The Islamic finance industry has grown quickly in
recent years. Yet while standards for financial instruments that comply with
Islamic law are well-developed, the adoption of specialized Islamic
accounting methods is lagging, according to the head of the Bahrain-based
Accounting and Auditing Organization for Islamic Financial Institutions,
one of the world’s biggest Islamic standards-setting
bodies.
“For Shariah standards [AAOIFI] is dominating the
market,” Khaled Al Fakih, the body’s secretary general and chief executive,
said on Tuesday. “Everyone is referring to AAOIFI when applying their
standards. As for accounting, this is the big problem.”
Many Islamic banks in the Arab Gulf already use
AAOIFI’s Islamic accounting standards. But plenty of lenders that do a
combination of Islamic financing and conventional lending continue to use
the popular IFRS or U.S. GAAP standards. The main difference between
conventional and Islamic financing is the prohibition on charging or paying
interest in Islamic structures.
Banks’ failure to use Islamic accounting standards
is a problem because the conventional methods don’t classify Islamic
structures accurately, Mr. Al Fakih said. A deposit at a bank, for example,
is considered a liability under conventional accounting rules: a bank has to
pay that money back, after all. An Islamic deposit, however, isn’t
technically as secure.
“Islamic bank deposits are not capital-guaranteed –
depositors are contributing to an investment and are willing to bear a
loss,” Mr. Al Fakih said. “They’re quasi-equity.”
If banks were to reclassify their Islamic deposits,
he added, they could benefit from reduced charges on their capital, freeing
up more money to put toward new financing. The fundamental issue, though, is
one of accuracy. “The substance of the contract should be properly
reflected,” Mr. Fakih said.
“When you go to IFRS or U.S. GAAP, the Islamic
transaction is not there,” he said. “Everything is about lending and
borrowing.”
Dodd-Frank Title VII (Dodd-Frank) significantly
changed the trading requirements for derivative instruments, such as
mandating that certain derivatives be centrally cleared.
A number of financial reporting implementation
questions have arisen as companies consider the Dodd-Frank requirements.
These include determining fair value of centrally cleared derivatives,
accounting for collateral, assessing the impact on hedge accounting, and
determining the appropriate presentation (gross versus net).
This Dataline discusses the financial reporting
implications of the new requirements, primarily focusing on end-users that
trade in the affected derivatives and who do not qualify for the end-user
exception.
Since 2009, Marhionne has presided over a business
that has experienced a loss in European market share from 9.3 to 6.2
percent.
. . .
On 20 January 2009, Fiat S.p.A. and Chrysler LLC
announced their intention to form a global alliance. Under the terms of the
agreement, Fiat would take a 20% stake in Chrysler and gain access to its
North American distribution network in exchange for providing Chrysler with
technology and platforms to build smaller, more fuel-efficient vehicles in
the US and providing reciprocal access to Fiat's global distribution
network.
In addition, the proposed agreement would entitle
Fiat to receive a further 15% (without cash
consideration) through the achievement of
specific product and commercial objectives.
No cash or financial support was required from Fiat under the agreement.
Instead it would obtain its stake mainly in exchange for covering the cost
of retooling a Chrysler plant to produce one or more Fiat models for in the
US. Fiat would also provide engine and transmission technology to enable
Chrysler to introduce smaller, fuel-efficient models in the NAFTA market.
The deal was engineered by Fiat chief Sergio Marchionne, who pulled the
Italian group back from the brink of collapse after taking over in 2004. The
principal objective of the partnership was to provide both groups with
significantly enhanced economies of scale and geographical reach at a time
when they were struggling to compete with larger and more global rivals such
as Toyota, Volkswagen and alliance partners Renault S.A. and Nissan.[
Since then, Fiat has become a "basket case," says
GM analyst David Healy at Burnham Securities. It has had five top- level
management changes, and the deaths of Gianni and Umberto Agnelli have left
no clear successor. Troubles began almost immediately. The American
corporate types were "on another planet," culturally speaking, from the
Agnelli family management at Fiat, says Manaresi. As Fiat's cash woes
mounted--their cars just weren't selling--it sold off Fidis, the
financial-services arm of Fiat Auto. GM claimed the sale breached the
agreement and made the put option invalid. Over four years, the companies
collaborated on only a few models, like the Croma, which will be launched in
March. Would GM do it again? "Hindsight is 20/20," says GM spokesperson Toni
Simonetti. Analysts also believe that GM never thought the put option would
come into play.
Rating firm Fitch dropped Fiat’s long term outlook
yesterday, while maintaining a BB- rating on its long term debt and a B
rating on its short-term debt. The new “negative” outlook, according to
Fitch, was based on weaknesses at Fiat’s core businesses, other than
Chrysler. The agency noted that while Chrysler was a separate entity, its
cash could not be easily diverted to Fiat, but that uncertainty over how
Fiat would pay for the rest of Chrysler (and how much it would pay) brought
doubt over the company’s long term prospects; they also expressed concern
over risks in Fiat’s ambitious plan to move its brands upscale and increase
exports from Europe. The drop in Fiat’s outlook could increase the cost of
borrowing money, though Fiat appears to have already arranged for lines of
credit to cover ongoing operations and possibly the cost of acquiring the
remainder of Chrysler.
While purchasing the rest of the VEBA’s stake in
Chrysler and integrating the two companies would provide significant tax
savings (assuming a tax headquarters in Britain or the Netherlands) and
allow for Chrysler’s profits to be diverted into Fiat debt reduction,
Chrysler itself still has significant debt which must be dealt with, and the
interest on the loans is likely to be high. Fiat leaders must balance these
costs and risks with the likelihood that Chrysler’s value will continue to
rise, especially if the 2014 Jeep Cherokee is a hit, which seems likely
based on critical reactions so far.
Chrysler's drive trains were so lousy the failing company began to give
lifetime warranties on the drive trains that, fortunately, was never a mistake
made by Yugo manufacturers. In the bailout deal, USA taxpayers gave Chrysler
over a billion dollars just to fund those lifetime warranties --- which for
young buyers could possibly carry on to the 22nd Century of free drive train
replacements of very old Chrysler vehicles.
Sadly, the Chrysler lifetime drive train warranties do not apply to its Jeep
subsidiary. The classic weakness on a Jeep is in its differential bearings. I
had to replace those bearings on an older Jeep Cherokee. Mechanics just
expect that those bearings will regularly give out. A friend had to have
those bearings replaced on a new Cherokee that's less than a year old. He'd best
dump that Cherokee before his warranty expires.
From the CFO Journal's Morning Ledger on January 2, 2013
What CEOs are worried about in 2014z The
WSJ’s John Bussey
asks members of The
Wall Street Journal’s CEO Council to ponder the unpredictable: What
development outside their control might significantly affect their
businesses in 2014? Among the top concerns were political stalemate in
Washington and the Affordable Care Act. While some of the CEOs endorsed the
intent of the new health-care law, they believe there will be more surprises
and unintended consequences as the reforms roll out. And that could push up
corporate costs, push down revenue, or just generally whack consumer
confidence. Meanwhile, Lenovo CEO Yang Yuanqing says the ever-increasing
consumption of the world’s expanding middle class, especially in China, is
key to all global companies. “There is an incredible amount of purchasing
power that will soon be unleashed as emerging markets become stronger and
the global economy becomes healthier,” he say
From the CFO Journal's Morning Ledger on January 2, 2013
Welcome back! The new year is bringing some big
changes for businesses. A handful of key tax credits expired at the end of
2013, so some companies are beginning the year with higher effective tax
rates,
writes CFOJ’s Emily Chasan in this must-read overview
of what’s in store this year. Congress
could extend some of the tax breaks, but lawmakers “might not get that done
until the end of 2014,” said Kate Barton, a tax-services adviser at Ernst &
Young. Among the biggest changes this year will be the way companies can
write off repair costs for fixed assets, such as windows or factory
generators, and new accounting standards for leases on an array of
property—from buildings to airplanes. The SEC, meanwhile, is likely to write
rules for companies to claw back some executive pay following a financial
restatement. There also will be new pay-for-performance disclosures.
As for health care, companies got a reprieve when
the provision requiring large employers to provide coverage for workers or
pay a penalty was delayed until 2015. But new rules this year will limit the
cost to employees and the waiting periods for coverage, and will extend
coverage to dependents until age 26. Some of the new rules will increase
costs for companies that provide health insurance, said Judy Bauserman, a
partner at benefits consultant Mercer, but none of this year’s new costs are
as significant as the 2015 penalties.
To handle the increase in work stemming from new
rules, Joseph Bellino, CFO of aerospace and defense manufacturer Ducommun,
has added about four people to his department over the past year, expanding
his finance staff by about 15%. His team has been poring over customer
contracts and debt covenants to see if they will be affected by new
revenue-accounting rules expected in the first quarter, among other
regulations. “The regulatory environment drives a lot of the work that we
do,” he said.
Five proposed narrow-scope amendments to four
standards were exposed for public comment Wednesday by the International
Accounting Standards Board (IASB) as part of its annual improvement process.
FASB took what appears to be two steps back from
convergence with the International Accounting Standards Board (IASB) last
week with a pair of major tentative decisions in its project on accounting
for financial instruments.
In the classification and measurement portion of
the project, the board decided not to continue to pursue its proposed
“solely payment of principal and interest (SPPI)” model to determine the
classification and measurement of financial assets.
The fundamental principles of FASB’s proposed SPPI
model were aligned with the IASB’s model, although the boards already
differed in other areas on classification and measurement.
FASB instead decided to retain the bifurcation
requirements for embedded derivative features in hybrid financial assets in
current U.S. GAAP. Board members said that although the current guidance is
complex, the SPPI model also was complex.
“The outcome [of the SPPI model] would be similar,
but the cost would be great,” FASB Chairman Russell Golden said.
The board directed the staff to perform additional
analysis of whether FASB should develop a new approach for using a cash flow
characteristics test for financial assets.
Decisions made last week also keep FASB’s proposed
model separated from the IASB’s proposed model on impairment in the
accounting for financial instruments project. FASB voted to continue
refining its proposed current expected credit loss (CECL) model for
impairment.
The proposed CECL model would call for the
allowance for credit losses on the balance sheet to represent lifetime
expected credit losses. At each reporting date, the changes to that
allowance would be immediately recognized as an increase or decrease of the
allowance, and an impairment expense in net income.
FASB’s proposed CECL model calls for more upfront
recognition of loan losses than the IASB’s proposed model. The IASB has
proposed initial recognition of expected credit losses for 12 months. After
initial recognition in the IASB model, lifetime expected credit losses would
be recognized for financial assets that experience significant deterioration
in credit quality.
Continued in article
Jensen Comment
Some of the most important divergences came when the IASB elected to water down
accounting for financial instruments and hedge accounting. The fact that IFRS no
longer requires finding and evaluating embedded derivatives is a huge mistake in
my opinion. I also do not agree with the IFRS obliteration of bright lines in
hedge effectiveness testing.
It appears that divergence is increasing in FAS 133 versus IAS 39/IFRS 9
in accounting for derivative financial instruments. Most of the differences are
caused by the IASB's softening of accounting standards.
From PwC on December 23, 2013
At its
December 18 meeting, the FASB made two significant decisions in its
financial instruments projects that reduce the likelihood of convergence
with the IASB:
Classification and measurement - the FASB decided unanimously to abandon
the solely payment of principal and interest model governing the
classification of debt investments, and instead retain the current
guidance for bifurcating hybrid financial instruments
Impairment - the FASB agreed to retain its "full lifetime expected
credit loss" model
Both of these decisions diverge from the IASB's approach in their parallel
projects, leaving the prospects for convergence in jeopardy.
Jensen Comment
There are other differences, particularly in the IASB's obliterating of bright
lines in hedge effectiveness testing --- which is tantamount causing enormous
inconsistencies in providing hedge accounting for ineffective hedges.
Jensen Comment
For me the most important point in all the above is Professor Friedman's warning
about ruining an economy with unfunded and runaway entitlement obligations that
can only be settled with breach of promises or hyperinflation. The most ruinous
form of entitlement is a promise to pay whatever the cost such as medical care
and medication obligations in Medicare and Medicaid insurance. In particular,
the Medicare D prescription drug program initiated by George W. Bush will be a
disaster. President Obama admits that Medicare entitlements cannot be
sustained, but reducing those entitlements is tantamount to political suicide.
Medicaid will become a disaster now that even millionaires with proper
financial planning can qualify for free medical care and medications --- such as
students with million dollar trust funds.
Entitlements are two-thirds of the federal budget.
Entitlement spending has grown 100-fold over the past 50 years. Half of all
American households now rely on government handouts. When we hear statistics
like that, most of us shake our heads and mutter some sort of expletive. That’s
because nobody thinks they’re the problem. Nobody ever wants to think they’re
the problem. But that’s not the truth. The truth is, as long as we continue to
think of the rising entitlement culture in America as someone else’s problem,
someone else’s fault, we’ll never truly understand it and we’ll have absolutely
zero chance... Steve Tobak ---
http://www.foxbusiness.com/business-leaders/2013/02/07/truth-behind-our-entitlement-culture/?intcmp=sem_outloud
3. What’s the biggest pedagogical challenge
you see right now, either in
your own classes or those of your colleagues?
Perhaps because I’m working in technology and have
been seeing examples of it in the past couple of years, I think the biggest
challenge is the increasing reality that students can get, on-line,
solutions to any problem we can pose to them. Tools like Wolfram Alpha can
solve almost any problem that evaluates skills that we want our students to
learn, and many other problems as well. This coupled with the availability
of social networking and answer sites that range from the simple (Yahoo
Answers) to sophisticated (Stack Exchange) means that we are suddenly in a
world where any question we ask of our students—from introductory courses to
graduate level courses in pure mathematics—can be answered by use of a
networked device, be it a phone, tablet, or more traditional computer. We’ve
always had to be concerned with students’ abilities to get answers from
other sources (talking with ones neighbor is a time-honored method of
getting an answer to a difficult problem), but the issue is suddenly
much more significant when the neighbor can be a smarter Ph.D. mathematician
than I (a world away!) or an application with language processing capability
that is able to perform any calculation we expect our students to learn how
to do.
Continued in article
Jensen Comment
This is an interesting article on the differences between small colleges and
mega universities. Gavin LaBose is a mathematics professor, but his comments
apply to most undergraduate disciplines in mega university.
Some things left unsaid probably are obvious. One is the need in most
instances for small college professors to teach more preps and highly varied
preps. For example, a math professor in a small college might have to teach
Calculus I and II plus advanced number theory and topology. That would be almost
unheard of in a mega university.
Years ago I shared a speaking platform with a woman who taught all the
accounting courses at a small Catholic university --- from Principles 101 to
Corporate Tax 304 to Auditing 416.. She was the Accounting Department. But her
class sizes were very small. I recall that her pedagogy in intermediate
accounting was rooted in The Wall Street Journal. She would find articles
impacted by accounting rules and then expand upon those rules in her classes.
Coverage may have been somewhat random, but students probably remembered what
they learned better than if they memorized textbook passages.
It's more difficult to generalize about variance in quality of students.
Small colleges can have enormous variances when the bar is pretty low for
admissions. Mega universities can have similar variances, although some
disciplines within such universities have higher bars. For example, the mega
university in thr article above is the University of Michigan. The Mathematics
Department at Michigan must deal with the lowest SAT admissions to the highest
SAT admissions. The Accounting Department at the University of Michigan, on the
other hand, does not have to teach remedial courses and restricts admissions to
become an accounting major. I don't know what the bar is today, but in the past
the bar was a 3.94 grade average to become an accounting major.
Does the
PCAOB’s proposal on naming lead audit partners for
US listed issuer audits contemplate any exemptions for personal safety?
There’s a significant discussion of exemptions in the latest reproposal but,
in the end, it doesn’t.
The Board has not included an exception to the
disclosure requirement analogous to that in the
EU’s Eighth Directive
in the reproposed amendments. Further, a requirement to disclose the
engagement partner’s name has been in place in certain foreign
jurisdictions for quite some time, yet no specific experience brought to
the Board’s attention provided persuasive information that personal
risks to the engagement partners would increase as a result of these
requirements.
GlaxoSmithKline (GSK), audited by PwC, is
headquartered in the UK although its shares are listed on the New York Stock
Exchange and the London stock exchange. The UK Companies Act governs GSK
plc. The Act requires that each and every copy of the auditors’ reports to
the company’s shareholders on the Annual Report, and other auditable
reports, which are published by or on behalf of the company, must state,
where the company’s auditors are a firm, the name of the person who signed
them in his or her own name as senior statutory auditor in relation to the
audit, for and
on behalf of the auditors.
GSK approved an exemption to the partner naming
rule and that means PwC and GSK can keep the name of the lead partner under
wraps.
The experience in the EU and the UK, where the
naming convention has been in place for a while, is frequently held up as an
example of “much ado about nothing” with regard to auditors’ worries about
pitchfork-wielding crowds coming after them at their homes in the event of a
failure of one of their client companies, like a bank. That doesn’t happen
although audit partners are more often mentioned by name in news accounts
when bad things happen or they go on to bigger and better things like
leading a firm or a regulator after presiding over a disaster like
Royal Bank of Scotland or
HBOS.
The opposite argument by US regulators proposing
the same naming requirement—that naming lead partners will improve quality
by deterring negligence and forcing higher standards of independence and
professional skepticism because of concerns about one’s professional
reputation— is also less than convincing. The UK had as many or more
failures, forced acquisitions and nationalizations than the US during the
financial crisis yet we continue to see new scandals pointing to auditor
negligence emerge there such as
Deloitte/MG Rover,
EY and Farepack, and the fraud claims against
Deloitte client Autonomy by acquirer HP. That’s in
spite of the lead audit partners names being public before, during, and
after the alleged negligence or fraud occurred.
For many years, according to the company, GSK plc
has “been the focus of protests by various animal protection groups, some of
which have engaged in aggressive, abusive and hostile acts.” GSK has taken
advantage of an exemption, perhaps based on a request from PwC, that allows
the company to leave the engagement partner’s name off its public reports
because someone thinks naming the partner might “create, or be likely to
create, a serious risk that he or she or any other person would be subject
to violence or intimidation.”
A Chicago Public Schools technology
coordinator stole more than $400,000 in school funds before fleeing to
Mexico, where he was later found dead, according to a just-released Chicago
Board of Education Office of the Inspector General annual report.
The technology coordinator — who is not named in
the 43-page report — created “fake vendors”, with much of the money going
into his own personal bank account, according to the report. Over one
22-month period, the coordinator received more than $144,00 in suspect
reimbursements, according to the report. Most of the fake vendors were
“either classmates of the technology coordinator when he attended the high
school or were students at the school” when the coordinator worker there,
the report states.
During the course of the investigation, the
technology coordinator withdrew $70,000 from a personal bank account,
refused on advice of counsel to speak with the inspector general’s office,
resigned from CPS, fled to California and was found dead in Tijuana, Mexico,
a short time later, according to the report.
In that case, one of many highlighted in the
report, the inspector general’s office worked with federal investigators,
but to date, no criminal charges have been filed, investigators said.
In a separate case, two CPS employees — including a
high school principal — enrolled “ghost students” in an attempt to qualify
for more staff.
In another case highlighted in the report, CPS
employees allowed a vendor to provide “inferior, substitute products,”
costing CPS nearly $100,000 in unnecessary charges.
The inspector general’s office received a total of
1,460 complaints this year — about 36 percent of which were reported
anonymously. About 18 percent of the complaints had to do with residency
issues, another 13 percent concerned “inattention to duty” and 9 percent
involved allegations of “on-duty criminal conduct.”
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.
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 theshift from Gemeinschaftto
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.”
Normally I do not use my Website for survey research. Now I will be guilty of
doing so myself, but the question is relatively short.
It concerns the American Accounting Association Notable Contributions to the
Accounting Literature Awards only for the years 1990-2013 ---
http://aaahq.org/awards/awrd3win.htm
The Requested Favor I would like to know which of these 1990-2013 notable
contributions to the accounting literature are featured in your undergraduate of
masters courses. Please do not include an item if it is merely cited as a
discretionary reference that you do not feature in particular at some point in
an undergraduate or masters accounting, tax, AIS, or auditing course.
It would be a nice extra if you could summarize what main findings you want
to pass on to your students.
If you think your summary may be of general interest to the AECM membership,
feel free to post it to the AECM. If you are only doing this as a favor for my
personal research then please reply only to me at: rjensen@trinity.edu
If you prefer not to be quoted by me in future please indicate that you
prefer not to be quoted by name.
A Message from the 2013-2014President of the American Accounting Association Accounting Education News Mary Barth, Stanford University
Fall 2013. Vol. 41, Issue 4
Pages 2-3
http://aaahq.org/pubs/AEN/2013/AEN_Fall13_WEB.pdf
I would like to give you an idea of what to expect
this year from your AAA. Remember, the AAA does not reinvent itself with
each new president. We each serve for three years—as president-elect,
president, and past president—to help ensure continuity. Joining the AAA
leadership team is like jumping on a moving train. The objective is to move
the train forward while enhancing the experience of all on board and getting
to a wonderful destination, not making big changes in direction.
As with any organization, there are the usual
things we must do to keep things running smoothly, such as publishing our 14
journals and helping our 16 sections and seven regions to thrive. In
addition, there are many ongoing activities focused on our common interests
, such as preserving our intellectual property, implementing the Pathways
Commission’s recommendations, ensuring we have sound publication ethics,
helping regions to reinvigorate their meetings, and planning our 2015–2016
Centennial celebration. W e will continue these activities so that we can
reap the benefits identified when they were begun. We will add some new
activities to reinforce the prior ones and enable us to meet whatever
challenges our future holds.
Big—potentially disruptive—changes are looming for
accounting education, accounting scholarship, and our role in the world’s
economy . The plenary and follow-up sessions at the 2013 Annual Meeting in
Anaheim focused on these changes in higher education, research, and teaching
and learning and clearly identified the challenges we face. Many of us feel
threatened by these disruptive changes. But the changes are exhilarating and
have great promise for making our jobs more efficient, more meaningful, and
more fun. They will enable each of us to focus on our high value–added
activities and to spend less time reinventing the tasks many of us do. With
you, we will work to turn these challenges into opportunities.
These challenges command the time and attention of
our leadership group . This past year, the AAA Council , Board of Directors,
and many of our other colleagues spent considerable time on sharpening the
vision in our strategic plan to determine what we can and should do to meet
these challenges. The Sharpening Our Vision discussions generated many
creative ideas . This year, we will determine which ideas we should
implement and how soon we should implement them. As your president, I will
help ensure the AAA helps you navigate the many changes on the
horizon—regardless of what the future brings .
When I look closer at the changes on the horizon, I
see globalization lurking in the background. There is no denying we live in
a global world. Globalization is part of today’s reality. The Internet and
other technologies, as well as routine long-distance travel, are constantly
shrinking the globe.
Continued in article
Jensen Comment
In her first message to the AAA membership President broke from the precedent of
Presidents posting this message to the AAA Commons --- which all former
presidents have done since the inauguration of the AAA Commons.
She mentions many of the resources of the AAA for its membership including 14
journals. But she makes zero mention of either the AAA's resources of the AAA
Commons or the AECM. She devotes most of her message to globalization
initiatives of the AAA without once mentioning the role the AAA Commons and the
AECM are already playing in globalization of accounting education.
I think I understand President Barth's low (zero) priority for the AAA
Commons. She's one of our top accountics scientists. Like virtually all
accountics scientists she has made no attempt to communicate with accounting
educators and practioners around the globe via the AAA Commons. To date she,
like almost every other accountics scientists, has made zero Posts and zero
Comments on the Commons ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Commons
She ignored by request, without even a courtesy reply, to support my
initiative to form a Tech Corner on the Commons where AAA journal editors could
request that accountics science author should send a message to the commons
explaining why their forthcoming articles are relevant to accounting teachers
and practitioners who follow the Commons.
Alas I fear promotion of the AAA Commons will have to wait for a
non-accountics scientist to promote the AAA Commons among the AAA membership.
Fortunately, the next President of the AAA will probably be that leader.
Christine Botoson as of November 14, 2013 has made 88 Posts, 15 Comments on the
AAA Commons. I suspect we will have to wait until she becomes President in
August 2014 for the leadership of the AAA to once again promote the AAA Commons
for networking of education, research, and practice messages on the AAA Commons.
I don't think there's any way to motivate accountics scientists to
communicate with the "common" academics on the AAA Commons.
Robust statistics are statistics with good
performance for data drawn from a wide range of probability distributions,
especially for distributions that are not normally distributed. Robust
statistical methods have been developed for many common problems, such as
estimating location, scale and regression parameters. One motivation is to
produce statistical methods that are not unduly affected by outliers.
Another motivation is to provide methods with good performance when there
are small departures from parametric distributions. For example, robust
methods work well for mixtures of two normal distributions with different
standard-deviations, for example, one and three; under this model,
non-robust methods like a t-test work badly.
Continued in article
Jensen Comment
To this might be added that models that grow adaptively by adding components in
sequencing are not robust if the mere order in which components are added
changes the outcome of the ultimate model.
David Johnstone wrote the following:
Indeed if you hold H0 the same and keep changing
the model, you will eventually (generally soon) get a significant result,
allowing “rejection of H0 at 5%”, not because H0 is necessarily false but
because you have built upon a false model (of which there are zillions,
obviously).
Jensen Comment
I spent a goodly part of two think-tank years trying in vain to invent robust
adaptive regression and clustering models where I tried to adaptively reduce
modeling error by adding missing variables and covariance components. To my
great frustration I found that adaptive regression and cluster analysis seems to
almost always suffer from lack of robustness. Different outcomes can be obtained
simply because of the order in which new components are added to the model,
i.e., ordering of inputs changes the model solutions.
Accountics scientists who declare they have "significant results" may also
have non-robust results that they fail to analyze.
When you combine issues on non-robustness with the impossibility of testing
for covariance you have a real mess in accountics science and econometrics in
general.
It's relatively uncommon for accountics scientists to criticize each
others' published works. A notable exception is as follows:
"Selection Models in Accounting Research," by Clive S. Lennox, Jere R.
Francis, and Zitian Wang, The Accounting Review, March 2012, Vol.
87, No. 2, pp. 589-616.
This study explains the challenges associated with
the Heckman (1979) procedure to control for selection bias, assesses the
quality of its application in accounting research, and offers guidance for
better implementation of selection models. A survey of 75 recent accounting
articles in leading journals reveals that many researchers implement the
technique in a mechanical way with relatively little appreciation of
important econometric issues and problems surrounding its use. Using
empirical examples motivated by prior research, we illustrate that selection
models are fragile and can yield quite literally any possible outcome in
response to fairly minor changes in model specification. We conclude with
guidance on how researchers can better implement selection models that will
provide more convincing evidence on potential selection bias, including the
need to justify model specifications and careful sensitivity analyses with
respect to robustness and multicollinearity.
. . .
CONCLUSIONS
Our review of the accounting literature indicates
that some studies have implemented the selection model in a questionable
manner. Accounting researchers often impose ad hoc exclusion restrictions or
no exclusion restrictions whatsoever. Using empirical examples and a
replication of a published study, we demonstrate that such practices can
yield results that are too fragile to be considered reliable. In our
empirical examples, a researcher could obtain quite literally any outcome by
making relatively minor and apparently innocuous changes to the set of
exclusionary variables, including choosing a null set. One set of exclusion
restrictions would lead the researcher to conclude that selection bias is a
significant problem, while an alternative set involving rather minor changes
would give the opposite conclusion. Thus, claims about the existence and
direction of selection bias can be sensitive to the researcher's set of
exclusion restrictions.
Our examples also illustrate that the selection
model is vulnerable to high levels of multicollinearity, which can
exacerbate the bias that arises when a model is misspecified (Thursby 1988).
Moreover, the potential for misspecification is high in the selection model
because inferences about the existence and direction of selection bias
depend entirely on the researcher's assumptions about the appropriate
functional form and exclusion restrictions. In addition, high
multicollinearity means that the statistical insignificance of the inverse
Mills' ratio is not a reliable guide as to the absence of selection bias.
Even when the inverse Mills' ratio is statistically insignificant,
inferences from the selection model can be different from those obtained
without the inverse Mills' ratio. In this situation, the selection model
indicates that it is legitimate to omit the inverse Mills' ratio, and yet,
omitting the inverse Mills' ratio gives different inferences for the
treatment variable because multicollinearity is then much lower.
In short, researchers are faced with the following
trade-off. On the one hand, selection models can be fragile and suffer from
multicollinearity problems, which hinder their reliability. On the other
hand, the selection model potentially provides more reliable inferences by
controlling for endogeneity bias if the researcher can find good exclusion
restrictions, and if the models are found to be robust to minor
specification changes. The importance of these advantages and disadvantages
depends on the specific empirical setting, so it would be inappropriate for
us to make a general statement about when the selection model should be
used. Instead, researchers need to critically appraise the quality of their
exclusion restrictions and assess whether there are problems of fragility
and multicollinearity in their specific empirical setting that might limit
the effectiveness of selection models relative to OLS.
Another way to control for unobservable factors
that are correlated with the endogenous regressor (D) is to use panel data.
Though it may be true that many unobservable factors impact the choice of D,
as long as those unobservable characteristics remain constant during the
period of study, they can be controlled for using a fixed effects research
design. In this case, panel data tests that control for unobserved
differences between the treatment group (D = 1) and the control group (D =
0) will eliminate the potential bias caused by endogeneity as long as the
unobserved source of the endogeneity is time-invariant (e.g., Baltagi 1995;
Meyer 1995; Bertrand et al. 2004). The advantages of such a
difference-in-differences research design are well recognized by accounting
researchers (e.g., Altamuro et al. 2005; Desai et al. 2006; Hail and Leuz
2009; Hanlon et al. 2008). As a caveat, however, we note that the
time-invariance of unobservables is a strong assumption that cannot be
empirically validated. Moreover, the standard errors in such panel data
tests need to be corrected for serial correlation because otherwise there is
a danger of over-rejecting the null hypothesis that D has no effect on Y
(Bertrand et al. 2004).10
Finally, we note that there is a recent trend in
the accounting literature to use samples that are matched based on their
propensity scores (e.g., Armstrong et al. 2010; Lawrence et al. 2011). An
advantage of propensity score matching (PSM) is that there is no MILLS
variable and so the researcher is not required to find valid Z variables
(Heckman et al. 1997; Heckman and Navarro-Lozano 2004). However, such
matching has two important limitations. First, selection is assumed to occur
only on observable characteristics. That is, the error term in the first
stage model is correlated with the independent variables in the second stage
(i.e., u is correlated with X and/or Z), but there is no selection on
unobservables (i.e., u and υ are uncorrelated). In contrast, the purpose of
the selection model is to control for endogeneity that arises from
unobservables (i.e., the correlation between u and υ). Therefore, propensity
score matching should not be viewed as a replacement for the selection model
(Tucker 2010).
A second limitation arises if the treatment
variable affects the company's matching attributes. For example, suppose
that a company's choice of auditor affects its subsequent ability to raise
external capital. This would mean that companies with higher quality
auditors would grow faster. Suppose also that the company's characteristics
at the time the auditor is first chosen cannot be observed. Instead, we
match at some stacked calendar time where some companies have been using the
same auditor for 20 years and others for not very long. Then, if we matched
on company size, we would be throwing out the companies that have become
large because they have benefited from high-quality audits. Such companies
do not look like suitable “matches,” insofar as they are much larger than
the companies in the control group that have low-quality auditors. In this
situation, propensity matching could bias toward a non-result because the
treatment variable (auditor choice) affects the company's matching
attributes (e.g., its size). It is beyond the scope of this study to provide
a more thorough assessment of the advantages and disadvantages of propensity
score matching in accounting applications, so we leave this important issue
to future research.
Jensen Comment
To this we might add that it's impossible in these linear models to test for
multicollinearity.
Now, let's return to
the "problem" of multicollinearity.
What do we mean by this
term, anyway? This turns out to be the key question!
Multicollinearity is a
phenomenon associated with our particular sample of data when
we're trying to estimate a regression model. Essentially, it's a
situation where there is insufficient information in the sample of
data to enable us to enable us to draw "reliable" inferences about
the individual parameters of the underlying (population) model.
I'll be elaborating more on the "informational content" aspect of this
phenomenon in a follow-up post. Yes, there are various sample measures
that we can compute and report, to help us gauge how severe this data
"problem" may be. But they're not statistical tests, in any sense
of the word
Because multicollinearity is a characteristic of the sample, and
not a characteristic of the population, you should immediately be
suspicious when someone starts talking about "testing for
multicollinearity". Right?
Apparently not everyone gets it!
There's an old paper by Farrar and Glauber (1967) which, on the face of
it might seem to take a different stance. In fact, if you were around
when this paper was published (or if you've bothered to actually read it
carefully), you'll know that this paper makes two contributions. First,
it provides a very sensible discussion of what multicollinearity is all
about. Second, the authors take some well known results from the
statistics literature (notably, by Wishart, 1928; Wilks, 1932; and
Bartlett, 1950) and use them to give "tests" of the hypothesis that the
regressor matrix, X, is orthogonal.
How can this be? Well, there's a simple explanation if you read the
Farrar and Glauber paper carefully, and note what assumptions are made
when they "borrow" the old statistics results. Specifically, there's an
explicit (and necessary) assumption that in the population the X
matrix is random, and that it follows a multivariate normal
distribution.
This assumption is, of course totally at odds with what is usually
assumed in the linear regression model! The "tests" that Farrar and
Glauber gave us aren't really tests of multicollinearity in the
sample. Unfortunately, this point wasn't fully appreciated by
everyone.
There are some sound suggestions in this paper, including looking at the
sample multiple correlations between each regressor, and all of
the other regressors. These, and other sample measures such as
variance inflation factors, are useful from a diagnostic viewpoint, but
they don't constitute tests of "zero multicollinearity".
So, why am I even mentioning the Farrar and Glauber paper now?
Well, I was intrigued to come across some STATA code (Shehata, 2012)
that allows one to implement the Farrar and Glauber "tests". I'm not
sure that this is really very helpful. Indeed, this seems to me to be a
great example of applying someone's results without understanding
(bothering to read?) the assumptions on which they're based!
Be careful out there - and be highly suspicious of strangers bearing
gifts!
Farrar, D. E. and R. R. Glauber, 1967. Multicollinearity in
regression analysis: The problem revisited. Review of Economics
and Statistics, 49, 92-107.
Shehata, E. A. E., 2012. FGTEST: Stata module to compute
Farrar-Glauber Multicollinearity Chi2, F, t tests.
Wilks, S. S., 1932. Certain generalizations in the analysis of
variance. Biometrika, 24, 477-494.
Wishart, J., 1928. The generalized product moment distribution
in samples from a multivariate normal population. Biometrika,
20A, 32-52.
Thank you Jagdish for adding another doubt in to the validity of more than
four decades of accountics science worship.
"Weak statistical standards implicated in scientific irreproducibility:
One-quarter of studies that meet commonly used statistical cutoff may be false."
by Erika Check Hayden, Nature, November 11, 2013 ---
http://www.nature.com/news/weak-statistical-standards-implicated-in-scientific-irreproducibility-1.14131
The
plague of non-reproducibility in science may be
mostly due to scientists’ use of weak statistical tests, as shown by an
innovative method developed by statistician Valen Johnson, at Texas A&M
University in College Station.
Johnson compared the strength of two types of
tests: frequentist tests, which measure how unlikely a finding is to occur
by chance, and Bayesian tests, which measure the likelihood that a
particular hypothesis is correct given data collected in the study. The
strength of the results given by these two types of tests had not been
compared before, because they ask slightly different types of questions.
So Johnson developed a method that makes the
results given by the tests — the P value in the frequentist paradigm,
and the Bayes factor in the Bayesian paradigm — directly comparable. Unlike
frequentist tests, which use objective calculations to reject a null
hypothesis, Bayesian tests require the tester to define an alternative
hypothesis to be tested — a subjective process. But Johnson developed a
'uniformly most powerful' Bayesian test that defines the alternative
hypothesis in a standard way, so that it “maximizes the probability that the
Bayes factor in favor of the alternate hypothesis exceeds a specified
threshold,” he writes in his paper. This threshold can be chosen so that
Bayesian tests and frequentist tests will both reject the null hypothesis
for the same test results.
Johnson then used these uniformly most powerful
tests to compare P values to Bayes factors. When he did so, he found
that a P value of 0.05 or less — commonly considered evidence in
support of a hypothesis in fields such as social science, in which
non-reproducibility has become a serious issue —
corresponds to Bayes factors of between 3 and 5, which are considered weak
evidence to support a finding.
False positives
Indeed, as many as 17–25% of such findings are
probably false, Johnson calculates1.
He advocates for scientists to use more stringent P values of 0.005
or less to support their findings, and thinks that the use of the 0.05
standard might account for most of the problem of non-reproducibility in
science — even more than other issues, such as biases and scientific
misconduct.
“Very few studies that fail to replicate are based
on P values of 0.005 or smaller,” Johnson says.
Some other mathematicians said that though there
have been many calls for researchers to use more stringent tests2,
the new paper makes an important contribution by laying bare exactly how lax
the 0.05 standard is.
“It shows once more that standards of evidence that
are in common use throughout the empirical sciences are dangerously
lenient,” says mathematical psychologist Eric-Jan Wagenmakers of the
University of Amsterdam. “Previous arguments centered on ‘P-hacking’,
that is, abusing standard statistical procedures to obtain the desired
results. The Johnson paper shows that there is something wrong with the P
value itself.”
Other researchers, though, said it would be
difficult to change the mindset of scientists who have become wedded to the
0.05 cutoff. One implication of the work, for instance, is that studies will
have to include more subjects to reach these more stringent cutoffs, which
will require more time and money.
“The family of Bayesian methods has been well
developed over many decades now, but somehow we are stuck to using
frequentist approaches,” says physician John Ioannidis of Stanford
University in California, who studies the causes of non-reproducibility. “I
hope this paper has better luck in changing the world.”
A federal judge has found unconstitutional a law
that lets clergy members avoid paying income taxes on compensation that is
designated part of a housing allowance.
The decision Friday by U.S. District Judge Barbara
Crabb could have far-reaching financial ramifications for pastors, who
currently can use the untaxed income to pay rental housing costs or the
costs of home ownership, including mortgage payments and property taxes.
“It’s a really big deal,” said Annie Laurie Gaylor,
co-president of the Madison-based Freedom From Religion Foundation, which
filed the lawsuit. “A church currently could pay a minister $50,000 but
designate $20,000 of it a housing allowance so that only $30,000 would be
taxed as salary.”
Crabb acknowledged in her decision that the
exemption is a boon to ministers, referencing a 2002 statement by then-U.S.
Rep. Jim Ramstad of Minnesota that the tax exemption would save clergy
members $2.3 billion in taxes from 2002-2007. But she said the magnitude of
the benefit only underscores what’s wrong with the law.
The exemption “provides a benefit to religious
persons and no one else, even though doing so is not necessary to alleviate
a special burden on religious exercise,” Crabb wrote.
The defendants in the case are U.S. Treasury
Secretary Jacob Lew and acting IRS commissioner Daniel Werfel. Attempts to
reach those agencies late Friday were unsuccessful.
Crabb said the defendants did not identify a reason
that a requirement on ministers to pay taxes on a housing allowance is more
burdensome for them than for the many millions of others who must pay taxes
on income used for housing expenses.
Gaylor called the lawsuit “a sleeper,” saying it
has received little media attention and may not be widely known by religious
organizations. That will no doubt change with this win, she said. Given the
dollar figures at stake, she expects clergy members to pressure the White
House to appeal the decision to the 7th U.S. Circuit Court of Appeals in
Chicago.
“Once the clergy get wind of it, I expect they will
be very upset,” she said.
The law, passed by Congress in 1954, allows a
clergy member to use the untaxed income to purchase a home, and then, in a
practice known as “double dipping,” deduct interest paid on the mortgage and
property taxes, the foundation said.
“The court’s decision does not evince hostility to
religion — nor should it even seem controversial,” foundation attorney
Richard L. Bolton said in a statement. “The court has simply recognized the
reality that a tax-free housing allowance available only to ministers is a
significant benefit from the government unconstitutionally provided on the
basis of religion.”
Jensen Comment
Obviously this will hurt some higher paid clergy who take advantage of this
income exclusion to lower their income taxes at the federal and state levels.
However, many (I should think most) clergy probably fall into the 49.5% of 130
million taxpayers who pay no income taxes, 98% of whom (according to Bloomberg)
make less than $100,000 per year ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm
In fact it may work just the opposite where clergy not only do not pay income
taxes, they take home refunds that exceed withholdings due to the earned income
credit that may well apply to the lower paid clergy. Their prayers may have been
answered by this latest court ruling. I wonder if the judge realized this.
Jensen Comment
Some of these tips are out of the hands of the doctoral candidate --- like
beating the competition to be sent to a doctoral consortium. I would recommend
some other things such as those shown below:
Study as many Khan Academy modules in math and statistics that appear to
be relevant to your current and future studies. Especially go for the
modules in statistics and probability ---
https://www.khanacademy.org/math/probability
From Day 1 in the program study (not just read) the more recent doctoral
dissertations from you program as well as some of those that look relevant
from other universities. American Doctoral Dissertations from ProQuest ---
http://www.umi.com/en-US/catalogs/databases/detail/add.shtml
Follow the AECM for ideas on term papers ---
http://pacioli.loyola.edu/aecm/
Note that you can scan the message titles without having to receive each
message in your email box.
Carefully psych out your doctoral program --- probably by getting advice
from recent graduates and students well along in the program. Every program
unique in important ways even though all of them are social science programs
with very little accounting content ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
Late in the program begin to study about how to game for tenure as an
accounting professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)
Other tips from my AECM friends, many of whom advise doctoral students in
accountancy:
The
government's audit regulator has publicly rebuked Deloitte & Touche LLP for a
second time, releasing some of its previously secret concerns about the Big Four
accounting firm's quality controls.
The
Public Company Accounting Oversight Board on Friday unsealed parts of an
inspection report on Deloitte that it issued in 2009, in which the board said
"important issues may exist" about whether the firm was doing enough to
supervise and review its audits and whether it was sufficiently emphasizing the
need for its auditors to exercise professional skepticism.
The
unsealing is a sign that the board feels Deloitte didn't respond properly, in
terms of speed and thoroughness, to address its past criticisms. The action
doesn't carry any fines or other sanctions for Deloitte.
Deloitte said in a statement that it had taken "remedial actions" to address the
board's criticisms.
The
board conducts annual inspections of Deloitte and other large accounting firms,
to evaluate their audit performance and compliance with accounting rules. Part
of the report is immediately made public. Another portion addressing any issues
with the firm's quality control is kept confidential, to allow the firm to
address those concerns.
If
the firm does so to the board's satisfaction, the criticisms remain sealed. But
if the board feels the firm hasn't done enough, quickly enough, it makes those
criticisms public.
This
is the second time the audit-oversight board has unsealed criticisms of
Deloitte. In 2011 it made public criticisms from an earlier year's inspection
report.
Earlier this year, the board unsealed past criticisms of two other Big Four
firms, PricewaterhouseCoopers LLP and Ernst & Young LLP.
In
its statement, Deloitte said it had taken "numerous good-faith remedial actions"
within the first year after the PCAOB issued its report in 2009, but that "we
recognize additional remedial actions were necessary and were subsequently
taken."
The
firm also noted that the PCAOB hasn't unsealed the relevant portions of two
subsequent Deloitte inspection reports, issued in 2010 and 2011. Deloitte said
that move was "reflective of the significant and measurable progress we have
made in recent years toward the achievement of our audit quality objectives."
In
the criticisms unsealed Friday, the PCAOB said that in six Deloitte audits
reviewed by its inspectors, the auditors didn't appropriately challenge, or
verify independently, the assertions of its clients' management.
Unless Congress acts, during the last week of
December an estimated 1.3 million people will lose access to an emergency
program providing them with additional weeks of jobless benefits. A further
850,000 will be denied benefits in the first quarter of 2014.
Congressional Democrats and the White House,
pointing to the sluggish recovery and the still-high jobless rate, are
pushing once again to extend the period covered by the unemployment
insurance program. But with Congress still far from a budget deal and still
struggling to find alternatives to the $1 trillion in long-term cuts known
as sequestration, lawmakers say the chances of an extension before Congress
adjourns in two weeks are slim.
¶ As a result, one of the largest stimulus measures
passed during the recession is likely to come to an end, and jobless workers
in many states are likely to receive considerably fewer weeks of benefits.
Continued in article
Jensen Comment
The article fails to mention that one of the main obstacles to full-time job
growth in some states is the high payroll tax. for unemployment benefits. The
lion's share of the payroll tax is paid buy business firms that hire workers.
High payroll taxes encourage replacing full-time workers with part-time workers
and robots.
One misleading number in this article is the $1 trillion for sequestration.
Yes this is the reduction in Federal spending for the next trillion years. But
sequestration for the first year is only 10% of an approximate $3.5 trillion of
the annual Federal government spending. The bulk of the savings from reduced
jobless benefits will go to hard-pressed state budgets rather than the Federal
government.
The irony is how, when it comes to unemployment benefits, the Democrats will
stress that the economic recovery is "sluggish." But for elections of 2012 and
2014 they will stress how huge gains are being made in economic recovery,
including daily new records in stock market prices.
The real crisis is that most of the unemployment is now structural made up of
unskilled workers who either do not want to return to work or cannot find jobs
because they do not have the skills needed for for the 21st Century. What we
need is to spend an enormous amount to provide modern skills to unskilled
workers.
Ironically, for 12-months the Wal-Mart stores in Littleton and Woodsville
(with a new Super Wal-Mart) in New Hampshire have had huge banners in front of
the stores reading "Now Hiring."
It's a welcome relief that long-time unemployed in New Hampshire and Vermont
will have at least two opportunities to fall back on when their unemployment
benefits terminate. Yeah right! What unemployed worker in New Hampshire or
Vermont wants to work for Wal-Mart?
On the other hand, I read where getting a job at the new Wal-Mart store in
Washington DC will be less probable that being "admitted to Harvard." Employment
opportunities vary widely across the USA. Some unemployed workers in Washington
DC should buy heavy parkas and snow shoes for their moves to Vermont so they can
work in Wal-Mart stores in New Hampshire. There are no new Wal-Mart stores in
Vermont since Vermont banned such new non-unionized big box stores. However,
moving to Vermont is preferred to New Hampshire since Vermont has the most
generous welfare benefits among all 50 states. Really!
Patrizia Zanotta, owner of a welding firm in
northern Italy, survived the country's worst recession since World War II
without layoffs by cutting her 10 employees' hours and scrimping on new
equipment.
Though orders are finally starting to pick up from
her clients abroad, demand remains weak from the local builders that are her
main clients. She blames Italy's extraordinarily high business and payroll
taxes, which together take some two-thirds of a company's gross earnings.
"The state is strangling us," she complains.
The staggering tax burden is a big part of the
reason Italy's output has grown the least over the last decade of any of the
34 countries in the Organization for Economic Development and Cooperation.
This does not go into the detail and illustrations than the the
228 page PwC summary of the the differences "IFRS and US GAAP: Similarities and
Differences" according to PwC (October 2013 Edition)
http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2013.pdf
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.
I have a huge beef with the lack of
illustrations in IFRS versus the many illustrations in U.S. GAAP.
Although the government's bailout of selected banks was deemed in the media
as "The Greatest Swindle in the History of the World," Professor Catanach
suggests that the Big Four attempt to thrust IFRS on the USA is the Great IFRS
Scandal." Some folks on the AECM (no names mentioned) are not going to like this
essay.
When we think about the worst U.S. accounting
scandals ever, those new to the profession usually cite the
Lehman collapse or Madoff scam of 2008, or maybe even the
Enron tragedy in 2001 which has become symbolic for bad
accounting and auditing. And those of us with gray (or no
hair) might recall the ZZZZ Best, Crazy Eddie, or Equity
Funding debacles. However, many of us may have missed what
may be the largest and longest running accounting swindle
ever, one that finds
accountants scamming accountants.
For almost a decade now, accounting educators, local and
regional practitioners, students, and regulators have
been bilked of their limited financial resources by the
large global accounting firms (GAFS). Yes, those of us that
make up what’s left of the “real” accounting profession may
have been victimized, forced to spend our cold, hard cash
(and time) to stimulate the IFRS conversion advisory
practices of these revenue-crazed consulting behemoths.
Why resurrect IFRS now you ask? Well,
most of you that have followed the Grumpies in the past,
already know that
“IFRS is for Criminals.” But in
case you missed it, IFRS adoption in this country is on a
deathwatch, and Tom Selling of the
Accounting Onion has even been so
bold as to proclaim its actual death. And how did you miss
the news of the demise, you ask? Well, you don’t really
believe that the GAFS, or the major industry trade
associations they dominate, will go public with any news
that negatively impacts their revenue generating abilities,
do you? The deathwatch began last summer with the issuance
of a
staff report by the US Securities
and Exchange Commission (SEC) that failed to endorse IFRS
adoption. Instead, it offered no recommendations or
adoption time line, and also raised serious implementation
concerns. And preparations for the wake have accelerated
since we learned that our accounting brethren “across the
pond,” also now are having
second thoughts about IFRS. Given
these developments, it just seemed appropriate to evaluate
who paid the price for the IFRS adoption initiative forced
upon us by the GAFS. Here’s how the swindle worked…
With revenues from Sarbanes-Oxley compliance consulting
beginning to wane, the GAFS needed a “new wave” to ride.
They found one in the European Union’s required adoption of
IFRS in 2005, and then planned to extend this to other
markets including the US. But given the SEC’s role in
standard-setting, the GAFS had to “build” a demand for IFRS
adoption that would effectively force the SEC to mandate
their use. Their well coordinated marketing plan included
the following components:
Convince the
accounting community that not only did everyone favor
IFRS adoption, but that everyone was preparing to adopt.
This was accomplished via poorly constructed surveys
delivered to heavily biased samples, that yielded weekly
newsletters touting IFRS support.
Large industry trade
associations were enlisted in the scam by promises of
new revenues from IFRS training courses which they would
provide to prepare practicing accountants for adoption.
Many accounting educators
also became unwitting accomplices enticed by grant
monies provided by the GAFS to create new IFRS courses
and conduct research into the benefits of IFRS adoption.
So, if awareness and demand could be built,
and enough political muscle exercised, the SEC could be
pushed into adopting IFRS in the US. The result: a really
“big wave” of revenue for the GAFS. And who would pick up
the tab for creating this “make believe” demand for IFRS
adoption services? You guessed it…companies, educators,
students, practitioners…anyone foolish enough to embraced
the GAFS propaganda. And fooled we were by the numerous
half-truths (i.e., the deception) intended to stimulate the
demand for their consulting services. This Grumpy Old
Accountant found one particular assertion particularly
offensive: that the entire world except the US was
adopting IFRS. What the GAFS forgot to tell you was
that this global IFRS adoption was not unconditional, and
was based on numerous “carve-outs,” and often contingent on
IFRS consistency with local GAAP. Hence, the swindle: the
GAFS together with large industry associations generated
large revenues by creating and selling products to meet a
largely fictitious need. So there we have it:
accountants scamming accountants.
But we were warned! David Albrecht
addressed the GAFS motivation for adopting IFRS in “They
Still Don’t Get It” when he so
eloquently and passionately stated:
“Audit firm principals
and corporate executives stand to profit, one way or
another, by billions and billions and billions and
billions of U.S. dollars. It is self-debasing greed. It
is avarice of the corrupted soul.”
“Although weary from
writing about the concerted push to embrace the
International Accounting Standards Board and adopt IFRS
in the U.S., we remain wary because lobbyists continue
publishing propaganda-like announcements to advance
their dubious interests.”
“For the sake of investor
protection and the public interest, the SEC should have
long ago made a U-turn on its Roadmap to IFRS adoption.”
Fortunately, the “good
guys” appear to have prevailed (at least for now). And on
page 2 of its
staff report, the SEC
recognized that a demand for IFRS adoption simply does not
exist in this country, thus clearly exposing the GAFS’
contrived consulting market:
“However, early in the
Staff’s research, it became apparent to the Staff that
pursuing the designation of the standards of the IASB as
authoritative was, among other things, not supported by
the vast majority of participants in the U.S. capital
markets and did not appear to be consistent with the
methods of incorporation employed by the other major
capital markets around the world.”
So there you have it…we
were scammed! But exactly how much did we lose? It’s really
hard to tell, but the number appears to be fairly
substantial. In an incremental analysis of IFRS adoption in
the United States,
David Albrecht suggests that the
total net cost potentially could reach $5 trillion if
complete adoption were to occur. Thank goodness we dodged
that bullet. But what losses have actually been
sustained…let’s look a little deeper at a couple of the more
seriously “injured” parties.
First, there are the
companies electing to adopt IFRS. According
to the SEC, costs to adopt could
consume up to 13 percent of revenue in the first year of
adoption, creating for some large companies an estimated $32
million in “extra” 10-K filing costs. And
recent research also suggests that
IFRS adoption drives up audit costs by over 20 percent in
the adoption year. These are pretty hefty price tags for any
early adopters who bought into the GAFS propaganda,
especially
for something you don’t really need.
Next, there are the
non-trivial sunk costs imposed on both academics and their
students by the GAFS’ IFRS agenda. Now to be fair, several
of the GAFS did provide
“seed” money to select
universities to develop courses and materials in advance of
IFRS adoption. However, most institutions did not receive
any such financial support. So, reacting to artificial
market pressures created by the GAFS, these programs were
forced to fund development of IFRS related courses and
instructional tools largely on their own. And then there is
the time wasted by teachers in preparing themselves to teach
and deliver this “valuable” IFRS content. Also, let’s not
forget the monies and time squandered on IFRS adoption
research in the US. Not only are there “hard” costs
associated with data collection, travel costs, and the like,
but there also are countless opportunity costs associated
with NOT researching other more important topics,
particularly in today’s challenging financial reporting
environment.
Yes, accounting educators paid a stiff price
in this accounting swindle.
Then there are the
students. Textbook publishers embraced the GAFS IFRS fable
wholeheartedly and rushed to revise all accounting related
texts at both undergraduate and graduate levels to include
IFRS related content. And naturally, they could charge more
for these new editions. No longer could students rely on
used books, they had to buy the new editions with the new
IFRS content. And let’s not forget the cost of enrolling in
the newly-created IFRS accounting courses whose benefit to
professional competence remains questionable. Finally, our
accounting students bear the cost of having to study for
IFRS related questions on the CPA exam. Yes, this shows you
just how far the GAFS went to create demand…isn’t the exam
hard enough testing just US GAAP? With today’s rising
tuition costs and student debt a growing problem, the GAFS
should be ashamed of themselves for
fleecing our youth for the sake of their IFRS
adoption “wave.”
Teaching Case on Cost Accounting in a Medical Revolution and Those 500% Mark
Ups
From The Wall Street Journal Accounting Weekly Review on November 21,
2013
TOPICS: Cost Management, Cost-Basis Reporting, Health Care,
Managerial Accounting
SUMMARY: Brent C. James is "...Chief Quality Officer for
Intermountain Healthcare, a...network of 22 hospitals and 185 clinics in
Utah and Idaho. Dr. James has been using electronic records to improve care
and cut costs since the 1980s." In this interview-format article, he
discusses the medical field push to a cost-based system, away from a current
system of charging for services performed regardless of necessity of the
procedure. The article gives classic examples of establishing standard costs
for materials and labor such as management engineers "who go around and
stopwatch how much time it takes a technician to set up a lab test. They
measure how much glassware and reagent the test consumes to process...."
CLASSROOM APPLICATION: The article may be used in a management
accounting class to introduce standard costs, particularly the process of
establishing standard costs.
QUESTIONS:
1. (Introductory) Who is Brent C. James? What "medical revolution"
may he be starting?
2. (Advanced) Define the term "standard cost." What measurement
techniques are described I the article to establish standard costs for
hospital products and services?
3. (Introductory) What does Dr. James say is the reason has it
taken until now for hospitals to establish cost management systems?
4. (Advanced) What is "transparency"? How has Dr. James's hospital
network's management pledged to provide transparency?
5. (Advanced) Are patients at Dr. James's hospital network going to
seeing the cost data his team is compiling? Explain your answer.
Reviewed By: Judy Beckman, University of Rhode Island
Brent C. James may be starting another medical
revolution.
As chief quality officer for Intermountain
Healthcare, a Salt Lake City-based network of 22 hospitals and 185 clinics
in Utah and Idaho, Dr. James has been using electronic records to improve
care and cut costs since the 1980s.
His data-driven clinical-management systems have
been emulated around the world. He estimates that they save at least $250
million and 1,000 lives a year at Intermountain alone.
Now, Intermountain is building an ambitious new
data system that will also be able to track the actual cost of every
procedure and piece of equipment used in its hospitals and clinics, a
function that is standard in many industries but not in health care.
Dr. James shared his vision and the challenges
ahead with The Wall Street Journal. Cost Clarity
WSJ: You've described your new data system as a
"cost master," in contrast to the "charge master" that many hospitals use to
set prices. What's the difference?
DR. JAMES: In a charge master, what you're seeing
is the old phenomenon called "mark it up to mark it down." Hospitals will
make an initial estimate of what something costs, and then they'll mark it
up—sometimes 400% to 500%. Insurance brokers measure success in the size of
the discount they get. That's how you end up with $17 pieces of gauze. It
loses all connection to reality.
In a cost-master system, you have empirical,
fact-based costs. We have eight management engineers, for example, who go
around and stopwatch how much time it takes a technician to set up a lab
test. They measure how much glassware and reagent the test consumes to
process, and how much time it takes on the analyzing machine. The engineers
load all that information into the cost master and they get the true cost of
running that lab test. They do similar cost measurements on every item
contained in our cost master.
We figure we have about 5,000 clinical terms and
upward of 25,000 total items in our cost master. Once I get those costs, I
can manage them the way I would if I were building an automobile or a
washing machine.
These are not new systems. They've been around for
a long time in other industries. All we're doing is shifting them over to
health care. Truth is, Intermountain has run this sort of activity-based
costing since 1983. It just wasn't integrated into clinical documentation
through an electronic medical record [EMR]. With a link to the EMR, maybe
we'll be able to move health care out of the dark ages.
WSJ: How will knowing what
everything costs change the way you deliver care?
DR. JAMES: If you know the true
cost of providing care, you can ask yourself whether doing one thing is
really more important than doing something else.
Our mission statement is: the best medical result
at the lowest necessary cost. We think there is enough waste in health care
that we can dramatically improve our costs. But to do that, I've got to be
able to measure and manage those costs.
A Money Loser?
WSJ: In fee-for-service
medicine, hospitals lose money when they cut costs and unnecessary care. How
do you get around that?
DR. JAMES: That's why
Intermountain made the decision several years ago to shift our business,
over time, to capitated care.
In the past, the way to make money was to do more.
Figure out how to do more surgeries, even if they're unnecessary. Add that
famous physician to try to attract more patients. It creates a medical arms
race. Imagine instead that I get a per-member, per-month payment for a
population of patients. I no longer have a strong financial incentive for
doing more. If I find a way to save money by taking out waste, all the
savings come back to me and my patients. At the same time, I make measures
of quality outcomes transparent. That way patients can know they are getting
good care, and know what it will cost them.
WSJ: What impact do you expect
this to have on the health-care industry?
DR. JAMES: The whole health-care
world is shifting to having the care provider take over the financial risk.
In that world, your survival depends on being able to manage your costs. We
happened, by luck and circumstance, to get going on it early on. Suddenly
this is becoming a race, with some very capable groups entering the fray—but
it's a race toward excellence.
Total Transparency
WSJ: Will patients be able to
see your actual costs?
DR. JAMES: We made a commitment
from senior management that we will be completely transparent.
We have already started to post prices for things
that many patients buy directly, such as lab tests and imaging exams [such
as X-rays]. We will soon add things like routine office visits and simple
procedures, like screening colonoscopy. Later we will add major treatments
like delivering a newborn, or surgery to implant an artificial knee joint.
While we will post prices on our website, probably
the most effective sharing of cost information will happen through our
insurance partners' websites. We believe that patients will mostly want to
know what their own out-of-pocket costs will be, given that they've already
paid for their health insurance. That's true even if your "insurance plan"
is the care delivery group.
Finally, remember that some care delivery is
impossible to price as a package deal in advance. For example, treatment of
major automobile trauma is so unique that it's impossible to predetermine a
standard price.
WSJ: How much will the new
system cost?
DR. JAMES: Several hundred million
dollars. But I could pay for it in one year, if I can use it to get
significantly more waste out.
Caterpillar Adds Fraud Meaning to Deep Sixing Perfectly Good Train Parts
From the CFO Journal's Morning Ledger on November 22, 2013
Caterpillar unit probed for dumping Federal investigators are probing a subsidiary of
Caterpillar to
determine whether it was dumping train parts into the ocean as part of a
possible scheme to bill railroad companies for unneeded repairs,
the WSJ reports.
Caterpillar disclosed in a securities filing three
weeks ago that it had received a federal grand jury subpoena to provide
documents and information on its Progress Rail unit, which repairs
locomotives and railcars. The grand jury investigation is examining whether
Progress Rail was dumping brake parts and other items as a way of concealing
evidence that Progress Rail was charging owners of rail equipment for
replacing parts that were still in good shape.
Union Pacific was
one customer believed to have been affected by the alleged Progress Rail
activities.
Introductory Note
India is scheduled to adopt IFRS accounting standards but as of yet is still
under domestic accounting standards.
Also not there is some difference between capitalization of R&D between FASB
standards in the USA versus international IFRS standards where the FASB requires
more expensing of R&D relative to IFRS and India's current accounting standards: "IFRS and US GAAP: Similarities and
Differences" according to PwC (October 2013 Edition)
http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2013.pdf
Teaching Case on How It Pay's to Look Under the Hood of Indian Financial
Statements
From The Wall Street Journal Accounting Weekly Review on November 21,
2013
TOPICS: Financial Accounting, Financial Ratios, Financial
Reporting, International Accounting
SUMMARY: Tata Motors is "India's largest auto company...[which]
leapt onto the world stage after buying JaguarLand Rover in 2008. Now that
the British luxury car maker makes up roughly 80% of Tata's revenue, this
Indian firm is competing with BMW, Mercedes-Benz and a host of American and
Japanese premium brands...Although its shares are up more than 20% so far
this year, the stock trades at 9.6 times estimated profit for the fiscal
year that ends next March...Yet Tata's valuation may be flattered by the way
it treats certain costs...At issue is how Tata treats research and
development costs...Indian accounting standards give Tata discretion in
accounting for such spending...Tata capitalized roughly 80% of R&D activity
last fiscal year."
CLASSROOM APPLICATION: The article provides an excellent comparison
of U.S. GAAP, IFRS, and Indian local accounting for R&D costs.
QUESTIONS:
1. (Introductory) What three accounting treatments for research and
development (R&D) activities are compared in this article?
2. (Advanced) Briefly summarize the accounting under each of these
systems in your own words.
3. (Advanced) Do you agree with the statement in the article that,
under IFRS, German auto makers can capitalize R&D? Explain your answer.
4. (Introductory) How does the author compare the amount of R&D
capitalization under these three accounting systems?
5. (Advanced) What is the implication of these differing accounting
treatments for the assessment of different auto manufacturers' financial
performance? Be specific about the financial ratios used in the article to
compare the companies' results, valuation, and stock price.
6. (Advanced) How does the author adjust the amounts reported by
these companies in order to make them comparable? Be specific in describing
what accounting treatment and income measures to which the author converts
the reported numbers.
Reviewed By: Judy Beckman, University of Rhode Island
India's Tata Motors TTM -1.05% is in the big league
of global car makers. When it comes to accounting for certain costs, though,
it doesn't play exactly the same way as its peers.
India's largest auto company by market value leapt
onto the world stage after buying JaguarLand Rover in 2008. Now that the
British luxury car maker makes up roughly 80% of Tata's revenue, this Indian
firm is competing with BMW, BMW.XE +0.37% Mercedes-Benz and a host of
American and Japanese premium brands.
And when compared with some of these peers, Tata
looks to be a relative bargain. Although its shares are up more than 20% so
far this year, the stock trades at 9.6 times estimated profit for the fiscal
year that ends next March. That is at a discount to Daimler, DAI.XE +0.20%
which owns Mercedes, and BMW.
Yet Tata's valuation may be flattered by the way it
treats certain costs. This has the effect of boosting its profit—in the near
term, at least. Taking that into account, Tata is more expensive than it
initially appears.
At issue is how Tata treats research and
development costs. Tata's R&D program, at 6% of sales, is higher than the 4%
or 5% global car makers typically spend on new products and designs.
Indian accounting standards give Tata discretion in
accounting for such spending. The company can treat it as an immediate
expense that cuts into income. Or it can capitalize the spending,
recognizing it over a longer period of time. Tata capitalized roughly 80% of
R&D activity last fiscal year. In this, Tata is ahead of Indian
counterparts—Indian SUV-maker Mahindra & Mahindra 500520.BY +0.44%
capitalized 44% of its R&D last fiscal year.
Tata's practice also contrasts with global rivals.
American and Japanese car makers expense all their R&D spending, as local
accounting rules require. German auto makers, who report under international
accounting standards, can capitalize R&D, though this has averaged only a
third at BMW the last five years.
To be sure, Tata may need more R&D than BMW and
Mahindra. JLR sported outdated models and platforms before 2008, and Tata
says it's treating the British unit as a young company hungry for new
designs. The company says it has followed this practice for years, meaning
it isn't changing course.
Still, Tata's R&D accounting bolsters the bottom
line. If all R&D spending were expensed, Tata's net profit for this fiscal
year would fall by two-thirds, estimates Bernstein Research. Tuning the
numbers this way decreases earnings by 10% at Daimler. And at BMW, it
actually boosts earnings 1% since this car maker amortizes older R&D
spending and bears the expense on its income statement.
Continued in article
Teaching Case on Wal-Mart's Audits of Safety Conditions of Foreign Suppliers
From The Wall Street Journal Accounting Weekly Review on November 21,
2013
SUMMARY: In the wake of the Bangladesh building collapse that
killed more than 1,100 people, Wal-Mart has begun auditing its suppliers to
verify their compliance with the retailer's supply-chain safety
requirements. "Nearly half the factories in...the initial round of safety
inspections...failed their audits and had to make improvements to keep doing
business with the giant retailer."
CLASSROOM APPLICATION: The article may be used in an auditing class
to discuss operational audits and the impact of safety violations on
Wal-Mart's own operating risks. It may also be used to introduce Corporate
Social Responsibility Reporting or supply chains.
QUESTIONS:
1. (Introductory) What devastating events have happened in
Bangladesh at companies manufacturing clothing for Wal-Mart and many other
retailers?
2. (Advanced) What type of audits is Wal-Mart conducting? Why is
the company performing these audits?
3. (Introductory) What is the result if a manufacturing location
fails an audit? If it fails to make required improvements?
4. (Advanced) What is Corporate Social Responsibility (CSR)?
6. (Introductory) According to the article, what are the concerns
with Wal-Mart's reporting about these audits? What steps could Wal-Mart take
to help alleviate these concerns?
7. (Advanced) Does this audit process over Bangladesh factories
have anything at all to do with Wal-Mart's financial reporting? Explain your
answer.
Reviewed By: Judy Beckman, University of Rhode Island
More than 15% of the factories in Wal-Mart Stores
Inc. WMT -0.05% 's initial round of safety inspections in Bangladesh failed
their audits and had to make improvements to keep doing business with the
giant retailer.
Wal-Mart said most of the three dozen factories
were able to correct the problems or are in the process of doing so. One
seven-story factory, for example, had to knock down an illegally built
eighth floor, the retailer said.
The company stopped doing business with two
factories that failed the safety audits and couldn't sufficiently fix the
problems discovered. One factory had to be closed completely.
Wal-Mart will release the results of 75 inspections
on its website and add others as they are completed, a step no other major
Western retailer has taken. The company currently does business with more
than 200 factories in Bangladesh, and has pledged to inspect all of them. It
previously said it would begin posting results of the inspections by last
June.
Wal-Mart is making the moves to get a handle on its
supply chain in the wake of deadly disasters at factories that did work for
the company and other retailers. The company, based in Bentonville, Ark., is
among the largest buyers of apparel made in Bangladesh, and its relentless
focus on cost has made it a target for critics of working conditions in the
impoverished nation.
In the past the retailer hadn't regularly named the
factories from which it buys clothing. But an April building collapse that
killed more than 1,100 Bangladesh garment workers and deadly fires at other
facilities focused international attention on the way Western retailers
obtain cheap clothing.
"We've spent $4 million on these audits, and we're
not done yet," Jay Jorgensen, Wal-Mart's global chief compliance officer,
said in an interview. "There's a lot of progress left to be made."
During an October safety audit at Epic Garments
Manufacturing Co., a factory near Dhaka, engineers hired by Wal-Mart checked
on new red fire doors and outside staircases that had been installed to make
evacuation easier in case of a fire and to prevent flames from spreading
from stock rooms to factory floors.
"Fireproof doors and materials weren't even
available in Bangladesh," Epic Group Chief Executive Ranjan Mahtani said in
an October interview at his plant "We had to fly them in from abroad and
teach local manufacturers how to make them." He said he had already spent
$300,000 on safety improvements to meet standards set by Wal-Mart and other
Western retailers.
The published audits won't offer specific findings
about conditions at the factories, such as whether there are too few exits
or if a building's columns are capable of bearing the weight of the
structure. Rather, they will give a general risk assessment based on a
letter grade that ranges from A through D.
Wal-Mart said it would stop production at factories
that receive a D rating, though the factories have a chance to correct the
problems and go through another assessment.
Critics say the disclosures don't provide enough
information to workers and others who want to keep tabs on factory
improvements.
"I am struck by how little real information they
are providing," said Scott Nova, executive director of the Worker Rights
Consortium, a Washington labor-monitoring group. "They offer no specifics
whatsoever as to the dangers workers face in these factories, all we get is
a scoring system that is largely opaque."
Wal-Mart said the letter-grade system aims to help
give people an easily understandable overview of the safety situation in a
given factory.
Jan Saumweber, Wal-Mart's head of ethical sourcing,
said she plans to increase her staff by 40% this year and add a team of 10
engineers to the company's Bangladesh sourcing office to regularly inspect
factories. Ms. Saumweber took over the ethical sourcing job in September
when Rajan Kamalanathan stepped down after a decade-long tenure at Wal-Mart.
Wal-Mart said it will also start to incorporate
safety standards into merchants' incentive-based compensation and train
buyers to take safety into account when placing orders with factories.
"These are big changes, and the company takes this
very seriously," Ms. Saumweber said.
* Note: States estimate the impact of tax cuts over different budget
cycles, some in one-year segments, others over two-, three- or five-year
periods.
** Nebraska’s Department of Revenue estimated the AMT cut will have a
$7.8 million fiscal impact in FY 2014-2015.
From the CFO Journal's Morning Ledger on November 22, 2013
The government is getting out of General Motors –
and the company is getting a freer hand in deciding what to pay its top
brass.
The Treasury Department plans to sell its remaining shares by year-end, the
final step in winding down the 61% stake it took with taxpayer money at the
height of the financial crisis,
the WSJ’s Damian Paletta and Jeff Bennett report.
In the final tally, the deal will have cost taxpayers about $10.4 billion,
based on the company’s current $38.12 share price. The U.S. so far has
recouped $38.4 billion of the $50 billion initially invested and the coming
sales would raise another $1.2 billion at the current share price.
The
exit frees GM next year from compensation limits on its top executives — a
Treasury-imposed condition that CEO Dan Akerson has said makes it harder to
recruit new executives and to retain others,
the Detroit Free Press’s Nathan Bomey writes.
“GM people can’t wait to get government people out of
their knickers,” Gerald Meyers, former chairman of American Motors and a
professor at the University of Michigan, tells the Journal. “It has been
demoralizing to management.” Mr. Akerson, who turned 65 last month, has
signaled that retirement is on the horizon and has said he prefers his
successor comes from within to avoid disruption,
Bloomberg notes.
There are at least four GM executives who have been mentioned as CEO
contenders – including CFO Dan Ammann.
Treasury’s divestment will also make it a lot easier for the company to
reinstate a dividend, the WSJ says. And if it doesn’t move quickly to return
money to shareholders, the auto maker could face pressure from activist
investors, Harry J. Wilson, founder of restructuring adviser Maeva Group,
and a former member of the Obama auto task force that helped restructure GM,
told Bloomberg. “They will be watched very closely,” said Mr. Wilson. “They
need to focus on improving operating margins, continue to invest in new
product and create a more efficient use of capital.”
Amazon and Wal-Mart are going to take over the
market for people who want stuff cheap and fast. Who will win is up for grabs. Leonard Lodish
Jensen Comment
People do not yet fully appreciate how online shopping reduces tens of billions
in shoplifting losses relative to onsite big box stores ---
http://en.wikipedia.org/wiki/Shoplifting
Of course not all frauds are eliminated such as returning fraudulent versions of
purchased items online or onsite. However, successful shoplifters are not
identified unless they use fake IDs. Online shoppers are identified except where
there's been ID theft which is an enormous problem for onsite and online
vendors.
In the retail realm, it’s a clash of the titans:
Wal-Mart, the world’s largest retailer, versus Amazon, the online giant that
aspires to be “the everything store.” Both are slashing prices and
increasing free, same-day and other enticing delivery-and-return services in
pursuit of market domination. Amazon’s online savvy and forbearance of
profit-taking are well known. Wal-Mart, with its vast bricks-and-mortar
network, is finally getting serious about e-commerce.
But with two, not just one, behemoths now cutting
into profit margins in a race for market share, what are the consequences
for the rest of retail? “If those two keep getting better, it’s going to be
rough news for other people,” says Wharton marketing professor Stephen J.
Hoch.
Retail futurist Doug Stephens also sees “huge”
potential for collateral damage to other retailers. “I think we are already
seeing it,” he notes. “Target issued a letter, though it was more of a
directive, to its vendors a year and a half ago that said if you sell us
anything we later find on Amazon, you run the risk of being delisted as a
vendor. This is very serious for every retailer — be careful of the shrapnel
flying around as Amazon expands into other categories.”
According to Wharton emeritus marketing professor
Leonard Lodish, “Amazon and Wal-Mart are going to take over the market for
people who want stuff cheap and fast. Who will win is up for grabs.”
And what Wal-Mart and Amazon do has a way of
trickling down: “There is definitely pressure on all retailers to increase
speed and lower the cost,” notes Matthew Nemer, a managing director at Wells
Fargo Securities covering the retail and e-commerce sectors.
The race to provide instant gratification has
intensified in recent weeks, with eBay’s acquisition of Shutl, a same-day —
and same-hour — delivery service based in the U.K. with service in New York,
San Francisco and Chicago. The purchase will help eBay expand the service
into 25 markets by the end of 2014. Last year, Google bought BufferBox, a
shipping kiosk service that places boxes inside of stores like 7-Eleven to
accept delivery of merchandise, enabling customers to pick them up at their
convenience.
Amazon, which has a similar pick-up service called
Locker, is operated from Procter & Gamble warehouses in an effort to cut
delivery times for household goods, The Wall Street Journal reported
recently. Even the venerable U.S. Postal Service is getting in on the
e-action, having just signed a deal to deliver Amazon’s packages on Sundays
in some cities. The post office says it expects to make similar deals with
other retailers.
Amazon’s business practices have produced a spark
of protectionism in France, where, in a regulatory fit of pique, the
Assemblée nationale approved a law aimed at defending independent bookshops.
If passed by the senate, the law would prohibit retailers from offering free
delivery on discounted books.
New Bricks and Mortar — for E-commerce
The Wal-Mart-Amazon clash, many observers say, is
part of a much larger battle compelling retailers to spend billions of
dollars in new warehouses to facilitate quick delivery as the shift toward
online shopping accelerates. Rather than luring the customer to the
merchandise, the merchandise is going to the customer, and the industry is
transforming itself. Amazon has funneled $13.9 billion into warehouses since
2010. Soon it will have nearly 100 warehouses to support what the company
aims to make the new norm: orders shipped the same day the purchase is made.
Many of the warehouses being built by retailers are
located close to urban centers — especially to the East Coast, where they
will be within a few hours drive to as much as 40% of the U.S. population.
Urban Outfitters is building a $110 million fulfillment center in Gap, Pa.,
the Philadelphia Inquirer reported recently. Macy’s, Nordstrom, Kohl’s, Bed
Bath & Beyond and others have built, or are planning to build, similarly
sized facilities.
“There’s a massive ecosystem being built around
online sales — shipping, payments, mobile applications, electronic notebooks
for store employees, lockers. I get an email every day highlighting all the
venture capital investments going after some part of it,” says Nemer, adding
that all of these developments point to a quickly evolving consumer mindset
that expects same- or next-day delivery every time.
Continued in article
Jensen Comment
The big losers in the clash between Amazon versus Wal-Mart are big box stores
who in some cases have great new online Websites that just are not keeping up
with the leads taken by Amazon and Wal-Mart.
Amazon is particularly competitive because of vastly
superior online software and network of online vendors selling used items that
carry the Amazon guarantee of satisfaction and return privileges.
Dumb and Dumber Business Policies (were talking billions of dollars in
losses here)
From the Harvard Business Review Newsletter on November 22, 2013
Department-store chain JC Penney, already hurting
financially from a misguided plan to end price promotions, was so plagued by
shoplifters in the third quarter of this year that it lost a full percentage
point of profit margin to theft, says the Wall Street Journal. When thieves
learned that Penney had removed sensor security tags as part of the
transition to a new type of inventory tracking, they targeted the company’s
stores. At the same time, Penney stopped requiring customers to provide
receipts with returned merchandise, so shoppers grabbed merchandise and
“returned” it at cash registers without leaving the stores, the Journal
says.
Jensen Comment
JC Penney was on the edge of survival before this happened. The billions of
added shoplifting losses are not going to help. The rule of fraud prevention is
to have effective internal controls. JC Penney did not implement good internal
controls.
From the CFO Journal's Morning Ledger on November 21, 2013
Sears is expected to report a wider loss in its fiscal third
quarter
The retailer underscored how grim the situation is on Oct. 29,
saying sales during the previous 12 weeks were off 3.7% from a year earlier,
on a comparable basis.
Ahead of the Tape’s Spencer Jakab
says that hedge-fund manager Edward Lampert has proved
hopeless as a retailer since taking control of Sears in 2005. And a recent
stock rally represents a bet that he will be a far better liquidator.
Jensen Comment on Net Earnings
Note how the first index analysts look to judge the financial performance trend
of a company is the bottom line net earnings. It's so sad that both the IASB and
the FASB gave the balance sheet numbers "primacy" and threw income statement
item definitions and measurement under the bus.
Jensen Comment on Sears At-Home Service
When I go to the Sears mall stores in St. Johnsbury, Concord, and Manchester
it's like walking into empty tombs. Where are the customers? The cashiers are
reading novels. Amazon and Wal-Mart are killing Sears.
My closest Sears store in Littleton (10 miles away) is almost always empty,
but it's just a tiny little thing that mostly takes orders and arranges for
delivery and installation.
Yet I always buy my heavy appliances, TV sets, lawn equipment (leaf blowers,
trimmers, chain saws, lawn mowers), and snow throwers from Sears. This is
because up here Sears is the only vendor with a decent at-home extended warranty
so that I don't have to pack up these items an take them 100 miles to Manchester
for repairs. When my snow thrower gave out more times than I can count on both
hands a Sears technician fixed it "for free" each time in my garage. Sears
finally solved an engineering flaw in that machine so it has not frozen up since
the chute cables were shortened. When my basement dehumidifier quit this
summer, a Sears technician showed up and replaced the circuit board --- free
parts and labor and no fee for a service call. Thus far my Sears treadmill has
had two motor replacements and three belt replacements --- all at no extra
charge to me. My warranties on 18 items (including stove, three refrigerators,
dishwasher, microwave, garbage disposal, washing machine, etc.) are all
renewable in 2017.
Try finding a TV repair technician in the State of New Hampshire. except for
the Sears guy that will come to your house. My point is that if you live
in the boon docks where the closest repair technicians are 100 or more miles
away, the Sears extended at-home warranties (usually 2-5 years for about $150)
are the only way to go. These warranties are less of a good deal if you live in
the big cities where there are more service technicians nearby. TV sets are so
reliable and relatively inexpensive these days that maybe they should just be
throw-aways like toasters when they give out. But that's not so with your snow
throwers, washing machines, dish washers, etc. That's also not the case for
gasoline leaf blowers, trimmers, and chain saws that are relatively unreliable.
Anything with a small gasoline engine needs a good extended warranty up in these
mountains. I'm just not adept at repairing small engines myself.
The bottom line is that I worry a lot about the income statement bottom line
of Sears. Sears, like JC Penney, sacrificed its mail-order business for Mall
tombs. Mall big-box stores are just too costly in the exploding world of more
convenient and often cheaper online shopping alternatives, especially online
alternatives from Wal-Mart and Amazon. Also Wal-Mart online and onsite pricing
must be driving the mall stores crazy. Compare the lawn mower prices at your
local Sears store with the prices at your local Wal-Mart. If it weren't for the
warranty services Sears would probably be already dead in New Hampshire and
Vermont. Wal-Mart warranty services suck up here! Also Sears has better
installation services for things like washing machines and dishwashers that
require heavy lifting and plumbing. And the Sears technicians who come to your
house know that Sears is a tiger about written evaluations of their services.
I do hope Sears survives. Sustainability is not very promising at the moment,
especially the mall tombs where Sears might eventually be buried.
Jensen Speculation
Online shopping will lead to a throw-away era where it's cheaper to replace
products under warranty rather than repair them.
I envision a new profession of defective product compliance testers for
expensive online products. If your big-screen TV or expensive video camera fails
a nearby professional compliance tester will come to your home and make some
simple tests of compliance of the products with its specifications.
If the product still under warranty is defective it's probably cheaper for
Amazon or Wal-Mart to simply send you a replacement product and instruct you on
where to ship the defective product (at vendor's cost). Dealers may spring up
who fix up and sell defective items if they can be fixed. Television sets these
days can be incredibly hard to fix..
Because of moral hazards, compliance testers should not also be defective
product dealers.
Amazon could then bill the TV or camera manufacturers, but chances are that
the initial wholesale prices to Amazon will be discounted in anticipation of
best-estimates of the costs of warranty replacement.
From the CFO Journal's Morning Ledger on November 21, 2013
Audit committees urged to be more transparent Some of the top corporate-governance organizations are urging audit
committees on corporate boards of directors to become more transparent about
their duties in hiring and overseeing the work of corporate auditors
Emily Chasan reports,.
Governance organizations including the National
Association of Corporate Directors, Center for Audit Quality and Association
of Audit Committee Members
said in a new reportWednesday that there is a “growing trend”
among audit committees to provide more information. But if committees are
not already doing so, they should regularly offer investors details about
their work. “We believe audit committees should critically evaluate their
disclosures and carefully consider whether improvements can be made to
provide investors with more relevant information,” the group said in the
report.
As some of you might know, about five years ago I
cofounded the website www.CPAreviewforFREE.com.
Since that time, we have provided CPA exam candidates with 2,400 free
questions and answers which are (in my opinion) well written and well
explained. We do this because we firmly believe that everyone needs
access to affordable materials so that they have a reasonable
opportunity of passing the CPA exam. The CPA profession should be open
to all people, even those who cannot afford expensive study guides and
review materials. Over the years, many candidates have passed the exam
solely using our questions and answers. These are often young people
with very limited resources. These are the kinds of folks who keep the
profession fresh, active, and innovative.
We have been searching for some way to fund this site so that we can
continue to offer this assistance for free. Over the last couple of
months, I have been writing an entire book on Achieving Success. I am
thrilled with the way it has turned out – even better than I had
hoped. We will publish the book in January or February for under $10
(with proceeds going to support
www.CPAreviewforFREE.com).
More information will be available soon but I wanted to get this book on
your radar. It is intended as a guide for anyone who wants to become
more successful: more successful in school, more successful at work,
more successful on tests, and just more successful in life. You can
never be successful 100 percent of the time but you can certainly
increase the odds for success by adopting logical (and reasonable)
strategies. Success does not happen by accident.
When the book is published in early 2014, I hope you will consider
buying a copy and telling your friends, neighbors, relatives, enemies,
and anyone else you encounter all about it. You will be helping us
continue our mission AND I hope that my thoughts on achieving success
will prove to be beneficial.
**
I was in San Francisco a few days ago on business and had some time to
waste. So, I wandered around the city and played one of my favorite
games. In this game, I assume that I am a rich business owner who has
an unlimited number of jobs to fill. I need one of everything: one
bus driver, one plumber, one dish washer, etc. As I walk from place to
place and go in and out of buildings, I ask myself which people I would
hire. Who catches my attention for doing a particularly good job?
And, just as importantly, what did they do that caught my attention? I
am trying to figure out what makes someone excellent at their work. I
am obviously fascinated by success and this is one way that I can better
see what leads to success. Focusing on the essential nature of success
helps a person become more successful.
In life, a few people are terrible at their vocations whereas a great
majority are basically average. Luckily, the remaining folks (a
relatively small number) are absolutely excellent. What makes this
last batch so very good at what they do? How does Mr. A manage to do
his job so much better than Mr. B? What can we learn from these
people?
For example, while I was in San Francisco, I had to rush across town and
then hurry back to work. The driver of the taxicab was wonderful. He
stayed calm in heavy traffic and was both friendly and helpful. I
would have hired him for my company. I liked his attitude. I liked
his efficiency. I liked his calm control while he navigated through
all the cars. If I drove a cab, I would want to be like him.
Later that day, I went to a deli (a large chain) and ordered a
sandwich. Four employees stood in line behind the counter making
sandwiches. Three of these people never looked at me even once, never
smiled, never seemed to care if I lived or died. However, the third
person in the line looked up with a kind smile and asked how she could
be of help. She actually listened to my request and made the sandwich
in the way that I had asked. She was quick and efficient. I would
have gladly hired her for my company. Her attitude made my day a bit
brighter and she did her work with a genuine sense of enthusiasm. If I
made sandwiches for a living, I would want to be like her.
Continued in article
DATABASE BIASES AND ERRORS
My casual studies of accountics science articles suggests that over 90% of those
studies rely exclusively on one or more public database whenever the studies use
data. I find few accountics science research into bias and errors of those
databases. Here's a short listing of research into these biases and errors, some
of which were published by accountics scientists ---
This page provides references for articles that
study specific aspects of CRSP, Compustat and other popular sources of
data used by researchers at Kellogg. If you know of any additional
references, please e-mail
researchcomputing-help@kellogg.northwestern.edu.
Jensen Comment
Fraud is inevitable and cannot be prevented when it comes to giving out
subsidies to to insured that are not legally entitled to such subsidies.
Firstly, there's the $2 trillion underground economy where people are receiving
income that even the IRS cannot detect --- those folks who work for unreported
cash earnings. We're talking about millions of people who do not report any
income to the IRS or greatly under report their incomes ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm
Secondly, the 17 million reported above does not jive with the estimated
49.5% (of 130 million) of taxpayers who file tax returns but do not pay any
income taxes. Some of them have incomes offset by credits such as credits for
dependents, but its likely that the nearly all of 50% of taxpayers who pay no
qualify, at least on paper, for subsidies ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm
Most of those making more than $100,000 pay some income taxes. Bloomberg
reports that 98% of those that pay no income taxes have less than $100,000 in
earnings. Most are availing themselves of recent tax breaks such as energy
credits, tax breaks from employer contributions to medical insurance, increased
tax breaks for dependents, and deferred tax breaks such as breaks professors get
for employer contributions to TIAA-CREF.
A family of four making less than $98,000 qualifies for a health insurance
subsidy from the government.
Hence I think the 17 million estimate is wildly inaccurate unless tens of
millions of those eligible for subsidies simply go uninsured because they cannot
afford the deductibles even if the premiums with subsidies are affordable.
One added qualifier is the huge unknown (at least to me) number of Medicaid
and Medicare recipients who are scoped out of the Affordable Health Care Act.
Those on Medicaid do not pay income taxes. Most of those on Medicare do pay
income taxes such that the sources of error in estimating the number of others
who will actually claim subsidies under the Affordable Health Care Act is
probably impossible to estimate within a 10 million range of error or more.
The enormous source of error that cannot be eliminated is that $2 trillion
underground cash-only economy that takes place under the noses of the IRS
enforcers of taxes.
Jensen Comment
The numbers are a little misleading. For example, Wal-Mart hires at low wages
without many benefits but promotes over 400 employees each day such that people
serious about staying with Wal-Mart get higher wages, more benefits (including
health care), and education and training benefits. New workers at Starbucks and
McDonalds, for example, have fewer opportunities for promotions and better
benefits.
Kroger surprises me since it is unionized.
I think Macy's is also unionized although I did not verify this. Most big
department store chains are unionized by the retail unions.
How come the top ten are not all fast food restaurants like McDonald's.
Is support for a higher minimum wage self-serving?
Some like Starbucks support legislation for modest increases in the minimum
wage. This is self-serving. Firstly, most of the companies listed above pay more
than minimum wage, and increases in the minimum wage clobber their competition
more than themselves. More than 50% of the companies that pay bare minimum
wage, often with part-time workers receiving no fringe benefits, are small
businesses.
For example, a doubling of the minimum wage might put some of the downtown
urban coffee shops out of business thereby making Starbucks much more
profitable. And many those former workers in those destroyed coffee shops won't
get unemployment compensation and will have to become welfare case for more than
just food stamps.
November 15, 2013 reply from Jim Peters
I agree that this is complicated. I had a very good
student a while back who quite Wal-Mart to come back and get his BA in
accounting. He was making $250,000 per year as a regional manager for
Wal-Mart without a BA degree. When I asked him how he learned the skills to
oversee a region, he said he got his education from "the University of
Wal-Mart." They have very good training programs and 75% of their execs came
up through the ranks.
Jensen Comment
This is a long article that covers most of the main points. The main conclusion
is that we need to comprehensively study the types of people who receive the
minimum wage and to invent better solutions to their problems that a higher
minimum wage alone will never solve. For example, young people should probably
be paid much less than the minimum wage provided they are provided alternatives
to acquire skills, experience at teamwork, and better hope for a rewarding
career. I'm not certain what to recommend for older folks beyond retirement age.
In many instances it's the work, no matter how mundane, that keeps them young
and needed. For others working for minimum wage is a bitch brought on by
inadequate savings, zero interest on what savings they have, and a painful chore
with their arthritis. For workers caught in the middle its the economy of high
unemployment, especially those who lost their higher paying jobs. Minimum wage
type of work was never meant to provide careers for the underemployed.
The knee jerk reaction is hope that Wal-Mart becomes unionized.
Wal-Mart is not your minimum-wage employer. Wal-Mart provides higher wages and
many benefits including good deals for health care and education and training.
Unionized companies like Kroger are not doing any better than Wal-Mart.
Well over half of the truly minimum wage workers in the USA work for small
businesses, and doubling the minimum wage will merely cost many of them the jobs
that they are clinging to in an effort to not have to totally disrupt their
lives with divorce, moving to another town, and uprooting their children in
school.
IN THIS week’s print edition, we look at Russia’s
stagnating economy. Our article focuses on current problems—including low
business confidence and a strong rouble. But an NBER paper*, published on
Monday, looks at Russia’s long-term economic future—and promises yet more
pain.
The research focuses on Russia’s “fiscal gap”—the
difference between the present value of a government's future expenditures
and its future receipts. The paper makes predictions out to 2100, and
calculates total government expenditure and revenue. If the latter is lower
than the former, a fiscal gap exists. To close the gap, higher taxes or
lower spending are needed.
Most people think that Russia’s fiscal position is
pretty solid. The country has over 16.5 trillion rubles ($500 billion) of
foreign-exchange reserves—nearly three times the size of its national debt.
(Britain’s reserves are less than a tenth of its national debt).
So what is the problem? According to the paper, it
all depends on how the government defines “debt”, “spending” and “taxes”.
Economics nerds will be unsurprised to hear that Larry Kotlikoff, a
professor at Boston College, is a co-author of this paper. In a famous
article, “Deficit delusion”, Mr Kotlikoff discusses the arbitrariness of the
labels that are given to different types of government spending, taxation
and debt. He looks at the example of “Mr X”, a man who pays $1,000 to the
government when he is forty and receives $1,500 from the government when he
is fifty. The government:
might label the $1,000 receipt “taxes”…and the
$1,500 repayment “transfer payments”…it could label the $1,000 receipt
“borrowing” and call $500 of the $1,500 payment “interest payments” and the
rest “repayment of principal”…[another] possibility is to label $500 of the
initial $1,000 “taxes” and the other $500 “borrowing”…
...and so on. Mr Kotlikoff’s point is that the
whole thing is rather arbitrary. And that has allowed governments to
underestimate massively their total liabilities—for example, by excluding
pensions from official government debt figures.
So the paper focuses purely on future government
payments versus future government receipts—an approach that gets around
government accounting gimmicks. It paints a worrying picture of Russia's
fiscal position.
A few examples illustrate the problems facing the
Russian economy. Government revenues are likely to be squeezed in the coming
years. Most people know that Russia is pretty dependent on natural
resources. About half of government revenues come from oil and gas. That
could well collapse:
That all adds up to an alarming figure. Under
certain assumptions the authors reckon that Russia’s fiscal gap, in 2013
money, is 1,670 trillion rubles—or 10.5% of the present value of all future
Russian output.
Economic projections of this nature cannot be
accurate. (Quite a lot may change between now and 2100.) And the numbers in
this paper are pretty crazy. The paper claims that a 37% “immediate and
permanent” tax hike or a 27% spending cut might be needed if Russia is to
avoid future fiscal meltdown. But even in the best-case scenario, Russia's
fiscal gap will be 280 trillion roubles.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review on November 15,
2013
TOPICS: business combinations, Goodwill, Impairment, Intangible
Assets, Mergers and Acquisitions
SUMMARY: "Last year U.S. companies slashed the value of their past
acquisitions by $51 billion because the deals didn't pan out as
expected...This year, however, there have been only a handful of big
corporate mea culpas." The article is an excellent introduction to the
meaning of accounting for goodwill and related impairment charges. In 2012,
nearly half of the total goodwill write-downs came from three companies:
Hewlett-Packard, stemming from its acquisition of software firm Autonomy;
Microsoft, mostly from its purchase of aQuantive; and Boston Scientific,
primarily from its acquisition of Guidant. The H-P/Autonomy acquisition and
goodwill write-off were covered in this review for which this review lists a
related article.
CLASSROOM APPLICATION: The article may be used in any financial
reporting class either covering intangible assets or business combination
accounting.
QUESTIONS:
1. (Introductory) According to the article, how is goodwill
determined?
2. (Advanced) Would you like to add any further details to the
description given in the article about how goodwill is determined? Explain.
3. (Introductory) How much goodwill have companies written off in
recent years? What factors have led to this trend in goodwill write-offs?
4. (Advanced) What is an alternative name for a goodwill write-off
used in accounting standards?
5. (Advanced) What does a goodwill write-off imply about the
business combination transaction from which it was generated?
6. (Introductory) According to the article, how are goodwill
write-offs determined?
7. (Advanced) Would you like to add any further details to the
description given in the article about determining and/or recording goodwill
write-offs? Explain.
Reviewed By: Judy Beckman, University of Rhode Island
Last year U.S. companies slashed the value of their
past acquisitions by $51 billion because the deals didn't pan out as
expected, according to a study set for release Tuesday. That was the highest
yearly total for such write-downs since the financial crisis.
This year, however, there have been only a handful
of big corporate mea culpas. Suitors are paying the lowest premiums for
target companies in nearly 20 years, stocks are trading near records, giving
companies cover to avoid write-downs on the value of their assets, and new
accounting rules may be allowing more of them to delay the charges.
"There could be less stress on values now than
there was in prior years," said Gary Roland, a managing director at Duff &
Phelps, the financial advisory firm that led the study.
Write-downs of soured acquisitions jumped 76% last
year from 2011, but remained far below the $188 billion in charges recorded
in 2008, as the recession bit down.
Nearly half last year's write-downs came from three
deals gone bad. Hewlett-Packard Co. HPQ +0.40% took the biggest—$13.7
billion—thanks largely to the vanishing value of its 2011 acquisition of
software firm Autonomy, which H-P said it was duped into buying at an
inflated price. Autonomy's former chief executive has denied the allegation.
Microsoft Corp. MSFT -0.19% took a $6.2 billion
write-down largely on its 2007 purchase of online-advertising company
aQuantive, and Boston Scientific Corp. BSX -0.21% shaved off another $4.35
billion, mostly related to its problem-plagued 2006 takeover of
medical-device maker Guidant. In all, 235 companies erased value from prior
deals last year. That's up from 227 the year before but down from 502 in
2008.
Last year's list also included Cliffs Natural
Resources Inc. CLF +2.32% 's roughly $1 billion charge on its 2011 purchase
of Consolidated Thompson Iron Mines.
When one company acquires another it calculates the
value of the target's assets, including property, equipment, trademarks and
licenses. If the purchase price is higher, the acquirer carries the
difference on its books as so-called goodwill.
At least once a year, companies must verify the
value of what they bought. If the acquired company had a product recall, for
example, the value of some of its assets might have to be
discounted.Goodwill write-downs don't affect cash flow, and so are often
ignored by investors, but they could indicate the acquiring company's
management botched its evaluation and overpaid.
"There's a reason you put goodwill on the books.
Yes, it's a noncash charge, but at the end of the day, it's a measure of
whether we have been able to derive the value we said we would from those
assets," said Judy Brown, chief financial officer of Perrigo Co. PRGO -0.46%
Perrigo, a drug manufacturer and distributor,
expects to book $1.19 billion of goodwill on its acquisition of Irish
biotech company Elan Corp. DRX.DB -0.15% , according to a regulatory filing.
"Ultimately, it's a measure of whether you put your shareholders' money to
work in an effective way," Ms. Brown said.
There is a risk, of course, that a run-up in
interest rates or a drop in the stock market could spark an increase in
goodwill write-downs. Companies in the S&P 500 index are still carrying a
total of $2 trillion in goodwill on their books. They include AT&T Inc., T
+0.80% Bank of America Corp. BAC +0.61% , Procter & Gamble Co. PG +0.50% ,
Berkshire Hathaway Inc. BRKB +0.10% and General Electric Co. GE +0.63% ,
which each have more than $50 billion in goodwill on their balance sheets,
according to S&P Capital IQ.
Boston Scientific, for example, has written down
goodwill in five of the past six years for a total of $9.9 billion in
charges, including $423 million this year. The company said in a recent
regulatory filing that another roughly $1.36 billion of its $5.55 billion in
remaining goodwill is at "higher risk" of a write-down.
"They clearly overpaid" in buying Guidant for $28.4
billion, said Tau Levy, an analyst at Wedbush Securities. Part of the reason
was a bidding war with Johnson & Johnson, JNJ -0.01% but part was because
Boston Scientific's prior top managers "underestimated the problems going on
with Guidant," Mr. Levy said.
A Boston Scientific spokeswoman declined to
"speculate on the reasons for past decisions."
Only a handful of other large companies have taken
hefty goodwill charges this year. U.S. Steel Co. X +1.96% took a $1.8
billion write-down, and Best Buy Co. BBY +0.72% recorded an $822 million
charge. Cardinal Health CAH -0.37% slashed the value of its pharmacy
business by $829 million.
In a separate Duff & Phelps survey this summer,
more than two-thirds of the 115 companies participating said they don't
expect goodwill write-downs this year. Only 10% of the public companies
polled said they expected such a charge, down from 17% in last year's
survey.
Corporate boards are showing more discipline in
approving acquisitions, despite favorable borrowing conditions and a soaring
stock market. U.S. buyers this year are paying an average premium of 19% to
the target's share price the week before the deals are announced, according
to Dealogic. That's the lowest average premium since at least 1995, as far
back as Dealogic's records go. Historically, premiums have averaged 30%.
Continued in article
Teaching Case on a Master Limited Partnership
From The Wall Street Journal Accounting Weekly Review on November 15,
2013
SUMMARY: The article describes the process of organizing a master
limited partnership (MLP) by Transocean Ltd. to hold its drilling rigs. Carl
Icahn, owning 6% of Transocean, has pushed for means to improve shareholder
returns and the company is responding with this strategy. The financial
risks and returns-partly driven by tax benefits such as avoiding corporate
tax-are discussed in the article.
CLASSROOM APPLICATION: The article may be used in a tax class or
other class discussing partnership form of business organization. It also
may be used in classes specifically addressing the oil and gas industry.
QUESTIONS:
1. (Introductory) How is Transocean setting up limited
partnerships? Specifically describe the steps in this process as you
understand them from the article.
2. (Advanced) For another example of a limited partnership already
organized, access the USA Compression Partners, LP quarterly financial
statements for the 3 months ended September 30, 2013, filed with the SEC on
and available at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=1522727&accession_number=0001104659-13-082392&xbrl_type=v#
Click on the link to Organization and Summary of Significant Accounting
Policies. Describe the purpose of the partnership and the relative holdings
of the entity's general and limited partners. In your answer, define these
two types of partners.
3. (Introductory) According to the article, what financial benefits
can be obtained by organizing an investment in specific assets with a master
limited partnership?
4. (Introductory) What tax advantage is provided by organizing an
entity as a partnership?
5. (Advanced) How can that tax advantage improve investor returns
for partners over the returns that are available to shareholders in a
corporation, such as Transocean, that previously owned the assets being
placed into a master limited partnership?
6. (Introductory) What are the financial risks associated with an
investment in this type of partnership?
Reviewed By: Judy Beckman, University of Rhode Island
As Transocean Ltd. RIG -0.02% moves to placate
activist investor Carl Icahn, it is embracing the hottest fad in the energy
industry today: master limited partnerships.
Energy companies are unloading pipelines,
refineries, drilling rigs and even sand mines into these partnerships, which
don't pay corporate income taxes and pay out most of their cash flow to
investors in the form of distributions like a quarterly dividend.
Since 2011, 45 of these partnerships have sold
units to the public, including 18 so far this year, according to Dealogic.
In the cash-intensive energy business, companies
like the partnerships as a way to raise cash, get access to capital markets
through future offerings, reduce debt and avoid taxes.
Investors looking for reliable returns in an era of
ultralow interest rates say the partnerships take low-risk equipment with
steady but not spectacular earnings, like pipelines, and turn them into cash
machines.
Detractors say these so-called safe investments
could be called into question by dropping oil prices, increased scrutiny
from regulators or rising interest rates.
Transocean, the world's largest offshore drilling
contractor, on Monday said it would put an unspecified number of its
drilling rigs into a master limited partnership next year and take it
public. The company also said it would shrink its board and propose a $3 a
share dividend at the next shareholder meeting, under an agreement it
reached with Mr. Icahn.
The company's shares rose 3.6% to $55.37 in 4 p.m.
trading on the New York Stock Exchange.
Meanwhile, shares of Denbury Resources Inc. DNR
+0.63% dropped 6% to $18.20, after the energy company said it won't use a
master limited partnership to restructure. Denbury specializes in
revitalizing mature oil and gas fields.
Transocean has talked about a partnership deal
since last year, when smaller rival SeaDrill Ltd. created one. Since
Seadrill SDRL +0.75% Partners LLC went public in October 2012, in an initial
public offering worth $221 million, the value of its shares has risen more
than 30%.
Offshore driller Ocean Rig UDW Inc. ORIG -0.48%
said last week it planned to create a new MLP for some of its rigs.
Some analysts noted that some Transocean drillships
being built now, which will be able to work in the deepest offshore areas,
are under five- to 10-year contracts, which makes them suitable for
generating stable MLP returns.
But the benefits of Transocean's MLP might be short
lived, said Trey Stolz, an analyst for Iberia Capital Partners.
"While the MLP structure may provide a short-term
boost to shares depending on the specific rigs included, we would prefer
Transocean keep the assets in house and continue to direct capital toward
organic growth and high-grading of the fleet," Mr. Stolz said.
Saying that Transocean's results had lagged behind
its peers in recent years, Mr. Icahn took a nearly 6% stake in the company
this year and sought to raise returns to shareholders and replace some board
members.
Mr. Icahn has experience with MLPs and owns a
controlling interest in refiner CVR EnergyInc., which launched a publicly
traded refining MLP earlier this year.
Continued in article
Teaching Case on Careers and Education
From The Wall Street Journal Weekly Accounting Review on November 15,
2013
SUMMARY: The article begins with a focus on choosing colleges, such
as private versus public and university versus liberal arts college but
offers many tips as students are choosing their majors. Students can discuss
the benefits of a focused, technical major such as accounting versus the
liberal arts majors. The issues discussed in the article focus on
variability of job opportunities upon students' graduation. Instructors
using the article can emphasize the relative consistency of accounting job
markets and the benefits of the skills learned in students' liberal arts
related courses.
CLASSROOM APPLICATION: The article may be used in an introductory
accounting class during a semester that students are choosing majors, or at
any time to discuss the benefits of skills learned in liberal arts classes
in addition to technical subjects studied for the accounting major. Several
questions ask students to state what they know about their own college or
university. Instructors can use this to assess students' knowledge and
contribute to class discussion about steps to take to ensure students
develop the best chances for employment after graduation.
QUESTIONS:
1. (Introductory) What are the current concerns in the job market
following students' graduation? How do those concerns form the basis for
this article?
2. (Introductory) According to the article, what are some majors
that have posed challenging job markets for students upon graduation?
3. (Advanced) What is the Sarbanes-Oxley Act? How did it "ramp up
demand for accountants"?
4. (Advanced) What do you know about the job opportunities for
accounting majors upon graduation? Think especially about the consistency of
job opportunities for accounting majors over different economies. State in
your answer how you can find out this information for accounting majors
graduating from your college or university.
5. (Introductory) What portion of your coursework is devoted to
liberal arts courses? Based on the discussion in the article, what is the
importance of the skills you learn in these courses?
6. (Advanced) View the related graphic entitled "Employer
Priorities." Are you surprised by or curious about any facet of this list?
List one item and explain your answer.
7. (Advanced) What steps in your remaining academic career can you
take to be sure that you meet employers' priorities when you graduate? Will
you need help in taking those steps? State where you think you can find that
assistance at your college or university.
Reviewed By: Judy Beckman, University of Rhode Island
A job after graduation. It's what all parents want
for their kids.
So, what's the smartest way to invest tuition
dollars to make that happen?
The question is more complicated, and more
pressing, than ever. The economy is still shaky, and many graduating
students are unable to find jobs that pay well, if they can find jobs at
all.
The result is that parents guiding their children
through the college-application process—and college itself—have to be
something like venture capitalists. They have to think through the potential
returns from different paths, and pick the one that has the best chance of
paying off.
For many parents and students, the most-lucrative
path seems obvious: be practical. The public and private sectors are urging
kids to abandon the liberal arts, and study fields where the job market is
hot right now.
Schools, in turn, are responding with new,
specialized courses that promise to teach skills that students will need on
the job. A degree in hospital financing? Casino management? Pharmaceutical
marketing?
Little wonder that business majors outnumber
liberal-arts majors in the U.S. by two-to-one, and the trend is for even
more focused programs targeted to niches in the labor market.
It all makes sense. Except for one thing: It
probably won't work. The trouble is that nobody can predict where the jobs
will be—not the employers, not the schools, not the government officials who
are making such loud calls for vocational training. The economy is simply
too fickle to guess way ahead of time, and any number of other changes could
roil things as well. Choosing the wrong path could make things worse, not
better.
So, how should the venture-capitalist parents
proceed? What should they weigh as they decide where to put their limited
capital to get the biggest bang? Here are some things to consider. Does the
Product Get Out the Door?
You can pick the perfect school in terms of courses
and location and price and ambience. But none of it does a student any good
if he or she doesn't end up with a degree. After all, college improves job
prospects only if a student graduates. That is why it is crucial to
scrutinize the graduation rates at various schools.
What's more, it is also important to look at how
long it takes students to graduate. Only about 60% of Division 1 university
students graduate in six years, for example.
Many parents and students don't realize that even
top schools differ greatly in their ability to get students out the door to
graduation on time. Consider the difference between an elite private
university like Stanford University and an elite public university like the
University of California, Berkeley. My colleague Robert Zemsky found that
the private school has a much wider array of support services—counseling,
tutoring and so forth—that vastly improve the odds that a student will
actually graduate, and will do so in four years. An expensive, private
school may end up being cheaper if a student doesn't have to be there as
long.
Probably the most important statistics to
scrutinize are job-placement rates for graduates, but they are often hard to
get and easy to fudge. Are we measuring jobs at graduation, or within a year
after? Do internships count as a "job"?
Statistics about starting salaries, to judge the
quality of those jobs, can be even more elusive. In the absence of good
data, visit the school's career center and see which employers are actually
interviewing students and for what jobs.
Parents and students should push to require schools
to post graduation rates, job-placement rates and other information on the
outcomes for their graduates—especially considering how many students are
now using government-backed loans to pay for their education. It is not in
the public interest for students to use public funds for vocational degrees
that don't have a good chance of paying off. Today's Jobs Aren't Necessarily
Tomorrow's
The trend toward specialized, vocational degrees is
understandable, with an increasing number of companies grumbling that
graduates aren't coming out of school qualified to work.
But guessing about what will be hot tomorrow based
on what's hot today is often a fool's errand.
The problem is that the job market can change
rapidly for unforeseeable reasons. Today, we frequently hear that computers
and information technology are and will be the hot fields, but both have
gone from boom to bust over time. Students poured into IT programs in the
late 1990s, responding to the Silicon Valley boom, only to graduate after
2001 into the tech bust.
Changes in regulations, meanwhile, can rapidly
create and kill fields. For instance, the Sarbanes-Oxley Act amped up the
demand for accountants. Emerging technologies can be just as
disruptive—applicant-tracking software eliminates jobs in recruiting, while
cellphones create programming jobs in mobile technology. Developments like
these are almost impossible to anticipate.
It gets even more complicated than that. Let's say
governments and colleges could tell what the demand would be for a
particular occupation years out. The problem for someone making an
investment in that occupation is that everyone else has the same
information. That means students will rush to train in that field, the
supply of potential workers goes up, and the jobs are no longer so
attractive.
Consider an email that Texas A&M University sent to
this year's class of incoming petroleum engineers, the hottest job in the
U.S. in terms of starting wages.
The message reminded students that the job market
for engineers has always been competitive and cyclical, and warned, "Recent
data suggests that some concern about the sustainability of the entry-level
job market during a time of explosive growth in the number of students
studying petroleum engineering in U.S. universities may be prudent."
Unfortunately, that kind of caution isn't common.
Schools want to get as many applicants as possible, and to get the best ones
to attend. Showing parents and students all the caveats that go with the
impressions they create about future jobs may conflict with those interests.
The Danger of Specialization
Another important caveat that doesn't get discussed
much: It may be worse to have the wrong career focus in college than having
no career focus—because skills for one career often can't be used elsewhere.
Let's say a student spends four years learning to
market pharmaceuticals. But what can he or she do with that degree if the
drug companies aren't hiring? The skills don't transfer easily anyplace
else.
That may even be true within a field. Anthony
Carnevale, of Georgetown's Center on Education and the Workforce, calculates
that the unemployment rate among recent IT graduates at the moment is
actually twice that of theater majors. Despite the constant complaints from
IT employers about skill shortages, only certain skills within IT are hot at
the moment, such as those associated with mobile communications.
Focusing on a very specific field also means that
you miss out on courses that might broaden your abilities. Courses that
teach, say, hospitality management or sports medicine may crowd out a logic
class that can help students learn to improve their reasoning or an English
class that sharpens their writing. Both of those skills can help in any
field, unlike the narrowly focused ones.
Beyond those concerns, a narrow educational focus
forces students to pick a career at age 17, before they know much of
anything about their interests and abilities. And if they choose
incorrectly, it can be very difficult for them to start over once they're
older.
Researchers Eric A. Hanushek, Ludger Woessmann and
Lei Zhang find that more vocationally focused education in high school
appears to limit adaptability to changing labor markets later in life. The
same thing may be true in college.
All that said, practical degrees do have value. But
they're not nearly as valuable as boosters say.
Yes, in some fields, like engineering, the only way
in is with a specialized degree. Other things being equal, students with one
of these degrees will have an easier time getting their first job in the
field than students with liberal-arts degrees. After the first job, though,
it is not clear how much advantage that practical degree has.
Certainly, some matter in part because they are
prestigious—such as a Wharton M.B.A.—but for those that aren't prestigious,
and where the degree isn't required or common, a degree may not matter at
all.
Also consider that what companies really want hires
to have is actual work experience. If they have a choice between hiring
someone fresh out of a hospitality-degree program or someone who doesn't
have that degree but who has run a restaurant, they will choose the latter.
The Way Forward
So, what are the practical lessons for the
venture-investor parent and their child?
Students that go the practical route should delay
choosing majors and specialized courses as long as possible, so that there
is likely to be a better match between course work and employer interests.
Students can rely on real-time information from the career office to gauge
demand. Because of the need to adjust, it also helps to be at a school where
switching majors is easy. Small programs with limited resources mean that
students may have to stay more than four years to get all the courses that
are required for a new major.
Continued in article
Jensen Comment
Whereas students planning ahead for medical school, accounting careers
engineering careers, etc. facing licensing examinations, it's not efficient to
avoid the requisite specializations in undergraduate studies.
Law used to be a wonderful career because you could major in virtually
anything and still go to law school. Now the opportunities for law graduates
have shrunk more than raw wool in a boiling cauldron.
MBA programs prefer that students were not undergraduate business majors.
However, opportunities for MBA graduates increase with certain undergraduate
specializations such as computer science, engineering, and accounting
(especially for wannabe tax lawyers).
Fortunately, it is possible to specialize in some programs like accountancy
and still take humanities minors or dual majors. Increasingly, accounting majors
become somewhat proficient in another language such as Mandarin.
Jensen Questions
Isn't there moral hazard in states where they aren’t
personally liable for the unpaid balance? What is to prevent Paul and
Susan homeowners from conspiring to sell their house way below its uncertain
market value to their friends George and Jane and split all the windfall?
Troubled homeowners who get a break from their mortgage lenders could
face a hefty tax bill next year if a key provision expires at the end of
the year, though state laws could determine which borrowers will have to
write a check to Uncle Sam.
Homeowners who live in states where mortgages are
non-recourse—that is, where they aren’t personally liable for the
unpaid balance—may avoid the potential tax hit even if Congress
doesn’t act,
according to a letter
sent by the IRS released by Sen. Barbara Boxer (D., Calif.) on Friday.
The tax provision currently allows some homeowners—mostly those facing
foreclosure—to avoid paying taxes on certain relief that they receive on
their mortgages. The IRS considers debt forgiveness to be a form of
taxable income. That means homeowners who sell their homes for less than
the amount they owe in a short sale could face a tax bill.
In 2007, as the foreclosure crisis spread, Congress exempted some
homeowners from counting certain kinds of forgiven mortgage debt as
taxable income in order to encourage banks and borrowers to seek
foreclosure alternatives. Congress retroactively extended the provision
earlier this year, after it expired on Dec. 31, 2012. The provision is
set to expire this coming Dec. 31 and there appears to be less urgency
in Congress right now to pass an extension.
In the letter to Sen. Boxer, the IRS clarified that certain non-recourse
debt forgiven by lenders wouldn’t typically be considered taxable income
by the IRS. This means that for most California borrowers, the
expiration of the tax provision may not have a meaningful effect.
Jensen Questions
Isn't there moral hazard in states where they aren’t
personally liable for the unpaid balance? What is to prevent Paul and
Susan homeowners from conspiring to sell their house way below its uncertain
market value to their friends George and Jane and split all the windfall?
Suppose Paul and Susan acquired their original loan from San Diego Bank. San
Diego Bank in turn sold this loan to Fannie Mae. If Paul and Susan later obtain
a $50,000 debt forgiveness, does Fannie Mae or San Diego Bank eat the loss?
Under newer FDIC rules I think San Diego Bank only eats 5% of the loss, thereby
really sticking it to Fannie's Fanny. However, I could be wrong on this one. I
hope somebody with greater expertise in this area will either confirm or deny my
scenario.
The bottom line is that I do not like this debt forgiveness law thrust upon
lenders in some states. You might guess that it's California creating the moral
hazards here!
From the CFO Journal's Morning Ledger on November 20, 2013
CFOs wary of Fed nominee Only about one in five chief financial officers in the U.S. believe
businesses will welcome Janet Yellen if she becomes Fed chairman, according
to a survey by Financial Executives International and Baruch College’s
Zicklin School of Business. An overwhelming majority of U.S. CFOs surveyed,
94%, expect Ms. Yellen to continue the Fed’s bond-buying program, which is
keeping interest rates low, until at least the first quarter of 2014,
James Willhite notes.
CFOs also expressed less optimism about the financial prospects for their
businesses. The survey’s CFO Optimism index dropped to 65 from almost 71 in
the second quarter, marking the lowest reading in the past four quarters.
From the CFO Journal's Morning Ledger on November 20, 2013
Regulatory pressures seen slowing audits Corporate finance executives say their annual audits are growing
more contentious and more expensive as auditors facing heightened regulatory
pressure are seeking more justification and documentation from managers.
Auditors have sharply increased requests for documentation, details of
internal control processes and minutia around asset valuations, as the PCAOB
found an uptick in audit deficiencies in these areas over the past couple of
years,
reports Emily Chasan.
“There is clearly a lot more stress in the system,” Pascal Desroches,
controller at Time Warner said at a Financial Executives International
accounting conference in New York. He said auditors are increasingly asking
the company to justify management decisions with much more documentation,
and increasing inspections related to internal controls. As a result, he
said, audit-fee discussions are growing “more intense” each year, as
auditors seek higher compensation for the extra work they are doing.
From the CFO Journal's Morning Ledger on November 20, 2013
Tax breaks may cut J.P. Morgan settlement outlays
J.P. Morgan could end up forking over billions of dollars less than
the $13 billion called for in its pact with the U.S. government,
the WSJ’s Michael Rapoport reports.
While fines and similar penalties a company pays to
the federal government—such as the $2 billion civil penalty the bank is
paying as part of the settlement—can’t be deducted, other amounts paid as
part of a settlement are deductible as ordinary business expenses. The $7
billion in compensatory payments that the bank agreed to pay as part of the
settlement “will be deductible for tax purposes,” CFO Marianne Lake said.
From the CFO Journal's Morning Ledger on November 15, 2013
Should CEO pay be capped?
Switzerland will vote next week on a proposal limiting executive pay to 12
times that of a company’s lowest paid worker, the second time this year the
country will use the ballot box in an attempt to rein in corporate
compensation,
writes the WSJ’s Neil MacLucas.
The Swiss have grown more concerned about wealth
disparity as the gap between a wealthy executive class and everyday workers
grows. But critics say the initiative, if passed, will make Switzerland a
less attractive place to do business. And executives at some companies,
including Glencore Xstrata
and Kuehne + Nagel,
have said they would consider leaving Switzerland if the initiative passes.
A billion here, a billion there, pretty soon, you're
talking real money.
Attributed to Senator Everett Dirksen on the Johnny Carson
Show ---
http://en.wikipedia.org/wiki/Everett_Dirksen
From the CFO Journal's Morning Ledger on
November 14, 2013
Starbucks beats the taxman through Kraft charge
Starbucks’s
latest income-tax bill has been cut to zero by a $2.7 billion compensation
charge it was ordered to pay
Kraft over a
contract dispute,
the FT reports. In
restated accounts, Starbucks said a global tax bill of $832 million that it
had expected for the year to Sept. 29, 2013 would instead become a tax
credit of $239 million. The company said: “Starbucks does not have any
pre-tax income as a result of the arbitration award, therefore we do not
have a tax obligation this year. For tax purposes, the payment is
deductible. We are still evaluating the ruling to determine the time period
for deductibility.”
From the CFO Journal's Morning Ledger on
November 13, 2013
Starbucks fined nearly $2.8 billion
Starbucks was
ordered to pay nearly $2.8 billion for backing out of a partnership with
Kraft to
distribute packaged coffee to grocery stores,
the WSJ reports.
Starbucks, complaining that Kraft wasn’t doing enough to stock and promote
its coffee, tried to terminate the agreement in 2010, offering to pay Kraft
$750 million. Kraft rejected the offer, but in 2011 Starbucks withdrew
anyway, prompting Kraft to begin arbitration proceedings. Starbucks CFO Troy
Alstead said the company strongly disagrees with the arbitrator’s
conclusion. “We believe Kraft did not deliver on its responsibilities to our
brand under the agreement; the performance of the business suffered as a
result.”
Jensen Comment
Gulp! The progressive (liberal) Starbucks, unlike me, is no longer doing a thing
to help fund Obamacare subsidies. Instead it is helping to pay for its court
settlement with a tax refund.
From the CPA Newsletter on November 14, 2013
CBO report gives 103 suggestions for balancing the budget A
Congressional Budget Office
report outlines 103
options for Congress and the Obama administration to raise revenue or cut
spending to bring down the budget deficit over the next 10 years. These
include 23 necessary spending cuts, 28 discretionary spending cuts, 36 tax
increases and 16 changes to spending in health care. The CPA profession has
called on both policymakers and the public to engage in a national dialogue
to improve our country's fiscal health through the
"What's at Stake" initiative.
The Hill/On the Money blog (11/13)
Jensen Comment
This is a long article that covers most of the main points. The main conclusion
is that we need to comprehensively study the types of people who receive the
minimum wage and to invent better solutions to their problems that a higher
minimum wage alone will never solve. For example, young people should probably
be paid much less than the minimum wage provided they are provided alternatives
to acquire skills, experience at teamwork, and better hope for a rewarding
career. I'm not certain what to recommend for older folks beyond retirement age.
In many instances it's the work, no matter how mundane, that keeps them young
and needed. For others working for minimum wage is a bitch brought on by
inadequate savings, zero interest on what savings they have, and a painful chore
with their arthritis. For workers caught in the middle its the economy of high
unemployment, especially those who lost their higher paying jobs. Minimum wage
type of work was never meant to provide careers for the underemployed.
The knee jerk reaction is hope that Wal-Mart becomes unionized.
Wal-Mart is not your minimum-wage employer. Wal-Mart provides higher wages and
many benefits including good deals for health care and education and training.
Well over half of the truly minimum wage workers in the USA work for small
businesses, and doubling the minimum wage will merely cost many of them the jobs
that they are clinging to in an effort to not have to totally disrupt their
lives with divorce, moving to another town, and uprooting their children in
school.
And now, the twist: prospect theory
probably isn't exactly true. Although it holds
up well in experiments where subjects are asked to make hypothetical
choices, it may fare less well in the rare experiments where researchers
can afford to offer subjects choices for real money (this isn't the best
paper out there, but it's one I could find freely available).
Nevertheless, prospect theory seems fundamentally closer to the mark
than simple expected utility theory, and if any model is ever created
that can explain both hypothetical and real choices, I would be very
surprised if at least part of it did not involve something looking a lot
like Kahneman and Tversky's model.
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.
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/
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.
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.
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
cooperationmay be useful for the species.
The IRS sent billions of dollars' worth of refunds
to tax cheats around the globe in 2011, according to a new federal report.
Treasury’s inspector general for tax administration
found that well over 1 million fraudulent tax returns made their way through
the IRS’s defenses, costing the Treasury just under $4 billion. That
includes more than $1 million sent to far-flung locales like Bulgaria,
China, Ireland and Lithuania.
Still, the inspector general also noted that the
IRS had improved its efforts to stop tax cheats who file returns using real
Social Security numbers or other tax identification numbers.
The IRS reduced the amount it lost to identity
thieves by around 30 percent in 2011, from more than $5 billion in 2010.
“Identity theft continues to be a serious problem
with devastating consequences for taxpayers and an enormous impact on tax
administration,” Russell George, the tax administration inspector general,
said in a statement.
“Undetected tax refund fraud results in significant
unintended federal outlays and erodes taxpayer confidence in the federal tax
system.”
The IRS has long acknowledged that identity theft
is a big problem, and has made battling it a top priority. Taxpayers who
file after an identity thief uses their Social Security number can face
significant delays in the processing of their legitimate return.
For instance, the agency has more than twice as
many employees working on identity theft cases now – around 3,000 – than it
did in 2011, and has trained roughly 35,000 employees to deal with the
issue. The IRS has also put new filters into place to weed out potential
fraudulent returns, and beefed up its cooperation with local law
enforcement.
But in a statement, the IRS also acknowledged that
it was a challenge to keep up with “constantly evolving tactics used by
scammers” while it had fewer resources at its disposal.
“Given significant budget cuts, the IRS continues
to balance and shift our limited resources as our work on identity theft and
refund fraud continues to grow, touching nearly every part of the
organization to better protect taxpayers and help victims,” the agency said.
“Over the past two years, we have continued to
improve our processes and systems for helping identity theft victims and
have considerably decreased the time it takes to resolve these complex
cases.”
Jensen Comment
To add pain to misery, many of those refunds went to cheats who receive cash
income in the underground economy that's not reported to the IRS. Thus the
cheats get a good deal both ways due to IRS failures ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm
To add tragedy on top of misery about 68 million of 137 million taxpayers in the
USA pay no income tax, 98% of whom have reported earnings less than
$100,000 according to Bloomberg. Sounds like even more of a free ride now the
the government will also subsidize medical insurance for these taxpayers who
either pay no tax or receive a net refund on their tax returns.
LETTERKENNY ARMY DEPOT, Chambersburg, Pennsylvania
(Reuters) - Linda Woodford spent the last 15 years of her career inserting
phony numbers in the U.S. Department of Defense's accounts.
Every month until she retired in 2011, she says,
the day came when the Navy would start dumping numbers on the Cleveland,
Ohio, office of the Defense Finance and Accounting Service, the Pentagon's
main accounting agency.
Using the data they received, Woodford and her
fellow DFAS accountants there set about preparing monthly reports to square
the Navy's books with the U.S. Treasury's - a balancing-the-checkbook
maneuver required of all the military services and other Pentagon agencies.
And every month, they encountered the same problem.
Numbers were missing. Numbers were clearly wrong. Numbers came with no
explanation of how the money had been spent or which congressional
appropriation it came from. "A lot of times there were issues of numbers
being inaccurate," Woodford says. "We didn't have the detail … for a lot of
it."
The data flooded in just two days before deadline.
As the clock ticked down, Woodford says, staff were able to resolve a lot of
the false entries through hurried calls and emails to Navy personnel, but
many mystery numbers remained. For those, Woodford and her colleagues were
told by superiors to take "unsubstantiated change actions" - in other words,
enter false numbers, commonly called "plugs," to make the Navy's totals
match the Treasury's.
Jeff Yokel, who spent 17 years in senior positions
in DFAS's Cleveland office before retiring in 2009, says supervisors were
required to approve every "plug" - thousands a month. "If the amounts didn't
balance, Treasury would hit it back to you," he says.
After the monthly reports were sent to the
Treasury, the accountants continued to seek accurate information to correct
the entries. In some instances, they succeeded. In others, they didn't, and
the unresolved numbers stood on the books. STANDARD PROCEDURE
At the DFAS offices that handle accounting for the
Army, Navy, Air Force and other defense agencies, fudging the accounts with
false entries is standard operating procedure, Reuters has found. And
plugging isn't confined to DFAS (pronounced DEE-fass). Former military
service officials say record-keeping at the operational level throughout the
services is rife with made-up numbers to cover lost or missing information.
Jensen Comment
One of our sons, David, went to Iraq working as an exterminator --- mostly
trapping wild dogs and jackals. He lived on a huge army base and reported back
that the meals were unbelievable. Every night was a buffett of steamed lobsters,
lobster thermadore, steaks of all varieties and sizes, wild game (including
partridge and quail) and on and on and on. In the mornings he liked the eggs
Benedict, and at noon he liked the prime rib sandwiches on freshly baked bread.
Meals on base were prepared by outside contractors rather than Army cooks.
I can vouch for the fact that Navy chow in my day was never like that . We
had lots of powdered milk (yuk) and s--- on a shingle and beans, beans, and more
beans. On ship the cooks baked fresh bread every day but were not allowed to
serve it until it sat in the air for two days. Some regulation in those days
declared fresh bread to be bad for digestion.
PS
What also surprised me is when David remarked that the base perimeter guarding
our military personnel and outside contractors was not guarded by the U.S.
military. Instead this enormous military base in Iraq was guarded by mercenaries
from Uganda. Go figure!
Question
What is the common mistake made by people who invest in items they store in
their houses or safe deposit boxes?
Answer
The mistake they make is in not understanding how markets differ.
Just because items in your home or safe deposit box are independently appraised
at $10,000 does not mean that you can find a buyer willing to pay more than
$4,000 or less. If dealers buy the items they usually expect to make a 50% mark
up or higher.
We have a friend who paid a fortune for a 1955 Chevy in mint condition as a
gift to his wife. The handsome car took up space in the garage for eight years
and was never driven. When they finally decided that the garage space was worth
more than the car they sold it for less that 20% of the purchase price.
Paying top dollar for gold and silver coins can be a big mistake. My wife
inherited a gold coin bracelet from her aunt (Tante Pepe) in Germany. It's a
beautiful piece of jewelry that she estimates is worth thousands. But where's
she going to sell it without taking a huge markdown on what she thinks its
worth? First she will have to incur a relatively expensive appraisal fee. Second
she will have to try to find a buyer who will pay close to the appraised value.
My guess is that it will almost be impossible to find a buyer paying that kind
of price unless she's really lucky on EBay. In the meantime it just sits in a
safe deposit box like it did in Germany before Tante Pepe died.
Equity stock investment in a gold company traded on a stock exchange is a
whole lot different than investing in gold coins. First there is that serious
gold appraisal cost. Second there's probably a much smaller spread between
equity stock bid and ask prices than gold coin and jewelry prices. The stock
market is much more liquid than the coin and jewelry market.
And coin coin investments are probably better than financial
investments in baseball cards, comic books, antiques, and other items you can
enjoy every day in ways other than selling, e.g., by adding to the decor of your
living room. But selling may be huge disappointment as illustrated in the comic
book sale mentioned in the article above. Perhaps those investments at home
items should be purchased for enjoyment of possessing but not for serious
investment --- at least that's my opinion. My wife neither enjoys the gold
bracelet in a bank deposit box nor enjoys the cash she thinks hopelessly that
she should get for the bracelet. The bracelet will probably pass down from Erika
to a daughter and then a granddaughter in the same manner it passed on from
Tante Pepe from Erika. What's the use?
My advice if you want to invest in gold is to buy equity shares in a gold
company. My advice is also to avoid gold as an investment unless you want to tie
your money up for years and years and years. Of course if you live in India
there are cultural reasons to hoard gold for reasons other than investment.
Most Iowa framers think that corn field black dirt is much more valuable
than gold both as a long term inflation hedge and as a cash cow year after year
of ownership. Some investors think muni bond funds are better than black
dirt because the cash inflow each year is tax free. Perhaps investors choosing
between black dirt or municipal bond or gold stock or Microsoft stock
investments should seek professional help because what is the best choice for
one investor is suboptimal for another investor.
Andrew Huszar, a former Federal Reserve employee who
executed QE, has written a
Wall Street Journal op-ed apologizing for the
"unprecedented shopping spree."
Huszar worked
at the Fed for seven years before leaving for Wall Street. The central bank
recruited him back in 2009 to manage "what was at the heart of QE’s
bond-buying spree–a wild attempt to buy $1.25 trillion in mortgage bonds in
12 months."
"I can only say: I'm sorry, America," Huszar
writes.
From the Journal:
It wasn't long before
my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't
helping to make credit any more accessible for the average American. The
banks were only issuing fewer and fewer loans. More insidiously, whatever
credit they were extending wasn't getting much cheaper. QE may have been
driving down the wholesale cost for banks to make loans, but Wall Street was
pocketing most of the extra cash.
From the trenches,
several other Fed managers also began voicing the concern that QE wasn't
working as planned. Our warnings fell on deaf ears. In the past, Fed
leaders—even if they ultimately erred—would have worried obsessively about
the costs versus the benefits of any major initiative. Now the only
obsession seemed to be with the newest survey of financial-market
expectations or the latest in-person feedback from Wall Street's leading
bankers and hedge-fund managers. Sorry, U.S. taxpayer.
Huszar argues that QE, while "dutifully
compensating for the rest of Washington's dysfunction," has become Wall
Street's new "too big to fail."
Jensen Comment
Where QE has been monumentally successful is in compensating the savings of
older people. Many could previously retire and have saving supplemented by safe
Certificate Deposit interest income. Thanks to QE the CDs and other save savings
alternatives pay virtually zero interest such that these old folks must more of
their savings capital for living expenses. Thanks Ben. You wiped out the old
folks and provide zero incentives for younger folks to save early in the career
for compounded interest. Compounded interest? What's that?
Yeah Right! Bob Jensen says Yeah Wrong!
"IASB releases new rules to better reflect hedge accounting," by Ken
Tysiac, Journal of Accountancy, November 19, 2013 ---
http://journalofaccountancy.com/News/20139119.htm
New rules released Tuesday by the International
Accounting Standards Board (IASB) are designed to improve how hedge
accounting activities are reflected in financial statements.
The IASB
changed the rules to address preparers’ concerns
about the challenges of appropriately representing their risk management
activities in financial statements.
The most significant changes apply to entities that
hedge nonfinancial risk. Previous rules did not allow hedge accounting to be
applied to components of nonfinancial items, even though businesses usually
hedge only parts of nonfinancial items.
In some instances, preparers previously were unable
to apply hedge accounting to groups of items, even though items often are
hedged on a group basis for risk management purposes.
As a result, businesses couldn’t reflect in their
financial statements the fact that they were entering into derivatives for
hedge accounting purposes. This led to volatility in the financial
statements that was inconsistent with the economics of the businesses,
according to the IASB.
Users of financial statements also sought
simplified hedge accounting, according to the IASB.
The new rules are designed to eliminate those
problems and provide improved disclosures that will explain:
The effect of hedge accounting on the
financial statements and the entity’s risk management strategy.
Details about derivatives entered into by the
entity, and the derivatives’ effect on future cash flows.
“This is a significant change in accounting that enables companies to better
reflect their risk management activities,” IASB Chairman Hans Hoogervorst
said in a news release. “This change has received strong support from
corporates around the world.”
The IASB also made changes that:
Enable entities to change the accounting for
liabilities they have elected to measure at fair value before applying
any of the other requirements in IFRS 9, Financial Instruments.
As a result, gains caused by a worsening in an entity’s own credit risk
on such liabilities will no longer be recognized in profit or loss.
Remove a mandatory effective date from IFRS 9
because the project’s impairment phase has not yet been completed.
Entities still may apply IFRS 9 immediately.
Jensen Comment
Yeah right if you don't care about detecting embedded derivative financial risks
in financial contracts. Unlike the FASB, the IASB says that you don't even have
to look for these risks.
Yeah right if you are in the parade for principles-base standards that
replace bright line rules. This leave wide open the probability that companies
will treat an identical financial instrument (hedge or no hedge) differently
depending upon management pressures to do so. For example, there were previously
some bright line rules in IFRS 39 for deciding what portion of a hedge was
effective and what portion was not effective. The ineffective portion is not
elgible for hedge accounting relief on earnings variations. Now the IASB says
you can "use more subjective judgment" in measuring what portion of a hedge is
ineffective. That portion that is ineffective now can easily differ between Bank
B audited by Auditor X versus Company C audited by Auditor X.
Sorry folks but I think the decision on hedge effectiveness will now rest on
the pressures banks and companies can bring to bear on their auditors. Such is
the world of principles-based standards. It's a long like theory versus practice
where what we pray for in theory is not what we get in practice. What business
firms, especially European banks, want in practice is earnings management.
From the CFO Journal's Morning Ledger on November 14, 2013
Investors are swarming around Internet companies that don’t make money.
Snapchat, a two-year-old company with no sales and no business model,
recently rejected a $3 billion buyout offer from
Facebook,
Evelyn M. Rusli and Douglas MacMillan report in this
WSJ scoop. Co-founder Evan Spiegel is
holding out because he hopes his company can get an even higher valuation.
Facebook had earlier offered to buy the company for more than $1 billion.
And in recent weeks, Facebook representatives contacted Snapchat again to
discuss an all-cash offer triple that amount, which would have been
Facebook’s largest acquisition to date.
The
Snapchat offer is the latest example of investor exuberance for social-media
and mobile-messaging upstarts. Twitter, which has yet to turn a profit, has
a market value of roughly $25 billion after its IPO last week. And Pinterest
last month raised $225 million from investors who valued the company, which
like Snapchat has no revenue, at $3.8 billion.
Snapchat’s smartphone app delivers hundreds of millions of messages, mostly
from teenagers and young adults. And Mr. Spiegel thinks Snapchat’s user
numbers will keep on growing. Still, it isn’t clear how Snapchat might make
money, Rusli and MacMIllan write. One path to revenue might be helping
marketers craft messages that speak to the service’s young users. Instead of
banner ads, the personal nature of Snapchat makes it more suited to stories
and characters who interact directly with users, says Julie Ask, principal
analyst at Forrester Research. “If you can create content, whether it is a
photo or a video or a story, and get it onto one of these instant-messaging
apps, it has the potential to go viral so fast because the community of
users is so big,” says Ms. Ask.
Jensen Comment
The things we teach about business valuation are no longer relevant in the tech
industry since Amazon was invented. Forget the ratios ---
http://www.trinity.edu/rjensen/roi.htm
At the same time there are a lot of pensioners like Erika and me who place an
order almost daily on the money-losing Amazon. Sure beats icy roads and wasting
an hour hunting for some obscure thing at Wal-Mart. And all day long I'm
listening to the money-losing Pandora. But I don't really need an iPhone,
Android, or Jolla as long as my seven-year old cell phone still dials home and
911 and a AAA towing (if I should ever need a tow) for less than $100 per year.
Did you really think the government was going to ultimately block this
merger?
Surely you're not that naive.
From the CFO Journal's Morning Ledtger on November 13, 2013
AMR and
US Airways got
the green light for their merger after just a few concessions
Antitrust and
airline-industry experts
tell the WSJ that the
settlement was a victory for the carriers, because it left the majority of
their merger plan intact. US Airways and AMR, parent of American Airlines,
agreed to give up space at several major airports. But they probably would
have given up some of the slots anyway to consolidate operations after their
merger. US Airways CEO Doug Parker told the Journal that the concessions
were “not material enough to offset what we said the day we announced,”
which was that the merger would create more than $1 billion in total annual
savings and revenue gains.
The
Justice Department, meanwhile, described the divestitures as the biggest
ever in an airline deal. Bill Baer, the department’s antitrust chief, said
that the settlement was better for competition than if the government had
won a court injunction against the merger, because the concessions will
allow low-cost carriers to expand at major airports. Even so, the
concessions are more limited than what the DOJ wanted when it sued to block
the merger in August.
Analysts also
questioned how much competition would be created. George Hoffer, a
transportation economics professor at the University of Richmond,
tells the NYT that
the merger effectively took one major competitor out of the market. That
could result in subtle fare increases in many markets and fewer flights, he
said. Mr. Hoffer added that “the Justice Department was in an indefensible
position. Once you created a super-Delta and a super-United, you had to
create a super-American. So the outcome was inevitable.”
Jensen Comment
It's beginning to look like the government's trust busting efforts are mostly a
sideshows while the center ring caves in to management and labor demands.
Airline prices are going up, up, and away in their beautiful balloons.
From the CFO Journal's Morning Ledger on November 12, 2013
CFOs beware of phishing scams CFOs should keep their guards up when going through their email.
Christopher Novak, managing principal and security expert at Verizon
Business,
tells the American Banker
about a popular phishing exploit that uses the stolen email addresses of top
executives. “Someone will spoof an email to the CFO or controller and it
will purport to be from the CEO,” he says. “The email will say something
like, we need to sponsor this event or pay this vendor, it’s urgent and I
need you to wire $100,000 into this account immediately, we’re already 30
days late. Because it’s from the CEO, other staff will expedite the request.
In one case, the CFO happened to have lunch with the CEO and said, just out
of curiosity, who was that merchant you had us expedite the wire transfer
to?” Mr. Novak recalls. “The CEO said, ‘What are you talking about?’ The
blood drained out of the CFO’s face and he said he had to go. We’ve seen
more than a dozen of those happen in the last week. Probably over $10
million has moved in the last week because of this.”
From the CFO Journal's Morning Ledger on November 12, 2013
Write-downs from deals gone bad soared last year, but 2013 is turning out
different
Suitors are paying the lowest premiums for target companies in
nearly 20 years and stocks are trading near records, giving companies cover
to avoid write-downs on the value of their assets,
write CFOJ’s Emily Chasan and Maxwell Murphy in
today’s Marketplace section. That’s a big
change from last year, when U.S. companies slashed the value of their past
acquisitions by $51 billion because the deals didn’t pan out as expected,
according to a study set for release today.”There could be less stress on
values now than there was in prior years,” said Gary Roland, a managing
director at Duff & Phelps, the financial-advisory firm that led the study.
Goodwill write-downs don’t affect cash flow, but they could indicate the
acquiring company’s management botched its evaluation and overpaid, Chasan
and Murphy write. “There’s a reason you put goodwill on the books. Yes, it’s
a noncash charge, but at the end of the day, it’s a measure of whether we
have been able to derive the value we said we would from those assets,” said
Perrigo CFO Judy
Brown. Perrigo expects to book $1.19 billion of goodwill on its acquisition
of Irish biotech company Elan. “Ultimately, it’s a measure of whether you
put your shareholders’ money to work in an effective way,” Ms. Brown said.
There’s a risk that a rise in interest rates or a drop in the stock market
could spark an increase in goodwill write-downs. But corporate boards are
showing more discipline in approving acquisitions. U.S. buyers this year are
paying an average premium of 19% to the target’s share price the week before
the deals are announced. Historically, premiums have averaged 30%. And last
year was the first year in which companies could use a new FASB rule that
lets them judge on a qualitative basis whether they need to perform
traditional quantitative tests on their asset values. Because the new rule
makes the decision more subjective, optimistic executives may be able to
stave off a potential write-down, says PJ Patel, a managing director at
Valuation Research, which advises companies on goodwill accounting.
Question Goodwill Impairment: What Happens When U.S. GAAP and IFRSs Clash?
From CFO.com on March 25, 2013
Differences in the goodwill impairment standards under U.S. GAAP and
IFRSs may create significant disparities as to whether goodwill is viewed as
impaired and, if so, how much is written off in the United States and the
other country, or even country to country. Learn more about the challenges
companies, especially acquisitive ones, may face in performing goodwill
impairment testing both in the U.S. and around the world. More ---
http://deloitte.wsj.com/cfo/2013/03/25/goodwill-impairment-what-happens-when-u-s-gaap-and-ifrss-clash/
For acquisitive companies, determining whether
goodwill booked in transactions has become impaired and if it has, by
how much, is now a fairly regular occurrence. However, the accounting
involved can be anything but straightforward when the acquirer is a
U.S.-based company and subsidiary businesses are located elsewhere or
vice versa.
Differences in the goodwill impairment
standards under U.S. GAAP and International Financial Reporting
Standards (IFRSs) may create significant disparities as to whether
goodwill is viewed as impaired and, if so, how much is written off in
the United States and the other country, or even
country-to-country. Other factors creating such disparities include the
varying application of valuation methodologies and historical cultural
differences in the application of impairment accounting.
Such situations may be especially troublesome
for U.S. businesses because of country-to-country differences around the
world. For example, a U.S. company with operations in Germany, France,
Spain and Greece may write off goodwill entirely on a consolidated basis
under U.S. GAAP. However, when a corporate life event, such as a
spin-off or carve out, is undertaken related to the subsidiary outside
of the U.S. depending on how the IFRSs principles are applied, some or
none of its goodwill might be written off. (See: U.S. GAAP-IFRSs
Dilemma: A Case Study further below).
Sorting out these differences may be a
challenging process for management of companies operating in numerous
countries across the world, when U.S. GAAP, IFRSs and potentially other
financial reporting frameworks need to be addressed. Relief from the
dilemma of distinguishing between the treatment under U.S. GAAP and
IFRSs does not appear to be on the way any time soon. On one hand, the
International Accounting Standards Board (IASB) and the U.S. Financial
Accounting Standards Board (FASB) are continuing their now decade-long
work to converge IFRSs and U.S. GAAP. However, converging goodwill
impairment accounting does not appear to be a near-term project.
In addition, on July 13, 2012, the SEC
issued its final staff report on the “Work Plan for Consideration of
incorporating IFRSs into the Financial Reporting System for U.S.
Issuers” without offering a timetable for potential U.S. adoption of
IFRSs for domestic filers¹. This leaves companies for the foreseeable
future still facing difficult situations when dealing with disparities
such as goodwill impairment.
The Conceptual Foundation of Impairment
Issues
The differences in U.S. GAAP and IFRSs goodwill
impairment treatment flow largely from a fundamental difference in
accounting approaches. As a principles-based accounting approach, IFRSs
provide a conceptual basis for accountants to follow in a one-step test
that has both a fair value and an asset-recoverability aspect. U.S.
GAAP, on the other hand, dictates that goodwill is tested for impairment
through a two-step, fair value test with the level of impairment, if
present, determined in Step 2 after an extensive analysis of related
asset values. However, the FASB’s recent issuance of a “step zero”
qualitative assessment for goodwill impairment testing did introduce an
element of a principles-based approach under U.S. GAAP³.Principles-based
standards allow accountants to apply significant professional judgment
in assessing a transaction. This is substantially different from the
underlying “box-ticking” approach historically common in rules-based
accounting standards.
The lack of precise guidelines in a
principles-based approach may create inconsistencies in the application
of standards across organizations and countries, particularly in a very
subjective area such as fair value. On the other hand, rules-based
standards can be viewed as insufficiently flexible to accommodate a
topic such as fair value, which often requires significant professional
judgments gained through experience, with extremely limited market data.
However, the U.S. has gradually been embracing
the principles-based approach. The recently converged standards on fair
value measurement (IFRS 13 and ASC 820), an IASB-FASB joint effort,
supports this.
Even though the SEC has not set a timetable for
if, when, or how the U.S. might move to IFRSs in the future, convergence
efforts themselves in recent years have started to influence how new
accounting standards are applied in practice.
U.S. GAAP-IFRSs Dilemma: A Case Study
The experience of a U.S.-based consolidated
company comprising six Reporting Units (RUs) demonstrates how
differences in U.S. GAAP and IFRSs may affect goodwill impairment. The
company was considering a spinoff of an RU located in a country
following IFRSs, as a standalone company through an IPO. Therefore, a
standalone audit of the RU was necessary under IFRSs. At the end of its
fiscal year, the U.S. consolidated company wrote off the goodwill in its
foreign-based RU and some other domestic RUs under U.S GAAP.
Outside the U.S., meanwhile, the subsidiary—a
standalone RU in the U.S. and a single Cash Generating Unit (CGU) under
IFRSs—performed an independent goodwill impairment analysis. The
standalone CGU management did not believe there should be a goodwill
write-off under IFRSs guidelines and following typical valuation
procedures in that country related to goodwill impairment testing. As a
result, the standalone CGU reported goodwill under IFRSs but the
standalone RU under U.S. GAAP wrote the entire amount off, at the same
point in time.
Addressing the Dilemma
In a world where investors often react to new
or inconsistent financial information within seconds, it is important
for company management to understand environments where different
conclusions may be reached relative to topics such as goodwill
impairment.
Sometimes differences need to be addressed and
initial conclusions potentially modified. In other situations
differences are just the result of the various financial reporting
frameworks and environments across the world. However, it is important
to be aware that situations may occur where various parties involved may
not agree or understand each other’s perspectives, and then be able to
navigate them effectively to get to supportable and reasonable
conclusions.
Understanding real differences due to statutory
guidance—such as non-convergent accounting versus interpretations of
principles-based standards, or the varying application of valuation
methods—is extremely important.
The Effects of Culture and Translation
As accounting standards, IFRSs are still
relatively recent, with European nations as early adopters in 2005;
although, in some countries, IFRSs have been around longer. Numerous
countries around the world have been transitioning to IFRSs in recent
years. In many of those countries, fair value was not present in the
original accounting framework. Indeed, a number of the countries now
following IFRSs do not have fully functioning market- based economies,
making the complexity of arriving at supportable fair value estimates
even greater.
Countries around the world have operated for
decades within their own accounting systems, and cultural differences
cause accountants in different countries to interpret and apply
accounting standards differently. Such differences can affect the
measurement and disclosure of financial information in financial reports
and potentially affect cross-border financial statement comparability.
National culture is most likely to influence
the application of financial reporting standards where judgment is
required. This is of concern due to IFRSs being principles- based and
requiring substantial judgment on the part of the accountant and the
valuation specialist performing the valuation.
The official working language of the IASB, and
the language in which IFRSs are published, is English. Translation of
IFRSs into various languages introduces an added complexity in
comparability of application of IFRSs across the world, as well as
comparability with U.S. GAAP. In some cases, words and phrases used in
English- language accounting standards cannot be translated into other
languages without some distortion of meaning. For instance, words such
as “probable,” “not likely,” “reasonable assurance” and “remote” can be
problematic during interpretation.
In addition, many countries that have moved to
IFRSs may have introduced their own country’s version of IFRSs; such
localization of the standards has led to the creation of many slightly
different versions of IFRSs.
Therefore, when analyzing and contrasting
financial reporting practices, such as those involving
goodwill impairment testing,
it is not as
simple as a comparison of U.S GAAP and IFRSs.
To highlight the need for greater consistency,
the European Securities and Markets Authority (ESMA) issued a Public
Statement on November 12, 2012, regarding European common enforcement
priorities for 2012 financial statements. ESMA’s reason for issuing the
statement was “to promote consistent application of the European
securities and markets legislation, and more specifically that of [IFRSs].”
One of the four “…financial reporting topics which they believe are
particularly significant for European listed companies…”⁴ was impairment
of non-financial assets, including goodwill.
The Effects of Different Accounting
Treatments
Taking a goodwill impairment can be a
necessary, if disappointing, step for a company. For publicly traded
companies in particular, depending on how the company has managed market
expectations, the move may or may not affect the company’s market
pricing. Dealing with inconsistencies from market to market can be even
more perplexing. Whatever the situation, companies operating across the
global economy continue to face the challenge of differing application
of valuation methodologies and accounting principles under U.S. GAAP and
IFRSs, local country GAAP and even country-to-country under IFRSs
regarding goodwill impairment testing.
While the mainstream media's hagiography of John F.
Kennedy continues on the 50th anniversary of his tragic death, it's
important to remember his full legacy - not just the parts that the
mainstream media likes to promote.
President Kennedy proved the existence of the
Laffer curve. When he came into office, Americans at the top end of the
income ladder faced marginal tax rates in excess of 90%. Kennedy proposed
tax cuts across the board - including marginal income tax rates, corporate
rates, capital gains rates. And after JFK's tax cuts passed, tax revenue
increased. As Diana Furchtgott-Roth, director of Economics21, writes:
Kennedy was one of the first presidents to
articulate a supply-side theory. On Nov. 20, 1962, at a news conference,
he said “It is a paradoxical truth that tax rates are too high and tax
revenues are too low and the soundest way to raise the revenues in the
long run is to cut the rates now ... Cutting taxes now is not to incur a
budget deficit, but to achieve the more prosperous, expanding economy
which can bring a budget surplus.”
Kennedy’s tax cuts were not passed by Congress
until after his death on Feb. 26, 1964, in the Revenue Act of 1964. The
bill reduced the top marginal rate from over 90% to 70%. Tax revenues
increased from $94 billion in 1961 to $153 billion in 1968, and the new
rates led to a greater percentage of tax revenue coming from those
making over $50,000 a year. Tax receipts from those making over $50,000
rose 57%, whereas receipts from those making under $50,000 rose 11%.
Continued in article
Jensen Comment
One instance of most anything does not prove much in economics. Even two
instances hardly constitutes proof even though President Clinton managed to
balance the budget largely due to lagged effects of the Reagan tax cuts. The
problem with tax cuts, stimulus spending, Quantitative Easing, or most any other
factor intended to increase the GDP and employment is that circumstances change
greatly over time. Economies have too many complex and interacting variables to
attribute much of anything to a single factor.
However, nearly all nations (including the Scandinavian countries, Canada,
all of Europe, and Iran) significantly decreased the top tax rates between 1979
and 2002 largely in belief of the Laffer Curve.
Table 1 Maximum Marginal Tax Rates on
Individual Income
*. Hong Kong’s maximum tax (the “standard rate”) has
normally been 15 percent, effectively capping the marginal rate
at high income levels (in exchange for no personal exemptions).
**. The highest U.S. tax rate of 39.6 percent after 1993 was
reduced to 38.6 percent in 2002 and to 35 percent in 2003.
Source: PricewaterhouseCoopers;
International Bureau of Fiscal Documentation.
Why states like Illinois and California cannot tax their way out of
unimaginable debt.
Why states' business taxes on big companies are often a myth.
From the CFO Journal's Morning Ledger on November 11, 2013
Washington state closes in on Boeing deal The Washington state legislature completed passage of key elements
of an incentive package aimed at guaranteeing that Boeing
will locate manufacturing work for its 777X jetliner in Puget Sound,
the WSJ reports. The
roughly $8.7 billion package of extended tax breaks, education and workforce
support and permit streamlining was passed less than a week after Democratic
Governor Jay Inslee called for a special legislative session to swiftly
approve the package. The incentives, along with a pending contract for
Boeing’s largest union, are seen as crucial to Washington state’s beubg
selected for the work.
Jensen Comment
Somehow Washington State is one of the seven states with no state income taxes.
How a Blue State manages this is a mystery to me.
From the CFO Journal's Morning Ledger on November 11, 2013
Office Depot faces
taxing decision on new headquarters A political stalemate could persuade
Office Depot to
move more than 2,000 jobs out of Illinois as lawmakers grouse about the
growing number of companies seeking special tax treatment,
the WSJ reports. The
company wants to decide soon where to place its headquarters, after closing
its $1.2 billion acquisition of OfficeMax last week. The choices:
Naperville, Ill., where more than 2,000 people work for what was OfficeMax,
or Office Depot’s home of Boca Raton, Fla., which houses more than 1,700
employees. To stay in Illinois, the new company is seeking relief from the
state’s taxes, which are among the highest in the country. But a bill
offering the office-supply chain $53 million in tax credits over 15 years
failed to make it to a full Senate vote during a session that ended last
week, and lawmakers aren’t likely to reconvene until next month at the
earliest.
Jensen Comment
Illinois already gives enormous tax relief to big companies like Caterpillar and
Sears to keep them from moving headquarter to another state. Who does that leave
to pay for fraudulent Illinois state pensions and half the people who are
fraudulently on Illinois Medicaid rolls --- fraudsters who are not really
qualified for Medicaid?
From the CPA Newsletter on November 11, 2013
AICPA releases final version of Accounting and Valuation Guide, Testing
Goodwill for Impairment
On Nov. 8, the
AICPA Financial Reporting Executive Committee and the Impairment Task Force
released the final version of the new AICPA Accounting and Valuation Guide,
Testing Goodwill for Impairment. The new guide
provides nonauthoritative guidance and illustrations for preparers,
auditors, valuation specialists and other interested parties regarding the
accounting, valuation and disclosures related to goodwill impairment
testing. Specifically, it focuses on practice issues related to the
qualitative assessment and the first step of the two-step test. In
connection with the release of this guide, a
webcast will be held,
3 to 5 p.m. ET on Nov. 19, during which task force
representatives who worked on this guide will discuss its provisions.
Academe does not appear in the
90%+ white chart. Perhaps this is because academic disciplines vary
so much in terms of having minority professors --- especially in disciplines
(like mathematics and accounting) having increasing proportions of Asian
Americans but not African Americans and Latinos. Also academe is confounded by
having "minorities" who are still on Green Cards and are otherwise non-native
Americans. Although the proportion of white professors of accounting is
declining due mostly to a growing number of Asian accounting professors, the
proportion African American and Latino accounting professors is miserably low.
The KPMG Foundation for decades has taken on a serious funding initiative to
increase the number of African Americans in accountancy doctoral programs. But
the number of graduates is still a drop in the proverbial bucket.
CPA firms increased their hiring of minorities to over 30% at the entry
level, but the retention level drops back down to the neighborhood of 20% ---
http://www.journalofaccountancy.com/Issues/2012/Jun/20114925.htm
Reasons for lower retention rates include failure of new hires to pass the CPA
Examination after being hired. Another perhaps more important reason is the
traditionally high turnover of more recent employees in the larger CPA firms
where most of those employees move into higher paying jobs (often with clients)
or move out of the labor force to become full-time parents. Top minority
employees of CPA firms are especially likely to receive attractive job offers
from clients.
Law schools have been especially aggressive in recruiting top African
American and Latino students.
This competition especially hurts when recruiting minority students for masters
programs in accountancy (most CPA Examination candidates now graduate from such
masters programs). One reason for law school minority recruitment success is
that students can major in virtually any discipline in college and later be
admitted to law school if they have the required LSAT scores. Most masters of
accounting programs require what is tantamount to an undergraduate accounting
major. This greatly reduces the number of minorities eligible to take the CPA
Examination. However, students can still be business accountants without having
passed the CPA examination. It's much harder, however, to get entry-level
experience without first working for either a CPA firm or the IRS.
Occupations with tough licensing examinations tend to have lower lower
percentages of blacks and Latinos.
More than half of the black and Latino students who
take the state teacher licensing exam in Massachusetts fail, at rates that are
high enough that many minority college students
are starting to avoid teacher training programs,The Boston Globereported. The failure rates
are 54 percent (black), 52 percent (Latino) and 23 percent (white). Inside Higher Ed, August 20, 2007 ---
http://www.insidehighered.com/news/2007/08/20/qt
Gender Pay Gap
From 24/7 Wall Street newsletter on November 6, 2013
The gender wage gap has narrowed over the years. In
1979, women made an estimated 62% of what men earned. In 2012, the wage of a
full-time female employee was roughly 81% of her male counterpart. While
that is good news, in the past 10 years, the gap has remained more or less
unchanged. The size of the remaining pay inequality depends a great deal on
the job. In many of the largest occupations in the country, women earn close
to what men do on a weekly basis. In others, however, the disparity remains
closer to the 1979 levels. For example, the typical female insurance agent
brought in just 62.5% of her male counterpart in 2012. These
are the jobs with the widest pay gaps between men and women.
Jensen Comment
I don't want to get into hot-button reasons for the gender gap in pay other than
to note that there's considerable evidence in some fields that the higher pay
for men is sometimes due to the male willingness to work longer hours and/or
endure more years of frequent overnight travel for days on end. Female doctors
are more likely to apply for emergency room duty purportedly when there are
eight-hour shifts as opposed to having to endure long days plus many nights and
weekends of on-call duty endured by non-emergency room physicians. For example,
private-practice physicians cannot always control what time of day their
patients have babies or heart attacks or post-surgery complications.
Eighty percent of the drugs prescribed to Americans
are generic drugs. They have to be approved by the FDA, usually after years
of testing. Many of those drugs are made in India, and it turns out a
leading manufacturer, Ranbaxy, often skipped the required steps for approval
of its generic drugs.
n 2004, Ranbaxy executive Dinesh Thakur was asked
by his boss to investigate allegations of fraud at the company. Thakur
quickly uncovered disturbing problems with the data required by the FDA to
prove the effectiveness of Ranbaxy drugs.
"The data's important because the FDA or other
agencies globally look at that information to give you marketing
authorization to sell the drug," Thakur says. "We started getting the files,
and, lo and behold, we find that none of that exists in the first place. ...
It means that we've gotten approvals from the FDA to sell drugs that were
based on no data, or data that was fraudulent."
Thakur found Ranbaxy's drugs for illnesses like
AIDS, heart problems and infections had no proof that they were effective.
His findings were presented to Ranbaxy executives in 2005. But he says
nothing was done.
"I was dumbfounded," he says. "I've worked in this
industry for 11 years at that point and never seen such callous behavior."
He points to an incident where his young son was
prescribed a Ranbaxy antibiotic for a fever.
"He kept getting worse, so we got another company's
formulation and the fever went away," he says, adding that incident made him
realize "I had to do something."
In 2005, Thakur blew the whistle to the FDA. Their
investigation found Ranbaxy had a "persistent ... pattern" of submitting
"untrue statements." On at least 15 new generic drug applications, auditors
found over 1,600 data errors. The FDA concluded that their drugs were
"potentially unsafe and illegal to sell."
In 2008, the FDA prohibited Ranbaxy from shipping
drugs to the U.S. from two Indian plants. But the company continued to sell
drugs in the U.S. from its other Indian facilities.
Continued in article
Jensen Comment
I found it odd that CBS News would hammer down so hard on the Ranbaxy scandal
and not even mention the $2.2 billion fine of Johnson and Johnson.
Tell me that the oversight could not possibly
intentional because Johnson and Johnson spends tens of millions of dollars in
advertising on CBS television.
In one of the largest health care fraud settlements
in U.S. history, Johnson & Johnson will pay $2.2 billion to end civil and
criminal investigations into kickbacks to pharmacists and the marketing of
pharmaceuticals for off-label uses, U.S. Attorney General Eric Holder said
on Monday.
The resolution of the long-running case covers the
marketing of the anti-psychotic drugs Risperdal and Invega and the heart
drug Natrecor over several years.
From 1999 through 2005, J&J and its subsidiary
Janssen Pharmaceuticals promoted Risperdal for unapproved uses, including
controlling aggression and anxiety in elderly dementia patients and treating
behavioral disturbances in children and in individuals with disabilities,
according to the complaint.
The off-label marketing cost U.S. government
insurance programs hundreds of millions of dollars in uncovered claims, the
complaint said.
Under the settlement, Janssen will plead guilty to
a single misdemeanor violation for its promotion of Rispersdal.
Meanwhile, the company paid millions of dollars in
kickbacks to Omnicare, the nation's largest pharmacy specializing in
dispensing drugs to nursing home patients, under various guises including
"educational funding."
Johnson & Johnson's conduct "recklessly put at
risk" the health of children, dementia patients and others to whom the drug
was prescribed at a time it was only approved by the U.S. Food and Drug
Administration to treat schizophrenia, Holder said.
Janssen's sales representatives "aggressively"
promoted Risperdal to doctors and other prescribers who treated elderly
dementia patients, and through a special "ElderCare sales force" targeted
nursing home operators.
"The company also provided incentives for off-label
promotion" and based sales representatives' bonuses on total sales, not just
sales for FDA-approved uses, the DOJ said.
Under FDA regulations, doctors may prescribe drugs
for unapproved, or off-label, use. But pharmaceutical companies are allowed
to market their drugs in the United States only for FDA-approved uses.
The FDA said it had delivered repeated warnings to
Janssen about "misleading marketing messages" to doctors, and later
initiated a criminal complaint.
"We are not the mistakes of our past," Jordan
Belfort told Sheelah Kolhatkar. Leonardo DiCaprio is starring in a
movie about Belfort's life, and
the former stock swindler is back in business.
Getting senior executives to trade in their
hardbound textbooks for digital copies is a challenge. But University of
California, Berkeley’s
Haas School of Business has had 68 of them doing
just that as part of a pilot program using a learning platform on
school-issued iPads
(AAPL)
this fall.
Students in the Berkeley MBA for Executives program
are testing a learning platform by EmpoweredU, which aims to consolidate
school materials in one source on an iPad. Essentially, the platform is an
app via which students can find pretty much all they need to complete their
coursework, including syllabi, readings, access to their
Facebook (FB) groups
and teams, and school and faculty information.
Reading textbooks on iPads was the issue that
caused the most discussion during this pilot phase, says Ashish Joshi, a
student in the MBA for Executives’ Class of 2014 and a senior director of
product management at
Oracle (ORCL).
Haas’ solution was to give students both hardbound
books and digital versions on their iPads.
A provider of subscription e-textbooks for
college students is making its 7,000-plus titles accessible on Apple Inc.'s
iPhone and iPod Touch as interest heats up in the digital-textbook arena.
The new applications, free for subscribers
to CourseSmart LLC, will let students access their full electronic
textbooks, read their digital notes and search for specific words and
phrases.
"Nobody is going to use their iPhone to do
their homework, but this does provide real mobile learning," said Frank
Lyman, CourseSmart's executive vice president. "If you're in a study group
and you have a question, you can immediately access your text."
The move comes as Amazon.com Inc. is
shipping its $489 large-screen Kindle DX e-reader, which is aimed in part at
college students. Amazon is overseeing a DX pilot program at seven colleges
this fall involving hundreds of students who will experiment with reading
textbooks digitally. Last week, McGraw-Hill Education, a unit of McGraw-Hill
Cos., said it is making about 100 college textbooks available for use on
Amazon's Kindle and Kindle DX.
CourseSmart's titles aren't available on
either Amazon device. Mr. Lyman said he would like to see his books
available wherever college students want them but that the two companies
haven't yet had any conversations.
CourseSmart, which was created in 2007 as a
joint venture of six higher-education publishers, including McGraw-Hill
Education and Pearson PLC's Pearson Education, operates on a subscription
model. Typically students rent a book for 180 days; when their subscription
expires, they lose access to the title.
The company, which doesn't release financial
results, offers its digital books at about 50% of the retail price of the
corresponding physical textbook. Although students can't resell their
e-textbooks, Mr. Lyman said they typically don't get more than 50% of what
they paid for a new book when they resell it.
"Textbooks are the missing link in the
e-reader content base," said Sarah Rotman Epps, an analyst with Forrester
Research, Inc. "The problem so far is that college students haven't really
been interested in reading on their laptops. The iPhone will help create
excitement and generate awareness of e-textbooks."
Mr. Lyman said he believes that lack of
awareness has been the largest barrier to students trying e-textbooks.
Albert N. Greco, a professor at the Fordham
Graduate School of Business Administration who studies the book industry,
estimates that sales of printed college textbook this year will reach $5.02
billion, up 3.5% from last year. He expects college e-textbooks to hit
$117.5 million in sales in 2009, up 10.3%. "Once the recession ends, we will
see a major, national push to make all higher education textbooks available
in digital formats, as well as a move in that direction for high-school
textbooks," Mr. Greco said.
The early findings of an ongoing review of the
Illinois Medicaid program revealed that half the people enrolled weren’t
even eligible.
The state insisted it’s not that bad but Medicaid
is on the federal government’s own list of programs at high risk of waste
and abuse.
Now, a review of the Illinois Medicaid program
confirms massive waste and fraud.
A review was ordered more than a year ago-- because
of concerns about waste and abuse. So far, the state says reviewers have
examined roughly 712-thousand people enrolled in Medicaid, and found that
357-thousand, or about half of them shouldn't have received benefits. After
further review, the state decided that the percentage of people who didn't
qualify was actually about one out of four.
"It says that we've had a system that is
dysfunctional. Once people got on the rolls, there wasn't the will or the
means to get them off,” said Senator Bill Haines of Alton.
A state spokesman insists that the percentage of
unqualified recipients will continue to drop dramatically as the review
continues because the beginning of the process focused on the people that
were most likely to be unqualified for those benefits. But regardless of how
it ends, critics say it's proof that Illinois has done a poor job of
protecting tax payers money.
“Illinois one of the most miss-managed states in
country-- lists of reasons-- findings shouldn't surprise anyone,” said Ted
Dabrowski.
Dabrowski, a Vice-President of The Illinois Policy
Institute think tank, spoke with News 4 via SKYPE. He said the Medicaid
review found two out of three people recipients either got the wrong
benefits, or didn't deserve any at all.
We added so many people to medicaid rolls so
quickly, we've lost control of who belongs there,” said Dabrowski.
SUMMARY: This article describes many financial accounting issues
related to Tesla Motors' quarterly filing for the three months ended
September 30, 2013. As of this writing only the Form 8-K filing for the
press release of these results has been made. Topics addressed include
overall description of financial performance, stock based compensation,
leasing revenues versus outright sales, and free cash flow. Managerial
topics of production constraints and investment in property, plant, and
equipment also are touched upon.
CLASSROOM APPLICATION: The article may be used in a financial
accounting class to cover the wide array of topics listed above and below.
QUESTIONS:
1. (Introductory) Summarize the Tesla Motors financial performance
reported in the article for the three months ended September 30, 2013
2. (Introductory) How did the stock market react to the company's
performance? What was the reason for this reaction?
3. (Advanced) The company has said it had "adjusted income" of $15
million after excluding the accounting for certain items. What are these
items? List the items and briefly explain the accounting for them.
4. (Advanced) What do you think is the rationale for excluding
"stock-based compensation costs" in describing the company as profitable
rather than losing money?
5. (Advanced) "Tesla began a leasing program this year...." How
many of Tesla's customers lease their vehicles rather than buy them? Do you
think that having a customer take a lease of a vehicle is as good as making
an outright sale? Explain your answer.
6. (Advanced) Why must some revenue be deferred when a customer
leases rather than buys a vehicle? Hint: To understand the leasing and other
programs offered to its customers, you may access the most recent Tesla
Motors filing on Form 10-Q with the SEC click on Notes to Financial
Statements, then Summary of Significant Accounting Policies, and scroll down
to Revenue Recognition.
7. (Advanced) Is it helpful to understand the company's operations
when Tesla Motors says that it would have had revenues of $602 million
rather than the $431 million reported in this quarter's income statement if
it had counted all revenue from auto leases as sales? Explain your answer.
8. (Advanced) What is free cash flow? What does it mean for the
company to forecast "break-even free cash flow"?
9. (Advanced) What is a production constraint? What constraint is
Tesla Motors currently facing?
10. (Advanced) What purchase of property, plant and equipment is
Tesla Motors' leader, Elon Musk, proposing? If this plan is undertaken, will
it impact the company's free cash flow? Explain your answer.
Reviewed By: Judy Beckman, University of Rhode Island
Tesla Motors Inc. TSLA -7.53% reported a narrower
third quarter net loss on higher production but its shares fell sharply in
after-hours trading as investors worried the luxury electric car maker's
outlook for revenue and profit fell short.
The Palo Alto, Calif., company said it delivered
5,500 of its $70,000 and up Model S electric cars in the three months ended
Sept. 30, including 1,000 vehicles shipped to Europe. That was more than the
company had projected earlier but below the whisper number of as many as
7,000 cars.
Tesla's shares fell 12% in after hours trading on
Tuesday after the company told investors to expect fourth quarter adjusted
profit would be similar to the third quarter. Excluding stock-based
compensation costs and accounting for Model S leases and "noncash interest
expense," the company said it had adjusted income of $16 million, or 12
cents a share, in the quarter.
Shares gained $1.61 to $176.81 in 4 p.m. trading on
the Nasdaq Stock Market NDAQ -1.07% before the release of quarterly results.
Chief Executive Officer Elon Musk said the company
would continue to increase production over the next several quarters from
its current rate of about 550 cars a week. Tesla forecast production of
about 6,000 Model S sedans in the current quarter.
Mr. Musk said the company is production constrained
primarily because of a lack of battery cells for its battery-powered Model
S. He said he expects the company's battery supply to improve next year as a
result of a new agreement with Panasonic Corp. 6752.TO -2.55%
Tesla Motors Inc. reported a narrower third quarter
net loss on higher production but its shares fell sharply in after-hours
trading as investors worried the outlook for revenue and profit fell short.
Mike Ramsey reports. Photo: Jason Henry for The Wall Street Journal.
Mr. Musk said that when Tesla begins building in
late 2016 or 2017 its mass-market electric vehicle, current production
capacity for the lithium-ion batteries won't be adequate. The company is
exploring building a battery plant with partners, most likely in North
America, he said on a conference call.
"There will need to be incremental production
capacity that doesn't exist in the world today," Mr. Musk said. "There will
need to be some kind of giga factory build."
Mr. Musk described the proposed battery factory as
one that could take raw materials in at one end, and ship finished battery
packs from the other end, evoking a lithium-ion battery equivalent of Ford
Motor Co. F -2.13% 's Rouge complex that early in the 20th century took in
iron ore and rolled out finished Model Ts.
The company posted a net loss of $38 million, or 32
cents a share, down from a loss of $110 million, or $1.05 a share, a year
earlier. Revenue rose eightfold to $431 million from $50 million a year ago
when the Model S was just starting to be delivered. Compared with the second
quarter, Tesla's revenue was up 6%.
On an operating basis, Tesla lost $30.6 million.
Now Reporting
Track the performances of 150 companies as they
report and compare their results with analysts' estimates. Sort by date and
industry.
More photos and interactive graphics
Tesla's gross margin, the profit after product
costs, was 24%. The company aims to get to a 25% gross margin by year-end.
Tesla began a leasing program this year under which
some revenue is deferred. Tesla said that if it took credit for the total
revenue expected from each lease transaction, it would have had revenues of
$602 million in the last quarter. Customers leased about half of the Model S
sedans delivered in the period, the company said.
Jensen Comment
This is a good illustration for your students on the extent to which companies
will go to gloss over the bad stuff in their financial reporting.
Before he died, Will Yancey had one of the best open sharing Websites on
compliance testing (where he made a ton of money as an expert witness and in
other types of compliance testing consulting) ---
http://www.willyancey.com/
In particular, Will was an expert on stratified sampling.
Criminals are increasingly using the internet to
turn dirty money into a spotless shade of green. Now a report written for
the United Nations lifts the lid on many of these increasingly popular
techniques.
Money laundering is increasingly becoming a
cybercrime. Gone are the days when the bad guys would pop down to the casino
and hope to convert their loot into a clean win on the roulette table. And
less popular is the old scam of taking out an insurance policy and then
redeeming it at a discount.
Instead, modern criminals are focusing on the
internet. And the opportunities for turning dirty money into a spotless
shade of green are plentiful.
So today, Jean-Loup Richet, a research associate at
the ESSEC Business School just outside Paris, surveys the new techniques
that criminals are using in a report written for the United Nations Office
on Drugs and Crime. And he reveals just how creative and opportunistic money
launderers have become.
Researching these kinds of operations is inherently
difficult. As Richet puts it: “Bad guys and their banks don’t share
information on criminal pursuits. “
Instead, he has had to cast his net a little wider.
Richet’s main sources of information are online hacker forums where
anonymous criminals exchange tips on the best ways to launder money and are
surprisingly frank about their methods.
In some ways, many of these methods are
unsurprising. A common approach until recently was to use the Costa Rican
digital currency service called Liberty Reserve. This converted dollars or
Euros into a digital currency called Liberty Reserve dollars or Liberty
Reserve Euros, which could then be sent and received anonymously—one of the
few services to allow this. The receiver can then convert the Liberty
Reserve currency back into cash for a small fee.
In May this year, however, the US authorities shut
down the service and charged its founder and various others with money
laundering.
But Richet says the closure of Liberty Reserve is
unlikely to end these practices because there so many alternatives. These
include WebMoney, Bitcoins, Paymer, PerfectMoney and so on.
Another increasingly common way of laundering money
is to use online gaming. In a growing number of online games, it is possible
to convert money from the real world into virtual goods services or cash
that can later be converted back into the real thing. “Popular games for
this type of scam include Second Life and World of Warcraft,” says Richet.
Then there are the money mule scams. Most people
will be familiar with the spam in which a high level official from a
developing country asks your help to transfer significant amounts of money
and are prepared to pay well for your services. But first, they require your
banking details which they promptly use to empty your account and then
disappear.
In a growing number of cases, however, the
criminals do actually transfer large amounts of money into your account and
then ask you to forward it. However, since this involves stolen funds that
are being laundered, you are accountable for the crime.
Another scam is to offer people jobs in which they
can make a substantial income working from home. However, the ‘job’ involves
accepting money transfers into their accounts and then passing these funds
on to an account set up by the employer. In other words, money laundering!
Auditors are meant to give an independent opinion
to shareholders about a company's accounts, but the financial crisis caused
disquiet about long, uncontested relationships between companies and big
accountancy firms that are meant to pore over their books.
Pomroy said: "The NAPF supports mandatory rotation
because we are not convinced that either partner rotation or more regular
tendering are sufficient in themselves to safeguard the independence of the
auditor when tenders stretch over decades."
Jensen Comment
How you pose a question in a survey also affects how it is answered. For
example, some respondents may think audit firm rotation is relatively costless.
This is far from the case.
More importantly, some respondents may think that one deep-pockets audit firm
will be replaced by another audit firm with equally deep-pockets in this era
where audit firms mostly self-insure against enormous negligence lawsuits. This
may not be the case if if the largest deep-pocket firms simply feel the risk of
incurring the huge fixed cost of taking on an enormous client like Barclays Bank
for a short term plus the risk of lawsuits is not justified by the relatively
low margin of the audit on a temporary basis.
If given a choice about replacing a deep-pockets auditing firm with a
no-pockets auditing firm, investor groups may have second thoughts about audit
firm rotation.
Jensen Comment
Remember that a high GMAT score is only one criterion for getting into a
prestigious MBA program. Other criteria include years of qualified experience
between the time of getting an undergraduate degree and applying for admission
into an MBA program. There are also affirmative action considerations for
applicants with lower GMAT scores and work experience, especially in terms of
both admission and financial aid. Most prestigious MBA programs want a high
diversity mix in terms of race, ethnic background, gender, and academic
background. A Native American history major might be given priority over a
Caucasian computer science major from the same undergraduate college.
Most of the prestigious MBA programs are not looking for undergraduate
business majors. There are of course less prestigious MBA programs that have
lower standards, including some that only have a standard that applicants are
still able to breathe and pay tuition.
I suspect that prestigious MBA programs are less aggressive when recruiting
learning disabled applicants such as those that have sight and hearing
impairments. Of course it would be legal suicide deny admission on only those
criteria.
Kenton District Judge Patricia Summe on Friday
issued a judgment of more than $100 million in favor of William J. Yung and
his family.
Yung is the owner of the Crestview Hills-based
hotelier Columbia Sussex. The defendant in the case is Grant Thornton LLP,
one of the world’s largest accounting firms.
Kenton County Circuit Court Clerk William Middleton
said the judgment is believed to be the largest ever in the county and one
of the largest in the state.
Grant Thornton was ordered to pay William and
Martha Yung $4.68 million in compensatory damages and $55 million in
punitive damages, as well as pre-judgment interest on $900,000 at a rate of
12 percent from June 11, 2007, through Friday’s ruling.
Grant Thornton was also ordered to pay the 1994
William J. Yung Family Trust $14.6 million in compensatory damages and $25
million in punitive damages.
Kevin Murphy of the Fort Mitchell law firm of
Graydon Head & Ritchey sued Grant Thornton on behalf of the Yung family.
Murphy said Grant Thornton’s tax advice cost the family millions of dollars
in excessive tax, penalties and interest, which carried a negative impact to
the family’s business interests.
Continued in article
Jensen Comment
This award is almost certain to be reduced on appeal, but how much is a real
question.
There has been a great deal of discussion
recently—much of it fraught with frustration—about the challenges facing our
nation's academic communities: How do we support basic curiosity-driven
research and maintain our position as the global leader in innovation and
technology at a time of rapidly dwindling government funds? This dilemma was
at the heart of a workshop convened by the National Academies that I
attended in September in Washington.
One potential solution, much discussed at the
conference, is through the creation of a new model of transdisciplinary
research that pulls together investigators from many disciplines to focus,
or converge, on high-value, near-term goals. This excites the industrial
sector because it generates information that can more quickly translate into
commercial innovation, but many people in the scientific community are
frankly terrified by this approach. They feel that focusing on solving
specific problems in the short term could steal funds from fundamental,
investigator-driven research that delves into new terrain—essentially, the
scientific equivalent of Captain Kirk's "final frontier"—and which often
uncovers high-value problems and solutions that no one knew existed.
There is a solution to this conundrum. I serve as
founding director of the Wyss Institute for Biologically Inspired
Engineering at Harvard University, which develops engineering innovations by
emulating how nature builds. With support from a major philanthropic gift,
and from visionary leadership at Harvard and our affiliated hospitals and
universities, we developed a new model of innovation, collaboration, and
technology translation that has attracted more than $125-million in research
support from federal agencies, private foundations, and for-profit
companies.
Continued in article
Jensen Comment
Some of this article applies to accountics science. In recent decades accountics
scientists have discovered virtually zero inventions for the practicing
side of the accounting and business profession ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Inventors
One potential solution ... is through the
creation of a new model of transdisciplinary research that pulls together
investigators from many disciplines to focus, or converge, on high-value,
near-term goals. This excites the industrial sector because it generates
information that can more quickly translate into commercial innovation, but many
people in the scientific community are frankly terrified by this approach. They
feel that focusing on solving specific problems in the short term could steal
funds from fundamental, investigator-driven research that delves into new
terrain—essentially, the scientific equivalent of Captain Kirk's "final
frontier"—and which often uncovers high-value problems and solutions that no one
knew existed.
What is different about accountics science versus real science is that in
real science "this excites the industrial sector
because it generates information that can more quickly translate into commercial
innovation," Not so in accountics science. The track record to date
of accountics scientists in generating findings tht translate into professional
innovation is so lousy it is doubtful that an accountics science initiative for
similar "transdisciplinary research" is not likely to generate much
excitement among accounting practitioners.
However, I would applaud loudly if accountics scientists would make an
attempt to excite the profession of accountancy with a similar proposal for "transdisciplinary
research." But I don't have much hope.
Faculty interest in a professor’s
“academic” research may be greater for a number of reasons. Academic
research fits into a methodology that other professors like to hear about
and critique. Since academic accounting and finance journals are methodology
driven, there is potential benefit from being inspired to conduct a follow
up study using the same or similar methods. In contrast, practitioners are
more apt to look at relevant (big) problems for which there are no research
methods accepted by the top journals.
Accounting
Research Farmers Are More Interested in Their Tractors Than in Their
Harvests
For a long time I’ve argued that
top accounting research journals are just not interested in the relevance of
their findings (except in the areas of tax and AIS). If the journals were
primarily interested in the findings themselves, they would abandon their
policies about not publishing replications of published research findings.
If accounting researchers were more interested in relevance, they would
conduct more replication studies. In countless instances in our top
accounting research journals, the findings themselves just aren’t
interesting enough to replicate. This is something that I attacked at
http://www.trinity.edu/rjensen/book02q4.htm#Replication
At one point back in the 1980s
there was a chance for accounting programs that were becoming “Schools of
Accountancy” to become more like law schools and to have their elite
professors become more closely aligned with the legal profession. Law
schools and top law journals are less concerned about science than they are
about case methodology driven by the practice of law. But the elite
professors of accounting who already had vested interest in scientific
methodology (e.g., positivism) and analytical modeling beat down case
methodology. I once heard Bob Kaplan say to an audience that no elite
accounting research journal would publish his case research. Science
methodologies work great in the natural sciences. They are problematic in
the psychology and sociology. They are even more problematic in the
professions of accounting, law, journalism/communications, and political
“science.”
College Scorecards
in the U.S. Department of Education’s College Affordability and
Transparency Center make it easier for you to search for a college that
is a good fit for you. You can use the College Scorecard to find out
more about a college’s affordability and value so you can make more
informed decisions about which college to attend.
To start, enter
the name of a college of interest to you or select factors that are
important in your college search. You can find scorecards for colleges
based on factors such as programs or majors offered, location, and
enrollment size
Jensen Comment
Note that at the above site you can also search for a college by name. Some data
like average earnings of graduates is still being compiled by the Department of
Education. Average earnings of graduates will probably be a misleading number.
Firstly, the most successful graduates might track into other colleges to
complete their undergraduate and/or graduate degrees. Hence feeder colleges may
be given too much or too little credit in terms of earnings success.
Secondly, I think earnings "averages" are misleading statistics unless they
are accompanied by analysis of standard deviations and kurtosis.
Thirdly, high earnings averages cannot all be attributed to where a degree is
earned. For example, students with stellar SAT scores on average are more likely
to have higher earnings no matter where they got their undergraduate
engineering, science, business or whatever baccalaureate degrees. Students with
low SAT scores may be likely to earn less in lower paying jobs like elementary
school teaching because of lower academic abilities as opposed to their
particular alma maters. And yes I know that some high SAT graduates who might
have made it to medical school teach first graders because they are dedicated to
teaching and/or want summers free to raise their own children.
Fourthly, a high percentage of college graduates become parents and full-time
homemakers. This might distort earnings statistics unless somehow factored out
of the calculation of averages. However, it's difficult to factor out in many
instances. For example, CPA firms now hire more female than male graduates from
accounting masters degree programs (undergraduates are not allowed to take the
CPA examination). This will raise a college's average earnings for graduates
before a significant number of those women drop out of the workforce --- often
for only a decade or two before somehow returning to their accounting careers.
In other instances the male spouses they married in college drop out of their
jobs to be homemakers so their traveling wives can carry on as auditors and tax
accountants and accounting information systems experts. My point is that those
starting salaries are not necessarily for lifelong continuous careers for many
mothers or sometimes fathers.
And there's the problem of debt burdens. Last night our furnace quit when the
temperature was headed toward an 10 degree night. We recently changed plumbing
companies, and a very nice and very skilled young man arrived on a Sunday night
(right after the Patriots clobbered the Steelers) to instantly identify the part
(the controller) that failed on our furnace. He had a replacement part in his
truck.
In the meantime our conversation drifted to the topic of student loans. We
mentioned how our son and his wife both amassed over $60,000 in debt and had to
remain at their old jobs after graduating from college --- meaning their college
degrees burdened with debt did not help them in the least to find better jobs.
Our new plumber then explained how his wife amassed a student debt of $88,000
which he's now paying off. She has two masters degrees and cannot find a job.
One of these degrees is in political science and the other is in international
relations. If she moved to Boston she could possibly find work, but the last
thing either of them want is to leave the White Mountains to live in Boston or
any other mega city.
I think what he was saying is that before taking on
such heavy student debt she should perhaps have done better planning about where
she wanted to live --- or more importantly where she did not want to live.
Most adults who are
considering college—either completing a degree or starting one for
the first time—aren't tapping into the wealth of information about
costs, graduation rates, and job prospects, and as a result they
aren't finding the right fit, according to a report released on
Monday by Public Agenda, a nonprofit research group.
The
report, "Is College Worth It for Me? How
Adults Without Degrees Think About Going (Back) to School," says
that most prospective adult students worry about the cost of college
and how to balance studies with families and careers. They're
looking for colleges with practical programs that will help them
land jobs, as well as personalized support from caring faculty
members and advisers.
The report, which
was financially supported by the Kresge Foundation, was based on a
survey this past spring of 803 adults, ages 18 to 55, who lack
college degrees but expect to start earning a certificate or degree
in the next two years. The group, which excludes students coming
straight from high school, accounts for about a third of first-time
college students in the United States, according to the report.
The survey found
that adults ages 25 to 55 have more doubts about going to college
and are less likely to have concrete plans. Those under 25 worry
more about whether they can succeed at college and land a job
afterward.
Jensen Comment
Accountant/Auditor is Number 4 on the list even though it requires 150 approved
credits (usually 2-4 extra semesters in an accounting masters program) to get
permission to take the CPA examination. The list is a bit misleading in that it
does not base the rankings on how hard it is to successfully break into the jobs
on the list.
For example, elementary school teachers have
relatively easy times finding entry-level jobs relative to management
consultants who almost never land entry-level jobs before they gain years of
experience in business and earn one of more specialty certifications. The
majority of graduates from prestigious MBA programs do not necessarily become
management consultants without experience, some of who were experienced in
business or engineering before they entered the MBA programs.
There's also a difference between landing a job and
landing a job in a top firm. For example, the top accounting firms generally
offer entry-level jobs to only the top graduates of a masters program although
the proportion of the class hired varies considerably with the prestige of the
program and the black book maintained by accounting firms on schools where they
recruit. In recent years more women than men are hired by the top accounting
firms. Business firms and small CPA firms tend not to hire new accounting
graduates and wait for moments when prospects have more accounting experience
such as experience as auditors and tax accountants in respected accounting
firms.
The IRS offers great opportunities to new
accounting graduates whereas the FBI hires a lot of accounting graduates only
after they are experienced in business or government.
Cheaper and more powerful equipment, in robotics
and computing, has allowed firms to automate an ever larger array of tasks.
New research by Loukas Karabarbounis and Brent Neiman of the University of
Chicago illustrates the point. They reckon that the cost of investment
goods, relative to consumption goods, has dropped 25% over the past 35
years. That made it attractive for firms to swap labour for software
whenever possible, which has contributed to a decline in the labour share of
five percentage points. In places and industries where the cost of
investment goods fell by more, the drop in the labour share was
correspondingly larger.
Other work reinforces their conclusion. Despite
their emphasis on trade, Messrs Elsby and Hobijn and Ms Sahin note that
American labour productivity grew faster than worker compensation in the
1980s and 1990s, before the period of the most rapid growth in imports.
Studies looking at the increasing inequality among workers tell a similar
story. In recent decades jobs requiring middling skills have declined
sharply as a share of total employment, while employment in high- and
low-skill occupations has increased. Work by David Autor of MIT, David Dorn
of the Centre for Monetary and Financial Studies and Gordon Hanson of the
University of California, San Diego, shows that computerisation and
automation laid waste mid-level jobs in the 1990s. Trade, by contrast, only
became an important cause of the growing disparity in wages in the 2000s.
Trade and technology’s toll on wages has in some
cases been abetted by changes in employment laws. In the late 1970s European
workers enjoyed high labour shares thanks to stiff labour-market regulation.
The labour share topped 75% in Spain and 80% in France. When labour- and
product-market liberalisation swept Europe in the early 1980s—motivated in
part by stubbornly high unemployment—labour shares tumbled. Privatisation
has further weakened labour’s hold.
Such trends may tempt governments to adopt new
protections for workers as a means to support the labour share. Yet
regulation might instead lead to more unemployment, or to an even faster
shift to automation. Trade’s impact could become more benign in future as
emerging-market wages rise, but that too could simply hasten automation, as
at Foxconn.
Accelerating technological change and rising
productivity create the potential for rapid improvements in living
standards. Yet if the resulting income gains prove elusive to wage and
salary workers, that promise may not be realised.
Deliberate destruction of property or slowing down of work with the
intention of damaging a business or economic system or weakening a
government or nation in a time of national emergency.
The word is said to date from a French railway strike
of 1910 when workers destroyed the wooden shoes (sabots) that held the rails
in place.
I wonder when sabotage of robotics displacing labor might become commonplace
in some nations.
For Readers With Limited Attention Spans When Reading Popular Business Books
15 Famous Business Books Summarized In One Sentence Each ---
http://www.businessinsider.com/famous-business-book-summaries-2013-10
In some instances I don't have the attention span needed for the one-liner. Most
state what is intuitively obvious to me! Like I know success in most instances
depends somewhat on luck and serendipity. What's new?
For Silicon Valley, the study has clear
implications: Boosting the number of H-1B visas granted has been a high
priority in the region. Facebook’s Mark Zuckerberg and other entrepreneurs
have been funding a lobbying effort to expand the number of such visas
granted to computer engineers from abroad amid a shortage of qualified
applicants at home. Research such as Malhotra’s could make Washington less
skittish about awarding more visas given the narrow group of workers opposed
to them.
The study’s implications for the broader question
of amnesty for millions of undocumented workers is not yet clear. Malhotra
said more research needs to be done to determine the true reasons behind
opposition to amnesty. Margalit, Malhotra’s co-researcher, is currently
conducting a similar targeted study of 12 fields that employ a large number
of foreigners — including construction and nursing — to see if there is a
similar impact beyond the high-tech sector. But Malhotra said no study to
date has done a good job really getting at the heart of why people feel the
way they do.
“You can’t do these broad omnibus studies,’’
Malhotra said in an interview. “You have to do targeted research.’’
Understanding why Americans feel the way they do about immigration is
important for smart policymaking. “The question is: What is actually driving
people in their hearts?’’
If American views on immigration are primarily tied
to economic issues, Malhotra said, “there are policy interventions you can
have.’’ If opposition is rooted in cultural biases or racism, that may be
harder to address, he added.
The study, presented at a conference of the Midwest
Political Science Association, is due to be published in a forthcoming issue
of the American Journal of Political Science.
Jensen Comment
Those who vigorously oppose immigration (sometimes labor unions protecting labor
more than businesses seeking labor) often forget that the USA rose to economic
dominance of the world on the backs of immigrant laborers and their families. My
Jensen grandparents immigrated from Norway and struggled 24/7 on a 160-acre Iowa
farm. They eventually died relatively poor in a drafty house without a furnace
or plumbing. My grandfather died shortly after my dad was born, but my
grandmother and her five sons carried on with the farm in that drafty house with
no furnace or plumbing. I remember the outhouse and doing farm chores as a small
boy on this farm ---
http://www.trinity.edu/rjensen/max01.htm
Cities like New York and Boston and Los Angeles are urban melting pots of
immigrants, many of whom achieved great success and watched their families
prosper.
At the same time, there's growing fear of getting too much of a good thing.
I don't think opposition to immigration is so much about losing jobs except in
certain industries such as construction currently suffering from unemployment.
In my opinion, the main fear of immigration is the fear of being overrun by
too much of a good thing. If the USA adopted an open border policy the
nation would be overrun by the tired, the sick, and the poor among the
approximately one billion people of the world who are desperate. The USA
would be destroyed by a sudden influx of hundreds of millions of the poorest
people of the world.
Thus immigration limits must be set to avoid being overrun. But immigration
should be encouraged to the extent that life is better in the USA because a
controlled number of immigrants make a net contribution to the economic and
social good life. We cannot realistically offer a better life to hundreds of
millions of poor people if being overrun destroys the opportunities for
immigrants themselves as well as those that already live in the USA.
Immigration authorities in the USA try as best they can to achieve racial and
ethic fairness in spreading legal immigration among all nations of the world.
Illegal immigration is quite another matter, and the problems here boggle my
mind. I don't have any quick answers other than to note that illegal immigration
is not just a Hispanic phenomenon. People of many racial and ethnic backgrounds
are sneaking into the USA daily, especially from Asia, the Middle East, and
Africa as well as from South of the Rio Grande. But it is nowhere near tens or
hundreds of millions of people.
One of our sons works for the hospital in Lewiston, Maine. Lewiston is an old
lumber, textile, and paper mill town that fell on hard times when the mills
closed ---
http://en.wikipedia.org/wiki/Lewiston,_Maine
At the urging of the United Nations in 1999, the USA opened its gates to
12,000 Somali and
Bantu immigrants. Lewiston had many abandoned houses and seemed like a good
place to settle the poorest of these new citizens along with Clarkson, Georgia.
However, there's a world of difference between Lewiston and Clarkson. Clarkson
is a suburb of Atlanta where jobs abound (relatively). Lewiston is surrounded
with timberland on economic decline. The Somali and Bantu new arrivals did
get government funding for new shops in decaying downtown Lewiston. But life is
still tough, and Lewiston is not a destination of most tourists entering Maine
in the summer. Life is very hard for Lewiston's new immigrants, but the town may
be better off because of the new small businesses struggling to make it.
Government loans to this area would be a whole lot less without these new
entrepreneurs who have been given a chance to make a new life. But if 20 million
of the poorest Somali and Bantu people received the same open gate to the USA I
don't see how they all could have a chance for a better life.
What I do know is that today it would take a multimillionaire to buy the farm
land and the machinery it takes to own and operate the dirt cheap farm in Iowa
that my grandparents purchased on credit with no money and farmed with horses in
the 1800s. Opportunities were much better in the USA for poor immigrants
in the 1800s. No poor immigrant in the 21st Century could afford what was once
our home farm. Opportunities for the good life are much more limited for
immigrants in this age unless they are rich in money or rich in specialty skills
such as skills needed to become multimillionaires in the Silicon Valley.
And any family that tries to make it on a mere 160 acres in Iowa in the 21st
Century qualifies for food stamps. Farm machinery is just too expensive for a
160-acre farming operation in Iowa. In the 1800s the family and their
horses/mules could live off the land if necessary. In the 21st Century the
family could not pay the taxes if they tried to farm with horses or mules. The
Amish make it with more land and communal sharing and jobs in town.
The Federal Trade Commission is warning military
veterans to be cautious when choosing to spend their GI Bill benefits at a
for-profit college.
In a
recent post on "8 Questions to Ask" when picking a
college, the agency urges veterans to "be aware that some for-profit schools
may not have your best interest in mind."
"They may want to use your Post-9/11 GI Bill
benefits to boost their bottom line and may not help you achieve your
education goals," the post reads. "They may stretch the truth to persuade
you to enroll, either by pressuring you to sign up for courses that don't
suit your needs or to take out loans that will be a challenge to pay off."
The post recommends that veterans consult the
Education Department's
College Navigator to
determine whether an institution is for-profit or not-for-profit.
The warning suggests the federal agency is
continuing to pay close attention to the for-profit sector. In an appearance
at June's annual meeting of the sector's main lobbying group, the
Association of Private Sector Colleges and Universities, a top FTC official
said the agency was "actively engaged" in
monitoring the marketing practices of for-profit
colleges.
Jensen Comment
Francine misses the point about what investors and donors to charities want most
from their CPA auditors.
First and foremost, they want auditors they think (even at absurdly high
prices) are going to do the best job preventing fraud, errors, and other
abuses that are more likely, in my opinion, to protect them than if an
organization faces no external auditors. We really have no data on how many
frauds, errors, and other abuses are prevented by having external auditors, but
in my opinion the preventative role pf auditing trumps all other roles of
auditing in general.
Maybe the auditor's opinion is of little consequence until the tort lawyer
pit bulls are called in to commence growling in court..
Second, most astute investors and donors to charities want auditors having
the deepest possible pockets when the tort lawyers grab onto the throat of an
audit firm. The investors in the Madoff Ponzi scheme were perhaps the most naive
investors in the world. Most of those investors were wealthy Jewish investors
who could not imagine that one of their own with impeccable Wall Street
credentials would steal billions from the the Jewish community. Their faith is
in each other is to be expected, but one of the Big Six auditing firms with very
deep pockets would have been value added in this case. Sometimes auditors don't
even have to be from the Big Six as the City of Dixon, Illinois happily found
out.
My
headline story yesterday was about the regulatory
black hole that exists for the consulting practices of the Big Four audit
firms. (The abyss exists for all of the audit firms but, as usual, we will
focus here in the business of the Big Four given their influence on issuers,
aka publicly listed companies.)
There are five big issues that space prevented a
full discussion of yesterday and that are not on the agenda of the
PCAOB Standing Advisory Group meeting this week.
My hope is that regulators, policy makers and other interested parties will
start talking about these issues, too, while I am in DC this week.
1) US regulators are not enforcing existing
rules —the pre- and post- Sarbanes-Oxley rules — regarding auditor
independence for the US firms of the Big Four auditors who also provide
consulting services for those clients.
I’ve written numerous times about independence
violations only to see no visible action by the SEC or PCAOB. This is what
I’ve written just since the beginning of 2012 about auditor independence
issues. Many posts reference earlier warnings about the activities,
especially the broker-dealer independence issues.
December 1, 2012,
Deloitte, HP And Autonomy: You Lose Some But You Win Some More, Much More
Big, big story at the end of 2012 that involves all
four of the Big Four audit firms and is a prime example of the growing
influence – and the threat to auditor independence – of the
reestablished consulting practices in the firms.
It also highlights the media confusion about the all roles audit firms are
playing these days. Often they are not audit-related and yet the media often
does not know for sure how to refer to the firms or their specific
responsibilities and potential legal liabilities.
“OPERATIONS consultants sit at the front of the
classroom,” says a partner at a strategy consultancy. “Strategy consultants
stay in the back, not paying attention, throwing paper airplanes. But they
still get the girls and get rich.” Like so many caricatures, this one is
cruel but contains a grain of truth. Operations consultants—the fine-detail
guys who tinker with businesses’ internal processes to make them run
better—generally do not enjoy the same glamour or financial rewards as
strategy specialists, whose job is to advise firms on make-or-break deals,
adopting new business models and other big stuff.
Although in practice their work overlaps, the two
have until now remained distinct businesses. Strategy firms like McKinsey,
Bain and the Boston Consulting Group hire from the top universities, are
packed with highly paid partners and whisper their counsel in CEOs’ ears. In
contrast, operations specialists such as IBM, Accenture and the Big Four
accounting firms (Deloitte, EY, KPMG and PwC) employ armies of lower-paid
grunts; and tend to answer to the client firm’s finance or tech chiefs.
This year, however, that line has begun to blur. In
January Deloitte became the largest of the Big Four by scooping up the
assets of Monitor, a strategy firm that had gone bust. And on October 30th
its closest rival, PwC, said it would buy another strategy firm, Booz &
Company, for a reported $1 billion. If Booz’s partners approve the deal, it
will vault PwC back into first place.
The accountancies’ push into strategy has been a
decade in the making. During the late-1990s technology bubble they beefed up
their IT-consulting arms. But in 2001 Enron, an energy-trading firm, went
bust and took its auditor, Arthur Andersen, down with it. In response,
America’s Congress passed the Sarbanes-Oxley corporate-governance reform,
which banned firms from doing systems consulting for companies they audited.
As a consolation prize, the Big Four made a fortune helping clients comply
with the new law. Their advisory businesses, full of potential for conflicts
of interest with their auditing side, by now seemed dispensable. All but
Deloitte had sold off those divisions by 2003.
Just as the workload from Sarbanes-Oxley began to
dwindle, the 2008-09 financial crisis hit, causing consulting revenues to
dip (see chart). But once the economy recovered, the climate for the Big
Four started to resemble the 1990s. They began to rush back into
consultancy, encouraged by its high margins and double-digit annual growth
rates at a time when revenue growth from auditing and tax work had slowed.
In particular, Deloitte and PwC began gobbling up operations consultancies
as they sparred for the top spot.
For years the strategy firms remained beyond the
Big Four’s grasp. During the 2000s they had mostly prospered on their own,
and their partners shuddered at the thought of being subsumed into giant
bureaucracies. After the financial crisis, however, midsized strategy
consultants hit hard times. Cost-conscious companies with globalising
businesses wanted either to hire boutiques with deep knowledge of their
industries, or to benefit from the scale of generalist firms with offices
everywhere. Too big for some clients and too small for others, Monitor went
under, and Booz—a spin-off from Booz Allen Hamilton, which now focuses on
operations work for governments—went on the block.
Both Booz and PwC say that the two sides of
consulting are converging, and that more clients want a one-stop shop that
can both devise a strategy and execute it. Deloitte and Monitor claim their
integration is already bearing fruit. “There’s been a very healthy two-way
cross-selling opportunity,” says Mike Canning of Deloitte.
Nonetheless, Booz’s leadership still faces a hard
sell to get the deal passed. In 2010 the company’s partners voted down a
proposed merger with AT Kearney, another midsized strategy firm. This
marriage involves far more risks. A significant number of Booz’s clients
would immediately be in doubt because PwC audits them—strategy consulting
for audit clients is banned in many countries, and even where it is legal it
is frowned upon (not least in America). Since the Big Four are structured as
associations of national partnerships, Booz’s staff would probably end up
being divided by country, hindering the global co-operation that many big
clients seek.
Most important, each of Booz’s 300 partners would
have to trade meaningful sway over the direction of a highly profitable firm
for a minuscule stake in a diversified, lower-margin empire. If the sale is
approved, the test of its success will come in a few years, after Booz’s
partners receive their full payout and can head off. An exodus would leave
PwC empty-handed.
Continued in article
PwC's Biggest Rebranding Yet: What Goes Around Comes Around
From the CFO Journal's Morning Ledger on October 31, 2013
PwC
is banking on more growth in consulting with its acquisition of Booz
Terms weren’t disclosed, but the transaction appears to be among the biggest
deals involving an accounting firm in at least the past decade,
the WSJ’s Michael Rapoport, Julie Steinberg and Joann
S. Lublin report. The deal is expected to
beef up PwC’s fast-growing advisory business and should also help it tap Booz’s
experience developing strategies for clients. “PwC has made it really clear
they’re bulking up their management-consulting business,” said Tom
Rodenhauser, managing director at Kennedy Consulting Research & Advisory.
The move gives PwC “a real leg up in credibility in terms of business
consulting.” The
FT’s Sam Fleming says
the hope is that Booz will allow PwC to offer a stronger challenge to the
prime end of the management-consulting sector, where McKinsey, Boston
Consulting Group and Bain dominate.
But it isn’t all smooth sailing. Sarbanes-Oxley bars
audit firms from many types of consulting for their U.S. audit clients, so
conflicts of interest are almost sure to arise in cases where Booz’s
existing consulting clients have their yearly audit done by PwC, the Journal
says. Meanwhile, former SEC Chairman Arthur Levitt, who pushed for rules to
curb accounting firms from providing both auditing and consulting services
to a client,
tells Bloomberg that
the deal puts the issue of independence front and center. “As the accounting
profession becomes more committed to consulting, their audit activities have
got to be questioned,” said Mr. Levitt. Some accounting firms “see their
future in consulting rather than auditing, and that’s unfortunate for
America’s markets.”
And Lynn Turner, the former chief accountant at the
SEC, tells Bloomberg that mergers like this raise a serious question: “Are
the auditors going to serve management, or are they going to serve the best
interests of the investing public?” If the combined firm agrees not to do
consulting for companies it audits, “then you eliminate the conflict,” Mr.
Turner said, but he doubts that will happen. “Do you honestly think Booz
partners would turn around and vote for this deal if they gave up all of
their clients that PwC audits?”
KPMG is getting into venture-capital investing,
according to an article today in the Times of London. It’s one more
sign that the Big Four audit firms are moving
beyond traditional accounting services and getting themselves into other
more far-flung endeavors.
The
newspaper said the fund, called KPMG Capital, will
be based in London and “will invest predominantly in small British and
American data and analytics businesses.” We can presume that KPMG would be
smart enough to avoid auditing the books at places where it invests,
although you never know.
Even if KPMG doesn’t audit the companies it owns,
an obvious problem is that KPMG inevitably will be in the position of
funding companies that compete against its own audit clients. That may not
be a violation of any rules, but it can create conflicting interests
nonetheless. (Then again, so can audit fees themselves, because the client
is paying the auditor.)
Adversarial relationships can be as damaging to the
notion of auditor independence as overly cozy ones. Plus, you have to wonder
if this even makes good business sense. If I were on the board at a KPMG
audit client and saw a KPMG-owned startup trying to take away my company’s
market share, I would want to drop KPMG and hire a different firm.
This line from the Times article, quoting a senior
KPMG partner named Simon Collins, caught my attention in particular: “Mr.
Collins said that it would be `very difficult’ to provide audit services to
the companies it invested in -- `but we can incubate them, we can advise
them.’”
Let’s get this much straight: “Very difficult” is
the wrong answer here. The correct response is that it should be impossible.
Any first-year accounting student can tell you that auditors aren’t supposed
to audit companies in which they have ownership stakes.
But maybe we shouldn’t be surprised. In February
2011 the Securities and Exchange Commission
censured KPMG’s Australia affiliate over
independence violations at two audit clients with U.S.-registered
securities. The SEC found the firm sent staff members to work at an audit
client under the client’s supervision and direction. In another situation
the firm was paid commissions for promoting an audit client’s products and
was retained by the client to provide legal services.
In another case, the SEC in 2005 settled with
KPMG’s Canadian affiliate and two of its partners over audit-independence
violations at a Colorado company, Southwestern
Water Exploration Co. The firm prepared some of the company’s basic
accounting records and financial statements and then audited its own work,
the SEC said.
In 2002, the SEC censured KPMG because it purported
to serve as the independent auditor for a mutual fund at the same time it
had invested $25 million in the same fund. At one point KPMG accounted for
15 percent of the fund’s assets, the SEC said. That was a black-and-white
violation of the auditor-independence rules.
The U.S. Supreme Court revisited the Enron Corp.
collapse as the justices debated whether whistle-blower protections in a
2002 law cover employees of auditors, law firms and other advisers to
publicly traded companies.
Hearing arguments today in the case of two former
mutual-fund industry workers, the justices tried to sort out a law that
represented Congress’s response to the accounting fraud behind Enron’s 2001
failure. The fast-paced session was laced with questions about a
hypothetical butler working for the late
Kenneth Lay, who was Enron’s chairman, and the
role of the company’s accounting firm,
Arthur Andersen LLP.
The case will determine the scope of whistle-blower
protections that watchdog groups say are important to prevent another
Enron-like catastrophe. The dispute pits business groups against President
Barack Obama’s administration, which is seeking a
broad interpretation of the whistle-blower provision.
“That’s what Congress intended to cover: these
accountants, lawyers and outside auditors who were so central to the fall of
Enron,” said Nicole Saharsky, a Justice Department lawyer. Enron, once the
world’s largest energy trader, collapsed after using off-books partnerships
to hide billions of dollars in losses and debt. That also brought down
Arthur Andersen.
Sarbanes-Oxley Law
The dispute turns on a provision in the 2002
Sarbanes-Oxley law barring publicly traded companies and their contractors
and subcontractors from discriminating against an “employee” who reports
fraud or a violation of securities regulations. The central question is
whether that provision allows retaliation lawsuits only by the employees of
the public company, or by those of its contractors as well.
The case is significant for the mutual fund
industry. While the funds themselves are publicly traded, they typically
have few if any employees, instead using privately held companies to conduct
day-to-day activities.
The suing employees, Jackie Hosang Lawson and
Jonathan M. Zang, worked for units of privately held FMR LLC. The units
provide investment advice and management services to publicly traded
Fidelity mutual funds.
The workers say they lost their jobs after
reporting fraud. Lawson complained that expenses were being inflated and,
ultimately, passed on to fund shareholders. Zang contended that a Fidelity
statement filed with the Securities and Exchange Commission misrepresented
how portfolio managers were compensated.
Appeals Court
FMR denies the allegations and says both employees
had performance problems. Zang was fired in 2005 and Lawson resigned in
2007.
A federal appeals court ruled that Lawson and Zang
can’t sue for retaliation under Sarbanes-Oxley because they didn’t work for
publicly traded companies.
The workers’ lawyer, Eric Schnapper, said the lower
court ruling “has the implausible consequence of permitting the very type of
retaliation that we know Congress was concerned about, retaliation by an
accountant such as Arthur Andersen.”
Several justices suggested Schnapper’s
interpretation of the law -- as protecting all the employees of a publicly
traded company’s contractors and subcontractors -- would sweep too broadly.
Justice
Stephen Breyer asked whether Schnapper’s approach
would allow lawsuits by employees of a gardening company that cuts the grass
outside a company’s office building.
‘Mom-and-Pop Shop’
Does the statute “make every mom-and-pop shop in
the country, when they have one employee, suddenly subject to the
whistle-blower protection for any fraud, even those frauds that have nothing
to do with any publicly traded company?” Breyer asked Schnapper.
Schnapper said his interpretation of the statute
wouldn’t apply to employees of the company’s officers, including “Ken Lay’s
butler.”
After years of rapid growth, economies in Brazil,
Russia, India, China and South Africa, known collectively as the BRICS, have
slowed considerably, International Monetary Fund data show. The economic
environment has also gotten more difficult in central and eastern Europe,
the Middle East and North Africa.
EY surveys found that many companies in these
countries are under increased pressure to meet targets of their investors
and owners. In countries where enforcement of anti-bribery and
anti-corruption laws is less rigorous, survey respondents perceived a rise
in unethical practices. The surveys involved 681 executives, senior managers
and other employees at companies in eight Asia-Pacific countries and more
than 3,000 board members, managers and their team members in 36 European,
African and Middle Eastern countries.
While regulatory efforts to tackle fraud and
corruption seem to be improving in China, where only 9% of respondents said
using bribery to win contracts is common practice in their industry, 79% of
respondents in Indonesia reported widespread bribery and corruption.
In South Korea, where investigations into alleged
bribery are underway at state-owned enterprises, 86% of respondents said
their companies have policies that are good in principle but do not work
well in practice.
In India, 74% of respondents reported increased
pressure to deliver good financial performance in the next 12 months, and
54% of respondents said their companies often make their financial
performance look better than reality.
Respondents in Spain and Russia reported the
highest incidence of misleading financial statements (61%).
About half of all respondents in Malaysia (54%)
said their companies are likely to take ethical short cuts to meet targets
when economic times are tough, or double the Asia-Pacific average (27%).
Local application is key
“The majority of businesses surveyed have created
or are in the process of creating policies and procedures to deal with
fraud, bribery and corruption,” Chris Fordham, an EY managing partner for
Asia-Pacific, observed in the introduction of one of the survey reports.
“However, too often we see a disconnect in the local application of these
policies and tools.”
The Asia-Pacific findings echo results of the
survey involving European, Middle Eastern, Indian and African companies,
Fordham said.
Big data technology.
Seventy-eight per cent of the Asia-Pacific respondents agreed that tapping
the large volumes of data companies generate and collect routinely to
examine all company transactions would result in better fraud detection and
more effective prevention of corruption, but only 53% do it. In several
Asia-Pacific countries, including Malaysia and Indonesia, IT investments are
still seen more as a burden than a tool.
Whistleblower programmes.
Eighty-one per cent of the Asia-Pacific respondents considered them useful,
mainly because whistleblower programmes are easy to access and employees are
willing to use them, but only 32% set them up. Concerns about potential
retribution and lack of legal protection and confidentiality prevent
implementation of whistleblower programmes. Thirty-four per cent of
respondents in Europe, Africa and the Middle East said their companies had
whistleblower programmes.
Codes of conduct. About
half of the respondents in Europe, Africa and the Middle East said their
companies had anti-bribery codes of conducts with clear penalties for
breaking them and that senior management was strongly committed to the codes
of conduct. Forty-eight per cent said certain unethical practices, such as
offering gifts or cash to win business or falsifying financial statements,
are justified to help a business survive an economic downturn. In
Asia-Pacific, 40% of respondents said their companies have anti-bribery
codes of conduct, but only 34% include clear penalties and senior management
at only 35% of companies were seen as strongly committed to compliance.
This teaching case should be of special interest to Tom Selling and other
advocates of fair value accounting for all bank loan assets and debt.
The case deals with the traditional and now renewed issue of whether a company
can avoid short-term fair value adjustments by declaring a financial instrument
asset or debt to be a long-term (e.g. loan investments to be held-to-maturity
rather than being held as available-for-sale). With great reluctance the IASB
caved in EU banker political pressures to allow historical cost accounting for
long-term financial instruments. Similarly, the FASB changed loan impairment
accounting for long-term receivables.
Personally I never have liked short-term fair value adjustments to very
long-term financial instruments (asset and debt financial instruments). The
reason is that I place primary importance on accounting for the bottom line (net
earnings) that becomes too volatile by the fictional unrealized gains and losses
of fair value accounting for very long-term financial instruments like mortgages
payable or mortgage loans receivable. Until political pressures were
applied, the IASB and FASB placed primary emphasis on balance sheet values even
though fair value adjustment fictions of long-term financial assets and debt
made it impossible to define net earnings ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
Most long-term receivables will be settled for contracted maturity value and
are not doubtful accountants. However, at any point where it appears that full
collection of maturity value is in doubt (such as defaulted monthly payments on
a mortgage loan), the the Allowance for Doubtful Accounts must be adjusted for
the best possible estimate of ultimate loan losses just as Sears and other big
companies adjust the Allowance for Doubtful Accounts for estimated receivables
bad debt losses. Often estimations of such losses for bank loans are more
complicated when loan collateral is involved as in the case of mortgage loans
where new government regulations make foreclosure litigation more complicated
and costly.
From The Wall Street Journal Weekly Accounting Review on November 8,
2013
CLASSROOM APPLICATION: The article may be
used to introduce fair value accounting for investments versus historical
cost accounting for loans receivable. Questions also ask students to
understand the CFO's personal responsibility for integrity in financial
statement filings and systems of internal control.
QUESTIONS:
1. (Introductory) Of what wrongdoing has the SEC accused Fifth
Third Bancorp of Cincinnati?
2. (Advanced) What is the importance of classifying loans as held
for sale rather than classifying them as long-term receivables?
3. (Advanced) Chief Financial Officer Daniel Poston certainly
wasn't the only one directly responsible for the bank's accounting in the
third quarter of 2008. Why then is he the one who is losing his position and
facing a one-year ban practicing before the SEC?
4. (Advanced) Do you think that Mr. Poston will return to his
position as CFO after his one year ban on practicing in front of the SEC is
completed? Explain your answer
Reviewed By: Judy Beckman, University of Rhode Island
Fifth Third Bancorp FITB -0.24% has moved its
finance chief to a different post in connection with a tentative agreement
it reached with the staff of the Securities and Exchange Commission
regarding the lender's accounting.
The Cincinnati bank said Daniel Poston will vacate
the chief financial officer's and become chief strategy and administrative
officer. Fifth Third appointed Tayfun Tuzun, its treasurer, to the role of
finance chief.
The SEC is seeking a one-year ban on Mr. Poston's
ability to practice before the agency under separate negotiations with the
executive, the bank said.
Fifth Third said its agreement in principle stems
from an investigation into how Fifth Third accounted for a portion of its
commercial-real-estate portfolio in a regulatory filing for the third
quarter of 2008. The dispute focuses on whether the bank should have
classified certain loans as being "held for sale" in the third quarter of
that year rather than in the fourth quarter.
Fifth Third said it will agree to an SEC order
finding that the company failed to properly account for a portion of the
portfolio but will not admit or deny wrongdoing. The bank will also pay a
civil penalty under the agreement, the amount of which wasn't disclosed.
The agreement requires the approval of the SEC
commissioners.
A spokeswoman for the SEC and a spokesman for Fifth
Third declined to comment.
Mr. Poston, who was serving as Fifth Third's
interim finance chief at the time of the activities, is in separate
settlement discussions with the SEC under which he would agree to similar
charges, a civil penalty and the one-year ban the agency is seeking, the
bank said.
Jensen Comment
Prior to this openness of a political fight involving the IASB I repeatedly
wrote that my concerns about convergence of USA and IASB standards were
political more than technical. However, I was wrong about the political trouble
commencing with enemies of the USA. As of late the political turmoil is being
created by friends of the USA in Europe.
As of late the sheer audacity of Europe to dominate the standard
setting in over 100 nations must be an insult to those nations that are not part
of Europe. To think the USA almost got involved in this political dog and cat
fight is frightening. It's a good thing the SEC backed away from replacing FASB
standards with IASB standards. What a political mess for the IASB ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
(Reuters) - The European Union is seeking to
increase its influence over global accounting standards by beefing up the
agency that scrutinizes new rules and in certain cases tweaking how they are
applied in the bloc.
The book-keeping standards, the bedrock of
markets, are written by the International
Accounting Standards Board (IASB). They apply in over 100 countries,
including the EU, but not the United States.
Accounting rules have become highly politicized
after policymakers around the world blamed them for exacerbating the 2007-09
financial crisis.
The standards must first be endorsed by the
European Commission for use in the bloc but member states and the European
Financial Reporting Advisory Group, or EFRAG, often give different views on
their suitability.
The EU is the biggest contributor to the IASB's
budget - it provided about a third of the 20 million pounds the board
received in 2012 - but feels its voice is not adequately heard.
Michel Barnier, commissioner for financial
services, asked former European Investment Bank chief Philippe Maystadt to
recommend how the bloc can streamline advice and endorsement.
In a report published on Tuesday, Maystadt
recommended beefing up EFRAG financially through compulsory levies on listed
companies, and elevating its board to look at the political and economic as
well as technical aspects of rules.
In a challenge to IASB authority, Maystadt also
recommended changing how the commission endorses a standard, broadening it
out from a simple yes or no to include the ability for "carve ins" - or
local tweaks to the rules - but only to improve the "public good".
"I am particularly keen that Mr Maystadt's
recommendations should be implemented swiftly," Barnier said in a statement.
He will present them to EU
finance ministers on Friday.
France, Britain,
Italy and
Germany will become permanent members of
the expanded EFRAG board. The European Central Bank and EU banking,
markets and
insurance watchdogs will also be members, a signal of how policymakers are
keen for lessons from the financial crisis to be applied.
"What is proposed gives us a means to build
something that is going to be efficient," said Jerome Haas, president of the
French accounting standards board ANC.
The IASB had no comment.
Maystadt's recommendations put heavy emphasis on
making sure IASB rules do not destabilize
banks,
insurers and markets.
The current requirement to value some bank assets
at the going rate was seen as accentuating the crisis by forcing lenders
into fire sales to shore up depleted capital.
Another accounting rule is seen as leaving it too
late for
banks to make provisions on souring loans,
forcing taxpayers to bail them out in the crisis.
"EXCESSIVE"
Barnier criticized the "excessive" focus in recent
years on the IASB trying to align its rules with those of the United States,
as called for by world leaders so that investors can compare companies more
easily.
Maystadt said he does not see the United States
adopting IASB rules in the foreseeable future and in the meantime other
parts of the world want to increase their influence.
Barnier said the recommendations will allow the
European Union to better organize itself to ensure the "needs of its
markets" are taken fully into account in IASB rulemaking.
The carve-in provision, along with tougher
conditions for endorsing a rule in the first place, such as not harming
financial stability, are intended to give the European Union more leverage
over shaping new IASB rules in future.
Haas said the "carve in" formalizes what is already
happening across the world, such as selective implementation by supervisors
and companies.
Teaching Case on the Allowance for Doubtful Accounts accrual accounting
(under the Matching Concept) Versus
the Cooke Jar Accounts accounting (under the Profit Smoothing Concept)
Either the banks are illegally using the Allowance for Doubtful Accounts
ledger inappropriately as cookie jar reserves or there is something that I'm not
aware of that suddently allows USA banks to use cookie jar accounts apart from
accounting rules and regulations for other companies.
The Allowance for Doubtful Accounts ledger accounts were never intended to be
cookie jar income smoothing accounts.
The bottom line is that I do not understand the article below by Michael
Rapaport.
From The Wall Street Journal Weekly Accounting Review on November 1,
2013
TOPICS: Allowance For Doubtful Accounts, Bad Debts, Banking,
Earnings Management, FASB
SUMMARY: The article focuses on bank loan loss reserves, but the
parallel to income effects from any reduction in bad debt provisions can be
highlighted to students. At the end of the article, the FASB's proposed
changes to an impairment model for loan losses-looking to future
expectations of realizable cash flows rather than only past collectability
of receivables-is discussed.
CLASSROOM APPLICATION: The article may be used to cover banking or
any loan loss allowance. It also may be used to cover the FASB/IASB project
on Financial Instruments--Credit Losses.
QUESTIONS:
1. (Introductory) What area of bank reporting has the Wall Street
Journal analyzed for this article? How are bank regulators also looking at
this issue?
2. (Advanced) What are loan loss reserves? What alternate term does
the accounting profession use in place of "reserves"? In your answer,
contrast this term with the word "provision."
3. (Advanced) Summarize the accounting for allowance for
uncollectable accounts. How is an allowance for uncollectable accounts (or
allowance for bad loans or receivables) established? What happens when an
uncollectable account is written off?
4. (Advanced) What happens when an allowance for uncollectable
accounts is reduced because of improving economic conditions leading to
better collectability of receivables? Specifically address the statement in
the article that "accounting rules allow the money to flow directly into
profits."
5. (Introductory) What is the concern with the timing of banks
improving profits with the "release" or reduction in allowances for
uncollectable loans?
6. (Advanced) "Bankers say current accounting rules essentially
compel them to release reserves when loan losses ease..." Explain this
statement.
8. (Advanced) Again return to the FASB proposed ASU. How does an
impairment model consider future cash flows better than traditional methods
of establishing an allowance for uncollectable accounts? To answer, describe
the process of determining an impairment of an asset and compare to the
description you wrote in answer to question 3 above.
Reviewed By: Judy Beckman, University of Rhode Island
Federal regulators have warned banks to be careful
about padding their profits with money set aside to cover bad loans. But
some of the nation's biggest banks did more of it in the third quarter than
earlier this year.
J.P. Morgan Chase JPM -2.02% & Co., Wells Fargo WFC
-0.95% & Co., Bank of America Corp. BAC -1.41% and Citigroup Inc., C -2.21%
the nation's largest banks by assets, tapped a total of $4.9 billion in
loan-loss reserves in the third quarter, up by about a third from both the
second quarter and the year-ago quarter after adjustments. All the banks
except Citigroup showed significant increases compared with the second
quarter.
Accounting rules allow the money to flow directly
into profits. In all, it made up 18% of the banks' third-quarter pretax
income excluding special items, the highest percentage in a year, according
to an analysis by The Wall Street Journal.
The moves come at a time when banks are being
slammed by revenue slowdowns. Big commercial banks have suffered from a
double whammy of plunging mortgage lending and trading activity.
Third-quarter revenue for the four banks dropped an average of 8% from the
previous quarter. The KBW Bank Index has declined 2% in the past three
months, while the S&P 500 stock index has gained 4% over the same period.
The accounting maneuvers show how banks can prop up
earnings when business hits a rough patch.
"You've seen reserve releases improve the stated
numbers," said Justin Fuller, a Fitch Ratings analyst. "Going forward, I
think there's fewer levers to pull for the banks."
Investment banks are feeling the squeeze as well.
Goldman Sachs Group Inc. cut the funds it set aside for compensation in the
third quarter, a move that bolstered its results in the face of a 20%
revenue decline from the same quarter a year earlier.
Such moves are "very emblematic of what's going
on," said Charles Peabody, partner in charge of research at Portales
Partners LLC, a financial-services research firm. The degree to which the
banks' earnings rely on loan-loss reserves "exposes the lack of growth" in
their traditional businesses, he said.
The banks justify the releases. They cite
improvements in credit quality and economic conditions—which make it less
necessary for them to hold large amounts of reserves as a cushion against
loans that go sour—and they say they are following accounting rules that
require them to release funds as losses ease.
A Bank of America spokesman said "the significant
impact in credit quality we've seen in the last 12 months" has driven the
reserve releases. J.P. Morgan, Wells Fargo and Citigroup all pointed to
previous comments their top executives recently made indicating that reserve
releases were merited because of factors like improving credit quality and
the recent increase in housing prices.
But the Office of the Comptroller of the Currency,
which regulates nationally chartered banks and federal savings associations,
is reiterating warnings to banks about overdoing it.
In a statement to the Journal, Comptroller Thomas
Curry said the OCC is monitoring banks' loan-loss allowances "very closely"
and that "we continue to caution banks not to move too quickly to reduce
reserves or become too dependent on these unsustainable releases." He didn't
comment specifically on the banks' third-quarter releases, but said OCC
examiners "will continue to challenge allowances on a bank-by-bank basis if
necessary."
If the regulator finds problems with a bank's
reserves, it can issue a "matter requiring attention," a specific finding of
a deficiency that a bank must address, an OCC spokesman said. The agency has
thousands of such findings outstanding on a variety of subjects, but the OCC
spokesman wouldn't say how many, if any, were related to banks' reserve
releases.
Mr. Curry has been vocal on the issue for more than
a year. In September 2012, he called it a "matter of great concern," warning
banks that "too much of the increase in reported profits is being driven by
loan-loss-reserve releases."
Last month, Mr. Curry said in a speech that when
economic growth is slow, as it is now, banks might take more risks to
maximize their returns, and so it is "particularly important" they maintain
appropriate reserves. While some level of reserve releases is "certainly
warranted," he said, the ease of boosting earnings through the practice "has
proved habit-forming" at some banks, though he didn't single out any
specific institutions.
Mr. Curry said his previous concerns initially
seemed to get banks' attention, and reserve releases temporarily eased, but
that was "an anomaly." Since then, he said, the releases have increased
again, despite "loosening credit underwriting standards" that suggest banks
are facing higher risks.
The OCC isn't alone in its concern. Last year,
Federal Deposit Insurance Corp. Chairman Martin Gruenberg said the trend of
earnings driven by lower loan-loss provisions "cannot go on forever." An
FDIC spokesman said Friday, "We will continue to evaluate and confirm the
ongoing adequacy of reserves during our regular examinations."
Other banks are releasing reserves, as well, though
the amounts drop off drastically below the top four. In the second quarter,
the most-recent period for which industrywide figures are available, nearly
40% of all FDIC-insured banks released reserves, according to the FDIC. As
of June 30, the industry's bad-loan reserves had fallen to their lowest
level as a percentage of total loans since before the financial crisis
began, according to FDIC data.
J.P. Morgan released $1.8 billion in the third
quarter, including $1.6 billion from its consumer and community banking
unit, accounting for 19% of its pretax income after the bank's giant
litigation expenses in the quarter are excluded. That is higher than in
recent quarters, though the bank's nonperforming assets have declined 18%
over the past year, helping to justify a larger release.
Bank of America released $1.4 billion, comprising
29% of pretax income, and Wells released $900 million, or 11% of pretax
income, its biggest release in more than two years. Citigroup released $778
million, down slightly from the second quarter, and the release amounted to
18% of pretax income. At all three, the percentage of pretax income was up
from the second quarter, and nonperforming assets have fallen at all four
banks at least 18% compared with a year ago.
Continued in article
Jensen Comment
This teaching case will be very confusing to accounting students learning
from traditional textbooks. In those textbooks the Allowance for Doubtful
Accountants ledger account has nothing to do with cash in reserve funds,
cookie jar accounting, or profits smoothing funds. The Allowance for
Doubtful Accounts is simply a contra account to receivables assets in the
accrual system that forces companies to currently expense the portion of
receivables that is estimated will not be collected. It is a way to
anticipate bad debt losses that are anticipated will not be collected. Bad
debt losses are not to be estimated in advance only when there is no
reliable statistical basis for estimating them in advance such as when a
company has only a few customers (like Boeing) as opposed to millions of
customers (like Sears). Sears can statistically estimate with great accuracy
what portions of credit sales this year will not be collected in later
years.
The key issue that will be confusing to students is what triggers a
debit (reduction) in the Allowance for Doubtful Accounts ledger account.
Our USA textbooks teach that this Allowance for Doubtful Accounts ledger
account deibt (reduction) comes when an account is ultimately written off as
a bad debt. The expense for this was estimated in an earlier year of a sale
under the Matching Concept that tries to match expenses in the same year
that those expenses are associated with the revenues they helped generate.
Hence current revenues and profits are not reduced due to bad debt write
offs from sales made on account in prior years.
Cookie Jar Reserve Funds for Income Smoothing Rather Than Bad Debt
Accruals
One difference in the past between USA accounting and European accounting
(especially in Switzerland) was that USA GAAP discouraged having rainy day
"cookie jar" reserve accounts that were set up to smooth profits rather than
merely satisfy better matching of revenues and expenses under the matching
concept.
Bob Jensen's thread on Cookie Jar Accounting at
http://www.trinity.edu/rjensen/Theory01.htm#CookieJar
Question
What is cookie jar accounting and why is it generally a bad thing in
financial reporting?
Answer
Cookie jar is more formally known as earnings reserve accounting where
management manipulates the timings of earnings and expenses usually to
smooth reported earnings and prevent shocks up and down in the perceived
stability of the company. European companies in the past notoriously put
deferred earnings in "cookie jars" so as to picture themselves as solid
by covering bad times with deferrals out of the cookie jar that mitigate
the bad news and vice versa for good times. The problem with too much in
the way of a good time (in terms of financial reporting) is that
accelerated growth rates in one year cannot generally be maintained
every year and it may be a bad thing, in the eyes of management, to have
investors expecting high rates of growth in revenues and earnings every
year.
What's wrong with cookie jar reporting is that
it allows management wide latitude in discretionary reporting that is a
major concern to both investors and standard setters. Accounting reports
become obsolete when they mix stale cookies from the cookie jar with
fresh sweets and lemon balls of the current period.
You can read more about FAS 106 at
http://www.fasb.org/st/index.shtml
Scroll down to FAS 106 on "Employers' Accounting
for Postretirement Benefits Other Than Pensions"
Federal regulators have warned banks to be careful
about padding their profits with money set aside to cover bad loans.
But some of the nation's biggest banks did more of it in the third quarter
than earlier this year.
Jensen Comment
Firstly, in USA textbooks we teach that money (cash) is not usually set aside
for the Allowance for Doubtful Accounts. Presumably cash could be set aside that
is earmarked for future bad debts, but this result in the opportunity loss on
what that cash could earn when invested in more profitable operations rather
than being stored in a savings account.
J.P. Morgan Chase JPM -2.02% & Co., Wells Fargo WFC
-0.95% & Co., Bank of America Corp. BAC -1.41% and Citigroup Inc., C -2.21%
the nation's largest banks by assets, tapped a total of $4.9 billion in
loan-loss reserves in the third quarter, up by about a third from both the
second quarter and the year-ago quarter after adjustments. All the banks
except Citigroup showed significant increases compared with the second
quarter.
Accounting rules allow the money to flow directly
into profits. In all, it made up 18% of the banks' third-quarter pretax
income excluding special items, the highest percentage in a year, according
to an analysis by The Wall Street Journal.
Jensen Comment
In USA textbooks we teach that money does not flow directly into profits when
receivables are declared bad debts and written off against the Allowance for
Doubtful Accounts contra account. Firstly, there's usually no cash that's been
set aside for such purposes. Secondly, the bad debt expense was estimated and
written off earlier in the year that the loans were made so that profits were
not overstated in those earlier years.
It would be a violation of USA GAAP if a bank used the Allowance for Doubtful
Account reduction for anything other than a legitimate admission that a
receivable must be at last deemed as uncollectable. It is the uncollectablity of
the account that triggers the write down of the Alllowance for Doubtful
Accounts. This contra account should never be a cookie jar account for the
purpose of smoothing profits independently of actually writing off of
uncollectable accounts.
Either the banks are illegally using the Allowance for
Doubtful Accounts ledger inappropriately as cookie jar reserves or there is
something that I'm not aware of that allows USA banks to use cookie jar accounts
apart from accounting rules and regulations for other companies.
Didn't Fair Value Accounting for Financial Instruments Eliminate the
Matching Concept and the Allowance for Doubtful Accounts?
Yes and no.
If JP Morgan bought $10 million worth of Greek bonds, USA GAAP dictates that the
value of those bonds should be written up and down for their estimated value in
the financial markets. (Rules for this have recently changed, but I will not go
into all of that here.)
But if Sears has 25 million accounts receivable on the books, including the
account of Bob Jensen, it is beyond comprehension that Sears will will track the
current fair value of the $29.18 that Bob Jensen currently owes Sears or the
current fair value of each of the other tens of millions accounts receivable.
Instead Sears with set up an aging schedule for the millions of active
accounts and estimate what portions of all accounts in each age class will
eventually be written off as bad debts. Then in the year of sale those estimates
will be expensed and credited to an Allowance for Doubtful Accounts ledger
account under the Matching Concept just as literally all the USA accounting
textbooks have explained for decades.
Similarly, JP Morgan and other large banks will use fair value accounting for
large-account financial instruments but will not use fair value accounting for
33 million small loans of under $500 to customers. Thus even though fair value
theorists would like to kill and bury the Matching Concept, this concept is
alive and well due to the total impracticality of tracking fair values of
millions and millions of small accounts receivable and small loans by banks.
But the Allowance for Doubtful Accounts ledger accounts were never intended
to be cookie jar income smoothing accounts.
The bottom line is that I do not understand the article above by Michael
Rapaport.
Governments around the world are taking bold steps
to minimize the likelihood of another catastrophic financial crisis.
Regulators and financial institutions already have their hands full, so the
bar for adding anything to the agenda should be high.
However, one relatively simple but critically
important item should move to the top of the list: reforming the accounting
rules that inexplicably prevent banks from establishing reasonable loan-loss
reserves. If reserve rules had been written correctly before 2008, banks
could have absorbed bad loans more easily, and the financial crisis probably
would have been less severe. It is now time, before the next crisis, to
recognize that reality.
Loan-loss reserves get far less attention than
capital or liquidity requirements, which are subject to specific government
regulations. Nevertheless, the "Allowance for Loan and Lease Losses" should
be an essential part of assessing the safety and soundness of any bank. The
ALLL—not Tier 1 capital or even cash-on-hand—is the most direct way a bank
recognizes that lending, including necessary and constructive lending,
entails risk. Those risks should be recognized in both accounting and tax
practices as a reasonable cost of the banking business.
However, banks are now only allowed to build their
loan-loss reserves according to strict accounting conventions, enforced by
the Securities and Exchange Commission. Reserves have to be based on losses
that are strictly "incurred," in effect shortly before a bad loan is written
off. Bankers have been prohibited from establishing reserves based on their
own expectations of future losses.
The practical result is that in good times real
earnings are overrated. Conversely, the full impact of loan losses on
earnings and capital is concentrated in times of cyclical strain.
Why have accounting conventions created this
perverse result? Some accountants claim that giving banks flexibility with
their reserves is bad because it lets bankers "manage earnings"—that is, to
raise or lower results from quarter to quarter to look better in investors'
eyes. This is a weak argument, because the ALLL reflects a banking reality,
and the allowance itself is completely transparent.
No one is misled when sufficient disclosures exist.
The size of the bank's reserve cushion will be on the balance sheet, and it
would need to be recognized as reasonable by auditors, supervisors and tax
authorities. Importantly, from a financial policy point of view, reserves
will tend to be countercyclical, likely to discourage aggressive lending
into "bubbles" but helping to absorb losses in times of trouble.
Capital is vital to the safety and soundness of
banks. It is the ultimate and necessary protection against insolvency and
failure. However, permitting a more flexible allowance for loan-loss
reserve, an approach that gives banks and prudential regulators the right to
exercise reasonable discretion to build a more flexible cushion in case of
loss, is a must. Accounting rules need to change to permit this to happen.
Mr. Ludwig, the CEO of Promontory Financial Group, was Comptroller of
the Currency from 1993 to 1998. Mr. Volcker, former chairman of the Federal
Reserve System, is professor emeritus of international economic policy at
Princeton University.
Even as some U.S. investors are lobbying the
Financial Accounting Standards Board to ease up on their plans to revise
lease accounting, a user advisory group at the International Accounting
Standards Board is urging its board to persist unswayed.
The IASB's Capital Markets Advisory Committee took
the rare step of putting its
views in writing, says committee member Jane
Fuller, who also chairs the Accounting Advocacy Committee of the CFA Society
of the United Kingdom. The group met after the Investor Advisory Group for
the Financial Accounting Standards Board said it believes FASB should back
away from making significant changes to lease accounting and simply
require new disclosures that would help users of
financial statements better understand the full scope and weight of an
entity's lease obligations.
“For some reason, they think you can start with
disclosure only,” says Fuller. “We happen to think that disclosure only
would still cost preparers. They've got to find the information and put it
into a form good enough to make it public. We feel very strongly that these
obligations and assets should be on the balance sheet, so why not go that
extra step as has been proposed for a long time?”
CMAC's brief letter to IASB Chairman Hans
Hoogervorst says the group determined unanimously among those who attended a
recent meeting that a disclosure-only approach to lease accounting would be
a “sub-optimal solution” because it would not materially reduce the cost to
preparers and would not give users of financial statements the information
they want in a “decision-useful fashion.”
Fuller says she was surprised to hear the IAG tell
FASB it would settle for a disclosure-only standard. The CMAC represents
both buy-side and sell-side analysts as well as credit analysts, she says,
and they are in agreement that leased assets and liabilities belong on the
balance sheet. “We do know there is tremendous pushback from companies who
would basically prefer not to make a change at all,” she says. “In some
parts of the world, company executives have a lot of influence over
politicians.”
Continued in article
Jensen Comment
The above summary by Ms. Whitehouse leaves out some of the "bad stuff." Readers
come away feeling that users want operating lease capitalization in all
instances. Actually, the survey really says users want lease capitalization only
when the numbers meet certain tests of reliability and do not contain numbers
for optional lease renewals beyond the first lease term maturity date.
From the CFO Journal's Morning Ledger on November 19, 2013
Compromise for lease-accounting overhaul starts to fall apart Accounting-rule makers are set this week to begin their latest
round of deliberations on a lease-accounting overhaul and aim to have a new
rule ready by the end of the first quarter,
Emily Chasan reports.
But a proposed compromise on how to record leased assets appears to be
falling apart as investors and companies raise concerns it’s too complex.
“The last decisions here are going to be very tricky,” Hans Hoogervorst,
chairman of the IASB, said at a conference
Monday. The FASB and the IASB have been working since 2006 on
a lease-accounting overhaul, spurred by investor complaints that huge
off-balance-sheet leases can muddy the picture of a company’s true financial
obligations
Jensen Comment
This may be a good thing. The compromise for lease-accounting will motivate
lessees to shorten operating lease terms to a point that reporting the booking
of operating lease debt is relatively small unless renewal options are also
valued and booked. Standard setters have not seriously considered booking of
lease renewal options because valuing such contingency options is so unreliable
to a point where financial analysts declared that they don't want these wild
valuations on the balance sheet.
The problem with only booking operating lease liabilities for shortened first
terms tends to greatly underestimate the total contingency debt --- debt
contingent upon circumstances that motivate lessees to renew leases.
Measurement of lease assets and liabilities
23. Investors and analysts consulted generally support the proposed
measurement of variable lease payments and options, ie
excluding variable lease payments linked to sales or
use and, in most cases, excluding optional renewal periods.
Almost all noted that they would not want subjective estimates about
variable lease payments and renewal options included in the reported asset
and liability amounts. In their view, it would make the balance sheet
amounts less reliable and, thus, less useful for their analyses. A number of
investors and analysts also think that it is more appropriate to reflect the
economic difference between fixed and variable lease payments, and
non-cancellable and optional lease periods, on a lessee’s balance sheet as
proposed — a lessee with contracts with variable lease payments and optional
renewal periods has a lot more flexibility than those making fixed payments
in non-cancellable period.
Gone are the days of simple one-time transactions
with customers as the subscription business model goes mainstream with
companies like Dropbox, Netflix, Adobe and Zipcar because it offers a
predictable, recurring revenue stream.
The management of these subscription models,
however, can be quite complex.
Subscription models used by companies like
Salesforce offer customers different levels of functionality for a variety
of prices per seat, per month. That, in and of itself, might not be too
complicated to calculate and bill. But what happens when a customer upgrades
or downgrades in the middle of the billing period and prorated billing must
occur? Or the credit card “on file” expires and renewal billings fail? How
do you bill customers for actual usage? What’s the tax rate on your product?
Can you track each product’s churn rate?
The truth is success with subscriptions entails
much more than merely switching from one-time to recurring billing. Whether
your company is starting or switching to a subscription-based model, let’s
examine six top challenges that you must master.
1. Revenue recognition
The subscription business model is mature enough
that Generally Accepted Accounting Principles (GAAP) address it. However:
Subscriptions are at the intersection between
software and services, requiring expert judgment as to the “right” revenue
recognition approach. It can be unclear how specific GAAP apply to many
revenue recognition situations. Subscription pricing model changes (e.g.
from a fixed price to actual usage) may be easy to make, but may have
revenue recognition implications.
2. Taxation
Worldwide, technology is changing faster than
regulations can keep up, resulting in more subscription taxation confusion
and turbulence. Let’s discuss just the U.S. first:
What is the taxation method? Sales tax can apply to
subscription products, at rates as high as 10 or more percent. In a typical
year, thousands of state sales tax rules, jurisdictional and rate changes
occur. Can you keep up? It gets worse. Are subscriptions software, services,
or other? Most states treat a 100 percent cloud-delivered subscription
product as software (often taxable), not a service (usually not taxable).
But because jurisdictions apply many different definitions of “software”,
knowing this distinction is not enough to accurately assess your taxation
situation. For example, if a subscription purchase includes a component
defined by states as “services” (e.g. phone support), then additional taxes
may apply. Is it taxable? If a company located in one state sells
subscription products in other states, then various states may determine if
they are taxable using delivery-related factors such as where a company
server is located or whether a download is part of the subscription.
Selling internationally amplifies tax calculation,
accounting and remittance overhead. In other developed economies,
Value-Added Tax (VAT) is imposed, which introduces additional complexity.
One example: the selling company can capture taxes already remitted by
someone earlier in the value chain.
3. Credit card expiration/payment method changes
One-time transactions using online payment methods
like credit cards are simple: either the payment goes through and the
customer gets the product, or it doesn’t and they don’t. For subscriptions,
you must be able to bill customers repeatedly, and to respond appropriately
if payment is not forthcoming.
Because renewals are often billed using payment
details provided for the initial purchase, subscription billing is more
vulnerable to payment detail changes such as credit card expiration. Renewal
billing using prepaid cards (growing in popularity) fails after the card is
“spent” unless the customer provides completely new payment details,
requiring more effort (and reducing renewals) compared to updating a credit
card expiration date.
4. Compliance
If your company is retaining online payment details
for subscription renewal billing, then you are subject to PCI regulations.
If you are selling only in the U.S. using an enterprise payment gateway
(e.g. Chase Paymentech or Braintree), you can outsource PCI compliance
challenges. Selling internationally? It is vastly more difficult and costly
to negotiate, integrate, and manage multiple payment processor relationships
to remain compliant globally.
Compliance challenges unique to subscriptions:
Obtaining customer consent for renewal billing at
time of initial purchase: As the rash of lawsuits against software giants
Symantec and McAfee attest, many jurisdictions require customer notification
during checkout that the subscription entails recurring billing. To settle
just one lawsuit for non-compliance in April 2013, Symantec offered $10
refunds or free subscription extensions to 3,900,000 customers Changing a
subscription’s renewal billing amount and/or frequency: While EU law is very
precise on this topic, many jurisdictions are vague on what constitutes
reasonable or effective notification or consent. As courts interpret the
law, the definition of “reasonable” can (and likely will) change.
The cost, complexity and risks associated with this
challenge escalate with every additional legal jurisdiction in which your
company does business.
5. Analytics
Subscription companies can experiment with price,
feature, and other product changes more easily than perpetual license
software companies. This advantage largely disappears if the profitability,
efficiency, and growth impact of such changes cannot be determined. This
means that tracking and managing activity in subscription-centric ways —
above and beyond traditional, transaction-based reporting — is
mission-critical. Without it, a subscription company will be sorely
challenged to monetize and optimize their products, predict cash flow or
achieve profitability.
6. Lifecycle management
Continued in article
From PwC Concerning Proposed Changes to Revenue Recognition Rules
The FASB and IASB (the "boards") met in October to
finalize several outstanding issues related to their joint revenue
recognition project. Specifically, the boards addressed the constraint on
recognizing revenue from variable consideration, accounting for licenses and
collectibility.
The boards confirmed that an estimate of variable
consideration is included in the transaction price if it is "probable" (U.S.
GAAP) or "highly probable" (IFRS) that the amount would not result in a
significant revenue reversal. The boards also reintroduced an exception for
revenue from sales- or usage-based royalties on licenses of intellectual
property (IP).
The boards decided to retain the proposed model for
distinct licenses, which distinguishes between two types of licenses - one
that provides a right to use IP and one that provides access to IP. Criteria
will be provided to help determine the accounting based upon the nature of
the license. Lastly, the boards introduced a collectibility threshold. An
entity only applies the revenue guidance to contracts when it is "probable"
the entity will collect the consideration it will be entitled to in exchange
for the goods or services it transfers to the customer.
Two years after $1.6 billion vanished from their
accounts, MF Global’s customers are now all but assured to collect every
last penny.
A federal bankruptcy court judge approved a plan on
Tuesday that would close the remaining shortfall for some 20,000 customers,
many whose lives were derailed when their money disappeared in the firm’s
final days.
As MF Global fought for survival in 2011, it
improperly transferred customer money to its banks and clearinghouses,
violating a cardinal rule of the financial industry. Federal investigators
soon swarmed MF Global, a brokerage firm run by Jon S. Corzine, formerly New
Jersey’s governor.
James W. Giddens, the trustee unwinding MF Global’s
brokerage unit, recovered large swathes of the money and gradually disbursed
it to clients. But Mr. Giddens, still facing a roughly $230 million gap,
recently petitioned Judge Martin Glenn to free up remaining funds from MF
Global Incorporated’s general estate.
. . .
Mr. Giddens also said he expected to repay that
loan from the estate “through future recoveries,” perhaps from the lawsuit
against Mr. Corzine. Unsecured creditors of the estate, like contract
employees and other vendors, however, are “likely to sustain very
substantial losses.”
Mr. Corzine is fighting the trading commission’s
charges and Mr. Giddens’ lawsuit. He also objected to Mr. Giddens’ use of
money from the estate to repay customers. Even so, he welcomed the return of
customer money on Tuesday.
“Mr. Corzine is very pleased that all customers
will receive a full recovery,” a spokesman for Mr. Corzine said. “This is a
great outcome, which has been anticipated for many months.”
The spokesman, however, noted that it could have
come sooner. And for that delay, he pinned blame partly on the banks.
“It is unfortunate that the complexities of U.S.
and U.K. bankruptcy laws, as well as the slow return of funds to the trustee
by various financial institutions, kept customers from receiving a full
recovery sooner,” he said.
Continued in article
Jensen Comment
Over time we will always remember that the repo sales accounting scandal of
Lehman Bros. (for which the Ernst & Young auditing firm eventually settled for
$99 million). But we might might forget that MF Global was also a repo
accounting scandal ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo
Question
What motivates companies to enter into stock splits?
From the CFO Journal's Morning Ledger on November 5, 2013
Is it time to revisit stock splits? Eight of the 11
S&P 500 companies that have split their stock this year have since
outperformed their peers,
writes CFOJ’s Maxwell Murphy in today’s Marketplace
section. And that’s rekindling the debate
about their value for shareholders.
Noble Energy,
Flowserve and
Gilead Sciences all have at least doubled their number of shares
outstanding this year, and had beaten the benchmark index by 20 to 63
percentage points as of the end of October. “It’s a psychological thing,”
says VF Corp. CFO
Robert Shearer. Last month, VF said it would quadruple the number of its
shares in December. That 4-for-1 split will cut the stock’s price and make
it “a little bit more accessible to the retail side,” he said. “There is
some evidence that [companies that split their stocks] have outperformed”
their peers later, Mr. Shearer said, but he acknowledged that it is hard to
know whether the split helped or if those companies were “better-performing
anyway.”
Stock splits have gone in and out of financial fashion
over the past three decades. Over time, institutional investors have come to
dominate the ownership of most large companies, and they aren’t as affected
by price psychology as individual shareholders. Right now, the average stock
price in the S&P 500 is north of $74 a share—the highest since at least
1980. Prices like that don’t scare off institutional investors, which own
70% or more of the shares in 20 of the 25 highest-priced stocks in the S&P
500. “We have no viable need to attract penny stockholders,” said Jan
Siegmund, CFO of Automatic
Data Processing. “I am also personally of the opinion that it is
creating no value.” Nonetheless, at least four of the companies that split
this year said they were doing it to increase value for stockholders, Murphy
notes.
The government's audit regulator is beefing up its
economic-analysis efforts, in the wake of criticism that it hasn't done
enough to take into account the costs of its rules on the audit firms it
regulates.
The Public Company Accounting Oversight Board said
Wednesday that it is establishing a Center for Economic Analysis to study
the audit's role in the capital markets and advise the board on using
economic analysis to make its rule-making, inspections and other activities
more effective.
The new economic-analysis center will be led by
Luigi Zingales, an economist at the University of Chicago. It is expected to
hire staff and begin operations early next year, and the PCAOB said the
center will host a conference in 2014 on economic research relating to the
role of the audit in the markets.
The new center's analyses will give the board the
information and tools to do things such as improve audits of companies'
internal safeguards, and encourage auditors to use their time with a
company's audit committee more effectively, said PCAOB Chairman James Doty.
"We get capabilities we didn't have before."
Members of Congress have alleged that the PCAOB
hasn't sufficiently taken into consideration the economic impact of its
regulations in the past, to make sure their benefits outweighed their costs.
In January, Rep. Darrell Issa (R., Calif.), chairman of the House Oversight
and Government Reform Committee, and another congressman sent the PCAOB a
letter saying its use of economic analysis was "insufficient" and that it
appeared to have "an institutional resistance to rigorous economic
analysis."
Mr. Doty said the establishment of the center was
"responsive" to the congressmen's comments. He said the board was already
doing economic analyses, and that the congressional interest in the subject
"has given us an opportunity and a reason" to do more.
Rep. Issa said in a statement he was "cautiously
optimistic that this move is a signal that the PCAOB is moving in the right
direction."
"By partnering with the profession in a
constructive way…the Center for Economic Analysis could be beneficial to
investors and audit quality," said Cindy Fornelli, executive director of the
accounting industry's Center for Audit Quality, in a statement.
From the CFO Journal's Morning Ledger on November 7, 2013
SEC wants ‘likes’ linked to bottom line U.S. securities regulators are still wary of technology companies’
touting “likes,” “users,” or “views” to illustrate the growth potential of
their business to investors,
Emily Chasan writes.
“Our staff’s concern has been the impact on investors of the sheer magnitude
of some of these metrics,” Mary Jo White, chairman of the SEC, said in
comments to a Practising Law Institute Conference in New York. A company
with double-digit growth in the number of users may not see similar growth
in revenue and profit, Ms. White said. Such nonfinancial metrics have been
an area of focus for the SEC’s disclosure review experts in the past few
years, as big technology companies including Facebook, Twitter and Zynga
have gone public. In some cases, it has asked companies to remove details or
go back and add more balanced information.
From the CFO Journal's Morning Ledger on November 1, 2013
The CFTC is facing a cash crunch
David Meister, who
stepped down this week as the agency’s enforcement chief,
tells
the WSJ’s Jean Eaglesham in this interview that
it is so underfunded it has had to delay cases and shelve certain probes.
The funding squeeze is forcing the CFTC to make “some very tough choices”
about its work, Mr. Meister said. One example: the agency’s decision not to
charge two former J.P. Morgan traders over the “London whale” trading mess.
Since Mr. Meister joined the CFTC in January 2011, the
agency has reinvented itself. During his watch, it has nearly doubled its
enforcement actions and tripled its sanctions, compared with the previous
three-year period. But that pace may slow. The agency in the 12 months to
Sept. 30 filed 82 enforcement actions, down
a fifth compared with the previous year. And “serious budget challenges” are
causing delays and other problems, Mr. Meister said.
Regulators often
complain about funding pressures and CFTC Chairman Gary Gensler rarely makes
a speech that doesn’t include a call for more money, Eaglesham notes. But
Mr. Meister says his concerns go deeper than the typical regulatory refrain
of “more, please.” His enforcement division is trying to do extra cases with
fewer people, he said. It has about 155 officials, 10% fewer than when he
started, and roughly the same number as 11 years ago. “That’s a very small
staff compared with the size of the job,” Mr. Meister said, comparing the
CFTC with the SEC, which has more than 1,200 enforcement officials. “It’s
remarkable how small we are.”
Jensen Comment
This is just one more example of how companies being regulated by a regulatory
agency end up owning that agency unless there's a public scandal. One way to
"own a government agency like the SEC" is to lobby Congress to starve it into
ineffectiveness. What is different about this illustration from the CFTC is that
the enforcement chief who stepped down is complaining in public rather than
quietly going to work as an executive in one of the regulated companies. Another
difference is that the CFTC is not directly a government agency. It's a
professional watchdog set up by the profession itself that can feed or starve it
independently of Congress.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on November 1, 2013
SUMMARY: The article describes expected growth for the first time
in several years during the upcoming Christmas season for video game
manufacturers because of new gaming systems just coming out, the Sony
PlayStation4 and Microsoft Xbox One systems. The article examines
profitability of Electronic Arts and Take-two Interactive relative to
expectations based on analysts' forecasts. Revenue is also examined; the
amount is adjusted to include deferred revenue stemming from accounting
practices based on software revenue recognition requirements. Questions ask
students to access the financial statements to understand the companies'
revenue recognition practices and resulting deferred revenue liability
balances.
CLASSROOM APPLICATION: The article is an excellent way to introduce
software revenue recognition with products likely to be of interest to a
good number of students in class. NOTE: INSTRUCTORS SHOULD REMOVE THE
FOLLOWING DISCUSSION BEFORE DISTRIBUTING TO STUDENTS AS IT ANSWERS SEVERAL
OF THE QUESTIONS. Take-Two Interactive Software's disclosure about
significant accounting policies related to revenue recognition states that
their multiple element arrangements provide "a combination of game software,
additional content, maintenance or support." They use vendor specific
objective evidence (VSOE) of fair value of each of these components to
allocate the price of product sold. "Absent VSOE, revenue is deferred until
the earlier of the point at which VSOE of fair value exists for any
undelivered element or until all elements of the arrangement have been
delivered. However, if the only undelivered element is maintenance and
support, the entire arrangement fee is recognized ratably over the
performance period." For Electronic Arts, disclosure about similar issues is
made under Note 10: Balance Sheet Details. Discussion of deferred net
revenue indicates that the balance is related to online-enabled games. This
balance "generally includes the unrecognized revenue from bundled sales of
certain online-enabled games for which we do not have VSOE for the
obligation to provide unspecified updates. We recognize revenue from the
sales of online-enabled games for which we do not have...[this] VSOE ...on a
straight-line basis, generally over an estimated six-month period beginning
in the month after shipment. " The most interesting is the difference
between the two companies' treatment of the related COGS. Take-Two
Interactive states, "For arrangements which require that revenue recognition
is deferred, the cost of goods sold is deferred and recognized as the
related net revenue is recognized. Deferred cost of goods sold includes
product costs, software development costs and royalties, internal royalties
and license amortization and royalties." Electronic Arts, on the other hand,
expenses "...the cost of revenue related to these transactions during the
period in which the product is delivered (rather than on a deferred basis)."
Questions ask the students to identify this issue and speculate as to the
companies' reasons for the differing treatment of related costs. The
questions also ask students to state the source of the requirements for
treatment of these items which can be found in ASC 985-605-25-5 through 7
and 25-10 as well as in the general revenue recognition sections of
605-25-30-6a through 30-7. Take-Two Interactive has made its filing on Form
10-Q for the quarter ended 9/30/13 on 10/30/13 and is available at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=946581&accession_number=0001047469-13-010066&xbrl_type=v#
For Electronic Arts, only the Filing of the press release on Form 8-K has
been made as of this writing; its most recent 10-Q was for the quarter ended
June 30, 2013 and is available at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=712515&accession_number=0000712515-13-000037&xbrl_type=v#
2. (Introductory) The article forecasts growth for these two
companies this Christmas season. What is the major reason for expecting that
growth?
3. (Introductory) How is the growth expected to affect the two
companies' earnings as described in the article?
4. (Introductory) The author also compares revenues by the two
companies. How is this comparison affected by deferred revenues? In your
answer, define the term deferred revenue.
5. (Advanced) Access the two companies' quarterly filings on Form
10-Q for the most recent period available (see above). Locate the amounts of
deferred revenue on each companies' balance sheet. State the amounts you
find and describe the size of these balances relative to the overall
business.
6. (Advanced) Again access the Electronic Arts quarterly filing on
Form 10-Q for the most recent period available and Click on "Balance Sheet
Details" under "Notes Tables." For what types of products does Electronic
Arts defer revenue?
7. (Advanced) Now access the Take-Two Interactive filing on Form
10-Q for the most recent period available and Click on Accounting Policies
in the left hand column, then scroll down to Revenue Recognition. Again
describe the type of products for which the company defers revenue
8. (Advanced) What do you notice that is different about the two
companies' policies? Why do you think the companies have this difference in
accounting practices? How do you think this difference will affect quarterly
profitability comparisons between the two companies, as is done in this
article?
9. (Introductory) What accounting standard requires EA and TTI to
defer these components of revenue? Provide specific references to a section
or sections of the FASB's Accounting Standards Codification.
Reviewed By: Judy Beckman, University of Rhode Island
Videogame makers Electronic Arts Inc. EA +0.96% and
Take-Two Interactive Software Inc. TTWO +4.49% raised their full-year
outlooks following strong sales of their products and early indications of
robust holiday sales.
The forecasts indicate the industry is upbeat that
new hardware releases from Sony Corp. 6758.TO -11.13% and Microsoft Corp.
MSFT -0.38% in November will jump-start videogame sales after years of
struggling to find growth.
EA raised its adjusted profit view by a nickel to
$1.25 a share, while Take-Two raised its per-share outlook to between $3.50
to $3.75. Both were above average analyst expectations.
EA reported its loss narrowed by 28% to $273
million in its fiscal second quarter, thanks to cost-cutting efforts and
successful launches of new big-name new titles, such as its "Madden"
football game and "Plants vs. Zombies 2" strategy game for mobile devices.
EA said sales fell about 2% to $695 million.
Adjusted for items such as deferred revenue, sales tallied $1.04 billion,
down slightly from the $1.08 billion a year prior.
Take-Two Interactive, meanwhile, posted a wider
loss in its fiscal second quarter, due in part to increased marketing costs
for its games. Take-Two said sales fell more than 45% to $148.9
million—though when adjusted for items such as deferred revenue, the tally
jumped to $1.27 billion, up significantly from the $288 million it reported
a year ago.
Behind that jump was the company's latest "Grand
Theft Auto" crime-drama videogame, which was released in September, right
before the end of the quarter. Take-Two said sales of the game topped $1
billion in its first three days on the market, a record for the videogame
industry.
Strauss Zelnick, Take-Two's chief executive, said
sales of that game and its other top-tier titles "demonstrate consumers'
enduring appetite for groundbreaking interactive entertainment."
Both firms are increasingly expecting a bounty from
consumer enthusiasm for the new consoles. Blake Jorgensen, EA's chief
financial officer, said the company is still cautious about how the market
will receive Sony's PlayStation 4 and Microsoft's Xbox One, but he said
customers appeared enthusiastic. "There's a huge amount of excitement," he
said.
Continued in article
Jensen Comments
I think video games are for idiot addictions unless they are designed with
specific educational objectives in mind such as a Jeopardy-like video game.
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.
If you got rid of your cat(s) but really miss the stench of a urine-soaked
litter box, Dell makes a Kitty Litter Laptop just for you.
"Dell users get claws out over laptops that stink of cat pee: Computer maker
forced to offer replacements after buyers complain of smell from Latitude E6430u
like 'tomcat's litter box'," by Samuel Gibbs, The Guardian, October 30,
2013 ---
http://www.theguardian.com/technology/2013/oct/30/dell-laptop-cat-pee-urine-smell-latitude-e6430u
Jensen Comment
Don't turn Dell's Kitty Litter Laptop in for new a replacement until you thought
of how such a computer can improve your life.
One day soon your Kitty Litter Laptop will be a collector's item.
Speed up that vote to adjourn. Turn it on during what's becoming a very
long and boring committee meeting.
If your research stinks you now have a better excuse.
Waste less time in chit chat. Visitors to your office will do their
business quickly and zoom out holding their breath.
You can smell better. This beats that deodorant that wears off after the
first 20 minutes. Now you've got a long-lasting cover up.
More cats. If you really miss your old cats, new cats will work every
which way to move in with you. Campus police might even turn on these
laptops in traps for stray cats.
Less dog pooh. If the neighborhood dogs are doing their messes in your
yard, this could be the answer to keeping them away. Dogs can even smell
this laptop when it's inside your house.
When turned on while walking downtown or in the woods you're less likely
to be mugged, especially by bad guys who are lurking nearby and have second
thoughts about stealing your stinking laptop.
If your laptop is stolen police dogs will more easily sniff out the
trail.
Maybe Dell should share this odorous patent with smart-phone
manufacturing firms.
A man and a woman were having a quiet, romantic dinner in a fine restaurant.
They were gazing lovingly at each other and holding hands.
The waitress, taking another order at a table a few steps away, suddenly
noticed the man slowly sliding down his chair and under the table, but the woman
stared straight ahead.
The waitress watched as the man slid all the way down his chair and out of
sight under the table.
Still, the woman stared straight ahead.
The waitress, thinking this behavior a bit risqué and that it might offend
other diners, went over to the table and, tactfully, began by saying to the
woman "Pardon me, ma'am, but I think your husband just slid under the table."
The woman calmly looked up at her and said, "No, he didn't. He just walked in
the door."
Forwarded by Maureen
Bathtub Test
During a visit to my doctor, I asked him, "How do you determine
whether or not an older person should be put in a Care Home?"
"Well," he said, "we fill up a bathtub, then we offer a teaspoon,
a teacup and a bucket to the person to empty the bathtub."
"Oh, I understand," I said. "A normal person would use the bucket
because it is bigger than the spoon or the teacup."
"No" he said. "A normal person would pull the plug. Do you want a
bed near the window?"
Forwarded by Gene and Joan
A Cab driver picks up a Nun. She gets into the cab, and notices that the VERY
handsome cab driver won't stop staring at her.
She asks him why he is staring. He replies: "I have a question to ask, but I
don't want to offend you"
She answers, "My son, you cannot offend me. When you're as old as I am and
have been a nun as long as I have, you get a chance to see and hear just about
everything. I'm sure that there's nothing you could say or ask that I would find
offensive."
"Well, I've always had a fantasy to have a nun kiss me." She responds, "Well,
let's see what we can do about that: #1, you have to be single and #2, you must
be Catholic."
The cab driver is very excited and says, "Yes, I'm single and Catholic! "OK"
the nun says. "Pull into the next alley."
The nun fulfills his fantasy with a kiss that would make a hooker blush. But
when they get back on the road, the cab driver starts crying. "My dear child,"
said the nun, "Why are you crying?" "Forgive me but I've sinned. I lied and I
must confess; I'm married and I'm Jewish." The nun says, "That's OK. My name is
Kevin and I'm going to a Halloween party."
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.
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 theshift from Gemeinschaftto
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.”
Bob Jensen's Threads on Shared Open Courseware (OCW) from
Around the World: OKI, MIT, Rice, Berkeley, Yale, and
Other Sharing Universities (OKI. MOOCs, SMOCs, etc.)---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
From Hapless to Helped
"autodidacts disadvantaged by distance" (Don't you love love alliteration as a
memory aid?) In the quotations below, contrast and compare the impact of the
interactive Internet and ebullient email on evolving education from 1858 versus
2001.
The Year 1858
When the University of London instituted correspondence courses
in 1858, the first university to do so, its students (typically expatriates in what were
then the colonies of Australia, Canada, India, New Zealand, and South Africa), discovered
the programme by word of mouth and wrote the university to enrol. the university
then despatched, by post-and-boat, what today we would call the course outline, a set of
previous examination papers and a list of places around the world where examinations were
conducted. It left any "learning" to the hapless student, who sat the examination whenever he or she felt ready: a
truly "flexible" schedule! this was the first generation of distance
education (Tabsall and Ryan, 1999): "independent" learning for highly
motivated and resourceful autodidacts disadvantaged by
distance. (Page 71)
Yoni Ryan who wrote Chapter 5 of The Changing Faces of Virtual Education
--- http://www.col.org/virtualed/
Dr. Glen Farrell, Study Team Leader and Editor The Commonwealth of Learning
Net Earnings Functional Fixation?
From the 24/7 Wall Street newsletter on October 28, 2013
Earnings season is in full swing and this coming
week will bring many key earnings reports. This will also be the last week
of major on-calendar earnings for the third quarter, even if important
earnings will still be coming out in the next two weeks or three weeks. 24/7
Wall St. has decided to publish previews for what it feels are the ten most
important earnings reports on the calendar for the week ahead. While these
may be market movers in their own right, they are definitely all sector
movers.
These are the 10 most important earnings in the week ahead.
Accounting theorists who sometimes argue that earnings numbers between firms
or even over time with within a firm are misleading and should not be compared.
Why then do earnings numbers and derivatives like earnings-per-share and P/E
ratios dominate the analyses of both investors and financial analysts?
"Accounting Alchemy," by Robert E. Verrecchia, Accounting Horizons,
September 2013, pp. 603-618.
Verrecchia alleges that it's not that managers have a functional fixation for
earnings metrics as it is that they believe that other managers and investors
are so fixated with earnings that it because of monumental importance not
because it is inherently a great metric but because they believe deeply that the
market itself makes this index of vital importance.
. . .
In summary, my thesis is that managers project that
others are fixated on earnings—independent of any evidence in support
of, or contrary to, this phenomenon. This leads to managers resisting the
inclusion in earnings items that fail to enhance performance, such as the
amortization of Goodwill, or measures that make future performance more
volatile, such as those based on fair value. In the absence of acknowledging
PEF and attempting to grapple with it, I continue to see confrontations over
accounting regulation along the lines of recent debates about fair value
accounting, in addition to further impediments along the path to greater
transparency in financial statements.
Question
What is the world like for some many Ph.D. graduates in medieval history?
I'm impatient during my endless hours of reading time and speed-read a vast
amount of items, especially on the Web. In retirement I have to force myself to
read a book cover-to-cover. It has been nearly a year, and I'm still working on
William Trevor's wonderful 80+ short stories at a pace of one-per-week. I have,
of course, read other books on my Kindle Fire. But I'm not a fanatic book reader
like Denny Beresford.
I rarely watch anything but news on television, although Erika and I usually
watch one non-current BBC or PBS movie per day on streaming NetFlix. This
has become our daily afternoon date. Occasionally she begs off because she's
just too busy for our date. I never beg off when it comes to our afternoon movie
dates. Rather than watch a lot of new Hollywood junk we watch an amazing number
of favorite movies for the second or even third times.
It helps to be going old.
Mostly we watch mystery series. Neither of us remember who committed the murders
in most movies we watched a year or two earlier. If we do remember we simply
shift to another movie.
I also spend quite a lot of time outdoors working this big yard. For two days
now I've been digging out my 200+ annuals that have died in the hard-freeze
nights. I haul these to the mulch pile in our recycling center three miles down
from our ridge. I've also had to sweep up a ton of leaves with my sweeper
behind my tractor. This $300 sweeper works much better than my $4,000 mulcher
attachment.
These are reasonable questions, and professors
often benefit from what their students say. Professors don't simply inspect.
They teach, and it's helpful to know how things might have gone better from
the students' point of view. The problem is that, for the vast majority of
colleges and universities, student opinion is the only means by which
administrators evaluate teaching. How demanding the course was—how hard it
pushed students to develop their minds, expand their imaginations, and
refine their understanding of complexity and beauty—is largely invisible to
the one mechanism that is supposed to measure quality.
It would be one thing if student evaluations did no
harm: then they'd be the equivalent of a thermometer on the fritz —a
nuisance, but incapable of making things worse. Evaluations do make things
worse, though, by encouraging professors to be less rigorous in grading and
less demanding in their requirements. That's because for any given course,
easing up on demands and raising grades will get you better reviews at the
end.
How much better? It's hard to say. But it isn't as
if most teachers are consciously calculating the grade-to-evaluation
exchange rate anyway. Lenient grading is always the path of least resistance
with or without student reviews: Fewer students show up in your office if
you tell them everything is OK, and essays can be graded in half the time if
you pretend they're twice as good.
There's also a natural tendency to avoid delivering
bad news if you don't have to. So the prospect of end-of-term student
reviews, which are increasingly tied to job security and salary increases,
is another current of upward pressure on professors to relax standards.
There is no downward pressure. College
administrators have little interest in solving or even acknowledging the
problem. They're focused on student retention and graduation rates, both of
which they assume might suffer if the college required more of its students.
Meanwhile, studies show that the average
undergraduate is down to 12 hours of coursework per week outside the
classroom, even as grades continue to rise. One of these studies,
"Academically Adrift" (2011) by sociologists Richard Arum and Josipa Roksa,
suggests a couple of steps that could help remedy the problem: "high
expectations for students and increased academic requirements in syllabi . .
. coupled with rigorous grading standards that encourage students to spend
more time studying."
Colleges can change this culture, in other words,
without spending a dime. The first thing they can do is adopt a version of
the Hippocratic oath: Stop doing harm. Stop encouraging low standards with
student evaluations that largely ignore academic rigor and difficulty.
Reward faculty for expecting more of students, for pushing them out of their
comfort zone and for requiring them to put academics back at the center of
college life.
Accrediting agencies could initiate this reform,
but they too would first have to stop doing harm. They would have to
acknowledge, for example, that since "learning outcomes" are calculated by
professors in the exact same way that grades are, it's a distinction without
a difference, save for the uptick in pseudo-technical jargon.
Then the accrediting agencies should insist that
colleges take concrete steps to make courses more uniformly demanding across
the board, and to decouple faculty wages and job security from student
opinion. The latter is an especially critical issue now, given the increase
in adjuncts and part-time faculty, whose job security often hangs by the
thread of student reviews.
President Obama's plan for higher education,
released in August, does not inspire confidence that this or any other issue
related to educational quality will become a central concern. On the
contrary, his emphasis on degree completion through "accelerated learning
opportunities," online courses, credit for "prior learning" and the like is
a recipe for making things worse. Pressing colleges to increase graduation
rates is every bit as shortsighted as it was to encourage banks to increase
mortgage-approval rates.
But if that's what the president wants to do, he
can rest assured that colleges and universities have an incentive structure
already in place to make it easier for students to get the degree they want,
rather than the education they need.
Mr. Asher is an associate professor of English at Lewis and Clark
College.
Jensen Comment
The biggest disgrace in education over the past five decades is grade inflation,
and in my opinion teaching evaluations are the primary cause. In the above
article Professor Asher states his opinions. For harder evidence (such as the
study at Duke) go to:
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation
The easy grading problem, in my viewpoint, is mainly caused when schools rely
mostly on required student evaluations for teaching evaluations in general. It
was much different when required student evaluations were only seen by the
instructors themselves.
I might add that the college-required evaluations are only part of the cause
of easy grading. What has become a huge factor is the Rate My Professors Website
where over a million students have sent in evaluations of their instructors. The
praises and criticisms of instructors are now available for the world to view.
Easy graders tend to get higher evaluations, although this is not always the
case. Tough graders as a rule get hammered ---
http://www.ratemyprofessors.com/
Hence even if a school reverts to the old system where only instructors see
student evaluations, some of those students will likely post their praises and
criticisms at the above link. This is especially problematic since only a small
nonrandom subset of every instructor's students send their evaluations to the
above link.
Two years after instituting grading caps for
undergraduate business students, the
Haas School of Business at the University of
California, Berkeley is relaxing its unpopular policy, making it possible
for students to earn higher grades.
In 2011, the school capped the mean GPA at 3.2 for
core classes and 3.4 for electives. Effective May 3, the
caps
have been raised to 3.4 for core classes and 3.6
for electives, according to the Daily Californian, the UC-Berkeley
student newspaper.
Haas says the
new cap for core classes “more closely reflects
the historical mean.” The goal of the new caps is to “establish clear and
consistent academic standards” across degree programs and multiple sections
of the same course, and “to encourage students to come to class, and to come
to class prepared.”
After Haas
scrapped its grading curve in 2011, the caps put
in place were not popular with students. Tyler Wishnoff, president of the
Haas Business School Association, said those caps left many students feeling
that it was too difficult to get the grades they thought they deserved and
may put them at a disadvantage when competing for jobs with graduates of
schools without such a policy. Some students felt there was little point in
trying hard for mediocre grades.
“There was definitely a lot of mixed feelings about
the caps,” Wishnoff says. “There was a perception that it was just too hard
to do well. … I definitely talked to students who stopped trying because the
policy was too oppressive.”
The new policy, Wishnoff says, is a big
improvement, giving faculty the flexibility they need to award grades that
accurately reflect a student’s performance. The new policy—while it won’t be
retroactive, as some students had wanted—is fair and maintains the school’s
academic rigor, he says.
Jensen Comment
Accountics scientist Ray Ball (Chicago) to my knowledge is the most
sophisticated wine expert in the Accounting Academy. Somebody once told me a
story about when Ray was attending an accounting conference in Venice.
Apparently he ordered a rare vintage that a hapless waiter served at dinner when
the owner was not in the restaurant. The story, which may be urban legend, goes
on to relate how the owner hit the ceiling the next day when he discovered the
waiter had served up this owner's prized bottle of wine. Purportedly Ray knew
exactly what historic year made this vintage so prized.
I'm not even certain in the USA what years were Gallo's best even though I
did know David Gallo slightly when I was at Stanford. My Ph.D. fellow student
Tom Montgomery tutored David in accounting. David did not allow his wealth to
get in the way of a determined effort to learn accounting in the MBA program.
Tom Montgomery was a very patient tutor in the office next to my office. Tom
later on lived on a houseboat in Sausalito and was on the accounting faculty at
San Francisco State University many years before he passed on. David went on to
become CEO of what is probably the largest wine operation in the world. I was
really disappointed when David stopped making both Gallo Ripple and Gallo
Chianti.
Question (actually a favor request)
Are there some current references on the data errors in public databases that
are mostly used in accountics science studies?
I scanned the five issues of The Accounting Review published thus far
in 2013 to detect what public databases were (usually at relatively heavy fees
for a system of databases) in the 60 articles published January-September, 2013
in TAR. The outcomes were as follows:
Non-public Databases (usually experiments) and
mathematical analysis studies with no data
Note that there are subsets of databases within
database like Compustat. CRSP, and Datastream
Many of these 60 articles used more than one public database, and when the Compustat and
CRSP joint database was used I counted one for the Compustat Database and
one for the CRSP Database. Most of the non-public databases are behavioral
experiments using students as surrogates for real-world decision makers.
My opinion is that 2013 is a typical year where over 90% of the articles
published in TAR used public databases.
The good news is that most of these public databases are enormous, thereby
allowing for huge samples for which statistical inference is probably
superfluous. For very large samples even miniscule differences are significant
for hypothesis testing making statistical inference testing superfluous:
Association is Not Causation
The bad news is that the accountics scientists who rely only on public databases
are limited to what is available in those databases. It is much more common in
the real sciences for scientists to collect their own data in labs and field
studies. Accountics scientists tend to model data but not collect their own data
(with some exceptions, especially in behavioral experiments and simulation
games). As a result real scientists can often make causal inferences whereas
accountics scientists can only make correlation or other types of association
inferences leaving causal analysis to speculation.
Of course real scientists many times are forced to work with public databases
like climate and census databases. But they are more obsessed with collecting
their own data that go deeper into root causes. This also leads to more risk of
data fabrication and the need for independent replication efforts (often before
the original results are even published) ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize
Note the quotation below from from veteran accountics science researchers:
Title: "Fair Value Accounting for Financial Instruments: Does It Improve
the Association between Bank Leverage and Credit Risk?"
Authors: Elizabeth Blankespoor, Thomas J. Linsmeier, Kathy R. Petroni and
Catherine Shakespeare
Source: The Accounting Review, July 2013, pp. 1143-1178
http://aaajournals.org/doi/full/10.2308/accr-50419
Potential Database Errors
Inability to search for causes is only one of the problems of total reliance on
public databases rather than databases collected by researchers themselves. The other potentially huge
problem is failure to test for errors in the public databases. This is an
enormous problem because accountics science public databases are exceptionally large with tens of
thousands of companies from which thousands of companies are sampled by
accountics scientists. It's sometimes possible to randomly test for database
errors but doing so is tedious and not likely to end up with corrections that
are very useful for large samples.
What I note is that accountics scientists
these days overlook potential problems of errors in their databases. In the past
there were some efforts to check for errors, but I don't know of recent
attempts. This is why I'm asking AECMers to cite where accountics scientists
recently tested for errors in their public databases.
The Audit Analytics database is purportedly especially prone to errors
and biases, but I've not seen much in the way of published studies on
these potential problems. This database is critically analyzed with several
others in the following reference:
ERROR RATES IN CRSP AND COMPUSTAT DATA BASES AND THEIR IMPLICATIONS
Barr Rosenberg Associate Professor†, Michel Houglet Associate Professor† The Journal of Finance
Volume 29, Issue 4, pages 1303–1310, September 1974
The market reaction to 10-K and 10-Q filings and to subsequent The Wall
Street Journal earnings announcements
EK Stice - Accounting Review, 1991
On The Operating Performance of REITs Following Seasoned Equity
Offerings: Anomaly Revisited
by
C Ghosh, S Roark, CF Sirmans
The Journal of Real Estate Finance and …, 2013
- Springer
A further examination of income shifting
through transfer pricing considering firm size and/or distress TL
Conover, NB Nichols - The International Journal of Accounting, 2000 -
Elsevier ... of information as well as the firm characteristics.
Kinney and Swanson (1993) specifically addressed COMPUSTAT errors and
omissions involving the tax fields. Since research investigating
transfer prices involves the impact ...
On Alternative Measures of Accruals
L Shi, H Zhang - Accounting Horizons, 2011 -
aaajournals.org
...
Panel B reports results on non-articulations in changes in accounts
receivable. The main
explanation for this type of non-articulation is Compustat
errors, to which five out of the six
observations can be attributed. ... All of them can be attributed
to Compustaterrors. ...
This page provides references for articles that study
specific aspects of CRSP, Compustat and other popular sources of data used
by researchers at Kellogg. If you know of any additional references, please
e-mail
researchcomputing-help@kellogg.northwestern.edu.
Questions (actually a favor request) Are there some current references on the data errors in public databases that
are mostly used in accountics science studies?
For example, how reliable are the Datastream databases? I have not seen much published about Datastream errors and biases.
October 21, 2013 reply from Dan Stone
A recent article in "The Economist" decries the
absence of replication in
science.
I read The Economist every week and usually respect it sufficiently to
quote it a lot. But sometimes articles disappoint me as an academic in
search of evidence for controversial assertions like the one you link to
about declining replication in the sciences.
Dartmouth Professor Nyhan paints a somewhat similar picture about where
some of the leading medical journals now "tend to fail to replicate."
However other journals that he mentions are requiring a replication archives
and replication audits. It seems to me that some top science journals are
becoming more concerned about validity of research findings while perhaps
others have become more lax.
The "collaborative replication" idea has become a big deal. I have a
former psychology colleague at Trinity who has a stellar reputation for
empirical brain research in memory. She tells me that she does not submit
articles any more until they have been independently replicated by other
experts.
It may well be true that natural science journals have become negligent
in requiring replication and in providing incentives to replicate. However,
perhaps, because the social science journals have a harder time being
believed, I think that some of their top journals have become more obsessed
with replication.
In any case I don't know of any science that is less concerned with lack
of replication than accountics science. TAR has a policy of not publishing
replications or replication abstracts unless the replication is only
incidental to extending the findings with new research findings. TAR also
has a recent reputation of not encouraging commentaries on the papers it
publishes.
Has TAR even published a commentary on any paper it published in recent
years?
Have you encountered any recent investigations into errors in our most
popular public databases in accountics science?
Thanks,
Bob Jensen
October 22, 2013 reply from Roman Chychyla
Hello Professor Jensen,
My name is Roman Chychyla and I am a 5th year PhD
student in AIS at Rutgers business school. I have seen your post at AECM
regarding errors in accounting databases. I find this issue quite
interesting. As a matter of fact, it is a part of my dissertation. I have
recently put on SSRN a working paper that I wrote with my adviser, Alex
Kogan, that compares annual numbers in Compustat to numbers in 10-K filings
on a large-scale basis using the means of XBRL technology: http://ssrn.com/abstract=2304473
My impression from working on that paper is that
the volume of errors in Compustat is relatively low (probably by now
Compustat has decent data verification process in place). However, the
Compustat adjustments designed to standardize variables may be a serious
issue. These adjustments sometimes results in both economically and
statistically significant differences between Compustat and 10-K concepts
that change the distribution of underlying variables. This, in turn, may
affect the outcome of empirical models that rely on Compustat data.
Arguably, the adjustments may be a good thing
(although an opposite argument is that companies themselves are in the best
position to present their numbers adequately). But it may well be the case
that accounting researches are not fully aware of these adjustments and do
not take them into account. For example, a number of archival accounting
studies implicitly assume that market participants operate based on
Compustat numbers at the times of financial reports being released, while
what market participants really see are the unmodified numbers in financial
reports. Moreover, Compustat does not provide original numbers from
financial reports, and it was unknown how large the differences are. In our
paper, we study the amount and magnitude of these differences and document
them.
Hope you find this information interesting. Please
feel free to contact me any time. Thanks.
All the best,
Roman
October 22, 2013 reply from Bob Jensen
Hi Roman,
Thank you so much for your reply. I realize that Compustat and CRSP have
been around long enough to program in some error controls. However, you are
on a tack that I never thought of taking.
My interest is more with the newer Datastream database and with Audit
Analytics where I'm still not trusting.
May I share your reply with the AECM?
Thanks,
Bob
October 23, 2013 reply from Roman Chychyla
I agree, new databases are more prone to errors.
There were a lot of errors in early versions of Compustat and CRSP as
Rosenberg and Houglet showed. On the other hand, the technology now is
better and the error-verification processes should be more advanced and less
costly.
Of course, feel free to share our correspondence with the AECM.
Thanks!
Best,
Roman
Consensus Seeking in Real Science Versus Accountics Science
Question
Are there any illustrations of consensus seeking in accountics like consensus
seeking in the real sciences, e.g., consensus seeking on climate change,
consensus seeking on pollution impacts, and consensus seeking on the implosion
of the Twin Towers on 9/11 (whether the towers had to be laced with explosives
in advance to bring them down)?
For example, some scientists predicted environmental disaster when Saddam set
virtually all the oil wells ablaze near the end of the Gulf War. But there was
no consensus among the experts, and those that made dire predictions ultimately
turned out wrong.
Jensen Comment
I can't recall any instances where high numbers of accountics scientists were
polled with respect to any of their research findings. Are there any good
illustrations that I missed?
In the real sciences consensus seeking is sometimes sought when scientists
cannot agree on the replication outcomes or where replication is impractical or
impossible based upon theory that has not yet been convincingly tested., I
suspect consensus seeking is more common in the natural sciences than in the
social sciences with economics being somewhat of an exception. Polls among
economists are somewhat common, especially regarding economic forecasts.
The closest thing to accounting consensus seeking might take place among expert
witnesses in court, but this is a poor example since consensus may only be
sought among a handful of experts. In science and engineering consensus seeking
takes place among hundreds or even thousands of experts.
The arrest of a Connecticut town's finance director
-- who is accused of embezzling $2.3 million while financially supporting
his mistress in Florida -- has left the small community in financial crisis.
Henry L. Centrella Jr., 59, was arrested in August
on five counts of first-degree larceny after several months of investigation
found more than $2 million of misappropriated funds from January 2008
through November 2012, according to his arrest warrant.
Centrella had served as the finance director for
the town of Winchester since 1982 and had unrestricted access to the town's
assets and finances for more than 30 years. He was fired in January, the
warrant said.
A private auditing firm discovered an irregularity
in the town's finances, which led to criminal allegations, Connecticut State
Attorney David Shepack told CNN.
Centrella, who lived in neighboring Winsted
according to the arrest warrant, allegedly gathered the large sum of money
by using various schemes such as filing inflated tax information and
misappropriating town funds. According to sworn statements written by
members of his staff, Centrella never allowed anyone to assist him with
depositing the town's money in the bank, even if he was on vacation,
insisting that money be kept in a drawer for him until his return.
The financial consequences for the small
Connecticut town of Winchester have been "wide-ranging and deep," according
to Kevin Nelligan, the town's attorney. The town has had to lay off police
officers and other government workers because of the financial strain, he
said.
Unable to pay bills on time, repair public roads
and facing the possibility of schools missing payroll, Nelligan expressed it
might take years for the town to recover.
The state investigation also claims that Centrella
had a mistress in Florida whom he met in 2000 at a casino he frequented.
In 2008, he told the woman his divorce was
finalized and the two became romantically involved. Centrella and the woman
were engaged from 2009 until December of 2012, when she discovered he was
still married to his wife, Gregg Centrella.
During their relationship, Centrella convinced the
woman to quit her job and move south. He supported the woman financially,
even buying her a wedding dress, the warrant says. She told investigators he
made plans to purchase a home with her, and told her he would soon move to
Florida to be with her.
Centrella paid for all of these expenses in cash.
He reportedly told his mistress he acquired his money from selling 88 acres
of land to Disney World and by investing in Google stock, according to the
warrant.
Based on Centrella's alleged activities, there is
approximately $7 million in cash that was not used for intended purposed,
leading to a cash flow problem for the town, said Town Manager Dale Martin.
The town is now seeking $2 million in private loans
from local banks, Martin told CNN. The money will be used for pending
payments until the town collects the remaining tax for the year.
The man responsible for the town's financial
turbulence was once respected and trusted by the tightknit community, said
Martin.
Centrella is being held at the New Haven
Correctional Facility on $100,000 cash bail. With a civil suit pending
against Centrella and his wife, all of their assets have been frozen, said
Nelligan.
Gregg Centrella reportedly told investigators that
although they still reside together, she had not spoken to her husband in
months. She claims the only knowledge she had of her husband's activities
were from what she read in the newspaper, the warrant says.
The IRS has failed to clamp down on improper
refundable tax credit payments,
according to a new federal audit.
In all, the IRS said it wrongly distributed as much
as a quarter of Earned Income Tax Credit (EITC) payments, to the tune of
between $11.6 billion and $13.6 billion, according to Treasury’s inspector
general for tax administration. Between 2003 and 2012, the IRS erroneously
paid out at least $110.8 billion and as much as $132.6 billion, the new
report says.
Due to a 2009 executive order, the IRS is supposed
to have targets for rolling back those improper payments. But the agency has
yet to do so, and the Treasury inspector general says in its audit that the
IRS needs to rethink its methods for cutting down on waste in EITC payments.
Russell George, the tax administration inspector
general, noted that the IRS had made some strides in stopping inappropriate
payments, and in educating taxpayers about EITC eligibility. Still, George
said the billions of dollars lost to waste each year was “disturbing.”
“The IRS must do a better job of reining in
improper payments in this and in other programs,” George said in a
statement.
Sen. Orrin Hatch (Utah), the top Republican on the
Finance Committee, called on the IRS to “aggressively crack down on these
erroneous payments,” insisting the agency’s issue with the EITC “doesn’t
bode well” for its oversight of subsidies for President Obama’s healthcare
law.
“Refundable tax credits are a nightmare to
administer and lead to far too much of the American people’s money going out
to those who aren’t eligible,” Hatch said in a statement.
For its part, the IRS said it is doing its best to
balance the need to target mistaken payments and to ensure that eligible
taxpayers know to claim the EITC, which is aimed at helping low-income
workers. Improper
payments have also declined since 2010, the IRS added in a statement.
Democrats successfully fought to extend expanded
versions of the EITC and other refundable tax breaks in the fiscal-cliff
deal signed early this year. Taxpayers
who claim the EITC or other refundable tax breaks receive payments from the
government if those credits are worth more than their tax burden.
IRS officials told the inspector general that they
were meeting with the Office of Management and Budget to search for ways to
supplement their efforts to reduce improper EITC payments.
The 21 percent to 25 percent figure the IRS uses
includes payments that should have never been made and both over- and
underpayments.
“The IRS appreciates the Inspector General’s
acknowledgment of all our work to implement processes that identify and
prevent improper EITC payments,” the agency said in its statement. “The IRS
protects nearly $4 billion in improper claims each year and is committed to
continuing to work to reduce improper claims.”
Still, the IRS acknowledges that complexities in
the tax law, and confusion and high turnover among those claiming the EITC
have hampered its efforts to reduce those payments.
Apps for Illegal Acts (well maybe not in some parts of the world)
Apps to Find a Prostitute ---
Search for the phrase "apps for a prostitute" at
http://www.google.ca/advanced_search
Jensen Comment
Firstly, it is very misleading to knee-jerk attribute changes in the National
Debt to a President of the United States. There are many good and bad factors
affecting this debt that are not caused by actions of a president during his
(soon to be her) term of office. For example, much of the prosperity in the
Clinton years can be attributed to lagged multiplier effects of the tax cuts
instigated in the Reagan years. Another example is where President Obama
inherited an economic crisis that commenced in the Bush years. Also much
of the blame or credit for changes in the National Debt may be attributed more
to USA Congress and global events than the President of the USA.
Secondly there are statistical and graphical deceptions that politicians use
all the time. For example, in the above graph President Obama does not look so
bad compared with President Regan who looks really bad in the above graph. But
the trick being played is what mathematicians call the "denominator effect," The
denominator in this case is the population of the United states that increased
from 227 million in the 1980 Reagan year to 309 million in 2010. This is an 82
million or 27% population growth denominator effect. I don't think we should
attribute a 27% growth in USA population to President Obama. I'm not so certain
about Bill Clinton however (just kidding).
In theory we could legally admit 17 trillion immigrants and reduce the
National Debt per capita to a dollar. Then if each of our new citizens donated a
dollar the USA National Debt would be wiped out. Yeah right! Of course with only
6 billion people in the world, it will be hard to find 17 trillion immigrants.
Different denominators can lead to a possibly misleading appearance of a USA
President's performance in terms of a denominator effect. For example, President
Obama looks a bit worse than Reagan in terms of having no denominator or having
a GDP denominator ---
http://en.wikipedia.org/wiki/United_States_national_debt
Jensen Comment
The moral of the story is that relatively accurate "figures don't lie but liars
figure," and cherry picked tables and graphs can serve biased purposes.
Academics are usually more cautious about such cherry picking because other
academics are trained to critically evaluate evidence.
This is an example of where we would like to instill more "critical thinking"
into the learning curriculum for students.
Research at the University of Rochester ---
https://urresearch.rochester.edu/home.action
Jensen Comment
Note that this site includes a long listing of research in accounting, finance,
and economics, much of it based on positivism and financial markets.
So how did this “the last shall come first” thinking become established?
You can blame it all on economists, specifically Harvard Business
School’s Michael Jensen. In other words, this idea did not come out of
legal analysis, changes in regulation, or court decisions. It was simply
an academic theory that went mainstream. And to add insult to injury,
the version of the Jensen formula that became popular was its worst
possible embodiment.
In the 1970s, there was a great deal of hand-wringing in America as
Japanese and German manufacturers were eating American’s lunch. That led
to renewed examination of how US companies were managed, with lots of
theorizing about what went wrong and what the remedies might be. In
1976, Jensen and William Meckling asserted that the problem was that
corporate executives served their own interests rather than those of
shareholders, in other words, that there was an agency problem.
Executives wanted to build empires while shareholders wanted profits to
be maximized.
I strongly suspect that if Jensen and Meckling had not come out with
this line of thinking, you would have gotten something similar to
justify the actions of the leveraged buyout kings, who were just getting
started in the 1970s and were reshaping the corporate landscape by the
mid-1980s. They were doing many of the things Jensen and Meckling
recommended: breaking up multi-business companies, thinning out
corporate centers, and selling corporate assets (some of which were
clearly excess, like corporate art and jet collection, while other sales
were simply to increase leverage, like selling corporate office
buildings and leasing them back). In other words, a likely reason that
Jensen and Meckling’s theory gained traction was it appeared to validate
a fundamental challenge to incumbent managements. (Dobbin and Jung
attribute this trend, as pretty much everyone does, to Jensen because he
continued to develop it. What really put it on the map was a 1990
Harvard Business Review article, “It’s
Not What You Pay CEOs, but How,” that led to an explosion in the use
of option-based pay and resulted in a huge increase in CEO pay relative
to that of average workers.)
To forestall takeovers, many companies implemented the measures an
LBO artist might take before his invading army arrived: sell off
non-core divisions, borrow more, shed staff.
The problem was to the extent that the Jensen/Meckling prescription
had merit, only the parts that helped company executives were adopted.
Jensen didn’t just call on executives to become less ministerial and
more entrepreneurial; they also called for more independent and engaged
boards to oversee and discipline top managers, and more equity-driven
pay, both options and other equity-linked compensation, to make
management more sensitive to both upside and downside risks.
Over the next two decades, companies levered up, became more
short-term oriented, and executive pay levels exploded. As Dobbin and
Jung put it, “The result of the changes promoted by agency theory was
that by the late 1990s, corporate America’s leaders were drag racing
without the brakes.”
The paper proceeds to analyze in considerable detail how three of the
major prescriptions of “agency theory” aka “executives and boards should
maximize value,” namely, pay for (mythical) performance,
dediversification, and greater reliance on debt all increased risk. And
the authors also detail how efforts to improve oversight were
ineffective.
But the paper also makes clear that this vision of how companies
should be run was simply a new management fashion, as opposed to any
sort of legal requirement:
Organizational institutionalists have long argued that new
management practices diffuse through networks of firms like fads
spread through high schools….In their models, new paradigms are
socially constructed as appropriate solutions to perceived problems
or crises….Expert groups that stand to gain from having their
preferred strategies adopted by firms then enter the void, competing
to have their model adopted….
And as Dobbin and Jung point out, the parts of the Jensen formula
that got adopted were the one that had constituents. The ones that
promoted looting and short-termism had obvious followings. The ones for
prudent management didn’t.
And consider the implications of Jensen’s prescriptions, of pushing
companies to favor shareholders, when they actually stand at the back of
the line from a legal perspective. The result is that various agents
(board compensation consultants, management consultants, and cronyistic
boards themselves) have put incentives in place for CEOs to favor
shareholders over parties that otherwise should get better treatment. So
is it any surprise that companies treat employees like toilet paper,
squeeze vendors, lobby hard for tax breaks and to weaken regulations,
and worse, like fudge their financial reports? Jensen himself, in 2005,
repudiated his earlier prescription precisely because it led to fraud.
From
an interview with the New York Times:
Q. So the maximum stock price is the holy grail?
A. Absolutely not. Warren Buffett says he worries as much when
one of his companies becomes overvalued as undervalued. I agree.
Overvalued equity is managerial heroin – it feels really great when
you start out; you’re feted on television; investment bankers vie to
float new issues.
But it doesn’t take long before the elation and ecstasy turn into
enormous pain. The market starts demanding increased earnings and
revenues, and the managers begin to say: “Holy Moley! How are we
going to generate the returns?” They look for legal loopholes in the
accounting, and when those don’t work, even basically honest people
move around the corner to outright fraud.
If they hold a lot of stock or options themselves, it is like
pouring gasoline on a fire. They fudge the numbers and hope they can
sell the stock or exercise the options before anything hits the fan.
Q. Are you suggesting that executives be rewarded for driving
down the price of the stock?
A. I’m saying they should be rewarded for being honest. A C.E.O.
should be able to tell investors, “Listen, this company isn’t worth
its $70 billion market cap; it’s really worth $30 billion, and
here’s why.”
But the board would fire that executive immediately. I guess it
has to be preventative – if executives would present the market with
realistic numbers rather than overoptimistic expectations, the stock
price would stay realistic. But I admit, we scholars don’t yet know
the real answer to how to make this happen.
So having led Corporate America in the wrong direction, Jensen
‘fesses up no one knows the way out. But if executives weren’t
incentivized to take such a topsy-turvey shareholder-driven view of the
world, they’d weigh their obligations to other constituencies, including
the community at large, along with earning shareholders a decent return.
But it’s now become so institutionalized it’s hard to see how to move to
a more sensible regime. For instance, analysts regularly try pressuring
Costco to pay its workers less, wanting fatter margins. But the
comparatively high wages are
an integral part of Costco’s formula: it reduces costly staff
turnover and employee pilferage. And Costco’s upscale members report
they prefer to patronize a store they know treats workers better than
Walmart and other discounters. If managers with an established,
successful formulas still encounter pressure from the Street to strip
mine their companies, imagine how hard it is for struggling companies or
less secure top executives to implement strategies that will take a
while to reap rewards. I’ve been getting reports from McKinsey from the
better part of a decade that they simply can’t get their clients to
implement new initiatives if they’ll dent quarterly returns.
This governance system is actually in crisis, but the extraordinary
profit share that companies have managed to achieve by squeezing workers
and the asset-goosing success of post-crisis financial policies have
produced an illusion of health. But porcine maquillage only improves
appearances; it doesn’t mask the stench of gangrene. Nevertheless,
executives have successfully hidden the generally unhealthy state of
their companies. As long as they have cheerleading analysts, complacent
boards and the Fed protecting their back, they can likely continue to
inflict more damage, using “maximizing shareholder value” canard as the
cover for continuing rent extraction.
So how did this “the last shall come first” thinking become established?
You can blame it all on economists, specifically Harvard Business
School’s Michael Jensen. In other words, this idea did not come out of
legal analysis, changes in regulation, or court decisions. It was simply
an academic theory that went mainstream. And to add insult to injury,
the version of the Jensen formula that became popular was its worst
possible embodiment.
In the 1970s, there was a great deal of hand-wringing in America as
Japanese and German manufacturers were eating American’s lunch. That led
to renewed examination of how US companies were managed, with lots of
theorizing about what went wrong and what the remedies might be. In
1976, Jensen and William Meckling asserted that the problem was that
corporate executives served their own interests rather than those of
shareholders, in other words, that there was an agency problem.
Executives wanted to build empires while shareholders wanted profits to
be maximized.
I strongly suspect that if Jensen and Meckling had not come out with
this line of thinking, you would have gotten something similar to
justify the actions of the leveraged buyout kings, who were just getting
started in the 1970s and were reshaping the corporate landscape by the
mid-1980s. They were doing many of the things Jensen and Meckling
recommended: breaking up multi-business companies, thinning out
corporate centers, and selling corporate assets (some of which were
clearly excess, like corporate art and jet collection, while other sales
were simply to increase leverage, like selling corporate office
buildings and leasing them back). In other words, a likely reason that
Jensen and Meckling’s theory gained traction was it appeared to validate
a fundamental challenge to incumbent managements. (Dobbin and Jung
attribute this trend, as pretty much everyone does, to Jensen because he
continued to develop it. What really put it on the map was a 1990
Harvard Business Review article, “It’s
Not What You Pay CEOs, but How,” that led to an explosion in the use
of option-based pay and resulted in a huge increase in CEO pay relative
to that of average workers.)
To forestall takeovers, many companies implemented the measures an
LBO artist might take before his invading army arrived: sell off
non-core divisions, borrow more, shed staff.
The problem was to the extent that the Jensen/Meckling prescription
had merit, only the parts that helped company executives were adopted.
Jensen didn’t just call on executives to become less ministerial and
more entrepreneurial; they also called for more independent and engaged
boards to oversee and discipline top managers, and more equity-driven
pay, both options and other equity-linked compensation, to make
management more sensitive to both upside and downside risks.
Over the next two decades, companies levered up, became more
short-term oriented, and executive pay levels exploded. As Dobbin and
Jung put it, “The result of the changes promoted by agency theory was
that by the late 1990s, corporate America’s leaders were drag racing
without the brakes.”
The paper proceeds to analyze in considerable detail how three of the
major prescriptions of “agency theory” aka “executives and boards should
maximize value,” namely, pay for (mythical) performance,
dediversification, and greater reliance on debt all increased risk. And
the authors also detail how efforts to improve oversight were
ineffective.
But the paper also makes clear that this vision of how companies
should be run was simply a new management fashion, as opposed to any
sort of legal requirement:
Organizational institutionalists have long argued that new
management practices diffuse through networks of firms like fads
spread through high schools….In their models, new paradigms are
socially constructed as appropriate solutions to perceived problems
or crises….Expert groups that stand to gain from having their
preferred strategies adopted by firms then enter the void, competing
to have their model adopted….
And as Dobbin and Jung point out, the parts of the Jensen formula
that got adopted were the one that had constituents. The ones that
promoted looting and short-termism had obvious followings. The ones for
prudent management didn’t.
And consider the implications of Jensen’s prescriptions, of pushing
companies to favor shareholders, when they actually stand at the back of
the line from a legal perspective. The result is that various agents
(board compensation consultants, management consultants, and cronyistic
boards themselves) have put incentives in place for CEOs to favor
shareholders over parties that otherwise should get better treatment. So
is it any surprise that companies treat employees like toilet paper,
squeeze vendors, lobby hard for tax breaks and to weaken regulations,
and worse, like fudge their financial reports? Jensen himself, in 2005,
repudiated his earlier prescription precisely because it led to fraud.
From
an interview with the New York Times:
Q. So the maximum stock price is the holy grail?
A. Absolutely not. Warren Buffett says he worries as much when
one of his companies becomes overvalued as undervalued. I agree.
Overvalued equity is managerial heroin – it feels really great when
you start out; you’re feted on television; investment bankers vie to
float new issues.
But it doesn’t take long before the elation and ecstasy turn into
enormous pain. The market starts demanding increased earnings and
revenues, and the managers begin to say: “Holy Moley! How are we
going to generate the returns?” They look for legal loopholes in the
accounting, and when those don’t work, even basically honest people
move around the corner to outright fraud.
If they hold a lot of stock or options themselves, it is like
pouring gasoline on a fire. They fudge the numbers and hope they can
sell the stock or exercise the options before anything hits the fan.
Q. Are you suggesting that executives be rewarded for driving
down the price of the stock?
A. I’m saying they should be rewarded for being honest. A C.E.O.
should be able to tell investors, “Listen, this company isn’t worth
its $70 billion market cap; it’s really worth $30 billion, and
here’s why.”
But the board would fire that executive immediately. I guess it
has to be preventative – if executives would present the market with
realistic numbers rather than overoptimistic expectations, the stock
price would stay realistic. But I admit, we scholars don’t yet know
the real answer to how to make this happen.
So having led Corporate America in the wrong direction, Jensen
‘fesses up no one knows the way out. But if executives weren’t
incentivized to take such a topsy-turvey shareholder-driven view of the
world, they’d weigh their obligations to other constituencies, including
the community at large, along with earning shareholders a decent return.
But it’s now become so institutionalized it’s hard to see how to move to
a more sensible regime. For instance, analysts regularly try pressuring
Costco to pay its workers less, wanting fatter margins. But the
comparatively high wages are
an integral part of Costco’s formula: it reduces costly staff
turnover and employee pilferage. And Costco’s upscale members report
they prefer to patronize a store they know treats workers better than
Walmart and other discounters. If managers with an established,
successful formulas still encounter pressure from the Street to strip
mine their companies, imagine how hard it is for struggling companies or
less secure top executives to implement strategies that will take a
while to reap rewards. I’ve been getting reports from McKinsey from the
better part of a decade that they simply can’t get their clients to
implement new initiatives if they’ll dent quarterly returns.
This governance system is actually in crisis, but the extraordinary
profit share that companies have managed to achieve by squeezing workers
and the asset-goosing success of post-crisis financial policies have
produced an illusion of health. But porcine maquillage only improves
appearances; it doesn’t mask the stench of gangrene. Nevertheless,
executives have successfully hidden the generally unhealthy state of
their companies. As long as they have cheerleading analysts, complacent
boards and the Fed protecting their back, they can likely continue to
inflict more damage, using “maximizing shareholder value” canard as the
cover for continuing rent extraction.
So how did this “the last shall come first” thinking become established?
You can blame it all on economists, specifically Harvard Business
School’s Michael Jensen. In other words, this idea did not come out of
legal analysis, changes in regulation, or court decisions. It was simply
an academic theory that went mainstream. And to add insult to injury,
the version of the Jensen formula that became popular was its worst
possible embodiment.
In the 1970s, there was a great deal of hand-wringing in America as
Japanese and German manufacturers were eating American’s lunch. That led
to renewed examination of how US companies were managed, with lots of
theorizing about what went wrong and what the remedies might be. In
1976, Jensen and William Meckling asserted that the problem was that
corporate executives served their own interests rather than those of
shareholders, in other words, that there was an agency problem.
Executives wanted to build empires while shareholders wanted profits to
be maximized.
I strongly suspect that if Jensen and Meckling had not come out with
this line of thinking, you would have gotten something similar to
justify the actions of the leveraged buyout kings, who were just getting
started in the 1970s and were reshaping the corporate landscape by the
mid-1980s. They were doing many of the things Jensen and Meckling
recommended: breaking up multi-business companies, thinning out
corporate centers, and selling corporate assets (some of which were
clearly excess, like corporate art and jet collection, while other sales
were simply to increase leverage, like selling corporate office
buildings and leasing them back). In other words, a likely reason that
Jensen and Meckling’s theory gained traction was it appeared to validate
a fundamental challenge to incumbent managements. (Dobbin and Jung
attribute this trend, as pretty much everyone does, to Jensen because he
continued to develop it. What really put it on the map was a 1990
Harvard Business Review article, “It’s
Not What You Pay CEOs, but How,” that led to an explosion in the use
of option-based pay and resulted in a huge increase in CEO pay relative
to that of average workers.)
To forestall takeovers, many companies implemented the measures an
LBO artist might take before his invading army arrived: sell off
non-core divisions, borrow more, shed staff.
The problem was to the extent that the Jensen/Meckling prescription
had merit, only the parts that helped company executives were adopted.
Jensen didn’t just call on executives to become less ministerial and
more entrepreneurial; they also called for more independent and engaged
boards to oversee and discipline top managers, and more equity-driven
pay, both options and other equity-linked compensation, to make
management more sensitive to both upside and downside risks.
Over the next two decades, companies levered up, became more
short-term oriented, and executive pay levels exploded. As Dobbin and
Jung put it, “The result of the changes promoted by agency theory was
that by the late 1990s, corporate America’s leaders were drag racing
without the brakes.”
The paper proceeds to analyze in considerable detail how three of the
major prescriptions of “agency theory” aka “executives and boards should
maximize value,” namely, pay for (mythical) performance,
dediversification, and greater reliance on debt all increased risk. And
the authors also detail how efforts to improve oversight were
ineffective.
But the paper also makes clear that this vision of how companies
should be run was simply a new management fashion, as opposed to any
sort of legal requirement:
Organizational institutionalists have long argued that new
management practices diffuse through networks of firms like fads
spread through high schools….In their models, new paradigms are
socially constructed as appropriate solutions to perceived problems
or crises….Expert groups that stand to gain from having their
preferred strategies adopted by firms then enter the void, competing
to have their model adopted….
And as Dobbin and Jung point out, the parts of the Jensen formula
that got adopted were the one that had constituents. The ones that
promoted looting and short-termism had obvious followings. The ones for
prudent management didn’t.
And consider the implications of Jensen’s prescriptions, of pushing
companies to favor shareholders, when they actually stand at the back of
the line from a legal perspective. The result is that various agents
(board compensation consultants, management consultants, and cronyistic
boards themselves) have put incentives in place for CEOs to favor
shareholders over parties that otherwise should get better treatment. So
is it any surprise that companies treat employees like toilet paper,
squeeze vendors, lobby hard for tax breaks and to weaken regulations,
and worse, like fudge their financial reports? Jensen himself, in 2005,
repudiated his earlier prescription precisely because it led to fraud.
From
an interview with the New York Times:
Q. So the maximum stock price is the holy grail?
A. Absolutely not. Warren Buffett says he worries as much when
one of his companies becomes overvalued as undervalued. I agree.
Overvalued equity is managerial heroin – it feels really great when
you start out; you’re feted on television; investment bankers vie to
float new issues.
But it doesn’t take long before the elation and ecstasy turn into
enormous pain. The market starts demanding increased earnings and
revenues, and the managers begin to say: “Holy Moley! How are we
going to generate the returns?” They look for legal loopholes in the
accounting, and when those don’t work, even basically honest people
move around the corner to outright fraud.
If they hold a lot of stock or options themselves, it is like
pouring gasoline on a fire. They fudge the numbers and hope they can
sell the stock or exercise the options before anything hits the fan.
Q. Are you suggesting that executives be rewarded for driving
down the price of the stock?
A. I’m saying they should be rewarded for being honest. A C.E.O.
should be able to tell investors, “Listen, this company isn’t worth
its $70 billion market cap; it’s really worth $30 billion, and
here’s why.”
But the board would fire that executive immediately. I guess it
has to be preventative – if executives would present the market with
realistic numbers rather than overoptimistic expectations, the stock
price would stay realistic. But I admit, we scholars don’t yet know
the real answer to how to make this happen.
So having led Corporate America in the wrong direction, Jensen
‘fesses up no one knows the way out. But if executives weren’t
incentivized to take such a topsy-turvey shareholder-driven view of the
world, they’d weigh their obligations to other constituencies, including
the community at large, along with earning shareholders a decent return.
But it’s now become so institutionalized it’s hard to see how to move to
a more sensible regime. For instance, analysts regularly try pressuring
Costco to pay its workers less, wanting fatter margins. But the
comparatively high wages are
an integral part of Costco’s formula: it reduces costly staff
turnover and employee pilferage. And Costco’s upscale members report
they prefer to patronize a store they know treats workers better than
Walmart and other discounters. If managers with an established,
successful formulas still encounter pressure from the Street to strip
mine their companies, imagine how hard it is for struggling companies or
less secure top executives to implement strategies that will take a
while to reap rewards. I’ve been getting reports from McKinsey from the
better part of a decade that they simply can’t get their clients to
implement new initiatives if they’ll dent quarterly returns.
This governance system is actually in crisis, but the extraordinary
profit share that companies have managed to achieve by squeezing workers
and the asset-goosing success of post-crisis financial policies have
produced an illusion of health. But porcine maquillage only improves
appearances; it doesn’t mask the stench of gangrene. Nevertheless,
executives have successfully hidden the generally unhealthy state of
their companies. As long as they have cheerleading analysts, complacent
boards and the Fed protecting their back, they can likely continue to
inflict more damage, using “maximizing shareholder value” canard as the
cover for continuing rent extraction.
So how did this “the last shall come first” thinking become established? You
can blame it all on economists, specifically Harvard Business School’s
Michael Jensen. In other words, this idea did not come out of legal
analysis, changes in regulation, or court decisions. It was simply an
academic theory that went mainstream. And to add insult to injury, the
version of the Jensen formula that became popular was its worst possible
embodiment.
In the 1970s, there was a great deal of hand-wringing in America as Japanese
and German manufacturers were eating American’s lunch. That led to renewed
examination of how US companies were managed, with lots of theorizing about
what went wrong and what the remedies might be. In 1976, Jensen and William
Meckling asserted that the problem was that corporate executives served
their own interests rather than those of shareholders, in other words, that
there was an agency problem. Executives wanted to build empires while
shareholders wanted profits to be maximized.
I
strongly suspect that if Jensen and Meckling had not come out with this line
of thinking, you would have gotten something similar to justify the actions
of the leveraged buyout kings, who were just getting started in the 1970s
and were reshaping the corporate landscape by the mid-1980s. They were doing
many of the things Jensen and Meckling recommended: breaking up
multi-business companies, thinning out corporate centers, and selling
corporate assets (some of which were clearly excess, like corporate art and
jet collection, while other sales were simply to increase leverage, like
selling corporate office buildings and leasing them back). In other words, a
likely reason that Jensen and Meckling’s theory gained traction was it
appeared to validate a fundamental challenge to incumbent managements.
(Dobbin and Jung attribute this trend, as pretty much everyone does, to
Jensen because he continued to develop it. What really put it on the map was
a 1990 Harvard Business Review article,
“It’s
Not What You Pay CEOs, but How,” that
led to an explosion in the use of option-based pay and resulted in a huge
increase in CEO pay relative to that of average workers.)
To forestall takeovers, many companies implemented the measures an LBO
artist might take before his invading army arrived: sell off non-core
divisions, borrow more, shed staff.
The problem was to the extent that the Jensen/Meckling prescription had
merit, only the parts that helped company executives were adopted. Jensen
didn’t just call on executives to become less ministerial and more
entrepreneurial; they also called for more independent and engaged boards to
oversee and discipline top managers, and more equity-driven pay, both
options and other equity-linked compensation, to make management more
sensitive to both upside and downside risks.
Over the next two decades, companies levered up, became more short-term
oriented, and executive pay levels exploded. As Dobbin and Jung put it, “The
result of the changes promoted by agency theory was that by the late 1990s,
corporate America’s leaders were drag racing without the brakes.”
The paper proceeds to analyze in considerable detail how three of the major
prescriptions of “agency theory” aka “executives and boards should maximize
value,” namely, pay for (mythical) performance, dediversification, and
greater reliance on debt all increased risk. And the authors also detail how
efforts to improve oversight were ineffective.
But the paper also makes clear that this vision of how companies should be
run was simply a new management fashion, as opposed to any sort of legal
requirement:
Organizational institutionalists have long argued that new management
practices diffuse through networks of firms like fads spread through high
schools….In their models, new paradigms are socially constructed as
appropriate solutions to perceived problems or crises….Expert groups that
stand to gain from having their preferred strategies adopted by firms then
enter the void, competing to have their model adopted….
And as Dobbin and Jung point out, the parts of the Jensen formula that got
adopted were the one that had constituents. The ones that promoted looting
and short-termism had obvious followings. The ones for prudent management
didn’t.
And
consider the implications of Jensen’s prescriptions, of pushing companies to
favor shareholders, when they actually stand at the back of the line from a
legal perspective. The result is that various agents (board compensation
consultants, management consultants, and cronyistic boards themselves) have
put incentives in place for CEOs to favor shareholders over parties that
otherwise should get better treatment. So is it any surprise that companies
treat employees like toilet paper, squeeze vendors, lobby hard for tax
breaks and to weaken regulations, and worse, like fudge their financial
reports? Jensen himself, in 2005, repudiated his earlier prescription
precisely because it led to fraud. Froman interview with the New York Times:
Q. So the maximum stock price is the holy grail?
A. Absolutely not. Warren Buffett says he worries as much when one of his
companies becomes overvalued as undervalued. I agree. Overvalued equity is
managerial heroin – it feels really great when you start out; you’re feted
on television; investment bankers vie to float new issues.
But it doesn’t take long before the elation and ecstasy turn into enormous
pain. The market starts demanding increased earnings and revenues, and the
managers begin to say: “Holy Moley! How are we going to generate the
returns?” They look for legal loopholes in the accounting, and when those
don’t work, even basically honest people move around the corner to outright
fraud.
If they hold a lot of stock or options themselves, it is like pouring
gasoline on a fire. They fudge the numbers and hope they can sell the stock
or exercise the options before anything hits the fan.
Q. Are you suggesting that executives be rewarded for driving down the price
of the stock?
A. I’m saying they should be rewarded for being honest. A C.E.O. should be
able to tell investors, “Listen, this company isn’t worth its $70 billion
market cap; it’s really worth $30 billion, and here’s why.”
But the board would fire that executive immediately. I guess it has to be
preventative – if executives would present the market with realistic numbers
rather than overoptimistic expectations, the stock price would stay
realistic. But I admit, we scholars don’t yet know the real answer to how to
make this happen.
So
having led Corporate America in the wrong direction, Jensen ‘fesses up no
one knows the way out. But if executives weren’t incentivized to take such a
topsy-turvey shareholder-driven view of the world, they’d weigh their
obligations to other constituencies, including the community at large, along
with earning shareholders a decent return. But it’s now become so
institutionalized it’s hard to see how to move to a more sensible regime.
For instance, analysts regularly try pressuring Costco to pay its workers
less, wanting fatter margins. But thecomparatively high wages are an integral part of
Costco’s formula: it
reduces costly staff turnover and employee pilferage. And Costco’s upscale
members report they prefer to patronize a store they know treats workers
better than Walmart and other discounters. If managers with an established,
successful formulas still encounter pressure from the Street to strip mine
their companies, imagine how hard it is for struggling companies or less
secure top executives to implement strategies that will take a while to reap
rewards. I’ve been getting reports from McKinsey from the better part of a
decade that they simply can’t get their clients to implement new initiatives
if they’ll dent quarterly returns.
This governance system is actually in crisis, but the extraordinary profit
share that companies have managed to achieve by squeezing workers and the
asset-goosing success of post-crisis financial policies have produced an
illusion of health. But porcine maquillage only improves appearances; it
doesn’t mask the stench of gangrene. Nevertheless, executives have
successfully hidden the generally unhealthy state of their companies. As
long as they have cheerleading analysts, complacent boards and the Fed
protecting their back, they can likely continue to inflict more damage,
using “maximizing shareholder value” canard as the cover for continuing rent
extraction.
Jensen Comment
Mike Jensen was the headliner at the 2013 American Accounting Association Annual
Meetings. AAA members can watch various videos by him and about him at the AAA
Commons Website.
Actually Al Rappaport at Northwestern may have been more influential in
spreading the word about creating shareholder value --- Rappaport, Alfred
(1998).
Creating Shareholder Value: A guide for managers and investors. New
York: The Free Press. pp. 13–29.
It would be interesting if Mike Jensen and/or Al
Rappaport wrote rebuttals to this article.
Abstract:
The rules that control the timing of the recognition of items of revenue and
expense for federal income tax purposes -- tax accounting -- have received
little attention in the last two decades. Presumably, this is due in some
measure to the time value of money being less interesting in the recent low
interest rate environment. With so little recent public discussion, many tax
lawyers' understanding of tax accounting rests on historical myths that no
longer are true. For example, many tax lawyers think that financial
accounting's Generally Accepted Accounting Principles (GAAP) are not
relevant to tax accounting because GAAP rests on the principle of
"conservatism." This has not been true since 2010. Many tax lawyers think
that the only example of when GAAP controls tax accounting is under the LIFO
conformity requirement. In fact, in many, many important real cases, this is
not true. For example, an accrual basis taxpayer's basic accounting for core
items of revenue and expense can be controlled by GAAP. This article
explores these and other tax accounting myths.
From the CFO Journal's Morning Ledger on October 29, 2013
The
looming expiration of some big corporate tax credits is starting to make
companies nervous.
As Congress prepares for the next round of the budget
battle, the uncertain fate of 55 federal tax breaks is muddying financial
forecasts for next year,
write CFOJ’s Maxwell Murphy and Emily Chasan in
today’s Marketplace section.
Among the business breaks set to expire at the end of the year: a tax credit
for investing in research and development; the “look-through rule” that
allows multinational companies to shift some profits between their foreign
subsidiaries tax-free; and the bonus-depreciation rule that allows a company
to write off half of its equipment purchases in a single year. Extending all
of the tax breaks for another year could cost the government at least $54
billion over 10 years. And that could make them a flashpoint for members of
Congress who want to overhaul the tax code for businesses and consumers,
Murphy and Chasan write. “I don’t know that there’s a real champion for
[these measures] right now” in Congress, said Hank Gutman, director of
KPMG’s Tax Governance Institute and a former chief of staff for Congress’s
Joint Committee on Taxation. “In terms of the bigger issues that the
country’s facing, they are not high on anybody’s radar now, even though they
are of significance for the business community.”
Psst! Want a new job as a Chief Financial Officer (CFO)?
Then try EBay!
From the CFO Journal's Morning Ledger on October 22, 2013
Aspiring tech-sector CFOs should check out the job
listings at
eBay
At
least 20 executives who have become finance chiefs in Silicon Valley and
beyond over the past three years have learned the ropes in the big
e-commerce company’s finance department,
CFOJ’s Emily Chasan reports in this must-read story on
B1 today.
“We recruit people who aspire to be CFOs,” says Robert
Swan, eBay’s finance chief since 2006. “If along the way there are
opportunities outside, that’s OK .… We have a deep bench.”
Members of the eBay Mafia—the tongue-in-cheek name for
company veterans who now are corporate-level CFOs—include Rob Krolik at
Yelp, Douglas
Jeffries at RetailMe Not
and Sean Aggarwal at
Trulia, who
have all taken their companies public in the past two years. Startups with
former eBayers at the financial controls include the online clothing
retailer ModCloth,
digital-video company Roku
and online ticketing company
Eventbrite.
One reason that
EBay has churned out so many CFOs is that it has the resources to invest in
grooming up-and-coming financial talent and the breadth to offer the best
prospects hands-on experience running their own operations. The company says
it has about 1,000 financial executives around the world and more than a
dozen divisional and regional CFOs. Rookies get both theoretical and
practical training in finance, analytics and leadership. And, as part of a
two-year program, eBay rotates star performers to a different division every
six months to expand their professional networks across the company, Chasan
writes.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on October 25, 2013
SUMMARY: The article describes eBay's program for training and
advancing its talented financial experts. Many leave eBay for CFO jobs in
Silicon Valley; the group there is known as the "eBay Mafia'" and gets
together for dinner periodically. The individual who hired many of the group
into eBay initially began there after serving as its auditor with PwC.
CLASSROOM APPLICATION: The article can be used as a fun way to
discuss potential career paths.
QUESTIONS:
1. (Advanced) What is the role of a chief financial officer (CFO)?
How does that role differ from a controller? From the head of internal
audit?
2. (Introductory) What knowledge, skills and abilities which help
with performing the CFO role do the "eBay Mafia" say they developed at their
former employer?
3. (Introductory) What is eBay's system for developing these
talents towards the CFO role?
4. (Advanced) Why do you think eBay continues to run this talent
development program when so many leave eBay to become CFOs elsewhere?
5. (Introductory) From where did Mark Rubash, now CFO at Eventbrite,
begin his career at eBay?
Reviewed By: Judy Beckman, University of Rhode Island
That is the tongue-in-cheek name for the at least
20 executives who have become chief financial officers in Silicon Valley and
beyond over the past three years after training in the big e-commerce
company's finance department.
Many of these eBay Inc. alumni stay in touch with
one another, regularly sharing tips about the growing pains of startups and
initial public offerings, while waxing nostalgic over a bottle of Cabernet
Sauvignon at a trendy San Francisco restaurant.
The list of eBay veterans who now are
corporate-level CFOs includes Rob Krolik at Yelp Inc., YELP +3.80% Douglas
Jeffries at RetailMe Not Inc. and Sean Aggarwal at Trulia Inc., TRLA +4.42%
who have all taken their companies public in the past two years. Startups
with former eBayers at the financial controls include the online clothing
retailer ModCloth Inc., digital-video company Roku Inc. and online ticketing
company Eventbrite Inc.
Table not shown here
"A whole bunch of us have come out of the eBay and
PayPal fold," said Trulia's Mr. Aggarwal, who was a vice president of
finance at eBay's PayPal subsidiary. "We're all helping each other out."
EBay has become a hot house for CFOs in part
because it has enough resources to invest in grooming up-and-coming
financial talent and enough breadth to offer the best prospects hands-on
experience running their own operations. The company says it has about 1,000
financial executives around the world and more than a dozen divisional and
regional CFOs.
Rookies get both theoretical and practical training
in finance, analytics and leadership. And, as part of a two-year program,
eBay rotates star performers to a different division every six months to
expand their professional networks across the company.
Sitting in on quarterly earnings calls with Wall
Street analysts and eBay's executive team, Mr. Aggarwal recalls, helped him
learn how to focus on the key points he wants to make to investors, and
served him well during Trulia's IPO roadshow.
EBay considers minting CFO as part of its mission.
"We recruit people who aspire to be CFOs," says Robert Swan, eBay's finance
chief since 2006. "If along the way there are opportunities outside, that's
OK.…We have a deep bench."
Mr. Swan says he does annual assessments to
identify potential candidates, in case of a vacancy, and any skill gaps
employees might have. He also stays in touch with executives who have moved
on "to understand how well they did and how well we did at preparing them to
be top notch at what they do."
Tech-industry CFOs tend to hop from startup to
startup. They are among the least likely to harbor ambitions of replacing
their chief executive, according to a survey this month by Deloitte & Touche
LLP.
Of course, companies also regularly poach finance
executives from Amazon.com Inc., AMZN +8.85% Google Inc., GOOG -0.57% and
Salesforce.com Inc., especially those who have helped the company expand,
says Joe Riggione, co-founder of executive-recruiting firm True Capital
Partners Inc.
TOPICS: Disclosure, Fair Value Accounting, Fair-Value Accounting
Rules
SUMMARY: The author uses disclosures required under FAS 157
(Accounting Standards Codification (ASC) section 820) to examine investors'
estimates of Twitter's value with specific examples from three mutual funds.
CLASSROOM APPLICATION: The article is excellent for introducing
fair value requirements and disclosures with specific application to an
equity security.
QUESTIONS:
1. (Introductory) What is Twitter Inc.? When is its initial public
offering (IPO) expected?
2. (Introductory) In what price range are Twitter's shares valued?
How has the WSJ obtained these values?
3. (Advanced) How is it possible that "at least 11 mutual funds and
closed-end funds own shares" of the company when Twitter hasn't yet held its
IPO? Include in your answer definitions of the two fund entities.
4. (Advanced) Why must mutual funds estimate the fair value of
Twitter shares for financial statement disclosures? In your answer, state
what other measurement basis could be considered for financial statement
reporting and identify all authoritative accounting guidance requiring the
disclosures discussed in the article.
5. (Advanced) "In footnotes, many fund firms will say that a
stock's value is...a 'Level 3' asset...." What is a Level 3 asset? Identify
your source for this definition from authoritative accounting literature.
Reviewed By: Judy Beckman, University of Rhode Island
Its highly anticipated initial public offering
probably won't happen until November at the earliest, but at least 11 mutual
funds and closed-end funds own shares of the San Francisco-based social
network. For example, Twitter shares make up more than 2% of the holdings of
the Morgan Stanley Institutional Small Company Growth mutual fund.
Fund companies—including Morgan Stanley Investment
Management, T. Rowe Price Group TROW -3.06% and Fidelity Investments—have
invested lately in pre-IPO companies, either by participating in
venture-capital financing rounds or by buying shares from insiders on the
private market. Before Facebook's FB +1.05% May 2012 IPO, for example, more
than 50 mutual funds already owned shares.
On Twitter, some funds already have made a
killing—at least on paper.
For example, according to its holdings disclosures,
at the end of September, the Morgan Stanley fund valued its Twitter shares
at about $22.31, up a whopping 36% from $16.42 in June.
Because of the fund's hefty Twitter stake, about
0.78 percentage point of the fund's 16% return in the third quarter was due
to Twitter's rise alone.
But there is a big catch: Because Twitter isn't
publicly traded yet, mutual-fund firms must estimate the company's price,
and those estimates can vary significantly.
In contrast to Morgan Stanley, funds run by T. Rowe
Price said that Twitter shares were worth about $24.35 each on Sept. 30, up
34% from $18.18 at the end of June.
In an email, a T. Rowe Price spokeswoman said that
the company uses a variety of sources, such as significant transactions, new
rounds of financing and relative valuations of other companies to value
private assets.
Since investors can buy and redeem shares of the
funds based on those estimates, the discrepancies mean that some fund
investors can effectively buy shares of Twitter at a lower price than others
or, conversely, sell them for more.
On Twitter's price, "we're all wrong. It's just a
matter of degree," says Kevin Landis, portfolio manager of Firsthand
Technology Value. SVVC -0.35% Because the Firsthand fund is a closed-end
fund, unlike a traditional mutual fund, its trading price can deviate from
the estimated value of its holdings. The firm it hires to value its private
holdings estimates that Twitter was worth about $24.37 a share on Sept. 30.
To be sure, Twitter—and any other stock, for that
matter—makes up just a small portion of most funds. But how the fund firms
value the stock can cause the funds to behave unexpectedly.
For example, the rapid increase of the Morgan
Stanley estimate in the third quarter was a sharp break from how the fund
previously treated shares.
On Sept. 30, 2011, Morgan Stanley said its shares
of Twitter were worth $16.09. It didn't change that estimate until March
2013, when it raised the price to $16.60.
New York University professor and valuation expert
Aswath Damodaran says that it doesn't make sense that a fund firm would keep
Twitter's price constant throughout 2012, even as prices of other
social-media companies changed sharply.
"What it effectively means is that the old
investors of the fund are going to lose money to the people who are able to
buy the fund now at a depressed price," Mr. Damodaran says. "It's not fair
to existing shareholders if others can exploit dated pricing."
In an email, a Morgan Stanley Investment Management
spokesman said, "We have a robust process for valuing investments in private
companies that considers a variety of factors including the company's
performance, financing activity and operating environment."
Unfortunately, as one of thousands of small
investors, there probably isn't a lot an individual can do to change how the
fund prices its shares. But to see how much dated, or potentially incorrect,
pricing affects a fund, take a look at its latest holdings report filed with
the Securities and Exchange Commission.
SUMMARY: "AT&T Inc. plans to lease a portfolio of cell towers, and
sell some others, to Crown Castle International Corp. for about $4.85
billion....Under the deal, AT&T will lease the rights to about 9,100 towers
and sell about 600 towers. The transaction is expected to close by year-end.
AT&T said last month that it was exploring the sale of some or all of its
cell towers....The portfolio had produced interest from a number of buyers
in an area that has been consolidating through a flurry of deals. "
CLASSROOM APPLICATION: The article may be used in a financial
reporting class to introduce both lessees' and lessor's business strategies.
The article also mentions tax efficiencies as a motivator in the
transaction.
QUESTIONS:
1. (Introductory) Summarize the transaction between AT&T and Crown
Castle. Identify which is the lessor and which is the lessee in this
transaction and comment on the fact that "AT&T will sublease space on the
towers for at least 10 years with an option to renew up to a total of 50
years."
2. (Advanced) AT&T said last month it was considering selling all
of its cell towers. Then why do you think it leased so many rather than sell
them to Crown Castle?
3. (Advanced) What does it mean to say that cell tower operators
are consolidating?
4. (Advanced) Identify some factors that may have led Crown Castle
to lease rather than buy the cell towers from AT&T.
5. (Advanced) What is a bargain purchase option (BPO)? Can you tell
whether the option held by Crown Castle to buy the towers in 28 years is a
BPO?
6. (Advanced) AT&T Chief Executive Randall Stephenson said, " There
are people who have a better tax position on owning these towers, that can
drive value from owning these towers more than we would." Explain that
statement.
Reviewed By: Judy Beckman, University of Rhode Island
"There are people who have a better tax position on
owning these towers, that can drive value from owning these towers more than
we would," AT&T Chief Executive
Randall Stephenson said earlier this month at an investor conference.
Under the deal, Crown Castle can lease and operate
the towers with an average lease term of about 28 years. When the leases
expire, the company will have the option to buy the towers for a total of
about $4.2 billion.
AT&T will sublease space on the towers for at least
10 years with an option to renew up to a total of 50 years.
Meanwhile, the continued rise in mobile data
consumption and industrywide network overhauls have helped increase revenue
at tower companies.
AT&T Inc. T -1.84% plans to lease a portfolio of
cell towers, and sell some others, to Crown Castle International Corp. CCI
+3.49% for about $4.85 billion as the telecom giant cashes in on
consolidation among tower operators and seeks to spend its money elsewhere.
Under the deal, AT&T will lease the rights to about
9,100 towers and sell about 600 towers. The transaction is expected to close
by year-end. AT&T said last month that it was exploring the sale of some or
all of its cell towers.
The portfolio had produced interest from a number
of buyers in an area that has been consolidating through a flurry of deals.
Crown Castle had been working on buying the AT&T portfolio, but American
Tower Corp. AMT +1.75% had also shown interest late in the sales process,
according to people familiar with the situation.
Officials from American Tower weren't immediately
available for comment.
The tower deal comes as AT&T has expressed interest
in overseas deals and has ramped up spending on its network in the U.S. The
time may also be right for selling tower assets, as the major operators that
focus solely on the business have been buying up many of the remaining
sizable portfolios.
"There are people who have a better tax position on
owning these towers, that can drive value from owning these towers more than
we would," AT&T Chief Executive Randall Stephenson said earlier this month
at an investor conference.
Under the deal, Crown Castle can lease and operate
the towers with an average lease term of about 28 years. When the leases
expire, the company will have the option to buy the towers for a total of
about $4.2 billion.
AT&T will sublease space on the towers for at least
10 years with an option to renew up to a total of 50 years.
Meanwhile, the continued rise in mobile data
consumption and industrywide network overhauls have helped increase revenue
at tower companies.
The paper contemplates a radical reformation of
our entire system for taxing exempt organizations and their patrons.
First, all non-charitable exempt organizations that compete with taxable
commercial businesses (such as fraternal benefit societies that provide
insurance (section 501(c)(8)) and credit unions (501(c)(4))) would
become taxable. Also, business leagues, chambers of commerce, and the
Professional Golf Association and National Football League would be
taxable but could operate as partnerships. Thus, section 501(c)(6) would
be repealed.
Most other tax-exempt organizations would be reassigned into one of five
categories, corresponding roughly to current section 501(c)(1) (U.S.
governmental organizations), section 501(c)(3) (charitable), section
501(c)(4) (social welfare), section 501(c)(7) (social clubs, but stated
more generally as mutual benefit organizations), and retirement plans.
The paper leaves section 501(c)(1) entirely intact, and largely leaves
section 501(c)(3) alone, except that it proposes that certain very large
public charities with “excessive endowments” be taxable on their
investment income to the extent the income is not used directly for
charitable purposes.
This paper also generally leaves section 501(c)(4) alone, except that
any 501(c)(4) (or other tax-exempt organization) that engages in a
significant amount of lobbying or campaigning would be taxable on all of
its investment income.
The fourth catchall category – corresponding roughly to the tax
treatment of social clubs ‒ would cover virtually all other tax-exempt
organizations (other than retirement plans). Very generally, these
organizations would not be subject to tax on donations or per capita
membership dues, but would be taxable on investment income, fees charged
to non-members, and fees charged to members disproportionately.
The paper proposes two significant changes to the treatment of donors.
First, section 84 would be expanded to treat any donation of appreciated
property to a tax-exempt organization as a sale of that property.
Second, any donation to a tax-exempt organization that engages in
significant lobbying or campaigning and does not disclose the name of
the donor would be treated as a taxable gift by the donor (subject to
the annual exclusion and lifetime exemption).
Finally, the paper proposes two measures of relief for tax-exempt
organizations. First, the unrelated debt-financed income rules would be
repealed. Second, limited amounts of political statements by the
management of 501(c)(3) organizations (like election-time sermons) would
not jeopardize the tax-exempt status of the organization.
Jensen Comment
Tax reformers should carefully consider this article.
Summary
The Office of the Chief Auditor is issuing t his practice alert in light of
significant auditing practice issues observed by the Public Company
Accounting Oversight Board ("PCAOB" or the "Board") staff in the past three
years relating to audits of internal control over financial reporting ("
audits of internal control") . The practice alert highlights certain
requirements of the auditing standards of the PCAOB in aspects of audits of
internal control in which significant auditing deficiencies have been cited
frequently in PCAOB inspection reports . Specifically, this alert discusses
the following topics:
• Risk assessment and the audit of internal
control
• Selecting controls to test
• Tes ting management review controls
• Information technology ("IT") considerations,
including sys tem
- generated data and reports
• Roll - forward of cont rols tested at an
interim date
• Using the work of others
• Evaluating identified control deficiencies
Auditors should take note of the matters discussed
in this alert in planning and performing their audits of internal control .
Because of the nature and importance of the matters covered in this alert,
it is particularly important for the engagement partner and senior
engagement team m embers to focus on these areas and for engagement quality
reviewers to keep these matters in mind when performing their engagement
quality reviews. Auditing firms also should consider whether additional
training of their auditing personnel is needed for th e topics discussed in
this alert.
Audit committees of companies for which audits of
internal control are conducted might wish to discuss with their auditors the
level of auditing deficiencies in this area identified in their auditors'
internal inspections and PCAOB inspections, request information from their
auditors about potential root causes of such findings , and ask how they are
addressing the matters discussed in this alert. In particular, audit
committees may want to inquire about the involvement and focus by senior
members of the firm on these matters
There are around
90 accounting PhD granting universities in the U.S. Some admit every
other year, and some have annual admissions of only two or three people.
Of course, some programs admit many more. Schools get many more
applications than they have spots for so this does two things: 1) makes
it hard to get in and 2) makes the job pay well when you get out.
Some Basics
Applicants
normally have to apply to both the graduate school AND the
accounting program. Often, the application deadlines for these two
groups are different, so make sure you check on that. Also,
I found that half of the schools I applied to lost something I sent
to them. I called to follow up with a few schools, was told I hadn’t
sent in something or other, responded with the date I sent the item,
was put on hold for five minutes, and the person would come back on
and tell me that they just found the thing and my application was
now complete. I don’t know if they would have tracked the item down
if I hadn’t called and insisted that it was sent.
I’ve heard
of a few schools that prefer people with professional accounting
experience, but from the inside it looks to me like a shiny GMAT
will beat out someone with a few years of public almost every
time. If you are a
public accounting person, I think it’s a good idea to try and
get one recommendation letter from a senior manager or a
partner. The other two recommendation letters should definitely
be from professors, and make these profs with the highest number
of quality publications and not necessarily the ones you liked
the best. Name recognition can go a long way here.
Cs
Don't Get PhDs and Overachieve
The admissions
committee usually sorts people based on GMAT score and undergraduate
GPA. Some schools require master’s coursework but most don’t. Even
schools that require a master’s degree will weigh the undergrad GPA more
heavily since there is more variation in undergrad GPA’s compared to
master’s GPA’s. I got the sense when talking to admissions people that
they think B’s are handed out in grad school but had to actually be
earned at the undergraduate level.
If you’re reading
this and you’re still an undergraduate, take some extra math classes. A
lot of schools say that having enough calculus to understand integration
and differentiation is a prerequisite for admission to the program. Some
schools additionally require both linear algebra and multivariate
calculus.
If you already
have a bachelor’s degree, I don’t think it’s a bad idea to take an MBA
statistics course before you apply to a program. This will give you a
small taste of what you’re getting into and will also show some
initiative. This is no substitute for a shiny GMAT score, but it can
help if you’re on the margin.
Remember That This Is About Research
Get a sense of
what type of research you want to do (analytical vs.
experimental/behavioral vs. archival, etc.) before you apply to a
school. Read some academic research to see if anything speaks to you.
Some schools are almost exclusively one area or the other and you don’t
want to get into a PhD program that trains you to do research in an area
you don’t like.
Connected to the
above, read a few papers from each professor at schools you will apply
to. See if you would want to study the same types of things as anyone
there. If not, then working on your dissertation for two or three years
will be extremely painful even if you get accepted.
I didn’t do this
when I applied, but I know someone that actually mentioned specific
profs he wanted to work with in his statement of purpose (this is the
letter you write with your admissions packet). I can see it being a good
thing because it at least shows that you know what people at the school
work on and it’s not a blanket letter. But I can see it being a bad
thing if none of those profs are on the admissions committee. Maybe
department admins would even tell you who is on the committee if you
call, but I’m not sure if they would give that info out or even know.
Up next: I will
give a few tips for navigating the first year in the program.
Audit Firm Rotation: The Huge Difference Between a Regulator's Forcing
a Client to Take Bids for a New Audit Firm (U.K.) Versus Not Allowing the
Existing Audit Firm to Bid (EU)
Jensen Comment
In 2013 the U.S. Congress, with a huge majority of votes, passed legislation to
ban forced audit firm rotation ala what is previously coming down the pike in
the EU nations with forced rotation every 15-20 years. The U.K. idea is only to
force a bidding process to take place where multiple audit firms are allowed to
bid for a firm's audit every 10 years --- presumably the existing auditor can
also tender a bid without restrictions that the lowest priced bid must be
accepted. Presumably the PCAOB audit firm regulator in the USA could consider
the U.K. model, but the interest in forced audit firm rotation in any form seems
to be waning in the USA.
To me the U.K. model seems like a reasonable compromise.
However, it will be very tough for bidding firms to be cost competitive in the
early years of new audits. The startup costs for auditing a big client like
Barclays or General Electric are enormous, including writing of specialized
software and putting hundreds of skilled auditors in place for a new enormous
audit that will disappear in 10-20 years. The harsh E.U. model is softened by
requiring audit firm rotation every 15-20 years depending upon the type of
industry. Over the first span of 15-20 years the EU legislation will probably
change three or more times.
The proposed E.U. model is harsh because it may force the largest
multinational audit firms in the EU to sell off their audit operations in the
EU. This in theory could be a good thing in that competition will increase. But
this could also be a bad thing if none of the smaller EU audit firms wants to
invest in labor and software capacity to take on an enormous audit like Shell or
Siemens.
Interestingly, audit firm rotation is an issue in private sector debates
but is never mentioned in public sector debates over audits.
For example, we just accept the GAO's declaration that its impossible to audit
some USA government agencies like the IRS and the Defense Department. Is this
really true if we let respectable audit firms bid on those "impossible" audits?
Insider Tips by Martha Stewart, Mark Cuban, Tom Selling, and Three Bobs (Vererrecchia,
Jaedicke, and Jensen)
Jensen Comment
I don't think the "The EBITDA Epidemic Takes Its Cue from Standard Setters."
Like Professor Verrecchia currently and my accounting Professor Bob
Jaedicke decades earlier I think the "EBITDA Epidemic" takes its cue from
investors and managers that have a "functional fixation" for earnings, eps,
EBITDA, and P/E ratios --- when in fact those metrics are no longer defined by
the FASB/IASB and may have a lot of misleading noise and secret manipulations.
Jensen Comment
If the FASB cannot define net earnings then it follows from cold logic that they
cannot define measures derived from net earnings like EBITDA.
However, virtually all private sector business firms compute net earnings and
some measures derived from net earnings like eps, EBITDA, and P/E ratios.
It's doubtful whether net earnings for two different companies or even one
company over two time intervals are really comparable.
But all that does not matter when it comes to adjudicating an insider trading
case in court even if the accused may not really be an insider.
I'm reminded of why billionaire Martha Stewart went to prison because she
acted on inside information about a company --- inside information passed on to
her by the CEO of that company. It doesn't matter that the amount of loss saved
by the inside tip involved is insignificant compared to her billion-dollar
portfolio. Evidence in the case made it clear that she did exploit other
investors by acting on the inside tip no matter how insignificant the value of
that tip to her. She was hauled off the clink in handcuffs and was released in
less than five months. But her good name and reputation were tarnished forever
---
http://en.wikipedia.org/wiki/Martha_Stewart
Flamboyant billionaire Mark Cuban is now in trial for very similar reasons,
although the alleged insider tip and the value of the alleged tip is more
obscure than in the Martha Stewart case. Like in the case of Martha Stewart the
loss avoided is pocket change ($750,000) relative to Cuban's billion-dollar
portfolio.
What Cuban failed to mention is that net earnings and EBITDA cannot be
defined since the FASB elected to give the balance sheet priority over the
income statement in financial reporting --- "The Asset-Liability Approach: Primacy does not mean Priority,"
by Robert Bloomfield, FASRI Financial Accounting Standards Research
Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
Be that as it may, net earnings and EBITDA are all-important because
investors change their portfolios based on net earnings and its derivatives more
than anything in the balance sheet.
"Accounting Alchemy," by Robert E. Verrecchia, Accounting Horizons,
September 2013, pp. 603-618.
Verrecchia alleges that it's not that managers have a functional fixation for
earnings metrics as it is that they believe that other managers and investors
are so fixated with earnings that it because of monumental importance not
because it is inherently a great metric but because they believe deeply that the
market itself makes this index of vital importance.
. . .
In summary, my thesis is that managers project that
others are fixated on earnings—independent of any evidence in support
of, or contrary to, this phenomenon. This leads to managers resisting the
inclusion in earnings items that fail to enhance performance, such as the
amortization of Goodwill, or measures that make future performance more
volatile, such as those based on fair value. In the absence of acknowledging
PEF and attempting to grapple with it, I continue to see confrontations over
accounting regulation along the lines of recent debates about fair value
accounting, in addition to further impediments along the path to greater
transparency in financial statements.
It's a bit like requiring calculus for undergraduate accounting courses.
Calculus probably is not essential in any undergraduate accounting course in the
curriculum, but faculty are fixated that the best accounting majors are the ones
do well in calculus. Similarly, investors change their portfolios based on
earnings, eps, EBITDA, and P/E ratios when in fact those metrics are not defined
and may have a lot of misleading noise and secret manipulations.
One virtue of the jury system is that it invites
the average person's common sense as a check on the excesses of law
enforcers. A nine-person Texas jury exercised precisely that judgment
Wednesday when it cleared Mark Cuban of insider trading.
The Securities and Exchange Commission had pursued
the case for nearly five years against the flamboyant owner of the NBA's
Dallas Mavericks. The agency charged that Mr. Cuban had sold 600,000 shares
of Mamma.com DPSI -3.17% after he received inside information in a
conversation with the Internet search company's CEO. The company's shares
fell after Mr. Cuban sold, but Mr. Cuban testified that he had many reasons
to sell and the agency had little evidence beyond the timing of the trade.
Selling shares to avoid a loss is not a crime, at least not yet.
The victory is especially notable because in a
civil case the SEC does not have to prove guilt beyond a reasonable doubt,
or even by a "clear and convincing" standard, but merely by the
preponderance of evidence. The SEC is used to defendants rolling over in
such cases because a defense can take years and millions of dollars in legal
fees. Most people pay the fines and move on. But as a billionaire, Mr. Cuban
had the money to fight, not to mention a sense of outrage.
"I am glad this happened to me," Mr. Cuban said
after the verdict. "I am glad I am wealthy enough to stand up to the SEC."
Let's hope the SEC thinks twice before it brings a similarly flimsy case
against the next nonbillionaire.
Fair Value Accounting for Financial Instruments:
Does It Improve the Association between Bank Leverage and Credit Risk?
I preface this tidbit that I've been pretty negative (especially to Tom
Selling's posts in The Accounting Onion Blog) of fair value accounting
when unrealized fair values are comingled with legally recognized revenues. This
balance sheet priority over the income statement has pretty much destroyed FASB
and IASB ability to even define net income.
I support fair value reporting under a multi-column reporting format where
legally recognized revenues are segregated from unrealized fair value changes in
the derivation of net earnings. Hence I am not really critical of fair value
accounting if dual earnings measures are provided in the process.
On the AECM Tom Selling and Patricia Walters (and I suspect many others)
cling to a preference even when unrealized fair value changes are comingled with
legally recognized revenues in the calculations of net earning and its
derivatives like eps and P/E ratios in single-column reporting.
In the interest of academic integrity, however, I respect these opinions of
my AECM friends and am willing to point out empirical evidence that support
their positions and the positions of the IASB and FASB regarding fair value
accounting for financial instruments.
One such important piece of empirical evidence is provided in the following
citation:
Title: "Fair Value Accounting for Financial Instruments: Does It Improve
the Association between Bank Leverage and Credit Risk?"
Authors: Elizabeth Blankespoor, Thomas J. Linsmeier, Kathy R. Petroni and
Catherine Shakespeare
Source: The Accounting Review, July 2013, pp. 1143-1178
http://aaajournals.org/doi/full/10.2308/accr-50419
Abstract
Many have argued that financial statements created under an accounting model
that measures financial instruments at fair value would not fairly represent
a bank's business model. In this study we examine whether financial
statements using fair values for financial instruments better describe
banks' credit risk than less fair-value-based financial statements.
Specifically, we assess the extent to which various leverage ratios, which
are calculated using financial instruments measured along a fair value
continuum, are associated with various measures of credit risk. Our leverage
ratios include financial instruments measured at (1) fair value; (2) U.S.
GAAP mixed-attribute values; and (3) Tier 1 regulatory capital values. The
credit risk measures we consider are bond yield spreads and future bank
failure. We find that leverage measured using the fair values of financial
instruments explains significantly more variation in bond yield spreads and
bank failure than the other less fair-value-based leverage ratios in both
univariate and multivariate analyses. We also find that the fair value of
loans and deposits appear to be the primary sources of incremental
explanatory power.
Jensen Caution
As is common in nearly all accountics science studies the analysis is limited to
only association and not causation which, in this particular paper, is dutifully
pointed out by these veteran accoutics scientists.
The authors also dutifully point out arguments for and against fair value
accounting in credit risk analysis
Several parties currently support fair value
accounting. In a 2008 joint letter to the Securities and Exchange
Commission, the Chartered Financial Analyst Institute Centre for Financial
Market Integrity (CFA Institute), the Center for Audit Quality, the Consumer
Federation of America, and the Council of Institutional Investors support
fair value accounting because they believe it provides more accurate,
timely, and comparable information to investors than amounts that would be
reported under other alternative accounting approaches (CFA 2008a). In a
survey of CFA Institute members worldwide more than 75 percent of the 2,006
respondents indicate that they believe that fair value requirements improve
transparency and contribute to investor understanding of financial
institutions' risk and that full fair value accounting for financial
instruments will improve market integrity (CFA 2008b). Presumably if fair
values better describe bank risk, then fair value accounting may mitigate
rather than exacerbate financial crises (Financial Crisis Advisory Group
2009; Bleck and Liu 2007). In a Financial Times editorial, Lloyd Blankfein,
chairman and chief executive officer of Goldman Sachs, argues that “an
institution's assets must be valued at fair market value—the price at which
buyers and sellers transact—not at the (frequently irrelevant) historic
value” (Blankfein 2009).
There are five basic arguments against fair value
accounting as discussed in more detail in ABA (2006, 2009). First, fair
value accounting for assets that are instruments held for collection does
not faithfully represent a bank's financial condition. As discussed above,
changes in fair value of these instruments may be transitory. Consistent
with this view, Sheila Bair, then chairman of the Federal Deposit Insurance
Corporation, has argued that there is no relevance in using fair value
accounting for loans that are held to maturity (N'Diaye 2009).
Second, fair value accounting for liabilities that
are instruments held for payment is not appropriate for two reasons. First,
there are few opportunities for firms to settle liabilities before maturity
at other than the principal amount. Debt markets are frequently very
illiquid and contractual restrictions often preclude the transfer of
financial liabilities. These limited opportunities to transfer liabilities
before payment suggest that fair values of financial liabilities are less
relevant for decision making than fair values of financial assets because
the fair values of liabilities are less likely to be realized.6 Second, many
argue that it is counterintuitive that under fair value accounting for
fixed-rate debt, an increase in credit risk results in a write-down of the
value of the debt and an associated gain in net income.7
The third argument against fair value is that the
financing of a bank's operations links loans issued with the deposits
received and, therefore, in order to best capture the economics of the
banking model, loans and deposits need to be similarly measured. From this
perspective, because it is difficult to estimate the fair values of
deposits, especially non-term deposits, both loans and deposits should be
recognized at amortized cost. The difference between fair values and
historical cost of non-term deposits, such as demand and savings deposits
that bear low rates of interest, arises because a significant proportion of
these funds can be expected to remain on deposit for long periods of time,
allowing the bank to invest the deposits in higher yielding and longer
duration loans. As shown by Flannery and James (1984), because these
non-term deposits are fairly insensitive to interest rate changes, they
serve as a type of hedge against the effect that changes in interest rates
have on loans. Specifically, if interest rates rise, then the fair value of
fixed-rate loans held by the bank will fall, but this loss will be offset by
a rise in the fair value of the deposits associated with the increasing
benefits of low- or no-cost financing in an increasing interest rate
environment. If the stable source of funding provided by depositors is not
recognized while the fair value of loans is recognized, then the bank will
appear more volatile than it truly is.8
The fourth opposing argument is that when fair
values must be estimated, the valuation process can be significantly complex
and the resulting numbers sufficiently unreliable to cause the benefits not
to outweigh the costs. The fifth argument is that because fair value
accounting contributes to the procyclicality of the financial system, it is
one of the root causes of the recent financial crisis, creating significant
harm to the economy.
Our examination of the ability of fair values
versus more historical-cost-based measures (GAAP and Tier 1 capital) to
reflect a bank's credit risk directly addresses the first three opposing
arguments. Our paper, however, does not contribute to understanding the
costs, complexity, and reliability of fair value accounting or whether fair
values contribute to procyclicality. We believe procyclicality is an
interesting issue and acknowledge that the role of fair values in the recent
financial crisis is still not fully understood.
And the authors dutifully conclude the following on the last page of the
article:
The results of our study should not be used in
isolation to suggest that all financial instruments should be recognized and
measured at fair value. Our study only speaks to the ability of fair values
to reflect credit risks of banks. There are other costs and benefits
associated with a movement to fair values that we do not consider. Most
notably, our study does not address the potential implications that fair
value accounting has on procyclicality or contracting. In addition, we do
not demonstrate that decision makers are using the fair values to determine
credit risk; rather, we only demonstrate that fair values are most highly
associated with the credit risk determinations. Last, it is worthwhile to
note that we measure fair values based on the fair values currently being
recognized or disclosed by banks. The FASB and the IASB have recently issued
standards that define fair values more precisely (see footnote 5 for
details) and, to the extent that this new definition affects the ultimate
fair values recognized or disclosed under future expected revisions to the
classification and measurement guidance for financial instruments, our
results may not generalize.
Added Jensen Comment
This paper does not provide any information on how the IASB is currently butting
heads with the EU Parliament (at the behest of the powerful EU banking lobby)
regarding different stances on fair value accounting by EU banks.
I am scanning quite a few Accounting Review articles these days in search of
types of databases and underlying assumptions. In the process I stumbled upon
these rather interesting quotations relative to recent posts in The Accounting
Onion blog by Tom Selling.
The following quotations appear at the beginning of the following article:
"Toward a Positive Theory of Disclosure Regulation: In Search of Institutional
Foundations," by Jeremy Bertomeu and Edwige Cheynel, The Accounting Review
May 2013, Page 789:
Quotation One The accounting academic world also seems to attract
those of a more cautious predisposition. Certainly, we are witnessing the
effects of some quite strong intellectual biases and prejudices that are
consistent with this. Keep away from politics, even the political science of
standard-setting, seems to be one. Anthony G. Hopwood (1944–2010)presidential address to
the American Accounting Association (2007, 1372)
Quotation Two If I have any criticism of FASB, and I would note
that I do, it is that they seem to have a political tin ear and to make a
lot of powerful enemies.
Rep. John Dingell (2000)
Incidentally, the abstract of the Bertomeu and Cheynel article:
This article develops a theory of standard-setting
in which accounting standards emerge endogenously from an institutional
bargaining process. It provides a unified framework with investment and
voluntary disclosure to examine the links between regulatory institutions
and accounting choice. We show that disclosure rules tend to be more
comprehensive when controlled by a self-regulated professional organization
than when they are under the direct oversight of elected politicians. These
institutions may not implement standards desirable to diversified investors
and, when voluntary disclosures are possible, allowing choice between
competing standards increases market value over a single uniform standard.
Several new testable hypotheses are also offered to explain differences in
accounting regulations.
From the CFO Journal's Morning Ledger on October 18, 2013
The messy jobs picture is gumming up the Fed’s tapering plans
Not only did the
disappointing September jobs report reassure investors that the Fed will
stick to its bond-buying program at its meeting next week, it likely raised
the bar for action at its mid-December meeting,
the WSJ’s Sarah
Portlock and Jonathan House write.
Jobs data this month and next will be skewed because
of the furloughs of government workers during the shutdown,
the NYT’s Nelson D. Schwartz notes.
So it won’t be until December that the monthly jobs
survey will be free of the shutdown static, and that report doesn’t come out
until early January. “We’re all going to have to calm down and be very
patient,” said Julia Coronado, chief economist for North America at BNP
Paribas. “It’s going to take a few months to get a good read after all the
trauma.”
Despite the uncertainty, there are some glimmers of hope. Employers added
only 148,000 jobs in September—well below the pace of gains in the first
half of the year. But the unemployment rate ticked down a notch to 7.2%—and
that was due to more people finding work rather than leaving the labor
force, the Journal notes.
Meanwhile, consumers still seem to be splashing out on big-ticket items.
U.S. shipments of home appliances are growing, helping double third-quarter
profit at Whirlpool,
the WSJ’s James R. Hagerty and Ben Casselman report.
Harley-Davidson and
Polaris Industries
also reported sharp increases in Q3 profit and sales. They’re benefiting
from the fact that employees at a lot of high-tech and energy companies, as
well as some farmers, have been doing pretty well lately. And a surging
stock market and recovering house prices have put a spring in the step of
well-heeled Americans.
Jensen Comment
If strong employment remains a condition for tapering then the USA may never
taper. Unemployment is caused by many factors including low-skilled workers,
robotics displacements, illegal immigration, the $2-trillion underground economy
where "unemployed" workers work for cash, and non-workers who prefer welfare and
food stamps to work of any kind."
From the CFO Journal's Morning Ledger on October 18, 2013
Startups are set too $1 million in
equity capital from ordinary investors
Slava Rubin, CEO of crowdfunding site
Indiegogo,
tells the WSJ that
the rules could “create a whole new wave of users for online fundraisers.”
The proposal, spurred by the JOBS Act, marks a shift for the agency’s role
of mandating that companies adhere to an extensive disclosure regimen before
selling shares publicly, the Journal notes. Companies using crowdfunding
still will face oversight but will have the chance to pitch their business
ideas to investors based on relatively limited disclosure. “We want this
market to thrive, in a safe manner for investors,” SEC Chairman
reap big benefits from new rules on “crowdfunding.”
The SEC voted to propose rules that would let startups and small businesses
raise up
Mary Jo White said.
Crowdfunding companies wouldn’t have to file the typical annual 10-K and
quarterly 10-Q reports that are expected of public companies,
CFOJ’s Emily Chasan reports.
But the proposed disclosures and smaller reports for crowdfunding investors
could be a watershed moment for private companies, which haven’t had to
disclose much information to investors in the past. To take advantage of
crowdfunding, companies would have to regularly file certain information
with U.S. markets regulators, provide it to their investors and the platform
or “online portal” facilitating their offering, according to the proposal.
“It’s the first time that the commission has proposed some ongoing reporting
requirement that’s something less than SEC reporting,” Anna Pinedo, a
securities attorney at law firm Morrison & Foerster, tells Chasan. “Some
startup companies might be taken a little aback by the fact that they’ll
have this annual filing burden, but from an investor-protection perspective
there has to be some sort of sense of transparency for those investors who
participate in this.”
From the CFO Journal's Morning Ledger on October 18, 2013
HSBC unit hit with record $2.46 billion judgement A unit of British bank HSBC Holdings
was hit with a record $2.46 billion judgementin a U.S. securities class action
lawsuit against a business formerly known as Household International,
Reuters reported. The suit was filed in 2002 and alleged Household
International, its chief executive, chief financial officer and head of
consumer lending made false and misleading statements that inflated the
company’s share price.
SAC
agrees to pay $1 billion in insider-trading case. Hedge-fund group
SAC Capital Advisors
agreed in principle to pay a penalty exceeding $1
billion in a potential criminal settlement
with federal prosecutors that would be the largest ever for an
insider-trading case, the WSJ reported, citing people familiar with the
matter. The payment, is expected to be roughly $1.2 billion to $1.4 billion,
bringing the total SAC would pay the U.S. to almost $2 billion following a
penalty from the SEC earlier this year. SAC, run by Steven A. Cohen, didn’t
admit or deny wrongdoing.
Barclays, Citigroup, RBS
forex messages probed An instant-message group involving senior traders at banks
including Barclays, Citigroup and Royal Bank of Scotland is being
scrutinized by regulators over
the
potential manipulation of the foreign-exchange market,
Bloomberg reported, citing four people with knowledge of the probe. Over a
period of at least three years, the dealers exchanged messages through
Bloomberg terminals outlining details of their positions and client orders
and made trades before key benchmarks were set.
WSJ ordered to not divulge
Libor names. UK prosecutors obtained a court order
prohibiting The Wall Street Journalfrom publishing names of individuals
the government planned to implicate in a criminal-fraud case alleging a
scheme to manipulate benchmark interest rates. The order, which applies to
publication in England and Wales, also demanded that the Journal remove “any
existing Internet publication” divulging the details. It threatened the
newspaper’s European banking editor and “any third party” with penalties
including a fine, imprisonment and asset seizure.
Jensen Comment
If you believe that some bankers will go to jail for LIBOR cheating then
I've got a some ocean frontage Arizona for sale. White collar crime pays
even if you know you're going to be caught.
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
Read this as meaning Amazon will not start collecting sales taxes for Wisconsin
(as the 14th state for which such sales taxes will be added to prices)
Illinois Supreme Court Strikes Down Effort to have Amazon will start
collecting sales taxes for Illinois
On Friday, the Supreme Court of Illinois held that
Illinois’s click-through nexus law is expressly preempted by the federal
Internet Tax Freedom Act (ITFA), P.L. 105-277, which prohibits states from
imposing discriminatory taxes on electronic commerce (Performance Marketing
Ass’n v. Hamer, No. 114496 (Ill. 10/18/13)).
The Illinois law (35 Ill. Comp. Stat. 105/2)
expanded the definition of retailers obligated to collect sales tax to those
having a contract with a person located in Illinois who refers potential
customers through a link on the Illinois person’s website (a so-called
click-through connection). According to the state Supreme Court,
out-of-state internet retailers are required to collect use tax if they have
a contract with a person in Illinois who displays a link on his or her
website connecting an internet user to that retailer’s website. This is
referred to as performance marketing.
Lower-court proceedings
In May 2012, the Circuit Court for Cook County,
Ill., issued an order declaring the click-through nexus law unconstitutional
because it violated the Commerce Clause’s requirement for substantial nexus
and it was preempted by the ITFA (Performance Marketing Ass’n v. Hamer, No.
2011 CH 26333 (Ill. Cir. Ct. Cook Cty. 5/7/12)). Because the case involved
the law’s constitutionality, the court’s ruling was directly appealable to
the Illinois Supreme Court under Illinois Supreme Court Rule 302(a), which
the Illinois Department of Revenue did.
Performance Marketing Association (PMA), the
plaintiff, is a national trade association whose members are in the
performance marketing business. (A similar organization, Direct Marketing
Association, was the plaintiff in a case challenging Colorado’s Amazon law.
The Tenth Circuit recently reversed a lower-court ruling that declared the
law unconstitutional. See “Tenth Circuit Throws Out Decision Striking Down
Colorado’s Amazon Law.”)
The Illinois Supreme Court’s opinion
According to the court, Illinois amended its use
tax law, which originally required any retailer doing business in the state
to collect use tax from its customers, to also require a retailer that has a
contract with a person located in Illinois who displays a link on his or her
website that connects an internet user to the retailer’s website to collect
use tax on those sales.
As the court noted, these types of marketing
arrangements, in which advertisers are compensated based on the success of
the marketing campaign, are not limited to the internet—they also exist in
print and broadcast media. The court agreed with PMA that this new law
imposed a tax that discriminated against electronic commerce for purposes of
the ITFA because it did not impose a similar obligation on print and
broadcast advertisements. Therefore, the Illinois Supreme Court affirmed the
lower court’s grant of summary judgment in PMA’s favor on the grounds that
the state law was preempted by the federal IFTA under the Supremacy Clause
of the U.S. Constitution (under which a federal statute preempts state law
in cases where there is a conflict between the two). The court did not reach
the Commerce Clause issue.
The dissent
Justice Lloyd Karmeier raised the lone dissent to
the 6–1 opinion, noting that many states are wrestling with the issues
raised by the rise of internet commerce: the inability to collect use tax
from consumers efficiently and the competitive advantage out-of-state
retailers have because many consumers purchase goods from them knowing they
will not pay any sales tax and not caring or realizing they owe use tax.
Continued in article
Read this as meaning Amazon will start collecting sales taxes for Wisconsin
(as the 14th state for which such sales taxes will be added to prices)
"Wisconsin adds sales tax to Amazon.com shopping cart," by Patrick
Temple-West, by Reuters via the Chicago Tribune, October 17, 2013 ---
http://www.chicagotribune.com/news/sns-rt-us-usa-tax-wisconsin-20131017,0,2328357.story
Jensen Comment
Even if Amazon starts collecting sales tax for the USA, there will be no sales
tax collections for New Hampshire residents since New Hampshie has no sales tax
and is unlikely to ever get one in the face of having 400 legislators who are
not easily swayed for more taxation).
What if I buy a gift billed to me in New Hampshire for our daughter Maria and
have it shipped to her home in Wisconsin.?
My guess is that Amazon will charge me sales tax on that gift but only if Amazon
ships it to Wisconsin. The gift could be mailed to our home in New Hampshire tax
free, but I would then have to incur some type of charge getting it to
Wisconsin.
My devious mind is now working.
Maria has a Kindle. I could buy her another cheap Kindle and load it up with 100
expensive books from Amazon before sending the new reader on to Wisconsin via
UPS. That way I would not have to pay sales tax on 100 new books that
cover her Christmas presents tax free for the next 50 years. (Just kidding of
course.)
This begs the question of sales taxes on services.
Amazon now competes with Netflix on streaming video for a monthly fee. If
Wisconsin wants to tax such a video streaming service it will be very difficult,
because I can subscribe to NetFlix or Amazon streaming video in New Hampshire
and watch streaming video in any other state in the USA. What's to prevent me
from letting our daughter Maria use our tax-free streaming video reader? Perhaps
this is one reason that Wisconsin probably will not tax streaming video and
similar services that can be based in tax-free states of the USA.
By the way, I have an HDMI adapter cable for my Kindle Fire and prefer
watching streaming video (via NetFlix) video on the Kindle better than from my
laptop connected to our living room television set. On occasion for various
reasons my laptop will display an annoying popup that never appears in a Kindle
streaming video on our TV screen.
In my local Wal-Mart grandmothers and grandfathers now cashier nearly all the
customers. They're great except that they are literally standing in the way of
opportunities for younger generations.
Two studies released today make some different
calculations to determine the total cost to American taxpayers of a large,
low-wage workforce. It comes to an average of $7 billion a year. That’s the
amount of annual public assistance families of fast-food workers received
between 2007 and 2011, according to a new report written by economist Sylvia
Allegretto and others, sponsored by the University of California at
Berkeley’s Labor Center and the University of Illinois at Urbana-Champaign,
and funded by Fast Food Forward, the group that helped organize the summer’s
labor strikes. The authors used publicly available data.
The report calls out the fast-food industry for its
low wages, citing a median salary of $8.69 an hour and a history of offering
part-time work. That might have been fine when those behind the counter were
mostly teenagers living at home. These days, though, 68 percent of fast-food
workers are single or married adults who aren’t in school—and 26 percent are
raising children.
Overall, 52 percent of families of fast-food
workers are enrolled in one or more public assistance programs, compared
with 25 percent of the workforce as a whole. Medicaid and the Children’s
Health Insurance Program accounted for nearly $4 billion of the $7 billion
figure. The Earned Income Tax Credit, food stamps, and the Temporary
Assistance for Needy Families program accounted for the rest. ”Public
benefits receipt is the rule, rather than the exception, for this
workforce,” the authors write.
Continued in the article
Jensen Comment
What seems to be the case is that fast-food jobs are picking up the slack left
by a down economy, the destruction of senior retirement savings with low
interest rate policies of the Federal Reserve, and failure of the public and
private sectors to train unskilled workers for the changing economy of factory
production and professional services (like plumbing and information technology).
Fast food workers used to be transitory on the ladder to preparing for higher
earning careers.
Now Grandmother is pushing out her grandchild for a McJob job because
virtually zero interest on her retirement savings has forced her to go back to
work at age 68.
I'm changing my mind about the minimum wage, but my support is conditioned
upon a massive effort in the public and private sectors to train younger people
for careers in the changed economy. Germany seems to have the model that I turn
to. Germany makes university education highly competitive while, at the same
time, affording genuine opportunities for high-paying careers in the skilled
trades. My wife's nephew works in an aluminum factory in Germany. His week ends
and nights are filled with studying and training for career advancement within
his factory. In the process he's become particularly skilled in computers and
automation and now has career opportunities outside his factory.
I'm not as down on Wal-Mart as most folks. Among the fringe benefits as
Wal-Mart are free opportunities to get more training and education advancements
that, if fully utilized, will help workers escape from Wal-Mart. The problem
among most Wal-Mart workers is lack of motivation to take advantages of the free
opportunities to escape Wal-Mart. The drug culture is real and many of our
unskilled workers are held back by their addictions and full-bodied tattoos.
Many of the Wal-Mart workers who are single parents of young children that, like
it or not, are a physical drain on ambitions for career advancement.
And the excuses for making lifelong careers as cashiers and inventory movers
go on and on --- what a waste that in the process closes down opportunities to
move on and make new opportunities for younger cashiers and inventory handlers.
In my local Wal-Mart grandmothers and grandfathers now cashier nearly all the
customers. They're great except that they are literally standing in the way of
opportunities for younger generations.
Quantitative easing (QE) is an unconventional
monetary policy used by central banks to prevent the money supply falling
when standard monetary policy has become ineffective.[1] [2][3] A central
bank implements quantitative easing by buying specified amounts of financial
assets from commercial banks and other private institutions, thus increasing
the monetary base.[4] This is distinguished from the more usual policy of
buying or selling government bonds in order to keep market interest rates at
a specified target value.[5][6][7][8]
Expansionary monetary policy typically involves the
central bank buying short-term government bonds in order to lower short-term
market interest rates.[9][10][11][12] However, when short-term interest
rates are at or close to zero, normal monetary policy can no longer lower
interest rates.[13] Quantitative easing may then be used by monetary
authorities to further stimulate the economy by purchasing assets of longer
maturity than short-term government bonds, and thereby lowering longer-term
interest rates further out on the yield curve.[14][15] Quantitative easing
raises the prices of the financial assets bought, which lowers their
yield.[16]
Quantitative easing can be used to help ensure that
inflation does not fall below target.[8] Risks include the policy being more
effective than intended in acting against deflation (leading to higher
inflation in the longer term, due to increased money supply),[17] or not
being effective enough if banks do not lend out the additional reserves.[18]
According to the IMF and various other economists, quantitative easing
undertaken since the global financial crisis has mitigated some of the
adverse effects of the crisis.[19][20][21]
BRIC countries have criticized the QE
carried out by the central banks of developed nations. They share the
argument that such actions amount to protectionism and competitive
devaluation. As net exporters whose currencies are partially pegged to
the dollar, they protest that QE causes inflation to rise in their
countries and penalizes their industries.
The Federal reserve even admits on its weekly
balance sheet analysis, “Since the beginning of the financial market turmoil
in August 2007, the Federal Reserve’s balance sheet has grown in size and
has changed in composition. Total assets of the Federal Reserve have
increased significantly from $869 billion on August 8, 2007, to well over $2
trillion.” That is an old figure because it is now over $3.75 trillion.
The full figure as of October 9, 2013 was $3.7586
trillion. The $85 billion per month plus the rollover maturities is adding
to this each and every month. At some point this will be real money to
someone. By the way, of that $3.7586 trillion in assets some $3.4895
trillion are listed as securities held.
Question for Your Students
What is meant by this phrase? "At
some point this will be real money to someone"
Jensen Comment
Firstly students should understand how money is created in the USA. The money
supply is not increased by the printing of money needed fro liquidity
preferences of the populace. When Ole Knutson chooses to write a check and
withdraw $500 a checking account money is not created and the money supply is
not changed. Ole has simply expressed a liquidity preference.
Money was created, however, if Ole's checking account was increased by a loan
from his bank for $500. That money did not exist in the nation's money supply
until the bank made the loan. In the USA money is created by commercial bank
loans.
Money was not created, however, if Ole increased his checking account balance
by borrowing from his friend Sven. That was simply a transfer of funds in the
USA money supply from Sven to Ole.
When the USA Government sells a treasury bond to the Fed (a central
bank) it does not directly create money and increase the USA Money Supply.
Quantitative easing has been nicknamed "printing
money" by some members of the media,[89][90][91] central bankers,[92] and
financial analysts.[93][94] However, central banks state that the use of the
newly created money is different in QE. With QE, the newly created money is
used to buy government bonds or other financial assets, whereas the term
printing money usually implies that the newly minted money is used to
directly finance government deficits or pay off government debt (also known
as monetizing the government debt).[89]
It is also noted[95] that the increase in the money
base produced by QE does not necessarily increase the aggregated money
supply because banks can keep cash provided by central banks in their
liquidity reserves. In other words, QE can only change the structure of
the money supply, decreasing the share of money that has been already
"printed" by fractional reserve banks; this is a way to tie existing bank
accounts and deposits back to real cash without increasing the amount of
money.
Central banks in most developed nations (e.g., the
United Kingdom, the United States, Japan, and the EU) are prohibited from
buying government debt directly from the government and must instead buy it
from the secondary market.[88][96] This two-step process, where the
government sells bonds to private entities which the central bank then buys,
has been called "monetizing the debt" by many analysts.[88] The
distinguishing characteristic between QE and monetizing debt is that with
QE, the central bank is creating money to stimulate the economy, not to
finance government spending. Also, the central bank has the stated intention
of reversing the QE when the economy has recovered (by selling the
government bonds and other financial assets back into the market).[89] The
only effective way to determine whether a central bank has monetized debt is
to compare its performance relative to its stated objectives. Many central
banks have adopted an inflation target. It is likely that a central bank is
monetizing the debt if it continues to buy government debt when inflation is
above target, and the government has problems with debt financing.[88]
Ben Bernanke remarked in 2002 that the US
government had a technology called the printing press (or, today, its
electronic equivalent), so that if rates reached zero and deflation
threatened, the government could always act to ensure deflation was
prevented. He said, however, that the government would not print money and
distribute it "willy nilly" but would rather focus its efforts in certain
areas (e.g., buying federal agency debt securities and mortgage-backed
securities).[97][98] According to economist Robert McTeer, former president
of the Federal Reserve Bank of Dallas, there is nothing wrong with printing
money during a recession, and quantitative easing is different from
traditional monetary policy "only in its magnitude and pre-announcement of
amount and timing".[99][100] Stephen Hester, Chief Executive Officer of the
RBS Group, said in an interview, "What the Bank of England does in
quantitative easing is it prints money to buy government debt, and so what
has happened is the government has run a huge deficit over the past three
years, but instead of having to find other people to lend it that money, the
Bank of England has printed money to pay for the government deficit. If that
QE hadn't happened then the government would have needed to find real people
to buy its debt. So the Quantitative Easing has enabled governments, this
government, to run a big budget deficit without killing the economy because
the Bank of England has financed it. Now you can't do that for long because
people get wise to it and it causes inflation and so on, but that's what it
has done: money has been printed to fund the deficit." [101]
Richard W. Fisher, president of the Federal Reserve
Bank of Dallas, warned in 2010 that a potential risk of QE is "the risk of
being perceived as embarking on the slippery slope of debt monetization.
We know that once a central bank is perceived as targeting government debt
yields at a time of persistent budget deficits, concern about debt
monetization quickly arises." Later in the same speech, he stated that
the Fed is monetizing the government debt. "The math of this new exercise is
readily transparent: The Federal Reserve will buy $110 billion a month in
Treasuries, an amount that, annualized, represents the projected deficit of
the federal government for next year. For the next eight months, the
nation's central bank will be monetizing the federal debt."[102]
Jensen Comment
I hazard a guess that nearly all the representatives and senators who vote on
whether or not to raise the USA Government's debt ceiling really understand how
persistent budget can lead to monetization of the debt and, thereby, make it
"real money."
Can you explain all this to your students?
Tapering means cutting back on Quantitative Easing which, in turn, will
increase interest rates on U.S. Treasuries and most other debt instruments in
the economy, including interest people earn on Certificates of Deposits
From the CFO Journal's Morning Ledger on October 17, 2013
A
probable long delay for the taper The direct economic effects of the shutdown will likely be small,
shaving about 0.3 of a percentage point off fourth-quarter GDP growth, with
much of the losses regained in the first quarter, estimates Joel Prakken of
Macroeconomic Advisers.
Harder to know is how lost confidence has affected the economy,
and to what degree its effects are temporary, Heard on
the Street writes. Economists won’t have any real sense of that until
December, when November data start filtering in. But there is a crucial
consideration: With the budget deal funding federal agencies only through
Jan. 15, and raising the debt ceiling only
through Feb. 7, another battle could be brewing. The
Fed will probably want to avoid doing anything to discomfit markets until
the risk of another showdown has passed. That pushes the likely timing for
starting the tapering process to the Fed’s March meeting.
Question
What are business student certificates and how do they differ from college
degrees?
Hint: Degrees generally take longer but the material itself can be a tough or
tougher than material in degree curriculum courses.
Jensen Comment
I think that in the distant future there will no longer be college degrees. An
academic transcript will become a more complex listing of 20 or more
certificates of competency-based assessment.
Jensen Comment
Since the HBS is the poster child for case method teaching this either spells
two things for pedagogy at the HBS. It may be that if online courses are
relatively small, the distance education pedagogy can accommodate the case
method as effectively as in a classroom of roughly 90 students (common on campus
at the HBS). However, it could also mean that the the HBS online program will be
a departure for its beloved case method. It's probably a combination of both
changes across a variety of courses.
It should be noted that the HBS venture is intended to earn "profits" unlike
the MOOC programs at prestigious universities, including Harvard's MOOC courses.
To be a MOOC the course has to be free by definition. However, fees may be
charged to students who also want transcript credits.
Jensen Question
Will this new graduate degree from a law school meet the relatively 150-hour
requirement (for taking the CPA examination) in New York State?
In my opinion much will depend on the background of the MLS graduate. If that
graduate was a former accounting major with sufficient accounting credits then
maybe this will meet the 150-hour constraint in New York. I have my doubts
whether this would be possible in some more restrictive states like Texas that
protect accountancy programs with CPA State Board pit bulls.
I don't think the Stern School of Business offers any masters degrees other
than the MBA where I think it would be difficult to sit for the CPA examination
without additional courses in accounting (possibly undergraduate courses).
Hence, the NYU Law School Master of Tax program will not be competing with a
masters of accounting or a masters of tax program in the NYU Stern School.
Sometimes the Nobel committee seems to make a
partly political statement in choosing winners of the prize in economics.
Not this year. On Monday, the Royal Swedish Academy of Sciences awarded the
2013 Nobel to three deserving American economists: Eugene Fama and Lars
Peter Hansen at the University of Chicago and Robert Shiller of Yale
University. The prizes were based on the importance of their work, which
"laid the foundation for the current understanding of asset prices."
Mr. Fama's major contribution, notably with the
1965 paper "Random Walks in Stock Market Prices," has been to show that
stock markets are very efficient. The term "efficient" here does not mean
what it normally means in economics—namely, that benefits minus costs are
maximized. Instead, it means that prices of stocks rapidly incorporate
information that is publicly available.
That happens because markets are so competitive.
Prices now move on earnings news not just within seconds, but within
milliseconds—which is why you're already too late if you decide to buy Apple
AAPL +0.65% stock after hearing about an unexpectedly high earnings report.
There are quicker trigger fingers acting instantly on new information. But
even before supercomputers got into the game, markets were reacting very
efficiently.
One implication of market efficiency is that
trading rules, such as "buy when the price fell yesterday," don't work. The
insight has had big implications for large and small investors: Don't waste
your money on professional financial managers who actively try to pick
individual stocks.
One high-profile beneficiary of Mr. Fama's insight
was John Bogle, who started the Vanguard 500 Index Fund in the 1970s. His
idea was to have a fund indexed to the overall market and save the costs of
hiring experts to predict stock prices. He shared Mr. Fama's skepticism
about golden stock-pickers. The result is that over the past four decades
millions of investors who buy index funds from Vanguard and its competitors
have saved hundreds of billions of dollars by not paying for dubious
investment advice.
Mr. Fama, 74, is also skeptical of the word
"bubble," which suggests market inefficiency by letting stock prices rise
higher than justified by market fundamentals. In 2010, he told the New
Yorker magazine: "It's easy to say prices went down, it must have been a
bubble, after the fact. I think most bubbles are twenty-twenty hindsight. .
. . People are always saying that prices are too high. When they turn out to
be right, we anoint them. When they turn out to be wrong we ignore them."
In the Milton Friedman University of Chicago
tradition, Mr. Fama believes that free markets are better than government at
allocating resources. He strongly opposed the 2008 selective bailout of Wall
Street firms, arguing that, without it, financial markets would have sorted
themselves out within "a week or two."
Robert Shiller's contribution to our understanding
of asset prices has included this insight: that stock prices fluctuate more
than can be explained by fluctuations in dividends. The 67-year-old Mr.
Shiller's finding in the 1980s set off a revolution in finance. It is now
accepted that high prices relative to earnings signal low subsequent returns
and vice-versa. This means, as George Mason University economist Tyler Cowen
has noted, that (contra Mr. Fama) a very patient investor should be able to
beat the market by betting against short-term market movements. So, for
example, if the price has fallen more than can be explained by relatively
steady dividends, you should buy and hold.
Mr. Shiller's work has been particularly notable
for two reasons: his contribution to the Case-Shiller home price index,
which has been invaluable for those who want good data on home prices both
nationally and regionally; and his proposal that government pensions and
entitlements be "indexed to some indicator of taxpayer ability to pay, such
as GDP." Thus government payments for pensions and entitlements such as
Social Security and Medicare would be tethered to the relative health of the
nation's economy, and the government wouldn't, as it does now, continue to
spend itself ruinously into debt. Mr. Shiller's young students—given that
they're of the generation likely to be surrendering more and more of their
income to the government to support its payments—should consider building a
statue of him.
The third recipient of the Nobel economics prize,
Lars Peter Hansen, 60, earned it for the mathematical techniques he
developed that apply to stock prices and other economic models. Here's how
John H. Cochrane, a University of Chicago colleague of Mr. Hansen's, put it
to me in an interview: "Hansen managed to boil all the complex statistical
techniques used in understanding economic models to just taking averages.
His techniques allowed economists to study the economy one piece at a time,
and to focus on the robust, important predictions of a model without being
distracted by irrelevant sideshows."
For much of the last 25 years, most of the
investment management world has promoted the idea that individual
investors can't beat the market. To beat the market, stock pickers of
course have to discover mispricings in stocks, but the Nobel-acclaimed
Efficient Market Hypothesis (EMH) claims that
the market is a ruthless mechanism acting instantly to arbitrage away
any such opportunities, claiming that the current price of a stock is
always the most accurate estimate of its value (known as
"informational efficiency"). If this is true, what hope can there be for
motivated stock pickers, no matter how much they sweat and toil, vs.
low-cost index funds that simply mechanically track the market? As it
turns out, there's plenty!
The (absurd) rise of the Efficient
Market Hypothesis
First proposed in University of Chicago
professor Eugene Fama’s 1970 paper
Efficient Capital Markets: A Review of Theory and Empirical Work,
EMH has evolved into a concept that a stock price
reflects all available information in the market, making it impossible
to have an edge. There are no undervalued stocks, it is argued, because
there are smart security analysts who utilize all available information
to ensure unfailingly appropriate prices. Investors who seem to beat the
market year after year are just lucky.
However, despite still being widely taught in
business schools, it is increasingly clear that the efficient market
hypothesis is "one of the most remarkable errors in the history of
economic thought" (Shiller). As Warren Buffett famously quipped, "I'd be
a bum on the street with a tin cup if the market was always efficient."
Similarly, ex-Fidelity fund manager and
investment legend
Peter Lynch said in a 1995 interview with
Fortune magazine: “Efficient markets? That’s a bunch of junk, crazy
stuff.”
So what's so bogus about EMH?
Firstly, EMH is based on a set of absurd
assumptions about the behaviour of market participants that goes
something like this:
Investors can trade stocks freely in any
size, with no transaction costs;
Everyone has access to the same
information;
Investors always behave rationally;
All investors share the same goals and the
same understanding of intrinsic value.
All of these assumptions are clearly
nonsensical the more you think about them but, in particular, studies in
behavioural finance initiated by Kahneman, Tversky and Thaler has shown
that the premise of shared investor rationality is a seriously flawed
and misleading one.
Secondly, EMH makes predictions that do not
accord with the reality. Both the Tech Bubble and the Credit
Bubble/Crunch show that that the market is subject to fads, whims and
periods of irrational exuberance (and despair) which can not be
explained away as rational. Furthermore, contrary to the predictions of
EMH, there have been plenty of individuals who have managed to
outperform the market consistently over the decades.
Bob, et al,
I never cease to marvel at the powers of rationalization defenders of
sacred institutions can muster. The above characterization of EMH was
certainly not the version pedaled by its accounting disciples (notably
Bill Beaver) back in the late 60s and early 70s. An accounting research
industry was created based on a version of EMH that was decidedly more
certain that securities were "properly priced." [Why else do studies to
debunk the Briloff effect?].
Given the interpretation offered above,
"Information Content Studies" make no sense. The whole idea of this
methodology was that accounting data that correlated with prices implied
market participants found it useful for setting prices based on publicly
available data, which implied such prices were the ones that would exist
in an idealized world of perfectly informed investors. Thus, this data
met the test of being information and was to be preferred to other
"non-information" to which the market did not react.
But now we are told that this latest version of
EMH does not justify such sanguinity because "...the prices in the
market are mostly wrong...", thus prices are not an indicator of the
value of data, i.e., just because there is a price effect we still don't
know if that data is truly "information." Think of the millions and
millions of taxpayer dollars that have been wasted over the last forty
years subsidizing people to search for something that is indeterminate
given the methodology they are employing.
And for this the AAA awarded Seminal
Contributions. Jim Boatsman had an ingenious little paper in Abacus eons
ago titled, "Why Are There Tigers and Things," that cast serious doubts
on the whole enterprise of "testing" market efficiency. It addressed the
issue Carl Devine harped on about needing an independent definition of
"information." And this is related to the logical slight of hand EMH
required of surmising there is a way to know what the "true" price is
since we glibly talk about over and under and mis-priced securities.
But there is no way to know this, since
security prices are CREATED by the institution of the securities market.
There does not exist a natural process against which market performance
can be compared. "Market value," which is what a price is, is a value
established by the market. The market is all there is. To paraphrase
NC's current governor's favorite expression, "The price is what it is."
It isn't over or under or mis or proper or
anything else, other than what a particular institution created by us at
one moment in time determines it is. If we lived in a society in which
mob rule settled issues of justice, it would make little sense to argue
that someone the mob hung was "not guilty." Of course he was guilty,
because the mob hung him!!
In the great book Dear Mr. Buffett, Janet Tavakoli shows how
Warren Buffet learned value (fundamentals) investing while taking Benjamin
Graham's value investing course while earning a masters degree in economics
from Columbia University. Buffet also worked for Professor Graham.
The following book supposedly takes the Graham approach to a new level
(although I've not yet read the book). Certainly the book will be
controversial among the efficient markets proponents like Professors Fama
and French.
Given that its the Berkshire annual meeting
this weekend, now is as good a time to roll out these quotes from Warren
himself:
“To invest successfully, you need not
understand beta, efficient markets, modern portfolio theory, option
pricing or emerging markets. You may, in fact, be better off knowing
nothing of these. That, of course, is not the prevailing view at most
business schools, whose finance curriculum tends to be dominated by such
subjects. In our view, though, investment students need only two
well-taught courses
-How to Value a Business, and How to Think About Market Prices.”
Source: Chairman’s Letter, 1996
“The best thing that happens to us is when a
great company gets into temporary trouble…We want to buy them when
they’re on the operating table.”
Source: Businessweek, 1999
“None of this means, however, that a business
or stock is an intelligent purchase simply because it is unpopular; a
contrarian approach is just as foolish as a follow-the-crowd strategy.
What’s required is thinking rather than polling. Unfortunately, Bertrand
Russell’s observation about life in general applies with unusual force
in the financial world: “Most men would rather die than think. Many do.”
Source: Chairman’s Letter, 1990
“Over the long term, the stock market news will
be good. In the 20th century, the United States endured two world wars
and other traumatic and expensive military conflicts; the Depression; a
dozen or so recessions and financial panics; oil shocks; a flu epidemic;
and the resignation of a disgraced president. Yet the Dow rose from 66
to 11,497.”
Source: The New York Times, October 16, 2008
“The line separating investment and
speculation, which is never bright and clear, becomes blurred still
further when most market participants have recently enjoyed triumphs.
Nothing sedates rationality like large doses of effortless money. After
a heady experience of that kind, normally sensible people drift into
behavior akin to that of Cinderella at the ball. They know that
overstaying the festivities ¾ that is, continuing to speculate in
companies that have gigantic valuations relative to the cash they are
likely to generate in the future ¾ will eventually bring on pumpkins and
mice. But they nevertheless hate to miss a single minute of what is one
helluva party. Therefore, the giddy participants all plan to leave just
seconds before midnight. There’s a problem, though: They are dancing in
a room in which the clocks have no hands.”
Source: Letter to shareholders, 2000
“You don’t need to be a rocket scientist.
Investing is not a game where the guy with the 160 IQ beats the guy with
130 IQ.”
Source: Warren Buffet Speaks, via msnbc.msn
Fundamentals Approach to Valuing a Business
In the great book Dear Mr. Buffett, Janet Tavakoli shows how
Warren Buffet learned value (fundamentals) investing while taking Benjamin
Graham's value investing course while earning a masters degree in economics
from Columbia University. Buffet also worked for Professor Graham.
The following book supposedly takes the Graham approach to a new level
(although I've not yet read the book). Certainly the book will be
controversial among the efficient markets proponents like Professors Fama
and French.
Purportedly a Great, Great Book on Value Investing From Simoleon Sense, November 16, 2009 ---
http://www.simoleonsense.com/
OMG Did I Die & Go to heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past
5 Years!!
Listen To This Interview!
I have a confession, I might have read the best
value investing book published in the past 5 years!
The book is called
Applied Value Investing By Joseph Calandro Jr.
In the book Mr. Calandro applies the tenets of value investing via
(real) case studies. Buffett, was once asked how he would teach a class
on security analysis, he replied, “case studies”. Unlike other books
which are theoretical this book provides you with the actual steps for
valuing businesses.
Without a doubt, this book ranks amongst the
best value investing books (with SA, Margin of Safety, Buffett’s letters
to corporate America, and Greenwald’s book) & you dont have to take my
word for it. Seth Klarman, Mario Gabelli and many top investors have
given the book a plug!
Purportedly a Great, Great Book on Value Investing From Simoleon Sense, November 16, 2009 ---
http://www.simoleonsense.com/
OMG Did I Die & Go to heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past
5 Years!!
Listen To This Interview!
I have a confession, I might have read the best
value investing book published in the past 5 years!
The book is called
Applied Value Investing By Joseph Calandro Jr.
In the book Mr. Calandro applies the tenets of value investing via
(real) case studies. Buffett, was once asked how he would teach a class
on security analysis, he replied, “case studies”. Unlike other books
which are theoretical this book provides you with the actual steps for
valuing businesses.
Without a doubt, this book ranks amongst the
best value investing books (with SA, Margin of Safety, Buffett’s letters
to corporate America, and Greenwald’s book) & you dont have to take my
word for it. Seth Klarman, Mario Gabelli and many top investors have
given the book a plug!
Leading Accountics researchers like Bill Beaver and Steve Penman have a
hard time owning up to CAPM's discovered limitations that trace back to
their own research built on CAPM. Steve Penman owns up to this somewhat in
his own latest book Accounting for Value that seems to run
counter to his earlier book Financial Statement Analysis and Security
Valuation.
Bill Beaver's review of Accounting for Value makes an
interesting proposition:
Since Accounting for Value admits to limitations of CAPM and lack of
capital market efficiency it should be of interest to investors, security
analysts, and practicing accountants consulting on valuation. However,
Penman's Accounting for Value is not of much interest to accounting
professors and students who, at least according to Bill, should continue to
dance in the fantasyland of assumed efficient markets and relevance of CAPM
in accountics research.
Accounting for Value
by Stephan Penman
(New York, NY: Columbia Business School Publishing, 2011, ISBN
978-0-231-15118-4, pp. xviii, 244).
Reviewed by William H. Beaver
The Accounting Review, March 2012, pp. 706-709
http://aaajournals.org/doi/full/10.2308/accr-10208
Jensen Note: Since TAR book reviews are free to the public, I quoted Bill's
entire review
When I was asked by Steve Zeff to review
Accounting for Value, my initial reaction was that I was not sure I
was the appropriate reviewer, given my priors on market efficiency.
As I shall discuss below, a central premise of the book is that there
are substantial inefficiencies in the pricing of common stock securities
with respect to published financial statement information. At one point,
the book suggests that most, if not all, of the motivation for reading
the book disappears if one believes that markets are efficient with
respect to financial statement information (page 3). I disagree with
this statement and found the book to be of value even if one assumes
market efficiency is a reasonable approximation of the behavior of
security prices.
It is unclear who is the intended
audience—academic or nonacademic. This is an important issue, because it
determines the basis against which the book should be judged. For an
academic audience, the book would be good as a supplemental text for an
investments or financial statement analysis course. However, for
an academic audience, it is not a replacement for his previous,
impressive text, Financial Statement Analysis and Security
Valuation (2009). The earlier text goes into much more detail, both in
terms of how to proceed and what the evidence or research basis is for
the security valuation proposed. The previous book is excellent as the
prime source for a course, and the current effort is not a substitute
for the earlier text.
However, as clearly stated, the primary
audience is not academic and is certainly not the passive investor. The
book was written for investors, and for those to whom they trust their
savings (page 1). Moreover, as stated on pages 3–4, the intended
audience is the investor who is skeptical of the efficient market, who
is one of Graham's “defensive investors,” who thinks they can beat the
market, and who perceives they can gain by trading at “irrational”
prices.1 For this reason, the book can be compared with the plethora of
“how to beat the market” books that fill the “Investments” section of
most popular bookstores. By this standard, Accounting for Value is well
above the competition. It is much more conceptually based and includes
references to the research that underlies the basic philosophy. By this
standard, the book is a clear winner.
Another standard is to judge the effort, not by
the average quality of the competition, but by one of the best, Benjamin
Graham's The Intelligent Investor (1949). This, indeed, is a high
standard. The Intelligent Investor is the text I was assigned in my
first investments course. My son is currently in an M.B.A. program,
taking an investments course, so for his birthday I gave him a copy of
Graham's book. However, markets and our knowledge of how markets work
have changed enormously since Graham's book was written.
The comparison with The Intelligent Investor is
natural in part because the text itself explicitly invites such
comparisons with the many references to Graham and by suggesting that it
follows the heritage of Graham's book. It also invites comparisons
because, like Graham's book, it is essentially about investing based on
fundamentals and tackles the subject at a conceptual level with simple
examples, without getting bogged down in extreme details of a “how to”
book. I conclude that Accounting for Value measures up very well against
this high standard and is one of the best efforts written on fundamental
investing that incorporates what we have learned in the intervening
years since the first publication of The Intelligent Investor in 1949. I
have reached this conclusion for several reasons.
One of the major points eloquently made is that
modern finance theory (e.g., CAPM and option pricing models) consists of
models of the relationship among endogenous variables (prices or
returns). These models derive certain relative relationships among
securities traded in a market that must be preserved in order to avoid
arbitrage opportunities. However, as the text points out, these models
are devoid of what exogenous informational variables (i.e.,
fundamentals) cause the model parameters to be what they are. For
example, in the context of the CAPM, beta is a driving force that
produces differential expected returns among securities. However, the
CAPM is silent on what fundamental variables would cause one company's
beta to be different from another's. One of major themes developed in
the text is that accounting data can be viewed as a primary set of
variables through which one can gain an understanding of the underlying
fundamentals of the value of a firm and its securities.2 This is
extremely important to understand, regardless of one's priors about
market efficiency. A central issue is the identification of
informational variables that aid in our understanding of security prices
and returns. As accounting scholars, we have an interest in the “macro”
(or equilibrium) role of accounting data beyond or independent of the
“micro” role of determining whether it is helpful to an individual in
identifying “mispriced” securities.
Another major contribution is the development
of a valuation model of fundamentals through the lens of accounting data
based on accrual accounting. In doing so, the text makes another
important point—namely the role of accrual accounting in bringing the
future forward into the present (e.g., revenue recognition).3 In other
words, accrual accounting contains implicit (or explicit) predictions of
the future. It is argued that, since the future is difficult to predict,
accrual accounting permits the investor to make judgments over a shorter
time horizon and to base those judgments on “what we know.” The text
develops the position that, in general, forecasts and hence valuation
analysis based on accrual accounting numbers will be “better” than cash
flow-based valuations. It is important to understand that the predictive
role is a basic feature of accrual accounting, even if one disagrees
about how well accrual accounting performs that role. Penman believes it
performs that function very well and dominates explicit future cash flow
prediction, based on the intuitive assumption that the investor does not
have to forecast accrual accounting numbers as far into the future as
would be required by cash flow forecasting. The implicit assumption is
that the prediction embedded in accrual numbers is at least as good, if
not better, than attempts to forecast future cash flows explicitly.
A third major point is that book-value-only or
earnings-only models are inherently underspecified and fundamentally
incomplete, except in special cases. Instead, a more complete valuation
approach contains both a book value and a (residual) earnings term. A
point effectively made is that measurement of one term can be
compensated for by the inclusion of the other variable by virtue of the
over-time compensating mechanism of accrual accounting.
A major implication of the model is the myopic
nature of two of the most popular methods for selecting securities:
market-to-book ratios and price-to-earnings ratios. Stocks may appear to
be over- or underpriced when partitioning on only one these two
variables. Using a double partitioning can help alleviate this myopia.
The book is positioned almost exclusively from
the perspective of the purchaser of securities. For example, one of the
ten principles of fundamental analysis (page 6) is “Beware of paying too
much for growth.” Presumably, a fundamental investor of an existing
portfolio is a potential seller as well as a buyer. As a potential
seller, the investor has an analogous interest in selling overpriced
securities, but this is not the perspective explicitly taken. In spite
of the apparent asymmetry of perspective, the concepts of the valuation
model would appear to have important implications for the evaluation of
existing securities held.
In the basic valuation model, value is equal to
current book value, residual earnings for the next two years, and a
terminal value term based on the present value of residual earnings
stream beyond two years.4 The model bears some resemblance to the
modeling of Feltham and Ohlson (1995) but adds context of its own. A
central feature of the approach is to understand what you know and
separate it from speculation.5 In this context, book value is “what you
know,” and everything else involves some degree of speculation. The
degree of speculation increases as the time horizon increases (e.g.,
long-term growth estimates).
A key feature is that it is residual earnings
growth, not simply earnings growth, that is the driver in valuation.
Price-earnings-only models are incomplete because of a failure to make
this distinction. The nature of the long-term residual earnings growth
is highly speculative, which leads to one of the investment
principles—beware of paying too much for growth. The text provides some
benchmarks in terms of the empirical behavior of long-term residual
growth rates and reasons why abnormal earnings might be expected to
decay rapidly. A higher expected residual growth is also likely to be
associated with higher risk and hence a higher discount rate. All of
these factors mitigate against long-term growth playing a large role in
the fundamental value (i.e., do not pay too much for growth). A similar
point is made with respect to the effect of leverage upon growth rates
(Chapter 4).
A remarkable feature of the book is how far it
is able to develop its basic perspective without specifying the nature
of the accounting system upon which it is anchoring valuation other than
to say that it is based on accrual accounting. Chapter 5 begins to
address the nature of the accrual accounting system. A central point is
that accounting treatments that lower current book value (e.g.,
write-offs and the expensing of intangible assets) will increase future
residual earnings (Accounting Principle 4). In particular, conservative
accounting with investment growth induces growth in residual income
(Accounting Principle 5). However, conservatism does not increase value.
Hence, valuations that focus only on earnings to the exclusion of book
value can lead to erroneous valuation conclusions. An investor must
consider both (Valuation Principle 6).
Chapter 6 addresses the estimation of the
discount rate. A central theme is how little we know about estimating
the discount rate (cost of capital), and we can provide, at best, very
imprecise estimates. The proposed solution is to “reverse engineer” the
discount rate implied by the current market price and ask yourself if
you consider this to be a rate of return at which you are willing to
invest, which is viewed as a personal attribute. Several examples and
sensitivity analyses are provided.
Chapter 7 synthesizes points made in earlier
chapters about how the investor can gain insights into distinguishing
growth that does not add to value from growth that does, through a joint
analysis of market-to-book and price-to-earnings partitions. The joint
analysis is clever and is likely to be informative to an investor
familiar with these popular partitioning variables, but is perhaps not
yet ready to use the explicit accounting-based valuation models
recommended.
Chapter 8 addresses the attributes of fair
value and historical cost accounting and is the chapter that is the most
surprising. The chapter is essentially an attack on fair value
accounting. Up until this point, the text has been free of policy
recommendations. The strength lies in taking the accounting rules as you
find them, which is a very practical suggestion and has great potential
readership appeal. The flexibility of the framework to accommodate a
variety of accounting systems is one of its strengths. As a result, the
conceptual framework is relatively simple. It does not attempt to
tediously examine accounting standards in detail, nor does it attempt to
adjust accounting earnings or assets to conform to a concept of “better”
earnings or assets, in contrast to other valuation approaches. I found
the one-sided treatment of fair value accounting to be disruptive of the
overall theme of taking accounting rules as you find them.
The text provides an important caveat. The
framework is a starting point rather than the final answer. A number of
issues are not explicitly addressed. It can also be important to
understand the specific effects of complex accounting standards on the
numbers they produce. Further, there is ample evidence that the market
does price disclosures supplemental to the accounting numbers.
Discretionary use of accounting numbers also can raise a number of
important issues.
In sum, the text provides an excellent
framework for investors to think about the role that accounting numbers
can play in valuation. In doing so, it provides a number of important
insights that make it worthwhile for a wide readership, including those
who may have stronger priors in favor of market efficiency.
This time last week, I, like nine out of
every 10 investors, believed
AOL (AOL)
was a dead-end investment. How could it not be? This is no longer a
56k, dial-up world, when those ubiquitous AOL
disks inundated mailboxes. AOL botched the chance to morph into a
broadband player with its
spectacularly bad marriage to
Time Warner (TWX).
AOL is behind on social media, and is struggling
to compete for ad dollars with
Google (GOOG)
and Facebook. Its sales declined in each quarter last year.
How many chances does a legacy company get?
(Remember
this reinvention?)
Then, on April 9, as if out of nowhere,
Microsoft (MSFT)dropped
in to buy $1 billion of AOL’s patents, sending
the latter’s shares up 43 percent in a single day. In the two years
leading up to the deal, the stock was down 37 percent.
How could a supposedly omniscient market get
this story so wrong? One explanation was offered by MDB, an intellectual
property-focused investment bank. MDB says the AOL patents had more
relevance to Microsoft and that company was uniquely well-studied on
them, especially in light of AOL’s ancient acquisition of Netscape, that
Microsoft nemesis in the age of Windows 95. MDB
found that Microsoft cited AOL patents as
related intellectual property 1,331 times in its own patent filings, vs.
AOL citing its own patents 1,267 times.
Even so, it’s surprising that this play
remained largely the province of tech-geek attorneys. After all, about
15 Wall Street analysts cover AOL—nine of them rating it either a hold
or sell. Hedge funds and bloggers are constantly on it. The Microsoft
deal shot AOL shares up two and a half times where they traded in
August, when the company owned the same patents.
I was similarly puzzled last summer when Google
paid big (63 percent-premium-to-close big) for
remnants of Motorola—placing major emphasis on the legacy tech company’s
patents. Motorola
Mobility (MMI)
shares popped 57 percent in a matter of hours. I
also scratched my head in September 2010, when
Hewlett-Packard (HPQ)emerged
victorious from a bidding war for a tiny data
storage company called 3Par—by paying $33 a share for a stock that
traded below $10 just three weeks earlier. How did everyone completely
whiff on 3Par’s desirability and valuation?
These disconnects have me thinking back to the
words of my friend, Justin Fox of the Harvard Business Review Group,
whose book
The Myth of the Rational Market
excoriated the idea that “the decisions of millions of investors, all
digging for information and striving for an edge, inevitably add up to
rational, perfect markets.”
Should Joe and Susan get their house back free
and clear or be forced out in anticipation of a million dollar settlement after
defaulting on their mortgage?
The Complicated Chaos of Measuring Impairment Losses on Tens of Millions of Poisoned Mortgage Loans
"Maybe" Backed by Real Estate Collateral
"Accounting Scholarship that Advances Professional Knowledge and
Practice," by Robert Kaplan, The Accounting Review, March 2011, Volume 86, Issue 2)
Page 377
(the Presidential Scholar Plenary Speech given by Harvard's Bob Kaplan at the
2009 American Accounting Association Annual Meetings):
. . .
Let us explore the state of the art today on
determining fair values for financial instruments, which are, by far, the
simplest applications for fair value measurements. The traditional
accounting approach of using contemporary market prices works well for
assets that trade continually in thick markets. For assets that are not
actively traded, banks advocate and accounting educators teach the
discounted cash flow approach, using the interest rate at the time the
financial asset was issued. While current accounting standards require that
impairments in these assets get recognized, most banks argue against
recognizing impairments as long as debtors continue to make payments. This
leads to nontraded or thinly traded financial assets being carried at
historical cost or terminal value . Wachovia, and other banks, resisted fair
value reporting of their financial assets by classifying them into their
“held-to-maturity” portfolios, a classification that defies economic
substance except in a highly restricted case. Wachovia in July 2008,
reported $75 billion in share- holders’ equity, even after taking “modest”
impairments of more than $10 billion during the previous 12 months in its
more than $300 billion loan portfolio valued at historical cost . Yet less
than three months later, the bank had failed, and its acquirer, Wells Fargo,
wrote down Wachovia’s asset loan position by an additional $74 billion. This
incident, and many others at the time, reveals a major shortcoming in the
contemporary financial reporting framework. The deterministic is counted
cash flow model is not adequate for estimating the fair values of risky
financial assets. And, sadly, the ability to estimate fair values of thinly
traded financial assets has existed for decades.
Continued in article
Jensen Comment CPA auditors failed us by allowing massive overstatements of bank assets and
earnings of over a thousand failing banks in 2008, including Wachovia mentioned
above by Bob Kaplan.
The audit firms' clients failed to realistically estimate investment losses
while the loan and collateral markets were so thin or even nonexistent for poisoned
mortgages (loans to home owners that were certain to default on homes that soon would
only sell for pennies on the dollar far below what they cost) that computing
financial investment impairment losses became fantasy estimates. For a time some
homes could not be given away because they were not worth, at least temporarily,
the multiple-year property taxes and maintenance that must be paid before a
buyer could be found.When banks like Wachovia declared
such fraudulent (poisoned) investments would be held-to-maturity (HTM) this was a big lie since default
ownership (or so it was thought) the collateral and resale was inevitable.
I agree with Bob Kaplan that the poisoned
mortgages should have been written down with massive impairment losses
recognized before the banks failed. Investors should have been warned in
financial statements about these losses before they read the banks' bankruptcy notices in the local
papers.
But the issue is not whether the
impairment losses are recognized as bad debt writeoffs as amortized historical cost
bites (as in HTM financial instruments) or adjustment bites to fair value carrying amounts
(as in AFS financial instruments that at times were worthless). In either of these two impairment loss
calculation approaches the fair values of the loan collateral had to be
estimated --- which meant trying to appraise housing values in situations where
there was no longer a poisoned mortgage market or a collateral real estate market following the bursting of the real
estate bubble in 2007. At the bottom of the real estate market these
formerly expensive homes were not worth what it would cost to pay their property taxes and
maintenance. The problem was that CPA auditors of banks did not insist on
such massive impairment charges however computed before the mortgage holders
failed.
Example of a Worthless AFS Mortgage
Investment
The problem was not write
downs in fair values versus historical cost loan loss setting up of contra loan
loss amounts with the loan losses being charged to bad debt expense. The problem
was that the auditors allowed their clients to understate loan loss estimates
computed by whatever means in the burst real estate market. Any type of impairment loss in this case boiled
down to estimation of what the real estate collateral was worth of failed loans
in a miserable real estate market with no recovery in sight.
Marvene Halterman, an unemployed elderly Arizona
woman with a long history of creditors, welfare, and food stamps, took out a
$103,000 mortgage on her above 576 square-foot shack in early 2007. Within a
year she stopped making payments and drove off in her new $60,000 truck
purchased with her loan proceeds. After she moved out neighbors bought the shack
for $10,000 and tore it down. The hapless bank that purchased her mortgage from
the criminal mortgage broker (Michael T. Asher from Integrity Funding LLC)
eventually ate the loss of over $90,000 that was primarily caused by a
fraudulent Mr. Asher who issued the mortgage to Marvene and then sold the
mortgage to that sucker bank for cash ---
http://www.trinity.edu/rjensen/FraudMarvene.htm
But the story gets worse.
The initiators of those fraudulent poisoned mortgages were criminal mortgage
lenders like Countrywide, Washington Mutual, Ameriquest and thousands of
lesser-known mortgage brokers who sold this
poisoned paper up the sales chain to Wachovia, Merrill Lynch, Lehman Bros., Bear
Stearns, Fannie Mae, Freddie Mack, etc. who, in turn, tried to lace CDO bonds
with portions of this poisoned paper. But the CDO attempt failed because most
of the CDO bonds were sold with recourse such that the junk simply was returned
to
the investment banks Merrill Lynch who begged for the U.S. Government to pay off the buyers of
those hopeless CDO bonds. And the government did so to the tune of over a $1
trillion swindle:
Then when Wachovia, Merrill Lynch, and the
like failed the Secretary of the U.S. Treasury, Hank Paulsen, forced the
prosperous larger banks like Bank of America and Wells Fargo to acquire some
of the failed investment banks like Merrill Lynch and criminal lenders like
Countrywide, e.g., Paulsen made hard
threats, actually extortion, to a reluctant Bank of America to acquire Merrill
Lynch and thereby Paulsen dumped billions upon billions of dollars of poisoned mortgages
on Bank of America that really did not previously own poisoned mortgages until the U.S.
Secretary of the Treasury forced all those poisoned mortgages onto Bank of
America's books.
Bank of America announced its deal with Merrill in
September, as financial markets were seizing up and Lehman Brothers fell to
its knees. But Mr. Lewis grew less certain once the bank discovered that
Merrill’s finances were worse than imagined, and considered pulling out of
the deal.
On Thursday, Mr. Lewis maintained that federal
officials pressured him to keep the merger alive, and acknowledged that his
job had been at risk if he did not. But he resisted lawmakers’ efforts to
characterize the situation as a threat. And he backed away from earlier
statements in which he suggested that Mr. Bernanke and Mr. Paulson had urged
him not to reveal Merrill’s troubling state before the merger was sealed,
calling them “two honorable people” who had “good intentions.”
“It’s important to remember that we have heard only
one side of the story today,” said Edolphus Towns, a Democrat from New York
who heads the House Committee on Oversight and Government Reform, which held
the hearing. But, he said, “the regulators and financial institutions seemed
to be making up the rules as they went along.”
For a merger once hailed as the way forward for
Wall Street, the backstory keeps getting messier. The bank’s executives,
including Mr. Lewis, face continued scrutiny from regulators and pressure
from shareholders.
And Mr. Paulson and Mr. Bernanke, who thought
preserving a deal would keep markets calm in the thick of the financial
crisis, are being questioned on whether they pressured a company’s
executives into ignoring their duty to their shareholders.
According to notes taken by Bank of America
executives to record their conversations with regulators at the time,
Timothy F. Geithner, now the secretary of the Treasury, and Lawrence H.
Summers, currently the president’s lead economics adviser, were also aware
of the effort to seal a merger as the Bush administration prepared a
transition to the incoming administration of Barack Obama.
Mr. Lewis, for instance, typed up notes from a
phone call he had on Dec. 31 with Mr. Bernanke on the subject of the merger.
According to the notes, which were provided to the Congressional committee
by Bank of America, Mr. Bernanke told him: “Geithner, Summers and Paulson up
to date. Geithner would like to see what is done as a template for the
industry.”
Continued in article
Although a few investment banks like
Lehman Bros. were not saved by Hank Paulsen, most like Merrill Lynch were saved
by forced buyouts by banks who did not realize that the poisoned mortgages that
they bought may not even be owned after the purchase (see below). Wachovia was
sucked up by Wells Fargo along with its billions in
poisoned mortgage investments.
But the story gets even worse.
Along with all this shuffling of hundreds of billions in fraudulent poisoned
mortgages from Main Street to Wall Street and the accounting coverups along the
way, much of the original paper signed by hopeless (could-never-pay) homeowners was also lost. In
other words, when Joe and Susan Smith signed a $500,000 subprime mortgage
in 2004 intending to flip their house for a profit in four years (with no hope on their
income of $70,000 per year of paying off that mortgage)
the piece of paper they
signed got lost by Countrywide or Merrill Lynch or Bank of America or whomever.
Nobody can belatedly find the original mortgage signed by Joe and Susan Smith!
When the real estate market crashed in
2007 Joe and Susan Smith had no hope flipping their 2004 home for anywhere close to
what they owed on their subprime mortgage. Instead they would have to sell for pennies on the
dollar if they could even sell for pennies to reluctant potential buyers who did
not want to take on their property taxes. Instead they decided to simply
become squatters in their own home and make no more payments of their mortgage
as it worked its way up from Countrywide to Merrill Lynch to Bank of America.
They did not even pay the property taxes that were paid by whatever bank thought
it owned their mortgage.
It gets even better for the Smiths because
the banks who thought they owned the Smith mortgage continued to pay the Smith
home property taxes.
Eventually, Bank of America or Wells Fargo
or whomever "owned" the Smith' mortgage wanted to send the local sheriff to Joe
and Susan and their kids out
of their house because they were no longer making any mortgage payments. This
proved difficult, however, without a copy of the original signed mortgage. When the eviction case wound up in court, the lawyer for Joe and Susan Smith
demanded to see the original loan that they signed. Sadly for the banks,
much of the
original paper got incinerated (unintentionally) or shredded when the offices of Countrywide
and the other fraudsters were hurriedly emptied out for that failed company.
It's currently estimated that about 50% of
the foreclosed homes are still occupied
by the borrowers who are squatting in those homes and making no loan payments or
property tax payments because the banks cannot find their original mortgage
papers.
http://www.nj.com/business/index.ssf/2013/10/half_of_foreclosed_homes_in_ne.html
The banks are still paying the property
taxes while hoping the courts will resolve this enormous problem.
The net results include the following:
The banks that purportedly "own" the mortgage
financial instruments and have paid property taxes for years cannot prove
they legally own the mortgages without having copies of the original signed
mortgages. Hence it's not clear they can foreclose on the original owners
(now squatters).
The banks' CPA auditors face an enormous task
of estimating loan value impairments on financial instruments that may or
may not be owned by their clients. To make matters worse courts in different
district courts may not consistently handle the ownership adjudication.
Joe and Susan Smith who are squatters making no
mortgage or tax payments can smirk at Sam and Judy Jones next door who dug
down deep into savings to keep paying their mortgage payments and property
taxes. Something seems terribly unfair if home owners like Joe and Susan
Smith who defaulted fare much better than people neighbors who honored their
obligations. Should Joe and Susan Smith get their house back free and clear
or be forced out in anticipation of a million dollar settlement?
What keeps Sam and Judy Jones from playing the
same game as Joe and Susan Smith is that Sam and Judy cannot be certain that
their mortgage holder does not have the original copy of their loan. It
would be risky for them to default, be tossed out on the street, and then
later discover in court that their original paper was not lost.
Is it ethical for Joe and Susan Smith to receive an
enormous settlement just because the banking system let their original mortgage
papers accidentally go up in smoke or be shredded? It's up to the courts to
decide, and until then CPA auditors will have an enormous problem valuing
financial instruments (mortgage investments) that the banks may or may not own
depending upon contingency court decisions on tens of millions of non-paying
squatters now living in their own homes and former squatters who are trying to
cash in the the legal lottery for damages, pain, and suffering.
From an accounting standpoint in some banks,
especially JP Morgan, these issues become even more complicated by probes into
criminal activities regarding manipulation of the mortgage markets.
A 1,625-square-foot bungalow at 51 Perthshire Lane
in Palm Coast, Fla., is among the thousands of homes at the heart of J.P.
Morgan Chase JPM +0.55% & Co.'s $5.1 billion settlement with a federal
housing regulator on Friday.
In 2006, J.P. Morgan bought one of two mortgage
loans on the home made by subprime lender New Century Financial Corp. J.P.
Morgan then bundled the loan with 4,208 others from New Century into a
mortgage-backed security it sold to investors including housing-finance
giant Freddie Mac. FMCC +11.89%
By the end of 2007, the borrower had stopped paying
back the loan, setting off yearslong delinquency and foreclosure proceedings
that halted income to the investors, according to BlackBox Logic LLC, a
mortgage-data company. Current Account
Settlement Puts U.S. in Tight Spot
The Palm Coast loan wasn't the only troubled one in
the New Century deal: Within a year, 15% of the borrowers were
delinquent—more than 60 days late on a payment, in some stage of foreclosure
or in bankruptcy—according to BlackBox. By 2010, that number exceeded 50%.
"That's much worse than anyone's expectations when
the deal was put together," said Cory Lambert, an analyst at BlackBox and
former mortgage-bond trader. "It's all pretty bad."
J.P. Morgan sidestepped many of the
subprime-mortgage problems that bedeviled rivals during the financial
crisis, and avoided much of the postcrisis scrutiny that dragged down others
on Wall Street. But now its own behavior during the housing boom is coming
under close examination as investigators work through a backlog of cases.
The bank dealt with some of the biggest subprime
lenders of the time, including Countrywide Financial Corp., Fremont
Investment & Loan and WMC Mortgage Corp., a former unit of General Electric,
according to the Federal Housing Finance Agency complaint.
J.P. Morgan's relationship with New Century, a
subprime lender that went bankrupt in 2007 and later faced a Securities and
Exchange Commission investigation and shareholder suits, shows that the New
York bank was part of the frenzied push to package mortgages for investors
at the end of the housing boom.
The New Century deal, J.P. Morgan Mortgage
Acquisition Trust 2006-NC1, was one of 103 cited in the lawsuit against J.P.
Morgan brought by the FHFA, which oversees Freddie Mac and home-loan giant
Fannie Mae. FNMA +13.40%
The $5.1 billion settlement is part of a larger
tentative deal with the Justice Department and other agencies that would
have J.P. Morgan pay a total of $13 billion. That deal is expected to be
completed this week.
"While these settlements seem huge, given the
nature of the offenses, they are trivially small," said William Frey, chief
executive of Greenwich Financial Services LLC, a broker-dealer that has
participated in investor lawsuits against banks that packaged mortgages.
J.P. Morgan declined to comment on the settlement or any loans in the bonds
it bought.
The FHFA has gotten aggressive in recouping losses
from mortgages and securities sold to Fannie and Freddie. In 2011 it sued 18
lenders, and J.P. Morgan was only the fourth to settle.
To be sure, the New Century deal was among J.P.
Morgan's worst performers, and other mortgage-backed securities it issued at
the time have held up better. An improving economy and housing market have
lifted many mortgage bonds sold in 2006 and 2007.
But that is of little consolation to Freddie Mac,
which bought more than a third of the $910 million New Century bond deal in
2006 and still is sitting on losses.
The group of loans backing Freddie's chunk of the
deal had more high-risk loans than the rest of the pool. Nearly 44% of
Freddie's piece had loan-to-value ratios between 80% and 100%, compared with
31% for the rest, according to the deal prospectus.
What's more, nearly half the loans backing the New
Century deal were from California and Florida, two states hit hard by the
housing bust. Of the 4,209 loans in the bond, more than half have some
experienced distress, according to BlackBox data.
Three debt-rating firms gave the top slice of the
deal AAA ratings. But as the housing market soured, a series of downgrades
starting in 2007 took them all into "junk" territory by July 2011. As of
last month, nearly a quarter of the principal of the underlying loans in the
deal had been wiped out, with a third of the remaining balance delinquent or
in some stage of foreclosure, according to BlackBox.
Continued in article
From the CFO Journal's Morning Ledger on October 28, 2013
J.P. Morgan settlement puts government in tight spot Will the U.S. government have to refund
J.P. Morgan part
of the bank’s expected $13 billion payment over soured mortgage securities?
The question is the biggest stumbling block to completing the record
settlement between the bank and the Justice Department,
writes the WSJ’s Francesco Guerrera.
The crux of the issue is whether the government can go
after J.P. Morgan for (alleged) sins committed by others. And investors,
bankers and lawyers are watching the process closely, worried that it could
set a bad precedent for the relationship between buyers, regulators and
creditors in future deals for troubled banks.
Thirteen billion dollars
requires some perspective. The record amount that
JPMorgan Chase (JPM)
has tentatively agreed to pay the
U.S. Department of Justice, to settle civil investigations into
mortgage-backed securities it sold in the runup to the 2008 financial
crisis, is equal to the gross domestic product of Namibia. It’s more
than the combined salaries of every athlete in every major U.S.
professional sport, with enough left over to buy every American a
stadium hotdog. More significantly to JPMorgan’s executives and
shareholders, $13 billion is equivalent to 61 percent of the bank’s
profits in all of 2012. Anticipating the settlement in early October,
the bank recorded its first quarterly loss under the leadership of Chief
Executive Officer Jamie Dimon.
That makes it real money, even for the
country’s biggest bank by assets. Despite this walloping, there’s reason
for the company to exhale. The most valuable thing Dimon, 57, gets out
of the deal with U.S. Attorney General Eric Holder is clarity. The
discussed agreement folds in settlements with a variety of federal and
state regulators, including the Federal Deposit Insurance Corp. and the
attorneys general of California and New York. JPMorgan negotiated a
similar tack in September, trading the gut punch of a huge headline
number—nearly $1 billion in penalties related to the 2012 London Whale
trading fiasco—for the chance to resolve four investigations in two
countries in one stroke. In both cases, the bank’s stock barely budged;
its shares have returned 25 percent this year, exactly in line with the
performance of Standard & Poor’s 500-stock index.
That JPMorgan is able to withstand
penalties and regulatory pressure that would cripple many of its
competitors attests both to the bank’s vast resources and the influence
of the man who leads it. The sight of Dimon arriving at the Justice
Department on Sept. 26 for a meeting with the attorney general
underscored Dimon’s extraordinary access to Washington
decision-makers—although the Wall Street chieftain did have to humble
himself by presenting his New York State driver license to a guard on
the street. As news of the settlement with Justice trickled out, the
admirers on Dimon’s gilded list rushed to his defense, arguing that he
struck the best deal he could. “If you’re a financial institution and
you’re threatened with criminal prosecution, you have no ability to
negotiate,”
Berkshire Hathaway (BRK/A)
Chairman Warren Buffett told
Bloomberg TV. “Basically, you’ve got to be like a wolf that bares its
throat, you know, when it gets to the end. You cannot win.”
The challenges facing Dimon and his
company are far from over. With the $13 billion payout, JPMorgan is
still the subject of a criminal probe into its mortgage-bond sales,
which could end in charges against the bank or its executives. And other
federal investigations—into suspected bribery in China, the bank’s role
in the Bernie Madoff Ponzi scheme, and more—are ongoing.
The ceaseless scrutiny has tarnished
Dimon’s public image, perhaps irreparably. Once seen as the white knight
of the financial crisis, he’s now the executive stuck paying the bill
for Wall Street’s misdeeds. And as the bank’s legal fights drag on, it’s
worth asking just how many more blows the famously pugnacious Dimon can
take.
Although the $13 billion settlement
would amount to the largest of its kind in the history of regulated
capitalism, it looks quite different broken into its component pieces.
While the relative amounts could shift, JPMorgan is expected to pay
fines of only $2 billion to $3 billion for misrepresenting the quality
of mortgage securities it sold during the subprime housing boom.
Overburdened homeowners would get $4 billion; another $4 billion would
go to the Federal Housing Finance Agency, which regulates
Freddie Mac (FMCC)
and
Fannie Mae (FNMA);
and about $3 billion would go to investors who lost money on the
securities, Bloomberg News reported.
JPMorgan will only pay fines (as
distinct from compensation to investors or homeowner relief) related to
its own actions—and not those of Bear Stearns or Washington Mutual, the
two troubled institutions the bank bought at discount-rack prices during
the crisis. Aside from shaving some unknown amount off the final
settlement, this proviso enhances Dimon’s reputation as the shrewdest
banker of that era. In 2008, with the backing of the U.S. Department of
the Treasury and the Federal Reserve, who saw JPMorgan as a port in a
storm, Dimon got the two properties for just $3.4 billion. Extending
JPMorgan’s retail reach overnight into Florida and California, Bear and
WaMu helped the bank become the largest in the U.S. by 2011. The
portions of the settlement attributable to their liabilities are almost
certainly outweighed by the profits they’ve brought and will continue to
bring.
Jensen Comment
As far as the consumer tort lawyers are
concerned no settlements will be enough for defaulting homeowners who were
tossed out on the street and defaulting squatters awaiting ownership
resolutions.
Meanwhile Joe and Susan Smith may squat out most of
their lives without making mortgage payments or property taxes while awaiting a
million dollar settlement.
CPA auditors face an enormous problem of booking
loan loss impairments on these foreclosed properties. The markets for these
properties and their mortgages are nonexistent until ownership issues are
resolved by the courts. The magnitudes of the potential loan losses are so
enormous that the lives of some of the biggest banks in the USA are hanging by a
thread.
Accounting Controversy
I don't agree with Bob Kaplan that companies should not be allowed in
general to declare financial instruments as held-to-maturity (HTM). Many
companies do indeed plan to carry some of their financial instrument assets and
liabilities to maturity for various reasons, usually because of transactions
costs of not carrying them to maturity. Fair value adjustments of such HTM
securities become fictional gains and losses in interim periods that adds
misleading noise to interim financial statements prior to maturity. Nor do I
think that unrealized market value gains and losses of available-for-sale (AFS)
securities should be combined with legally revenues in the calculations of net
earnings. I do think that separate columns should be provided for legally
realized revenue transactions versus unrealized value change transactions of AFS
securities. Unrealized value changes on HTM securities should be disclosed but
not combined with unrealized value changes of AFS financial instruments.
The point of this tidbit is to stress that the loss
impairment calculation problem is much more complicated when there are hundreds
of billions of dollars in mortgage investments for which there are no financial
instruments markets and the "values" must be determined by estimates of the
collateral (homes) values. It is even more complicated when the original signed
mortgage notes cannot be found, thereby complicating the issue of who owns the
homes.
What are befuddled auditors and clients supposed to
book in these circumstances? The simple answer is full disclosure. But full
disclosure might require paper trails that would reach to the moon.
Bank
of America this week is fighting a civil fraud case in New York brought by
the Justice Department, seeking $1 billion in damages for allegedly
defective mortgages its Countrywide unit sold those innocents Fannie Mae and
Freddie Mac. Never mind that these loans predated BofA's purchase of
Countrywide with Washington's encouragement during the subprime crisis.
Whether he prevails at his insider-trading trial or
winds up paying a fine to the Securities and Exchange Commission, Mark
Cuban, owner of the Dallas Mavericks, performed a mitzvah during his
testimony this week when he plainly described to the jury what “Ebitda” is.
“It's a term companies use when they want to make
it seem like they're doing better than they are," he
said of the oft-cited financial metric, which
stands for earnings before interest, taxes, depreciation and amortization.
Nice timing, too. Cuban said it right before Twitter Inc. filed the
registration statement for its initial public
offering
Ebitda doesn’t exclude enough expenses for
Twitter’s liking. So it highlights “adjusted Ebitda,” which excludes
expenses for stock-based compensation, as well. For 2012, the microblogging
service said it had a net loss of $79.4 million, using generally accepted
accounting principles, or GAAP. By comparison, its adjusted Ebitda was $21.2
million, which indeed looks much better.
Likewise, for the six months that ended June 30,
Twitter reported a net loss of $69.3 million. Its adjusted Ebitda was $21.4
million. Twitter also cited something that it called “non-GAAP net loss,”
which is just another made-up earnings metric that doesn't comply with GAAP.
This one looks better than the company’s actual net loss, but not as good as
adjusted Ebitda.
The Securities and Exchange Commission’s rules for
non-standard financial metrics say that companies must provide “a statement
disclosing the reasons why the registrant’s management believes that
presentation of the non-GAAP financial measure provides useful information
to investors regarding the registrant’s financial condition and results of
operations.”
Twitter tried, but its explanation wasn’t very
convincing. Here’s an excerpt: “We believe that adjusted Ebitda and non-GAAP
net loss help identify underlying trends in our business that could
otherwise be masked by the effect of the expenses that we exclude in
adjusted Ebitda and non-GAAP net loss.” It didn’t say what such trends might
be or explain how including such expenses could render them invisible.
Obviously, the real reason Twitter cites these baloney numbers is the one
that Mark Cuban gave.
Other companies have engaged in far worse non-GAAP
abuses. Groupon Inc., the online coupon distributor, invented a ridiculous
financial metric before its IPO called “adjusted
consolidated segment operating income,” which
conveniently excluded most of its operating expenses.
Continued in the article
Jensen Comment
I'm reminded of a definition by Dennis Beresford regarding pro forma earnings.
He defined pro forma earnings as earnings before all the bad stuff is deducted.
With tongue in cheek I don't know why Weil is making such a fuss Ebitda that the
accounting standard setters cannot even define. In fact, since the standard
setters started mixing unrealized fair value fictions with legally recognized
revenues, net earnings is no longer definable in the the conceptual frameworks
of the FASB or IASB.
Jensen Questions
Why build that new GM plant in Arlington, Texas and not the historic Motor City,
Detroit?
Isn't Detroit centrally located for both the USA and Canadian vehicle markets?
Aren't there enough good auto workers left in Detroit? I hope so in Detroit and
other parts of Michigan!
Won't the UAW make concessions to save Detroit? I hope so for the sake of
Detroit and Michigan!
(Note that the UAW did make concessions on wages, pensions, and robotics when
both GM and Chrysler were in Bankruptcy courts.)
What's the continuing comparative advantage of Texas?
Teaching Case for Managerial Accounting
From The Wall Street Journal Accounting Weekly Review on October 17, 2013
SUMMARY: General Motors Co. is opening a $200 million
metal-stamping plant next to its Arlington, TX, site. Hoods, fenders, and
doors going into Tahoe and Yukon sport-utility vehicles for years were made
in Ohio and Michigan, then shipped to Texas. The new plant reduces the
travel for these parts "...to about 20 feet from machine to welder.
Estimated savings: about $40 million a year in shipping costs." GM's CEO Dan
Akerson is focusing on reducing logistics costs "to close the company's
profit margin gap with rival Ford Motor Co."
CLASSROOM APPLICATION: The article may be used in a managerial
accounting class to introduce logistics and supply chain management. It also
includes managerial accounting uses of four financial accounting measures:
gross profit, operating margin, operating profit, and pre-tax profit.General
Motors
QUESTIONS:
1. (Advanced) Define the terms logistics and supply chain
management.
2. (Introductory) Summarize how GM is trying to improve
profitability by reducing costs of logistics.
3. (Advanced) Why do you think that consultant John Henke says
"auto makers who are just trying to cut costs and not working with the parts
makers will lose"?
4. (Introductory) GM's overriding reasons for making moves to cut
logistics costs have to do with comparisons to rival Ford Motor Co. What was
the average profitability per vehicle shipped for Ford in the quarter ended
June 30, 2013? For GM?
5. (Advanced) How do you think that Ford and GM determine average
profitability per vehicle?
6. (Advanced) What are the differences among operating margin,
operating profit, and pretax profit? In your answer, define each of these
terms.
7. (Introductory) How do GM and Ford compare on each of the metrics
discussed in question 6?
Reviewed By: Judy Beckman, University of Rhode Island
For years, General Motors Co. GM +1.51% pounded out
hoods, fenders and doors for its Tahoe and Yukon sport-utility vehicles at
plants in Ohio and Michigan and shipped them to its assembly plant in
Arlington, Texas.
On Monday, the auto maker officially opens a $200
million metal-stamping plant adjacent to the Arlington factory that reduces
that travel to about 20 feet from machine to welder. Estimated savings:
about $40 million a year in shipping costs.
The new plant, is part of a broader rethinking of
logistics by GM Chief Executive Dan Akerson, who is anxious to close the
company's profit margin gap with rival Ford Motor Co. F +0.98%
His aim is to lift GM's North American margins to
10% from about 8% now, a feat that would generate hundreds of million of
dollars in new profit.
"We spend billions a year on logistics," Mr.
Akerson said. "Think about that, billions. Any savings I can get by cutting
my logistics bill goes right to my bottom line and makes us more
competitive. I've told our teams that we need to make this a priority to
look across the organization and take the steps to cut the costs."
Having cut labor costs and closed unprofitable
plants during the 2008/2009 recession, GM now sees logistics as representing
the biggest potential opportunity to squeeze new profit from operations.
For its second quarter ended June 30, crosstown
rival Ford earned $2,830 for each car it shipped in North America—$387 more
per vehicle than GM did during the same period. Ford's 10.4% operating
margin and $2.3 billion operating profit overshadowed GM's 8.4% operating
margin and $1.98 billion pretax profit in the region.
Co-locating parts-making and auto assembly promise
higher quality and greater profit. GM and other auto makers say they can no
longer put up with parts that arrive scratched or dented and have to be
repaired. Workers at the Arlington plant had to waste time trying to buff
out imperfections caused by travel, GM said.
"We as an industry chased labor costs for years
because that was the only thing we thought we could control," said Tim
Leuliette, CEO of parts maker Visteon Corp. VC +1.30% "Now, with the reset
of labor costs, especially in the U.S., more efficiency in the plants and
the importance of quality, we can finally evolve."
Mr. Leuliette points to his own company's plans,
which include building more production facilities in Russia to supply car
makers there. Last month the company's Halla Visteon Climate Control unit
opened its first plant in Togliatti, Russia, to build cooling, heating and
air conditioning units for local producers such as OAO AvtoVAZ.
"They have finally all wised up," said John Henke,
chief executive of consultants Planning Perspective Inc., which conducts an
annual survey of auto maker and supplier relationships. "But unless all of
them stick with it, the savings won't amount to peanuts. I can't tell you
how many times we see new people on the executive level come in and change
things."
Mr. Henke said the drive to co-locate factories
intensifies the cost pressures on the parts suppliers. "Those auto makers
who are just trying to cut costs and not working with the parts makers will
lose," Mr. Henke said. "They will lose out on the latest advancements and
financial savings. Then all the logistic changes in the world won't mean
much."
TOPICS: Accounting For Investments, business combinations, Interim
Financial Statements
SUMMARY: The article begins with a review of the LVMH report for
the third quarter of 2013. Sales of leather goods and fashion are falling;
the Louis Vuitton brand accounts for half the company's overall operating
profit. The discussion then covers acquisition strategies for new designers
which includes initial steps of support for young designers and small
investments which could be discussed as equity investments.
CLASSROOM APPLICATION: The article discusses a company whose brands
are likely of interest to many students. The first questions on quarterly
performance may be used in any financial reporting class. The later
questions may be used to introduce business investment strategies before
covering either accounting for investments or business combinations.
QUESTIONS:
1. (Introductory) Summarize the main problems, according to the
author, with the financial report just issued by LVMH Moet Hennessy Louis
Vuitton.
2. (Advanced) Where is the stock for this company traded? (Hint:
click on the live link in the article in the first mention of the company's
name.)
3. (Introductory) What brand is the primary source of the company's
profits? What other brands and products does the company sell?
4. (Introductory) Until recently, what was the company's brand
focus for making sales grow?
5. (Introductory) What is the concept of diversification? According
to the article, how does this concept apply to LVMH's strategy in acquiring
designer brands?
6. (Advanced) Refer to the related article. Describe the newest
strategy the company is undertaking to spur growth.
7. (Advanced) How does LVMH support younger designers? How does
this strategy help spur growth at LVMH?
Reviewed By: Judy Beckman, University of Rhode Island
These days, investors in LVMH Moët Hennessy Louis
Vuitton MC.FR +1.52% could do with a little variety.
Shares of the French fashion house fell 4.3%
Wednesday after the company issued disappointing third-quarter revenue. The
culprit: a mere 3% rise in currency-adjusted sales from the key fashion and
leather-goods division, which makes almost all of its profit from the Louis
Vuitton brand. While LVMH has some other red-hot brands such as Celine, they
were unable to make up for a soft performance from Louis Vuitton, which
accounts for about half of operating profit overall.
Unfortunately, heavy reliance on Louis Vuitton
could be an issue for some time to come.
In China, for instance, the luxury market has
become considerably more challenging in recent years. In the past, luxury
consumers mainly shopped for a few brands such as Louis Vuitton, Gucci and
Hermès. These days, malls in major cities are loaded with options for
increasingly sophisticated shoppers, says Frank Yao of SmithStreetSolutions,
a consultancy.
Another problem: LVMH has been slow to win online
sales, which have surged at rival luxury labels such as Burberry. It is
understandable that LVMH wants to have close control over the in-store
luxury-shopping experience. But the Internet will increase the knowledge of
wealthy shoppers quickly and probably encourage them to expand beyond their
old favorites.
What can Louis Vuitton do in response? Its current
strategy seems to be protecting itself from competitors by becoming even
more exclusive. In recent quarters, the company has begun focusing more on
ultraexpensive soft leather to reduce its reliance on canvas bags emblazoned
with the "LV" logo.
Such a shift makes sense—in the long run. But those
canvas bags probably help Louis Vuitton maintain very high margins that it
would have to sacrifice. Indeed, Thomas Chauvet of Citigroup estimates the
brand has an operating margin of 42%, well above the industry average.
Ultimately, the real solution is for LVMH to
actually make its conglomerate model work by nurturing the various brands it
has acquired into big moneymakers.
SUMMARY: Big changes may be coming to the auditor's report: that
letter in every company's annual report in which the company's auditor
blesses its financial statements. But lots of corporate directors don't
think the changes are such a good idea. Only 27% of public-company board
members believe the proposed changes to the report will improve its
usefulness. A larger portion of those surveyed, 45%, say the changes won't
improve the report, while 28% aren't sure. The Public Company Accounting
Oversight Board, the government's audit-industry regulator, proposed the
changes. If they are enacted, auditors would have to disclose more
information to investors in the auditor's report: currently a boilerplate,
pass-fail document that critics say doesn't tell investors much about a
company's financial health. Among other changes proposed by the PCAOB, audit
firms would have to tell investors more about any "critical audit matters,"
the parts of the audit in which the auditor had to make its toughest
decisions. They also would have to evaluate other information in the annual
report beyond the financial statements, and tell investors how long the
audit firm has worked for the company.
CLASSROOM APPLICATION: This article addresses the contents of the
annual report and it can be used in auditing and financial accounting
classes. You can use it for a discussion or assignment regarding what is
included in the annual report and the proposed changes. I found it
interesting that the auditor's report has not changed since the 1940s. The
related articles help to flesh out the topic and will serve nicely as a case
study, if you choose.
QUESTIONS:
1. (Introductory) What are the changes proposed for the auditor's
report? How are directors of public companies reacting to these proposals?
2. (Advanced) Why do you think directors have these views regarding
each of the proposed changes? What changes are acceptable to more directors?
Which of the changes are less appealing to directors? Why?
3. (Advanced) What is the PCAOB? Why is it involved in the
composition of annual reports?
4. (Advanced) How long have the current requirement been in place?
Why are changes being proposed at this time? Are you surprised that the
current format has not been changed? Why might it have stayed unchanged for
so many years?
Reviewed By: Judy Beckman, University of Rhode Island
Reviewed By: Linda Christiansen, Indiana University Southeast
Big changes may be coming to the auditor’s report –
that letter in every company’s annual
report in which the company’s auditor blesses its financial
statements. But lots of corporate directors don’t think the
changes are such a good idea, according to a survey to be
released Tuesday.
Only 27% of public-company
board members believe the proposed changes to the report
will improve its usefulness, according to the survey by
accounting firm BDO USA LLP. A larger portion of those
surveyed, 45%, say the changes won’t improve the report,
while 28% aren’t sure.
The Public Company
Accounting Oversight Board, the government’s audit-industry
regulator, proposed the changes in August. If they are
enacted, auditors would have to disclose more information to
investors in the auditor’s report – currently a boilerplate,
pass-fail document that critics say doesn’t tell investors
much about a company’s financial health.
Among other changes proposed by the PCAOB,
audit firms would have to tell
investors more about any “critical audit matters,” the parts
of the audit in which the auditor had to make its toughest
decisions. They also would have to evaluate other
information in the annual report beyond the financial
statements, and tell investors how long the audit firm has
worked for the company.
Of the 74 public-company
directors surveyed by BDO in September, 52% are opposed to
the proposal that auditors should discuss critical audit
matters, and 67% are opposed to requiring auditors evaluate
information beyond the financial statements. But 78% were in
favor of disclosing the length of the auditor’s tenure – a
move prompted by concerns that a long-tenured auditor might
grow too cozy with a company to conduct a tough audit.
The auditor’s report
hasn’t been significantly changed since the 1940s, and “when
you make changes to something that has been done the same
way for more than 70 years, there is bound to be some
pushback,” Lee Graul, a partner in BDO’s corporate
governance practice, said in a statement. Corporate
directors “aren’t sold on the usefulness of the PCAOB’s
proposal,” he said.
TOPICS: Accounting, Assurance Services, Auditing, Big Four
Accounting Firms, Consulting, Segment Analysis
SUMMARY: Ernst & Young's yearly world-wide revenue rose 5.8%, as
the accounting industry continues to battle challenging economic conditions.
Ernst's growth trend held up relatively well compared with other major
accounting firms that recently reported slowing growth.
PricewaterhouseCoopers said its revenue was up 4% from the previous year
when foreign-exchange rates are held constant-lower than the previous year's
growth of 8%. Deloitte Touche Tohmatsu said that its fiscal 2013 revenue had
grown 3.5% in U.S. dollars, below the previous year's 8.6% growth. Ernst and
other firms have rebuilt their consulting businesses in recent years-three
of the Big Four, including Ernst, had sold or divested themselves of their
consulting businesses around the time the Sarbanes-Oxley Act was passed in
2002, barring accounting firms from many types of consulting for their audit
clients. But the firms rebounded by consulting for companies they didn't
audit and for non-U.S. companies, and benefited from a rising appetite for
consulting services.
CLASSROOM APPLICATION: This article offers an overview of the
services (and job opportunities) provided by the 'Big Four' accounting
firms, along with a glance into the profitability of those firms. You can
use this article in an auditing class to discuss the industry and also
career options for students, as well as for a managerial accounting class
for a discussion of business segmentation and analysis.
QUESTIONS:
1. (Introductory) What are the 'Big Four' accounting firms? What
are their geographic territories? What are the various business segments
within those firms?
2. (Advanced) What are the growth rates for the Big Four firms? Why
is revenue growth reported, but profitability is not reported in this
article? How do firms and analysts use each of those types of data?
3. (Advanced) What is assurance services? How does it differ from
consulting? Which is more profitable? Which of these business segments has
more potential for growth? Why?
4. (Advanced) The article states that the firms have "rebuilt their
consulting businesses in recent years." Why were the firms put in the
position of rebuilding consulting, rather than building or maintaining what
they had? How have the firms approached rebuilding to avoid any issues or
legal problems? Why is consulting an attractive business for these firms?
5. (Advanced) What are the career opportunities with Big Four
accounting firms? What other career options do students have within public
accounting? What options do accounting majors have besides public
accounting?
Reviewed By: Judy Beckman, University of Rhode Island
Reviewed By: Linda Christiansen, Indiana University Southeast
Ernst & Young's yearly world-wide revenue rose
5.8%, the Big Four accounting firm said Tuesday, as the accounting industry
continues to battle challenging economic conditions.
Ernst's global revenue was $25.8 billion in the
fiscal year that ended June 30, up 5.8% from the previous year in U.S.
dollar terms. That was down from the previous year's 6.7% growth, though the
firm noted that in local-currency terms, the most recent year's revenue grew
by 7.7%, its fastest growth in those terms since 2008.
Ernst's growth trend held up relatively well
compared with other major accounting firms that recently reported slowing
growth. Last week, PricewaterhouseCoopers said its revenue was up 4% from
the previous year when foreign-exchange rates are held constant—lower than
the previous year's growth of 8%. Deloitte Touche Tohmatsu said in September
that its fiscal 2013 revenue had grown 3.5% in U.S. dollars, below the
previous year's 8.6% growth.
Like other major accounting firms, Ernst & Young is
an international network of private partnerships in individual countries and
doesn't disclose earnings as companies widely held by public shareholders
do.
Ernst said all of its business lines and
geographical regions showed growth despite "uneven market conditions in many
parts of the world." Mark Weinberger, the firm's global chairman and chief
executive, said in a statement that "there remain significant economic and
geopolitical uncertainties in developed and fast-growth emerging markets."
Ernst's strongest growth was in its consulting
business, with advisory revenue up 18%. That continued a recent industry
trend of faster growth in the high-demand consulting field than in the
more-mature core audit business. Revenue at Ernst's assurance business rose
4%.
Ernst and other firms have rebuilt their consulting
businesses in recent years—three of the Big Four, including Ernst, had sold
or divested themselves of their consulting businesses around the time the
Sarbanes-Oxley Act was passed in 2002, barring accounting firms from many
types of consulting for their audit clients. But the firms rebounded by
consulting for companies they didn't audit and for non-U.S. companies, and
benefited from a rising appetite for consulting services.
The
FASB tentatively decided to exclude money market funds that are registered
with the Securities and Exchange Commission at its October 24, 2013 meeting,
as well as "similar" unregistered money market funds from the scope of the
consolidation literature. In addition, the FASB tentatively decided to
rescind the 2010 deferral of the variable interest entity consolidation
amendments from 2009. Many companies may not be consolidating registered
and similar unregistered funds under the deferral of the adoption of the
variable interest entity consolidation amendments issued in June of 2009. So
for some companies, the temporary deferral may now be a permanent scope out
of the consolidation model, while for other companies, the definition of
"similar" will determine whether they are required to consider the
consolidation model.
Read our
In brief
article
for an overview of the FASB's latest decisions.
Regards,
CFOdirect Network team
Jensen Comment
It's not clear why firms want to keep money market funds off in a VIE in the
first place. Am I missing something here?
The change to the health care law under the
agreement reached Wednesday sets up a new requirement that the eligibility
of people who receive cost-sharing reductions under Section 1402 of the
Patient Protection and Affordable Care Act, P.L. 111-148, or the health
insurance premium tax credit under Sec. 36B, be verified. Under the
agreement, the secretary of Health and Human Services must ensure that
health insurance exchanges verify that individuals applying for the credit
or cost-sharing reductions are eligible and must certify to Congress that
the exchanges are verifying eligibility. The secretary is required to report
to Congress by Jan. 1, 2014, what procedures exchanges are using to verify
eligibility.
The health insurance credit is available to
eligible individuals who purchase coverage under a qualified health plan
through one of the new health insurance exchanges. The credit subsidizes the
cost of health insurance for certain low-income individuals.
To be eligible for the credit, a taxpayer must (1)
have household income between 100% and 400% of the federal poverty line
(FPL) amount for his or her family size (starting in 2014, persons with
income below 133% of the FPL are eligible for Medicaid), (2) not be claimed
as a dependent by another taxpayer, and (3) if married, file a joint return.
The credit amount is the sum of “premium assistance amounts” for each month
the taxpayer or any family member is covered by a qualified health plan
through an exchange. The premium assistance amount is the lesser of (1) the
premium amount or (2) the result of a formula based on a “benchmark plan”
and the taxpayer’s household income (Sec. 36B(b)).
Continued in article
Jensen Comment
I think it would be better to have the new fraud law enforced by the IRS since
the IRS will have both income data and the health premium subsidy data. However,
the IRS insisted all along that it did not want to enforce any part of the
Affordable Health Care Act.
I think the Secretary of Health and Human Services will be helpful in
enforcing this fraud detection and prevention law unless it has access to the
IRS database on tax returns.
Otherwise enforcement will be hopeless. It is rather hopeless in any case
since millions of people receiving the subsidy will have unreported income from
the underground economy that even the IRS cannot stop or even seriously deter.
Jensen Comment
There may be better ways to define "friendly" than in terms of business and
individual taxes. For example, Texas did not make the tax-friendly list in
comparison with Wyoming, Alaska, New Hampshire, and Nevada. Yet firms are
flocking more to Texas that all of those other states combined. Being tax
friendly does not trump such things as available workforce (yes Hispanics in
Texas are good workers) and incentives provided by state and local governments.
Location is important with Texas being a gateway to commerce south of the Rio
Grande. Large airport hubs are important to attracting new businesses. This also
gives Dallas and Houston an edge. And not having labor union strife is
all-important which favors southern states relative to New England and New York.
Oklahoma Governor Mary Fallin is starting to feel
surrounded. On her state's southern border, Texas has no income tax. Now two
of its other neighbors, Missouri and Kansas, are considering plans to cut
and eventually abolish their income taxes. "Oklahoma doesn't want to end up
an income-tax sandwich," she quips.
On Monday she announced her new tax plan, which
calls for lowering the state income-tax rate to 3.5% next year from 5.25%,
and an ambition to phase out the income tax over 10 years. "We're going to
have the most pro-growth tax system in the region," she says.
She's going to have competition. In Kansas,
Republican Governor Sam Brownback is also proposing to cut income taxes this
year to 4.9% from 6.45%, offset by a slight increase in the sales tax rate
and a broadening of the tax base. He also wants a 10-year phase out. In
Missouri, a voter initiative that is expected to qualify for the November
ballot would abolish the income tax and shift toward greater reliance on
sales taxes.
South Carolina Governor Nikki Haley wants to
abolish her state's corporate income tax. And in the Midwest, Congressman
Mike Pence, who is the front-runner to be the next Republican nominee for
Governor, is exploring a plan to reform Indiana's income tax with much lower
rates. That policy coupled with the passage last week of a right-to-work law
would help Indiana attract more jobs and investment.
That's not all: Idaho, Maine, Nebraska, New Jersey
and Ohio are debating income-tax cuts this year.
But it is Oklahoma that may have the best chance in
the near term at income-tax abolition. The energy state is rich with oil and
gas revenues that have produced a budget surplus and one of the lowest
unemployment rates, at 6.1%. Alaska was the last state to abolish its income
tax, in 1980, and it used energy production levies to replace the revenue.
Ms. Fallin trimmed Oklahoma's income-tax rate last year to 5.25% from 5.5%.
The other state overflowing with new oil and gas
revenues is North Dakota thanks to the vast Bakken Shale. But its
politicians want to abolish property taxes rather than the income tax.
They might want to reconsider if their goal is
long-term growth rather than short-term politics. The American Legislative
Exchange Council tracks growth in the economy and employment of states and
finds that those without an income tax do better on average than do high-tax
states. The nearby table compares the data for the nine states with no
personal income tax with that of the nine states with the highest personal
income-tax rates. It's not a close contest.
Skeptics point to the recent economic problems of
Florida and Nevada as evidence that taxes are irrelevant to growth. But
those states were the epicenter of the housing bust, thanks to overbuilding,
and for 20 years before the bust they had experienced a rush of new
investment and population growth. They'd be worse off now with high
income-tax regimes.
The experience of states like Florida, New
Hampshire, Tennessee and Texas also refutes the dire forecasts that
eliminating income taxes will cause savage cuts in schools, public safety
and programs for the poor. These states still fund more than adequate public
services and their schools are generally no worse than in high-income tax
states like California, New Jersey and New York.
They have also recorded faster revenue growth to
pay for government services over the past two decades than states with
income taxes. That's because growth in the economy from attracting jobs and
capital has meant greater tax collections.
The tax burden isn't the only factor that
determines investment flows and growth. But it is a major signal about how a
state treats business, investment and risk-taking. States like New York,
California, Illinois and Maryland that have high and rising tax rates also
tend to be those that have growing welfare states, heavy regulation,
dominant public unions, and budgets that are subject to boom and bust
because they rely so heavily on a relatively few rich taxpayers.
The tax competition in America's heartland is an
encouraging sign that at least some U.S. politicians understand that they
can't take prosperity for granted. It must be nurtured with good policy, as
they compete for jobs and investment with other states and the rest of the
world.
"Our goal is for our economy to look more like
Texas, and a lot less like California," says Mr. Brownback, the Kansas
Governor. It's the right goal.
One has to wonder how quarterbacks can be ranked apart from their protective
linemen and the quality of their receivers. In addition, the running game can
make or break a passing game, at least in terms of statistical performance of
the quarterback. And a weak defense can leave the world's greatest quarterback
sitting on the bench for most of the game while the opposing team chews up the
clock with 3.5 yards at a time.
In a private message regarding RateMyProfessors.com, Joe Hoyle questioned how
the Top 25 college teachers can be ranked apart from statistics like grading
easiness. He made his point, and I might add that Joe gets stellar ratings while
being hammered for grading toughness --- a remarkable accomplishment in my
opinion.
The Number 1 teacher ranks 5.0/5.0 overall and 4.8/5.0 in terms of
easiness
The Number 5 teacher, an accounting professor, ranks 5.0/5.0 overall and
4.9/5.0 in terms of easiness
So how is the ranking of teachers (sort of islands) like ranking of
quarterbacks (never islands)?
I don't really think teachers are islands. Their performance depends a great
deal upon others, notably the abilities and motivations of the students that
their colleges provide them in the classroom. In this age there is also the
factor of facilities. Do they teach in electronic classrooms? There also is a
factor of resources. Does their college provide them with money for field trips?
There is, however, one key difference between comparing quarterbacks versus
comparing of teachers. The statistics tracked for quarterbacks are well defined.
In comparison the overall ratings of teachers and the easiness of teachers are
not well defined in terms of the subjective response of each and every
respondent.
FASB's September action included logging 600 comment letters
The Financial Accounting Standards Board was busy in
September. It said the comment period for proposed accounting standards
revision would be extended, and it continued ongoing work with the
International Accounting Standards Board on "must-converge" goals. FASB also
put forth a public comment proposal for its GAAP amendment, and logged
600 public comments on its joint leasing-standard update.
Bloomberg BNA (free content)/Accounting Blog (9/30)
Jensen Comment
My son Marshall was recently stopped in his leased car for a red light in
downtown Lewiston (where he works for a hospital) when he was rear ended by a
woman who was paying more attention to her baby than her driving at the time.
Although her insurance company paid the $5,700 slight damages to his leased car,
it would have been his responsibility to fix the car if she had no insurance.
Thus leasing is no different than ownership in the case of a leased car in the
case to collisions. However, not all "risks and rewards of ownership" are
transferred to lessees of cars, including capital gains and losses of the entire
car at the end of the lease term.
The problem is even more dramatic in the case of operating leases of real
estate like a store in a strip mall. If the store changes dramatically in value
the capital gain or loss usually accrues to the lessor who will adjust the rent
accordingly at the end of the lease term or simply refuse to write another lease
if the mall is going to be sold or destroyed.
My point is that I don't think there will be many leases booked under the PwC
model. One reason is that any operating lease that meets the PwC model
might be re-written to get out of having to book the lease.
Measurement of lease assets and liabilities
23. Investors and analysts consulted generally support the proposed
measurement of variable lease payments and options, ie
excluding variable lease payments linked to sales or
use and, in most cases, excluding optional renewal periods.
Almost all noted that they would not want subjective estimates about
variable lease payments and renewal options included in the reported asset
and liability amounts. In their view, it would make the balance sheet
amounts less reliable and, thus, less useful for their analyses. A number of
investors and analysts also think that it is more appropriate to reflect the
economic difference between fixed and variable lease payments, and
non-cancellable and optional lease periods, on a lessee’s balance sheet as
proposed — a lessee with contracts with variable lease payments and optional
renewal periods has a lot more flexibility than those making fixed payments
in non-cancellable period.
From the CFO Journal's Morning Ledger on October 15, 2013
Some
small businesses are finding that if they don’t have a handle on the
health-care law’s cost and impact,
they may have a harder time getting a loan,
Maxwell Murphy reports on CFOJ. To qualify for some loans, especially for
growth capital, more companies are being required to provide assurances that
they will be in compliance with the law by 2015. “To raise capital, if
you’re in a growth mode, you want a [CFO] who exudes credibility,” says
Christian Oberbeck, CEO of the lender Saratoga Investment.
Among the small businesses that will be affected by the law, a survey of
roughly 1,300 executives this summer by the U.S. Chamber of Commerce found
just 30% said they were ready to comply. About 27% said they would cut hours
to reduce full-time employees and 23% planned to replace full-time workers
with part-timers. Those options might not help their loan applications, Mr.
Oberbeck says, because firing workers and cutting hours can damage a
business. He also says he would question a business plan that risks running
afoul of the spirit of the law.
Executives weighing their options also might have to wait awhile for any
relevant data to come from the new public health-care exchanges created by
the law. The exchanges have been beset by glitches and other problems, at
both the federal and state levels. “It’s tougher to lend money to those
companies until we see how the ACA will play through,” says Art Penn,
managing partner at PennantPark Investment Advisers, a middle-market lender.
From the CFO Journal's Morning Ledger on October 1, 2013
Auditors at big firms cited for more deficiencies Auditors at the seven largest U.S. accounting firms
were
cited for deficiencies in 37.5% of audits inspected by
U.S. regulators in 2011, Emily Chasan
reports. That figure was up from 32.6% in 2010, and has more than doubled
from 14.8% in 2009. About 31% of the deficiencies involved auditors’
evaluation of the market prices companies supplied for complex assets, down
from about half in the prior year. In previous years, the most common
valuation errors were caused by auditors’ failures to understand methods and
assumptions used by third-party pricing services. But one in three of those
deficiencies uncovered by the 2011 inspections involved failures to test
managers’ assertions about the methods and data used to value assets.
The new, converged revenue recognition standard
will include substantially less industry-specific,
“bright-line” guidance than many U.S. companies are accustomed to.”
[italics added]
That understatement is brought to you by the
Journal of Accountancy. It’s the lede for a
story on a presentation by McGladrey partner Brian Marshall in which he
identified six broad areas of the proposed revenue recognition standard
where issuers will have to exercise judgment, on things that were straight
from the cookbook of existing US GAAP.
Maybe I’m still carrying a grudge against the
Accounting Establishment for their incessant ‘IFRS is inevitable’ chanting,
which may have been the cause of my tinnitus; but I don’t think I’m overly
sensitive to be peeved by JofA’s use of ”will include” in the
forgoing when “would include” is patently the more appropriate
tense. The fact remains that the FASB is still only in the exposure draft
stage, and consequential changes are surely in the works before a final
standard is put to a vote by both the FASB and the IASB. It has become
painfully obvious to all, including JofA’s editorial staff, that the
proposal is highly controversial; and that a great many stakeholders would
prefer for this convergence project to fade away, as so many others have
before it.
Having once again been forced to
lament that JofA is no longer the respected
“journal” it once was, and is now merely a house organ for the AICPA
leadership (padded with some nerdy tips on using Excel), I do welcome the
coverage of thought-provoking remarks by Mr. Marshall. But, the unasked
$64K question on the revenue recognition project, is whether expected future
costs will exceed benefits.
Continued in article
Jensen Comment
I most certainly do not agree that the JofA is no longer a respected journal. I
find many useful articles and other Tidbits in the JofA.
It seems that Tom is using the above article to restate his laments about the
accounting establishment, the AICPA, possible convergence of US GAAP into IFRS
standards, liability accounting etc. I would have liked more discussion of the
revenue revenue recognition standard per se.
Note that the judgment issues discussed by Brian Marshall are not necessarily
all new judgment issues resulting from the proposed standards. Many of them are
existing issues in the current standards.
Independence: What is that? The IASB is making a show of trying to
display its independence
The IASB is the designated standard setter for a majority of nations of the
world who will have to allow European lawmakers to have their own way if the
IASB caves in on this dictate from the EU lawmakers
The group which writes global accounting rules said
the European Parliament was threatening its independence by calling for a
fundamental change to the way it sets standards, and linking it to future
funding.
The parliament wants the International Accounting
Standards Board (IASB) to include a specific reference to "prudence" in its
basic tenets, to put pressure on accountants to err on the side of caution
when scrutinizing losses at
banks.
In a draft law, it wants to make future
contributions from the European Union - which provides about a third of
funding for the IASB - effectively conditional on this reform.
Lawmakers believe the prudence reference could help
avoid a repeat of the 2007-09 financial crisis in which EU taxpayers had to
put billions of euros into struggling
banks.
IASB Chairman Hans Hoogervorst described the
parliament's stance as "highly worrisome".
"This is something we cannot accept," he told a
meeting of his body's advisory council on Monday.
"If Europe is going to do this, other parts of the
world might be encouraged to do so. It's a threat to our independence," he
said.
The European Parliament's work is being led by
lawmaker Theodor Dumitru Stolojan, whose office did not respond immediately
to a request for comment.
The IASB writes book-keeping rules used in over 100
countries, including the European Union, but not the United States.
In 2012, the EU provided 7.1 million pounds or
roughly a third of the 20 million pounds the IASB received that year.
In an amendment to a draft law on future
contributions to the IASB, the European Parliament wants to make funding
conditional upon the body giving serious consideration to amending its basic
tenets, known as the conceptual framework, and wants it to insert a
reference to "prudence".
"COOKIE JAR"
"Cofinancing should be given to the bodies in
question only if it is clear that... accounting concepts, in particular with
regard to 'prudence' ... are appropriately considered in the revision of the
conceptual framework," says the amendment, seen by Reuters.
A specific reference to prudence was dropped by the
IASB in 2010 to help align IASB and U.S. accounting rules.
U.S. critics say prudence introduces a bias into
financial reporting when it is meant to be a neutral snapshot. There is also
a risk of creating "cookie jar" accounting, meaning companies downplay
profits in good years to smooth out a rockier performance in tougher years,
the critics say.
Hoogervorst said many of the EU member states, who
have joint say with parliament over funding, oppose the linkage. Britain,
however, has just thrown its weight behind the re-introduction of prudence.
The spat over funding is a further sign of
policymaker frustration at the speed of reform in accounting rules for banks
after the financial crisis.
In 2008, during the financial crisis, world leaders
called on the IASB and its U.S. counterpart, the Financial Accounting
Standards Board, to force banks to recognize souring loans much earlier so
they can take speedy action and avoid calling on taxpayers.
So far the two boards have failed to find a common
solution despite several drafting changes.
"We have to think about the credibility of standard
setting. We have had five years and six models. It's decision time,"
Hoogervorst said. "We have certainly not thrown in the towel. We are
determined to get this done."
Continued in article
Jensen Comment
The IASB and FASB are both concerned about firms managing an accounting concept
that neither of the standard setters can define --- net earnings!
Last defendant standing. Not an enviable place for
EY in the case, In re Lehman Brothers Securities and Erisa Litigation.
Everyone else had folded their tent, paid the price
to cross this dog off the list. Lehman underwriters agreed in 2011 to a
$426.2 million settlement. UBS, one of the underwriters, held out and
settled last August for another $120 million. Even before the UBS and EY
settlements,
Bernstein
Litowitz Berger & Grossmann, attorneys for the plaintiffs, claimed
the combined recovery of $516,218,000 is the third
largest recovery to date in a case arising from the financial crisis.
The $99 million EY will pay is more than Lehman’s
officers and directors, who settled for $90 million. That’s a big deal
considering the executives typically say, “The auditors said it was ok,” and
the auditors say, “Management duped us.” But it’s not that much considering
that EY agreed to pay C$117 million ($117.6 million) last December to settle
claims in a Canadian class action suit against Sino-Forest Corp, a Chinese
reverse merger fraud. That settlement is the largest by an auditor in
Canadian history, according to the the law firms.
And it’s not as much as some thought EY would pay
for Lehman. In fact, many thought Lehman would finish off EY for good.
“The Examiner concludes that sufficient
evidence exists to support colorable claims against Ernst & Young LLP
(“Ernst & Young”) for professional malpractice arising from Ernst &
Young’s failure to follow professional standards of care with respect to
communications with Lehman’s Audit Committee, investigation of a
whistleblower claim, and audits and reviews of Lehman’s public filings.”
That may not sound like a mortal threat against
Ernst & Young. But the damages here could be enormous. A successful
lawsuit against E&Y could result in a court finding that the failure to
properly advise the audit committee prevented Lehman from taking genuine
steps to substantially reduce its leverage, which may have saved the
firm from bankruptcy. Which is to say, E&Y could find itself blamed for
all the losses to Lehman
shareholders. That would be a stretch—such a
claim would be speculative—but it still should be scaring the heck out
of the partners.
When the bankruptcy examiner’s report on Enron
came out, the language about Arthur Andersen was quite mild. It merely
noted there was “sufficient evidence from which a fact-finder could
conclude that Andersen: (1) committed professional negligence in the
rendering of accounting services to Enron…” It went on to note that
Andersen likely had a strong defense against liability since so many
Enron executives were implicated.
“Enron brought down Arthur Andersen,”
Felix Salmon notes. “Will Lehman do the same for E&Y?”
In July of 2011, New
York Federal Court Judge Lewis Kaplan decided to
allow substantially all of the allegations against Lehman executives and at
least one of the allegations against Ernst & Young to move forward to
discovery and trial. One month later Lehman Brothers executives, including
its former chief executive Richard S. Fuld Jr., agreed to pay $90 million to
settle. Insurance proceeds paid for their settlement.
What was the
remaining allegation against Ernst & Young? That
the auditor had reason to know Lehman’s 2Q 2008 financial statements could
be materially misstated because of the extensive use of Repo 105
transactions.
At its October 2 meeting, the
FASB tentatively decided to retain some aspects of the accounting model for
repurchase agreements that it proposed in an exposure draft1
issued in January 2013 (the “Exposure Draft”). This is a significant change
from the Board’s tentative decision in May 2013 when, after reviewing
comment letter feedback, it decided not to modify the accounting for
transfers of financial assets and only require additional disclosures.
What are the key decisions?
The FASB made the following tentative decisions in
regard to the repurchase agreement accounting model:
Repos-to-maturity2: The
Board decided to require repo-to-maturity transactions to be accounted
for as secured borrowings.
Repurchase financings3:
Under current guidance, repurchase agreements entered into as part of a
repurchase financing may be required to be accounted for on a “linked”
basis with the original transfer and analyzed as a single transaction.
As a result, the purchaser may account for the transaction as a
derivative instrument as opposed to a purchase and a financing.
Consistent with the Exposure Draft, the Board decided to eliminate the
current model for repurchase financings and require that repurchase
agreements be accounted for separate from the original transfer.
“Substantially the same” guidance: The
Board decided to add new implementation guidance to clarify the
assessment of the substantially the same characteristics within the
effective control model for dollar roll4 transactions
involving the transfer of an existing agency mortgage-backed security
and a forward To Be Announced (TBA) repurchase agreement. The
implementation guidance would indicate that a forward TBA dollar roll
without trade stipulations would not be expected to result in the return
of a substantially the same financial asset, but a forward TBA dollar
roll with stipulations might.
When applying the new guidance, certain market
standard TBA dollar rolls without stipulations may be accounted for as sales
(if the other criteria are satisfied), but a transaction with stipulations
would require additional analysis.
The Board also determined that additional
disclosures will be required for certain transfers accounted for as
sales by transaction type, including:
- the carrying amounts of assets derecognized as of the date of the
initial transfer in transactions for which an agreement with the
transferee remains outstanding at the reporting date,
- information about the transferor’s ongoing exposure to the
transferred financial assets, including a description of the
arrangements that result in the transferor retaining exposure to the
transferred financial assets, the risks related to those assets to which
the transferor remains exposed, and the maximum exposure related to
those assets (fair value of assets derecognized), and
- amounts recorded in the financial statements related to agreements
accounted for as sale (i.e., the forward purchase commitment accounted
for as a derivative), with a cross reference to the disclosures required
by ASC 815, Derivatives and Hedging.
Is convergence achieved?
Convergence is not a stated goal of this project.
This is a FASB-only project involving amendments to ASC 860 under which
surrendering effective control is required to achieve sale accounting. IFRS
requires a different model which is more of a “risk and rewards” approach
that generally results in treating repurchase agreements as secured
borrowings.
We may live in a mobile-obsessed world,
but it turns out the best-selling consumer-electronics gadget on Amazon
isn't made by Apple or Samsung. Neither is it a Kindle—which is kind of
shocking, given that Amazon promotes its own tablets and e-readers right on
its own home page.
The winner is …
Chromecast, the tiny Google device that streams
video and music to a TV. Chromecast has topped several of Amazon's
bestseller lists—including the biggie, its list of all electronics—for weeks
now,
displacing a Kindle model as sales leader and
leapfrogging ahead of both Apple TV and the Roku.
The two-month-old Chromecast currently tops the
charts for every Amazon subcategory it's listed in, including digital media
devices, streaming media players and televisions and video. The next most
popular TV streaming devices in the general electronics rankings are the
Apple TV (at #7) and the Roku 3 (at #8).
It's easy enough to guess why the
Chromecast is popular. First, it's cheap—$35 for a gadget with functionality
similar to other streaming devices in the $50 to $100 range. Second, when it
debuted, Chromecast
immediately sold out—at the Google Play store, at
Amazon, and at other retailers. Whether that was by design or due to inept
supply chain management isn't clear, but one consequence was that Chromecast
took on the allure of a hot, in-demand item.
Perhaps most important, Chromecast isn't
restricted to a single platform. Although it's produced by Google,
Chromecast works for both iPhone/iPad and Android users, at least
for the most part, which gives almost anyone with
a smartphone, tablet or computer the opportunity to stream to their TV using
devices they already know and use. In other words, there's virtually no
learning curve.
Chromecast's sales success does suggest
that mainstream users aren't too concerned about the lack of streaming
options—to date, only two non-Google services, Netflix and Hulu, work
directly with Chromecast—or the wait for more apps to emerge. At least not
yet.
From the CFO Journal's Morning Ledger on October 4, 2013
Twitter’s IPO is set to be one of the biggest tests of the JOBS
Act
The company revealed plans to raise up to $1 billion yesterday after
previously using a portion of the law to file confidentially with
regulators. So potential buyers just got their first glimpse of
Twitter’s financials, which showed the social
network’s revenue more than doubled to $254 million
in the first six months of this year, the WSJ reports.
But there were also some red flags. Its net loss grew by 40% to $69 million
in the period as expenses ballooned. And its user growth is slowing, at the
same time prices for ads, which make up the bulk of the company’s revenue,
are falling. “They certainly have a lot of work ahead of them to get
mainstream America to understand” how Twitter works, said Brian Solis, an
analyst at the Altimeter Group.
. . .
Absent from Twitter’s big reveal were the
pay packages for its current and former chief
financial officers
CFOJ’s Emily Chasan reports. The company is
taking advantage of JOBS Act rules that let it disclose compensation for
only its top three named executive officers, rather than five, which is
required for a larger company. Twitter CEO Richard Costolo received a
compensation package valued at $11.5 million last year. Christopher Fry,
senior vice president of engineering, was paid $10.3 million and Adam Bain,
president of global revenue, received compensation worth $6.7 million,
according to the filing. But the pay packages for CFO Mike Gupta and former
CFO Ali Rowghani, who now serves as chief operating officer of the company,
weren’t included.
From the CFO Journal's Morning Ledger on October 4, 2013
Ex-Tyco CFO granted parole Former
Tyco International CFO Mark Swartz was granted parole
and should be released in January, Bloomberg reports.
Mr. Swartz, who served as Tyco’s finance chief from February 1995 to
September 2002, and former CEO Dennis Kozlowski were convicted in 2005 of
defrauding shareholders of more than $400 million. They are both serving
sentences of 8 1/3 years to 25 years for stealing from the company and
deceiving shareholders.
Britain still believes a specific reference to
"prudence" would improve international accounting standards, but reasserted
on Thursday the rules as they stand are legally binding, hoping to end any
uncertainty over the matter.
Rules on how companies are audited, drawn up by the
International Accounting Standards Board (IASB), are mandatory in Britain
and elsewhere in the European Union, but a decision in 2010 to drop a
specific reference to prudence has been questioned by some investors.
Prudence requires accountants to err on the side of
caution when treating something not covered by a specific IASB rule and the
investors said its omission from the foundation for the IASB's rules, known
as the conceptual framework, was inconsistent with some EU and British laws.
They argued it could help banks mask any problems
they were suffering, a particular concern given banks were given a clean
bill of health just before taxpayers had to rescue them in the 2008
financial crisis.
One of the critics, Tim Bush of shareholder
pressure group Pirc, challenged the IASB rules in a 24-page letter in 2010
in his role as member of a UK Accounting Standards Board committee.
Britain's government is "entirely satisfied that
the concerns expressed are misconceived", consumer affairs minister Jo
Swinson said in a statement on Thursday.
Melanie McLaren, a director at the Financial
Reporting Council (FRC), which regulates accounting in Britain, said the
government statement, backed by a legal opinion for the FRC, ended the
uncertainty over accounting practices.
"We felt we needed to listen to the investors and
give the matter due consideration. Having done that we needed to make sure
we were quite firm to close that uncertainty down as we approach the
financial year-end," McLaren told Reuters.
Bush said the debate over IASB rules could
continue.
He told Reuters it was difficult to see how the
matter is conclusively settled if there is a situation where the latest
legal opinion seemed to be disagreeing with an earlier opinion and also with
other judges and a Law Lord.
The IASB is reviewing its conceptual framework and
the UK government and FRC maintain a reference to prudence should be
reinserted.
"It's not as if there is no concept of exercising
caution in the conceptual framework, but we feel it has been de-emphasized,"
McLaren said.
IASB Chairman Hans Hoogervorst has so far resisted
such calls, saying prudence was there "in spirit".
Continued in article
FASB Weighs Simplified Accounting Standards for Private Companies
From Ernst & Young on October 4, 2013
The PCC
modified its proposals to allow private companies to simplify their
accounting for certain interest rate swaps and to amortize goodwill
acquired in a business combination and sent them to the FASB for
final endorsement. If endorsed by the FASB, the proposals would be
the first accounting alternatives approved for private companies
under US GAAP, in an effort to reduce cost and complexity for
private companies. Our
To the Point publication
tells you what you need to know about the proposals.
Jensen Comment
Although private companies do not sell equity shares to the public, they are
often required to have audits by creditors, potential creditors, and owners.
External auditors base opinions on GAAP conformity --- whatever the GAAP.
Private companies as well as small to medium sized public companies (SMEs) are
lobbying for simplified USA accounting standards for SMEs. Companies adopting
IFRS GAAP now have simplified IFRS SME standards. The FASB and SEC are being
pressured to do the same for USA GAAP. One of the primary reasons is to reduce
audit fees.
IFRS SMEs = IFRS Lite for Small and Medium Sized Entities
Similarities and Differences - A comparison of IFRS for SMEs and 'full
IFRS'
Published:09/03/2009
Summary: This PwC
publication compares the requirements of the IFRS for small and
medium-sized entities with 'full IFRS' issued up to July 2009. It
includes an executive summary outlining some key differences that
have implications beyond the entity's reporting function and
encourages early consideration of what IFRS for SMEs means to the
entity.
This publication
is a part of the PricewaterhouseCooper’s ongoing commitment to help
companies navigate the switch from local GAAP to IFRS for SMEs. For
information on other publications in our series on IFRS for SMEs,
see the inside front cover.
Abstract:
We conduct an empirical study to analyze how waiting in queue in the context
of a retail store affects customers’ purchasing behavior. Our methodology
combines a novel dataset with periodic information about the queuing system
(collected via video recognition technology) with point-of-sales data. We
find that waiting in queue has a non-linear impact on purchase incidence and
that customers appear to focus mostly on the length of the queue, without
adjusting enough for the speed at which the line moves. An implication of
this finding is that pooling multiple queues into a single queue may
increase the length of the queue observed by customers and thereby lead to
lower revenues. We also find that customers' sensitivity to waiting is
heterogeneous and negatively correlated with price sensitivity, which has
important implications for pricing in a multi-product category subject to
congestion effects.
Jensen Comment
I typically pay much more for an item that I purchase from Franconia Hardware
where there's seldom any line and the owner cheerfully helps me find what what I
came to purchase. I usually go to Walmart when I don't think Mike carries an
item on my shopping list. Even then I sometimes go to Franconia Hardware before
driving on to Walmart.
But Walmart provides better exercise.
I typically have to walk for a half mile on ice and slush getting to and from
where I have to park my car amidst all the parked cars from Vermont in the
Walmart parking lot.. I think there would be some benefits if New Hampshire
enacted a sales tax.
The Securities and Exchange Commission is
investigating whether employees at Xerox Corp.'s XRX -2.50% big computer
services division inflated sales figures, taking aim at a business the
company has invested in heavily to diversify away from copiers.
The investigation involves Affiliated Computer
Services, a technology outsourcing company Xerox bought in 2010 for $6.5
billion, and its former CEO, who now runs the services business at Xerox,
according to a securities filing Tuesday.
At issue is whether ACS included the underlying
price of the equipment it resold when counting up its revenue rather than
booking only its markup—a practice that has tripped up other technology
companies.
Xerox said the SEC has issued so-called Wells
notices indicating that the agency may bring civil enforcement actions
against the former CEO, Lynn Blodgett , and two other employees it didn't
name.
Mr. Blodgett, currently president of Xerox
Services, couldn't be reached for comment.
According to the filing, all three employees—only
two of whom are still with Xerox—plan to argue that the SEC shouldn't take
action. The SEC isn't recommending that Xerox be charged, and the company is
cooperating with the probe, according to the filing.
The probe casts a shadow over an acquisition that
was the biggest in the company's history and central to Chief Executive
Ursula Burns gamble to move Xerox away from equipment sales and into
providing back-office services like document management and bill processing
for businesses and governments.
The transition has been bumpy. Services accounted
for 51% of Xerox's $22.4 billion in revenue last year. But revenue has
increased little since 2010, amid falling sales of equipment like printers
and copiers; services revenue stagnated last year.
According to the filing, the SEC is looking at
whether ACS booked revenue from equipment it resold on a gross basis when it
should have used a net basis. Hypothetically, if ACS bought a computer
server for $1,000 and sold it to a client for $1,100, the SEC is arguing it
should have booked only the $100 it was due rather than the full $1,100.
A similar issue led daily deals marketer Groupon
Inc. GRPN -4.58% to cut its reported revenue in half in the fall of 2011
ahead of its initial public offering. After discussions with the SEC,
Groupon shifted to booking only its commission on sales rather than the
total value of the online coupons it sold.
Xerox said more than 80% of the revenue in question
was booked before it acquired ACS. None of it happened after 2010, and the
amounts in question weren't material to the company's subsequent financial
results, it said.
In Tuesday trading on the New York Stock Exchange,
Xerox shares were down 2.5%, or 26 cents, to $10.14.
"I don't think the numbers matter so much as the
fact they are being investigated again," said Dylan Cathers , equity analyst
at S&P Capital IQ. "We had hoped that problems that ACS had were long behind
them and here they are popping up again."
In 2006, the SEC investigated ACS executives for
backdating stock-option grants made to executives, which was followed by the
resignation of the CEO Mark King and the Chief Financial Officer Warren
Edwards .
Mr. Blodgett took over after as chief executive of
ACS after the resignations and became an executive vice president of Xerox
when the company acquired ACS. He became president of Xerox Services in
2012. He will continue to lead the services business, a Xerox spokesman
said.
Xerox was founded 107 years ago in Rochester, N.Y.,
as a manufacturing of photographic paper and equipment. It flourished
through the 1960s with sales of the first plain paper photocopier, but its
fortunes waned amid rising competition in the 1990s. In 2000, the company
booked its first loss in 211 consecutive quarters amid a rising levels of
bad debt.
Froin the CFO Journal's Morning Ledger on October 10, 2013
SEC drops 20% of investigations after warning. Government figures show about 20% of people who were warned over a
two-year period that they might be sued for violations of securities laws
ended up not facing charges,
the WSJ reports. Wells notices — which disclose the
specific charges that enforcement officials are considering recommending to
the SEC’s commissioners for approval — were issued 797 times in the two-year
period that ended in September 2012, and 159 of those went nowhere or
stalled, according to the SEC. Individual targets of SEC investigations who
weren’t later charged include Anthony Piszel, the former Freddie Mac CFO.
Some experts said the 20% abandonment rate is surprisingly high given the
SEC stockpiles significant ammunition before issuing a Wells notice. “This
shows that individuals…are more successful than previously thought in
persuading the SEC not to pursue an enforcement action,” said Erik Gerding,
a law professor at the University of Colorado.
Setting aside those concerns for
the moment, however, my biggest disappointment is that CFAI does not
separately disclose summaries of the responses of U.S.-based
participants. I realize that CFAI brands itself as a
global association; but my dog in the hunt, which should be the same as
US-based CFAs, is for the FASB to come to the answers that best serve
stakeholders in the U.S. capital markets. And by the same token, I
expect that IASB members would be primarily interested in the views of
non-US CFAs.
Continued in article
Jensen Comment
Under heavy pressure from the EU Parliament and EU bankers, the IASB passed a
rule easing the requirement for clobbering financial instruments with huge
"temporary" market value write downs. The FASB meanwhile shifted to the old
fashioned estimated loan loss reserve method of accounting.
The IASB approach is likely to leave troubled investments currently
overstated on "theory" that current market declines will be overcome in the long
haul of a held-to-maturity security investment.
Will Greek bonds eventually repay the face amount?
The FASB approach may or may not leave net balances overstated depending upon
the size of the change in the allowance for loan losses.
CPA auditors since the 2008 economic crises commenced have gone pretty loose
on requiring realistic current market value write downs or loan loss reserves.
What is this thing called professionalism?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
October 8, 2013 message from Tom Selling
Will the CECL model fix this one?
(Answer: No).
Only current values determined by an independent third party would.)
Hello, "independent" auditors??
"The Guarantee That Banks May Fear to Invoke,"
by FLOYD NORRIS
The mortgage orgy that banks entered into before
the financial crisis has caused them — and their borrowers — immense pain
since then. I have lost track of all the settlements and payments. FLOYD
NORRIS
Notions on high and low finance.
Now The American Banker newspaper isreporting that
banks may be hiding lossesfrom their shareholders:
The nation’s four largest banks are holding $57
billion of seriously delinquent loans that they’ve been slow to move into
foreclosure over concerns that the Federal Housing Administration, the
government mortgage insurer, will refuse to cover the losses and hit them
with damages, according to industry sources.
The banks — Bank of America (BAC), Citigroup (NYSE:
C), JPMorgan Chase (JPM), and Wells Fargo (WFC) — have assured investors in
the footnotes of quarterly filings that the loans are government-insured and
therefore pose no threat to their bottom lines, even if they end up in
foreclosure. What’s more, the banks have used these supposedly ironclad
government guarantees as a pretext for continuing to classify the loans as
performing and for holding no reserves against them.
Normally, an F.H.A. guarantee can be taken as
meaning that the lender will be repaid. (We are going to ignore the
possibility that the F.H.A. could be unable to meet its obligations.)
But as the article points out:
The FHA’s guarantee does not apply if lenders are
found to have violated underwriting or servicing standards, or to have
engaged in misconduct. Banks can also be held liable for treble damages
under the False Claims Act if they are found to have “falsely certified”
that mortgages met all FHA requirements.
Tom wrote: Will the CECL model fix this one? (Answer: No.)
Jensen Question
Why won't the CECL model fix this one if the auditors do their jobs
professionally? If CPA auditors are not professional in the majority of
audits our entire financial reporting system becomes a sick joke. Admittedly
its not likely that a subset of audits will will be deficient and even
fraudulent.
Tom wrote Only current values determined by an independent
third party would.) Hello, "independent" auditors??
Jensen Question
If the big banks cheated for trillions of dollars on the "current value
model" between 2007 and 2012 what's the evidence that they will not
continue to cheat on estimation of current values?
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Where are those "independent third parties" in white robes and golden halos
that banks can't buy off?
Let's not confuse banking fraud with laws and accounting standards that are
simply not being enforced.
Jensen Comment
The Floyd Norris article raises a more interesting accounting question to
me. Normally, the CECL and current value models focus on loan
receivables due. I'm not sure how to report estimated "treble damage" fines
imposed for issuing fraudulent loans.
I suspect estimated treble damages are contingent liabilities that should
probably become booked liabilities if and whenit looks like the wimpy
government regulators are really going to impose these damages for real.
Until the current pending JP Morgan settlement on mortgages for $3
billion actually transpires the government regulators will continue to look
wimpy. Reports are that even the $3 billion record setting settlement is a
pretty good deal for JP Morgan. So government regulators are still being
wimpy.
The U.S. Supreme Court turned away an appeal by
Robert Coplan, a former Ernst & Young LLP executive convicted of selling
illegal tax shelters that cost the federal government as much as $2 billion.
The justices today left intact Coplan’s seven-count
conviction and three-year prison sentence. His appeal, which challenged one
of the seven counts, sought to narrow the scope of the federal law that
criminalizes conspiracies to defraud the U.S. government.
Coplan, a tax lawyer, is one of four Ernst & Young
executives convicted in 2010 for developing and marketing tax shelters sold
from 1999 to 2001. Two of the men, Richard Shapiro and Martin Nissenbaum,
have since won reversals.
Prosecutors said Coplan also took steps to conceal
the shelters from the Internal Revenue Service, lied to the IRS in audits
and encouraged clients to do likewise.
In his appeal, Coplan pointed to a 2010 Supreme
Court decision that limited the reach of a separate federal fraud law in the
case of former Enron Corp. Chief Executive Officer Jeffrey Skilling.
In its brochures, Deloitte Consulting proclaims a
record of “smooth implementations” of complex technology projects. But in
courts, school systems, and government agencies in several states, the
roll-out of computer systems built by the global consulting firm has proved
to be anything but smooth.
From Florida and Pennsylvania to California,
multimillion-dollar projects managed by the New York company have come in
behind schedule, over budget, and riddled with problems. It is a situation
that has been repeated in Massachusetts this summer; Deloitte was two years
late and $6 million over budget in delivering a system to manage
unemployment claims, and, separately, the Department of Revenue fired the
firm for falling behind on a $114 million tax-system overhaul mired in
errors.
In Florida’s Miami-Dade County, school officials
fired Deloitte in 2009, partway through an $84 million contract to overhaul
the district’s computer system. After paying Deloitte $30 million and having
“virtually nothing” usable they could rescue, Superintendent Alberto
Carvalho said, the district turned the project over to its in-house
technology department, which completed it on time and within the budget.
“After much review the best thing to do was
terminate Deloitte, and we did with a vengeance,” Carvalho said. “We cut out
the middleman.” Related
10/3: State to look at claim system 10/4: DOR fired
firm in August
In a statement, Deloitte defended its efforts on
public contracts, saying it has worked with agencies in 45 states.
Jensen Comment
I doubt that the $1,000 fine is much of a deterrent since porn sites might pay
much more for really juicy stuff, especially stair steps to the stars.
The six-month jail threat is more serious, and certainly civil suits can be
deterrents except when the perpetrators are poor.
I often wondered if somebody would start a SeeMyProfessors.com site where
students submit illicit videos taken with clandestine cameras in class. No porn
here, but the videos might be embarrassing.
How to Mislead or Under-educate With a Case Illustration
Jensen Comment
This is a useful case illustration for an elementary accounting course. However,
for an intermediate accounting or higher-level course it leaves out too many
differences in the real world between tax earnings and book earnings. It also
does not delve into the the many complexities of dividing transactions between
book earnings and OCI, e.g., the calculation of what part of a partially
ineffective hedge goes to earnings versus what part goes to OCI.
The fact of the matter is that neither the FASB nor the IASB have definitive
concept of net earnings. Net earnings simply falls out of the clouds undefined
after computing all other balance sheet changes.
"Monetary Caps on Damages Due to the Liability of Auditors for Audit
Failures in Publicly Listed Companies - Subtitle: A Comparative Legal Analysis
between Common Law and Civil Law Regimes in Countries, Which Have Capping Damage
Awards of Auditors," SSRN, August 1, 2008 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1311384
Long Abstract:
Monetary CAPS on Damages due to the Liability of
Auditors for Audit Failures in Publicly Listed Companies.
A Comparative Legal analysis
between Common Law and Civil Law Regimes in countries, which have
Capping Damage Awards of Auditors.
Monetary CAPS on Damages due to the Liability of auditors for Audit
Failures in Publicly Listed Companies.
A Comparative Legal analysis
between Common Law and Civil Law Regimes in the Limitation of Monetary
Damage Awards a Court can hold an Auditor of a Publicly Listed Company
Liable for or Capping Damage Awards of Auditors.
2. Analysis of Audit Failure
in Common Law and Civil Law Regimes 5
What is Audit Failure? 6
Chronology Account of European Regulatory Action 8
Audit failure in the United Kingdom (common law) 9
Historical Analysis of the
Auditor 9-
Audit failure in the United States (common law) 11
Auditor Misconduct and Corporate Scandals 14
Audit Failure in France (civil law) 20
The Civil Law Approach 21
The financial markets of Europe and the United States comprise the most
reputable publicly listed companies in the world. The actions of the
auditor resulted in a audit failure. What is an audit failure? Audit
failure occurs when an auditor incorrectly issues an opinion that the
annual report represents a publicly listed company's financial condition
in conformity with generally accepted accounting principles globally as
a result of its actions as auditors. In addition to the Directives, the
latest Communication for the Commission to the Member States is a
Recommendation for a limitation on auditor liability of auditor caps.
This thesis will focus on the legal liability and the limitation of
liability of auditors in large publicly listed companies by using the
comparative legal approach in common and civil law regimes. The EU and
the U.S. require public companies to disclose similar financial
information requirements. which required the annual reports to give a
true and fair view of the company's assets, liabilities, financial
position and profit or loss was an EU accounting principle.
European Regulatory Action
The Financial Services Action Plan was a major step in a legal framework
for auditors.
The Recommendation states that auditors should be prohibited from
carrying out a statutory audit one required by law - if the auditors
have any relationship with their client that might compromise the
auditor's independence. Prompt action is needed to ensure sustainable
public confidence in financial markets. Dialogue between investors and
auditors are also essential. The general objectives for any policy
action are: Reduce the risk to capital markets that statutory auditors
might no longer be available to audit listed companies; and encourage
more auditors to audit listed companies. Subsequent to the Eight Company
Law Directive on statutory audits of annual accounts and consolidate
accounts, The European Commission's study on auditor's liability regimes
included the question , "Does Auditor liability impact on the quality of
audits."
The European Commission issued a Recommendation concerning the
limitation of auditors' civil liability. Audit Failure in the United
Kingdom (common law).
In the UK, following the City Equitable Fire Insurance case where
auditors escaped liability because of the articles of association, the
1929 Companies Act prohibited auditors from limiting their liability .
The court also found that the auditor has no accountability or liability
to third parties. Auditor Failure in the United States (common law).
In America, the auditor was an accountant who served the company. Audit
was viewed.
Prompt action is needed to ensure sustainable public confidence in
financial markets. Audit firms play a key role in ensuring the integrity
of financial statements and the effectiveness of internal controls of
public companies. Auditors review and certify the annual accounts of
public listed companies.
In the audit area, fearing the disappearance of another major accounting
firm, the Committee Report recommends a cap on the liability of
auditors. According to Professor Coffee, auditors financial misconduct
has implications for design of legal controls to protect public
shareholders. What is audit failure? Audit failure occurs when an
auditor incorrectly issues an opinion, among other things, that the
annual report represents a publicly listed company's financial condition
in conformity with generally accepted accounting principles. The stakes
of audit failure are enormous when only three large firms are competent
to audit the vast majority of public enterprises. Duties and liabilities
of auditors are based on company law and common law case law and not
based on any type of securities regulations as in the U.S. The law of
the state of incorporation and its state case governs corporate
liabilities and duties under contractual liability. What would be the
effect of introducing auditor liability limitation on industry
concentration? Audit Failure in France.
French law is based on the legal theory of justifiable reliance as a
basis of liability for incorrect advice, such as the advice of an
auditor in a large public company. In French law, liability for
incorrect information will usually fall under contractual liability.
The French law of articles 1282 and 1383 Code Civil is a general system
of tort law. French law as a civil system lays down the principle that
an audit failure causes liability in either contract or tort, as long as
there is a legal causal link
in the audit failure and the economic damages claimed. For the first
time in history of the accounting and auditing profession, auditors are
subject to public oversight. The U.S. may pursue the auditor cap or safe
harbor rules for auditors. One could imagine a single European system of
auditor liability and caps for those auditors who are working for large
publicly listed companies.
CESR, Report on the Current State of Integration of EU Financial
Markets, Annual Reports (April 2005)
Company Law and Corporate Governance Action Plan, IP/03/716 of May 21,
2003
COM 629 White Paper on Financial Services Policy 2005-2010 (2005)
Financial Services Authority, Financial Risk Outlook (2005)
FSA, Financial Risk Outlook 2006, p.97. Annual Report 2006, 46th.
The Statutory Audit Directive replaces the Eighth Company Law Directive
of 1984 (Directive 84/253/EC) and also amends the Fourth and Seventh
Company Law Directives (Directives 78/660/EEC and 83/349/EEC) by
introducing additional EU rules on the audit of company accounts.
GAO, Public Accounting Firms, Mandated study on consolidation and
competition, Report to the Liability: Commission consults on possible
reform of liability rules in the EU . Miles Gietzmann, Auditor
Performance, Implicit Guarantees, and the Valuation of Legal Liability,
International Journal of Auditing 1, 13-30 (1997)
Competition and choice in the UK audit market. Steven L. Schwarcz2,
Financial Information Failure and Lawyer Responsibility, 31 Journal of
Corporation Law. William A. Gregory, Accounting Firm Consolidation:
Selected Large Public Company Views on Audit Case Law in Chronological
Order
The French Civil Code in an audit failure which results in an economic
loss to another person is a result of an auditor of a publicly listed
company who misrepresents the annual report. damages. There is a
division of negligent liability in French law. liability and liability
for simple or gross negligence.
Were these IFRS financial reports audited by an independent auditing firm?
It would be very difficult for the Vatican to provide full disclosure of the
perhaps trillion+ euro fair value of Vatican assets, especially the massive
holdings of real estate and the collections of antiquities in its vaults and
inside its many churches around the world.
I don't think these annual reports consolidate the treasury operations of the
many Catholic churches around the world.
Recall that the Vatican financial operation was recently plagued with
financial and pedophilia scandals. The current pope seems to be making a bona
fide effort for greater integrity and financial disclosures.
The Vatileaks scandal[ is a scandal initially
involving leaked Vatican documents, exposing alleged corruption; an internal
Vatican investigation purportedly uncovered the blackmailing of homosexual
clergy as well. The scandal first came to light in late January 2012 in a
television programme aired in Italy under the name of The Untouchables (Gli
intoccabili). Further information was released when Italian journalist
Gianluigi Nuzzi published letters from Carlo Maria Viganò, formerly the
second ranked Vatican administrator to the pope, in which he begged not to
be transferred for having exposed alleged corruption that cost the Holy See
millions in higher contract prices. Viganò is now the Apostolic Nuncio to
the United States. The name "VatiLeaks" is a play on the word WikiLeaks, a
not-for-profit media organisation whose goal is to bring important news and
information to the public; providing an anonymous way for sources to leak
information to their journalists.
Over the following months the situation widened as
documents were leaked to Italian journalists, uncovering power struggles
inside the Vatican over its efforts to show greater financial transparency
and comply with international norms to fight money laundering. In early
2012, an anonymous letter made the headlines for its warning of a death
threat against Pope Benedict XVI. The scandal escalated in May 2012 when
Nuzzi published a book entitled His Holiness: The Secret Papers of Benedict
XVI consisting of confidential letters and memos between Pope Benedict and
his personal secretary, a controversial book that portrays the Vatican as a
hotbed of jealousy, intrigue and underhanded factional fighting. The book
reveals details about the Pope's personal finances, and includes tales of
bribes made to procure an audience with him.
One of the first Business School Deans to work at a standing desk was Harvey
Wagner when he became Dean of the business school at the University of North
Carolina back in the 1960s. Prior to that Harvey was a Stanford University
professor and author of one of the first books in Operations Research in the
early days of OR. Harvey was one of my OR professors. He was a good teacher with
a great technical brain, but I cannot imagine that he was a very good dean. He
eventually wrote five books and over 60 technical articles in OR and management
science.
While Harvey stood at his own desk as a Dean at UNC his office visitors also
had to stand. It was rumored that Harvey liked this because meetings were
shorter when people were not comfortably seated.
Accountants have been slow to embrace the idea that
a core function of their job is to identify fraud during company audits.
Part of the problem is it’s not always possible to know who in an
organization is involved in deceptive number-crunching.
Accountants have been slow to embrace the idea that
a core function of their job is to identify fraud during company audits, and
more education and training is needed to hasten the advancement of this
idea. Part of the problem is while standards have evolved to incorporate
fraud detection into the job description, it’s not always possible to know
who in an organization is involved in deceptive number-crunching, say two
accounting experts.
While hard to believe, some CPAs believe detecting
fraud still isn’t one of their core responsibilities, said Brian Fox, a
certified fraud examiner and the founder and president of Confirmation.com,
a cloud-based audit security tool used to prevent confirmation fraud. “For a
long time we said finding fraud wasn’t our responsibility. Our
responsibility was to find material errors in statements,” Mr. Fox said.
“We’ve got great technology today, we don’t need to be paid to add up
numbers. The public is relying on us to make sure accounting standards are
being applied correctly and that management’s estimates are fairly stated
and there is no fraud. They view us as the public’s watchdog.”
Most auditors are not prepared to search for and
identify the signs of financial fraud, and this lack of preparation is even
more pronounced among staff and senior auditors, where the majority of the
detailed audit work and client conversations take place, Mr. Fox said,
adding this shows resistance remains as to whether this should be the
responsibility of the accountant/auditor. “It’s also a bit of a legacy issue
in not training our folks on ways to find fraud,” he said. “We cover some of
that material but if you ask people in the public who rely on our audited
statements they say it is our responsibility to find fraud. But the CPA
exam, less than 1% focuses on fraud, it’s somewhat surprising, somewhat of a
misalignment.”
Standards requiring auditors to have responsibility
for finding material misstatements in financial statements and designing
audit procedures to detect that fraud have been around for more than a
decade, but John Keyser, national director of assurance services at
assurance, tax and consultant services firm McGladrey, said recent changes
to rules have refined those standards to require additional procedures and
additional inquiries of management and others charged with governance.
Changes include more fraud awareness training, and
identification of fraud control deficiencies that allow fraud to occur, he
said, along with additional conversation among audit teams about where fraud
could occur and the ways management might try to commit fraud, with the end
result being the designing of policies to protect against those risks.
“There’s been an evolution in required procedures, refined over time, of
additional procedures directed at fraud,” Mr. Keyser said. He cited the
development of the “fraud triangle,” or the three elements needed for fraud
to occur: the opportunity to commit fraud, the incentive for someone to
commit fraud and the ability to rationalize the fraud. Although auditors are
good at identifying the areas where opportunities to commit fraud exist, it
is harder for them to know who in an organization may have motivation to
commit fraud and it is even more difficult to know who may be capable of
rationalizing away such actions, he said.
“I think there is more of a recognition of the
types of fraud that occur and how those get perpetrated,” Mr. Keyser said.
Auditors need to pay particular attention to year-end statements and
performance targets that may be tied to executive bonuses, as these are
areas where management may fudge the numbers to ensure they receive the most
compensation they can. “Standards are pretty robust, I think, but at the
same time we only can know what we can know. This does not provide absolute
assurance. We can only make educated guesses and evaluate management’s
assumptions to see if they are reasonable. There are limitations.”
Continued in article
Jensen Comment The problem with having CPA auditors detect fraud is that they are not very
good at it
This is mostly because they generally do not have programs for rewarding whistle
blowers like those whistle blower programs of the SEC (where an informant
recently received $14 million) and rewards posted in the justice system, e.g.,
Crime Stopper rewards.
Presumably whistle blowing rewards should be one
of the first considerations if fraud detection is made part of the
responsibility for CPA financial statement audits. Doing so, however, may add
greatly to auditing costs that are already under fire for being too high.
The PCAOB inspection reports over the past few
years indicate that the auditing firms are often deficient in their auditing
procedures focused on GAAP conformance. If these audit firms take on the added
responsibility for fraud detection that does not materially impact financial
statements, the likelihood of them installing highly effective fraud detection
audit procedures is relatively low. One problem is that CPA financial statement
auditors are not trained very well for fraud detection beyond GAAP conformance
fraud.
For example, GAAP conformance fraud places heavy
reliance upon analytical reviews comparing a company's financial statements with
benchmark financial statements for companies in a given industry. Analytical
review procedures are almost useless in detecting whether Johnny Cash has been
pilfering parts for a home made Cadillac over the past 10 years. One Piece at a Time by Johnny Cash
http://www.youtube.com/watch?v=0ynSm1Ngfn8
Veteran employees in warehouses have a hard time
keeping from laughing out loud when neophyte college graduates in suits arrive
to test check the inventory counts.
Analytical review procedures are almost useless
in detecting whether June Carter is kiting accounts receivable in the General
Motors parts division. Without whistle blowers these types of frauds often go
undetected.
Fraud detection can become so granular that it
entails examining the bras and briefs of workers who handle cash and other
valuables like jewelry.
She entered like Twiggy and exited like Dolly: The "loss
should have been spotted sooner"
Nobody Questioned Why Her Bras Were Twice as Big as She Could Justify "Accountant suspected of embezzling school lunch money in Rialto:
Judith Oakes faces the prospect of embezzlement and grand theft charges. As much
as $3.16 million might be missing," by Richard Winton, Los Angeles Times,
October 4, 2013 ---
http://www.latimes.com/local/la-me-rialto-lunch-money-20131005,0,3922960.story
Usually it's the school bully who steals lunch
money from the kids.
But in Rialto, it's allegedly the accountant hired
to keep an eye on the lunch money.
When accountant Judith Oakes was arrested on
suspicion of embezzling from the school district's nutrition services
department this summer — allegedly caught on surveillance tape stuffing cash
in her bra — officials said they were staggered when they were told that as
much as $3.16 million might be missing.
Oakes faces the prospect of embezzlement and grand
theft charges, but the fallout from the lunch money episode could continue
as law enforcement agencies and the state Department of Education
investigate why the loss was not spotted sooner. FOR THE RECORD: Rialto
accountant: An article in the Oct. 5 LATExtra edition about the arrest of
accountant Judith Oakes on suspicion of embezzling from the Rialto school
district's nutrition services department said her late husband had been a
school principal in Rialto. He was a principal in San Bernardino. —
An investigative firm hired by the Rialto Unified
School District has so far found a "documented" loss of at least $1.8
million but warned it could reach as high as $3.16 million, including
discrepancies that could not be documented. School records go back only to
2005.
The district's superintendent and his deputy have
been placed on leave by the school board.
"That is money that should have been going to
students," said school board Vice President Edgar Montes. "That this
betrayal may have been going on for approximately 14 years is disturbing and
disgusting."
Oakes, 49, resigned the day after her arrest Aug. 7
on suspicion of embezzlement and grand theft. A mother of three, Oakes
earned $60,000 in her accounting job. Her late husband was a well-respected
school principal in Rialto.
Rialto police Capt. Randy De Anda said Oakes, who
had worked for the district 16 years, kept tabs on lunch money for 29
district schools.
"The lunch money can really add up," he said. "She
had unfettered access to enormous sums of money over the years — much of it
in cash."
Continued in article
Why is this no longer a surprise?
From the CFO Journal's Morning Ledger on October 1, 2013
Auditors at big firms cited for more deficiencies Auditors at the seven largest U.S. accounting firms
were
cited for deficiencies in 37.5% of audits inspected by
U.S. regulators in 2011, Emily Chasan
reports. That figure was up from 32.6% in 2010, and has more than doubled
from 14.8% in 2009. About 31% of the deficiencies involved auditors’
evaluation of the market prices companies supplied for complex assets, down
from about half in the prior year. In previous years, the most common
valuation errors were caused by auditors’ failures to understand methods and
assumptions used by third-party pricing services. But one in three of those
deficiencies uncovered by the 2011 inspections involved failures to test
managers’ assertions about the methods and data used to value assets.
This article isn't about detecting immaterial fraud
it's about taking our current responsibility to provide reasonable assurance
to detect material misstatements due to fraud seriously. When the firms take
this responsibility seriously they will spend much more than the 1% of their
audit effort at it that the article mentions. I've asked groups of
practicing auditors from staff to partner if they have "responsibility to
detect material misstatement due to fraud" and roughly 50% of them believe
they don't. I agree with the premise of the article that the audit
profession needs to focus more on this responsibility to detect material
misstatements due to fraud. I also do not believe auditors or should be
concerned with immaterial fraud.
Mark Zimbelman
October 11, 2013 reply from Bob Jensen
Hi Mark,
I agree that auditors should not focus heavily on immaterial fraud beyond
examining internal control adequacy to help prevent and detect such fraud.
One problem, however, is when immaterial fraud each day or each week mounts
up to materiality.
The cash-in-the-bra fraud is an excellent example. Cash lost in one bra
full on one day is immaterial. The cash lost in a year's time is probably
still immaterial from a financial reporting standpoint although we can't
tell without knowing more about the financial statements. But over a decade
the bra hauls added up to over $3 million which begins to sound like a
material loss to school district.
Materiality can also be defined in a lot of ways. I recall an AECM
message from Denny Beresford showing how the Lehman Bros. repo sales were
not material in amount relative to total leverage. However, the fact that
Lehman's top executives saw this need for what the media later called repo
"debt masking" suggests that the amounts were material to Lehman executives.
I think the issue was one of leverage on the margin materiality that may
have been more of concern than impact on total leverage.
But I do agree that the author of the WSJ article was not thinking in
terms of bra fulls of cash in companies the size of JP Morgan. A better
example is the woman executive at Tiffany & Co. who was recently indicted
for pilfering some of the jewelry she took home from sales shows. The loss
only amounted to $1 million wholesale which is immaterial on the financial
statements.
The gray zone for auditors becomes how much of the audit is devoted to
SOX investigation of internal controls. It was actually Tiffany's internal
inventory control system that eventually detected the fraud. A better
internal control system would have prevented the fraud. But since she only
stole jewelry pieces valued at under $10,000 each, it took the internal
control system a lot longer to catch up with her than if she'd only taken
one piece worth $1 million.
What was interesting is that this Tiffany & Co. executive thief was
purportedly knowledgeable about the weakness of the internal control system
for inventory items valued at under $10,000/
Certainly an internal control system that allows a woman to daily fill
her bra with cash or pilfer lower-valued jewelry is seriously deficient.
Over decades the accumulated loss is probably becomes material.
An argument has been making the rounds that there’s
really no danger of default if the U.S. runs up against the debt ceiling —
the president could simply make sure that all debt payments are made on
time, even as other government bills go unpaid. I’ve heard it from economist
Thomas Sowell,
investor and big-time political donor
Foster Friess, and pundit
George Will. It’s even been made right here on
HBR.org by Tufts University accounting professor
Lawrence Weiss.
The Treasury Department has been saying all along
that
it can’t do this; it makes 80 million payments a
month, and it’s simply not technically capable of sorting out which ones to
make on time and which ones to hold off on. I don’t know if this is true,
and there may be an element of political posturing in such statements. On
the other hand, it is the Treasury Department that has to pay the bills. If
they say they’re worried, I can’t help but worry too. When Tony Fratto, who
worked in the Treasury Department in the Bush Administration,
seconds this concern, I worry even more. Not to
mention that this has happened before, in
the mini-default of 1979, when Treasury systems
went on the fritz in the wake of a brief Congressional standoff over — you
guessed it — raising the debt ceiling.
Then there’s the question of legality. The second
the President or the Treasury Secretary starts choosing which bills to pay,
he usurps the spending authority that the U.S. Constitution grants Congress.
The Constitution states, in the 14th Amendment, that the U.S. will pay its
debts. But there is no clear path to honoring this commitment in the face of
a breached debt ceiling. Writing
in the Columbia Law Review last year, Neil
H. Buchanan of George Washington University Law School and Michael C. Dorf
of Cornell University Law School concluded that as every realistic option
faced by the president violated the Constitution in some way, the “least
unconstitutional” thing to do would not be to stop making some payments but
to ignore the debt ceiling. That’s because, in comparison with unilaterally
raising taxes or cutting spending to enable the U.S. to continue making its
debt payments under the current ceiling, ignoring the debt limit would
“minimize the unconstitutional assumption of power, minimize
sub-constitutional harm, and preserve, to the extent possible, the ability
of other actors to undo or remedy constitutional violations.” And even this
option, Buchanan and Dorf acknowledge, is fraught with risk: financial
markets might shun the new bonds issued under presidential fiat as
“radioactive.”
So assigning a 0% probability to the possibility
that running into the debt ceiling will lead to some kind of default doesn’t
sound reasonable. What is reasonable? Let’s say 25%, although really
that’s just a guess. The likelihood that hitting the ceiling will result in
sustained higher interest rates for the U.S. is higher (maybe 50%?) and the
likelihood that it will temporarily raise short-term rates is something like
99.99%, since those rates have
already been rising.
It’s the kind of thing that makes you wish Nate
Silver weren’t
too busy hiring people for the new,
Disneyfied fivethirtyeight.com to focus on. At
this point even Silver would have to resort to guesswork — this is a mostly
unprecedented situation we’re dealing with here. But the updating of his
predictions as new information came in would be fascinating to watch, and
might even add some calm sanity to the discussion.
Updating is what the
Bayesian approach to statistics that Silver swears
by is all about. Reasonable people can start out with differing opinions
about the likelihood that something will happen, but as new information
comes in they should all be using the same formula (Bayes’
formula) to update their predictions, and
in the process their views should move closer together. “The role of
statistics is not to discover truth,” the late, great Bayesian Leonard
“Jimmie” Savage used to say. “The role of statistics is to resolve
disagreements among people.” (At least, that’s how his friend Milton
Friedman remembered it; the quote is from the book
Two Lucky People.)
I tread lightly here, because I’m one of those
idiots who never took a statistics class in college, so don’t expect me to
be any help on Bayesian methods. But as a philosophy, I think it can be
expressed something like this: You’re entitled to your opinion. You’re even
entitled to your opinion as to how much weight to give new information as it
comes in. But you need to be explicit about your predictions and
weightings, and willing to change your opinion if Bayes theorem tells you
to. A political environment where that was the dominant approach
would be pretty swell, no?
Not that it would resolve everything. Some
Republicans
have been making the very Bayesian argument that,
after dire predictions about the consequences of the sequester and the
government shutdown failed to come true, the argument that a debt ceiling
breach would be disastrous has become less credible. As a matter of
politics, they have a point: the White House
clearly oversold the potential economic
consequences of both sequester and shutdown. But I never took those dire
claims about the sequester and shutdown seriously, so my views on the
dangers associated with hitting the debt ceiling haven’t changed much at
all. And while I’m confident that my view is more reasonable than that of
the debt-ceiling Pollyannas, I don’t see how I can use Bayesian statistics
to convince them of that, or how they can use it to sway me. Until we hit
the debt limit.
Jensen Comment
David Johnstone's romance with Bayesian probability, in his scholarly messages
to the AECM, prompted me once again in my old age to delve into the Second
Edition of Causality by Judea Pearl (Cambridge University press).
I like this book and can study various points raised by David. But estimating
the probability of default in the context of the above posting by Justin Fox
raises many doubts in my mind.
A Database on Each Previous Performance Outcome of a Baseball Player
The current Bayesian hero Nate Silver generally predicts from two types of
databases. His favorite database is the history of baseball statistics of
individual players when estimating the probability of performance of a current
player, especially pitching and batting performance. Fielding performances are
more difficult to predict because is such a variance of challenges for each
fielded ball. His Pecota system is based upon the statistical history of each
player.
A Sequence of Changing Databases of Election Poll Outcomes
Election polls emerge at frequent points in time (e.g., monthly). These are not
usually recorded data points of each potential voter (like data points over time
of a baseball player). But they are indicative of the aggregate outcome of all
voters who will eventually make a voting choice on election day.
The important point to note in this type of database is that the respondent
is predicting his or her own act of voting. The task is not to predict how an
act of Congress over which the respondent has no direct control and no inside
information about the decision process of individual members of Congress (who
could just be bluffing for the media).
The problem Nate has is in the chance that a significant number of voters
will change their minds back and forth write up to pulling the lever in a voting
booth. This is why Nate has some monumental prediction errors for political
voting relative to baseball player performance. One of those errors concerned in
predictions regarding the winner of the Senate Seat in Massachusetts after the
death of Ted Kennedy. Many voters seemingly changed their minds just before or
during election day.
There are no such databases for estimating the probability of USA debt
default in October of 2013.
Without a suitable database I don't think Nate Silver would estimate the
probability of USA loan default in October of 2013. This begs the question of
what Nate might do if a trustworthy poll sampled voters on their estimates of
the probability of default. I don't think Nate would trust this database,
however, because the random respondents across the USA do not have inside
information or expertise for making such probability analysis and are most
likely inconsistently informed with respect to which TV networks they watch or
newspapers they read.
I do realize that databases of economic predictions of expert economists or
expert weather forecasters have some modicum of success. But the key word here
is the adjective "expert." I'm not sure there are any experts of the
probabilities of one particular and highly circumstantial USA debt default in
October of 2013 even though there are experts on forecasting the 2013 GDP.
Bayesian probability is a formalized derivation of a person's belief
But if there is no justification for for having some confidence in that person's
belief then there really is not much use of deriving that person's subjective
probability estimate. For example, if you asked me about my belief in regarding
the point spread in a football game next Friday night between two high schools
in Nevada my belief on the matter is totally useless because I've never
even heard of any particular high schools in Nevada let alone their football
teams.
I honestly think that what outsiders believe about the debt default issue for
October 2013 is totally useless. It might be interesting to compute Bayesian
probabilities of such default from Congressional insiders, but most persons in
Congress cannot be trusted to be truthful about their responses, and their
responses vary greatly in terms of expertise because the degree of inside
information varies so among members of Congress. This is mostly a game of
political posturing and not a game of statistics.
October 12, 2013 reply from David Johnstone
Dear Bob, I think you are on the Bayesian hook, many Bayesians say how they
started off as sceptics or without any wish for a new creed, but then got
drawn in when they saw the insights and tools that Bayes had in it. Dennis
Lindley says that he set out in his 20s to prove that something was wrong
with Bayesian thinking, but discovered the opposite. Don’t be fooled by the
fact that most business school PhD programs have in general rejected or
never discovered Bayesian methods, they similarly hold onto all sorts of
vested theoretical positions for as long as possible.
The thing about Bayes, that makes resistance amusing, is that if you accept
the laws of probability, which merely show how one probability relates
logically to another, then you have to be “Bayesian” because the theorem is
just a law of probability. Basically, you either accept Bayes and the
probability calculus, or you go into a no man’s land.
That does not mean that Bayes theorem gives answers by formal calculations
all the time. Many probabilities are just seat of the pants subjective
assessments. But (i) these are more sensible if they happen to be consistent
with other probabilities that we have assessed or hold, and (ii) they may be
very inaccurate, since such judgements are often very hard, even for
supposed experts. The Dutch Book argument that is widely used for Bayes is
that if you hold two probabilities that are mutually inconsistent by the
laws of probability, you can have bets set against you by which you will
necessarily lose, whatever the events are. This is the same way by which
bookmakers set up arbitrages against their total of bettors, so that they
win net whatever horse wins the race. The Bayesian creed is “coherence”, not
correctness. Correctness is asking too much, coherence is just asking for
consistency between beliefs.
Bayes theorem is not a religion or a pop song, it’s just a law of
probability, so romance is out of the question. And if we do conventional
“frequentist” statistics (significance tests etc.) we often break these laws
in our reasoning, which is remarkable given that we hold ourselves out as so
scientific, logical and sophisticated. It is also a cognitive dissonance
since at the same time we often start with a theoretical model of behaviour
that assumes only Bayesian agents. This is pretty hilarious really, for what
it says about people and intellectual behavior, and about how forgiving
“nature” is of us, by indulging our cognitive proclivities without stinging
us fatally for any inconsistencies.
Bayes theorem recognises that much opinion is worthless, and that shows up
in the likelihood function. For example, the probability of a head given
rain is the same as the probability of a head given fine, so a coin toss (or
equivalent “expert”) gives no help whatsoever in predicting rain. Bayes
theorem is only logic, it’s not a forecasting method of itself. While on
weather, those people are seriously good forecasters, despite their
appearance in many jokes, and leave economic forecasters for dead. Their
problems might be “easier” than forecasting markets, but they have made
genuine theoretical and practical progress. I have suggested to weather
forecasters in Australia that they should run an on-line betting site on
“rain events” and let people take them on, there would be very few who don’t
get skinned quickly.
I won’t go on more, but if I did it would be to say that it is the
principles of logic implicit in Bayes theorem that are so insightful and
helpful about it. These should have been taught to us all at school, when we
were learning deductive logic (e.g. sums). I think it is often argued that
probability was associated with gambling and uncertainty, offending many
religious and social beliefs, and hence was a bit of an underworld
historically. Funny that Thomas Bayes was a Rev.
October 12, 2013 reply from Jagdish Gangolly
David,
1.
I agree
that Bayesian methods have gained substantial
acceptance in the sciences. However, after reading
the HBR blog, I am pessimistic about their adoption
in the business schools except in Finance,
Management Science, and Marketing. There is a good
reason why they have become accepted in these three
areas: Bayesian analysis is necessary if the
decisions are to reflect the decision maker's
worldview. In accounting, on the other hand, our
positivist fetish and our aversion for anything
subjective (Physics envy) preclude their use.
HBS was
probably the first business school (apart from Wharton)
where Bayesian statistics was popularised starting the
early sixties. When I was in Grad school, the books of
Pratt/Raiffa/Schleiffer/schlaiffer/, all from HBS
and Luce (then at Penn) were our staples. In fact
Raiffa's "Advanced Statistical Decision Theory" was an
absolute required reading (I still have the book right
next to Feller's probability on my shelf even today). I
am not sure that these days they teach much of it at
either place, except probably in the above three areas.
2.
There is plenty of software, almost
all free for doing excellent Bayesian analysis of data. In R
alone, at my last count, there were 96 Bayesian packages
(see
http://cran.r-project.org/web/views/Bayesian.html)
in addition to 11 links to various
sampling engines. SPSS, SAS, Stata, Statistica,... too I am
sure have such software. The problem with us is not shortage
of software but shortage of curiosity and willingness to
consider alternative modes of analysis. Accountants tend to
be far too conservative and risk averse in research.
3.
The last paragraph
in your message gets to the heart of the matters:
a.
lot of “significant” results are really not significant in even
a statistical (evidence) perspective, and
b. Bayesian methods are very big on formally allowing for “model
risk”, and averaging results over different possible models, rather
than simply assuming a given model and hoping it’s right enough.
4.
The
greatest advantage of Bayesian analysis is in model
selection. Bayes factor and BIC (Bayesian Information
Criterion) provide a basis for model
comparison/selection. While there is a criterion for
model selection in frequentist statistics, the Akaike
Information Criterion (AIC), it has been shown that
model comparisons using AIC are asymptotically
equivalent to those of BIC
Isn't
it strange that there is no model selection in most
accountics work? If I were a referee on any
accountics paper I would insist on it if only to
show that the author was curious enough to try
different models. Comparison of equations based on
R^2 or p values is NOT model selection.
Because of the superior model selection capabilities
of Bayesian analysis, even frequentists in the
sciences (who tend to be in general frequentists)
are using Bayesian methods (especially in the
statistics of neuro-imaging, see
http://www.fil.ion.ucl.ac.uk/~wpenny/publications/spm-book/selection.pdf).
In
practice, most accounticians use some sort of
supervised learning, usually in cross-validation.
But the choice of the size of training and test
sets are totally arbitrary, a problem that Bayesian
analysis does not face.
5.
There is no question that Bayesian probabilities are
subjective. But then so is the Fisherian rule of
thumb of .005 or .001 for p values, or Pearson's
idea of balancing significance and power in the
choice of alpha. But then Bayesian analysis imposes
consistency requirements for preferences as well as
judgement. No such things in the frequentist's
world.
Regards,
Jagdish S.
Gangolly
Department of Informatics
College of Computing & Information
State University of New York at Albany
1400 Washington Ave Albany, NY 12222
Phone:
518-956-8251, Fax:
518-956-8247
October 12, 2013 reply from David Johnstone
Thank you Jagdish for once again adding all this great depth and detail.
I do anticipate however that Bayesian methods will get to Accounting, even
if only because at some point their “newness” and their increasing adoption
in finance will attract interest and acceptance. More and more people I meet
are telling me that in their work with larger samples (as data bases get
older and larger) “all their results are significant”, which of itself is
arousing question marks. Also, like Bob knows, many people, once they are
shown Bayesian logic, become zealots, and why should the personality of
accounting be immune to this, quite the opposite in many ways.
We have to remember that when frequentist methods took hold, there was not a
fair contest. Bayesian methods were in their infancy and there was no
software for them. Also, Berkeley Prof Jerzy Neyman, who was the father of
statistics departments in the USA, was dead against them at a personal
level, and to push them required bravery. L.J. Savage, who was a great
Bayesian, and President of American Statistical Association (among all his
famous economics work), died too early to gather the supporters who would
have followed. The black-and-whiteness of empiricism (“let the data decide”)
became the positivist creed, and people went for it and the clout it gave
them, in droves.
BTW it is not possible “to let the data decide”, and Bayesians recognize
this explicitly. First, data does not say much without being viewed through
a model, and second, you can’t interpret data without starting beliefs. Nor
might there be enough data to swamp prior beliefs, even under one given
model.
The early influence of the founding Bayesians at Harvard, who happened to be
in the business school, did not last, but it did influence early accounting
researchers. Sudipta Basu showed me where Beaver (1968) wrote explicitly
about information and uncertainty in Bayesian logical terms, and said things
that have since been contradicted in accounting theory. For example, it is
common now to say that better accounting information “resolves (some)
uncertainty”, necessarily. This is false, as intuition might suggest.
Sometimes the best information changes our beliefs Bayesianly such that we
go backwards in certainty.
October 12, 2013 reply from Bob Jensen
Hi David,
You're facing an enormous task
trying to change accountics scientists who trained only to apply
popular GLM statistical inference software like SAS, SPSS,
Statistica, Sysstat, and MATLAB to purchased databases like
Betty Crocker follows recipes for baking desserts. Mostly they
ignore the tremendous limitations and assumptions of the Cult of
Statistical Inference:
Dear Bob, the software as you say is a driving force. There is a massive
education campaign going on in the harder sciences on development, use and
application of Bayesian software, and that is often the starting point for
people. Many people seem to want to play with the tools hands on as a first
step. I personally know empiricists who only know their methods through the
output of software, no pre-reading or theoretical instruction.
I suspect this Bayesian software trend will migrate into business schools in
the same way as the use of earlier statistical packages did. Finance
portfolio theory has become heavily Bayesian, as its the natural way to
build (i) parameter estimation risk and (ii) subjective considerations into
the portfolio construction.
SAS does include some Bayesian methods now too I think, but the Bayesian
software BUGS MCMC etc has its own great development. I am more interested
in the principles than the data sets, as Bayes does not make getting
reliable data and empirical results any easier – you still need models of
economic phenomena whether these are tested Bayesianly or conventionally.
Bayes methods are likely to reveal that a lot of “significant” results are
really not significant in even a statistical (evidence) perspective, let
alone an economic perspective (again within the context of an assumed
model). BTW Bayesian methods are very big on formally allowing for “model
risk”, and averaging results over different possible models, rather than
simply assuming a given model and hoping it’s right enough.
From the Scout Report on October 11, 2013 Modeling And Simulation Tools For Education Reform ---
http://www.shodor.org/master/
Created by the Shodor Education Foundation, Inc.,
the Modeling And Simulation Tools for Education Reform (MASTER) provide
useful educational tools that help students and teachers learn through
observation and modeling activities. The Shodor Foundation worked in tandem
with the National Center for Supercomputing Applications, George Mason
University, and other educational organizations to craft these tools and
visitors can access all eight of them here. The Fractal Modeling Tools are a
good place to start as visitors can download the required software or take
in some instructional materials, such as the interactive fractal microscope
and the snowflake fractal generator. Other notable areas here include The
Pit and the Pendulum, which offers the work of Edgar Allan Poe as a way to
learn about better reading through computation.
There are a number of simulations and games available for learning
accounting and auditing on the AAA Commons (available only to American
Accounting Association members). Go to the AAA Commons and search on the
term "simulation".
Wal-Mart (WMT)
is the biggest retailer in the world, with sales of
$135 billion in 26 countries outside the U.S. But it doesn’t have stores in
some of the world’s
biggest markets. Not in Germany, not in South
Korea, not in Russia. And as of this week,
not in India, either.
On Oct. 9, Walmart announced that it is
breaking up with its Indian partner, Bharti
Enterprises, which means the American company’s ambitious plans to open
hundreds of supercenters around India won’t be realized soon. In the
official statement, Scott Price, head of Walmart Asia, referred obliquely to
“investment conditions” as part of the problem. He had been more direct in
an Associated Press
interview two days
earlier at the Asia-Pacific Economic Cooperation summit. Price said that the
Indian government’s requirement that foreign retailers source 30 percent of
the products they sell from small and medium-sized Indian businesses is
the ”critical stumbling block.” Walmart does have a wholesale business in
India, which it is keeping.
Price didn’t mention that the Indian government is
investigating allegations that Walmart violated
rules governing foreign investment in the retail industry, or that Walmart is
conducting an internal probe on possible violations of U.S. anti-corruption
laws.
Walmart has not figured out a way to enter Russia,
either. For nearly six years, it looked to buy a local company that could
ease potential cultural and bureaucratic misunderstandings. Walmart lost a
bid for a promising partner, a discount chain called Kopeyka, in 2010. Walmart
later closed its Moscow office after saying
disagreements on price had thwarted its
acquisition plans.
Then there’s Germany and South Korea. After opening
stores in both countries, Walmart closed them in 2006.
Germans didn’t like Walmart employees handling
their groceries at the check-out line. Male customers thought the smiling
clerks were flirting. And many Europeans prefer to shop daily at local
markets. In South Korea, Walmart also stuck to its
American marketing strategies, concentrating on
everything from electronics to clothing and not what South Koreans go to big
markets for: food and beverages.
Continued in article
Jensen Comment
There are parts of the USA that ban Wal-Mart stores. Exhibit A is Boston where
labor unions run the city. Exhibit B is Vermont that protects both small
businesses and labor unions like a tiger even though employees in those small
businesses are often not in labor unions.
Only a veto of the mayor recently blocked the banning of Wal-Mart stores in
Washington DC. It's not that the mayor loves Wal-Mart. In this case, he vetoed
the legislation to provide more job opportunities to the unemployed in
Washington DC, including construction worker jobs for six planned new stores in
his city.
Question
What are the for-profit Laureate International Universities and where are their 800,000 paying students?
Why did key alumni of Thunderbird University resign from the Board because of
the sale of campus to Laureate?
Laureate Education is big. Like 800,000 students
attending 78 institutions in 30 countries big. Yet the privately held
for-profit university system has largely remained out of the public eye.
That may be changing, however, as the company
appears ready for its coming out party after 14 years of quiet growth.
Laureate has spent heavily to solidify its head
start on other globally minded American education providers. In addition to
its rapid growth abroad, the company has courted publicity by investing in
the much-hyped Coursera, a massive open online course provider. And Laureate
recently
made news when the International Finance
Corporation, a World Bank subsidiary, invested $150 million in the company
-- its largest-ever investment in education.
The company has also kicked up controversy over its
affiliation with the struggling Thunderbird School of Global Management, a
freestanding, nonprofit business school based in Arizona.
The backlash among Thunderbird alumni, many of whom
aren’t keen on a takeover by a for-profit, has dragged the company into the
ongoing fight over the role of for-profits in American higher education,
which Laureate had largely managed to avoid until now.
In fact, Laureate likes to distinguish itself from
other for-profit education companies. It is a strange (and substantial)
beast to get one’s arms around.
Laureate is a U.S.-based entity whose primary
operations are outside the U.S. It is a private, for-profit company that
operates campuses even in countries, like Chile, where universities must be
not-for-profit by law.
It is unabashed in its pursuit of prestige:
Laureate boasts of partnerships with globally ranked public research
universities like Monash University and the University of Liverpool as
indicators of quality. It also aggressively promotes the connection to its
honorary chancellor, former U.S. President Bill Clinton. When Laureate
secured approval to build a new for-profit university in Australia (where
for-profits are called “private” institutions), the
headline in a national newspaper read: “First
private uni in 24 years led by Clinton.”
Laureate likes to use the tagline “here for good.”
The company has moved into parts of the world where there are insufficient
opportunities to pursue a higher education, investing heavily in developing
nations. It's based on this track record that the IFC invested in
the company with
the stated aim of helping Laureate expand access
to career-oriented education in "emerging markets": Latin America, the
Middle East and Africa.
The strategy of expanding student access in the
developing world has won Laureate many fans. And for a for-profit, it gets
unexpectedly little criticism.
Until recently, at least. With Thunderbird,
Laureate has done what it has done in many countries around the world --
purchasing or in this case partnering with a struggling institution with a
good brand, offering an infusion of capital, and promising to help develop
new programs and grow enrollments and revenues. This time around, however,
widespread skepticism about for-profit education has bedeviled the deal.
The Bird's-Eye View
Laureate’s footprint outside the United States tops
that of any American higher education institution. The company brought in
approximately $3.4 billion in total revenue during the 2012 fiscal year,
more than 80 percent of which came from overseas.
For comparison, the Apollo Group -- which owns the
University of Phoenix and is the largest publicly traded for-profit chain --
brought in about $4.3 billion in revenue last year. However, Apollo Global,
which is an internationally focused subsidiary, only accounted for $295
million of that.
Indeed, in the late 1990s, when most other
for-profit education companies were focused on the potential of the U.S.
market, Laureate looked abroad. The Baltimore-based company, at that point a
K-12 tutoring outfit known as Sylvan Learning Systems, purchased its first
campus, Spain’s Universidad Europea de Madrid, in 1999, and has since
affiliated with or acquired a total of 78 higher education institutions on
six continents, ranging from art and design institutes to hotel management
and culinary schools to technical and vocational colleges to full-fledged
universities with medical schools
Laureate operates the largest private university in
Mexico, the 37-campus Universidad del Valle de México, and owns or controls
22 higher education institutions in South America (including 11 in Brazil),
10 in Asia, and 19 in continental Europe. It manages online programs in
cooperation with the Universities of Liverpool and Roehampton, both in the
United Kingdom. It has a new partnership with Australia’s Monash University
to help manage its campus in South Africa and it runs seven vocational
institutions in Saudi Arabia in cooperation with the Saudi government.
In contrast, Laureate’s largest and most
recognizable brand in the U.S. is the online-only, predominantly
graduate-level Walden University, which enrolls 50,000 students. And even
Walden is global, with students in 145 countries.
Jensen Comment
The evidence that ethics education and training in after K-12 schooling
significantly improves ethics behavior is controversial. Evidence points more
toward childhood home life, although in most cases ethical lapses in college
students and graduates points even more to situational ethics where violations
of ethics (such as cheating) is more a function of opportunity and a
follow-the-herd mentality. Another situation is need such as when gambling
losses and mounting debt motivate workers to cheat.
A Gretna woman has pleaded guilty to three counts
of tax evasion in connection with $4.1 million she admitted stealing from an
Omaha tobacco and candy distributor.
Caroline K. Richardson, 54, will be sentenced in
December. She faces up to five years in prison.
In return for her pleas, Sarpy County prosecutors
dropped three counts of filing a false income tax return.
The World-Herald first reported on Richardson's
case in April. Court documents indicated she admitted to taking $4.1 million
over the 2½ years she worked as an accountant for Colombo Candy & Tobacco, a
distributor.
Instead of going after Richardson, Colombo and
owner Monte Brown sued Ameristar Casino. They said the casino should have
known that Richardson was making huge wagers with ill-gotten money. The
casino is fighting that lawsuit in federal court.
Colombo also sued Richardson's former boss — saying
the boss recommended that Colombo hire Richardson despite her alleged
history of theft. Richardson's former boss denied any knowledge of theft by
Richardson at her prior company.
Richardson also admitted to stealing $110,000 from
a La Vista business in 2009. However, Sarpy County sheriff's investigators
never referred that case for prosecution, and Richardson subsequently became
an accountant at Colombo.
Will the Affordable Health Care Act taxpayer subsidies also help with the
deductibles?
On television the other night a woman who succeeded in signing up for Obamacare
said the only plan she could afford cost her $140 per month with a $13,500
deductable for each claim or set of closely-related claims.
I don't know if this is better or worse than she can get on the market these
days, but this does not seem especially affordable to me unless she has
substantial savings and very low probability of filing large claims. I
also doubt whether the subsidy will help much if she has three claims during the
year that sum to a $40,500 deductable. I think the subsidy only helps with the
$140 monthly payments and not the deductibles. I could be wrong about this.
Will the subsidies also help with the deductibles or do they only help her
with her $140 monthly payments if she qualifies for a subsidy?
Subsidies are available to an insured person or family making 0% to 400% of
the government-defined poverty threshold of declared (not including underground)
revenue. But people on Medicaid are not required to buy added medical insurance
and are covered free of charge jointly by the federal and state governments.
One of the purposes of the Affordable Health Care Act is to sign up people
with mental illnesses and other chronic conditions or pre-conditions that are
not presently covered for them in currently available medical insurance plans.
It does not seem to me that plans with $13,500 deductibles ofnclaims gives them
much improvement unless they have access to income or savings to cover such huge
deductibles. The Affordable Health Care medical insurance plan should have been
a national health care plan from the start. Oh Canada!
We are considering adding capstone courses to our
UG Accounting Program and were wondering what others might have done – what
works – what doesn’t? Any advice?
Alisa L Hunt PhD
Interim Dean of the Malcolm Baldrige School of Business at Post University
October 3, 2013 reply from Bob Jensen
HI Alisa,
There are various options, but I think the most
popular capstone course at the undergraduate level is usually a business
policy case course with a heavy dose of financial statement analysis,
business valuation calculations, marketing strategy, financing strategy, and
possibly some simulation studies such as Mike's Bikes ---
http://www.smartsims.com/simulation/mikes-bikes-advanced
I would also recommend some cases on tax
strategies.
The capstone course may have to be team taught for
full effectiveness.
When done well this can be the most memorable and
the most despised course in the curriculum. I say "despised" because
policy-level cases typically do not have right and wrong answers that
students prefer. The cases deal more in real-life higher-level issues in the
executive suite. I also say despised because such a course generally has a
heavy writing component at a time when students are suffering from the
disease called senioritis that becomes exacerbated by spring fever.
Such a capstone course is also common in MBA
programs. The course varies considerably in terms of the accounting and
finance and tax focus of the course.
Respectfully,
Bob Jensen
Free Videos on Basic Accounting
October 3, 2013 message from Carolyn Wilson
Sorry for the delayed response as our course load has
prevented us from keeping up with the conversations. Here are links to our
videos (all free) on debits and credits, as well as inventories as Bob
mentioned. All the videos include highlights of the differences in US GAAP
and IFRS, as appropriate.
Best regards,
Pete and Carolyn Wilson
Videos on entries: Balance-sheet equation and debits
and credits
Batista declined to be interviewed for this story,
but journalists are not the only ones asking questions. Brazil’s securities
regulator has started an investigation into Batista and OGX after an
investor alleged that Batista dumped 126.7 million OGX shares just before
the company scrapped projects and warned that it may stop pumping crude next
year. In a July op-ed for Brazil’s Valor Econômico newspaper, Batista said
he would honor all of his obligations. In
that same article, he put some of the blame on his auditing firm and
executives for unreasonably building shareholder expectations.
The company has denied it gave faulty advice. Once a staple on the airwaves
and in print, Batista has mostly gone silent.
From The Wall Street Journal Accounting Weekly Review on October 4,
2013
SUMMARY: "The fallout of the government shutdown spread
Tuesday to college sports, as some intercollegiate athletics
at U.S. service academies were canceled, and Saturday's football game
between Air Force and Navy was put in doubt." The lead article might be of
most interest to college students, though the related article on the shut
down provides more of the accounting related material to which questions are
directed.
CLASSROOM APPLICATION: The article may be used in a government
accounting class to discuss the need for a budget and spending authorization
for a new year.
QUESTIONS:
1. (Introductory) Why is this
coming Saturday's football game between the U.S. Air force and
the U.S. Navy now in doubt?
2. (Advanced) The game is already sold out and it is scheduled to
be televised by CBS-canceling clearly creates costs related to these items.
How else will a cancelation "mean a loss of millions of dollars for the
community"?
3. (Advanced) Refer to the related article. What role does the
budget for the U.S. government play in this government shut down? In your
answer, state the fiscal year end for the U.S. government and what funding
authority is needed for the government to operate.
4. (Advanced) The related article cites "a determined faction of
conservative Republicans." What does this group hope to accomplish by using
the fiscal year end deadline to partially shut down the U.S. government?
Does their concern relate directly to budget negotations? Explain your
answer.
Reviewed By: Judy Beckman, University of Rhode Island
The fallout of the government shutdown spread
Tuesday to college sports, as some intercollegiate athletics at U.S. service
academies were canceled, and Saturday's football game between Air Force and
Navy was put in doubt.
Air Force has canceled travel plans for all of its
teams, including the Navy game, the academy said in a statement. A decision
about whether the game will be played will be made by noon Thursday. The
game, scheduled for an 11:40 a.m. kickoff in Annapolis, Md., was already
sold out and scheduled to be televised by CBS.
Army is scheduled to play at Boston College on
Saturday and was preparing to play until told otherwise, an Army spokesman
said.
As news of the potential Air Force-Navy
cancellation spread, the Defense Department received private offers of
support to fly the Air Force football players to Maryland for the game. The
military is trying to determine if it can legally accept the funds and
create a policy for people who want to help other teams play during the
shutdown, said one Defense Department official.
One official at the Naval Academy said cancellation
of the game would mean a loss of millions of dollars for the community.
The sad thing in all of this is the vast amount of accountics science
research over the past three decades that relied upon a CAPM Model that worked.
We will probably never learn about how this weakened much of many of the
findings in accountics science capital markets research.
An Older Paper from Nobel Laureate Bill Sharpe (Stanford)
"Today's fad is index funds that
track the Standard and Poor's 500. True, the average soundly beat most
stock funds over the past decade. But is this an eternal truth or a
transitory one?"
"In small stocks, especially, you're probably better off with an active
manager than buying the market."
"The case for passive management rests only on complex and unrealistic
theories of equilibrium in capital markets."
"Any graduate of the ___ Business School should be able to beat an index
fund over the course of a market cycle."
Statements such as these are made with
alarming frequency by investment professionals1.
In some cases, subtle and sophisticated reasoning may be involved. More
often (alas), the conclusions can only be justified by assuming that the
laws of arithmetic have been suspended for the convenience of those who
choose to pursue careers as active managers.
If "active" and "passive" management
styles are defined in sensible ways, it must be the case that
(1) before costs, the return on
the average actively managed dollar will equal the return on the average
passively managed dollar and
(2) after costs, the return on the
average actively managed dollar will be less than the return on the
average passively managed dollar
These assertions will hold for any
time period. Moreover, they depend only on the laws of
addition, subtraction, multiplication and division. Nothing else is
required.
Of course, certain definitions of the
key terms are necessary. First a market must be selected -- the
stocks in the S&P 500, for example, or a set of "small" stocks. Then each
investor who holds securities from the market must be classified as either
active or passive.
A passive investor always
holds every security from the market, with each represented in the same
manner as in the market. Thus if security X represents 3 per cent of the
value of the securities in the market, a passive investor's portfolio
will have 3 per cent of its value invested in X. Equivalently, a passive
manager will hold the same percentage of the total outstanding amount of
each security in the market2.
An active investor is one
who is not passive. His or her portfolio will differ from that of the
passive managers at some or all times. Because active managers usually
act on perceptions of mispricing, and because such misperceptions change
relatively frequently, such managers tend to trade fairly frequently --
hence the term "active."
Over any specified time period, the
market return will be a weighted average of the returns on the
securities within the market, using beginning market values as weights3.
Each passive manager will obtain precisely the market return, before costs4.
From this, it follows (as the night from the day) that the return on the
average actively managed dollar must equal the market return. Why?
Because the market return must equal a weighted average of the returns on
the passive and active segments of the market. If the first two returns are
the same, the third must be also.
This proves assertion number 1. Note
that only simple principles of arithmetic were used in the process. To be
sure, we have seriously belabored the obvious, but the ubiquity of
statements such as those quoted earlier suggests that such labor is not in
vain.
To prove assertion number 2, we need
only rely on the fact that the costs of actively managing a given number of
dollars will exceed those of passive management. Active managers must pay
for more research and must pay more for trading. Security analysis (e.g. the
graduates of prestigious business schools) must eat, and so must brokers,
traders, specialists and other market-makers.
Because active and passive returns are
equal before cost, and because active managers bear greater costs, it
follows that the after-cost return from active management must be
lower than that from passive management.
This proves assertion number 2. Once
again, the proof is embarrassingly simple and uses only the most rudimentary
notions of simple arithmetic.
Enough (lower) mathematics. Let's turn
to the practical issues.
Why do sensible investment
professionals continue to make statements that seemingly fly in the face of
the simple and obvious relations we have described? How can presented
evidence show active managers beating "the market" or "the index" or
"passive managers"? Three reasons stand out5.
First, the passive managers in
question may not be truly passive (i.e., conform to our definition of
the term). Some index fund managers "sample" the market of choice,
rather than hold all the securities in market proportions. Some may even
charge high enough fees to bring their total costs to equal or exceed
those of active managers.
Second, active managers may not
fully represent the "non-passive" component of the market in question.
For example, the set of active managers may exclude some active holders
of securities within the market (e.g., individual investors). Many
empirical analyses consider only "professional" or "institutional"
active managers. It is, of course, possible for the average
professionally or institutionally actively managed dollar to outperform
the average passively managed dollar, after cost. For this to take
place, however, the non-institutional, individual investors must be
foolish enough to pay the added costs of the institutions' active
management via inferior performance. Another example arises when the
active managers hold securities from outside the market in question. For
example, returns on equity mutual funds with cash holdings are often
compared with returns on an all-equity index or index fund. In such
comparisons, the funds are generally beaten badly by the index in up
markets, but sometimes exceed index performance in down markets. Yet
another example arises when the set of active mangers excludes those who
have gone out of business during the period in question. Because such
managers are likely to have experienced especially poor returns, the
resulting "survivorship bias" will tend to produce results that are
better than those obtained by the average actively managed dollar.
Third, and possibly most important
in practice, the summary statistics for active managers may not truly
represent the performance of the average actively managed dollar.
To compute the latter, each manager's return should be weighted by the
dollars he or she has under management at the beginning of the period.
Some comparisons use a simple average of the performance of all managers
(large and small); others use the performance of the median active
manager. While the results of this kind of comparison are, in principle,
unpredictable, certain empirical regularities persist. Perhaps most
important, equity fund managers with smaller amounts of money tend to
favor stocks with smaller outstanding values. Thus, de facto,
an equally weighted average of active manager returns has a bias toward
smaller-capitalization stocks vis-a-vis the market as a whole. As a
result, the "average active manager" tends to be beaten badly in periods
when small-capitalization stocks underperform large-capitalization
stocks, but may exceed the market's performance in periods when
small-capitalization stocks do well. In both cases, of course, the
average actively managed dollar will underperform the market,
net of costs.
To repeat: Properly measured, the
average actively managed dollar must underperform the average passively
managed dollar, net of costs. Empirical analyses that appear to refute this
principle are guilty of improper measurement.
Continued in article
Bob Jensen's threads on the efficient capital market or lack thereof as
evidenced by so much research since 1991 ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH
Bill shared the Nobel Prize for invention of the CAPM Model which in recent
years has been shown not to work.
"The CAPM
Debate and the Logic and Philosophy of Finance,"
by David Johnstone, Abacus, Volume 49, Issue Supplement S1, pages 1–6,
January 2013 ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6281.2012.00378.x/full
Although most Abacus articles not free, this is a free editorial
download.
Finance, and particularly financial decision
making, has much in common with the discipline of statistics and statistical
decision theory. Both fields involve conceptual models and related methods
by which to make numerical assessments that are meant to assist users to
draw inferences about future states and to make choices between possible
actions. In both fields, inferences and decisions are reached by
implementing quantitative methods, and in both fields those methods require
either empirical or subjective inputs (e.g., sample estimates of relevant
input parameters or human estimates of the same sorts of variables).1
This is not merely saying that finance theory makes
use of statistical theory. That is incidental, as is the fact that
statistics now adopts the language and ideas of finance in some of its
important applications. Rather, the point is that the two disciplines are
fundamentally analogous in their purposes and construction. They differ
markedly, however, in their states of philosophical introspection, as is
natural given that finance arose as a field only in the 1960s or later, and
has therefore had much less time to mature and look back at itself and its
development in a critical philosophical way.
A stark difference between the two fields is that
in statistics there exists a formalized branch of enquiry called ‘the logic,
methodology and philosophy of statistical inference and decision theory’,
whereas in finance there is as yet no equivalent well-defined or
orchestrated subfield. The philosophy of statistics is a highly developed
discipline, built upon hundreds of papers and books, written by
statisticians, logicians, philosophers of science and practitioners in
applied fields (e.g., psychology, medicine, economics) since the early
1900s. All of the great names in statistical theory, including Karl Pearson,
R. A. Fisher, Neyman, Savage, von Neumann and de Finetti, have contributed
philosophically as well as technically to the field we know as statistics,
and indeed virtually all of the empirical work that is done in finance today
is licensed by one or other of these philosophers. Similarly, very
influential modern statistical theorists such as Lindley, Kadane, Bernardo,
Seidenfeld and Berger have contributed numerous papers and books to the
big-picture philosophical issues in statistics.
By comparison, the philosophy, logic and
methodology of finance are yet to expressly emerge, or to obtain the
overarching respect and influence that such work has in statistics. This of
itself is something for explanation from positivist and sociological
perspectives. In the early years of finance, there was a great deal of such
work published, but in later years the majority of published research in
finance has been predominantly descriptive or empirical (data driven) rather
than conceptual or philosophical. There are some obvious practical reasons
for this, such as for example the modern availability of excellent
unexplored data bases and fast inexpensive computing. More fundamentally,
however, there has been a cultural shift away from critical philosophical
analysis of financial logic and financial methods within finance.
As one simple example, early generations of
students in finance spent much time trying to understand the NPV versus IRR
debate, and the mathematical explanations of how these techniques can
coincide or clash. Theoretical papers were written on this topic, not just
in finance but also in economics and engineering. By comparison, current
finance students are not asked to think about the logical foundations of DCF
analysis, and are mostly unaware of the related debate and mathematical
enquiry that once took centre stage. The most that a modern finance student
can be expected to know of the issue is that undergraduate textbooks list
some important problems of IRR and conclude that NPV does not have the same
troubles, and that essentially the case is closed. Generally this
superficial appreciation comes from pre-scripted lecture slides rather than
from any individual research or thought on the issue. Most textbooks give no
academic references to the related historical literature and no inkling of
how subtle matters of interpretation of NPV and IRR can be.
Research students might once have discovered such
issues for themselves, through curiosity and unstructured background
reading, but the modern way of PhD research is much narrower and usually
involves a substantial commitment of time and thought to learning
statistical techniques, and how to implement them using different software
packages, and to cleaning, merging and reconstructing large data files.
There is obviously less time and appetite for philosophical critique, out of
which potential research outcomes are no doubt less ‘safe’ than those from a
well-conceived empirical investigation.
. . .
The issue nearly 50 years after its invention is
where finance stands on the CAPM. The papers published in this issue contain
the unedited positions on the CAPM of well-known finance researchers. They
are reactions to the main paper of Dempsey, who adopts a critical and
therefore provocative standpoint. Consistent with the sentiments expressed
above, it is my belief that the free and frank academic discussion provoked
by Dempsey's paper is not only essential to a mature field but is also of
great academic and communal enjoyment. Those who have provided comments on
Dempsey's paper did so willingly and apparently with the thought that it
would be worthwhile to put in print some ideas and opinions that are usually
reserved for informal or unguarded tearoom conversations.
By chance, this issue of Abacus on the status of
the CAPM coincides with the publication of a wonderful book on the same
subject, written by one of the founders of the field. This book by Haim Levy
(2012) titled The Capital Asset Pricing Model in the 21st Century covers
much of the history and debate over the CAPM and its theoretical, empirical
and practical validity. Readers will likely be interested in how the
arguments advanced by Dempsey and others in this issue of Abacus compare
with the position taken by Levy. There is in fact a great deal of
reinforcement between Levy and some of the commentators. Levy's essential
conclusion is that the CAPM stands, in his words, ‘alive and well’. This is
for philosophical reasons, including particularly that the CAPM is a model
of ex ante decision making and hence does not need to be, and cannot be
expected to be, mirrored neatly by historical data. Levy's faith in the CAPM
is also for practical reasons, particularly for the close approximation with
which it mimics ex ante optimal investment, and the returns thereof, over a
wide class of utility functions.
I conclude this introduction to Dempsey and others
on the topic of the CAPM in the twenty-first century with the spur that only
when we openly discuss what is inadequate or questionable with our own
theories can we lay claim to scientific ‘objectivity’. Technical or
empirical positions adopted routinely, untempered by philosophical
scepticism or appreciation, can prove greatly inadequate, misleading and
ultimately costly to users and to the scientific reputation of the field,
even when used for strictly practical purposes (such as choosing
investments).
Finance as a field embodies more than sufficient
theoretical substance to warrant its own subfield in philosophy—the logic
and philosophy of finance. By nature, philosophical critique is normative,
so any aversion in principle to normative research needs to be overcome. I
began this introduction with the claim that finance and statistics are like
twins. Note, however, that published research in statistics is predominantly
normative (e.g., Bayes versus non-Bayes, etc.) whereas most finance research
is largely empirical. If we look more closely, however, empirical finance,
which is sometimes championed as ‘positive’ and ‘anti-normative’, is replete
with normative discussion about matters such as how to construct an
experiment or a statistical test, or how to define a key measure such as the
cost of capital. There should therefore be no in-principle resistance to the
reinvigoration of normative or philosophical thought concerning finance
theory proper.
Footnotes
1 For example, applications in finance of portfolio theory and the CAPM
require an ex ante joint probability distribution of the future returns on
all firms in the market. That distribution is usually estimated empirically
but is in principle a subjective probability distribution.
2 ‘There is no inevitable connection between the validity
of the expected utility maxim and the validity of portfolio analysis based
on, say, expected return and variance’ (Markowitz, 1959, p. 209).
The model assumes that the variance of returns is an adequate
measurement of risk. This would be implied by the assumption that returns
are normally distributed, or indeed are distributed in any two-parameter
way, but for general return distributions other risk measures (like
coherent risk measures) will reflect the active and potential
shareholders' preferences more adequately. Indeed risk in financial
investments is not variance in itself, rather it is the probability of
losing: it is asymmetric in nature.
Barclays Wealth have published some research on asset allocation with
non-normal returns which shows that investors with very low risk tolerances
should hold more cash than CAPM suggests.[7]
The model assumes that all active and potential shareholders have access
to the same information and agree about the risk and expected return of all
assets (homogeneous expectations assumption).[citation
needed]
The model assumes that the probability beliefs of active and potential
shareholders match the true distribution of returns. A different possibility
is that active and potential shareholders' expectations are biased, causing
market prices to be informationally inefficient. This possibility is studied
in the field of
behavioral finance, which uses psychological assumptions to provide
alternatives to the CAPM such as the overconfidence-based asset pricing
model of Kent Daniel,
David Hirshleifer, and Avanidhar Subrahmanyam (2001).[8]
The model does not appear to adequately explain the variation in stock
returns. Empirical studies show that low beta stocks may offer higher
returns than the model would predict. Some data to this effect was presented
as early as a 1969 conference in
Buffalo, New York in a paper by
Fischer Black,
Michael Jensen, and
Myron Scholes. Either that fact is itself rational (which saves the
efficient-market hypothesis but makes CAPM wrong), or it is irrational
(which saves CAPM, but makes the EMH wrong – indeed, this possibility makes
volatility arbitrage a strategy for reliably beating the market).[citation
needed]
The model assumes that given a certain expected return, active and
potential shareholders will prefer lower risk (lower variance) to higher
risk and conversely given a certain level of risk will prefer higher returns
to lower ones. It does not allow for active and potential shareholders who
will accept lower returns for higher risk.
Casino gamblers pay to take on more risk, and it is possible that some
stock traders will pay for risk as well.[citation
needed]
The model assumes that there are no taxes or transaction costs, although
this assumption may be relaxed with more complicated versions of the model.[citation
needed]
The market portfolio consists of all assets in all markets, where each
asset is weighted by its market capitalization. This assumes no preference
between markets and assets for individual active and potential shareholders,
and that active and potential shareholders choose assets solely as a
function of their risk-return profile. It also assumes that all assets are
infinitely divisible as to the amount which may be held or transacted.[citation
needed]
The market portfolio should in theory include all types of assets that
are held by anyone as an investment (including works of art, real estate,
human capital...) In practice, such a market portfolio is unobservable and
people usually substitute a stock index as a proxy for the true market
portfolio. Unfortunately, it has been shown that this substitution is not
innocuous and can lead to false inferences as to the validity of the CAPM,
and it has been said that due to the inobservability of the true market
portfolio, the CAPM might not be empirically testable. This was presented in
greater depth in a paper by
Richard Roll in 1977, and is generally referred to as
Roll's critique.[9]
The model assumes economic agents optimise over a short-term horizon,
and in fact investors with longer-term outlooks would optimally choose
long-term inflation-linked bonds instead of short-term rates as this would
be more risk-free asset to such an agent.[10][11]
The model assumes just two dates, so that there is no opportunity to
consume and rebalance portfolios repeatedly over time. The basic insights of
the model are extended and generalized in the
intertemporal CAPM (ICAPM) of Robert Merton,
[12] and
the
consumption CAPM (CCAPM) of Douglas Breeden and Mark Rubinstein.[13]
CAPM assumes that all active and potential shareholders will consider
all of their assets and optimize one portfolio. This is in sharp
contradiction with portfolios that are held by individual shareholders:
humans tend to have fragmented portfolios or, rather, multiple portfolios:
for each goal one portfolio — see
behavioral portfolio theory[14]
and
Maslowian Portfolio Theory.[15]
Empirical tests show market anomalies like the size and value effect
that cannot be explained by the CAPM.[16]
For details see the
Fama–French three-factor model.[17]
Alternative to
CAPM: Dual-Beta
Dual-beta
model differentiates
downside beta from
upside
beta. The difference between CAPM and dual-beta model is that the CAPM
assumes that upside and downside betas are the same while the dual-beta model
does not. Since this assumption is rarely accurate, the dual-beta model is
considered to provide better information for investors.[2]
Jensen Comment
My own threads on how the CAPM has been misleading for much of accountics
research are at
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Be patient, this document is very slow to load at the second stage
(#AccentTheObvious)due to the immense size of the document.
You have to scroll down quite a ways for the CAPM tidbits.
Two tidbits of particular interest are as follows:
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!
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.
An alternative to CAPM theory is Arbitrage Pricing Theory. My long critique
of APT was rejected by the Journal of Finance. The Editor said if he did
not understand it nobody else would probably understand it. In retrospect is
should have been rejected because it was poorly written ---
http://www.trinity.edu/rjensen/default4.htm#BigOnes
The sad thing in all of this is the vast amount of accountics science
research over the past three decades that relied upon a CAPM Model that worked.
We will probably never learn about how this weakened much of many of the
findings in accountics science capital markets research.
TOPICS: Code of Ethics, Code of Professional Conduct, Ethics,
Fraud, Ponzi Schemes
SUMMARY: "Nearly five years after the Madoff Ponzi scheme was first
discovered, agents from the FBI arrested Paul Konigsberg, 77 years old. He
was the accountant to whom Bernard Madoff directed "many of his
clients-including some of his most important customers, in whose accounts
Madoff executed the most glaringly fraudulent transactions..." Mr.
Konisgerber is accused of conspiracy and falsifying records but not of
having knowledge of the Ponzi scheme.
CLASSROOM APPLICATION: The article may be used in any class
discussing accountants' professional responsibilities, including an ethics
class.
QUESTIONS:
1. (Advanced) What is a Ponzi scheme?
2. (Advanced) Summarize what you know about Bernard Madoff's Ponzi
scheme, including the length of time and extent of Mr. Madoff's fraud.
(Hint: access the indictment linked to the article or search the WSJ site
for information if you are unfamiliar with the Madoff fraud.)
3. (Introductory) According to the article, why is this indictment
being made almost 5 years after the Madoff fraud came to light?
4. (Advanced) Madoff's accountant, Paul Konigsberg, has been
indicted on charges of conspiracy and falsifying records, but not of having
knowledge of the Ponzi scheme. How do you think this is possible? (Hint:
consider the responsibility of a CPA under the code of ethics as well as the
responsibility not to knowlingly or recklessly contribute to violations of
the ethics code.)
Reviewed By: Judy Beckman, University of Rhode Island
Paul Konigsberg, a long-time former accountant to
Bernard Madoff, was indicted Thursday for allegedly keeping false books that
helped the convicted Ponzi-scheme operator cover up the fraud for decades.
Mr. Konigsberg, 77 years old, was arrested at 6
a.m. by agents from the Federal Bureau of Investigation, nearly five years
after the Madoff Ponzi scheme was first discovered. Mr. Konigsberg pleaded
not guilty and was released on bail Thursday.
Mr. Konigsberg's attorney, Reed Brodsky, said his
client "is an innocent victim of Bernie Madoff."
"He looks forward to clearing his good name at
trial," Mr. Brodsky said. "In their witch hunt arising out of the largest
Ponzi scheme in history, the government conveniently ignores that the
sociopath Bernie Madoff deceived everyone around him—from the most
sophisticated investors to the SEC itself."
In a five-count criminal indictment, prosecutors
accused Mr. Konigsberg of conspiracy and of falsifying records. They didn't
accuse him of having knowledge of Mr. Madoff's Ponzi scheme.
"In order to keep his scheme hidden for so long,
Madoff needed the assistance of certain willing outsiders that could be
trusted to handle otherwise suspicious activity," the indictment said.
"In particular, Madoff directed many of his
clients—including some of his most important customers, in whose accounts
Madoff executed the most glaringly fraudulent transactions—to use Paul J.
Konigsberg, the defendant, as their accountant."
The charges come just weeks before a criminal trial
of five former Madoff employees is slated to begin. Five back-office
employees, including two computer programmers and a secretary, are accused
of a host of crimes, including conspiracy, securities fraud and falsifying
records. The former employees have denied wrongdoing
According to a person briefed on the investigation,
prosecutors believe they have less than a year to bring cases against people
they suspect of having played a role in the Ponzi scheme, given the
five-year statute of limitations on securities-fraud cases.
Mr. Madoff, 75 years old, admitted in March 2009
that he carried out a decades-long Ponzi scheme, and is serving a 150-year
sentence in federal prison in North Carolina. He has always insisted he
acted alone.
So far, prosecutors have focused their
investigation on easier-to-prove charges like making false statements to
investors and government agencies. Nine people, including Mr. Madoff, have
pleaded guilty to criminal charges in connection with the probe but none
other than Mr. Madoff have admitted to knowing about the fraud. Last year,
Mr. Madoff's brother, Peter, pleaded guilty to filing false documents as
chief compliance officer at the firm, but denied knowing about the Ponzi
scheme. He was sentenced to 10 years in prison.
Mr. Konigsberg, a partner at accounting firm
Konigsberg Wolf & Co., is the second former accountant to come under
scrutiny in the criminal investigation. David Friehling, Mr. Madoff's former
outside accountant, has previously pleaded guilty to criminal charges.
According to a person familiar with the matter,
federal criminal investigators also are looking into whether J.P. Morgan
Chase JPM -0.29% & Co. or its employees funneled money into the Madoff
scheme while ignoring warning signs about the fraud. J.P. Morgan didn't
respond to a request for comment.
J.P. Morgan is one of a number of banks that faced
civil lawsuits in recent years filed by court-appointed trustee Irving
Picard, who is tasked with recovering funds for victims. Mr. Picard's
lawsuit alleges that J.P. Morgan was "at the very center" of Mr. Madoff's
fraud, and "thoroughly complicit in it."
However, in June, 2013, Mr. Picard's lawsuit
against J.P. Morgan and other banks was blocked from going forward because
an appeals court ruled that the lawsuit didn't comply with bankruptcy laws.
The appeals court didn't address the validity of Mr. Picard's allegations
against J.P. Morgan and other banks. Mr. Picard is weighing his options.
Last year, investigators focused on Shana Madoff,
Peter Madoff's daughter, who served as in-house counsel and compliance
director. It is unclear whether prosecutors are considering any action
against her. She hasn't been accused of wrongdoing. A lawyer for Shana
Madoff said he is no longer representing her. She couldn't be reached for
comment.
Prosecutors also continue to investigate Andrew
Madoff, Bernie Madoff's son, according to people familiar with the matter. A
lawyer for Andrew Madoff didn't respond to a request for comment.
The coming trial of the five ex-employees could
offer further insight into Mr. Madoff's operation, which went undetected for
decades by regulators and investors. At a pretrial hearing on Wednesday,
prosecutors were told by the judge that they couldn't introduce evidence of
the defendants' lavish lifestyle while employed with Mr. Madoff, including
purchases of expensive cars and vacation homes, lest that unfairly colors
jurors' perceptions. However, prosecutors would be allowed to share evidence
of other purchases funded directly by the Madoff enterprise, including a
Caribbean vacation.
A 'Poopetrator' Is Terrorizing The Campus Of Yale University ---
http://www.businessinsider.com/yale-poopetrator-2013-10
Jensen Comment
Professors are outraged. This challenges their monopoly on spreading BS across
the campus.
A woman on a motorized scooter allegedly stole a
flat screen television from a Walmart in Tennessee by toting it out the door
in a cart trailing the scooter, CBS affiliate WJHL reports. She was caught
in the act on surveillance cameras. Police are still searching for the
suspect.
Forwarded by Paula
Belief has it that the more cedar branches bedecking a home, the safer it is
from witches. The theory behind this is that the devil decreed a witch must
count every needle before she enters a house where she's intent on mischief.
From: Blue Ridge Country Magazine, January/February 2007.
Forwarded by Zafar
The Allergists voted to scratch it, but the Dermatologists advised not to
make any rash moves.
The Gastroenterologists had sort of a gut feeling about it, but the Neurologists
thought the Administration had a lot of nerve.
The Obstetricians felt they were all laboring under a misconception.
Ophthalmologists considered the idea shortsighted.
Pathologists yelled; "Over my dead body!" while the Pediatricians said, 'Oh,
Grow up!
The Psychiatrists thought the whole idea was madness, while the Radiologists
could see right through it.
Surgeons decided to wash their hands of the whole thing.
The Internists thought it was a bitter pill to swallow, and the Plastic Surgeons
said, "This puts a whole new face on the matter."
The Podiatrists thought it was a step forward, but the Urologists were pissed
off at the whole idea.
The Anesthesiologists thought the whole idea was a gas, and the Cardiologists
didn't have the heart to say no.
In the end, the Proctologists won out, leaving the entire decision up to the
*******s in Washington !
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.
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 theshift from Gemeinschaftto
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.”
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.
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 theshift from Gemeinschaftto
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.”
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 theshift from Gemeinschaftto
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.”
