leverage (financial risk) and operating
leverage (operating risk) resulting from capitalized off-balance sheet
operating leases and that the positive association between the ex ante cost
of capital and the impact of operating leases on a firm’s financial leverage
is weaker for the operating leases compared with the capital leases. This
study also finds that the positive association between the ex ante cost of
capital and the impact of operating leases on a firm’s financial leverage
has decreased considerably in recent years, since regulators issued
interpretation letters clarifying controversial lease accounting issues.
Ketz Me If You Can
"Operating Lease Obligations to be Capitalized." by J. Edward Ketz,
SmartPros, August 2010 ---
http://accounting.smartpros.com/x70304.xml
Wow! I have wondered for a few decades whether the
accounting profession ever would account for operating leases correctly.
Long-term operating leases, as opposed to rentals no longer than one year,
clearly convey property rights and encumber the business entity with debt
obligations. Not to require this accounting has served as a badge of
hypocrisy long enough.
The
FASB and the
IASB issued exposure drafts August 17, which
propose to make this change in the treatment of operating leases. They also
discuss some changes in the accounting for purchase options, conditionals,
leases with service contracts, and the accounting for lessors, including the
elimination of leveraged leases. I shall address these topics at a later
time; in this essay I wish to concentrate on the more fundamental issue of
lessee accounting.
Let’s review the history of accounting for
operating leases briefly. The board issued Statement No. 13 on lease
accounting in November 1976. (The Accounting Principles Board also had
pronouncements on lease accounting, but they were simply dreadful.) For
lessees, the statement created two categories, capital leases and operating
leases. The FASB concocted four criteria for the recognition of a lease as
a capital lease. If any one of the following criteria is met, then the
business enterprise must account for the lease as a capital lease. They
are: (a) if legal title passes to the lessee; (b) if the lease contains a
bargain purchase option; (c) if the lease term (the length of the lease)
equals or exceeds 75 percent of the asset’s life; and (d) if the present
value of the minimum lease payments equals or exceeds 90 percent of the fair
value of the leased property. If none of the four criteria is met, then the
business enterprise treats the lease as an operating lease.
Accounting for these leases differs greatly. In a capital lease, the firm
capitalizes the asset at its present value (not to exceed its fair value),
and it capitalizes the lease obligation at the present value of future cash
flows. On the income statement, the business enterprise shows the
depreciation of the capitalized asset and displays the interest expense on
the lease obligation. In an operating lease, the entity ignores its
property rights and it pretends that it has no debts, and on the income
statement, the organization acknowledges a rent expense. There is, however,
no economic justification for this differential treatment.
I think it amazing—maybe even revolutionary—for the
board finally to follow its own conceptual framework in the development of
lessee accounting standards. The FASB’s conceptual framework defines assets
as “probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events.” Further, it defines
liabilities as “probable future sacrifices of economic benefits arising from
present obligations of a particular entity to transfer assets or provide
services to other entities in the future as a result of past transactions or
events.”
It doesn’t take an accounting professor, much less
Donald Trump, to figure out that leases confer to lessees probable future
economic benefits and probable future sacrifices. Present-day accounting
for operating leases contradicts this rational approach of reporting the
economics of these business transactions. If the board only applies its own
conceptual framework, as it appears ready to do, then it will achieve a much
better accounting.
Let’s also remind ourselves of the significant
consequences of these actions. Billions, maybe trillions, of dollars of
lease obligations have been off-balance sheet since time began. Here is a
small sample of firms, with my estimates (details on my estimation scheme in
“Hidden
Financial Risk”) of the present value of the cash
flows of the operating leases (numbers are millions of dollars except for
percentages).
| |
Reported Debt |
PV of Operating Lease Cash Flows |
Percent Debt is Under-reported |
|
CVS |
25,873 |
26,913 |
104.02% |
|
Walgreens |
10,766 |
23,212 |
215.60% |
|
McDonalds |
16,191 |
7,996 |
49.39% |
|
Target |
29,186 |
2,155 |
7.38% |
|
Home Depot |
21,484 |
5,846 |
27.21% |
|
Starbucks |
2,532 |
3,685 |
145.54% |
Clearly, the capitalization of essentially all
leases is an important step to knowing realistically what corporations owe.
Notice that this sample of only six firms has off-balance sheet lease debts
of almost $70 billion. As this amount is material to everybody (except for
members of Congress and the White House), business enterprises should supply
this information to investors and creditors so they can better understand
the firm’s financial leverage.
While this chapter of financial reporting is coming
to a close, the most remarkable event in the history of lease accounting
occurred in 1960. That year Arthur Andersen published the booklet “The
Postulate of Accounting” and averred that the only postulate of accounting
is fairness. “Financial statements cannot be so prepared as to favor the
interests of any one segment without doing injustice to others.” To add
flesh to this argument, Arthur Andersen then gave the example of leases,
contending that all leases should be capitalized. Unfortunately, the
AICPA’s Committee on Accounting Procedure and its Accounting Principles
Board ignored these comments.
Fifty years ago this once great firm, under the
leadership of Leonard Spacek, showed how a principled and courageous
analysis of the facts could lead one to the proper accounting. It shows
that principles-based accounting can work—as long as we have principled
leaders in the profession. But it also shows the dangers of
principles-based accounting when others are not blessed with logical
thinking or courage—when they are not principled.
P.S. The FASB really doesn’t have to apply an exception to short-term
leases, those under twelve months in duration. Every FASB statement is
stamped with the caveat, “The provisions of this Statement need not be
applied to immaterial items.” As I expect most short-term rentals to
provide income statement and balance sheet effects that are immaterially
different from their capitalization, there is already a basis for firms
not to worry about the accounting for such leases.
Jensen Comment
Something keeps nagging me that the "right to terminate" a lease in a year or
less has economic value to be factored into the concocted scheme to forecast
operating lease rentals ad infinitum. Until the IASB and FASB give us
implementation guidelines on how to value the right to terminate, I'm not as
solidly behind this revision to the standard as Professor Ketz.
Those professionals that are the most mobile and expectant of promotions and
relocations, like gifted accounting staff, are recognizing the "right to
terminate" values vis-a-vis having former houses in Phoenix and Las Vegas that
they just cannot unload for as much as their equity in those houses. If they
knew what they know now they would've rented throughout much of their careers
--- at least until they've finally settled in.. The same can be businesses
growing wildly or shrinking wildly that find facilities they own very hard to
unload.
The lease versus buy cases that we've taught for years were probably
incomplete --- I've never seen a case that values the "right to terminate" such
that instead of capital lease versus buy we probably should've include a third
alternative --- operating lease with an inherent right to terminate without
penalty.
August 23, 2010 message from Tom Selling
If you are looking for a principles-based approach
to lease accounting, you may be interested in reading these blog posts
(especially the first one listed)
Lease Accounting: Replacement Cost is the Only Hope for a
Principles-Based Solution
Reason #2 to Dump on the IASB/FASB Leasing Proposal
The Lease Accounting Proposal: What Investors Say
Lease Accounting: Replacement Cost is the Only Hope
for a Principles-Based Solution
Reason #2 to Dump on the IASB/FASB Leasing Proposal
The Lease Accounting Proposal: What Investors Say
Bob, if you are looking for information on
cancellation options, I’ll bet you can find it in:
Copeland and Antikarov, Real Options, Revised
Edition: A Practitioner’s Guide. There is a chapter on how Airbus used
option valuation techniques for pricing and negotiating leases of
airplanes.
I should also say that I don’t see how the presence
of an option to cancel without penalty calls capital lease accounting into
question. Isn’t it the mirror image of a renewal option? The only additional
twist is that the option is “American style”, i.e., it may be exercised at
any time, as opposed to only the expiration date (“European style”).
Finally, I plan on writing another leasing post –
probably building on Ed’s (whom I had the pleasure of meeting for the first
time at the AAA). I expect the message in my post will be that lease
capitalization is fine as far as it goes, but the ED blithely continues the
tradition of plugging in made up numbers since nobody can bring themselves
to commit to some version of current value – and historic cost principles
are to leasing as a pea shooter is to an elephant.
Best, Tom
August 24, 2010 reply from Bob Jensen
Bob
Jensen's sadly
neglected
threads on real options and references to early applications are at
http://www.trinity.edu/rjensen/Realopt.htm
I like to think of actual examples. There was a big east-side mall in San
Antonio that was a great mall suffering from a rapid decline in the
surrounding neighborhood. It became a beautiful indoor congregating point
for dope dealers and gangs and prostitutes. After a couple of murders in the
mall, customer traffic declined dramatically and within a few years this
great mall had to close. The three big department stores attached to the
mall probably had long-term leases such that they were forced to try to
operate on their own for a while even though the interior two-story mall
with nearly 50 stores and theatres was blocked off and empty. I suspect the
big department stores wanted out of their leases, but they could not do so
nearly as easy as the stores inside the mall that only had operating leases
with the right of termination in less than 12 months.
Also consider the surrounding stores and restaurants that built up around
the mall and depended upon the thousands of customers drawn weekly to the
mall when it was thriving. For example right next to the mall parking
Toys”R”Us built its own store financed with ownership or a capital lease.
Think of how much more valuable, in hindsight, it would have been for
Toy”R”Us to have an operating lease inside the mall where the “right to
terminate” became extremely valuable as the customers abandoned the mall in
droves. In retrospect Toys”R”Us was stuck with long-term financing
obligations that extended well beyond the profitability of the location. In
short, the building quickly became a liability rather than an asset.
An operating lease is extremely valuable in situations where future needs
for buildings and/or the equipment are extremely volatile and virtually
unpredictable due to nonstationarities that make mathematical forecasting
models virtually worthless. Mathematical valuation models like real
options models require greater statationarities.
Real options analysis was invented by one of my fellow students, Stu Meyers
(finance), in the doctoral program at Stanford. It's a brilliant
financial model, but like so many finance models, it does not deal well in
nonstatationarity environments. Stu did not invent the model until years
later when he was a professor at MIT. I think it would be a great danger to
an entrepreneur when assumed parameters are extremely tenuous.
Other more traditional capital budgeting models also fail in in
nonstationarity situations. But the problem is greatly reduced when there is
less fixed cost such as when an entrepreneur commits only to an operating
lease rather than a long-term mortgage or capital lease.
Real Options Analysis ---
http://en.wikipedia.org/wiki/Real_Options#Comparison_with_standard_techniques
ROA is often contrasted with more standard
techniques of capital budgeting, such as net present value (NPV), where
only the most likely or representative outcomes are modelled, and the
"flexibility" available to management is thus "ignored"; see Valuing
flexibility under Corporate finance. The NPV framework therefore
(implicitly) assumes that management will be "passive" as regards their
Capital Investment once committed, whereas ROA assumes that they will be
"active" and may / can modify the project as necessary. The real options
value of a project is thus always higher than the NPV - the difference
is most marked in projects with major uncertainty (as for financial
options higher volatility of the underlying leads to higher value).
More formally, the treatment of uncertainty
inherent in investment projects differs as follows. Under ROA,
uncertainty inherent is usually accounted for by risk-adjusting
probabilities (a technique known as the equivalent martingale approach).
Cash flows can then be discounted at the risk-free rate. Under DCF
analysis, on the other hand, this uncertainty is accounted for by
adjusting the discount rate, (using e.g. the cost of capital) or the
cash flows (using certainty equivalents, or applying "haircuts" to the
forecast numbers). These methods normally do not properly account for
changes in risk over a project's lifecycle and fail to appropriately
adapt the risk adjustment.
In general, since ROA attempts to predict the
future, the quality of the output will only ever be as good as the
quality of the inputs, which by their nature are sketchy. This comment
also applies to net present value analysis, although NPV does not
require volatility information (see below).
Opinion is thus divided as to whether Real Options
Analysis provides genuinely useful information to real-world
practitioners. ROA is therefore
increasingly used as a discussion framework, as opposed to as a
valuation or modelling technique.
Bob
Jensen's sadly
neglected
threads on real options and references to early applications are at
http://www.trinity.edu/rjensen/Realopt.htm
The above document quotes a great article by Wayne Upton when he was still
at the FASB.
"Special Report: Business and Financial Reporting, Challenges from
the New Economy," by Wayne Upton, Financial Accounting Standards Board,
Document 219-A, April 2000 ---
http://accounting.rutgers.edu/raw/fasb/new_economy.html
Incidentally Wayne was the FASB's technical guru on FAS 133 and its very
technical revisions like FAS 138. Last I heard, Wayne changed to the IASB.
PS
I’ve not lived in San Antonio for nearly five years, but I think the failed
mall was eventually purchased by the School District for offices and maybe
some classrooms. I could be wrong about whether that proposal for the mall's
use came into being.. In any case, businesses lost a lot of money when the
mall failed, but those businesses with operating leases had an easier time
due to the value of the “Right to Terminate.”
Bob Jensen
Inconsistencies in Two Proposed IFRS Changes: The Ups and Downs of
International Accounting Standard "trigger events"
In the context of FAS 39, a "trigger event" is an event that changes the
likelihood of fully collecting or paying out a forecasted stream of future cash
flows. The forecasted cash flows could be contractual such as the contracted
stream of cash flows from a forward contract used as a speculation or a hedge.
The fair value of the future stream is said to have become "impaired" by the
"trigger event" that is material in nature. Auditors are required to test for
impairments in cash flow streams. The net impact on the balance sheet may vary
greatly when the contract is a speculation versus when the contract is a hedge
and the amount of impairment loss/gain is offset by the amount of impairment
gain/loss on a hedged item and vice versa.
For items carried at fair value, trigger events should be automatically
recognized in changes in fair value unless the trigger event itself makes it
impractical to measure fair value (such as a freezing or collapse in the market
used to measure fair value). If a receivable is carried at amortized cost,
trigger events are especially important and may signal the need to anticipate a
loss such as an estimated bad debt loss.
An example of a common trigger event is a hugely lowered credit score/rating
of a debtor.
For later reference, I might define a "wipeout trigger event" as one that
reduces the NPV of a future cash flow stream to zero or virtually zero. Although
such a trigger event might be analogous to when Madoff's arrest was announced, a
wipeout trigger event may also be perfectly legal such as when a lessee
announces in advance that a short-term lease will not be renewed.
It seems to me that in two current proposed changes to IFRS standards, one
proposal is reducing the role of explicitly defined trigger events whereas the
other is increasing the role of implicitly defined wipeout trigger events. The
two IASB proposed change documents are as follows:
Financial Instruments
IAS 39 to IFRS 9: "IFRS 9: Financial Instruments (replacement of IAS 39)
---
Click Here
The objective of this project is
to improve the decision usefulness for users of financial statements by
simplifying the classification and measurement requirements for
financial instruments. In November 2008 the IASB added this project to
their active agenda. The FASB also added this project to their agenda in
December 2008.
Leases
FASB-IASB Joint Proposal on Lease Accounting ---
Click Here
http://www.ifrs.org/Current+Projects/IASB+Projects/Leases/ed10/Ed.htm
... the International Accounting
Standards Board (IASB) and the US Financial Accounting Standards Board
(FASB) published for public comment joint proposals to improve the
reporting of lease contracts. The proposals are one of the main projects
included in the boards’ Memorandum of Understanding. The proposals, if
adopted, will greatly improve the financial reporting information
available to investors about the financial effects of lease contracts.
The accounting under existing
requirements depends on the classification of a lease. Classification as
an operating lease results in the lessee not recording any assets or
liabilities in the statement of financial position under either
International Financial Reporting Standards or US standards (generally
accepted accounting principles). This results in many investors having
to adjust the financial statements (using disclosures and other
available information) to estimate the effects of lessees’ operating
leases for the purpose of investment analysis. The proposals would
result in a consistent approach to lease accounting for both lessees and
lessors—a ‘right-of-use’ approach. This approach would result in all
leases being included in the statement of financial position, thus
providing more complete and useful information to investors and other
users of financial statements.
Financial Instruments ED That Plays Down Trigger Events
IAS 39 to IFRS 9: "IFRS 9: Financial Instruments (replacement of IAS 39)
---
Click Here
This Financial Instruments Exposure Draft (ED), among other things
downplays, the role of trigger events in impairment tests. In IAS 39 an
anticipated loss may be delayed until a trigger event transpires to require
immediate write down of an asset such as a receivable. Presumably this will
not be the case in the new IFRS 9.
When IAS 39 is replaced by IAS 9, the ED proposes to recognize losses
(prior to trigger events) by earlier use of probability-weighted
estimates of the amounts to be collected in a future cash flow stream.
Presumably these probabilities must be subjective (Bayesian) since it is
difficult to imagine circumstances where the probability distribution can be
objectively estimated. Implicit in the ED is the estimation of probabilities
of future states of the domestic and/or world economy.
Auditors are no objecting to the replacement of trigger events with
probability-weighted estimates on the grounds that attesting to such
probability-weighted estimates before trigger events will not operational in
auditing.
"Deloitte comment letter on financial instruments," July 6, 2010 ---
http://www.iasplus.com/dttletr/1007amortcost.pdf
Excerpt
We agree with the Board’s objective in this phase of the IASB project to
replace IAS 39 Financial Instruments: Recognition and Measurement (IAS
39) to address weaknesses of the incurred loss model in IAS 39 that were
highlighted during the global financial crisis. An impairment loss model
that focuses on an assessment of recoverable cash flows reflecting all
current information about the borrower’s ability to repay would be an
improvement on the current approach in IAS 39 which relies on
identification of trigger events and often leads to a delay in loss
recognition. However, we have concerns about the specific requirements
proposed by the IASB, in particular those to determine, and allocate,
the initial estimate of expected credit losses on a financial asset and
to use a probability-weighted outcome approach. We believe that this
approach will in many cases be unnecessarily complex. Further, the
incorporation of potential future economic environments in estimating
recoverable cash flows would be extremely complex, costly and burdensome
to apply by preparers.
The requirement in the ED to forecast future economic
environments and events without providing sufficient guidance with
respect to the level of objectivity, verifiability, or support for the
underpinnings of these inputs presents significant challenges to
internal auditors, external auditors, and regulators.
Overall, we believe that the measurement principle would not be
operational if the Board were to adopt the ED in its current form.
Leases ED That Plays Up Wipeout Trigger Events
FASB-IASB Joint Proposal on Lease Accounting ---
Click Here
http://www.ifrs.org/Current+Projects/IASB+Projects/Leases/ed10/Ed.htm
The most controversial and in most instances welcome proposed change is
the required capitalization of operating leases that were previously and
commonly used to hide debt in what was tantamount to off-balance sheet
financing.
And the most controversial of the controversial proposed changes is that
short term operating leases having renewal options are to assume (for
accounting purposes) renewals will take place even though they are not
contractually required. For example, a store in a mall may have a
year-to-year lease that was not booked on the lessee or lessor balance
sheets until the monthly rent is due. The ED requires assumption of renewals
that are not contractually required. Hence, the NPV of a year-to-year store
lease must be booked as an asset on the lessor's books and a liability on
the lessee's balance sheet for a rent cash flow stream across many years in
which it is estimated that the lease will be renewed.
However, the ED does allow for what are tantamount to wipeout trigger
events (not called as such in the ED). If it becomes known that the lessee
or lessor will not renew the year-to-year lease, then the lessor may no
longer record the NPV of future rentals that will not be received and the
lessee need not book the NPV of future rentals that will not be paid.
Jensen Comment
For these two exposure drafts to be consistent, it would seem that either
the probability-weighted requirement in the new IFRS 9 should be deleted or
that a probability-weighted requirement should be imposed on short-term
lease accounting. In the case of leases, probability weights would be
assigned to assumed lease renewals.
The probability-weighted short-term lease requirement would most likely
be objected to by auditors for the same reasons that auditors object to the
probability-weighted requirement proposed for the IFRS 9.
I can anticipate the Deloitte objection letter to be as follows if
auditing of lease renewal probability weightings were to
(hypothetically) be required::
Excerpt
We agree with the Board’s objective to book operating leases in a manner
consistent with how capital leases are booked. An impairment loss model
that focuses on an assessment of renewable lease cash flows reflecting
all current information about the lessee's intent to exercise a renewal
option would be an improvement on the current approach of keeping
operating leases entirely off the balance sheet. However, we have
concerns about the specific requirements proposed by the IASB, in
particular those to determine probability weightings of lease renewals.
We believe that this approach will in many cases be unnecessarily
complex. Further, the incorporation of potential future economic
environments in estimating lease renewal cash flows would be extremely
complex, costly and burdensome to apply by preparers.
The requirement in the ED to forecast future economic
environments and events without providing sufficient guidance with
respect to the level of objectivity, verifiability, or support for the
underpinnings of these inputs presents significant challenges to
internal auditors, external auditors, and regulators.
Overall, we believe that the measurement principle would not be
operational if the Board were to adopt the ED in its current form.
In general, use of probability-weighted impairment accounting before
trigger events transpire is probably an auditing nightmare in general.
Trigger event impairment tests are much more realistic for auditors.
However, at present the lease accounting ED does not take up the issue of
how to deal with trigger events that are not wipeout trigger events.
Increasingly we are adding subjectivity and hypothetical transactions to
financial statements. The biggest example is the transitioning to fair value
accounting where assets and liabilities are adjusted for transactions that
did not and might not ever transpire such as the interim changing of the
value of a forward contract used as a hedge when, at the maturity date, the
net cash flows are absolutely certain irrespective of the "hypothetical"
changes in fair value before the maturity date.
If we're going to be so subjective about hypothetical transactions, we
might as well impose subjective probability weights to short-term lease
renewals rather than assume they will always be renewed until a wipeout
trigger event transpires.
October 21, 2011 reply from Beryl Simonson
For your lease discussion
Beryl D. Simonson CPA
Partner, Assurance Services
McGladrey & Pullen, LLP
(267) 515-5144
From: NAREIT FirstBrief [mailto:FirstBrief@nareit.com]
Sent: Thursday, October 20, 2011 03:54 PM
To: Simonson, Beryl
Subject: FASB and IASB Tentatively Expand Scope Exception for
Proposed Leases Standard to All Investment Property
|
October 20, 2011
FASB and IASB Tentatively Expand Scope Exception for Proposed
Leases Standard to All Investment Property
On Oct. 19 - 20, NAREIT attended the Financial Accounting
Standards Board (FASB) and International Accounting Standards
Board (IASB) (collectively, the Boards) joint meetings on the
proposed Leases standard in Norwalk, CT. The Boards tentatively
decided to expand the scope exception from the proposed Leases
standard to all investment property, whether measured at
fair value or cost. In order to be eligible for the scope
exception, investment property would need to be consistent with
the definition of investment property as defined in the proposed
FASB Investment Properties standard for U.S. companies and
International Accounting Standards No. 40 Investment Property
for companies reporting under IFRS. Based on this tentative
decision, all lessors would avoid reporting under the previously
proposed receivable and residual lessor accounting model. Those
lessors that qualify as an investment property entity under the
FASB's Investment Properties standard would be required to
report their investment properties at fair value and recognize
rental revenue on a contractual basis. All other investment
property lessors would report rental income as currently
required on a straight-line basis. Based on discussions with the
FASB staff, NAREIT expects the FASB to issue the Investment
Properties exposure draft in the next few days.
On Sept. 20, NAREIT met with the FASB and IASB staff to discuss
potential issues with applying the proposed receivable and
residual lessor accounting model to investment properties
reported at cost. NAREIT developed an illustration that served
as the basis for the meeting. The illustration indicated that
the proposed receivable and residual lessor accounting model was
not operational and yielded irrelevant financial reporting. The
FASB and IASB staff discussed NAREIT's concerns with the Boards
and recommended that all investment property be exempted from
the proposed receivable and residual lessor accounting model in
conjunction with the staff paper on Lessor Accounting that was
presented on Oct. 19. To read the staff paper on Lessor
Accounting, refer to
IASB Agenda Reference 2F/FASB Agenda Reference 210.
Previously, the Boards tentatively decided to include a scope
exception in the proposed leases standard for investment
property only if measured at fair value.
Contact
If you have any comments or questions, please contact
Christopher Drula, NAREIT's Senior Director, Financial
Standards, at
cdrula@nareit.com.
|
The October 21, 2011 Ernst & Young Reaction
Ernst & Young
To the Point:
Operating lease accounting survives for some real estate lessors
Yesterday, the Boards made some significant modifications to the
proposed accounting for lessors agreed to in July 2011. Our
To the Point publication explains what you need to know about the
revised approach and the Boards’ decision to allow certain lessors of
real estate investment properties to continue to use operating lease
accounting.
Link ---
Click Here
http://www.ey.com/global/assets.nsf/United%20Accounting/TothePoint_BB2198_LessorApproach_20October2011/%24file/TothePoint_BB2198_LessorApproach_20October2011.pdf
Bob Jensen's threads on lease accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#Leases
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
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.
In addition, warns Ken Bentsen, president of the
Equipment Leasing and Financing Association, the proposed changes could lead
to higher costs for both capital and accounting. "Rather than simplifying
[FAS 13], it ends up creating an extremely complex formula, which will put a
great burden, particularly on smaller, nonpublic companies, and does not
achieve what we believe is the ultimate goal of FASB and IASB, which is to
improve financial reporting," he told CFO.com.
Bentsen's trade association notes in a recent
comment letter (the deadline for comments was last Friday) that the proposed
changes will impose on smaller companies a disproportionate burden to apply
the new accounting to their leases "for immaterial but required
adjustments." According to ELFA, more than 90% of leases involve assets
worth less than $5 million and have terms of two to five years.
The 109-page discussion paper at least starts with
what seems like a new simplified concept for lease accounting: lessees must
account for their right to use a leased item as an asset and their
obligation to pay future rental installments for that item as a liability.
JCPenney claims it has been in that mindset all
along. "Historically, we have managed our capital structure internally as if
all real estate property leases were recognized on the balance sheet," wrote
Dennis Miller, controller for the retailer, adding that lease obligations
are considered long-term debt and have been disclosed in financial-statement
footnotes.
Dissidents to FASB's changing of lease accounting
rules have all along said that rating agencies and analysts have referenced
such disclosures in footnotes and made adjustments in their modeling to
account for a company's leased assets.
Still, as IASB chairman David Tweedie has noted,
the current rules, for example, allow airlines' balance sheets to appear as
if the companies don't have airplanes. One of the quibbles with the existing
standard is its bright lines, which have legally allowed companies to
restructure a leasing agreement so that it be considered an operating lease
and not have its assets and liabilities fall onto the balance sheet. In
2005, the Securities and Exchange Commission staff estimated that publicly
traded companies are in this way able to hide $1.25 trillion in future cash
obligations.
Critics of the rule-makers' discussion paper are
hoping that they'll at least replace the deleted bright lines with some new
ones, such as the exclusion of short-term leases. For instance, the Small
Business Administration suggested companies should be able to expense rather
than capitalize lease transactions of less than $250,000, and others said
leases that last less than one year should be expensed. However, the
discussion paper notes that such scenarios could give way to workarounds.
Other common issues raised by respondents to the
discussion paper: they want the standard-setters to also tackle lease
accounting by lessors. The rule-makers had deferred thinking about lessors
as the project continued to be delayed.
In addition, some respondents pushed back against
the suggestion that they should have to reassess each lease as "any new
facts and circumstances" come to light. Exxon Mobil's controller, Patrick
Mulva, said such reassessments — which would require a quarterly review —
would be "excessively onerous" for his company, which has more than 5,000
"significant" operating leases and thousands of "low level" leases. Mulva
called on the standard-setters to be more specific for when a reassessment
would be required.
At the FASB (Financial Accounting Standards Board),
Bob Herz says he thinks "lease accounting is probably an area where people had
good intentions way back when, but it evolved into a set of rules that can
result in form-over substance accounting." He cautions that an overhaul
wouldn't be easy: "Any attempts to change the current accounting in an area
where people have built their business models around it become extremely
controversial --- just like you see with stock options."
Jonathan Weil, "How Leases Play A Shadowy Role In Accounting" (See below)
By the phrase form over substance, Bob Herz is referring to the four bright line
tests of requiring leases to be booked on the balance sheet. Over the past two
decades corporations have been using these tests to skate on the edge with
leasing contracts that result in hundreds of billions of dollars of debt being
off balance sheets. The leasing industry has built an enormously profitable
business around financing contracts that just fall under the wire of each bright
line test, particularly the 90% rule that was far too lenient in the first
place. One might read Bob's statement that after the political fight in the
U.S. legislature over expensing of stock options, the FASB is a bit weary and
reluctant to take on the leasing industry. I hope he did not mean this.
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.
FASB Okays Project to Overhaul Lease Accounting
The Financial Accounting Standards Board voted
unanimously to formally add a project to its agenda to "comprehensively
reconsider" the current rules on lease accounting. Critics say those rules,
which haven't gotten a thorough revision in 30 years, make it too easy for
companies to keep their leases of real estate, equipment and other items off
their balance sheets. As such, FASB members said, they're concerned that
financial statements don't fully and clearly portray the impact of leasing
transactions under the current rules. "I think we have received a clear signal
from the investing community that current accounting standards are not providing
them with all the information they want," FASB member Leslie Seidman said before
the vote.
"FASB Okays Project to Overhaul Lease Accounting," SmartPros, July 20,
2006 ---
http://accounting.smartpros.com/x53931.xml
July 21 reply from Bob Jensen
Hi Pat,
I agree entirely with you and the new IASB/FASB standard that recognizes
that for assets that depreciate, the lessees were gaming the system under
either FAS 13 or IAS 17 so as to hide debt and reduce leverage. I’m all for
the changes in the standards for depreciable assets.
I have a bit more of a problem with such things as leased land or leased
air space for a store inside a mall. Compare a 20-year lease on an airliner
versus a 20-year lease on a shoe store in a Galleria. Even though the
airline’s lease was gamed so as not be a capital lease under FAS 13, for all
practical purposes the airline has used up much of the aircraft after 18
years. There’s not much difference between leasing and ownership in this
case.
But what has the shoe store used up after 18 years? A cube of air that
regenerates every second of every day. The shoe store can never own that air
space except in the unlikely event that the Galleria decides to sell all of
its rentals as condos. Then the condo terms would all have to be written
fresh anyway.
The big distinction in my mind is the expected amount that would be a
cash flow loss to the lessor if the lessee breaks the lease after 18 years.
In the case of the aircraft, the loss is very, very substantial. In the case
of the cube of air, the loss is minimal assuming the Galleria has equivalent
rental opportunities when the lease is broken.
Is there some type of distinction that should be made on the balance
sheet between leased airliners and leased cubes of air?
Bob Jensen
July 21, 2009 reply from John Brozovsky
[jbrozovs@VT.EDU]
Probably no distinction should be made. The
shoestore has purchased the right to park their hat in a prime location. In
real estate it is location, location, location. The right to use an
exclusive location is certainly an asset and the future payments a
liability.
John
July 21, 2009 reply from Bob Jensen
Hi John,
One distinction arises if the shoe store can simply walk away from the
lease contract with a trivial penalty payment. The airline probably will
incur a non-trivial penalty for walking away from an aircraft lease before
the lease contract matures.
Perhaps this distinction is not important to modern accountants, but us
old geezers still think the distinction is important on the balance sheet
reporting of lease obligations. Interestingly, the exit value of the shoe
store lease may be nearly zero even though the present value of remaining
lease payments is sizeable. We may have to think differently about fair
value accounting for air space leases if we broaden fair value accounting
requirements.
Exit value surrogates for fair value accounting may work better for
aircraft than for air space. Or put another way, booking air space leases at
present value of remaining cash flow payments may not be consistent with
fair value accounting under FAS 157 where Level 1 estimation is the high God
relative to inferior Level 3 present value estimation of fair value.
If we book air space leases at exit values we may in effect be (gasp)
accounting for them as operating leases.
Thanks John,
Bob Jensen
Another
One from That Ketz Guy
"The
Accounting Cycle: CVS Caremark Leases Op/Ed," by: J. Edward Ketz, SmartPros,
September 2008 ---
http://accounting.smartpros.com/x67548.xml
Bob Jensen's threads on lease accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Leases
DID YOU KNOW??
Forwarde4 by Gene and Joan
Take your bananas apart when you get home from the store. If you leave them
connected at the stem, they ripen faster.
Store your opened chunks of cheese in aluminum foil. It will stay fresh much
longer and not mold!
Peppers with 3 (males) bumps on the bottom are sweeter and better for eating.
Peppers with 4 (females) bumps on the bottom are firmer and better for cooking.
Add a teaspoon of water when frying ground beef. It will help pull the grease
away from the meat while cooking.
To really make scrambled eggs or omelets rich add a couple of Spoonfuls of
sour cream, cream cheese, or heavy cream; then beat them.
Add garlic immediately to a recipe if you want a light taste Of garlic and at
the end of the recipe if your want a stronger taste of garlic.
Reheat Pizza Heat leftover pizza in a nonstick skillet on top of the stove;
set heat to med-low And heat till warm. This keeps the crust crispy. No soggy
micro pizza. I saw this on the food channel and it really works.
Easy Deviled Eggs Put cooked egg yolks in a zip lock bag. Seal; mash till
they are all broken up Add remainder of ingredients, reseal, keep mashing it up
mixing thoroughly, cut the tip of the baggy; squeeze mixture into egg. Just
throw bag away when done - easy clean up.
Reheating refrigerated bread To warm biscuits, pancakes, or muffins that were
refrigerated, place them in A microwave next to a cup of water. The increased
moisture will keep the food Moist and help it reheat faster.
Newspaper weeds away Start putting torn newspaper in your plants, work the
nutrients in your soil. Wet newspapers, Put layers around the plants,
overlapping as you go; cover with mulch and forget about weeds. Weeds will get
through some gardening plastic; they will not get through wet newspapers.
Broken Glass Use a wet cotton ball or Q-tip to pick up the small shards of
glass you can't see easily.
Flexible vacuum To get something out of a heat register or under the fridge
add an empty paper towel roll or empty gift wrap roll to your vacuum. It can be
bent or flattened to get in narrow openings.
Reducing Static Cling Pin a small safety pin to the seam of your slip and you
will not have a clingy skirt or dress. Same thing works with slacks that cling
when wearing panty hose. Place pin in seam of slacks and ... Ta DA! ... Static
is gone.
Measuring Cups Before you pour sticky substances into a measuring cup, fill
with hot water. Dump out the hot water, but don't dry cup. Next, add your
ingredient (peanut butter, honey, etc.) and watch how easily it comes right out.
Foggy Windshield? Hate foggy windshields? Buy a chalkboard eraser and keep it
in the glove box of your car When the windows fog, rub with the eraser! Works
better than a cloth!
Reopening envelope If you seal an envelope and then realize you forgot to
include something inside, Just place your sealed envelope in the freezer for an
hour or two. Viola! It unseals easily.
Conditioner Use your hair conditioner to shave your legs. It's cheaper than
shaving cream and leaves your legs really smooth. It's also a great way to use
up the conditioner you bought but didn't like when you tried it in your hair.
Goodbye Fruit Flies To get rid of pesky fruit flies, take a small glass, fill
it 1/2 with Apple Cider Vinegar And 2 drops of dish washing liquid; mix well.
You will find those flies drawn to the cup and gone forever!
Get Rid of Ants Put small piles of cornmeal where you see ants. They eat it,
take it 'home,' can't digest it so it kills them. It may take a week or so,
especially if it rains, but it works and you don't have the worry about pets or
small children being harmed!
INFO ABOUT CLOTHES DRYERS The heating unit went out on my dryer! The
gentleman that fixes things around the house for us told us that he wanted to
show us something and he went over to the dryer and pulled out the lint filter.
It was clean. (I always clean the lint from the filter after every load of
clothes.) He took the filter over to the sink and ran hot water over it. The
lint filter is made of a mesh material . I'm sure you know what your dryer's
lint filter looks like. Well .... the hot water just sat on top of the mesh! It
didn't go through it at all! He told us that dryer sheets cause a film over that
mesh - that's what burns out the heating unit. You can't SEE the film, but it's
there. It's what is in the dryer sheets to make your clothes soft and static
free. You know how they can feel waxy when you take them out of the box ... well
this stuff builds up on your clothes and on your lint screen. This is also what
causes dryer units to potentially burn your house down with it! He said the best
way to keep your dryer working for a very long time (and to keep your electric
bill lower) is to take that filter out and wash it with hot soapy water and an
old toothbrush at least every six months. He said that increases the life of the
dryer at least twice as long! How about that!?! Learn something new every day! I
certainly didn't know dryer sheets would do that. So, I thought I'd share! Note:
I went to my dryer and tested my screen by running water on it. The water ran
through a little bit but mostly collected all the water in the mesh screen. I
washed it with warm soapy water and a nylon brush and I had it done in 30
seconds. Then when I rinsed it .... the water ran right thru the screen! There
wasn't any puddling at all! That repairman knew what he was talking about!
"I'm 76 and I'm Tired," by Robert A. Hall, Former Massachusetts
State Senator
The piece is often attributed incorrectly to Bill Cosby ---
http://www.snopes.com/politics/soapbox/imtired.asp
I'm 76. Except for brief period in the 50's when I was doing my National
Service, I've worked hard since I was 17. Except for some some serious health
challenges, I put in 50-hour weeks, and didn't call in sick in nearly 40 years.
I made a reasonable salary, but I didn't inherit my job or my income, and I
worked to get where I am. Given the economy, it looks as though retirement was a
bad idea, and I'm tired. Very tired.
I'm tired of being told that I have to "spread the wealth" to people who
don't have my work ethic. I'm tired of being told the government will take the
money I earned, by force if necessary, and give it to people too lazy to earn
it.
I'm tired of being told that Islam is a "Religion of Peace," when every day I
can read dozens of stories of Muslim men killing their sisters, wives and
daughters for their family "honor"; of Muslims rioting over some slight offense;
of Muslims murdering Christian and Jews because they aren't "believers"; of
Muslims burning schools for girls; of Muslims stoning teenage rape victims to
death for "adultery"; of Muslims mutilating the genitals of little girls; all in
the name of Allah, because the Qur'an and Shari'a law tells them to.
I'm tired of being told that out of "tolerance for other cultures" we must
let Saudi Arabia and other Arab countries use our oil money to fund mosques and
madrassa Islamic schools to preach hate in Australia, New Zealand, UK, America
and Canada, while no one from these countries are allowed to fund a church,
synagogue or religious school in Saudi Arabia or any other Arab country to teach
love and tolerance..
I'm tired of being told that drug addicts have a disease, and I must help
support and treat them, and pay for the damage they do. Did a giant germ rush
out of a dark alley, grab them, and stuff white powder up their noses or stick a
needle in their arm while they tried to fight it off?
I'm tired of hearing wealthy athletes, entertainers and politicians of all
parties talking about innocent mistakes, stupid mistakes or youthful mistakes,
when we all know they think their only mistake was getting caught. I'm tired of
people with a sense of entitlement, rich or poor.
I'm really tired of people who don't take responsibility for their lives and
actions. I'm tired of hearing them blame the government, or discrimination or
big-whatever for their problems.
I'm also tired and fed up with seeing young men and women in their teens and
early 20's be-deck them selves in tattoos and face studs, thereby making
themselves un-employable and claiming money from the Government.
Yes, I'm damn tired. But I'm also glad to be 76.. Because, mostly, I'm not
going to have to see the world these people are making.I'm just sorry for my
granddaughter and her children. Thank God I'm on the way out and not on the way
in.
Humor Between October 1 and October 31, 2011
The Phyllis Diller Gag File ---
http://americanhistory.si.edu/documentsgallery/exhibitions/diller/
Aging Boomers ---
http://www.newsday.com/polopoly_fs/1.235372.1243574086!menu/standard/file/ny-walt-baby-boomers.swf
Sir Ian McKellen Reads Manual for Changing Tires in Dramatic Voice ---
Click Here
http://www.openculture.com/2011/10/sir_ian_mckellen_reads_manual_for_changing_tires_in_dramatic_voice.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
Smart Idea: 80-Foot Mast Under a 65-Foot Bridge ---
http://www.wimp.com/mastbridge/
Julia Sweeney "Sex Ed." Monologue ---
http://minnesota.publicradio.org/display/web/2010/04/06/wits-sweeney/
Sister Myotis on Thongs - Halleluja! Amen! ---
http://videos2view.net/thongs.htm
Forwarded by Auntie Bev
A man walks into a psychiatrist's office wearing only underwear made of glad
Wrap.
The psychiatrist says, "Well, I can clearly see you're nuts."
JEWISH ZODIAC ---
http://www.jewzo.com/Jewish-Zodiac-Placemat-p/jz-1001.htm
Forwarded by Eric Cohen
You call THAT a test message?
Now THIS is a test message.
1) Why did the Sabbath, observed by Jews beginning on Friday nights, change
to be celebrated by Christians on Sundays?
2) Why was the Western Roman Empire more easily and quickly conquered than
the Eastern Roman Empire?
3) If a urinalysis test comes back with results showing a large amount of
blood and also showing few to no red blood cells seen (per high power field),
what is the likely cause of this otherwise seeming disparity?
4) You're in Miami, Florida. There is great chaos going on around you, caused
by a hurricane and severe floods. There are huge masses of water all around you.
You are a CNN photographer and you are in the middle of this great disaster. The
situation is very dire -- nearly hopeless.
There are houses and people floating by you, disappearing into the swirling
waters. Nature is showing all its destructive power and is ripping everything
away with it. Suddenly you see a man in the water. He is gasping for air,
fighting for his life, trying not to be taken away by the torrents of water and
mud.
You move closer.
Somehow the man looks familiar.
Suddenly it strikes you. You know who the struggling man is! It's the
President!!! At that very same moment, you notice that the raging waters are
about to take him away, forever.
You have two options. You can save him or you can take the best photo of your
life. Again, you can save the life of the President, or you can shoot a Pulitzer
Prize winning photo -- a unique photographic record displaying the death of one
of the world's most powerful men.
Would you (a) select color film, or (b) go with the simplicity of classic black
and white?
5) To which composer and song is it a custom to have the orchestra members
stop playing one by one, get up one by one, blow out a candle, and leave the
stage as the song continues until there is only one person performing...and why?
Forwarded by Maureen
TWO NUNS WERE SHOPPING AT A 7-11 STORE. AS THEY PASSED BY THE BEER COOLER,
ONE NUN SAID TO THE OTHER, " WOULDN'T A NICE COOL BEER OR TWO TASTE WONDERFUL ON
A HOT SUMMER EVENING?"
THE SECOND NUN ANSWERED, "INDEED IT WOULD, SISTER, BUT I WOULD NOT FEEL
COMFORTABLE BUYING BEER, SINCE I AM CERTAIN IT WOULD CAUSE A SCENE AT THE
CHECKOUT STAND."
"I CAN HANDLE THAT WITHOUT A PROBLEM" THE OTHER NUN REPLIED, AND SHE PICKED
UP A SIX-PACK AND HEADED FOR THE CHECK-OUT.
THE CASHIER HAD A SURPRISED LOOK ON HIS FACE WHEN THE TWO NUNS ARRIVED WITH A
SIX-PACK OF BEER. "WE USE BEER FOR WASHING OUR HAIR" THE NUN SAID, "BACK AT OUR
NUNNERY, WE CALL IT CATHOLIC SHAMPOO."
WITHOUT BLINKING AN EYE, THE CASHIER REACHED UNDER THE COUNTER. PULLED OUT A
PACKAGE OF PRETZEL STICKS, AND PLACED THEM IN THE BAG WITH THE BEER.
HE THEN LOOKED THE NUN STRAIGHT IN THE EYE, SMILED, AND SAID: "THE CURLERS
ARE ON THE HOUSE."
Forwarded by Paula
A group of kindergärtners were trying very hard to become accustomed to the
first grade. The biggest hurdle they faced was that the teacher insisted on NO
baby talk!
You need to use 'Big People words,' she was always reminding them.
She asked John what he had done over the weekend? 'I went to visit my Nana.'
'No, you went to visit your GRANDMOTHER. Use 'Big People' words!'
She then asked Mitchell what he had done 'I took a ride on a choo-choo.' She
said. 'No, you took a ride on a TRAIN. You must remember to use 'Big People'
words.'
She then asked little Alex what he had done? 'I read a book,' he replied.
That's WONDERFUL!' the teacher said.
'What book did you read?'
...
Alex thought real hard about it, then puffed out his chest with great pride
and said,
"Winnie the SHIT"
Forwarded by Auntie Bev
A man
had just settled into his seat next to the window on the plane, when another man
sat down in the aisle seat and put his black Labrador Retriever in the middle
seat next to the man.
The
first man looked very quizzically at the dog and asked why the dog
was allowed on the plane.
The
second man explained that he was from the Police Drugs Enforcement Agency and
that the dog was a ‘sniffing dog’.
‘His name is Sniffer and he’s the best there is. I’ll
show you once we get airborne, when I put him to work.’
The
plane took off, and once it has leveled out, the Policeman said, ‘Watch this.’
He told Sniffer to ‘search’. Sniffer jumped down,
walked along the aisle, and finally sat very purposefully next to a woman for
several seconds. Sniffer then returned to his seat and put one paw on the
policeman’s arm.
The
Policeman said, ‘Good boy’, and he turned to the man and said, ‘That woman is in
possession of marijuana, I’m making a note of her seat number and the
authorities will apprehend her when we land.
‘Gee,
that’s pretty good,’ replied the first man.
Once again, the Policeman sent Sniffer to search the
aisles. The Lab sniffed about, sat down beside a man for a few seconds, returned
to its seat, and this time he placed two paws on the agent’s arm.
The
Policeman said, ‘That man is carrying cocaine, so again, I’m making a note of
his seat number for the police.’
‘I like it!’ said his seat mate.
The Policeman then told Sniffer to ‘search’ again.
Sniffer
walked up and down the aisles for a little while, sat down for a moment, and
then came racing back to the agent, jumped into the middle seat and proceeded to
poop all over the place. The first man was really disgusted by this behavior and
couldn’t figure out how or why a well-trained dog would behave like that. So he
asked the Policeman, ‘What’s going on?’
The
Policeman nervously replied, ‘He’s just found a bomb.
Some of these are probably urban legends, but what the heck!
Forwarded by Dr. Wolff
HISTORICAL TRIVIA
Did you know the saying "God willing and the Creek don't rise" was in
reference to the Creek Indians and not a body of water? It was written by
Benjamin Hawkins in the late 18th century. He was a politician and Indian
diplomat. While in the south, Hawkins was requested by the President of the U.S.
To return to Washington . In his response, he was said to write, "God willing
and the Creek don't rise." Because he capitalized the word "Creek" it is deduced
that he was referring to the Creek Indian tribe and not a body of water.
**********************
In George Washington's days, there were no cameras. One's image was either
sculpted or painted. Some paintings of George Washington showed him standing
behind a desk with one arm behind his back while others showed both legs and
both arms. Prices charged by painters were not based on how many people were to
be painted, but by how many limbs were to be painted. Arms and legs are 'limbs,'
therefore painting them would cost the buyer more. Hence the expression, 'Okay,
but it'll cost you an arm and a leg.' (Artists know hands and arms are more
difficult to paint)
***********************
As incredible as it sounds, men and women took baths only twice a year (May and
October) Women kept their hair covered, while men shaved their heads (because of
lice and bugs) and wore wigs. Wealthy men could afford good wigs made from wool.
They couldn't wash the wigs, so to clean them they would carve out a loaf of
bread, put the wig in the shell, and bake it for 30 minutes. The heat would make
the wig big and fluffy, hence the term 'big wig... ' Today we often use the term
'here comes the Big Wig' because someone appears to be or is powerful and
wealthy.
**********************
In the late 1700's, many houses consisted of a large room with only one chair.
Commonly, a long wide board folded down from the wall, and was used for dining.
The 'head of the household' always sat in the chair while everyone else ate
sitting on the floor. Occasionally a guest, who was usually a man, would be
invited to sit in this chair during a meal.. To sit in the chair meant you were
important and in charge. They called the one sitting in the chair the 'chair
man.' Today in business, we use the expression or title 'Chairman' or 'Chairman
of the Board.'
**********************
Personal hygiene left much room for improvement.. As a result, many women and
men had developed acne scars by adulthood. The women would spread bee's wax over
their facial skin to smooth out their complexions. When they were speaking to
each other, if a woman began to stare at another woman's face she was told,
'mind your own bee's wax.' Should the woman smile, the wax would crack, hence
the term 'crack a smile'. In addition, when they sat too close to the fire, the
wax would melt . . . Therefore, the expression 'losing face.'
**********************
Ladies wore corsets, which would lace up in the front. A proper and dignified
woman, as in 'straight laced' wore a tightly tied lace..
**********************
Common entertainment included playing cards. However, there was a tax levied
when purchasing playing cards but only applicable to the 'Ace of Spades...' To
avoid paying the tax, people would purchase 51 cards instead. Yet, since most
games require 52 cards, these people were thought to be stupid or dumb because
they weren't 'playing with a full deck..'
**********************
Early politicians required feedback from the public to determine what the people
considered important. Since there were no telephones, TV's or radios, the
politicians sent their assistants to local taverns, pubs, and bars. They were
told to 'go sip some Ale and listen to people's conversations and political
concerns. Many assistants were dispatched at different times. 'You go sip here'
and 'You go sip there.' The two words 'go sip' were eventually combined when
referring to the local opinion and, thus we have the term 'gossip.'
*********************
At local taverns, pubs, and bars, people drank from pint and quart-sized
containers. A bar maid's job was to keep an eye on the customers and keep the
drinks coming. She had to pay close attention and remember who was drinking in
'pints' and who was drinking in 'quarts,' hence the phrase 'minding your 'P's
and Q's'.
************************
More: bet you didn't know this! In the heyday of sailing ships, all war ships
and many freighters carried iron cannons. Those cannons fired round iron cannon
balls. It was necessary to keep a good supply near the cannon. However, how to
prevent them from rolling about the deck? The best storage method devised was a
square-based pyramid with one ball on top, resting on four resting on nine,
which rested on sixteen. Thus, a supply of 30 cannon balls could be stacked in a
small area right next to the cannon. There was only one problem....how to
prevent the bottom layer from sliding or rolling from under the others. The
solution was a metal plate called a 'Monkey' with 16 round indentations.
However, if this plate were made of iron, the iron balls would quickly rust to
it. The solution to the rusting problem was to make 'Brass Monkeys.' Few
landlubbers realize that brass contracts much more and much faster than iron
when chilled.. Consequently, when the temperature dropped too far, the brass
indentations would shrink so much that the iron cannonballs would come right off
the monkey; Thus, it was quite literally, 'Cold enough to freeze the balls off a
brass monkey.' (All this time, you thought that was an improper expression,
didn't you.)
John Hodgman Riffs on Magicians and Their Craft at Maker Faire --- Click
Here
http://www.openculture.com/2011/09/john_hodgman_riffs_on_magicians_and_their_craft_at_maker_faire.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
Forwarded by Dan Gheorghe Somnea in Romania
2011 Security Alerts
for Travel in Europe
by John Cleese
The French government announced yesterday that it has raised its
terror alert level from "Run" to "Hide." The only two higher levels
in France are "Collaborate" and "Surrender." The rise was
precipitated by a recent fire that destroyed France 's white flag
factory, effectively paralyzing the country's military capability.
The English are feeling the pinch in relation to recent events in
Libya and have therefore raised their security level from "Miffed"
to "Peeved." Soon, though, security levels may be raised yet again
to "Irritated" or even "A Bit Cross." The English have not been "A
Bit Cross" since the blitz in 1940 when tea supplies nearly ran out.
Terrorists have been re-categorized from "Tiresome" to "A Bloody
Nuisance." The last time the British issued a "Bloody Nuisance"
warning level was in 1588, when threatened by the Spanish Armada.
The Scots have raised their threat level from "Pissed Off" to "Let's
get the Bastards." They don't have any other levels. This is the
reason they have been used on the front line of the British army for
the last 300 years.
Italy has increased the alert level from "Shout Loudly and
Excitedly" to "Elaborate Military Posturing." Two more levels
remain: "Ineffective Combat Operations" and "Change Sides."
The Germans have increased their alert state from "Disdainful
Arrogance" to "Dress in Uniform and Sing Marching Songs." They also
have two higher levels: "Invade a Neighbor" and "Lose."
Belgians, on the other hand, are all on holiday as usual; the only
threat they are worried about is NATO pulling out of Brussels .
The Spanish are all excited to see their new submarines ready to
deploy. These beautifully designed subs have glass bottoms so the
new Spanish navy can get a really good look at the old Spanish navy.
Australia , meanwhile, has raised its security level from "No
worries" to "She'll be all right, Mate." Two more escalation levels
remain: "Crikey! I think we'll need to cancel the Barbie this
weekend!" and "The Barbie is canceled." So far no situation has ever
warranted use of the final escalation level.
-- John Cleese - British writer, actor and tall person
Source ---
http://biserica.org/phpBB2/viewtopic.php?p=5040#5040
|
Humor Between October 1 and October 31, 2011 ---
http://www.trinity.edu/rjensen/book11q4.htm#Humor103111
Humor Between September 1 and September 30, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor093011
Humor Between August 1 and August 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor083111
Humor Between July 1 and July 31, 2011
---
http://www.trinity.edu/rjensen/book11q3.htm#Humor073111
Humor Between May 1 and June 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor063011
Humor Between April 1 and April 30, 2011
---
http://www.trinity.edu/rjensen/book11q2.htm#Humor043011
Humor Between February 1 and March 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor033111
Humor Between January 1 and January 31, 2011
---
http://www.trinity.edu/rjensen/book11q1.htm#Humor013111
And that's
the way it was on October 31, 2011 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Concerns That Academic Accounting Research is Out of Touch With 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
|
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 Pictures and
Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
And that's the way it was on October 31, 2011 with
a little help from my friends.
Bob Jensen's gateway to millions of
other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New
Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud
Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Concerns That Academic Accounting Research is Out of Touch
With Realit
I think leading academic
researchers avoid applied research for the profession because making
seminal and creative discoveries that practitioners have not already
discovered is enormously difficult.
Accounting academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence
increasingly developed out of the internal dynamics of esoteric
disciplines rather than within the context of shared perceptions
of public needs,” writes Bender. “This is not to say that
professionalized disciplines or the modern service professions
that imitated them became socially irresponsible. But their
contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative –
as there always tends to be in accounts
of the
shift from Gemeinschaft
to Gesellschaft. Yet it
is also clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter
and procedures,” Bender concedes, “at a time when both were
greatly confused. The new professionalism also promised
guarantees of competence — certification — in an era when
criteria of intellectual authority were vague and professional
performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The
risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and
scholasticism (of three types: tedium, high tech, and radical
chic).
The agenda for the next decade, at least as I see it, ought to
be the opening up of the disciplines, the ventilating of
professional communities that have come to share too much and
that have become too self-referential.”
What went wrong in
accounting/accountics research?
How did academic accounting
research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting
History News Sites ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Some
Accounting News Sites and Related Links
Bob Jensen at
Trinity University
Accounting and Taxation News Sites ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Fraud News ---
http://www.trinity.edu/rjensen/AccountingNews.htm
XBRL News ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Selected Accounting History Sites ---
http://www.trinity.edu/rjensen/AccountingNews.htm
Some of Bob Jensen's Pictures and Stories
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Free Tutorials, Videos, and Other Helpers
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private
Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Health
Care News ---
http://www.trinity.edu/rjensen/Health.htm
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
574 Shields
Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Bob Jensen's Personal History in Pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
As you might have guessed, the topic I have been asked to speak on is IFRS adoption in the U.S. Later in the day, I will participate in a panel discussion on the same topic with a very senior partner from the KPMG's "Department of Professional Practice" and the current FASB Academic Fellow, Terry Iannaconi and Lynn Rees, respectively. I go way back with Terry and Lynn, and I am looking forward to being on a panel with both of them.
So as not to steal any 'thunder' away from my talk, I'm going to try and keep a lid on my criticisms of IFRS adoption until then. But, I will say that I plan to provide a point-by-point rebuttal of the latest arguments for IFRS adoption, which were made by its paid promoters, Hans Hoogervorst and Harvey Goldschmidt, at the latest AICPA-IASB love fest.
What I would like to address in this post, though, is a question that I have asked myself for a long time now, but now seems like the right time to write a post about it: why are there so few academic accountants who blog?
I decided to blog soon after I took early retirement from academia because it had recently emerged as an extremely convenient and direct approach for generating web content that might lead others to learn about the professional services I could provide. Back in 2007, blogging wasn't nearly as pervasive as it is now, and I was certain that my early mover advantage in the competition for visibility would soon dissipate. Surely, other accounting academics wanted to write about their own pet peeves, or to use the medium to have more of a role in important questions facing the profession and our students.