In 2017 my Website was migrated to the clouds and reduced in size.
Hence some links below are broken.
One thing to try if a “www” link is broken is to substitute “faculty” for “www”
For example a broken link http://faculty.trinity.edu/rjensen/Pictures.htm
can be changed to corrected link http://faculty.trinity.edu/rjensen/Pictures.htm
However in some cases files had to be removed to reduce the size of my Website
Contact me at rjensen@trinity.edu if you really need to file that is missing

New Bookmarks
Year 2016 Quarter 2:  April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Choose a Date Below for Additions to the Bookmarks File

2015
April 30

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June 2016

Bob Jensen's New Additions to Bookmarks

June 2016 

Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://faculty.trinity.edu/rjensen/bookurl.htm 
Bookmarks for the World's Library --- http://faculty.trinity.edu/rjensen/bookbob2.htm 

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

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 

Coursera --- https://en.wikipedia.org/wiki/Coursera

A Handy Guide on How to Download Old Coursera Courses Before They Disappear ---
http://www.openculture.com/2016/06/a-handy-guide-on-how-to-download-old-coursera-courses-before-they-disappear.html

Bob Jensen's threads on MOOCs --- including links to the 50 most popular MOOCs to date ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Top Fee-Based Online Education Programs ---
http://faculty.trinity.edu/rjensen/Crossborder.htm#Education
 

Discover Business
Fee-Based Online MBA Programs and Online MBA Programs in Accounting ---
http://www.discoverbusiness.us/education/online-mba/accounting/

Bob Jensen's Threads on Fee-Based Online Education and Training Programs ---
http://faculty.trinity.edu/rjensen/Crossborder.htm

Teacher-training institutions need to be more rigorous (about teaching, including doctoral programs in virtually all disciplines)
"How to Make a Good Teacher," The Economist (Cover Story), June 11, 2016 ---
http://www.economist.com/printedition/covers/2016-06-09/ap-e-eu-la-me-na-uk-1 

FORGET smart uniforms and small classes. The secret to stellar grades and thriving students is teachers. One American study found that in a single year’s teaching the top 10% of teachers impart three times as much learning to their pupils as the worst 10% do. Another suggests that, if black pupils were taught by the best quarter of teachers, the gap between their achievement and that of white pupils would disappear.

But efforts to ensure that every teacher can teach are hobbled by the tenacious myth that good teachers are born, not made. Classroom heroes like Robin Williams in “Dead Poets Society” or Michelle Pfeiffer in “Dangerous Minds” are endowed with exceptional, innate inspirational powers. Government policies, which often start from the same assumption, seek to raise teaching standards by attracting high-flying graduates to join the profession and prodding bad teachers to leave. Teachers’ unions, meanwhile, insist that if only their members were set free from central diktat, excellence would follow.

The premise that teaching ability is something you either have or don’t is mistaken. A new breed of teacher-trainers is founding a rigorous science of pedagogy. The aim is to make ordinary teachers great, just as sports coaches help athletes of all abilities to improve their personal best (see article). Done right, this will revolutionise schools and change lives.

Quis docebit ipsos doctores?

Education has a history of lurching from one miracle solution to the next. The best of them even do some good. Teach for America, and the dozens of organisations it has inspired in other countries, have brought ambitious, energetic new graduates into the profession. And dismissing teachers for bad performance has boosted results in Washington, DC, and elsewhere. But each approach has its limits. Teaching is a mass profession: it cannot grab all the top graduates, year after year. When poor teachers are fired, new ones are needed—and they will have been trained in the very same system that failed to make fine teachers out of their predecessors.

By contrast, the idea of improving the average teacher could revolutionise the entire profession. Around the world, few teachers are well enough prepared before being let loose on children. In poor countries many get little training of any kind. A recent report found 31 countries in which more than a quarter of primary-school teachers had not reached (minimal) national standards. In rich countries the problem is more subtle. Teachers qualify following a long, specialised course. This will often involve airy discussions of theory—on ecopedagogy, possibly, or conscientisation (don’t ask). Some of these courses, including masters degrees in education, have no effect on how well their graduates’ pupils end up being taught.

What teachers fail to learn in universities and teacher-training colleges they rarely pick up on the job. They become better teachers in their first few years as they get to grips with real pupils in real classrooms, but after that improvements tail off. This is largely because schools neglect their most important pupils: teachers themselves. Across the OECD club of mostly rich countries, two-fifths of teachers say they have never had a chance to learn by sitting in on another teacher’s lessons; nor have they been asked to give feedback on their peers.

Those who can, learn

If this is to change, teachers need to learn how to impart knowledge and prepare young minds to receive and retain it. Good teachers set clear goals, enforce high standards of behaviour and manage their lesson time wisely. They use tried-and-tested instructional techniques to ensure that all the brains are working all of the time, for example asking questions in the classroom with “cold calling” rather than relying on the same eager pupils to put up their hands.

Instilling these techniques is easier said than done. With teaching as with other complex skills, the route to mastery is not abstruse theory but intense, guided practice grounded in subject-matter knowledge and pedagogical methods. Trainees should spend more time in the classroom. The places where pupils do best, for example Finland, Singapore and Shanghai, put novice teachers through a demanding apprenticeship. In America high-performing charter schools teach trainees in the classroom and bring them on with coaching and feedback.

Teacher-training institutions need to be more rigorous—rather as a century ago medical schools raised the calibre of doctors by introducing systematic curriculums and providing clinical experience. It is essential that teacher-training colleges start to collect and publish data on how their graduates perform in the classroom. Courses that produce teachers who go on to do little or nothing to improve their pupils’ learning should not receive subsidies or see their graduates become teachers. They would then have to improve to survive.

Continued in article

"A Lack Of Rigor Leaves Students 'Adrift' In College," , NPR, February 9, 2011 ---
http://www.npr.org/2011/02/09/133310978/in-college-a-lack-of-rigor-leaves-students-adrift

"What Keeps Us from Being Great," by Joe Hoyle, February 21, 2011 ---
http://joehoyle-teaching.blogspot.com/2011/02/what-keeps-us-from-being-great.html

"CONVERSATION WITH BOB JENSEN," by Joe Hoyle, Teaching Blog, October 8, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/10/conversation-with-bob-jensen.html

"CONVERSATION WITH DENNIS BERESFORD," by Joe Hoyle, Teaching Blog, March 26, 2013 ---
http://joehoyle-teaching.blogspot.com/2014/03/conversation-with-dennis-beresford.html

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 Globe reported. 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
Jensen Question
Is the primary cause the lack of admissions standards and rigor in programs that educate those students taking the licensing examinations?

"This new education law could lower the standards for teachers' qualifications," by Gail L. Boldt and Bernard J. Badiali, Business Insider, March 26, 2016 ---
http://article.wn.com/view/2016/03/26/This_new_education_law_could_lower_the_standards_for_teacher/

"How to Turn Around a Terrible School:  A Mississippi elementary school was transformed by a nonprofit run by Netscape’s former CEO," by Richard Grant, The Wall Street Journal, April 1, 2016 ---
http://www.wsj.com/articles/how-to-turn-around-a-terrible-school-1459550615?mod=djemMER

"4-Part Plan Seeks to Fix Mathematics Education," by Dan Barrett, Chronicle of Higher Education, April 10, 2016 ---
http://chronicle.com/article/4-Part-Plan-Seeks-to-Fix/236037?cid=at&utm_source=at&utm_medium=en&elqTrackId=8b3f5c18c713478da5dc6b307768fa12&elq=58285565e94b49cdbe1bac3d487692e6&elqaid=8680&elqat=1&elqCampaignId=2922

Bob Jensen's threads on higher education controversies ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm

Bob Jensen's threads on resources for teachers ---
http://faculty.trinity.edu/rjensen/Bookbob2.htm#EducationResearch

June 10, 2016 message from Tracey E. Sutherland
Executive Director
American Accounting Association

Dear Bob,

The AAA is proud to announce the following winners of the 2016 awards which will be presented at the Annual Meeting in New York City in August.

Accounting Horizons Best Paper Award

Colleen M. Boland, University of Wisconsin-Milwaukee Scott N. Bronson, The University of Kansas Chris E. Hogan, Michigan State University "Accelerated Filing Deadlines, Internal Controls, and Financial Statement Quality: The Case of Originating Misstatements." Accounting Horizons, September 2015, Volume 29, No. 3, pp. 551-575.

Ronald A. Dye, Northwestern University Jonathan C. Glover, Columbia University Shyam Sunder, Yale University "Financial Engineering and the Arms Race between Accounting Standard Setters and Preparers." Accounting Horizons, June 2015, Volume 29, No. 2, pp.265-295.

Competitive Manuscript Award Amanda M. Winn, University of Illinois "Partner Rotation and PCAOB Inspections: Effects on End-of-Term Audit Quality"

Deloitte Wildman Medal Award Mary E. Barth, Stanford University Wayne R. Landsman, The University of North Carolina Mark H. Lang, The University of North Carolina Christopher D. Williams, University of Michigan "Are IFRS-based and US GAAP-based Accounting Amounts Comparable?" Journal of Accounting Economics, August 2012, Volume 54, Issue 1, pp. 68-93.

Distinguished Contribution to Accounting Literature Award Holger Daske, Universitat Mannheim Luzi Hail, University of Pennsylvania Christian Leuz, University of Chicago Rodrigo S. Verdi, Massachusetts Institute of Technology "Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences." Journal of Accounting Research, Volume 46, Issue 5, pp. 1085-1142, December 2008.

Doctoral Dissertation Awards for Innovative Research in Accounting Education Danqi Hu, University of Toronto Soonchul Hyun, University of Calgary Lorien Stice-Lawrence, University of North Carolina-Chapel Hill Aleksandra Zimmerman, Case Western Reserve University

Innovation in Accounting Education Award (sponsored by the Ernst & Young Foundation) Michael J. Meyer, University of Notre Dame Teresa S. Meyer, University of Notre Dame "Accounting Case Search: A Web Search Tool for Finding Published Accounting Cases"

Frank Buckless, North Carolina State University Kathy Krawczyk, North Carolina State University D. Scott Showalter, North Carolina State University "Use of Second Life Virtual Reality World for Inventory Simulation"

Issues in Accounting Education Best Paper Award Rebecca G. Fay, East Carolina University Norma R. Montague, Wake Forest University "Witnessing Your Own Cognitive Bias: A Compendium of Classroom Exercises." Issues in Accounting Education, February 2015, Volume 30, No. 1, pp 13-34.

Lifetime Service Award Theodore J. Mock, University of California, Riverside David E. Stout, Youngstown State University

Notable Contributions to Accounting Literature Award (sponsored by AICPA) Ilia D. Dichev, Emory University John R. Graham, Duke University Campbell R. Harvey, Duke University Shivaram Rajgopal, Columbia University "Earnings quality: Evidence from the field." Journal of Accounting Economics. Volume 56 (2013), pp. 1-33.

Outstanding Accounting Educator Award (sponsored by the PricewaterhouseCoopers Foundation) Jerold Zimmerman, University of Rochester Douglas F. Prawitt, Brigham Young University

Outstanding Service Award Michael A. Diamond, University of Southern California George W. Krull, Jr., Grant Thornton LLP, Retired

Seminal Contribution to Accounting Literature Award Richard G. Sloan, University of California, Berkley "Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?" The Accounting Review, Vol. 71, No. 3. (July 1996), pp. 289-315.

We congratulate all of the above award winners and look forward to the awards presentations in August! You can view the list of 2016 AAA Awards award winners online, as well as when the awards will be presented at the Annual Meeting.

Best Regards,
Tracey

Jensen Comment
I was the Chair of the 2016 Selection Committee for the Notable Contributions to Accounting Literature Award.
After choosing the 2016 winning contribution I recommended changes for selecting this award in the future.

Bob Jensen's Recommendations for Change on the American Accounting Association's
Notable Contributions to Accounting Literature Award
http://faculty.trinity.edu/rjensen/TheoryNotable.htm

March 28, 2016 reply from Paul Williams

Bob, Hurray for you!! The AAA is still the last remaining Politburo on earth. Like Russian generals with medal strewn chests, the Notable awards process is truly a farce. The same applies to the Seminal Contribution award; does anyone know how that process works? It mustn't work very well because if we are to believe in the wisdom of the process nothing of any worth was written before 1968. The two Notable exceptions were the result of selection committees that were put together by the AAA to create the appearance that it was taking diversity seriously. For the Notable Contribution why do we need a Nominating Committee and a Selection Committee? Because the nominating committee is a way to let the peons participate but deny them any power to actually decide what is or is not noteworthy (as if within a five year period that is possible). Here is a study for someone to do. Two awards, the Horizons and Issues best papers, are by a vote of the membership. All of the others are by a committee whose members are selected, I assume, by the "Board. My sense is that there is a dramatic contrast between who wins by vote and who wins by committee. Tony Tinker and Tony Puxty published a book a number of years ago titled Policing Accounting Knowledge, which documents with actual cases of how the review and awards process at AAA worked in the past. Until the bylaws are changed to allow a more democratic selection of directors of research and publication nothing is going to happen. In former AAA president Gregory Waymire's white paper "Seeds of Innovation" he made the following assessment of the status of the U.S. academy's premier research: "As a result, I believe our discipline is evolving towards irrelevance within the academy and the broader society with the ultimate result being intellectual irrelevance and eventually extinction." That assessment is spot on, but when a leader of the academy apparently is powerless to alter the course, it indicates how firmly entrenched and institutionalized the intellectual mindset of the AAA is. Until it takes the view that the purpose of research and writing is not to garner politically correct academic reputations but to address serious and interesting questions then we will become extinct and no one will even notice. Our plenary speaker the last time our meeting was in Anaheim was Diedre McCloskey whose message was the message that Bob has been harping on for years -- the mindlessness of regressions and obsession with p values. Did it have any effect? Just look at the content of our so-called U.S. based premier journals. One huge linear model after another utilizing data completely ill-suited to the task. Bob: Guess when we get old the Don Quixote in us comes out. I wish you well.

Bob, Addenda to my previous rant. Your point about replication is more significant than some seem to appreciate. No archival study that I know of has ever been literally replicated. Even worse none of those studies can be replicated because the people who did them violate one of the fundamental "ethics" of science. Every laboratory scientist must maintain a log book which describes in great detail how the result of a particular experiment was produced, i.e., a complete recipe that permits an independent scientist to actually replicate the study in its entirety to simply validate the knowledge claim being made by the scientist. Without that capacity, the claim being made is merely an anecdote (think of the Jim Hunton affair). It should be sobering to an academy to realize that the corpus of its knowledge is simply a collection of anecdotes. "Anecdotal evidence"-- the ultimate put-down, yet most of our evidence is little more than anecdotes.

June 2016 message from Prem Sikka

BHS is one of the biggest retail casualties in the UK. Over 11,000 people are losing their jobs and more than 20,000 employees are facing cuts to their pension entitlements. BHS had been in financial difficulties for a number of years, but auditors PricewaterhouseCoopers, who received nearly £11.3 million in fees, never ever raised any red flags. Further details are in the article titled “BHS and the silence of the auditors” and may interest you. It is available at

 

http://www.theaccountant-online.com/features/comment-bhs-and-the-silence-of-the-auditors-4923573/

 

Regards

 

Prem Sikka

Professor of Accounting

Centre for Global Accountability

Essex Business School

University of Essex

Colchester, Essex CO4 3SQ, UK

Office Tel:   +44(0)1206 873773

Office Fax:  +44 (01206 873429

Twitter: https://twitter.com/premnsikka

Facebook:https://www.facebook.com/prem.sikka.1

AABA Website: http://www.aabaglobal.org

June 16, 2016 reply from Tom Selling

The BHS case might make for an interesting case study in two respects: (1)would any of the financial statement analysis models have indicated a high probability of bankruptcy or financial statement fraud; and even more interesting to me is (2) what, if anything, should we have expected to read about this because of the newly expanded auditor’s reporting model in the UK?

Regarding the second question I discussed the PCAOB proposals for an expanded auditor’s report covering critical audit matters in my latest blog post (just today). The UK already has something similar to what the PCAOB is proposing. Moreover, IFRS requires management to decide whether disclosures regarding the ability to continue as a going concern are called for. It would seem to me that a critical matter for the auditor of BHS would have been to evaluate management’s judgment as to whether such disclosures would have been necessary.

June 16, 2016 reply from Bob Jensen

Does PwC have a great reputation as an audit firm in the U.K.?

"PricewaterhouseCoopers hit twice as its Tesco and Barclays work is investigated by watchdog, By Ruth Sunderland, ThisIsMoney, December 22, 2014 --- 
http://www.thisismoney.co.uk/money/markets/article-2884187/PricewaterhouseCoopers-hit-twice-Tesco-Barclays-work-investigated-watchdog.html

Khan Academy Helpers for Interpreting Income Statements ---
https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-stateme/financial-statements-tutorial/e/interpreting-the-income-statement-2

Fraudulent Publishers Reneging on Royalty Contracts ---
http://www.publishersweekly.com/pw/by-topic/industry-news/publisher-news/article/68236-textbook-authors-suing-pearson-education-over-royalities.html
Thank you Richard Campbell for the heads up.

WSJ: Jobs, Salaries Dwindle For Ph.D.s ---
http://taxprof.typepad.com//taxprof_blog/2016/06/wsjjobs-salaries-dwindle-for-phds.html

"The End Of Accounting." by Paul Caron, TaxProf Blog, June 20, 2016 ---
http://taxprof.typepad.com/taxprof_blog/2016/06/the-end-of-accounting.html

,

Baruch Lev (NYU) & Feng Gu (SUNY-Buffalo), The End of Accounting (Wiley, June 27, 2016) (WSJ excerpt):

The problem with reported earnings, and financial statements in general, is that they no longer reflect the realities of businesses. Instead, they follow an arcane set of accounting rules and regulations. An alternate reality which fails to illuminate essential factors that make an enterprise rise or fall, where, for example:

The most important, value-creating investments in patents, brands, IT and other intangibles are considered regular expenses, like salaries or rent, without future benefits.

Reported earnings are a mixed bag of long-term items (indicating sustained growth) and one-time, transitory gains/losses (restructuring costs, for example), having negligible effect on corporate value. ...

Nontraded assets/liabilities, like privately placed bonds, which have no market values are nevertheless required to be marked-to-market in the financial reports. This, of course, is an oxymoron. ...

If that’s not bad enough, accounting earnings are based on multiple subjective managerial estimates and projections (depreciation, stock-option expense, asset write-offs, prospective bad debts, future pension liabilities, etc.), prone to errors and manipulations. All this results in backward-looking accounting statements that say little about an enterprise’s future growth and ability to compete. ... The time has come for firms to regularly provide information of true value to investors to supplement accounting’s serious shortcomings.

June 20, 2016 reply from Dennis Beresford

Bob,

Baruch has been preaching that intangibles should be recorded as assets for R&D, etc. for 20 years or more. So the "end" he suggests should have occurred before now. Many agree with him in theory but the numerous implementation issues tend to create too much of a hurdle. The FASB plans to soon issue a request for comment on what should be the next major project to be undertaken and I believe this will be one possibility. It will be interesting to see how much support it gets.

BTW, I wonder if the new book also calls for Human Resource Assets to be recorded - another idea whose time probably hasn't (and shouldn't) come.

Denny

June 20, 2016 Reply from Tom Selling

Bob and Denny:

Before Denny’s comment, I was thinking of replying to Bob that I don’t find “The End of Accounting” as a book title to be “absurd” at all. I have been planning to write a blog post on the distinction between “accounting” — as in Financial Accounting Standards Board — and the plain-English meaning of “give an account” — what one owns and owes at point(s) in time. This is as good a time as any to go public with my thoughts on this.

The FASB’s meaning of “accounting” as embodied in its standards is completely divorced from the the notion of giving an account of what one owns and owes. I attribute the cause of the disconnect to the quixotic notion that standards of reporting “income” should be the main objective of the FASB (and its predecessors).

“The End of Accounting” in the non-technical sense of the term has already happened. Today, we have a “statement of financial position” has become nothing but a list of items determined by rule to be assets or liabilities (whether or not they really are) paired with arbitrary currency amounts. An "income statement" is no different; it is nothing more than a statement of items recognized to be revenues/gains/expenses/losses. The result is not “income” in any commonly understood sense of the term (or even a subset of “income”), but only the sum of these categories of items.

I can’t wait to read the book!

Best,
Tom

Jensen Comment

If Lev's proposals (actually unrealistic dreams) really lowered cost of capital more firms would be routinely applying Lev's proposals.

Like Ijiri's "Force Accounting" Lev is reaching into the clouds to touch the angels.

The title "The End of Accounting" seems to be an attempt to attract attention with an absurd title just like political economist Francis Fukuyama tried to attract attention with his book "The End of History." Obviously neither accounting nor history will come to an "end." Accounting will come to an end when audited financial statements no longer impact portfolio decisions of investors and employment decisions of business firms such as the firing of a CEO who fails to meet "earnings" targets.

It will be interesting to see if Lev and Gu really have something new and exciting to say in their new book. I've not yet read the book, but I have my doubts that they will tell us anything we don't already know and ignore important things we also already know. We already know that things we cannot measure are important, perhaps more important than things we can measure about a lot of things in life. This is also true for most things in life. For example, consider choosing the a cpllege quarterback fpr the NFL draft. We can measure performance statistics from college playing and all sorts of medical statistics. But the experts who choose these new NFL quarterbacks have more failures than successes. This is because of all the intangibles that cannot be measured. The same is true for business forecasts for future performance of going concerns and staruips. Lev adn Gu are correct about the importance of intangibles that cannot be measured. The same is true for NFL prospective quarterbacks. But nobody has written a book entitled "The End of Quarterbacks" or given up on using college performance statistics to help predict how college quarterbacks will perform in the NFL. Thus I do not give up on trying to make that which we can measure about business financial performance better and more relaible and less fraudulent.

Bob Jensen's threads for years have contended that accounting reports are only the tip of the iceberg relative to contingencies and intangibles that cannot be measured beneath the surface ----
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

While the number of accounting graduates has been increasing, the number of CPA candidates has remained relatively flat. According to the AICPA’s "2015 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits," in 2013-14 there were 54,423 bachelor’s in accounting awarded and 27,359 master’s in accounting. In the same period there were 207,071 students enrolled in bachelor’s in accounting programs, representing a 5 percent growth in overall enrollments. In 2014 there were 43,252 accounting graduates hired by CPA firms, including both master’s and bachelor’s degree holders, a growth of 7 percent since 2012.
NASBA, October 2015
https://nasba.org/blog/2015/10/15/number-of-accounting-grads-up/

Jensen Comment
Since CPA Exam candidates must have the requisite 150 credits enrollments would probably be down in this era of rising student debt just for four-year degrees based on approximately 120 credits. In my opinion what keeps the 150 credit programs thriving are the CPA firm and business firm internships that are very popular with top accounting students. Even though those internships mostly are given to seniors, those internships are usually restricted for seniors intent on taking the fifth year (or more) to qualify for the taking the CPA examination. HooRay for internships!

The Sarbanes-Oxley Act of 2002 attempted to get auditing firms out of the consulting business that tempted conflicts of interest in audit engagements
Fat lot of good that has done!

"Big Four Firms Dominate U.S. Consulting Market," by Michael Cohn, Accounting Today, June 9, 2016 ---
http://www.accountingtoday.com/news/firm-profession/big-four-firms-dominate-us-consulting-market-78352-1.html

. . .

The Big Four grew 10.9 percent to $19.6 billion in 2015, compared to growth of 7.7 percent in the wider consulting market to nearly $55 billion, according to a new report from Source Global Research. The report found that the Big Four’s market share is now 65 percent bigger than the next-largest firm type—technology firms, that is—and is growing much faster.

“They’ve got about 35 percent of the entire U.S. consulting market share, which is extraordinary,” said Source Global Research director Edward Haigh. “That replicates what we see elsewhere as well, and their growth is higher than anybody else. They’re 10.9 percent in 2015.”

Much of the growth stems from the Big Four’s aggressive pursuit of an expensive acquisition agenda that has transformed the market over the past few years. For example, PwC completed its acquisition of Booz & Company in April 2014, renaming it Strategy&. Deloitte acquired Monitor Group in 2013, renaming it Monitor Deloitte. Ernst & Young acquired the Parthenon Group in 2014. KPMG acquired Beacon Partners in 2015, along with Towers Watson’s Human Resources Service Delivery practice.

“We have to point to the degree of inorganic growth that’s going on there,” said Haigh. “One of the reasons why they’re doing so well is they’re buying everybody, and they’re desperately trying to increase capability across the spectrum. They’re trying to go after these big transformation projects and dominate the consulting market now. The past consulting projects tended to be discrete projects within one particular area of the business. The nature of today’s market is that you get these big multifunctional, multigeographical transformation projects that encompass everything from the dividing of the strategy to the advice around the technology to the implementation of the technology to the human part. Firms are trying to bolster their capabilities in the areas where they are not traditionally strong. The Big Four are trying to buy up all the bits of capability that they don’t feel they have.”

Acquisition isn’t the sole factor driving growth, the report acknowledged. Demand from the financial services sector and an increasing interest in risk consulting—both of which are signature areas for the Big Four—are also driving significant growth at the firms.

Risk and regulatory work across the U.S. consulting market grew 7.8 percent this past year to over $14 billion. However, the hottest area for many firms is cybersecurity consulting, thanks to headline-grabbing news stories about data breaches. The Big Four have been building their capabilities in all these areas.

Continued in article

Bob Jensen's threads about professionalism in auditing ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm

"Spotting Nonprofit Accounting Tricks:  Nonprofits are profiting off lax accounting oversight," by Gary Weiss, Barrons, June 18, 2016 ---
http://www.barrons.com/articles/spotting-nonprofit-accounting-tricks-1466222360

You need to be as rigorous in vetting nonprofits for accounting chicanery as you are with public companies trading on the stock exchanges.

Disabled American Veterans, or DAV, is a 96-year-old nonprofit that does fine work for vets wounded in the service of their country. Its glossy 2014 annual report shows that it’s also efficient, with 76.6% of expenditures going to worthwhile programs, and the rest for fund raising and administration.

The Better Business Bureau agrees, rating DAV “accredited” in all 20 categories, including program and fund-raising expenses.

But dig into the financials, as the watchdog group CharityWatch has done, and you get a different picture: Just 50% of DAV’s funds go to helpful programs, which is why CharityWatch, found online at charitywatch.org, gives the veterans’ charity a “D,” its second-lowest rating. It’s the same rating it originally gave Wounded Warrior Project, which has since been roundly criticized for unwise spending of donors’ money (see “Veterans’ Needs, Charitable Dangers,” Penta Daily, Jan. 4, 2013).

DAV’s downgrade is largely the result of its accounting practices. Nonprofit accounting is arguably one of the last vast wastelands of corporate accountability; rules are lax, disclosure is minimal, and available data are usually months, or even years, old.

Don’t expect the U.S. government to protect you. “There’s no regulatory agency for nonprofits,” observes CharityWatch President Daniel Borochoff.

That makes room for some fast accounting moves. A good accountant or bookkeeper working for a nonprofit “can make it pretty hard for a donor to pick up on accounting issues,” says Robert Kesten, a consultant, policy advisor, and nonprofit executive. “I can list a fund-raising dinner as education, public relations, donor appreciation, and only a fraction of it attributed to fund raising or overhead. I can parse out salaries over any number of categories and show I spend nothing on overhead or fund raising.”

So it’s up to you, as the donor, to ferret out such bad accounting practices. Most donors are, of course, acquainted with the Internal Revenue Service Form 990, the nonprofit annual report that can be downloaded from several sites on the Internet.

But pertinent details are often found only in the report of the independent auditor, which some states require for larger charities. These can be found on state charity databases, such as the New York State Attorney General’s charitiesnys.com.

In arriving at its “D” rating for DAV, for example, CharityWatch examined both the 990 and the auditor report, and adjusted for two of the most common accounting red flags: “joint costs” (when fund-raising costs are doing double duty as a program) and “gifts in kind” (illiquid gifts booked as revenue).

How does it work? Fund-raising costs can be hidden when a bit of dubious advice or a call to action is tacked on to what blatantly is a pitch. DAV, for example, includes with its solicitations a form that allows recipients to obtain more information on DAV programs, and three paragraphs of “additional ways you can help injured and ill veterans.” Among the tidbits of advice is the need to “respect handicapped parking and resources,” such as reserving “the handicap-accessible stall for others who may need the extra space and specialized accommodations.” Potential donors are also urged to make business facilities “accessible to people with mobility issues” and to hire veterans, who, we learn, “possess skill sets that are desirable to any workplace.”

But here’s the thing: DAV’s joint-cost allocations are found not in the 990, but in Audit Note No. 2, located 71 pages into its 84-page New York state filing for 2014. There, you will discover DAV’s “incurred joint costs of $53,208,722 for informational materials and activities that included fund-raising appeals. Of those costs, $25,008,099 was allocated to public-awareness outreach (program services) and $28,200,623 allocated to fund-raising costs.”

CharityWatch adjusted for that, and for DAV’s “gifts in kind”—noncash donations of goods and services. The group believes that donated goods and services are not directly comparable to cash contributions in determining how well money is spent. GIKs don’t exactly leap out of the financials. They are on the Form 990 Schedule D, but buried in Parts XI, XII, and XIII.

Daniel Clare, DAV’s national director of communications, disputed CharityWatch’s analysis and said the group is “an entity which does not conform with widely accepted financial and reporting standards.”

Perhaps, but CharityWatch has warned in advance of coming scandals at Feed the Children, Central Asia Institute, and Wounded Warrior Project.

Clare is right, however, that such accounting loopholes are widely used and accepted in the nonprofit world, and while such accounting is legal, donors need to be aware of such tactics and incorporate them into their decision making. Do you want to donate funds to a charity that is liberal with its accounting, or one that takes a more conservative approach?

Thrift-store operations are another red flag and often lumped in as a program expense, when such operations are primarily there to raise money and should be viewed as a fund-raising cost. Amvets National Service Foundation, another veterans organization, says on its Website that “84% goes toward programs that directly benefit veterans.”

CharityWatch deducted $7.4 million in Amvets NSF’s thrift-store costs, a good chunk of the $14.3 million in reported total program-services expenses for its fiscal year ended on Aug. 31, 2014. Based on that and other adjustments, CharityWatch found a mere 29% going to programs and gave Amvets NSF an “F” rating. The group did not respond to Penta’s phone calls requesting comment.

Any expenses that generate revenue need to be examined carefully. Planet Aid operates training and development projects abroad, and accepts donated clothing and shoes at 20,000 clothing bins scattered across 21 states. It sells the used clothes in the U.S. and overseas. It’s really a recycling program, Planet Aid contends, and so it can legally claim that it spends 85% of its outlays on program costs.

But CharityWatch believes the old clothing would just be donated elsewhere or sold, and so deducts the clothing-donation-related costs. It figures the charity’s real program number is 25%, and gives Planet Aid a big fat “F.”

Planet Aid CEO Ester Neltrup responded in a statement that “protecting the environment through our extensive textile-recycling network” is part of the group’s core purposes “and not an administrative or fund-raising cost. Our financial statements are subject to regular audit, and the U.S. government, Better Business Bureau, and other major charity-rating organizations recognize that our accounting follows standard industry practices.”

Donors should also be wary of claims that 100% of donor dollars go to program costs when directed to particular funds within the charity.

In such cases, the cost of running the charity is found elsewhere in the financial statement. Kids Wish Network claims on its Website that “100% of contributions directed to Kids Wish Network’s Guardian Angel fund will go directly to supporting our kids through our services and programs.”

But its 990 discloses that the group actually has high overall fund-raising costs. According to CharityWatch analyst Stephanie Kalivas, in reality, just 10% of KWN’s donor dollars go to programs. Of the $12.2 million in gross receipts, she notes, $10.5 million went to professional fund-raisers. The group’s rating: “F.”

Continued in article

Some Watchdog Groups (forwarded by Scott Bonacker)

There are some watchdog groups –

http://americandemocracy.org/adlf-files-complaint-against-the-donald-j-trump-foundation-and-mr-donald-j-trump/

 

https://www.charitywatch.org/charitywatch-hot-topic/how-does-charitywatch-rate-the-veterans-charities-on-trump-39-s-fundraiser-list-/60

Bob Jensen's threads in the sad state if governmental and other accounting for non-profit organizations ---
http://faculty.trinity.edu/rjensen/theory02.htm#GovernmentalAccounting

Bob Jensen's threads on creative accounting ---
http://faculty.trinity.edu/rjensen/theory02.htm#Manipulation

Insider Trading --- https://en.wikipedia.org/wiki/Insider_trading

"How the Feds Pulled Off the Biggest Insider-Trading Investigation in U.S. History." by Patricia Hurtado & Michael Keller, Bloomberg, June 1, 2016 ---
http://www.bloomberg.com/graphics/2016-insider-trading/?cmpid=BBD060116_BIZ&utm_medium=email&utm_source=newsletter&utm_campaign=

For more than seven years, the U.S. government has relentlessly prosecuted Wall Street traders who used inside information to rake in hundreds of millions of dollars in profits.

Federal prosecutors in New York have racked up 91 convictions and collected almost $2 billion in fines. In the latest action on May 19, the government looked beyond Wall Street, accusing a legendary Las Vegas gambler of profiting from insider tips.

Here's a by-the-numbers look at what happens when the Feds get serious about insider trading.

The suspects worked in what prosecutors described as rings — loose and sometimes overlapping groups of insiders, traders, and facilitators.

This arrangement, however, was also their undoing. Adopting tactics used against mobsters and narcoterrorists, the FBI infiltrated these rings using wiretaps and informants to work their way further up the chain.

Continued in article

Bob Jensen's Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's Rotten to the Core Threads ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm

They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss. 
What's a sweetheart like you doin' in a dump like this?
Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US] 

Enron Accounting Deja Vu
A California public water district that earned a rare federal penalty over what it described as "a little Enron accounting" lent one of its executives $1.4 million to buy a riverfront home, and the loan remains unpaid nine years later although the official has left the agency, according to records and interviews.
http://www.mercurynews.com/california/ci_29996525/after-enron-accounting-california-public-water-districts-1

Bob Jensen's Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

April 22, 2016
664,532: The Number of Active CPAs in the US ---
http://www.accountingweb.com/practice/team/664532-the-number-of-active-cpas-in-the-us?source=ei060816

Jensen Comment
This does not include the over-the-hill CPA inactives like me.

FIFA World Cup Soccer --- https://en.wikipedia.org/wiki/FIFA_World_Cup

From the CFO Journal's Morning Ledger on June 13, 2016

KPMG leaves the pitch
Global accounting KPMG became the latest company to sever ties with soccer’s world governing body, when it informed FIFA on Friday that it was dropping its account. The auditor’s Swiss affiliate had signed off on FIFA’s financial statements for 16 consecutive years. The announcement came 10 days after the disclosure that a small group of FIFA’s top officials allegedly paid each other tens of millions of dollars in bonuses and other incentives, and followed the resignation of FIFA’s chief financial officer, Markus Kattner.

 

Bloomberg, June 3, 2016
http://www.bloomberg.com/news/articles/2016-06-03/fifa-top-three-bosses-netted-80-million-in-pay-and-severance?cmpid=BBD060316_BIZ&utm_medium=email&utm_source=newsletter&utm_campaign=

FIFA’s Top Three Bosses Netted $80 Million in Pay and Severance

Disgraced ex-president Sepp Blatter, former Secretary-General Jerome Valcke and former CFO Markus Kattner shared more than $80 million over the past five years in bonuses, incentives and salary increases that they signed off on themselves, according to soccer’s global governing body. All three men had already been suspended or fired by FIFA. In a separate statement, the Swiss authorities said they raided FIFA’s offices a day ago.

Bob Jensen's Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Cher Sues Financial Firm for Fraud After $1.3 Million in Investments ---
http://www.msn.com/en-us/music/celebrity/cher-sues-financial-firm-for-fraud-after-dollar13-million-in-investments/ar-AAgOK6v?ocid=spartanntp

Ethics conviction removes Alabama House speaker from office ---
http://www.msn.com/en-us/news/crime/ethics-conviction-removes-alabama-house-speaker-from-office/ar-AAgSCTt?ocid=spartanntp

Alabama House Speaker Mike Hubbard's conviction on ethics charges automatically removes him from office and could mean years in prison for the powerful Republican.

Friday night, a jury found the one-time GOP star guilty of 12 counts of public corruption for using the influence and prestige of his political stature to benefit his companies and clients. He faces up to 20 years in prison for each count.

The jury, which arrived at the verdict after nearly seven hours of deliberation, acquitted Hubbard on 11 other counts.

The conviction comes amid a season of scandal that has engulfed Republicans at the helm of Alabama's legislative, judicial and executive branches of government. Chief Justice Roy Moore faces possible ouster from office over accusations that he violated canons of judicial ethics during the fight over same-sex marriage. And Gov. Robert Bentley has faced calls for his impeachment after a sex-tinged scandal involving a former top aide.

"We hope this verdict tonight restores some of the confidence in the people of the state of Alabama that public officials at all levels in the state of Alabama will be held accountable for their actions, especially those that would betray the public trust," said W. Van Davis, the acting attorney general in the case.

Hubbard, 54, spoke briefly with his attorneys before being escorted from the courtroom and to the Lee County jail, a detention center not far from Mike Hubbard Boulevard named for him. He was released on $160,000 bond and driven away by a bail bondsmen as he held his face in his hand.

Continued in article

Bob Jensen's Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

How Intel Makes a Chip ---
http://www.bloomberg.com/news/articles/2016-06-09/how-intel-makes-a-chip

Jensen Comment
As with any government regulation decree, regulation of the Internet might be good news or bad news. It's good news to the extent that the government allows Internet service providers to have monopolistic pricing and service powers. It's bad news to the extent that price-fixing by government decree generally entails less quantity and quality of service. The WSJ generally has a Knee jerk reaction to new government regulations. With my Time Warner cable billing jumping each year to now where it is nearly $200 per month I keep wondering if the quality of service has really matched the price increases. I think what Time Warner needs in my part of the world is more competition rather than more regulation. Sure I have more and more channels on cable  television, but virtually all of them are junk I never needed or wanted.

38 Community Colleges to Begin Replacing Textbooks With Free Educational Resources ---
http://chronicle.com/blogs/ticker/38-community-colleges-to-begin-replacing-textbooks-with-free-educational-resources/112157?elqTrackId=bfd35a1be07e47e890cf78370a4be272&elq=7f9d809feb3b4db9933d0a1c7607479b&elqaid=9473&elqat=1&elqCampaignId=3348

Jensen Comment
This can complicated decisions regarding transfer credit. For example, when I was still on the faculty at Trinity University I was frequently consulted by administrators regarding transfer credit. Often a full-time Trinity student wanted transfer credit for a course taken elsewhere in the summer. In addition to the reputation of college where the course was offered the textbook used in that course affected my recommendation regarding transfer credit. Usually I was familiar enough with popular accounting textbooks to evaluate the course content. For instance, the second Principles of Accounting Course at Trinity is mostly a managerial accounting course. A transfer course would not be equivalent if it used a textbook was heavy on financial accounting and very lite on managerial accounting content.

When a course does not use a popular textbook it becomes more of a chore to remotely evaluate course content.

Also "free educational courses" might include older textbooks (such as those available for a penny as used textbooks on Amazon). In accountancy, unlike mathematics, textbooks quickly start becoming obsolete the minute they are published new. This is particularly true in financial accounting, tax, and auditing where technical rules are constantly being changed.

Studies like this are misleading due to many reasons, especially missing variables when analyzing financial returns.
There's also a huge tradeoff between financial security versus financial returns and risk

Which degrees give the best financial returns? ---
http://www.economist.com/blogs/graphicdetail/2015/03/daily-chart-2?fsrc=scn/tw/te/dc/revengeofthenerds

FASB Proposes Amendments to Simplify Goodwill Impairment Accounting ---
http://deloitte.wsj.com/cfo/2016/06/17/fasb-proposes-amendments-to-simplify-goodwill-impairment-accounting/

The FASB proposed a change to goodwill accounting that would remove step 2 impairment testing aimed at measuring the implied fair value of goodwill. Issued on May 12, the proposed ASU¹, which is intended to simplify the accounting for goodwill impairment, would instead require an entity to “recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, that amount should not exceed the carrying amount of goodwill allocated to that reporting unit.”

Following is an excerpt from Deloitte’s Heads Up newsletter related to the proposed ASU.

Continued in article

EY:  The FASB issued a new credit loss standard that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_01626-161US_Impairment_16June2016/$FILE/TothePoint_01626-161US_Impairment_16June2016.pdf

What you need to know

The FASB issued a new credit loss standard that changes the impairment model for most financial assets and certain other instruments. Virtually all entities will be affected.

For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses.

For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities.

Entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables.

The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer.

Overview The Financial Accounting Standards Board (FASB) issued final guidance1 that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses.

No. 2016-31 16 June 2016

To the Point FASB — final guidance FASB issues sweeping changes to credit loss guidance

The new standard

Bob Jensen's threads on impairments and valuation ---
http://faculty.trinity.edu/rjensen/theory02.htm#Impairment

EY EITF Update on June 2016 Meeting ---
http://www.ey.com/Publication/vwLUAssetsAL/EITFUpdate_01556-161US_14June2016/$FILE/EITFUpdate_01556-161US_14June2016.pdf

The Emerging Issues Task Force (EITF) reached a final consensus on the following issue:

 

Issue 15-F: Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

 

The EITF reached a consensus-for-exposure on the following issue:

 

      Issue 16-B: Employee Benefit Plan Master Trust Reporting

 

Disappearing Stock Options: The Evolution of Equity Pay
SSRN, February 12, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2766352 

Author

Gala Ades-Laurent Columbia University, Law School, Students

Abstract

The question of whether senior executives are overpaid has long been a source of controversy, spurring academic debates, congressional hearings, and statutory changes. It has grown more pointed in the past twenty years due to the increased use of equity pay, which has allowed corporations to generously compensate their top executives while, at least facially, improving performance. Largely due to changes in the tax code and accounting rules in 1993, public companies have favored issuing stock options over stock grants. Yet this trend shifted in the past decade: stock grants replaced options as the dominant form of equity pay.

This Note presents the first comprehensive study of the change in the equity composition of executive compensation after the financial crisis, focusing on change in trends between 2006-2014. The evidence shows that the movement away from stock options is largely a response to the panoply of federal efforts to control ‘runaway’ executive compensation and mitigate risk. This finding has important implications for investors and regulators who wish to offset managerial influence over executive pay at public companies, as well as offering an early glimpse into the post-financial crisis state of affairs.

Bob Jensen's threads on accounting for stock options ---
http:/www.trinity.edu/rjensen/theory/sfas123/jensen01.htm 

Accounting for Pension Obligations in the European Union: A Case Study for EPSAS and Transnational Budgetary Supervision
SSRN, May 27, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785725

Authors

Yuri Biondi French National Center for Scientific Research (CNRS)

Marion Boisseau Université Paris Dauphine

Abstract

Pension obligations constitute a critical issue for public finances and budgets. This is especially true for the European Union whose institutional mechanism aims to supervise Member States’ spending through centralised budgetary rules based upon financial covenants. In this context, accounting methods of recognition and measurement of pension obligations become an integral and critical aspect of Europe’s transnational budgetary and financial supervision. Drawing upon a comprehensive overview of pension management and regulation, this article aims to analyse the ongoing debate on accounting for pension obligations with a specific attention to the harmonization of European Public Sector Accounting Standards (EPSAS). While the European Commission has been favouring the ‘indisputable reference’ to the International Public Sector Accounting Standards (IPSAS), European Member States’ practices and views remain inconsistent with the normative solution imposed by the IPSAS 25, which favours and facilitates Definite Contribution pension schemes. In this context, we do summarise the IPSAS position mimicking the IFRS, review the pension’s accounting in national statistics and EPSAS debate, and provide some building blocks for a comprehensive model of accounting for pension obligations that admits and enables several viable modes of pension management.

Bob Jensen's threads on pension accounting ---
http://faculty.trinity.edu/rjensen/theory02.htm#Pensions

The Journal of Management Accounting Research: A Citation Analysis of the First 25 Years
SSRN, May 27, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785755

Authors

Daryl M. Guffey Clemson University

Nancy L. Harp Clemson University

Abstract

This article provides a citation analysis for the Journal of Management Accounting Research (JMAR) between 1989 and 2013. During this study, citations to articles in JMAR were collected and used to rank articles and authors. Citations collected were used to identify individuals, articles, and methodologies that contributed the most towards establishing JMAR as a premier accounting journal. Rankings were based on (scaled and unscaled) citation count and citation rate. This article also provides information on methodological trends in JMAR and highlights both encouraging and cautionary insights for the future of JMAR.

Bob Jensen's threads on management accounting ---
http://faculty.trinity.edu/rjensen/theory02.htm#ManagementAccounting

Free Book
Follow the Money: Essays on International Taxation - Introduction
SSRN, May 26, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2784804

Author

Michael J. G. raetz Columbia Law School; Yale Law School

Abstract

Publicity about tax avoidance techniques of multinational corporations and wealthy individuals has moved discussion of international income taxation from the backrooms of law and accounting firms to the front pages of news organizations around the world. In the words of a top Australian tax official, international tax law has now become a topic of barbeque conversations. Public anger has, in turn, brought previously arcane issues of international taxation onto the agenda of heads of government around the world.

Despite all the attention, however, issues of international income taxation are often not well understood. This Introduction outlines a collection of essays, written over the past two decades, that reveals how current international tax policy came into place nearly a century ago, critiques the inadequate principles still being used to make international tax policy, identifies and dissects the most prevalent tax avoidance techniques, and offers important suggestions for reform.

The book is available for free download via the Yale Law School Library Documents Collection Center.

Audit Office Reputation Shocks from Gains and Losses of Major Industry Clients
SSRN, May 31, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2787269
Ross School of Business Paper No. 1317

Authors

Jere R. Francis University of Missouri at Columbia

Mihir N. Mehta University of Michigan, Stephen M. Ross School of Business

Wanli Zhao Southern Illinois University

Abstract

Our study reports evidence on the dynamic effects of client switches on auditor reputations and fee premia. Offices of large accounting firms that lose (gain) major industry clients experience a reputation shock leading to more same-industry client losses (gains) over the next two years. There is also a shift in audit fees charged to other same-industry clients when a major client loss (gain) results in an audit office losing (gaining) city-level industry leadership. A major client loss or gain also creates a short-term capacity shock to an audit office’s ability to supply high-quality audits. However, there is no evidence of reputation spillovers to other-industry clients in the audit office, or to clients in other offices of the accounting firm.

Bob Jensen's threads on professionalism in auditing ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm

The Parable of the Talents
SSRN, May 31, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2787452

Author

Stephen M. Bainbridge University of California, Los Angeles (UCLA) - School of Law

Abstract

On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished.

Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely answers to those questions map to modern relations, such as those of principal and agent? Curiously, however, there are almost no detailed analyses of these questions in Anglo-American legal scholarship.

This project seeks to fill that gap.

Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia
SSRN, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785245 

Bundesbank Series 1 Discussion Paper No. 2006,19

Authors

Kerstin Bernoth German Institute for Economic Research (DIW Berlin)

Guntram B. Wolff Deutsche Bundesbank; University of Bonn - Center for European Integration Studies (ZEI)

Abstract

We investigate the effects of official fiscal data and creative accounting signals

Bob Jensen's threads on creative accounting ---
http://faculty.trinity.edu/rjensen/theory02.htm#Manipulation

Financial Reporting Differences Around the World: What Matters?
SSRN, June  2, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2788741

Authors,

Helena Isidro ISCTE IUL Business School

Dhananjay Nanda University of Miami - School of Business Administration

Peter D. Wysocki University of Miami - School of Business Administration

Abstract

 

The international financial reporting literature identifies a multitude of country attributes that appear to explain financial reporting differences around the world. We first show that a single underlying factor explains across-country variation in 6 reporting quality measures used in the international literature. We then examine 72 previously-identified country attributes and show that they are highly correlated and that 4 underlying factors explain most of the across-country variation in these attributes. Furthermore, individual country attributes provide essentially no incremental explanatory power for international reporting diversity over these 4 factors, which collectively explain over 70% of the variation in reporting differences. Our findings highlight the very high causal density of country attributes and thus the difficulty in attributing international reporting diversity to specific institutions and policies. We conclude by providing a framework to guide future studies on financial reporting quality around the world.

Measuring Diploma Production Costs: Does an Undergraduate Business Degree Cost More to Produce than a Non-Business Degree?
SSRN, December 25, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2788736

Authors

Michael M. Barth The Citadel

Iordanis Karagiannidis The Citadel

Abstract

Many colleges and universities have implemented tuition differentials for certain degree programs including business and engineering. The primary justification for the differential is that the cost of producing these degrees is higher than the cost of other degrees. Most college accounting systems are unsuited for measuring cost differentials by degree program and instead look at the cost of operating the academic unit itself. This research outlines a method that can be used to convert commonly available financial data to a more appropriate form for cost analysis using a value stream accounting approach. We apply Lean management thinking and value stream accounting to compute the per capita salary expense incurred individual students as they progress through their degree program, then aggregate those costs per student to arrive at the average direct teaching cost of earning the degree. Our results show that the average aggregate faculty salary expense differs between degree programs. However, while business salaries tend to be higher than other disciplines, we find that the cost of delivering the classroom instruction portion of a business degree falls within a range. It was higher than the humanities, but significantly lower than the teaching costs for engineering and for the sciences. Cross-subsidies between degree programs can be ameliorated through well-designed tuition differentials, but institutions must understand the underlying cost structure to better manage scarce resources. Although the results we obtained are specific to this institution, the process we used is generalizable to all institutions

Jensen Comment

I have little faith in such costing studies due to the confounding factors of joint and common costs further complicated by curricula, pedagogy, learning technologies, etc.

Bob Jensen's threads on Estimating a College's Cost of Degrees Awarded and "Worth" of Professors are at
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#CostAccounting

To my knowledge the most extensive study of costs of college majors was conducted at Texas A&M
https://accountability.tamu.edu/

Texas A&M University is committed to accountability in its pursuit of excellence. The university expects to be held to the highest standards in its use of resources and in the quality of the educational experience. In fact, this commitment is a part of the fabric of the institution from its founding and is a key component of its mission statement (as approved by the Board of Regents and the Texas Higher Education Coordinating Board), its aspirations found in Vision 2020 (approved by the Board of Regents in 1999), and its current strategic plan, Action 2015: Education First (approved by the Chancellor in December 2010).

Jensen Comment
In an advanced Cost/Managerial Accounting course this assignment could have two parts. First assign the case below. Then assign student teams to write a case on how to compute the cost of a given course, graduate in a given program, or a comparison of a the cost of a distance education section versus an onsite section of a given course taught by a tenured faculty member teaching three courses in general as well as conducting research, performing internal service, and performing external service in his/her discipline.

Issues in Computing a College's Cost of Degrees Awarded and the "Worth" of Professors ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#CostAccounting2

Carol Johnson took the podium of a lecture hall one recent morning to walk 79 students enrolled in an introductory biology course through diffusion, osmosis and the phospholipid bilayer of cell membranes.

A senior lecturer, Ms. Johnson has taught this class for years. Only recently, though, have administrators sought to quantify whether she is giving the taxpayers of Texas their money's worth.

A 265-page spreadsheet, released last month by the chancellor of the Texas A&M University system, amounted to a profit-and-loss statement for each faculty member, weighing annual salary against students taught, tuition generated, and research grants obtained.

Ms. Johnson came out very much in the black; in the period analyzed—fiscal year 2009—she netted the public university $279,617. Some of her colleagues weren't nearly so profitable. Newly hired assistant professor Charles Criscione, for instance, spent much of the year setting up a lab to research parasite genetics and ended up $45,305 in the red.

The balance sheet sparked an immediate uproar from faculty, who called it misleading, simplistic and crass—not to mention, riddled with errors. But the move here comes amid a national drive, backed by some on both the left and the right, to assess more rigorously what, exactly, public universities are doing with their students—and their tax dollars.

 

As budget pressures mount, legislators and governors are increasingly demanding data proving that money given to colleges is well spent. States spend about 11% of their general-fund budgets subsidizing higher education. That totaled more than $78 billion in fiscal year 2008, according to the National Association of State Budget Officers.

The movement is driven as well by dismal educational statistics. Just over half of all freshmen entering four-year public colleges will earn a degree from that institution within six years, according to the U.S. Department of Education.

And among those with diplomas, just 31% could pass the most recent national prose literacy test, given in 2003; that's down from 40% a decade earlier, the department says.

"For years and years, universities got away with, 'Trust us—it'll be worth it,'" said F. King Alexander, president of California State University at Long Beach.

But no more: "Every conversation we have with these institutions now revolves around productivity," says Jason Bearce, associate commissioner for higher education in Indiana. He tells administrators it's not enough to find efficiencies in their operations; they must seek "academic efficiency" as well, graduating more students more quickly and with more demonstrable skills. The National Governors Association echoes that mantra; it just formed a commission focused on improving productivity in higher education.

This new emphasis has raised hackles in academia. Some professors express deep concern that the focus on serving student "customers" and delivering value to taxpayers will turn public colleges into factories. They worry that it will upend the essential nature of a university, where the Milton scholar who teaches a senior seminar to five English majors is valued as much as the engineering professor who lands a million-dollar research grant.

And they fear too much tinkering will destroy an educational system that, despite its acknowledged flaws, remains the envy of much of the world. "It's a reflection of a much more corporate model of running a university, and it's getting away from the idea of the university as public good," says John Curtis, research director for the American Association of University Professors.

Efforts to remake higher education generally fall into two categories. In some states, including Ohio and Indiana, public officials have ordered a new approach to funding, based not on how many students enroll but on what they accomplish.

Continued in article

From Econometrics Beat by David Giles on June 2, 2016

Econometrics Reading List for June

Here's some suggested reading for the coming month:

Backhouse, R. and B. Cherrier, 2016. 'It's  computerization, stupid!' The spread of computers and the changing roles of theoretical and applied economics.

Castle, J. L., M. P. Clements, and D. F. Hendry, 2016. An overview of forecasting facing breaks. Discussion Paper No. 779, Department of Economics, University of Oxford.

Constantini. M. and A. Sen, 2016. A simple testing procedure for unit root and model specification. Computational Statistics and Data Analysis, 102, 37-54.

Lutkepohl, H., A. Staszewska-Bystrova, and P. Winker, 2016. Calculating joint confidence bands for impulse response functions using highest density regions. SFB 649 Discussion Paper 2016-017.

Valadkhani, A., R. Smyth, and B. Mahoney, 2016. Asymmetric causality between Australian inbound and outbound migration tourism flows. Applied Economics, in press.

Webel, K., 2016. A data-driven selection of an appropriate seasonal adjustment approach. Discussion Paper No. 07/2016, Deutsche Bundesbank

May Reading List

Here's my reading list for May:

Hayakawa, K., 2016. Unit root tests for short panels with serially correlated errors. Communications in Statistics - Theory and Methods, in press.

Hendry, D. F. and G. E. Mizon, 2016. Improving the teaching of econometrics. Discussion Paper 785, Department of Economics, University of Oxford.

Hoeting, J. A., D. Madigan, A. E. Raftery, and C. T. Volinsky, 1999. Bayesian model averaging: A tutorial (with comments and rejoinder). Statistical Science, 14, 382-417. 

Liu, J., D. J. Nordman, and W. Q. Meeker, 2016. The number of MCMC draws needed to compute Bayeian credible bounds. American Statistician, in press.

Lu, X., L. Su, and H. White, 2016. Granger causality and structural causality in cross-section and panel data. Working Paper No, 04-2016, School of Economics, Singapore Management University.

Nguimkeu, P., 2016.  An improved selection test between autoregressive and moving average disturbances in regression models. Journal of Time Series Econometrics, 8, 41-54.

From Econometrics Beat by David Giles on May 16, 2016

An Econometrics Graduate Course Mid-term Examination and Final Examination and the associated R code-

Occasionally readers ask about the exams that I set in my graduate econometrics courses.

The elective graduate econometrics course that I taught this past semester was one titled "Themes in Econometrics". The topics that are covered vary from year to year. However, as the title suggests, the course focuses on broad themes that arise in econometrics. Examples might include maximum likelihood estimation and the associated testing strategies;instrumental variables/GMM estimation; simulation methods; nonparametric inference; and Bayesian inference.

This year most of the course was devoted to maximum likelihood, and Bayesian methods in econometrics.

The mid-term test covered the first of these two thematic topics, while the final exam was devoted largely to Bayesian inference.

You can find the mid-term test here ---
http://web.uvic.ca/~dgiles/blog/midterm_16.pdf

The final exam question paper is here; --
http://web.uvic.ca/~dgiles/blog/Final_16.pdf

and the associated R code is here ---
http://web.uvic.ca/~dgiles/blog/2016 final.R

Obama's Request for Increased SEC Funding Denied
House Panel Votes to Give SEC $1.5B in 2017; Hensarling Looks to End Dodd-Frank ---
http://www.thinkadvisor.com/2016/06/09/house-panel-votes-to-give-sec-15b-in-2017-hensarli?slreturn=1465564671

Top Five Digital Trends for 2016 ---
http://www.businessinsider.com/the-top-5-digital-trends-for-2016-2016-3

Estate Tax in the USA --- https://en.wikipedia.org/wiki/Estate_tax_in_the_United_States

Questions
How much did it cost Prince's estate to reside in Minnesota when he died relative to a state easier on inheritance taxes?
https://en.wikipedia.org/wiki/Estate_tax_in_the_United_States#Estate_and_Inheritance_taxes_at_the_state_level
 

Estate attorney Jeffrey P. Scott, partner at St. Paul, Minnesota, firm Jeffrey P. Scott & Associates previously told PEOPLE that an estate tax is applied to anything over $1.6 million in Minnesota, and, at the federal level, to any estate over $5.4 million."
Taxes Could Wipe Out Half of Prince's $250 Million Estate and Force Early Sale of His Unreleased Songs, Trustee Says ---
http://www.people.com/article/prince-estate-cut-in-half-state-federal-taxes

More Links ---
http://taxprof.typepad.com/taxprof_blog/2016/06/taxes-could-wipe-out-half-of-princes-250-million-estate.html#more

From the CPA Newsletter on June 3, 2016

Poor tech use, weak internal controls enable fraudsters

Companies are not taking advantage of the technology available to help stop fraud, KPMG says in a report. The use of proactive data analytics is involved in detecting just 3% of fraudsters globally, KPMG says. Meanwhile, 59% of fraud in North America stems at least partly from weak internal controls, the report says.

The National Law Review (5/30) 

Bob Jensen's Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

From the CFO Journal's Morning Ledger on June 25, 2016

Obama’s tips for American business
Bloomberg Businessweek met President Obama in the Oval Office this month, and published a transcript of the far-ranging interview with the man it calls “The Anti-Business President Who’s Been Good for Business.” He covers, among other subjects, free trade and the Trans-Pacific Partnership, regulating banks and why his daughters won’t work for Wall Street.

Jensen Comment
President Obama says "his daughters won't work for Wall Street."
But will they mary husbands who work on Wall Street?
Chelsea Clinton is married to an investment banker on Wall Street ---
https://en.wikipedia.org/wiki/Marc_Mezvinsky

Also see
The ‘Anti-Business’ President Who’s Been Good for Business ---
http://www.bloomberg.com/features/2016-obama-anti-business-president/?cmpid=BBD062316_BIZ&utm_medium=email&utm_source=newsletter&utm_campaign=

From the CFO Journal's Morning Ledger on June 25, 2016

A Brexit cheat sheet.
 Just because our readers are a sophisticated and savvy bunch, that doesn’t mean everyone is ready for a scintillating discussion about the future after Brexit. Over at Vox, they put together a primer for those who are shy to add to the discussion for fear of looking a naïf. Nine basic questions (actually eight and a musical number) will help make sure what you add to the conversation doesn’t cause chuckles or raised eyebrows.

From the CFO Journal's Morning Ledger on June 17, 2016

Car dealers prefer Japan
Owners of American dealerships prefer working with Japanese auto makers even after Detroit’s car companies spent heavily to make domestic retail networks more competitive, according to a new industry survey. Dealers rank Toyota Motor Corp.’s Lexus and Toyota franchises as the most valuable and say the Japanese company and two of its rivals are the most responsive to their needs, according to a report published Tuesday by the National Automobile Dealers Association.

Jensen Comment
Car owners like me also prefer Japan.

Forbes' List of Longest Lasting Cars (250,000 Miles or More) ---
http://www3.forbes.com/business/10-cars-that-can-run-for-over-250000-miles/?utm_campaign=cars-that-can-run&utm_source=yahoo-gemini&utm_medium=referral

1. Toyota Sienna
2. Lexis RX350
3. Mazda Mazda6
4. Volkswagen Passat
5. Audi Allroad
6. Subaru Forrester
7. Toyota Prius/ Plug-in Prius
8. Lexus ES350
9. Toyota Camry/ Camry Hybrid
10. Scion xB

Consumer Reports List of the Most Reliable Cars and Small Trucks ---
http://www.autoguide.com/auto-news/2015/10/top-10-most-reliable-and-least-reliable-cars.html
Note that reliability is not the same as longevity 

1. Lexus (most reliable)
2. Toyota
3. Audi
4. Mazda
5. Subaru
6. Kia
7. Buick
8. Honda
9. Hyundai
10. MINI and GMC (tied)

Consumer Reports List of the Least Reliable Cars and Small Trucks ---
http://www.autoguide.com/auto-news/2015/10/top-10-most-reliable-and-least-reliable-cars.html

1. Fiat (least reliable)
2. Jeep
3. Ram
4. Cadillac
5. Infiniti
6. Dodge
7. Chrysler
8. Mercedes-Benz
9. Chevrolet
10. GMC

Japan not only please its auto consumers, it also pleases its auto dealers.

I love my Subaru even more after I learned that Jeeps are engineered to rust out in places like New Hampshire where roads are frequently salted for reduction of ice and snow. Thanks for nothing Chrysler.

From the CFO Journal's Morning Ledger on June 16, 2016

Home Depot sues Visa, MasterCard
Home Depot Inc. filed an antitrust lawsuit against Visa Inc. and MasterCard Inc., reigniting claims from a decade ago that merchants pay too much for debit- and credit-card transactions and adding new contentions about the effectiveness of chip-based cards to reduce fraud. The lawsuit comes several years after Home Depot and hundreds of other retailers opted out of a settlement, then valued at $7.25 billion, in a price-fixing case that addressed many of the same issues. This time, the do-it-yourself retailer also contends that Visa and MasterCard colluded to prevent the adoption of new chip-based cards that require consumers to enter a personal identification number, or PIN, to authorize a transaction.

Question
What's a cash recycler? This sounded like something I might like for our cottage until I realized it would only gather dust in our cottage.

Automated Cash Handling --- https://en.wikipedia.org/wiki/Automated_cash_handling

From the CFO Journal's Morning Ledger on June 16, 2016

 Wal-Mart explores back-office trimming
About 500 Wal-Mart Stores Inc. locations, mostly on the West Coast, are dropping positions that cover accounting and invoicing for individual stores, said Mark Ibbotson, executive vice president for central operations at Wal-Mart U.S. A Wal-Mart store typically has about three employees in those roles, usually higher-paid hourly workers who count cash or manage invoices for companies that bring products directly to stores, not through Wal-Mart’s warehouses. Instead, invoicing will be handled by a central office at Wal-Mart’s Bentonville, Ark., headquarters and money will be counted at each store by a “cash recycler” machine, Mr. Ibbotson said.

One of the insider trading government officials who got caught

From the CFO Journal's Morning Ledger on June 16, 2016

Former FDA official charged
A hedge-fund insider-trading case has ensnared a former Food and Drug Administration official, one of the first criminal actions focused on how Wall Street gathers information from Washington. Federal prosecutors on Wednesday unveiled charges against a current and a former portfolio manager of hedge- fund firm Visium Asset Management LP, accusing them of trading on confidential government information about generic-drug approvals. They allegedly received the tips from a former FDA supervisor, who after leaving the agency’s office of generic drugs allegedly obtained the information from an ex-colleague who still worked at the agency.

From the CFO Journal's Morning Ledger on June 14, 2016

SCOTUS scotches Puerto Rican restructuring
The Supreme Court on Monday struck down Puerto Rico’s effort to restructure its public utility debts, increasing pressure on Congress to finish work on pending legislation to help the U.S. territory address its growing debt crisis. The court’s 5-2 decision said Congress, in prior legislation on municipal bankruptcies, didn’t give Puerto Rico the ability to enact its own bankruptcy process. The ruling eliminated the slim chance that the territory could write its own bankruptcy plan. The island is about $70 billion in debt and has missed bond payments.

COSO --- https://en.wikipedia.org/wiki/Committee_of_Sponsoring_Organizations_of_the_Treadway_Commission

From the CFO Journal's Morning Ledger on June 14, 2016

The COSO doing business
A new guide that aims to fuse risk management with everyday managerial considerations will open for public comment this week, Tatyana Shumsky reports for CFOJ. The Committee of Sponsoring Organizations of the Treadway Commission, or COSO, wants to augment its risk-management protocols to connect risk, strategy and performance. It will take comments on the matter through September and COSO plans to have a final version in place next year.

From the CFO Journal's Morning Ledger on June 6, 2016

Top 10 U.S. accounting firms step up domination
 The group handled audits for 60.7% of the nearly 7,000 firms and funds required to file third-party audited financials with the Securities and Exchange Commission, according to research provider Audit Analytics. That’s up 3.8 percentage points from a year earlier, Audit Analytics said. Only six accounting firms, which Audit Analytics dubbed the Global Six, have the size and scope to audit large multinational accounts and so-called accelerated filers, or companies that have earlier deadlines to file annual reports with the SEC.

Why it's so difficult to even fine the bankers who steal millions of dollars or euros?

Steal a little and they throw you in jail,
Steal a lot and they make you king (or queen).
Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US]

Countrywide Financial --- http://en.wikipedia.org/wiki/Countrywide_Financial

From the CFO Journal's Morning Ledger on June 6, 2016

Good morning. Rebecca Mairone was either a villain or victim of the financial crisis. The legal battle to determine the answer shows how hard it still is to definitively say who was responsible for the housing bubble, Christina Rexrode  and Aruna Viswanatha write in a profile. The 49-year-old mother of two became a face of housing-crisis misdeeds when the Justice Department pursued civil-fraud charges against her for her work at Countrywide Financial Corp. A jury in 2013 found her liable, and a federal judge ordered her to personally pay $1 million, making her one of the few financial executives to be held to account for the housing bust.

Until last month: A federal appeals court threw out the verdict against Ms. Mairone, who is now divorced and goes by her maiden name, Steele. The court ruled the government hadn’t proved her actions met the legal definition of fraud. For Ms. Steele, it was exoneration. In her first interview since the 2012 case was filed, Ms. Steele emphasized she had done nothing wrong and denied any mistakes in a controversial mortgage-approval program she helped create at Countrywide, called “Hustle.” When she heard about the appellate ruling, she said, she texted her daughter at high school, who replied, “Are you sure?’”

Meanwhile, across the pond, a French labor court Tuesday awarded Jérôme Kerviel, the Société Générale SA rogue trader convicted in 2010 of bringing the bank to the brink of collapse, a total of €450,000 ($511,000) because it found he was fired without “real or serious cause.” Société Générale “could not pretend it hadn’t long been aware of the unauthorized trades conducted by Mr. Kerviel,” judges wrote in their ruling. The bank therefore can’t argue that Mr. Kerviel was at fault when it “previously tolerated similar practices,” they added.

Peter Pan, the manager of Countrywide Financial on Main Street, thought he had little to lose by selling a fraudulent mortgage to Wall Street. Foreclosures would be Wall Street’s problems and not his local bank’s problems. And he got his nice little commission on the sale of the Emma Nobody’s mortgage for $180,000 on a house worth less than $100,000 in foreclosure. And foreclosure was almost certain in Emma’s case, because she only makes $12,000 waitressing at the Country Café. So what if Peter Pan fudged her income a mite in the loan application along with the fudged home appraisal value? Let Wall Street or Fat Fannie or Foolish Freddie worry about Emma after closing the pre-approved mortgage sale deal. The ultimate loss, so thinks Peter Pan, will be spread over millions of wealthy shareholders of Wall Street investment banks. Peter Pan is more concerned with his own conventional mortgage on his precious house just two blocks south of Main Street. This is what happens when risk is spread even farther than Tinkerbell can fly!
Read about the extent of cheating, sleaze, and subprime sex on Main Street in Appendix U.

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

From the CFO Journal's Morning Ledger on June 6, 2016

At least the yield isn’t negative. Investors are buying municipal debt at a record clip, enduring low returns in exchange for the relative stability of bonds sold by U.S. state and local governments. Municipal-bond funds had more than $632 billion in assets as of June 1, a record high, according to Lipper data going back to 1992. Investors have poured a net $22.5 billion into such mutual funds in 2016 through Wednesday, the best start to a year since 2009. They have pulled almost $40 billion from equity funds in the same time.

The buying is being spurred by ongoing concerns about the slow pace of global growth and the prospect of interest rates staying lower for longer, concerns boosted by Friday’s weak jobs report. In addition, low—or negative—yields on government bonds world-wide have made munis increasingly appealing relative to other fixed-income assets. The amount of municipal debt held by foreign investors increased 44% from 2009 through 2015, according to Federal Reserve data.

Jensen Comment
Most muni bond investors like the tax exemption of interest income on Federal tax returns. State tax exemption depends upon what bonds. For example, former Mass. Rep. Barnie Frank said he invested in Massachusetts muni bonds because these were also exempt on his state income tax return.

I recommend buying into a diversified muni bond fund. I invest the lion's share of my retirement savings in a massive "insured" long-term tax exempt fund from Vanguard. This is not a government-insured fund, but there is an insurance pool against individual defaults. For example, the pool covers defaults of individual municipalities such as a Stockton, CA municipal bond. The pool is not large enough cover a massive number of defaults, but such a disaster is highly unlikely in the USA even in the event of an enormous California earthquake. When I need cash I simply write out a check on this fund that provides me with a checkbook. For example, today I will write a Vanguard check to pay my property taxes.

The biggest risk of a muni bond fund is that, like bond and stock funds in general, values of the shares in the fund go up and down unlike investment in bank Certificates of Deposit. In retirement I don't even bother to look at the value changes in my muni bond shares --- those are fictions for me. What I am interested in is the cash flows of interest posted to my account each month. Those cash flows for me over the last 20 years have been very steady in amount and are much, much higher than I would be earning on the miserable Certificates of Deposit paying less than 1% on five-year CDs. Of course speculators in stocks and bonds are often after the value changes. Not me!

What's surprising in the above article is that foreign investors are so interested in muni bonds even though those foreign investors may not be doing so for purposes of tax exemption on USA muni bond interest in their foreign tax returns. Perhaps this is partly because huge "insured" muni bond funds like those of Vangard and Fidelity have taken much of the risk out of muni bond investing.

Beware of mutual funds that overcharge for management fees. Compare those fees when choosing any mutual fund. This can make a big difference on your returns. There seem to be economies of scale for mutual funds. Personally I would never buy municipal bond fund shares from a broker or investment advisor who also gets a cut. I prefer to deal directly with large online funds like TIAA, Fidelity, and Vanguard.

Also beware that bond funds in general, including muni bond funds, are not good inflation hedges. Younger folks may prefer long-term equity investments rather than bond investments that interest older folks like me who are not at very great inflation risk for what remains of our lives.

Keep in mind that I'm not a financial advisor. My investing preferences may be quite unlike what is best for anybody else. Some people do need to pay for investment advice. My advice is free and may be worth less than you paid for it. I just happen to like tax exempt cash flow from investments that also benefit the schools, town, county, and state governments of the USA. So do millions other investors in the USA. We could get caught holding the muni bag if socialists take over the USA, but this is unlikely in what remains of my lifetime. Whew!

Pension Benefit Guaranty Corp (PGBC) --- https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation

Central States Pension Fund (CSPF) --- https://mycentralstatespension.org/

From the CFO Journal's Morning Ledger on May 31, 2016

Central States could torpedo PBGC
One of the nation’s largest multiemployer pension funds said that it is out of ideas for ways to save itself from an impending failure. The Central States Pension Fund has little choice but to turn to a federal insurance program that is supposed to offer a lifeline to troubled pension funds, the Washington Post reports. But the strain may be more than the Pension Benefit Guaranty Corp., which insures private pensions, can bear. The fund’s deterioration could pose a threat to the 10 million people in multiemployer plans who could soon be left without a safety net for their pensions.

Jensen Comment

On May 6, 2016, the U.S. Department of the Treasury (Treasury) notified Central States Pension Fund that our proposed pension rescue plan was denied. A copy of the communication from Treasury is available at
http://www.cspensionrescue.com/

. . .

Central States Pension Fund remains in critical and declining status, and is projected to run out of money in less than ten years. In a letter to Congressional leaders, Secretary of the Treasury Jack Lew reinforced the fact that Treasury’s denial in no way resolves the serious threat to our participants’ pension benefits. The fact that the federal government’s multiemployer pension insurance program, the Pension Benefit Guaranty Corporation (PBGC), is also running out of money means we may see our pension benefits ultimately reduced to virtually nothing when the Fund runs out of money. At this time, only government funding, either directly to our Pension Fund or through the PBGC, will prevent Central States participants from losing their benefits entirely.

A significant number of Members of Congress were vocal in calling for Treasury to reject our pension rescue plan. It is now time for those and others who suggested that there is a better way to fix this critical problem to deliver on real solutions that will protect the retirement benefits of Central States participants.

There is no time—or reason—to delay. With each passing month, this crisis becomes more difficult—and costly—to solve. For over ten years, we have fought to protect our participants’ hard-earned retirement benefits. This included painful benefit reductions for active members and mandatory employer contribution increases in 2004, legislative campaigns to secure additional funding in 2009 and 2010, and most recently, our pension rescue plan application under MPRA.

In the coming months, we will do everything in our power to support a legislative solution that protects the pension benefits of the more than 400,000 Central States participants and beneficiaries, who should not have to bear the emotional trauma of waiting until the Fund is at the doorstep of insolvency before Congress acts. The moment for action and for doing the right thing is now.

We understand the uncertainty and anxiety that our participants and beneficiaries may be experiencing as this process continues. As always, our goal is to ensure that the Fund is able to continue to pay future benefits.

We will continue to track progress and provide updates on this website, through email for those who have registered on our website to receive such communications, and/or by U.S. postal mail. You can also call our dedicated hotline at 1-800-323-7640 to listen to a recorded message with updated information.

 

One of the huge problems with the CSPF is the underfunding of Teamster's Union pension obligations.

From the CPA Newsletter on June 1, 2016

 

States eye services delivered via the cloud for tax revenue Some states are seeking to tax services delivered through computing platforms as they attempt to make up for lost tax revenues from online sales. Finance executives should carefully review services to determine if their companies might be affected and what they can do about it.

Jensen Comment
Read that as states that are looking for the clouds to deliver falling cash.

Jensen Comment
Although I tend to agree I think bankers, traders, and others who abuse the Wall Street financial system should face higher risk of jail time and less outrageous compensation ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm

The Audit Committee of the Future ---
|http://www.thecaq.org/docs/default-source/reports-and-publications/caq_insights_audit_committee_future.pdf

Bob Jensen's threads on audit committee professionalism ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm#AuditCommittee

This might be a good essay question in tax or financial accounting courses?

When should stock buybacks be taxed as dividends?
http://taxprof.typepad.com/taxprof_blog/2016/06/most-stock-buybacks-should-be-taxed-as-dividends.html

Examples of Buybacks:

"Bank Stress Tests: The Bar Keeps Getting Higher," by Aaron Back, The Wall Street Journal, June 1, 2016 ---
http://www.wsj.com/articles/bank-stress-tests-the-bar-keeps-getting-higher-1464795373?mod=djemCFO_h

Banks are better positioned than ever to withstand the Federal Reserve’s annual stress tests. But investors still shouldn’t count on smooth passage.

Sometime this month, the Fed will unveil the latest results of this exercise under which banks have to show how they would contend with myriad challenges including a financial shock and global recession. This is crucial to investors in bank stocks: The tests determine how much banks can pay out in dividends and share buybacks. Around a week after the results are published, the Fed will say whether it has approved or rejected individual bank capital-return plans.

The good news is that lenders have steadily built up capital in the year and a half since the last tests. This gives them substantial buffers to get through the Fed’s adverse scenarios. The six biggest U.S. banks all essentially passed the last round. That said, Bank of America had to resubmit its plan, and others, including J.P. Morgan Chase and Goldman Sachs, had to tweak their capital-return requests.

Since the third quarter of 2014, the starting point for the previous tests, these six banks have grown their common equity Tier 1 capital ratios—the most important measure of balance-sheet strength—by around 1 percentage point, to 12.1% on average. That is a strong position.

The bad news is that the Fed’s risk scenarios are much harsher this time around. Under the most extreme scenario, banks must envision a global recession that drives U.S. unemployment up by 5 percentage points, a bigger jump than in previous tests, to 10%. In a first, the Fed also has asked banks to anticipate what would happen if rates on short-term Treasury notes fell into negative territory.

This opens up several unknowns. If, for example, the Fed thinks a bank’s technical systems for trading bonds aren’t prepared for negative rates, that could be grounds for a failing grade.

It is important for investors to remember that banks’ capital plans are assessed both on quantitative and qualitative grounds. So it isn’t enough to simply pass the stress tests on a numerical basis. The Fed can still turn around and fail a bank for more subjective reasons, as has happened in the past.

What’s more, banks are already looking ahead to stress tests in 2017 and beyond. In these, the Fed could add to the capital that banks deemed globally significant must hold, even under severe scenarios. The need to prepare for this could affect how much capital banks are willing to send back to shareholders currently, says Credit Suisse analyst Susan Roth Katzke.

Continued in article

AICPA:  Accounting for Leases ---
http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/leases/Pages/Leases.aspx?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07Jun2016

A Good Illustration to Add to Lease Versus Buy Modules in Managerial/Cost Accounting Courses
MIT:  Shifting Economic Winds Spell Trouble for Solar Giants SolarCity and Sunrun ---
https://www.technologyreview.com/s/601612/shifting-economic-winds-spell-trouble-for-solar-giants-solarcity-and-sunrun/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20160603#/set/id/601621/

Jensen Comment
No mention is made on the possible link between the upgraded FASB standard on leasing and the lower incentive to lease for off-balance-sheet financing. Personally I don't think there's much of a link but it is a research idea. The real incentives to buy seems to be impacted by both government subsidies and low borrowing rates that are likely to increase in future years. Borrow now while rates are low?

EY U.S. Chairman: Regulatory Burden Is Stifling Companies ---
http://finance.townhall.com/video/ey-us-chairman-regulatory-burden-is-stifling-companies-n2175734?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Jensen Comment
This is interesting in that regulatory compliance is becoming an ever increasing part of public accounting revenues as well as employment opportunities for our accounting graduates who choose to specialize in regulatory compliance. One of my friends who was an accounting professor at TCU made a lot money by going into regulatory compliance consulting full time.

A Special Tribute to My Open Sharing Friend Will Yancey ---
http://faculty.trinity.edu/rjensen/Yancey.htm

EY:  Clarifying the accounting for the derecognition of nonfinancial assets and in substance nonfinancial assets ---
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_01509-161US_NonfinancialAssets_9June2016/$FILE/TothePoint_01509-161US_NonfinancialAssets_9June2016.pdf

What you need to know

The FASB proposed clarifying the guidance in ASC 610-201 on how to account for the derecognition of nonfinancial assets and in substance nonfinancial assets once an entity adopts the new revenue recognition guidance. The proposal also would provide guidance on the accounting for partial sales of these assets.

A group of assets or a subsidiary that is not a business would be considered an in substance nonfinancial asset if substantially all of the fair value of the assets is concentrated in nonfinancial assets.

The derecognition of all businesses would be accounted for in accordance with the consolidation guidance.

The accounting under the proposal would be a significant change from current practice under the real estate sales guidance.

Comments are due by 5 August 2016.

Overview The Financial Accounting Standards Board (FASB or Board) proposed amending the new guidance in Accounting Standards Codification (ASC) 610-20 to clarify how entities would account for the derecognition of a nonfinancial asset or an in substance nonfinancial asset that is not a business. In this publication, the term derecognition refers to the derecognition, sale or transfer of an asset.

3 of the world's 10 largest employers are now replacing a serious number of workers with robots ---
http://www.businessinsider.com/clsa-wef-and-citi-on-the-future-of-robots-and-ai-in-the-workforce-2016-6

Wal-Mart Facts?

Forwarded by Auntie Bev
I did not do any fact checking

1. Americans spend $36,000,000 at Wal-Mart Every hour of every day.

2. This works out to $20,928 profit every minute!

3. Wal-Mart will sell more from January 1 to St. Patrick's Day (March17th) than Target sells all year.

5. Wal-Mart employs 1.6 million people, is the world's largest private employer, and most speak English.

6. Wal-Mart is the largest company in the history of the world.

7. Wal-Mart now sells more food than Kroger and Safeway combined, and

keep in mind they did this in only fifteen years.

8. During this same period, 31 big supermarket chains sought

bankruptcy.

9. Wal-Mart now sells more food than any other grocery chain in the world.

10. Wal-Mart has approx 3,900 stores in the USA of which 1,906 are

Super Centers; this is 1,000 more than it had five years ago.

11. This year 7.2 billion different purchasing experiences will occur

at Wal-Mart stores. (Earth's population is approximately 6.5 Billion.)

Added by Bob Jensen

12. Puerto Rico legislated a Wal-Mart Tax intended to confiscate all Wal-Mart profits of its Puerto Rico stores. That tax was struck down by the Supreme Court.

13. Some pro-union areas like Boston and Vermont do not allow new Wal-Mart stores. On many days the out-of-state cars in New Hampshire's Wal-Mart parking lots outnumber the New Hampshire cars. Of course the added incentive is not having to pay a sales tax in New Hampshire.

14. Bob Jensen mostly shops at Amazon without having to leave the house. UPS, FedEx, and the US Postal Service (our mail carrier is named Mary) deliver packages inside our garage.

These are the 18 most corrupt countries in the developed world ---
http://www.businessinsider.com/the-most-corrupt-countries-in-the-oecd-2016-6

1. Mexico
2. Turkey
3. Italy
4. Greece
5. Slovakia
6. Hungary
7. South Korea
8. Czech Republic
9. Spain
10. Slovenia
11. Israel
12. Poland
13. Portugal
14. France
15. Estonia
16. Chile
17. Japan
18. Ireland

Corruption Rankings of 167 Nations ---
https://en.wikipedia.org/wiki/Corruption_Perceptions_Index

From The Wall Street Journal Accounting Weekly Review on June 3, 2016

CEO Bonuses: How Pro Forma Results Boost Them
by: Justin Lahart
May 27, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, SEC

SUMMARY: Last year was tough for many companies, resulting in the biggest divergence since 2009 between GAAP results and pro forma results, which exclude items such as restructuring charges and stock-based compensation. But these non-GAAP adjusted metrics aren't just showing up in earnings releases; when used with compensation metrics, they can help executives draw bigger pay packets. Using pro forma to set bonuses provides executives with an incentive to exclude items not because they should, but to hit performance bogeys. That creates a risk that pro forma results say less about a company's underlying health than about executives desire to get paid more.

CLASSROOM APPLICATION: This article is an excellent addition to the recent popularity and increased concerns regarding non-GAAP/pro forma financial reporting articles.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) How can pro forma reporting be related to executive compensation? What potential problems could result from this practice?

3. (Advanced) Are there laws or rules against companies reporting pro forma or non-GAAP financial results? If so, which apply to this situation? If not, should there be?

4. (Advanced) How is executive compensation determined? Why decides? How are incentives determined? Is it proper for the incentives to include the use of non-GAAP reporting? Why or why not?

5. (Advanced) If a company chooses to report non-GAAP financial results, must it also report financial information on a GAAP basis? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

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by Dave Michaels
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"CEO Bonuses: How Pro Forma Results Boost TheM," by Justin Lahart, The Wall Street Journal, June 3, 2016 ---
http://www.wsj.com/articles/ceo-bonuses-how-pro-forma-results-boost-them-1464285447?mod=djem_jiewr_AC_domainid

Reported earnings faltered last year; to help set bonus payments, many companies relied on pro forma measures

Earnings before the bad stuff can do good things for executive pay.

Last year was tough for many companies, so many asked investors to imagine what things would have looked like if the tough things had never happened. This led to the biggest divergence since 2009 between pro forma results, which exclude items such as restructuring charges and stock-based compensation, and results under generally accepted accounting principles, or GAAP.

But these adjusted metrics aren’t just showing up in earnings releases. Pro forma figures have been proliferating in annual proxy statements, too. There, when used with compensation metrics, they can help executives draw bigger pay packets.

Research firm Audit Analytics finds that the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.

There is nothing improper about using non-GAAP measures as long as they are disclosed properly. And corporate boards decide on the measures they want to use for compensation purposes. Plus, there is an argument to be made for sometimes excluding items from results for compensation purposes. If, say, a natural disaster hits a company with expensive repairs, perhaps an adjustment is in order.

But other items that often get excluded in pro forma results, such as layoff-related charges, do seem like a reflection of management’s performance. And boards have too often shown a willingness to set awfully low bars for executives to clear.

That, though, can disadvantage shareholders and wreck the idea of pay for performance. In that vein, the dramatic rise in the number of companies using pro forma measures to determine bonuses would indicate the balance between shareholders and executives is being skewed in executives’ favor.

Indeed, an examination of the most recent proxy statements from companies in the Dow Jones Industrial Average shows about a dozen of the index’s 30 constituents had annual pro forma earnings well in excess of GAAP ones and used the pro forma ones in annual bonus calculations.

Coca-Cola ’s pretax income increased by 3% under GAAP. But after adjusting for the impact of the stronger dollar and “nonrecurring items,” the income growth figure the Dow component used for bonus purposes rose to 5.5%.

Absent adjustments, Dow member Home Depot reported operating income of $11.77 billion last year. But the pro forma figure of $12.06 billion it used for compensation figures excluded the impact of the strong dollar and costs associated with its 2014 credit-card data breach.

 

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 3, 2016

Alibaba Discloses SEC Probe of Its Accounting Practices
by: Alyssa Abkowitz and Michael Rapoport
May 26, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, GAAP, SEC

SUMMARY: Federal regulators are investigating the accounting practices of Alibaba Group Holding Ltd., the e-commerce giant whose blockbuster U.S. stock-market debut helped win a wide following for Chinese tech firms. The company disclosed that the Securities and Exchange Commission asked Alibaba to provide details of its accounting for a delivery affiliate, its operating data for the largest online shopping day of the year, and "related-party transactions in general." Alibaba shares fell nearly 7%. Alibaba has drawn the SEC's attention in the past over alleged sales of fake goods on its Chinese website, and analysts have raised concerns about its use of financial measures that don't comply with generally accepted accounting principles, or GAAP, and because it doesn't consolidate results of some affiliates. Alibaba has said it cooperated with the past request, and has provided greater financial information in its latest annual report.

CLASSROOM APPLICATION: This article is appropriate for coverage of financial reporting.

QUESTIONS: 
1. (Introductory) What is the SEC? What is its area of authority?

2. (Introductory) What is Alibaba? What are the details of its business? Where is it located? What are the details of the SEC's investigation of the company?

3. (Advanced) Why is the SEC involved with Alibaba? How is the company within the SEC's jurisdiction?

4. (Advanced) What information has the SEC requested? What violations could the SEC allege?

5. (Advanced) How are related party transactions treated by GAAP? What could be the problems with how Alibaba reported those transactions?

6. (Advanced) What other concerns are raised by the main article and the related articles? Should investors be concerned? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

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by Michael Rapoport
May 27, 2016
Online Exclusive

"Alibaba Discloses SEC Probe of Its Accounting Practices," by Alyssa Abkowitz and Michael Rapoport, The Wall Street Journal, May 26, 2016 ---
http://www.wsj.com/articles/alibaba-discloses-sec-probe-of-its-accounting-practices-1464195695?mod=djem_jiewr_AC_domainid

China’s biggest e-commerce company says it is cooperating with the SEC

Federal regulators are investigating the accounting practices of Alibaba Group Holding Ltd., the e-commerce giant whose blockbuster U.S. stock-market debut helped win a wide following for Chinese tech firms.

The company disclosed Tuesday that the Securities and Exchange Commission asked Alibaba to provide details of its accounting for a delivery affiliate, its operating data for the largest online shopping day of the year, and “related party transactions in general.”

Alibaba shares fell nearly 7% to $75.59 at 4 p.m. in trading Wednesday in New York.

Alibaba and its executive chairman, Jack Ma, are prized as partners and investors around the world. The company’s affiliates are involved in mobile payments, financial services and television and film production. In the U.S., it holds stakes in car-sharing service Lyft Inc., e-commerce logistics provider ShopRunner Inc. and discount shopping website operator Jet.com Inc.

Alibaba has drawn the SEC’s attention in the past over alleged sales of fake goods on its Chinese website, and analysts have raised concerns about its use of financial measures that don’t comply with generally accepted accounting principles, or GAAP, and because it doesn’t consolidate results of some affiliates. Alibaba has said it cooperated with the past request, and has provided greater financial information in its latest annual report.

The U.S.-listed company said in a regulatory filing Tuesday that it is cooperating with the SEC on its inquiry. It also stressed the commission told it the request for information shouldn’t be taken as an indication of any violation of federal securities law.

The SEC doesn’t comment on individual investigations.

Investors have been concerned about the company’s growth prospects amid the economic slowdown in China. Its shares soared right after its $25 billion initial public offering in 2014. The shares jumped 38% in first day trading, but later fell below its $68 IPO price on concerns about its outlook.

Earlier this month, Chief Financial Officer Maggie Wu said the company would begin to provide greater transparency on its businesses by introducing annual revenue guidance and releasing new business cost structures and margins.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 3, 2016

SEC Urges Companies to Take a Fresh Look at Non-GAAP Measures
by: Deloitte Risk Journal Editor
May 27, 2016
Click here to view the full article on WSJ.com

TOPICS: C&DIs, Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, SEC

SUMMARY: The SEC recently updated its Compliance and Disclosures Interpretations (C&DIs) on non-GAAP measures in response to its increasing concerns that such measures may be misleading, more prominent than comparable GAAP measures or inconsistently presented from period to period. The C&DIs do not prohibit companies from using non-GAAP measures that comply with the SEC's existing rules. However, the SEC staff's tone in the C&DIs is intentionally forceful in an effort to "send a message." This article reports on current areas of focus and concern.

CLASSROOM APPLICATION: This article adds a valuable contribution to the non-GAAP financial reporting issues, with the addition of a listing and explanation of current areas of focus and concern.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Introductory) What is the SEC? What is its area of authority?

4. (Advanced) What is a C&DI? Why did the SEC recently issue C&DIs regarding non-GAAP reporting? Why has the SEC chosen to get involved with non-GAAP reporting? What is the agency planning to do?

5. (Advanced) What non-GAAP measures does the SEC consider to be misleading or prohibited? Why?

6. (Advanced) How does the SEC determine which situations is the disclosure of a non-GAAP measure more prominent than that of a GAAP measure? Why is that a problem?

7. (Advanced) How should a registrant present income tax effects for a non-GAAP measure? Why is the reporting of income tax effects an issue with non-GAAP reporting?

Reviewed By: Linda Christiansen, Indiana University Southeast

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by Justin Lahart
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by Theo Francis and Kate Linebaugh
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by Richard Teitelbaum
Dec 10, 2015
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by Deloitte CFO Journal Editor
Apr 22, 2016
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"SEC Urges Companies to Take a Fresh Look at Non-GAAP Measures," by Deloitte Risk Journal Editor, The Wall Street Journal, May 27, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/05/27/sec-urges-companies-to-take-a-fresh-look-at-non-gaap-measures/?mod=djem_jiewr_AC_domainid

The SEC recently updated its Compliance and Disclosures Interpretations (C&DIs)¹ on non-GAAP measures in response to its increasing concerns that such measures may be misleading, more prominent than comparable GAAP measures or inconsistently presented from period to period. The C&DIs do not prohibit companies from using non-GAAP measures that comply with the SEC’s existing rules.² However, the SEC staff’s tone in the C&DIs is intentionally forceful in an effort to “send a message,” as stated by Mark Kronforst, chief accountant in the SEC’s Division of Corporation Finance (the “Division”) at the May 18 meeting of the PCAOB’s Standing Advisory Group (SAG).

In his discussion of the SEC’s concerns about non-GAAP measures, Mr. Kronforst announced that “this next quarter will be a great opportunity for companies to self-correct.”

Deloitte’s Heads Up newsletter about the update to the C&Dis on non-GAAP measures covers several key issues on the topic, including questions to consider related to using these metrics. Following is an excerpt from the newsletter.

Current Areas of Focus and Concern

The C&DIs provide guidance on the following questions related to non-GAAP measures:

What is misleading or prohibited?

Misleading adjustments—Several new C&Dis³ provide examples of non-GAAP measures that could mislead investors, including those that:

—Exclude normal, recurring cash operating expenses necessary for business operation.

—Adjust an item in the current reporting period but do not adjust for a similar item in the prior period, without appropriate disclosure about the change and an explanation for the reasons for the change.

—Exclude certain nonrecurring charges but do not exclude nonrecurring gains (i.e., “cherry-picking” non-GAAP adjustments in a non-GAAP measure to achieve the most positive measure).

—Are based on individually tailored accounting principles, including certain adjusted revenue measures.

In C&DI 100.04, the SEC staff provides an example of a prohibited non-GAAP performance measure that reflects revenue that is recognized over the service period under GAAP on an accelerated basis as if the registrant earned revenue when it billed its customers. The measure is prohibited because it is an individually tailored accounting principle and does not reflect the registrant’s required GAAP measurement method.

While the example is about revenue recognition, the C&DI indicates that individually tailored accounting principles applied to other financial statement line items to create a non-GAAP measure may also be prohibited.

Per-share non-GAAP measures—Registrants must assess whether a non-GAAP measure is a performance measure that is different from and reconciled to net income or loss; or a measure of liquidity that is different from and reconciled to cash flow from operations. This determination is important because cash-flow or liquidity per-share measures are prohibited.

Historically, the SEC staff has generally accepted management’s determination of whether a measure is a performance measure or liquidity measure. However, as indicated in C&DI 102.05, as revised, the SEC staff may challenge measures designated as performance measures that appear to be more like liquidity measures. If they are ultimately determined to be liquidity measures, the SEC would prohibit per-share amounts (e.g., free cash flow is a liquidity measure and therefore per share presentation is expressly prohibited).⁴ In addition, C&DI 103.02 notes that EBIT⁵ or EBITDA⁶ should not be presented on a per-share basis.

When is the disclosure of a non-GAAP measure more prominent than that of a GAAP measure?

A registrant that presents a non-GAAP measure is required to present the most directly comparable GAAP measure with equal or greater prominence. C&DI 102.10 provides examples illustrating when the presentation of non-GAAP measures may not meet this requirement and thus might be subject to SEC scrutiny. It states, in part:

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 3, 2016

No One Is Auditing Alibaba's Auditors
by: Michael Rapoport
May 27, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, PCAOB, International Business, Finance, Financial Markets, Investing, Auditing, International Business, PCAOB

SUMMARY: Alibaba's independent auditor isn't subject to periodic inspection by U.S. regulators. That is a contrast to most of the accounting firms that audit U.S.-listed companies. While Alibaba is listed on the New York Stock Exchange, it is based in China and audited by the Hong Kong affiliate of PricewaterhouseCoopers. China, citing concerns over sovereignty, has long barred inspectors from the U.S. Public Company Accounting Oversight Board from reviewing the work of local audit firms in charge of scrutinizing Chinese companies' books.

CLASSROOM APPLICATION: This article is useful for auditing courses, and courses dealing with financial markets.

QUESTIONS: 
1. (Introductory) What is the PCAOB? What is its purpose and function? When was it created? Why?

2. (Advanced) What is Alibaba? How is it connected to the United States?

3. (Advanced) What are the auditing issues regarding Alibaba? Who is concerned or should be? What are their concerns?

4. (Advanced) Should Alibaba be subject to U.S. regulations or jurisdiction? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Alibaba Discloses SEC Probe of Its Accounting Practices
by Alyssa Abkowitz and Michael Rapoport
May 26, 2016
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Alibaba Dealings With Chinese Regulator Draw SEC Interest
by Telis Demos
Feb 14, 2015
Online Exclusiv

 

"No One Is Auditing Alibaba's Auditors," by Michael Rapoport, The Wall Street Journal, May 27, 2016 ---
http://blogs.wsj.com/moneybeat/2016/05/26/no-one-is-auditing-alibabas-auditors/?mod=djem_jiewr_AC_domainid

Alibaba investors certainly have a lot to chew over in the wake of news of a U.S. Securities and Exchange Commission investigation into its accounting. Here’s something else to mull: the company’s independent auditor isn’t subject to periodic inspection by U.S. regulators.

That is a contrast to most of the accounting firms that audit U.S.-listed companies. While Alibaba is listed on the New York Stock Exchange, it is based in China and audited by the Hong Kong affiliate of PricewaterhouseCoopers. China, citing concerns over sovereignty, has long barred inspectors from the U.S. Public Company Accounting Oversight Board from reviewing the work of local audit firms in charge of scrutinizing Chinese companies’ books. Alibaba is one of the largest U.S.-traded companies whose auditor is in that position.

PCAOB inspections are intended to evaluate an audit firm’s work and make sure that it is of high quality. As Alibaba acknowledged in its annual report, “our shareholders are deprived of the benefits of such inspection.”

Depending on how the SEC investigation plays out, they may find out there are real costs to being deprived of that.

From The Wall Street Journal Accounting Weekly Review on June 10, 2016

IRS Shuts Down Remaining Channels for REIT Spinoffs
by: Richard Rubin
Jun 08, 2016
Click here to view the full article on WSJ.com

TOPICS: Corporate Taxation, Pass-Through Entities, REIT

SUMMARY: The Internal Revenue Service shut down an apparent gap in a tax law that otherwise could have allowed companies across industries to continue spinning off their property holdings into tax-advantaged real-estate investment trusts. The law banned companies created in tax-free spinoffs from electing REIT status for 10 years after the transaction. But the law didn't prevent spun-off companies from merging into an existing REIT, among other possible workarounds. The regulations from the IRS and Treasury Department end that prospect. They take effect immediately and "are necessary to prevent abuse," the government said. The rules would require spun-off companies that later get REIT status to pay corporate taxes as if they sold their appreciated real estate, a tax that would undermine much of the purpose of putting it in a REIT. REITs pay no corporate-level tax on most of their profits and effectively pass those profits through to their shareholders. Corporations, by contrast, pay an income tax, and then investors subject to tax must pay again when they receive dividends or capital gains.

CLASSROOM APPLICATION: This is a rare article on REITs updates the law regarding the use of REITs for corporate tax strategy and planning.

QUESTIONS: 
1. (Introductory) What is a REIT? What industries use this ownership vehicle? How is it used? What benefits does it provide?

2. (Advanced) What is a loophole? Why are loopholes problematic? What are the details of the loophole discussed in the article?

3. (Advanced) What are the details of the law passed in December? How have the regulations closed a loophole? Why did the government want to close this loophole?

4. (Advanced) How does the taxation of REITs compare to the taxation of corporations?

5. (Advanced) How can REITs be used as a tax-planning strategy? How have the recent changes in laws and regulations changed the tax-planning strategies?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"IRS Shuts Down Remaining Channels for REIT Spinoffs," by Richard Rubin, The Wall Street Journal, June 8, 2016 ---
http://www.wsj.com/articles/irs-shuts-down-remaining-channels-for-reit-spinoffs-1465325526?mod=djem_jiewr_AC_domainid

WASHINGTON—The Internal Revenue Service shut down an apparent gap in a tax law that otherwise could have allowed companies across industries to continue spinning off their property holdings into tax-advantaged real-estate investment trusts.

The December law was written in response to a wave of deals by retailers, hotels and others that sought the tax-beneficial status of being a real-estate investment trust, or REIT. The law banned companies created in tax-free spinoffs from electing REIT status for 10 years after the transaction. But the law didn’t prevent spun-off companies from merging into an existing REIT, among other possible workarounds.

“I have every confidence that this loophole would have been exploited,” said Robert Willens, a New York-based tax adviser. “It came up in just about every discussion I had with investors regarding the scope of what Congress did last December.”

The regulations from the IRS and Treasury Department end that prospect. They take effect immediately and “are necessary to prevent abuse,” the government said. The rules would require spun-off companies that later get REIT status to pay corporate taxes as if they sold their appreciated real estate, a tax that would undermine much of the purpose of putting it in a REIT.

“This should effectively shut down REIT spins,” said Lisa Zarlenga, a former Treasury official who is now co-chair of the tax practice at Steptoe & Johnson LLP in Washington.

The December law and the new regulations don’t prevent REITs from spinning off other REITs. Nor do they apply to REIT spinoffs for which companies sought private letter rulings from the IRS by Dec. 7, 2015. That means a transaction being considered by Caesars Entertainment Corp. as it restructures itself in chapter 11 bankruptcy wouldn’t be affected.

REITs pay no corporate-level tax on most of their profits and effectively pass those profits through to their shareholders. Corporations, by contrast, pay an income tax, and then investors subject to tax must pay again when they receive dividends or capital gains.

Those differences created an opportunity for companies with significant real estate holdings—including hotels, retailers and telecommunications companies—to break themselves in two. The resulting REIT could get property that has appreciated in value without paying taxes on the gains and would then enter a leasing agreement with the operating company.

 

From The Wall Street Journal Accounting Weekly Review on June 10, 2016

Oracle Shares Fall After a Lawsuit Related to Cloud Computing Business
by: Jay Greene
Jun 03, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Revenue Recognition, Whistleblowing

SUMMARY: Oracle Corp. shares slid 4% after a former senior finance manager claimed in a lawsuit that the software giant fired her after she threatened to blow the whistle on possibly unlawful accounting practices in its cloud-computing business. Svetlana Blackburn alleges her finance job in Oracle's cloud-computing business "came to an abrupt end because she resisted, refused to engage in and threatened to blow the whistle on accounting practices she reasonably believed to be unlawful." Ms. Blackburn's superiors "instructed her to add millions of dollars in accruals to financial reports, with no concrete or foreseeable billing to support the numbers," the suit said. The suit doesn't provide details on data that Ms. Blackburn alleges she was asked to manipulate. Oracle denied the allegations.

CLASSROOM APPLICATION: This article is appropriate for the topics of whistleblowing and revenue recognition.

QUESTIONS: 
1. (Introductory) What are the facts of this case? Who are the parties to the lawsuit?

2. (Advanced) What is whistleblowing? How are whistleblowers protected? Is it protected by U.S. law? What is the value of whistleblowing?

3. (Advanced) What accounting issues did Ms. Blackburn say were unlawful? What are the reasons she alleges they are unlawful?

4. (Advanced) What was Oracle's response to the lawsuit and allegations? What can the company do to defend itself? How could it prove that its accounting practices were proper and lawful?

5. (Advanced) How did the lawsuit affect Oracle's stock price? Why was the stock price affected?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Oracle Shares Fall After a Lawsuit Related to Cloud Computing Business," by Jay Greene, The Wall Street Journal, June 3, 2016 ---
http://www.wsj.com/articles/oracle-shares-fall-after-a-lawsuit-related-to-cloud-computing-business-1464908394?mod=djem_jiewr_AC_domainid

Oracle Corp. shares slid 4% Thursday after a former senior finance manager claimed in a lawsuit that the software giant fired her after she threatened to blow the whistle on possibly unlawful accounting practices in its cloud-computing business.

The stock decline led to a class-action suit filed on Thursday that cited the earlier litigation.

Svetlana Blackburn, in a suit filed Wednesday in federal court in the Northern District of California, alleges her finance job in Oracle’s cloud-computing business “came to an abrupt end because she resisted, refused to engage in and threatened to blow the whistle on accounting practices she reasonably believed to be unlawful.”

Ms. Blackburn’s superiors “instructed her to add millions of dollars in accruals to financial reports, with no concrete or foreseeable billing to support the numbers,” the suit said. The suit doesn’t provide details on data that Ms. Blackburn alleges she was asked to manipulate.

Oracle denied the allegations.

“We are confident that all our cloud accounting is proper and correct,” said Oracle spokeswoman Deborah Hellinger. “This former employee worked at Oracle for less than a year and did not work in the accounting group. She was terminated for poor performance.”

According to the suit, Ms. Blackburn was a senior finance manager in Oracle’s cloud-computing business. A LinkedIn page appearing to represent Ms. Blackburn’s career notes the dates of her employment there as having been between September 2014 and October 2015. Ms. Blackburn’s attorney, Daniel Velton, declined to comment.

Oracle’s shares fell to $38.66 in trading in New York on news of the suit.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 10, 2016

U.S. Audit Firm, SEC Settle Over Alleged Mishandling of Audits of Chinese Company
by: Michael Rapoport
Jun 08, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, SEC

SUMMARY: A California audit firm agreed to settle with the Securities and Exchange Commission over allegations that it mishandled the audits of a Chinese company. The SEC alleges that Frazer Frost and its accountants signed off on a 2010 review even though they knew the company's financial report contained inaccurate information about an acquisition. The accountants also failed to find out that $1.7 million in tax payments had not been made. Frazer Frost agreed to pay a $50,000 fine and another $56,914 in disgorgement and interest. The firm also agreed to be barred from auditing SEC-registered companies for at least five years. Two Frazer Frost accountants also agreed to pay fines of $5,000 and $1,000, respectively. All three defendants didn't admit or deny any wrongdoing.

CLASSROOM APPLICATION: This article can be used in an auditing class to show sanctions imposed for poor audit and accounting work.

QUESTIONS: 
1. (Introductory) What are the facts of this case? Who are the parties in this case?

2. (Advanced) What violations did the audit firm allegedly commit? In what ways was the defendants' auditing deficient?

3. (Advanced) To what sanctions did the defendants agree in the settlement? What impact do those sanctions have on each of the parties? What impact will it have on the firm's business?

4. (Advanced) The article states all three defendants did not admit or deny any wrongdoing. Why would they agree to the sanctions if they were not admitting guilt? Is proving guilt important? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
SEC Files Administrative Proceeding Against Audit Firm Frazer Frost
by
Feb 12, 2016
Online Exclusive

"U.S. Audit Firm, SEC Settle Over Alleged Mishandling of Audits of Chinese Company," by Michael Rapoport, The Wall Street Journal, June 8, 2016 ---
http://www.wsj.com/articles/u-s-audit-firm-sec-settle-over-alleged-mishandling-of-audits-of-chinese-company-1465343324?mod=djem_jiewr_AC_domainid

A California audit firm agreed Tuesday to pay more than $100,000 to settle with the Securities and Exchange Commission over allegations that it mishandled the audits of a Chinese company.

Frazer Frost LLP of Brea, Calif., agreed to pay a $50,000 fine and another $56,914 in disgorgement and interest. The firm also agreed to be barred from auditing SEC-registered companies for at least five years. Two Frazer Frost accountants also agreed to pay fines of $5,000 and $1,000, respectively. All three defendants didn’t admit or deny any wrongdoing.

The SEC alleges that Frazer Frost and its accountants signed off on a 2010 review of China Valves Technology Inc., a maker of water-flow management products, even though they knew the company’s financial report contained inaccurate information about a China Valves acquisition. The accountants also failed to find out that $1.7 million in tax payments purportedly made by a China Valves subsidiary had in fact not been made, the SEC said.

The SEC’s case against Frazer Frost is one of numerous cases the commission has filed in recent years against auditors, financiers, consultants and other “gatekeepers” who helped Chinese companies gain access to U.S. markets. Many of the Chinese companies later encountered questions from regulators about their accounting or disclosure.

Frazer Frost hasn’t issued any audit reports for public companies since 2012. Officials of Frazer Frost and China Valves Technology could not immediately be reached for comment.

China Valves Technology withdrew from its Nasdaq Stock Market listing in 2012, and the SEC barred it from U.S. trading in 2015.

From The Wall Street Journal Accounting Weekly Review on June 10, 2016

Finance Chiefs Collect Strings of Acronyms to Bolster Credentials
by: Alix Stuart
Jun 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Careers, CFO, CPA

SUMMARY: Being a CPA used to be a prerequisite for becoming a CFO. But a growing number of other labels are vying for a place of honor on finance professionals' résumés. Groups offering professional credentials are booming. Many attest to strategic planning and data-analysis skills that might help a corporate finance department play a more active role in company operations. But it's a case of buyer beware: the value of such labels can vary when it comes to hiring and promotions. Beyond a CPA license and an M.B.A., companies rarely request specific certifications of CFO candidates.

CLASSROOM APPLICATION: This is a great article to share with students when discussing career opportunities and options for accounting majors.

QUESTIONS: 
1. (Introductory) What is a CPA? What is required to become a CPA?

2. (Introductory) What is a CFO? What are the duties of a CFO?

3. (Advanced) What are some of the credentials and work experience that would be good preparation for being a CFO? What are likely to be the most valuable?

4. (Advanced) What other career options are available to accounting majors? Which of these career paths require the CPA certification? For which paths is the certification not required, but could be valuable?

5. (Advanced) What challenges do some CPAs face in maintaining the certification? What options do they have to maintain it?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Finance Chiefs Collect Strings of Acronyms to Bolster Credentials," by Alix Stuart, The Wall Street Journal, June 7, 2016 ---
http://www.wsj.com/articles/finance-chief-collect-strings-of-acronyms-to-bolster-credentials-1465256938?mod=djem_jiewr_AC_domainid

Benjamin Mulling puts great stock in two three-letter acronyms that follow his name: CPA and CMA.

Mr. Mulling, chief financial officer of wheel maker Tente Casters Inc., is passionate about the CMA, which stands for certified management accountant. He is global board chairman of the organization that bestows that title.

The executive spends a total of 40 to 50 hours a year taking classes to maintain his credentials as both a CMA and certified public accountant.

“The CPA is what helped me get my job; the CMA is what helps me do my job,” he said.

Being a CPA used to be a prerequisite for becoming a CFO. But a growing number of other labels are vying for a place of honor on finance professionals’ résumés.

Many attest to strategic planning and data-analysis skills that might help a corporate finance department play a more active role in company operations.

But it’s a case of buyer beware: the value of such labels can vary when it comes to hiring and promotions.

“As business gets more complex, it’s helpful to have more specialization to deal with it,” said Mr. Mulling, who also holds a master’s degree in business administration and is a certified information technology professional, a credential available to CPAs who receive additional training.

Ted Jeanloz, director of finance for Athenahealth Inc., a provider of electronic health records, takes an alternate view. “The CPA is legitimately useful, but after that it falls off pretty steeply,” he said.

Mr. Jeanloz said the certifications “are a good signal someone is a self-starter,” but “we would assume that anybody we hire for a role…would already have that knowledge.”

Groups offering professional credentials are booming. The number of people getting the CMA title from the Institute of Management Accountants Inc. grew 17% last year to 3,500 and is expected to hit a record this year, according to Jeff Thomson, the organization’s president.

Some corporate finance professionals also become chartered global management accountants or earn the two-year-old certification for financial planning and analysis. Some also are CFAs, or chartered financial analysts.

Last year a record 177,758 candidates took the CFA Institute’s exam, more than double the 2005 number.

At the American Institute of CPAs, which offers the chartered global management accountant exam, along with the well-known CPA test and several more specialized designations, both membership and revenue have increased steadily in the past 10 years, according to its annual reports. Membership has expanded 16% over the decade.

But the alphabet soup of acronyms appear to play a waning role in the selection of CFOs. Just 43% of finance chiefs at the 1,000 largest U.S. public companies have a CPA background, according to executive recruiter Korn/Ferry International.

Beyond a CPA license and an M.B.A., companies rarely request specific certifications, said Bryan Proctor, global leader of the financial-officer practice at Korn/Ferry. And even when a CPA is required, CFO candidates are “rarely” expected to have kept it up, he said.

“It’s hard to take two weeks off even to go on vacation, much less take two weeks off to go sit in a classroom,” said Docusign Inc. Chief Accounting Officer Vivian Macdonald. Her CPA accreditation is inactive, she says; she doesn’t have time to maintain it.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 10, 2016

IRS Says Fines Paid to Finra Aren't Tax-Deductible
by: Michael Rapoport
Jun 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Corporate Taxation, Deductibility, Fines

SUMMARY: Fines and penalties paid to government agencies aren't tax-deductible, and the IRS said the Financial Industry Regulatory Authority, or Finra, is effectively a government agency when it enforces securities regulations. The ruling effectively expands by a bit the types of corporate settlement expenses that can't be deducted - something that has become a contentious issue in the past few years. While fines and penalties paid to the government aren't deductible, many other settlement expenses are - allowing companies that reach huge settlements with the government over alleged misdeeds to reduce the amounts they actually pay.

CLASSROOM APPLICATION: This article is appropriate for corporate taxation classes.

QUESTIONS: 
1. (Introductory) What is Finra? What is its purpose?

2. (Advanced) What did the IRS rule regarding Finra? What was the reasoning for this ruling?

3. (Advanced) How is Finra similar to the SEC and other government agencies? How is it different? Should the rules regarding fines be the same or different for Finra as it is for government agencies? Why or why not?

4. (Advanced) Why is the deductibility of fines an important issue? How could it impact companies? How could it affect settlement negotiations?

Reviewed By: Linda Christiansen, Indiana University Southeas

"IRS Says Fines Paid to Finra Aren't Tax-Deductible," by Michael Rapoport, The Wall Street Street Journal, June 7, 2016 ---
http://www.wsj.com/articles/irs-says-fines-paid-to-finra-arent-tax-deductible-1465234661?mod=djem_jiewr_AC_domainid

The Internal Revenue Service has ruled that fines and penalties paid to the securities industry’s self-regulatory organization shouldn’t be considered tax-deductible, a stance that could cost financial firms that settle matters with the regulator.

Fines and penalties paid to government agencies aren’t tax-deductible, and the IRS said the Financial Industry Regulatory Authority, or Finra, is effectively a government agency when it enforces securities regulations.

Hence, fines paid to Finra aren’t deductible just as fines paid to the Securities and Exchange Commission aren’t, the IRS said in a memo from its associate chief counsel’s office released Friday.

“If a fine is imposed on a taxpayer for violation of the securities laws and regulations, the deductibility of the fine should not depend on whether the same type of bad conduct is being punished by the SRO or directly by the SEC,” according to the memo, referring to a self-regulatory organization.

The ruling effectively expands by a bit the types of corporate settlement expenses that can’t be deducted—something that has become a contentious issue in the past few years.

While fines and penalties paid to the government aren’t deductible, many other settlement expenses are—allowing companies that reach huge settlements with the government over alleged misdeeds, from BP PLC to J.P. Morgan Chase & Co., to reduce the amounts they actually pay.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 17, 2016

KPMG Severs Ties With Scandal-Hit FIFA
by: Joshua Robinson and John Letzing
Jun 14, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Big 4, Forensic Accounting, International Business

SUMMARY: Accountancy firm KPMG became the latest company to sever ties with soccer's world governing body, when it informed FIFA that it was dropping its account. The auditor's Swiss affiliate had signed off on FIFA's financial statements for 16 consecutive years. KPMG's Swiss affiliate had handled audits of Zurich-based FIFA since 1999. Before then, FIFA's audits were handled internally. But since last autumn, KPMG Switzerland has been the subject of an internal probe by KPMG International to establish why it didn't pick up on irregularities at FIFA. Auditors in Switzerland aren't legally bound to report irregularities to law enforcement. But international auditing standards require them to pull out if they believe management to be untrustworthy.

CLASSROOM APPLICATION: This article is appropriate for use in auditing classes, as well as when discussion public accounting and forensic accounting.

QUESTIONS: 
1. (Introductory) What is KPMG? What FIFA? What did KPMG announce regarding FIFA? Why was KPMG involved with FIFA?

2. (Advanced) What is Big 4 accounting? Why was a U.S. Big 4 firm involved with FIFA in Switzerland?

3. (Advanced) Why did KPMG decline to comment on its resignation? What are some likely reasons KPMG resigned?

4. (Advanced) What is forensic accounting? Why was KPMG performing forensic work for FIFA? Why are some questioning this work?

5. (Advanced) Are there any rules limiting forensic work for audit clients? Should there be any rules? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
KPMG, FIFA Ties Highlight Hazards for Auditors
by John Letzing
Jun 14, 2016

"KPMG Severs Ties With Scandal-Hit FIFA," by Joshua Robinson and John Letzing, The Wall Street Journal, June 14, 2016 ---
http://www.wsj.com/articles/kpmg-severs-ties-with-fifa-1465826039?mod=djem_jiewr_AC_domainid

Accountancy firm KPMG became the latest company to sever ties with soccer’s world governing body, when it informed FIFA on Friday that it was dropping its account.

The auditor’s Swiss affiliate had signed off on FIFA’s financial statements for 16 consecutive years.

The announcement came 10 days after the disclosure that a small group of FIFA’s top officials allegedly paid each other tens of millions of dollars in bonuses and other incentives, and followed the resignation of FIFA’s chief financial officer, Markus Kattner.

“FIFA welcomes this change as it gives the organization the opportunity to work with a new audit firm, which will be appointed soon,” FIFA said. “In light of the serious allegations involving financial transactions outlined by the Swiss and U.S. authorities, it is essential for the financial function at FIFA to be externally reviewed and thoroughly reformed.”

KPMG confirmed its resignation, but declined to comment further, because “we have ongoing fiduciary duties to FIFA.”

KPMG’s Swiss affiliate had handled audits of Zurich-based FIFA since 1999, a year after the group’s former president, Sepp Blatter, was first elected. Before then, FIFA’s audits were handled internally. But since last autumn, KPMG Switzerland has been the subject of an internal probe by KPMG International to establish why it didn’t pick up on irregularities at FIFA.

The U.S. Department of Justice indicted more than 40 individuals and companies with ties to FIFA in May 2015, alleging massive corruption and racketeering. Several seven- and eight-figure payments made by FIFA—and approved by FIFA’s former secretary-general, Jérôme Valcke, and Mr. Kattner—drew particular scrutiny.

Auditors in Switzerland aren’t legally bound to report irregularities to law enforcement. But international auditing standards require them to pull out if they believe management to be untrustworthy.

KPMG Switzerland performed a recent forensic investigation for FIFA that led earlier this year to the organization banning Mr. Valcke from soccer-related activities—a probe that covered a period during which KPMG Switzerland had been auditing the organization’s books.

Experts say such doubling up on services is common, but some question KPMG Switzerland’s multiple engagements for FIFA.

“In a way, they’re auditing their own mistakes, and usually you don’t find you’ve made mistakes yourself,” Bino Catasús, a professor of accounting and auditing at Stockholm Business School, said of KPMG. “This is not good in appearance.”

KPMG declined to comment further.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 17, 2016

Medtronic Wins U.S. Tax Case
by: Richard Rubin and Jeanne Whalen
Jun 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Corporate Taxation, Transfer Pricing, International Business, International Taxation, Corporate Taxation, Financial Accounting, Transfer Pricing

SUMMARY: The U.S. Tax Court handed Medtronic Plc a victory in a $1.4 billion dispute with the Internal Revenue Service over how much of the medical device maker's profits should be taxed by Puerto Rico and how much should face higher federal taxes instead. The case involved transfer pricing and the rules that govern transactions between different arms of the same company. Corporations must make such transactions as if they were engaged in arm's length deals between unrelated companies, and allocate income where it is earned, depending on which entity truly generates the profits. But those standards frequently lead to fact-intensive disputes with the IRS. In this case, the company and the government were arguing about the proper methods for determining how profits should be split between foreign and domestic operations. Although Puerto Rico is part of the U.S., companies based there are considered foreign corporations for U.S. corporate income-tax purposes. That means companies pay the local tax and don't have to pay the full 35% U.S. tax rate until they repatriate the money.

CLASSROOM APPLICATION: This is an excellent case that combines financial accounting and corporate taxation on the topics of transfer pricing and international taxation.

QUESTIONS: 
1. (Introductory) What are the facts of this case? What did the judge rule? In what court was the case tried?

2. (Advanced) What is transfer pricing? What are the financial accounting rules regarding transfer pricing? What are the tax rules?

3. (Advanced) How were transfer pricing rules applied by the company in this case? Why did the IRS disagree with this application?

4. (Advanced) How are companies based in Puerto Rico taxed for income tax purposes? What is the reason for this? What incentives does that offer businesses?

5. (Advanced) What kind of precedent does this decision set for other companies? Is the precedent limited or might it apply to many situations?

Reviewed By: Linda Christiansen, Indiana University Southeast

 "Medtronic Wins U.S. Tax Case," by Richard Rubin and Jeanne Whalen, The Wall Street Journal, June 10, 2016 ---
http://www.wsj.com/articles/medtronic-wins-tax-court-case-over-irs-1465508207?mod=djem_jiewr_AC_domainid

The U.S. Tax Court handed Medtronic Plc a victory in a $1.4 billion dispute with the Internal Revenue Service over how much of the medical device maker’s profits should be taxed by Puerto Rico and how much should face higher federal taxes instead.

In a 144-page ruling, Judge Kathleen Kerrigan agreed with the company, saying it had proved the government’s “allocations were arbitrary, capricious, or unreasonable.” The Puerto Rican subsidiary, she wrote, “was involved in every aspect of the manufacturing process” and thus was making significant contributions to the overall company’s profits.

The dispute dates back to the 2005 and 2006 tax years, before Medtronic merged with Covidien PLC and moved its legal address to Ireland.

Had the IRS won, it could have applied the same arguments to every Medtronic tax return from 2007 forward, potentially pursuing several billion dollars more in taxes.

The case involved transfer pricing, or the rules that govern transactions between different arms of the same company. Corporations must make such transactions as if they were engaged in arm’s length deals between unrelated companies, and allocate income where it is earned, depending on which entity truly generates the profits.

But those standards frequently lead to fact-intensive disputes with the IRS. In this case, the company and the government were arguing about the proper methods for determining how profits should be split between foreign and domestic operations.

Although Puerto Rico is part of the U.S., companies based there are considered foreign corporations for U.S. corporate income-tax purposes. That means companies pay the local tax and don’t have to pay the full 35% U.S. tax rate until they repatriate the money.

Medtronic’s Puerto Rican subsidiary manufactured medical devices, and the company said it was attributing an appropriate amount of the profits to its U.S. operations.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 17, 2016

PwC Independence Questioned in Dispute With Regulators
by: Michael Rapoport, Sarah Krouse, and Dave Michaels
Jun 14, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Auditor Independence, Big 4, Loan Rule, SEC

SUMMARY: PricewaterhouseCoopers LLP is in talks with regulators to resolve a dispute about whether the accounting giant is too close to some of its mutual-fund clients, highlighting an issue that could upend some relationships between auditors and money managers. Some of PwC's competitors might run afoul of the SEC's rule, too. The disagreement with the Securities and Exchange Commission's staff centers on a SEC requirement known as the Loan Rule. Auditors, according to the rule, can't serve clients that are at least 10% owned by a bank or any other large firm that lends the auditors money. Debate over the SEC's Loan Rule has intensified with the proliferation of so-called omnibus accounts that broker affiliates of banks use to pool together customer transactions. These accounts can nominally give a lender a big stake in a mutual fund even though the shares actually are owned by many individual investors. The fund industry says those accounts are tripping the rule's threshold even when there isn't really a conflict.

CLASSROOM APPLICATION: This is an excellent example for an auditing class when covering auditor independence.

QUESTIONS: 
1. (Introductory) What is the SEC? What are its areas of authority?

2. (Introductory) What is PricewaterhouseCoopers? What is its industry and what are its areas of business? How is it under the SEC's authority?

3. (Advanced) What is the Loan Rule? What activities does it restrict? What are the reasons for this rule?

4. (Advanced) What is auditing? What is auditor independence? Why is auditor independence so important and necessary?

5. (Advanced) How could mutual funds be affected by the Loan Rule? How does this connect to auditor independence? Is this particular connection a specific target of the Loan Rule?

6. (Advanced) What issues could occur if the SEC decides PwC has violated the Loan Rule? What problems could this cause? How widespread could the impact be?

7. (Advanced) Why has the Loan Rule become more of an issue for mutual fund companies? Should this be continued? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeas

 

Continued in article

"PwC Independence Questioned in Dispute With Regulators," BY Michael Rapoport, Sarah Krouse, and Dave Michaels, The Wall Street Journal, June 10, 2016 ---
http://www.wsj.com/articles/pwc-independence-questioned-in-dispute-with-regulators-filings-1465858609?mod=djem_jiewr_AC_domainid

PricewaterhouseCoopers LLP is in talks with regulators to resolve a dispute about whether the accounting giant is too close to some of its mutual-fund clients, highlighting an issue that could upend some relationships between auditors and money managers.

The disagreement with the Securities and Exchange Commission’s staff centers on a SEC requirement known as the Loan Rule, according to federal filings from fund companies including BlackRock Inc., Goldman Sachs Asset Management and Delaware Investments. Auditors, according to the rule, can’t serve clients that are at least 10% owned by a bank or any other large firm that lends the auditors money.

PwC has told dozens of funds it hasn’t violated the requirement, but it is unclear whether the SEC’s staff will decide that it has, according to the filings.

Some mutual funds say they could be forced to find new auditors if the SEC decides PwC has violated the rule and thus hasn’t maintained the required “independent” arm’s-length relationship with its clients. That could put in play some of the $300 million-plus that U.S. mutual funds, exchange-traded funds and closed-end funds spend on audits annually, according to data from consulting firm Barrington Partners.

In an extreme situation, the funds say in the filings, they could be blocked from issuing new shares to investors for as long as it takes them to get reaudited, because mutual funds can’t issue new shares without audited financial statements.

The matter “has certainly created some scrambling at fund firms trying to figure out what to do,” said Douglas Dick, a partner at law firm Dechert LLP who advises asset-management companies

Some of PwC’s competitors might run afoul of the SEC’s rule, too. Deloitte & Touche LLP has told its client Waddell & Reed Financial Inc. ’s Ivy Funds that a lender to Deloitte owns at least 10% of at least one Ivy fund, according to an Ivy filing last week. The filing doesn’t mention any dispute with the SEC, and Deloitte told Ivy that its lender’s stake doesn’t impair Deloitte’s judgment.

The SEC, PwC, Deloitte and the fund companies all declined to comment.

The SEC showed concern about auditor independence at mutual funds last year, when Deloitte paid more than $1.1 million to settle SEC allegations that it didn’t abide by its own policies when its consulting unit had a business relationship with a trustee of three funds that Deloitte audited. Deloitte didn’t admit or deny any wrongdoing in agreeing to that settlement.

Debate over the SEC’s Loan Rule has intensified with the proliferation of so-called omnibus accounts that broker affiliates of banks use to pool together customer transactions. These accounts can nominally give a lender a big stake in a mutual fund even though the shares actually are owned by many individual investors. The fund industry says those accounts are tripping the rule’s threshold even when there isn’t really a conflict.

PwC has told clients one or more of its lenders own stakes of 10% or more in mutual funds audited by PwC, but that this ownership doesn’t compromise its objectivity or impartiality, according to fund companies’ filings. But the firm also has informed the companies that the SEC may disagree: Under the SEC’s interpretation, some such situations involving PwC may violate the rule, “calling into question PwC’s independence,” according to filings from BlackRock, Delaware and Invesco Inc.

Another PwC client, mutual-fund giant Vanguard Group, hasn’t mentioned the Loan Rule in its filings. A spokeswoman said Vanguard is “currently in the process of analyzing our independent auditor, PwC’s, relationships with various lenders” because of the SEC’s Loan Rule.

It isn’t clear when the SEC might decide what position it will enforce, and it could resolve the matter by issuing new guidance for such relationships going forward, fund lawyers say. But if the commission finds PwC doesn’t have the required independence from its clients, and the funds have to undergo new audits, it could have “a material adverse effect” on the funds, BlackRock, Delaware, Invesco and Goldman said in their filings.

Funds are worried that their already limited choice of auditors could be narrowed further if the SEC were to disqualify firms because of conflicts under the Loan Rule.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 17, 2016

Federal CFO: Tackling Auditability Challenges for Internal Use Software Assets
by: Deloitte CFO Journal Editor
Jun 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Valuation, Auditing, FASAB, Governmental Accounting, Internal Use Software, SFFAS

SUMMARY: At the end of each federal audit season, many federal CFOs are faced with the inevitable stack of auditor findings, recommendations and comments to correct in the short few months before audits, internal reviews and inspections begin again. Among the most persistently challenging and significant of these findings for many agencies are those related to property, plant and equipment (PP&E), particularly the most nebulous category of PP&E, Internal Use Software (IUS). By carefully considering how an agency defines IUS and important characteristics such as capitalization threshold and useful life, federal CFOs can limit and focus their IUS auditability readiness efforts on the most significant and supportable assets while reducing the cost and effort expended on more marginal potential assets.

CLASSROOM APPLICATION: This article can be used in a governmental accounting class or when covering governmental accounting topics in other accounting classes.

QUESTIONS: 
1. (Introductory) What is the FASAB? What is its purpose? What are its areas of authority?

2. (Introductory) What is an SFFAS? To what entities do they apply?

3. (Advanced) What is a federal CFO? How do they differ from other CFOs? How do their job duties differ? How is the accounting different?

4. (Advanced) What is PP&E? What is IUS? What types of software does it include? How is it classified and defined?

5. (Advanced) What are the issues associated with accounting for IUS?

6. (Advanced) What is useful life? What should be the useful life limit for software? Why? How is useful life determined for accounting purposes? Can useful life for accounting purposes be different than the software's actual useful life? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

 "Federal CFO: Tackling Auditability Challenges for Internal Use Software Assets," by Deloitte CFO Journal Editor, The Wall Street Journal, June 10, 2016 ---
http://deloitte.wsj.com/cfo/2016/06/10/federal-cfo-tackling-auditability-challenges-for-internal-use-software-assets/?mod=djem_jiewr_AC_domainid

At the end of each federal audit season, many federal CFOs are faced with the inevitable stack of auditor findings, recommendations and comments to correct in the short few months before audits, internal reviews and inspections begin again. Among the most persistently challenging and significant of these findings for many agencies are those related to property, plant and equipment (PP&E), particularly the most nebulous category of PP&E, Internal Use Software (IUS). By carefully considering how an agency defines IUS and important characteristics such as capitalization threshold and useful life, federal CFOs can limit and focus their IUS auditability readiness efforts on the most significant and supportable assets while reducing the cost and effort expended on more marginal potential assets.

While there is no silver bullet for effectively and consistently supporting management assertions for all IUS assets in the federal environment, it is possible for federal CFOs to attack auditability issues in a more manageable and realistic manner by understanding and working with some of the unique aspects of IUS and the associated accounting requirements. CFOs can consider how defining and limiting populations for representation based on the federal accounting standards and industry practice can focus remediation and reporting efforts and allow for faster and more efficient results.

Defining and Limiting Populations for Representation

Properly defining capitalizable IUS and associated populations of potential assets for remediation and reporting is an important first step in addressing IUS auditability issues. The Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) 10: Accounting for Internal Use Software defines IUS as software developed or obtained for internal use to include the following:

—Software used to operate an entity’s programs;

—Software used to produce the entity’s goods and to provide services; and

—Software that is developed or obtained for internal use and subsequently provided to other Federal entities with or without reimbursement¹

As stated in SFFAS 10, IUS is classified as “general property, plant, and equipment” in accordance with SFFAS 6, Accounting for Property, Plant, and Equipment, and is further defined as software that is purchased from commercial vendors “off the shelf”, internally developed, or contractor developed solely to meet the entity’s internal or operational needs.²

The following three important aspects of the FASAB definition of IUS may be leveraged to limit and further define populations of software applications which a federal agency should consider when remediating auditability issues:

1. Software licenses. Significantly, the FASAB excludes software licenses from its definition of IUS, specifying that it “would be appropriate for the federal entity to apply lease accounting concepts and the entity’s existing policy for capitalization thresholds and for bulk purchases to licenses. Immaterial costs would be expensed, but the entity should consider whether period costs would be distorted by expensing the license.”³

Based on this guidance, CFOs may often exclude many small dollar value license fees paid for short-term (and especially single year) licenses when defining populations of applications for remediation and representation as IUS. However, CFOs should carefully consider the overall annual expenditures for licenses to avoid distorting effects on the statement of net cost, and whether the terms of licenses may result in a classification as capital leases.

2. Software enhancements. Software applications and operating systems frequently undergo enhancements, upgrades, security patches and routine maintenance releases to keep pace with the rapid evolution of technology and mission needs. The pace and volume of such changes can present a daunting challenge to tracking and accounting. However, when defining capitalizable enhancements, CFOs should understand the requirements and determine that definitions are sufficiently narrow to avoid unnecessary efforts.

SFFAS 10 states that the acquisition cost of enhancements to existing IUS (and modules thereof) should be capitalized when it is more likely than not that they will result in significant additional capabilities.⁴ In contrast to SFFAS 6, it is permissible to expense efforts that extend the useful life or increase the capacity of existing IUS assets when these upgrades do not introduce significant new functionality. Furthermore, minor enhancements resulting from on-going systems maintenance are to be expensed in the period incurred. CFOs should consider appropriate policies and controls to define and identify enhancement efforts that introduce “significant” new capabilities to an IUS asset, such as specifying upgrades from an X.1 to X.2 version may be considered as not introducing significant new capabilities, whereas an upgrade from an X to a Y version may be considered significant. Business rules will vary, but should consider the guidance from SFFAS 10 highlighted above. Judgment is required in determining what is “significant” and such judgments should be based on observable evidence and fully documented.

3. Capitalization thresholds. Since software applications and improvements to software represent intangible and costs are often difficult to bifurcate or track separately where acquisitions are not significant, agencies have often established higher capitalization thresholds for IUS than for other categories of PP&E. FASAB recognized and supported this position in SFFAS 10 where it states that “software is more fluid and malleable than other PP&E and the Board concludes that a higher threshold for capitalization is reasonable.”⁵

Due to the diversity in mission requirements, complexity, size and stakeholder needs of each federal agency, determining an appropriate capitalization threshold for IUS is a challenging topic to address. It is critical that leadership, and CFOs in particular, analyze their agency’s operating environment and stakeholder needs, and leverage the flexibility and discretion afforded to them in setting a capitalization threshold that enables materially correct account balances while preventing the agency from exhausting excessive time, effort and cost associated with capitalizing, tracking and monitoring immaterial software projects.

Using “Useful life” to Limit the Universe of Reported and Supported Capitalized IUS

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 24, 2016

FASB Rule to Require Banks to Record Projected Loan Losses Up Front
by: Michael Rapoport
Jun 17, 2016
Click here to view the full article on WSJ.com

TOPICS: FASB, Financial Accounting

SUMMARY: Under a new rule issued by the Financial Accounting Standards Board, banks will have to record all losses they project over the lifetime of their loans as soon as the loans are made. That is a change from current practice, under which banks wait to record loan losses until there is evidence a loss is likely to occur. The move will require U.S. banks to book losses on soured loans much faster and will change that could cut into some banks' profits by forcing them to set aside more in reserves. The idea, supporters say, is to give investors better, more timely information about banks' loan losses. Many observers think banks recorded losses too little and too late during the financial crisis, blindsiding investors when they were ultimately disclosed.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What is the FASB? What is its area of authority?

2. (Introductory) What rule has the FASB issued? To what industry does it apply?

3. (Advanced) Why was the new rule instituted? What possible problems does the FASB hope to solve?

4. (Advanced) How could financial statements be affected by the new rule? How could users of the financial statements benefit from these changes?

5. (Advanced) What are some parties critical of the new rule? Why do they say the changes are not necessary?

6. (Advanced) How will the banking industry be affected by the new rule? How might banks change the way they do business in response to this rule?

7. (Advanced) When does the rule take effect? Why it is not being implemented sooner?

8. (Advanced) What is the IASB? What is its area of authority? What is the IASB's stance on this issue? How does it differ from the FASB's stance? What might be some reasons for the difference?

Reviewed By: Linda Christiansen, Indiana University Southeast

 "FASB Rule to Require Banks to Record Projected Loan Losses Up Front by: Michael Rapoport, The Wall Street Journal, June 17, 2016 ---
http://www.wsj.com/articles/fasb-rule-to-require-banks-to-record-projected-loan-losses-up-front-1466085523?mod=djem_jiewr_AC_domainid

Accounting rule makers on Thursday completed a move requiring U.S. banks to book losses on soured loans much faster, a change that could cut into some banks’ profits by forcing them to set aside more in reserves.

Under the new rule the Financial Accounting Standards Board issued Thursday, banks will have to record all losses they project over the lifetime of their loans as soon as the loans are made. That is a change from current practice, under which banks wait to record loan losses until there is evidence a loss is likely to occur.

The idea, supporters say, is to give investors better, more timely information about banks’ loan losses. Many observers think banks recorded losses too little and too late during the financial crisis, blindsiding investors when they were ultimately disclosed.

“You’re giving investors a better starting point,” said Hal Schroeder, an FASB member. “You’re going to remove the limitations of the current model and allow companies to look forward.” The rule will also require banks to make “far more revealing” disclosures about their loan losses, he said.

The rule, which the FASB approved in principle in April, takes effect in 2020 for publicly traded banks and 2021 for privately held ones. Banks will be allowed to implement the new approach beginning in 2019, if they choose.

Booking all expected losses up front could require some banks to reserve more for those losses, though Mr. Schroeder said that will vary from bank to bank and will depend partly on conditions at the time the rule change kicks in.

Some banks have criticized the loan-loss change, particularly small banks which have argued it will be too costly and burdensome. The American Bankers Association continues to have “strong concerns” over the costs related to the change, ABA President and Chief Executive Rob Nichols said in a statement, though he added the group is “committed” to working with regulators to help banks implement it.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 24, 2016

FASB Proposes Amendments to Simplify Goodwill Impairment Accounting
by: Deloitte CFO Journal Editor
Jun 17, 2016
Click here to view the full article on WSJ.com

TOPICS: FASB, Financial Accounting, Goodwill, IFRS

SUMMARY: The FASB proposed a change to goodwill accounting that would remove step 2 impairment testing aimed at measuring the implied fair value of goodwill. The proposed ASU, which is intended to simplify the accounting for goodwill impairment, would instead require an entity to "recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, that amount should not exceed the carrying amount of goodwill allocated to that reporting unit."

CLASSROOM APPLICATION: This article is appropriate for coverage of goodwill in financial accounting classes.

QUESTIONS: 
1. (Introductory) What is goodwill? Where does it appear on financial statements?

2. (Introductory) What is the FASB? What is its area of authority?

3. (Advanced) What are the details of the FASB's proposed changes to goodwill accounting rules? Why were these changes proposed?

4. (Advanced) What is impairment of goodwill? Why is goodwill impaired?

5. (Advanced) What is IFRS? To what companies does it apply? What are the IFRS rules regarding goodwill impairment? How do they differ from GAAP?

Reviewed By: Linda Christiansen, Indiana University Southeast

"FASB Proposes Amendments to Simplify Goodwill Impairment Accounting," by Deloitte CFO Journal Editor, The Wall Street Journal, June 17, 2016 ---
http://deloitte.wsj.com/cfo/2016/06/17/fasb-proposes-amendments-to-simplify-goodwill-impairment-accounting/?mod=djem_jiewr_AC_domainid

The FASB proposed a change to goodwill accounting that would remove step 2 impairment testing aimed at measuring the implied fair value of goodwill. Issued on May 12, the proposed ASU¹, which is intended to simplify the accounting for goodwill impairment, would instead require an entity to “recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, that amount should not exceed the carrying amount of goodwill allocated to that reporting unit.”

Following is an excerpt from Deloitte’s Heads Up newsletter related to the proposed ASU.

Background and Key Provisions of the Proposed ASU

The simplification project will be completed in two phases. In phase 1, step 2 would be removed from the current goodwill impairment test; in phase 2, the Board will explore other alternatives related to the accounting for goodwill, including the amortization of goodwill.

Under ASC 350², impairment of goodwill “is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.” The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The process of measuring the implied fair value of goodwill is currently referred to as step 2 of the goodwill impairment test.

To perform step 2, an entity is required to “assign the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination.” Therefore, the performance of step 2 can sometimes result in significant cost and complexity since “the fair value of goodwill can be measured only as a residual and cannot be measured directly.” Likewise, cost and complexity related to step 2 were also identified in the post-implementation review of FASB Statement No. 141 (revised 2007), Business Combinations.

As noted above, the proposed ASU would eliminate step 2 of the goodwill impairment test. Instead, goodwill impairments would be measured by the amount by which the carrying amount exceeds the reporting unit’s fair value, but that amount should not exceed the reporting unit’s allocation of the carrying amount of goodwill.

The qualitative assessment of goodwill would be unchanged under the proposed ASU. However, the proposed amendments would remove “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount, would apply the same impairment test.

As noted in the proposal’s Basis for Conclusions, goodwill of reporting units with a zero or negative carrying amount would not be impaired even when conditions underlying the reporting unit indicate that it was impaired. However, entities would be required to disclose any reporting units with a zero or negative carrying amount and the respective amounts of goodwill allocated to those reporting units.

The proposed amendments would also make minor changes to the Overview and Background sections of certain ASC Topics and Subtopics as part of the Board’s initiative to unify and improve those sections throughout the Codification.

Next Steps

Comments on the proposed ASU are due by July 11, 2016. An entity would apply the final guidance prospectively from the date of adoption. The proposal notes that the FASB “will determine the effective date and whether early adoption should be permitted after it considers stakeholder feedback on the proposed Update.” A nonpublic business entity that has already elected the Private Company Council’s accounting alternative for goodwill and would like to apply the final guidance would need to perform an assessment of preferability in accordance with ASC 250

Continued in article

 

From The Wall Street Journal Accounting Weekly Review on June 24, 2016

The End of Accounting
by: Baruch Lev and Feng Gu
Jun 22, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, Financial Statement Analysis

SUMMARY: The writers argue the problem with reported earnings, and financial statements in general, is that they no longer reflect the realities of businesses. Instead, they follow an arcane set of accounting rules and regulations. Accounting earnings are based on multiple subjective managerial estimates and projections (depreciation, stock-option expense, asset write-offs, prospective bad debts, future pension liabilities, etc.), prone to errors and manipulations. All this results in backward-looking accounting statements that say little about an enterprise's future growth and ability to compete.

CLASSROOM APPLICATION: This is a very interesting discussion regarding whether current financial reporting rules offer the information wanted and needed by users of the financial statements.

QUESTIONS: 
1. (Introductory) What is the main point or thesis of the article? What are the writers criticizing? What issues do they raise?

2. (Advanced) What type of reporting are the writers advocating? Why? What would this include or add? What would it exclude from current offerings?

3. (Advanced) What information do users of the financial statements want and need? How do the needs of various types of users differ? Who is served well by the information provided under the current rules? Who needs or would prefer other information?

4. (Advanced) What is non-GAAP reporting? Why is it becoming more popular? What are the benefits? What are some potential problems?

5. (Advanced) Should the U.S. change its financial reporting rules? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Non-GAAP Numbers May Confuse Investors: SEC Chair
by Richard Teitelbaum
Dec 10, 2016
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Questions to Ask When Using a Non-GAAP Measure
by Deloitte CFO Journal Editor
Apr 22, 2016
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U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theor Francis and Kate Linebaugh
Dec 15, 2015
Online Exclusive

"The End of Accounting," by Baruch Lev and Feng Gu, The Accounting Review, June 22, 2016 ---
http://www.wsj.com/articles/the-end-of-accounting-1466529229?mod=djem_jiewr_AC_domainid

When Netflix ’s quarterly earnings announcement in April fell short of the consensus estimate of analysts, its share price surprisingly rose almost 18% on the announcement. An investor blackout? No. Investors justifiably ignored the backward-looking accounting information, reacting enthusiastically to a sharp rise in the forward-looking new-subscribers indicator: 4.9 million vs. expected 4 million. Furthermore, astute investors noticed that a major reason for the earnings shortfall was Netflix’s large investment in future growth—technology development; 9% of sales—which accountants expense in the income statement.

Netflix is not an aberration. The problem with reported earnings, and financial statements in general, is that they no longer reflect the realities of businesses. Instead, they follow an arcane set of accounting rules and regulations. An alternate reality which fails to illuminate essential factors that make an enterprise rise or fall, where, for example:

—The most important, value-creating investments in patents, brands, IT and other intangibles are considered regular expenses, like salaries or rent, without future benefits.

—Reported earnings are a mixed bag of long-term items (indicating sustained growth) and one-time, transitory gains/losses (restructuring costs, for example), having negligible effect on corporate value. (A case in point: Netflix’s one-time foreign-exchange loss had a major role in its earnings shortfall.)

—Nontraded assets/liabilities, like privately placed bonds, which have no market values are nevertheless required to be marked-to-market in the financial reports. This, of course, is an oxymoron.

If that’s not bad enough, accounting earnings are based on multiple subjective managerial estimates and projections (depreciation, stock-option expense, asset write-offs, prospective bad debts, future pension liabilities, etc.), prone to errors and manipulations. All this results in backward-looking accounting statements that say little about an enterprise’s future growth and ability to compete. Take Amazon, for example: Its earnings fell short of analysts’ consensus earnings estimates in eight of the 16 quarters of 2012-2015, alarming some investors, yet obscuring its phenomenal growth and competitive prowess.

No wonder that research shows an increasing gap between reported earnings and share prices, particularly for new-economy technology and science-based companies, and that earnings have lost their ability to predict future corporate performance—their main use by investors.

Continued in article

June 20, 2016 reply from Dennis Beresford

Bob,

Baruch has been preaching that intangibles should be recorded as assets for R&D, etc. for 20 years or more. So the "end" he suggests should have occurred before now. Many agree with him in theory but the numerous implementation issues tend to create too much of a hurdle. The FASB plans to soon issue a request for comment on what should be the next major project to be undertaken and I believe this will be one possibility. It will be interesting to see how much support it gets.

BTW, I wonder if the new book also calls for Human Resource Assets to be recorded - another idea whose time probably hasn't (and shouldn't) come.

Denny

June 20, 2016 Reply from Tom Selling

Bob and Denny:

Before Denny’s comment, I was thinking of replying to Bob that I don’t find “The End of Accounting” as a book title to be “absurd” at all. I have been planning to write a blog post on the distinction between “accounting” — as in Financial Accounting Standards Board — and the plain-English meaning of “give an account” — what one owns and owes at point(s) in time. This is as good a time as any to go public with my thoughts on this.

The FASB’s meaning of “accounting” as embodied in its standards is completely divorced from the the notion of giving an account of what one owns and owes. I attribute the cause of the disconnect to the quixotic notion that standards of reporting “income” should be the main objective of the FASB (and its predecessors).

“The End of Accounting” in the non-technical sense of the term has already happened. Today, we have a “statement of financial position” has become nothing but a list of items determined by rule to be assets or liabilities (whether or not they really are) paired with arbitrary currency amounts. An "income statement" is no different; it is nothing more than a statement of items recognized to be revenues/gains/expenses/losses. The result is not “income” in any commonly understood sense of the term (or even a subset of “income”), but only the sum of these categories of items.

I can’t wait to read the book!

Best,
Tom

Jensen Comment

If Lev's proposals (actually unrealistic dreams) really lowered cost of capital more firms would be routinely applying Lev's proposals.

Like Ijiri's "Force Accounting" Lev is reaching into the clouds to touch the angels.

The title "The End of Accounting" seems to be an attempt to attract attention with an absurd title just like political economist Francis Fukuyama tried to attract attention with his book "The End of History." Obviously neither accounting nor history will come to an "end." Accounting will come to an end when audited financial statements no longer impact portfolio decisions of investors and employment decisions of business firms such as the firing of a CEO who fails to meet "earnings" targets.

It will be interesting to see if Lev and Gu really have something new and exciting to say in their new book. I've not yet read the book, but I have my doubts that they will tell us anything we don't already know and ignore important things we also already know. We already know that things we cannot measure are important, perhaps more important than things we can measure about a lot of things in life. This is also true for most things in life. For example, consider choosing the a cpllege quarterback fpr the NFL draft. We can measure performance statistics from college playing and all sorts of medical statistics. But the experts who choose these new NFL quarterbacks have more failures than successes. This is because of all the intangibles that cannot be measured. The same is true for business forecasts for future performance of going concerns and staruips. Lev adn Gu are correct about the importance of intangibles that cannot be measured. The same is true for NFL prospective quarterbacks. But nobody has written a book entitled "The End of Quarterbacks" or given up on using college performance statistics to help predict how college quarterbacks will perform in the NFL. Thus I do not give up on trying to make that which we can measure about business financial performance better and more relaible and less fraudulent.

Bob Jensen's threads for years have contended that accounting reports are only the tip of the iceberg relative to contingencies and intangibles that cannot be measured beneath the surface ----
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

From The Wall Street Journal Accounting Weekly Review on June 24, 2016

Auditor Raised Issues With FIFA Before Resigning
by: John Letzing and Joshua Robinson
Jun 20, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Big 4, Forensic Accounting, International Business

SUMMARY: FIFA's auditor raised issues about the global soccer body's efforts to overhaul its operations weeks before resigning, in parallel with growing internal concern over expenses booked by the governing organization's new president. KPMG had sent FIFA President Gianni Infantino a letter expressing "concerns regarding the potentially significant increase of development funds" that Mr. Infantino planned to distribute to FIFA's member associations. The higher payments, KPMG said, "bear an increased risk of funds being misused" by their recipients. KPMG also cautioned against "any dilution, either in form or in substance" of overhauls FIFA approved in February - in particular, the diminishing of Mr. Infantino's role as president relative to the influence over day-to-day operations of FIFA's general secretary. FIFA said it welcomed the change when KPMG resigned this month after 16 years, adding that the appointment of a new auditor would be essential for the thorough overhaul of its financial functions.

CLASSROOM APPLICATION: This article is appropriate for use in auditing classes, as well as when discussing public accounting in general.

QUESTIONS: 
1. (Introductory) What is KPMG? What FIFA? What did KPMG announce regarding FIFA? Why was KPMG involved with FIFA?

2. (Advanced) What is a Big 4 firm? Why was a U.S. Big 4 firm involved with FIFA in Switzerland?

3. (Advanced) What concerns did KPMG raise about FIFA's activities? What was the result of the firm raising these concerns?

4. (Advanced) Was KPMG required to raise these concerns with its client? Must KPMG notify outside parties of these concerns? Why or why not?

5. (Advanced) Why did KPMG resign? What implications does an auditor resignation have?

6. (Advanced) After KPMG's resignation, what should the new auditor do going forward?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
KPMG Severs Ties With Scandal-Hit FIFA
by Joshua Robinson and John Letzing
Jun 14, 2016
Online Exclusive

KPMG, FIFA Ties Highlight Hazards for Auditors
by John Letzing
Jun 14, 2016
Online Exclusive

"Auditor Raised Issues With FIFA Before Resigning," by John Letzing and Joshua Robinson, The Wall Street Journal, June 20, 2016 ---
http://www.wsj.com/articles/auditor-raised-issues-with-fifa-before-resigning-1466380050?mod=djem_jiewr_AC_domainid

ZURICH—FIFA’s auditor raised issues about the global soccer body’s efforts to overhaul its operations weeks before resigning, in parallel with growing internal concern over expenses booked by the governing organization’s new president, according to documents reviewed by The Wall Street Journal and people familiar with the matter.

FIFA said it welcomed the change when KPMG AG resigned this month after 16 years, adding that the appointment of a new auditor would be essential for the thorough overhaul of its financial functions.

However, KPMG had sent FIFA President Gianni Infantino a letter in early May, seen by The Wall Street Journal, expressing “concerns regarding the potentially significant increase of development funds” that Mr. Infantino planned to distribute to FIFA’s member associations.

The higher payments, KPMG said, “bear an increased risk of funds being misused” by their recipients.

KPMG also cautioned against “any dilution, either in form or in substance” of overhauls FIFA approved in February—in particular, the diminishing of Mr. Infantino’s role as president relative to the influence over day-to-day operations of FIFA’s general secretary.

A spokesman for KPMG Switzerland declined to comment.

In a separate letter to KPMG from FIFA seen by The Wall Street Journal, Mr. Infantino disputed KPMG’s interpretation of the increased development funds. Mr. Infantino wrote he didn’t understand “why the amount of the funds to be distributed should per se constitute a particular issue.”

KPMG is in the midst of an internal review launched last year of why it didn’t pick up on irregularities at Zurich-based FIFA.

The firm’s letter to Mr. Infantino followed unspecified friction between FIFA and KPMG before the auditor agreed to sign off on the soccer body’s recently published annual financial and governance report, people familiar with the matter said.

People familiar with FIFA’s thinking said the organization was frustrated that it hadn’t received an update on KPMG’s review of its dealings with FIFA.

KPMG’s resignation comes amid mounting tensions at FIFA under Mr. Infantino, who was elected to succeed Sepp Blatter and turn around the organization in February, following a year that saw the U.S. Justice Department file corruption charges against more than 40 individuals and companies with ties to FIFA.

In May, the chairman of FIFA’s audit and compliance committee, Domenico Scala, resigned in protest over a vote to enable FIFA’s ruling council to fire heads of independent committees.

Days later, FIFA’s deputy secretary-general Markus Kattner was dismissed for allegedly paying himself millions of dollars in bonuses. Mr. Kattner has denied wrongdoing.

An internal memo sent in late May by a FIFA employee to Mr. Scala’s successor, Sindi Mabaso Koyana, and reviewed by the Journal raised concerns about Mr. Infantino’s expense reporting and acceptance of free travel.

The memo cited the potential impropriety of expenses allegedly submitted by Mr. Infantino including roughly 9,000 Swiss francs ($9,400) for an exercise machine, and 20,000 francs for a personal driver and car for Mr. Infantino that was used to transport his family members in March—which came in addition to his FIFA-issued Audi Q7.

FIFA didn’t make Mr. Infantino available for comment, But a person familiar with the matter said Mr. Infantino wasn’t involved in purchasing the exercise machine. Instead, it was bought for the staff gym by FIFA and is kept in a room adjoining Mr. Infantino’s office for his use. Mr. Blatter had kept a bed there, this person said.

The person denied that Mr. Infantino had asked to be reimbursed for his family’s driver.

The memo also flagged Mr. Infantino’s acceptance of private flights in April between Geneva, Moscow, Doha and Zurich valued at as much as 150,000 francs and paid for by sports officials and World Cup organizers in Russia and Qatar. That raised the potential for a conflict of interest, as those officials rely upon funding from FIFA, according to the memo.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 24, 2016

Saudi Stocks Regulator Penalizes Deloitte Unit After Tainted IPO
by: Ahmed Al Omran
Jun 20, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Firms, Auditing, Big 4, International Business

SUMMARY: The Saudi stock market's regulator has banned the local unit of Deloitte & Touche LLP from providing accounting services in the kingdom for two years for its work with a local contracting company that was sanctioned for market violations. The Committee for the Resolution of Securities Disputes penalized a number of parties for violations including manipulation, fraud and creating a misleading and incorrect impression regarding the valuation of Mohammed Al-Mojil Group, or MMG, shares at the time of its initial public offering. The Capital Market Authority regularly penalizes companies for various market violations, which many analysts see as a welcome move aimed at reassuring investors that Saudi Arabia is a safe place to do business.

CLASSROOM APPLICATION: This article is appropriate for an auditing class or financial accounting class when discussing international accounting firms and international business.

QUESTIONS: 
1. (Introductory) What is Deloitte & Touche? Why is it doing business in Saudi Arabia?

2. (Introductory) What violation was reported in the article? What body served the penalty? Why were the sanctions levied?

3. (Advanced) What impact could this penalty have on Deloitte? Is it significant? Could it have any impact on the firm's U.S. business?

4. (Advanced) Why do some accounting firms have operations all around the world? What benefits does that add to the firm? What issues or problems could it cause?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Saudi Stocks Regulator Penalizes Deloitte Unit After Tainted IPO," by Ahmed Al Omran, The Accounting Review, June 20, 2016 ---
http://www.wsj.com/articles/saudi-stocks-regulator-penalizes-deloitte-unit-after-tainted-ipo-1466363294?mod=djem_jiewr_AC_domainid

RIYADH, Saudi Arabia—The Saudi stock market’s regulator has banned the local unit of Deloitte & Touche LLP from providing accounting services in the kingdom for two years based on its work with a local contracting company that was sanctioned for market violations.

The Committee for the Resolution of Securities Disputes penalized a number of parties for violations including manipulation, fraud and creating a misleading and incorrect impression regarding the valuation of Mohammad Al-Mojil Group, or MMG, shares at the time of its initial public offering in May 2008, the Capital Market Authority, or CMA, said late Saturday.

The Saudi regulator had suspended Deloitte’s local unit a year ago from doing any auditing work for listed companies in the kingdom while the regulator investigated the long-running case involving MMG.

A spokeswoman for Deloitte’s local unit, Deloitte & Touche Bakr Abulkhair & Co., acknowledged that the CMA decision related to an investigation of MMG, a former audit client of the firm.

“While the CRSD’s decision is disappointing, Deloitte & Touche Bakr Abulkhair & Co respects the CMA’s important role in regulating the Saudi capital markets, and will always fully cooperate with the CMA and other regulators,” the spokeswoman said. Deloitte’s Saudi unit didn’t say whether it would appeal the CMA decision.

The regulator’s decision states that listed companies and entities authorized by the CMA refrain from engaging with Deloitte’s local unit in relation to audit services for two years beginning in June 2016, the spokeswoman said. The decision also includes a financial penalty of 300,000 Saudi riyals ($80,000).

The decision doesn't extend to the firm’s audit services being provided to non-CMA licensed entities in the kingdom, and doesn't affect its other services, Deloitte’s Saudi unit said.

The CMA, which didn’t name any of the parties penalized, said the resolution isn’t final and parties involved can appeal it in 30 days after they receive it.

Saudi Arabia opened its stock market to international investors last year to attract more foreign capital as it reshapes its economy in an era of cheap oil. The CMA regularly penalizes companies for various market violations, which many analysts see as a welcome move aimed at reassuring investors that Saudi Arabia is a safe place to do business.

As part of the verdict issued on Wednesday, the CMA’s legal committee ordered one of the defendants to pay 1.62 billion Saudi riyals ($432 million) for “illegal profits” in addition to a separate fine of 2.7 million riyals.

The illegal profits represents the difference between the IPO share value and the real share value, the CMA said, noting the amount once collected will be paid to those who were affected by these violations.

The legal committee also sentenced MMG founder Mohammad Al-Mojil and his son Adel, who serves as the company’s chairman, to five years in jail for misrepresenting the firm’s value at its IPO. A third executive received a three-year sentence.

Mr. Mojil sold 30% of his MMG stake to the public in an IPO in 2008, reaping 2.1 billion Saudi riyals ($560 million).

The Al-Mojil family on Friday denied wrongdoing and said they would appeal the legal committee’s decision, which they called “fundamentally flawed.” Its members weren’t formally interviewed by the CMA or given a chance to comment on the evidence used against them, the family claimed.

Continued in article

Bob Jensen's threads on critical thinking ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#CriticalThinking

Jim Martin wrote the following in his MAAW Blog on May 20,2016
http://maaw.blogspot.com/2016/05/financial-shenanigans-update.html

Financial Shenanigans update
I added the following note to my summary of Schilit, H. 2002. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports. 2nd edition. McGraw Hill.

Schilit includes seven main shenanigans that include 30 accounting tricks and techniques. See http://maaw.info/ArticleSummaries/ArtSumSchilit2002.htm

The third edition of this book was published in 2010. See Schilit, H. and J. Perler. 2010. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd edition. McGraw-Hill Education.

Part three includes four chapters on cash flow shenanigans:

Chapter 10: Shifting financing cash flows to the operating section.

Chapter 11: Shifting normal operating cash flows to the investing section.

Chapter 12: Inflating operating cash flows using acquisitions or disposals.

Chapter 13: Boosting operating cash flows using unsustainable activities.

 

Part four includes two chapters on key metrics shenanigans:

Chapter 14: Showcasing misleading metrics that overstate performance.

Chapter 15: Distorting balance sheet metrics to avoid showing deterioration

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

STUDY FINDS THAT, AS AUDIT COMPETITION INCREASES, SO DOES CORPORATE OPINION-SHOPPING REGARDING INTERNAL CONTROLS ---
Accounting Education News --- Click Here
Also see
http://aaahq.org/Outreach/Newsroom/As-audit-competition-increases-so-does-corporate-opinion-shopping-new-research-finds

Funds managed by activists are poor performers (something campus activists fail to mention)
Hedge funds that are managed by activist investors have underperformed the S&P 500 for years, according to a Fundstrat report. These funds have posted a cumulative return of 113% since 2005 compared with the 115% of the S&P 500
MarketWatch --- http://www.marketwatch.com/story/why-activist-investors-in-the-boardroom-is-not-cause-for-celebration-2016-04-27

529 College Prepaid and Savings Plans With Serious Tax Benefits --- https://en.wikipedia.org/wiki/529_plan
These plans are often used by parents and grandparents for young children who will one day enter college
These plans vary with such things as state of residence and plan manager fees

From the CPA Newsletter in May 27, 2016

Assets in college savings plans up 4.3%, data show

Assets held in 529 college savings plans reached $227.3 billion at the end of 2015, a 4.3% increase from a year earlier, according to a report from Morningstar. Growth was fastest for direct-sold plans, which had a 53.3% market share last year, up from 51.7% a year earlier.

Pensions & Investments (free access for SmartBrief readers) (5/26) 

Siemens' USA apprenticeship plan is modeled after common apprenticeship plans in Germany
"College Isn’t Always the Answer:  Plenty of alternatives can prepare young people to enter the workforce," by Professor Jeffrey J. Selingo, The Wall Street Journal, May 26, 2016 ---
http://www.wsj.com/articles/college-isnt-always-the-answer-1464300544?mod=djemMER

During this particularly rancorous election season, at least one bipartisan consensus persists: More Americans, we are told, need to earn undergraduate degrees. The political debate tends to focus on the best way to graduate more people with less debt. But it makes little sense to send more students to college when nearly half of new graduates are working jobs that don’t require a bachelor’s degree, according to a 2014 report from the Federal Reserve Bank of New York.

It would be better to reconsider the entire issue. There’s a disconnect between supply (what the education system produces) and demand (what employers seek). Rather than trying to shuffle young people off to college three months after they graduate from high school, policy makers should support alternative routes to the education and training required for high-quality jobs. Plenty of successful examples have sprung up around the country.

Siemens and other manufacturers, for example, developed a high-school apprenticeship program in North Carolina when they couldn’t find enough workers with advanced skills. After completing a three-year apprenticeship, the students leave with an associate degree and a $55,000 starting salary.

John Deere runs a similar program at Walla Walla Community College in Washington state. Students are trained to fix million-dollar farm equipment, which allows them to use their hands and advanced math and mechanical skills. High-school guidance counselors, who are evaluated on the proportion of students they send to four-year universities, may discourage such choices.

It might also be helpful if more high-school graduates took a “gap year” before heading off to college. Too often they pick a field of study based on what’s familiar, with little exposure to many of the jobs that exist today. Having high-school graduates take time to explore careers before college—through internships or national service—gives them a sense of focus and purpose. It likely saves money in the long run too.

While not a traditional gap year, a program in Baltimore called BridgeEdU bills itself as a reinvention of the freshman experience. It offers college credits, internships and coaching for under $8,000.

The number of teenagers who have some sort of job while in school has dropped to 20% in 2013 from about 45% in 1998, according to the Bureau of Labor Statistics. Once in college, students need to combine education with relevant work experience. Otherwise, they know little about the workplace before they land their first full-time job after graduation.

More colleges should embrace the idea of cooperative education. At universities such as Northeastern and Drexel, students alternate between the classroom and the job. Co-ops are part of the undergraduate experience at these institutions, and paid work makes up anywhere from one-third to almost half of the time a student spends in school. Co-op education helps students develop a tolerance for ambiguity in their work, which so many employers say today’s college graduates lack.

Many who earn a bachelor’s degree are not prepared to enter the workforce. A new learning ecosystem is emerging outside of traditional higher education to assist them. General Assembly offers courses on topics like Web design, and Koru teaches practical business skills. Students can also use free or inexpensive online courses from edX and Lynda.com to build skills that can help them get that first job.

Continued in article

Bob Jensen's helpers for finding online training programs (not all are free) ---
http://faculty.trinity.edu/rjensen/Crossborder.htm

"The new astrology:  By fetishising mathematical models, economists turned economics into a highly paid pseudoscience," by Alan Jay Levinovitz, AEON, May 2016 ---
https://aeon.co/essays/how-economists-rode-maths-to-become-our-era-s-astrologers

Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest. In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major. In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme. The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes. Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.

But despite the funding crunch, it’s a bull market for academic economists. According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists. For the top 10 per cent of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering. These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)

Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline. Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories. Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect. In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’. What is the basis of this collective faith, shared by universities, presidents and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?

In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.

Real Science versus Pseudo Science ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Pseudo-Science

Jensen Comment
Academic accounting (accountics) scientists took economic astrology a step further when their leading journals stopped encouraging and publishing commentaries and replications of published articles ---
How Accountics Scientists Should Change: 
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

Times are changing in social science research (including economics) where misleading p-values are no longer the Holy Grail. Change among accountics scientist will lag behind change in social science research but some day leading academic accounting research journals may publish articles without equations and/or articles of interest to some accounting practitioner somewhere in the world ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong 

Booth Graduate School of Business at the University of Chicago ---
https://www.chicagobooth.edu/

Eugene Fama --- https://en.wikipedia.org/wiki/Eugene_Fama

Kenneth French --- https://en.wikipedia.org/wiki/Kenneth_French

David Booth Brings Academic Research to Life ---
http://www.institutionalinvestor.com/article/3552928/investors-endowments-and-foundations/david-booth-brings-academic-research-to-life.html#/.Vzy3Co-cEcQ

Jensen Comment
Although David Booth is doing well bringing academic research to life, we can also remember how two Nobel Prize winning economics professors  (Merton and Scholes) and some of their doctoral students brought academic research to death in the infamous Long Term Capital Management (LTCM) trillion dollar failure
http://faculty.trinity.edu/rjensen/FraudRottenPart2.htm#LTCM

"The Relative and Incremental Explanatory Power of Earnings and Alternative (to Earnings) Performance Measures for Returns"
by Jennifer Francis, Katherine Schipper, and Linda Vincent
Contemporary Accounting Research
Volume 20, Issue 1, pages 121–164, Spring 2003

Abstract
We analyze the ability of earnings and non-earnings performance metrics to explain the variability in annual stock returns for industries where we identify, ex ante, an allegedly preferred (for valuation purposes) summary performance metric. We identify three industries where earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash from operations (CFO) are preferred, and three industries where specific non-GAAP performance metrics are preferred. As a benchmark, we also examine the ability of EBITDA and CFO to explain returns for seven industries for which earnings is the preferred metric. Results for the benchmark earnings industries show that earnings dominates EBITDA and CFO in explaining returns. All other results are inconsistent with the view that perceptions of preferred metrics are reflected in actual aggregate investment behaviors.

WARNING USE OF EBITDA MAY BE DANGEROUS TO YOUR CAREER
by ALFRED M. KING
Strategic Finance
http://go.galegroup.com/ps/anonymous?id=GALE%7CA78355003&sid=googleScholar&v=2.1&it=r&linkaccess=fulltext&issn=1524833X&p=AONE&sw=w&authCount=1&isAnonymousEntry=true

Using EBITDA (earnings before interest, taxes, depreciation, and amortization) in financial analysis may be dangerous to your career prospects. It's one of the most flawed concepts to be adopted by the financial community. Finance professionals rightly focus on cash flows. Valuations are based on the present value of future cash flows. Standard discounted cash flow valuation techniques taught in all finance and MBA programs have stood the test of time. They have served us well. Many investors and security analysts have also focused on price/earnings (PIE) ratios. The assumption is that if Company "A" is now earning $2.00 per share and the stock is $30.00, then the 15 PIE ratio can: 1) be compared to other stocks and 2) used to forecast future stock prices. To use a P/E ratio for comparative purposes, assume Company "A" is in the auto parts business. All its competitors are selling at PIE ratios between 13 and 17. Thus you might reasonably conclude that the stock is fairly priced on a current basis. Using a PIE ratio for forecasting purposes is simple: If the stock is likely to earn $2.40 a share next year, it would be expected to sell for about $36 a share (15 * 2.40 = 36), assuming the PIE ratio holds constant. So, cash flow and price/earnings analyses are two tools with which financial professionals are familiar. They work. But now we have detected an intruder on our financial radar: The rapid approach of EBITDA is closing fast on cash flow and price/earnings. It's time to shoot the enemy out of the sky before we suffer another defeat. HOW EBITDA IS BEING USED EBITDA is being used by security analysts because its "answers" appear more attractive. For example, if a company has $4 million of after-tax earnings and one million shares outstanding, the earnings per share are $4. If the stock is in a popular field such as media, it might sell today for a PIE of 35x earnings, or $140 per share. But substitute EBITDA for earnings per share, and you could easily get $7 per share or $7 million overall. Then, using the same current price of the stock,...

Bob Jensen's Threads on Return on Business Valuation, Business Combinations, 
Investment (ROI), and Pro Forma Financial Reporting ---
http://faculty.trinity.edu/rjensen/roi.htm

Five Books Bill Gates Wants You to Read This Summer ---
http://www.openculture.com/2016/05/5-books-bill-gates-wants-you-to-read-this-summer.html

A new book says you need passion and perseverance to achieve your goals in work and life. Is this a bold new idea or an old one dressed up to be the latest self-help sensation?
"Is “Grit” Really the Key to Success?" by Daniel Engber, Slate, May 2016 ---
http://www.slate.com/articles/health_and_science/cover_story/2016/05/angela_duckworth_says_grit_is_the_key_to_success_in_work_and_life_is_this.html#rt

Scientists have tried to solve this puzzle for more than 50 years, writes Duckworth in her new book Grit: The Power of Passion and Perseverance. But even the school’s best means of screening its applicants—something called the “whole candidate score,” a weighted mixture of a student’s SATs, high school ranking, leadership ability, and physical fitness—does not anticipate who will succeed and who will fail at Beast. So Duckworth designed her own way of scoring candidates, giving each a survey that tested his or her willingness to persevere in pursuit of long-term goals. She called this measure “grit.” And guess what? Grit worked. The cadets’ survey answers helped predict whether they would make it through the grueling program. Duckworth’s best-seller peddles a pair of big ideas: that grit—comprising a person’s perseverance and passion—is among the most important predictors of success and that we all have the power to increase our inner grit. These two theses, she argues, apply not just to cadets but to kids in troubled elementary schools and undergrads at top-ranked universities and to scientists, artists, and entrepreneurs. Duckworth’s book describes a wide array of  “paragons of grit,” people she’s either interviewed or studied from afar: puzzlemasters and magicians, actors and inventors, children and adults, Steve Young and Julia Child. Grit appears in all of them, sprinkled over their achievements like a magic Ajax powder. In tandem with some feisty scrubbing, it dissolves whatever obstacles might hold a person back.

While her book has only just arrived, Duckworth’s gritty tales—and the endlessly extensible ideas they represent—have already spread throughout the country, into classrooms, boardrooms, and locker rooms alike. Popularized in a viral TED talk from 2013 and validated by that year’s MacArthur “genius” grant, they’ve been inscribed into national education policy, and public school districts in California are grading kids—as well as schools themselves—on grit. Duckworth’s message has been broadcast with such speed and thoroughness that other people even started selling books on grit before she published her own.

With Grit, Duckworth has now put out the definitive handbook for her theory of success. It parades from one essential topic to another on a float of common sense, tossing out scientific insights as it goes along. How to raise your kids, how to unearth your inner passion, how to find a higher purpose—like other self-help authors, Duckworth finds authoritative answers to these questions, promising to change how we see the world. And like other self-help authors, she pulls a sleight of hand by which even widely held assumptions end up looking like discoveries. It’s as important to work hard, the book contends, as it is to be a natural talent. Who would disagree with that?

Continued in article

Jensen Comment
Years ago one of my psychology professors at Stanford who did a long-term (funded by the US Navy) study of predictors of success and concluded that the fundamental problem of such research was in defining and measuring "success."
He termed this "The Criterion Problem" ---
http://faculty.trinity.edu/rjensen/assess.htm#Predictors 

A message from Professor XXXXX

I recently submitted an article on Assessment Outcomes for distance education (DE) to "The Technology Source". The editor suggested that I include a reference to profiling the successful DE student because he was sure some research existed on the subject. Well I have been looking for it casually for 3 years in my reading and the 3-4 conferences per year that I attend, and never have come across anything. Have spent the last week looking in InfoTrac and reviewed close to 300 abstracts, without a single good lead. You are the man. So hoping you can answer the question - is there any empirical research on the question of profiling a successful DE student and in particular any research where an institution actually has a hurdle for students to get into DE based on a pedagogically sound questionnaire? Hoping you know the answer and have time to respond.

Reply from Bob Jensen

Hi XXXXX,

I am reminded of a psychology professor, Tom Harrell, that I had years ago at Stanford University.  He had a long-term contract from the U.S. Navy to study Stanford students when they entered the MBA program and then follow them through their careers.  The overall purpose was to define predictors of success that could be used for admission to the Stanford GSB (and extended to tests for admission into careers, etc.)  Dr, Harrell's research became hung up on "The Criterion Problem   (i.e., the problem of defining and measuring "success.")  You will have the same trouble whenever you try to assess graduates of any education program whether it is onsite or online.  What is success?  What is the role any predictor apart from a myriad of confounded variables?

You might take a look at the following reference:
Harrell, T.W. (1992). "Some history of the army general classifications test," Journal of Applied Psychology, 77, 875-878.

Success is a relative term.  Grades not always good criteria for assessment.  Perhaps a C student is the greatest success story of a distance education program.  Success may lie in motivating a weak student to keep trying for the rest of life to learn as much as is possible.  Success may lie in motivating a genius to channel creativity.  Success may lie in scores on a qualification examination such as the CPA examination.  However, use of "scores" is very misleading, because the impact of a course or entire college degree is confounded by other predictors such as age, intellectual ability, motivation, freedom to prepare for the examination, etc.  

Success may lie in advancement in the workforce, but promotion and opportunity are subject to widely varying and often-changing barriers and opportunities.  A program's best graduate may end up on a dead end track, and its worst graduate may be a maggot who fell in a manure pile.  For example, it used to be virtually impossible for a woman to become a partner in a large public accounting firm.  Now the way is paved with all sorts of incentives for women to hang in there and attain partnership. Success also entails being at the right place at the right time, and this is often a matter of luck as well as ability.  George Bush probably would never have had an opportunity to become one of this nation's best leaders if there had not been a terrorist attack that afforded him such an opportunity.  Certainly this should not be termed "lucky," but it is a rare "opportunity" to be a great "success."

Expected-Credit Loss Standard to Replace Incurred-Credit Loss Standard
"FASB to draft final standard on credit losses," by Ken Tysiac, Journal of Accountancy, April 27, 2016 ---
http://www.journalofaccountancy.com/news/2016/apr/fasb-votes-to-issue-credit-loss-standard-201614335.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=28Apr2016

Financial reporting of credit losses on loans and other financial assets would move from an incurred-loss approach to an expected-loss approach under accounting rules FASB voted Wednesday to draft for issuance.

 

Current GAAP requires organizations to defer recognition of a credit loss until the loss is probable or has been incurred. The most recent global financial crisis resulted in calls for more timely reporting of credit losses on loans and other financial assets held by banks, lending institutions, and public and private organizations.

 

As a result, FASB and the International Accounting Standards Board (IASB) began a joint project to change financial reporting rules. Although both boards decided to issue standards that would reflect expected losses of credit rather than incurred losses, they settled on different models and could not agree on a converged standard. The IASB introduced its expected-loss model in 2014 when it issued IFRS 9, Financial Instruments.

 

The IASB’s standard takes effect for annual periods beginning on or after Jan. 1, 2018.

 

Continued in article

These billionaires moved out of state just to avoid state income taxes ---
http://finance.townhall.com/columnists/markskousen/2016/05/11/these-billionaires-moved-just-to-avoid-state-income-tax-n2161291?utm_source=thdaily&utm_medium=email&utm_campaign=nl

The University of Cambridge is planning one of the most expensive business (Doctoral) degrees in the world ---
http://www.businessinsider.com/cambridge-expensive-executive-mba-2016-5

The University of Cambridge has proposed a new business program that may cause some sticker shock.

The four-year course is a doctorate of business and will cost students $332,000, as Times Higher Education reported. Not including room and board, that makes it one of the most expensive degrees in the world.

The "Doctor of Business Degree" will be comparable to a PhD program, a representative for Cambridge told Business Insider in an email, noting that it's still subject to approval.

"The four-year programme's annual fees are comparable to leading Executive MBA programmes, while also reflecting the fact that the programme will be very small and selective, demanding substantial resources for intensive teaching and support services," the representative said. For comparison, the Wharton School of the University of Pennsylvania has a two-year executive-education program that runs students $192,900. The London Business School has a 20-month-long program that runs students 72,795 pounds, or $106,328. The University of Cambridge's massive price tag has already led some faculty members to implore the school to think through the implications of creating the new course.

Continued in article

Jensen Comment
In the past few decades DBA degrees are on the decline relative to Ph.D. degrees. Typically a DBA entails less specialization in a given business discipline such as accounting, finance, marketing, management, MIS, etc. Executive Ph.D. or DBA programs are more popular in Europe than the USA and typically are of much shorter duration than a North American business Ph.D. program. Usually research universities in the USA do not hire executive doctoral program graduates on tenure tracks, although this proposed Cambridge program may become more of an exception. One sign of prestige of a doctoral program is the research reputations of thesis supervisors plus the number of doctoral theses being supervised by a given thesis supervisor. Executive doctoral programs whether online or onsite tend to lack research prestige.

Bob Jensen's threads on the sad state of accounting (read that "accountics" doctoral programs) ---
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

KPMG was at the bottom (worst) of the PCAOB's inspection reports of the Big Four audit firms in 2015. KPMG auditors also ended up in the bottom in the UK in 2016.

"Audit Regulator Finds 28 Deficient Audits By KPMG in Annual Report:  PCAOB says Big Four firm’s deficiency rate of 54% is up from 46% a year ago," by Michael Rapoport, The Wall Street Journal, November 10, 2015 ---
http://www.wsj.com/articles/audit-regulator-finds-28-deficient-audits-by-kpmg-in-annual-report-1447177800

The UK found similar bad news for KPMG auditors ---
http://www.ft.com/intl/cms/s/f418e1d2-1da7-11e6-b286-cddde55ca122,Authorised=false.html?siteedition=intl&_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Ff418e1d2-1da7-11e6-b286-cddde55ca122.html%3Fsiteedition%3Dintl&_i_referer=http%3A%2F%2Fgoingconcern.com%2F0267e6094658820051eabb1f65ef45f3&classification=conditional_standard&iab=barrier-app#axzz497HuXT00

"UK lawmaker piles pressure on watchdog over HBOS accounting probe (of KPMG)," by Huw Jones, Reuters, February 3, 2016 ---
http://www.reuters.com/article/britain-parliament-hbos-idUSL8N15I27G

Feb 3 Britain's accounting watchdog came under further political pressure on Wednesday to undertake a full, independently supervised investigation into the auditing of HBOS's accounts by KPMG before the bank collapsed in 2008.

The Financial Reporting Council said last month it would undertake an initial enquiry into how KPMG and its staff audited HBOS before it went bust at the height of the financial crisis.

That announcement followed calls for a full probe from Andrew Tyrie, chairman of parliament's Treasury Select Committee, who on Wednesday intervened again to detail the conditions he wanted for the FRC enquiry to "command public confidence".

"This work is long overdue. Furthermore, the process by which the FRC has reached this decision, as well as the approach it plans for its preliminary enquiries, both raise a number of concerns," Tyrie said in a letter to the FRC and released to the media.

The FRC, which had no immediate comment, looked at aspects of KPMG's accounts of HBOS during 2013, but found no grounds to take matters further.

In his letter, Tyrie asked why the FRC was still only looking at two elements of the HBOS audit rather than undertaking a broader review.

He said a review of the HBOS collapse by the Bank of England and the Financial Conduct Authority published last November had benefited from independent supervision.

"What provision will be made for independent and external oversight of the FRC's enquiries into the auditing of HBOS ?"

Tyrie asked what deadline the FRC was working to, and whether the findings will be published in full.

Continued in article

After KPMG paid $456 million in 2006 fines for selling phony tax shelters, KPMG promised it would never happen again. Yeah Right!
Four KPMG partners arrested in tax evasion investigation ---
http://www.accountancyage.com/aa/news/2436814/four-kpmg-partners-arrested-in-tax-evasion-investigation

"FIFA auditor KPMG totally missed the soccer scandal," by Francine McKenna, Market Watch, June 3, 2015 ---
http://www.marketwatch.com/story/fifa-auditor-kpmg-missed-scandal-but-stays-out-of-spotlight-2015-06-03 

Bob Jensen's threads on KPMG audit litigation ---
http://faculty.trinity.edu/rjensen/fraud001.htm

Bob Jensen's Fraud Updates ---  http://faculty.trinity.edu/rjensen/FraudUpdates.htm
 

Why we need the FASB to reduce the risk that Washington lobbyists will set accounting rules

"Schumer’s Self-Detonating Confirmation Demand," by Joseph A. Grundfest, The Wall Street Journal, April 24, 2016 ---
http://www.wsj.com/articles/schumers-self-detonating-confirmation-demand-1461531681?mod=djemMER

Are senators sometimes too smart for their own good?

President Obama has nominated Lisa Fairfax, a Democrat, and Hester Peirce, a Republican, to fill two vacancies on the Securities and Exchange Commission. New York Sen. Charles Schumer demands that the nominees promise—in writing—that if the SEC ever considers a rule requiring publicly traded corporations to disclose political contributions, the nominees will support it.

The nominees haven’t done so, and on April 7 Mr. Schumer lambasted them for “fence-sitting” and for feeding him a bunch of “gobbledy gook.” So spurned, Sen. Schumer, joined by fellow Banking Committee Democrats Elizabeth Warren, Robert Menendez and Jeff Merkley, announced that they will oppose the nominees. The confirmation process has now ground to a halt.

Are these senators striking a powerful blow for disclosure of campaign-finance reform, or are they merely shooting themselves in the foot? There’s every reason to believe that these senators will end up limping out of the hearing room.

The law is clear that when it comes to adopting a rule, SEC commissioners must be open to persuasion based on public comment. If a commissioner has an “unalterably closed mind”—as the U.S. Court of Appeals for the District of Columbia Circuit put it in a 1980 decision—then she can’t participate.

What better evidence is there of an unalterably closed mind than a nominee’s written promise to support a senator’s policy no matter what? Any nominee who agrees to such a demand effectively disqualifies herself from participating in the rule-making that the senator so ardently desires. By demanding the promise, Mr. Schumer and his colleagues destroy her ability to deliver on the promise. It also transforms the nomination process into a scene from the theater of the absurd: “I promise to support a policy position that I won’t be able to vote on because I am making this promise.”

Continued in article

Jensen Comment
We can only imagine how the Senate may extend this confirmation power to abuse of the separation of powers doctrine in the USA system of division of power between Congress, the President, and the Supreme Court. For example, the Senate dictate how a Supreme Court nominee votes on the most controversial cases. Eventually the Supreme Court would not longer be needed for such cases since the Senate really pre-determines the vote.

From an accounting perspective, we might encounter a situation where the SEC has no say in the issue of convergence of US GAAP and IFRS.

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

From the CFO Journal's Morning Ledger on May 26, 2016

Bankers rarely do time
The Wall Street Journal examined 156 criminal and civil cases brought by the Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission against 10 of the largest Wall Street banks since 2009. In 81% of those cases, individual employees were neither identified nor charged. A total of 47 bank employees were charged in relation to the cases. One was a boardroom-level executive, the Journal’s analysis found. The analysis shows not only the rarity of proceedings brought against individual bank employees, but also the difficulty authorities have had winning cases they do bring.

Bob Jensen's threads on bankers who were rotten to the core ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

From the CFO Journal's Morning Ledger on May 23, 2016

Investors are fleeing Europe
Fund managers are pulling cash out of European equity and debt markets in response to concerns about the continent’s fractious politics, ultralow interest rates and weak banks, and relentless economic malaise. The money is finding a home in places from U.S. Treasurys to emerging economies, helping to push up prices in those markets.

From the CFO Journal's Morning Ledger on May 23, 2016

Health-care executives go on trial
Two criminal trials of former health-care executives set to begin in a Boston courthouse in the coming weeks illustrate what the federal government says is a new push to hold more individuals accountable for alleged corporate wrongdoing. A former division president at drugmaker Allergan PLC’s Warner Chilcott unit will stand trial on a charge of conspiring to pay kickbacks to doctors to prod them to prescribe the company’s medicines, including osteoporosis drug Atelvia. And two former senior officers of Johnson & Johnson medical-device unit Acclarent are charged with marketing a sinus-opening device for a use not authorized by the Food and Drug Administration. All three executives deny wrongdoing.

From the CFO Journal's Morning Ledger on May 19, 2016

Proceed with non-GAAP metrics at your own peril
http://www.wsj.com/articles/sec-tightens-crackdown-on-adjusted-accounting-measures-1463608923?mod=djemCFO_h
The Securities and Exchange Commission is keeping up its recent drumbeat criticizing the use of “non-GAAP” financial measures that may make a company’s earnings look stronger than they really are, report Michael Rapoport and Dave Michaels. More SEC comment letters to companies will soon be released in which the commission’s staff questions the companies’ use of the customized metrics, a senior SEC staff member said Wednesday. The SEC also issued new guidance this week that clarifies some of the issues surrounding non-GAAP measures and emphasized some of the circumstances in which the SEC would take issue with them. “We are sending a message and we are going to continue talking about it,” said Mark Kronforst, chief accountant of the SEC’s corporation-finance division. There will be “an uptick” soon in the number of SEC comments to companies, he said at a meeting of an advisory group to the Public Company Accounting Oversight Board, as concerns have mounted that non-GAAP metrics could mislead investors and the commission has devoted more attention to them.

Bob Jensen's Threads on Return on Business Valuation, Business Combinations, Investment (ROI), and Pro Forma Financial Reporting ---
http://faculty.trinity.edu/rjensen/roi.htm
 

From the CFO Journal's Morning Ledger on May 12, 2016

Boeing’s buybacks make analysts jittery
Boeing Co., the world’s biggest plane maker by deliveries, has spent $19 billion buying back its own stock over the past three years, a spending spree that worries analysts who think the airplane-building cycle may be near its peak. The plane maker has been directing almost all of its free cash back to shareholders, boosting buybacks and dividends with the proceeds from record deliveries of its passenger jets.

Jensen Comment
When teaching accounting for stock buybacks, instructors should stress why such buybacks are still popular. In particular, business graduates should fully understand why buying back a corporation's own stock is not like buying an asset.

From the CFO Journal's Morning Ledger on May 9, 2016

Three big global issues are looming as we start the week; talk about a case of the Mondays. China is doubling down on efforts to keep unprofitable factories afloat despite for years pledging to curb excess capacity. Its overproduction of industrial goods has driven down prices and crippled competitors, leading to thousands of lost jobs in the U.S. and elsewhere. As trade disputes ramp up against the backdrop of the U.S. presidential election, China is subsidizing its steel, coal, solar, copper, chemicals and other industries.

Saudi Arabia forged ahead on a far-reaching government shake-up this weekend, adding to a barrage of proposals aimed at overhauling the economy. The monarchy announced a sweeping reorganization Saturday that included new leadership at some of Saudi Arabia’s most important institutions, including the powerful oil ministry and the central bank. The changes come less than two weeks after Saudi Arabia said it would wean itself off oil, which still provides the vast majority of government revenue even though prices have fallen. We imagine finance chiefs of Saudi Arabian Oil Co. and Tadawul, the country’s stock exchange, aren’t thrilled with the last-minute set of questions they’ll likely have to field on the road shows for their planned initial public offerings.

Meanwhile, the dollar is hovering around a one-year low against a basket of currencies. That could mean good news for U.S. multinationals, whose overseas revenue and earnings have been hamstrung when translating weak foreign-currency sales back into dollars. But that will depend on how well companies hedged currencies, both naturally—building where you sell, daily cash sweeps and demanding payment in dollars, for example—and synthetically through hedging contracts. Perhaps more importantly for CFOs, if second-quarter results are helped—or not badly hurt—because of the dollar, do you lead with that benefit? Companies have been quick to point out how badly their numbers have suffered as global currencies have plunged against the greenback, so it will be interesting to see if they are candid about the reverse should the situation prove tonic to the income statement.

From the CFO Journal's Morning Ledger on May 4, 2016

Tesla is heading straight for a speed trap
On the supposed long-term road to success, Tesla Motors Inc. bulls face a harsh short-term reality, likely evident in Wednesday’s quarterly results, writes Steven Russolillo for Ahead of the Tape. Tesla has reported years of losses and has burned through billions of dollars. The hope is that the new, shiny and more affordable Model 3, unveiled earlier this year but not expected to ship until late 2017, will reverse those trends.

Jensen Comment
This begs the question of how Amazon kept being favored by investors in the face of years of reported losses and burning of cash. Amazon did this because its enormous investments were putting it ahead of literally all competitors in both prices and services. Tesla has been doing pretty well on in terms of innovations, but it is not doing so well in terms of pricing and services. For example, the Chevy Bolt is much cheaper and will be sold and serviced by dealers in most of the entire free market world. Japanese and German automakers are poised to become extremely competitive at the high end market.

I think it's a fact. Tesla is heading for a speed trap where it will not be competitive in terms of pricings or services. Being first in the market does not always mean you will be another Amazon.

From the CFO Journal's Morning Ledger on May 4, 2016

The hottest metric in finance: ROIC
A metric known as return on invested capital is all the rage, used by companies such as General Motors Co. to placate activist investors. For ROIC lovers, which also include traditional stock pickers, the measure is the best way to distill what activists view as the most critical skill of management: how they allocate capital.

Bob Jensen's neglected threads on financial ratios ---
http://faculty.trinity.edu/rjensen/bookbob1.htm#010303FinancialRatios

From the CFO Journal's Morning Ledger on May 4, 2016

MetLife to pay $25 million Finra penalty over variable annuities
MetLife Inc. misled tens of thousands of customers about a product retirees seek out for safety, according to regulators, who levied a near-record $25 million fine against it. In a rare black eye for MetLife, a brokerage industry regulator said MetLife failed to help customers properly compare old and new versions of variable annuities, leading some clients to give up versions of products that were cheaper and had more-generous features than new ones.

Bob Jensen's Fraud Updates ---
 http://faculty.trinity.edu/rjensen/FraudUpdates.htm 

From The Wall Street Journal Accounting Weekly Review on April 29, 2016

What Is Prince's Legacy Worth? The Tax Man Wants to Know
by: Richard Rubin
Apr 28, 2016
Click here to view the full article on WSJ.com

TOPICS: Estate Tax, Valuation

SUMMARY: After the doves cry, there's IRS Form 706. Estate-tax attorneys for Prince must attempt to put a precise financial value on his name, image and likeness. That Prince-ness could make him one of America's top-earning deceased celebrities, and it may be one of his estate's largest assets-subject to a 40% federal tax. The Internal Revenue Service is used to putting price tags on tradeable assets and is well-trained in taking existing revenue streams and capitalizing them into a value. It is much trickier to divine the worth of a unique niche business-marketing Prince's legacy-that doesn't really exist yet. There is no real precedent for Prince. The closest thing is the Michael Jackson estate-tax battle, headed for trial in the U.S. Tax Court. The toughest issue won't be Prince's real estate, song royalties or his unreleased trove of recordings, though that could all be contentious. It isn't even the future profits from his name, image and unpronounceable glyph, which the government will tax as income as it is earned. The estate-tax challenge is setting a cumulative value on Prince's profit potential on the day he died.

CLASSROOM APPLICATION: This is an excellent article for use when covering estate tax and for asset valuation of image and likeness.

QUESTIONS: 
1. (Introductory) What is the estate tax? What is the top estate tax rate?

2. (Advanced) Why are estates taxed? What estates are taxable?

3. (Advanced) What are the tax reporting requirements for an estate? What tax form is required? When is it due? What must be reported?

4. (Advanced) What are the special estate tax issues facing Prince's estate? How is his estate different from most estates? How is his case unique even for a celebrity?

5. (Advanced) What is precedent? Why is there no precedent for Prince's estate? What are some close cases? Why are they close?

6. (Advanced) What is asset valuation? What are the challenges involved with valuation of some of Prince's assets? What parts of the estate will be most challenging to value? Why?

7. (Advanced) How are these cases ultimately resolved? How long might that take?

8. (Advanced) What estate tax planning could Prince have done to minimize estate taxes?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"What Is Prince's Legacy Worth? The Tax Man Wants to Know," by Richard Rubin ,The Wall Street Journal, April 28, 2016 ---
http://www.wsj.com/articles/what-is-princes-legacy-worth-the-tax-man-wants-to-know-1461784686?mod=djem_jiewr_AC_domainid

After the doves cry, there’s IRS Form 706.

Estate-tax attorneys for Prince, who died last week, must attempt to put a precise financial value on his name, image and likeness.

That Prince-ness could make him one of America’s top-earning deceased celebrities, and it may be one of his estate’s largest assets—subject to a 40% federal tax.

The Internal Revenue Service is used to putting price tags on tradeable assets and is well-trained in taking existing revenue streams and capitalizing them into a value. It is much trickier to divine the worth of a unique niche business—marketing Prince’s legacy—that doesn’t really exist yet.

There is no real precedent for Prince. The closest thing is the Michael Jackson estate-tax battle, headed for trial in the U.S. Tax Court in February.

Mr. Jackson’s estate initially said his image and likeness were worth $2,105 when he died in 2009, near the nadir of a career dragged down by scandal. The IRS, however, said the King of Pop’s posthumous image was worth $434 million.

Mr. Jackson’s total estate, according to court records, tops $1 billion under the original IRS estimate, while the estate first said it was just $7 million. The two sides have resolved some valuation disputes, but the name-and-likeness fight is what the estate-tax bar is following closely.

“This could be very ground-breaking,” said Jonathan Blattmachr, a retired estate-tax lawyer from Milbank, Tweed, Hadley & McCloy LLP. A victory for the IRS, he said, could spur celebrities to alter how their estate plans handle their image rights.

Beyond hundreds of millions of dollars for the U.S. government, Mr. Jackson’s case also has tax-planning consequences for any actor, musician, politician or athlete famous enough to earn beyond the grave.

The dilemma has been tripping up celebrity estates since at least 1994, when a federal court decided a dispute involving V.C. Andrews, author of the novel “Flowers in the Attic.” The IRS said Ms. Andrews’s name was worth $1.2 million.

That was based in part on her publisher’s ability to produce ghostwritten books after her 1986 death, discounted for the risk that the ghostwriter would flub the task. The court, looking at what a buyer could have known before the ghostwritten books were successful, set the value at $703,500.

Still, there are virtually no rules for the IRS or taxpayers to follow, said Mr. Blattmachr. He has suggested exempting the value of names and likenesses from the estate tax but taxing future earnings as ordinary income, not capital gains.

“Michael Jackson will be different from Prince who will be different from Madonna,” Mr. Blattmachr said. “It’s horribly speculative as to what the value is.”

Continued in article

From The Wall Street Journal Accounting Weekly Review on April 29, 2016

CFOs with CPAs Skimp in Growth Industries
by: Richard Teitelbaum
Apr 21, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Careers, CFO, Chief Financial Officer

SUMMARY: CFOs with accounting backgrounds in high-growth industries invest less in research and development, make lower capital expenditures and are less likely to obtain external financing for their businesses, according to a paper to be published in an upcoming issue of the Journal of Accounting and Economics. It shows that such "accounting CFOs," CPAs, or those who worked previously as an auditor or controller before their appointments, are more effective at controlling costs at low-growth industries than those without such backgrounds.

CLASSROOM APPLICATION: This is an interesting article for its content, but also to raise the issue of career opportunities for accounting majors.

QUESTIONS: 
1. (Introductory) What is a CFO? What are the duties of that position?

2. (Advanced) How are accountants uniquely qualified for CFO positions? What backgrounds, skills, and experience could be beneficial for a person in the CFO position?

3. (Advanced) How does the article make a distinction between low-growth and high-growth industries? What are the differences in CFO actions and requirements for each of those categories?

4. (Advanced) What are some other career paths for accounting majors? What positions are not specifically accounting, but a candidate with an accounting background would be valuable?

Reviewed By: Linda Christiansen, Indiana University Southeast

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Three Stubborn Types of Mistakes Dog Financial Reporting
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"CFOs with CPAs Skimp in Growth Industries," by Richard Teitelbaum ,The Wall Street Journal, April 21, 2016 ---
http://blogs.wsj.com/cfo/2016/04/21/cfos-with-cpas-skimp-in-growth-industries/?mod=djem_jiewr_AC_domainid

Certified public accountants may be hazardous to your company’s growth.

CFOs with accounting backgrounds in high-growth industries invest less in research and development, make lower capital expenditures and are less likely to obtain external financing for their businesses, according to a paper to be published in an upcoming issue of the Journal of Accounting and Economics.

It shows that such “accounting CFOs,” CPAs, or those who worked previously as an auditor or controller before their appointments, are more effective at controlling costs at low-growth industries than those without such backgrounds.

The study looked at how the two kinds of CFOs performed in high-growth industries, such as pharmaceuticals, electronics, and business services as well as low-growth industries, such as transportation, machinery and petroleum.

The upshot was that companies with accounting CFOs tended to be more risk averse. CFOs with accounting backgrounds in high-growth industries on average were associated with a 7.4% lower investment expenditure at their company and a 14.6% lower likelihood of financing. That might hurt growth.

Professor Rani Hoitash of Bentley University, his younger brother Udi Hoitash, an associate professor of Northeastern University, and assistant professor Ahmet Kurt of Suffolk University, examined a sample size of about 1,800 CFOs, looking at how they performed between 2000 and 2010.

With data more than five years old, Mr. Kurt said he suspects boards may have already shifted CFO hiring practices. “Companies are making some changes,” he said. “Some firms are realizing that accounting CFOs are not working for them.”

In the low-growth industries, accounting CFOs showed a tendency towards greater cost efficiency. When revenues were increasing in such industries, according to the paper, the accounting CFOs showed a 19% increase in cost efficiency. “It’s associated with their conservative nature,” said Mr. Kurt in an interview. “They hold the costs down when sales are growing.”

In low-growth industries, accounting CFOs were not linked with investment expenditures, external financing or cash holdings, according to the study.

Mr. Kurt said the study built on previous research that showed accounting CFOs were linked to fewer restatements at the companies they work at, as well as fewer discretionary accruals. The key was distinguishing between the kinds of businesses the CFOs were heading, because each requires different skillsets. “When we sliced the sample into high-growth and low-growth it was a bit of a surprise,” he said.

The study doesn’t weigh in on whether the accounting CFOs’ tendencies toward risk aversion is good or bad. “This may increase firm value in some cases and lower it in others,” it reads.

From The Wall Street Journal Accounting Weekly Review on April 29, 2016

Questions to Ask When Using a Non-GAAP Measure
by: Deloitte CFO Journal Editor
Apr 22, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, SEC

SUMMARY: Press coverage and Securities and Exchange Commission (SEC) scrutiny of non-GAAP measures have exploded recently. The intense focus on these measures results from their increased use and prominence, the nature of the adjustments and the progressively large difference between the amounts reported for GAAP and non-GAAP measures. Although non-GAAP measures can be meaningful and provide valuable information about what is important to management, the SEC is concerned that the measures may be confusing to investors and analysts. This article offers a list of questions management should consider when using non-GAAP measures.

CLASSROOM APPLICATION: This article is appropriate when discussing non-GAAP financial reporting in financial accounting classes.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? Who and what entities use GAAP?

2. (Advanced) What in non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) If a company chooses to report non-GAAP financial results, must it also report financial information on a GAAP basis? Why or why not?

4. (Advanced) What is the purpose of the questions listed in the article? Who should be answering these questions? Why are these questions valuable? What are some of the benefits for users of the financial statements?

5. (Advanced) What is the SEC? What is its area of authority? How is it involved with non-GAAP reporting? Should the SEC regulate and/or restrict non-GAAP reporting?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
SEC Enforcement, Non-GAAP Measures: Regulatory Considerations
by Deloitte Risk Journal Editor
Apr 13, 2016
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by Dave Michaels and Michael Rapoport
Mar 17, 2016
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Non-GAAP Numbers May Confuse Investors: SEC Chair
by Richard Teitelbaum
Dec 09, 2015
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U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theor Francis and Kate Linebaugh
Dec 15, 2015
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S&P 500 Earnings: Far Worse Than Advertised
by Justine Lahart
Feb 25, 2016
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Blowing the Froth Off Tech Earnings
by Miriam Gottfried
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Securities Rules Help to Close The Earnings Reports GAAP
by Jonathan Weil
Apr 25, 2003
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Investing Red Flag: Pro Forma Results and Share-Price Performance
by Justine Lahart
Mar 25, 2016
Online Exclusive

 

"Questions to Ask When Using a Non-GAAP Measure," by Deloitte CFO Journal Editor" ,The Wall Street Journal, April 22, 2016 ---
http://deloitte.wsj.com/cfo/2016/04/22/questions-to-ask-when-using-a-non-gaap-measure/?mod=djem_jiewr_AC_domainid

. . .

What to Ask

As companies prepare earnings releases and periodic filings for first-quarter 2016 and future reporting periods, management should consider the following questions when using a non-GAAP measure:

1. Is the measure misleading or prohibited? While such instances have been infrequent, the SEC has objected to the use of non-GAAP measures when they are potentially misleading. For example, in one comment letter, the SEC objected to a non-GAAP measure that excluded certain marketing expenses that were considered normal recurring operating cash expenditures.

2. Is the measure presented with the most directly comparable GAAP measure and with no greater prominence than the GAAP measure?

3. Is the measure appropriately defined and described, and clearly labeled as non-GAAP?

4. Does the reconciliation between the GAAP and non-GAAP measure clearly label and describe the nature of each adjustment, and is each adjustment appropriate?

5. Is there transparent and company-specific disclosure of the substantive reason(s) why management believes that the measure is useful for investors and the purpose for which management uses the measure? Mr. Schnurr indicated in his speech that companies should question “why, in contrast to the GAAP measure, the non-GAAP measure is an appropriate way to measure the company’s performance and is useful to investors.”

6. Is the measure consistently prepared from period to period in accordance with a defined policy, and is it comparable to that of the company’s peers?

7. Is the measure balanced (i.e., it adjusts not only for nonrecurring expenses but also for nonrecurring gains)?

8. Does the measure appropriately focus on material adjustments and not include immaterial adjustments that would not seem to be a focus of management?

9. Do the disclosure controls and procedures address non-GAAP measures?

10. Is the audit committee involved in the oversight of the preparation and use of non-GAAP measures?

For a summary of the disclosure requirements and rule prohibitions related to non-GAAP measures, see the appendix in the full Heads Up report

From The Wall Street Journal Accounting Weekly Review on April 29, 2016

Mystery on Wall Street: How P&G Will Deliver on Cost Cuts
by: Sharon Terlep
Apr 25, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, Business Segments, Managerial Accounting, Financial Statement Analysis, , Business Segments, Financial Reporting, Managerial Accounting

SUMMARY: Procter & Gamble Co. is slashing costs and commanding higher prices for staples from shaving cream to paper towels. The maker of Gillette razors and Pampers diapers reported higher profit for its fiscal third quarter ended in March and improvement in a core sales metric. Even so, sales volume declined across nearly all of its businesses. P&G, which has struggled for years to accelerate sales growth, said economic woes in emerging markets coupled with the company's moves to sell off dozens of brands further slowed sales the past quarter. Procter & Gamble Co.'s new boss has promised investors $10 billion in belt-tightening, as the world's largest consumer-goods company tries to adjust to a future of slower growth.

CLASSROOM APPLICATION: This article and the related article are appropriate for financial and managerial accounting classes.

QUESTIONS: 
1. (Introductory) What challenges has P&G been facing in recent years? What has company management stated are its plans for the future of the company?

2. (Advanced) What is P&G's current financial condition? What financial ratios and indicators are being used by management and investors to analyze the company's position? What are those metrics revealing about the company's condition?

3. (Advanced) What accounting tools can management use to address investor concerns? Which of these tools are related to financial accounting, and which are more closely related to managerial accounting?

4. (Advanced) What is forecasting? What has the company forecasted for the coming quarters? How can forecasting be used to manage investor concerns?

5. (Advanced) What is a business segment? What has P&G been doing regarding its various business segments? Which segments are successful; which are (or were) struggling? What business segments has the company chosen to keep, and which has it sold? Why? How is the company likely using segment analysis to make these decisions?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
P&G Posts Higher Profit, but Sales Volume Declines Across Most Businesses
by Sharon Terlep
Apr 26, 2016
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"Mystery on Wall Street: How P&G Will Deliver on Cost Cuts," by Sharon Terlep ,The Wall Street Journal, April 25, 2016 ---
http://www.wsj.com/articles/mystery-on-wall-street-how-p-g-will-deliver-on-cost-cuts-1461531632?mod=djem_jiewr_AC_domainid

Procter & Gamble Co. ’s new boss has promised investors $10 billion in belt-tightening, as the world’s largest consumer-goods company tries to adjust to a future of slower growth.

The trouble is, Wall Street doesn’t know how he will get there. “People are uncertain as to how this is being accounted for,” said UBS analyst Stephen Powers. “It is not written down on any slide anywhere, and they did not quantify any bucket from which the money is supposed to come from.”

At his first public meeting with investors in February, P&G Chief Executive David Taylor said he would follow a recently completed $10 billion cost-cutting plan with a program that would pare another $10 billion of costs during the next five years.

When it launched its previous round of cost cuts in 2012, P&G laid out specifics: $3 billion would come from overhead reductions, $6 billion from reducing the cost of goods sold and $1 billion from its marketing budget. The company itemized cost-reduction targets for transportation, warehousing and research and development. P&G ended up eliminating more than 20,000 jobs.

This time around, executives gave few details. Chief Financial Officer Jon Moeller said at the February meeting that P&G would be able to squeeze more out of its supply chain, and there was “room to improve” in trimming the $1.5 billion a year it is spending on advertising agencies. He also said the company plans to shift more toward digital ads to bring in additional savings. P&G said job cuts would account for just a small part of the savings.

At the same time, Mr. Moeller warned investors not to expect the new cost-cutting campaign to yield a major improvement in the company’s profit margins. “Margins will continue to grow, but not at as high levels.” he said.

P&G declined to discuss its cost-cutting plan, which is expected to spark questions from investors and analysts Tuesday when the Cincinnati-based company reports its latest quarterly results. Analysts are expecting a revenue decline of 13% and profit to tick higher following the divestiture of several brands.

The maker of Gillette razors and Pampers diapers still lags behind nimbler rivals Kimberly-Clark Corp. and Colgate-Palmolive Co. , which are grabbing market share, particularly in emerging markets such as China and in key categories like diapers.

In February, P&G cut its revenue growth expectations for the fiscal year ending in June to between 2% and 3%, down from 3% to 4%. Earlier this month, the company said it would boost its quarterly dividend by 1%, the smallest increase since at least 1977.

Mr. Taylor, a 36-year P&G veteran before becoming CEO in November, has described the company’s recent performance as “unacceptable,” even though it cut billions of dollars in costs through layoffs, the elimination of 40% of its ad agencies and the sale of several businesses, including Duracell batteries and a raft of beauty brands.

In a private session with Messrs. Taylor and Moeller immediately following the February presentation, analysts pressed the executives to break down the cost-cutting targets in its latest plan, but they left without concrete answers, according to analysts who attended the meeting.

Research notes to investors recapping the event either questioned or barely mentioned P&G’s plan. Goldman Sachs analyst Jason English said the company put forth “various new tactics,” but, “none that seemed needle-moving for a company of P&G’s size.”

“For a company that used to say it was very lean, we were surprised to see another $10 billion of cost savings being announced,” said Bernstein Research analyst Ali Dibadj, in a recent email. The analyst has called for a breakup of P&G.

Continued in article

From The Wall Street Journal Accounting Weekly Review on April 29, 2016

Sheltering Foreign Profits From U.S. Taxes Is No Big Feat
by: Vipal Monga
Apr 26, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Corporate Taxation, Financial Accounting, International Business

SUMMARY: While most countries tax only the money companies earn inside their borders, the U.S. taxes profits that American companies make world-wide at 35%, minus any foreign taxes paid. Still, accounting regulations and auditing standards make it relatively easy for U.S.-based businesses to avoid taxes on their overseas profits. All those companies have to do is say the money is "indefinitely reinvested" abroad. Using that phrase allows them to avoid deducting U.S. taxes on those funds from their overall earnings. That can save them billions of dollars, fattening their bottom line.

CLASSROOM APPLICATION: This article features the intersection between financial accounting, auditing, and taxation for American companies doing business in other countries.

QUESTIONS: 
1. (Introductory) What is the tax treatment of corporate profits earned outside the U.S. by American companies? Why?

2. (Advanced) How does U.S. corporate tax law differ from the law in most countries? What issues can that create? How are corporations responding? In what types of tax planning do they participate?

3. (Advanced) How do accounting regulations make it relatively easy for U.S.-based businesses to avoid taxes on their overseas profits?

4. (Advanced) How do auditing standards contribute to this type of tax planning?

5. (Advanced) For purposes of this area of law, what are reinvested earnings? What is the difference in treatment between reinvested earnings and other earnings?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
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by Vipal Monga
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"Sheltering Foreign Profits From U.S. Taxes Is No Big Feat," by Vipal Monga ,The Wall Street Journal, April 26, 2016 ---
http://www.wsj.com/articles/sheltering-foreign-profits-from-u-s-taxes-is-no-big-feat-1461627831?mod=djem_jiewr_AC_domainid

The U.S. government chalked up a big victory this month when it stopped pharmaceutical giant Pfizer Inc. from merging with Allergan PLC and shifting its address overseas to avoid U.S. taxes.

But there is at least one thing the Treasury Department still can’t do: force Pfizer to book taxes on $80 billion in foreign profits the New York-based company has socked away overseas.

While most countries tax only the money companies earn inside their borders, the U.S. taxes profits that American companies make world-wide at 35%, minus any foreign taxes paid.

Still, accounting regulations and auditing standards make it relatively easy for U.S.-based businesses to avoid taxes on their overseas profits.

All those companies have to do is say the money is “indefinitely reinvested” abroad. Using that phrase allows them to avoid deducting U.S. taxes on those funds from their overall earnings. That can save them billions of dollars, fattening their bottom line.

What counts as reinvestment? “It’s fair to say the bar is very low,” said Michael Minihan, a principal at Dallas-based tax consulting firm Ryan LLC.

S&P 500 companies including Pfizer, Apple Inc. and Microsoft Corp. indefinitely put away a record $2.3 trillion of cumulative foreign earnings by the end of 2015, according to Credit Suisse Group AG , up 11% from 2014 and more than the gross domestic product of Italy.

Under U.S. accounting rules, companies have to persuade their auditors that they are justified in designating foreign earnings as permanently reinvested. But the evidence doesn’t have to be ironclad. It can include plans for new overseas factories, prospective acquisition sprees, or restrictions in loan agreements that prevent them from transferring money to the U.S.

“It’s a very big loophole, and I think companies use it liberally,” said Tony Sondhi, a financial consultant and member of the Emerging Issues Task Force of the Financial Accounting Standards Board, which sets U.S. accounting rules.

The companies and their auditors also can take into account the “tax consequences” of any decision to bring money back to the U.S. or reinvest overseas, according to an accounting guide published by accounting firm PricewaterhouseCoopers. They can justify parking the money overseas to avoid paying U.S. taxes by arguing that taxes are too high, said Ryan’s Mr. Minihan.

Continued in article

From the Wall Street Journal Accounting Weekly Review on May 5, 2016

Happy Anniversary! The Estate Tax Turns 100
by: Laura Saunders
Apr 30, 2016
Click here to view the full article on WSJ.com

TOPICS: Estate Tax

SUMMARY: In 1916, as World War I raged in Europe, Congress wanted to boost U.S. revenues in case America joined the fighting, so lawmakers voted for a new tax on a person's assets at death. This levy affected fewer than 1% of Americans who died and raised less than 1% of federal revenue in 1917. So began the modern U.S. estate tax. Today, the tax comes in the form of owing the government up to 40% of your assets at death, above an exemption of $5.45 million per person. The estate tax-together with the gift tax, which applies to asset transfers made during life-contributed an average of 1.4% annually to total federal revenues between 1950 and 2014.

CLASSROOM APPLICATION: This article about the 1000 years of the estate tax is appropriate for coverage of the estate tax class. It could be useful for a discussion of whether it should exist and how to assist clients with estate tax planning.

QUESTIONS: 
1. (Introductory) What is the estate tax? How is it calculated? What are the tax rates?

2. (Advanced) What is the history of the estate tax? Why was it enacted? How has the estate tax changed over the past 100 years?

3. (Advanced) What is the extent of the estate tax? How many people are affected? What funds are raised by the estate tax?

4. (Advanced) Should the estate tax be repealed? Why or why not?

5. (Advanced) What is a stepped-up basis? How is it related to the estate tax? How would the step-up in basis be affected by the repeal of the estate tax?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Happy Anniversary! The Estate Tax Turns 100," by: Laura Saunders, The Wall Street Journal, April 30, 2016 ---
http://www.wsj.com/articles/happy-anniversary-the-estate-tax-turns-100-1461945166?mod=djem_jiewr_AC_domainid

In 1916, as World War I raged in Europe, Congress wanted to boost U.S. revenues in case America joined the fighting, so lawmakers voted for a new tax on a person’s assets at death. This levy affected fewer than 1% of Americans who died and raised less than 1% of federal revenue in 1917.

In an editorial at the time, The Wall Street Journal called the tax “frankly a class discrimination.” But most lawmakers who voted in favor of the levy, which had a top rate of 10% and an exemption of $50,000 (about $1 million in current dollars), saw it as a reasonable way to raise revenue. Opponents thought such levies should be left to the states.

So began the modern U.S. estate tax. Today, the tax comes in the form of owing the government up to 40% of your assets at death, above an exemption of $5.45 million per person.

One hundred years later, experts across the political spectrum continue to debate if it should remain. While important details of the estate tax, such as rates and exemptions, have changed over the years, some fundamentals haven’t.

The idea of such a tax wasn’t new: The ancient Egyptians and the Romans had versions of it, and Congress had imposed temporary taxes at death to help pay for a conflict in 1797, the Civil War and the Spanish-American War.

Unlike the earlier levies, the 1916 estate tax stuck.

As was true in 1917, the estate tax has seldom raised much money compared with other levies. According to Congress’s Joint Committee on Taxation, the estate tax—together with the gift tax, which applies to asset transfers made during life—contributed an average of 1.4% annually to total federal revenues between 1950 and 2014. That’s a far cry from the average of 44% the individual income tax contributed annually to the total for the same period.

The U.S. estate tax has never affected many people, either. According to Paul Caron, an estate-tax specialist who teaches at Pepperdine Law School, it often has applied to fewer than 2% of those dying each year.

Continued in article

From the Wall Street Journal Accounting Weekly Review on May 5, 2016

SEC Cracks Down on Novel Earnings Measures That Boost Profits
by: Dave Michaels
Apr 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, SEC

SUMMARY: The Securities and Exchange Commission is stepping up its scrutiny of companies' homegrown earnings measures, signaling it plans to target firms that inflate their sales results and employ customized metrics that stray too far from accounting rules. The move to intensify oversight signals that regulators have grown weary of the widespread use of some adjusted measures, which often result in a rosier view of profits than what is reported under generally accepted accounting principles, or GAAP. The campaign comes after SEC Chairman Mary Jo White said that the agency could use its rule-making powers to rein in non-GAAP reporting.

CLASSROOM APPLICATION: This article is appropriate when discussing non-GAAP financial reporting in financial accounting classes.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What in non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) What is the SEC? What is its area of authority? Why has the SEC chosen to get involved with non-GAAP reporting? What is the agency planning to do?

4. (Advanced) If a company chooses to report non-GAAP financial results, must it also report financial information on a GAAP basis? Why or why not?

5. (Advanced) Should the SEC regulate and/or restrict non-GAAP reporting? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"SEC Cracks Down on Novel Earnings Measures That Boost Profits," by Dave Michaels, The Wall Street Journal, April 29, 2016 ---
http://www.wsj.com/articles/sec-cracks-down-on-novel-earnings-measures-that-boost-profits-1461870107?mod=djem_jiewr_AC_domainid

The Securities and Exchange Commission is stepping up its scrutiny of companies’ homegrown earnings measures, signaling it plans to target firms that inflate their sales results and employ customized metrics that stray too far from accounting rules.

The move to intensify oversight signals that regulators have grown weary of the widespread use of some adjusted measures, which often result in a rosier view of profits than what is reported under generally accepted accounting principles, or GAAP. The campaign comes after SEC Chairman Mary Jo White said in March that the agency could use its rule-making powers to rein in non-GAAP reporting.

Regulators plan to push back on companies that accelerate the recognition of revenue that is supposed to be deferred into the future, said Mark Kronforst, chief accountant of the SEC’s corporation finance division. Firms that sell their product on a subscription model, for instance, are required to book the revenue as they deliver the goods or services. But some firms are using non-GAAP measures that assume all sales are recorded as soon as customers are billed, which adds revenue to their books earlier than what is allowed under GAAP, Mr. Kronforst said.

“The point is, now the company has created a measure that no longer reflects its business model,” he said. “We’re going to take exception to that practice.”

In the coming months, the agency plans to make public letters to companies that question the practice of booking revenue on an accelerated basis. Mr. Kronforst, who also spoke Thursday at a Northwestern University legal conference about the issue, declined to name them.

One company that recognizes revenue early under a non-GAAP approach is Microsoft Corp. That move boosted its non-GAAP measure of earnings per share in the first quarter of 2016 by about 32% over its GAAP result. The company’s latest earnings announcement said the deferred revenue was largely related to its rollout of its Windows 10 operating system. Microsoft spokeswoman Cameron Bays declined to comment.

The SEC’s rules allow companies to report profit figures that don’t comply with GAAP, provided they don’t obscure the official numbers and reconcile the non-GAAP numbers to the equivalent GAAP figure.

Firms say investors value the adjusted measures because they don’t count unusual or noncash costs, resulting in measures that better reflect future operating results. Technology firms such as Facebook Inc. and other Silicon Valley brand names are particularly devoted users of non-GAAP formulas, reporting numbers that strip out hundreds of millions of dollars of stock compensation.

But the SEC has recently seen companies report adjusted earnings that go further. In one instance, a company uses different accounting assumptions, such as changing the lifespan of equipment that must be expensed over time. Stretching out the useful life of machinery typically results in lower annual costs and boosts profits.

Mr. Kronforst said regulators also plan to challenge companies that report their adjusted earnings on a per-share basis. The results are often higher than per-share GAAP earnings and look too much like measures of cash flow, which decades-old accounting rules prevent from being presented on a per-share basis, Mr. Kronforst said. That is because investors could confuse cash flow with actual earnings, which truly represent the amounts that could be distributed to investors.

“We are going to look harder at the substance of what companies are presenting, rather than what the measures are called,” he said.

Sarah McVay, an accounting professor at the University of Washington, said the SEC should target instances in which companies use non-GAAP metrics that make results look better, but ditch the metrics when they would make earnings look worse. Ms. McVay’s 2014 paper, co-written with colleagues at the University of Washington and University of Georgia, found that 27% of companies disclosed non-GAAP earnings that excluded one-time losses, but didn’t report the adjusted figures when they had fleeting gains.

“I’m a little disappointed to hear those are what they’re going after,” she said. “It seems like there are more opportunistic things happening.”

SEC officials say they often push back on instances in which companies “cherry-pick” non-GAAP measures that only serve to put the company in the best light.

Continued in  article

From the Wall Street Journal Accounting Weekly Review on May 5, 2016

Cloud Unit Pushes Amazon to Record Profit
by: Greg Bensinger
Apr 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Business Segments, Financial Statement Analysis, Managerial Accounting

SUMMARY: Amazon.com Inc. delivered its most profitable quarter ever, topping last year's record holiday period, thanks to surging sales from its lucrative cloud-computing business. Despite a persistent reputation as a profit miser, Amazon turned in its fourth straight moneymaking quarter and expanded margins in its core retail business, as well as the Amazon Web Services division that rents computing power to other companies. Shares in the Seattle online retailer surged more than 12% after hours as the company's results far outpaced analyst estimates. Superlatives abound: Its 28% sales growth was the highest since the second quarter of 2012, while its operating margin of 3.7% was its best in more than five years.

CLASSROOM APPLICATION: This article offers a mini-case study with opportunities for analysis in financial and managerial accounting, as well as financial statement analysis and business strategy.

QUESTIONS: 
1. (Introductory) What are the results of Amazon's more recent quarter? What is the overall view of Amazon's financial performance?

2. (Advanced) What is segment analysis? What does segment analysis reveal about Amazon? What are Amazon's various business segments? Which segments are profitable? Should any segments be eliminated?

3. (Advanced) The article states Amazon has a reputation has a profit miser. What does that mean? Why does the company have that reputation? What is the company's strategy in that regard? Has it been successful or is it problematic?

4. (Advanced) What are Amazon's forecasts for the future of the company and its business segments?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Cloud Unit Pushes Amazon to Record Profit," by Greg Bensinger, The Wall Street Journal, April 29, 2016 ---
http://www.wsj.com/articles/amazon-reports-surge-in-profit-1461874333?mod=djem_jiewr_AC_domainid

Amazon Inc. on Thursday delivered its most profitable quarter ever, topping last year’s record holiday period, thanks to surging sales from its lucrative cloud-computing business.

Despite a persistent reputation as a profit miser, Amazon turned in its fourth straight moneymaking quarter and expanded margins in its core retail business, as well as the Amazon Web Services division that rents computing power to other companies.

Shares in the Seattle online retailer surged more than 12% after hours as the company’s results far outpaced analyst estimates.

Superlatives abound: Its 28% sales growth was the highest since the second quarter of 2012, while its operating margin of 3.7% was its best in more than five years.

The cash cow driving these figures is AWS, a decade-old operation that pioneered the business of hosting computer servers for companies like Netflix Inc. and the Central Intelligence Agency. AWS has become the go-to provider for a generation of startups, government agencies and other corporations seeking to offload computing power to Amazon’s thousands of servers.

The cloud division’s sales rose 64% to $2.57 billion. While that is less than one-tenth of Amazon’s overall revenue, AWS generated about 67% of the company’s operating income in the quarter.

In other words, AWS is supporting Amazon’s sprawling, 20-year-old business that spends billions of dollars in an effort to upend traditional brick-and-mortar retail by providing customers nearly everything imaginable in as quickly as one hour.

Chief Executive Jeff Bezos has said he expects AWS to reach $10 billion in sales this year, even as Microsoft Corp., Alphabet Inc. and others ramp up pressure. AWS’s operating margin was 28%.

Continued in article

From the Wall Street Journal Accounting Weekly Review on May 5, 2016

FASB Approves Move Requiring Banks to Book Loan Losses More Quickly
by: Michael Rapoport
Apr 28, 2016
Click here to view the full article on WSJ.com

TOPICS: FASB, Financial Accounting, Financial Reporting, Reserves,

SUMMARY: The Financial Accounting Standards Board, which sets accounting rules for U.S. companies, agreed in principle to require U.S. banks to book losses on soured loans much more quickly, a move that would force banks to set aside more in reserves for failed loans and thus cut into their profits. Banks will have to record all losses they project over the lifetime of their loans as soon as the loans are made. That is sharply different from the current approach, in which banks wait to record losses until there is evidence a loss has actually occurred. Banks that are publicly traded would have to adopt the FASB's change beginning in 2020, with privately held banks following in 2021, though any bank could choose to implement the new approach as early as 2019.

CLASSROOM APPLICATION: This article would be appropriate for financial accounting classes when discussing the topics of reserves or the FASB.

QUESTIONS: 
1. (Introductory) What is FASB? What is its area of authority?

2. (Advanced) What rule did the FASB approve regarding banks? What are the reasons for this rule?

3. (Advanced) What effects could this new rule have on each of the financial statements? How could it impact the business of the banks? How could in impact bank stock prices?

4. (Advanced) What are the effective dates for the implementation of the new rule? Why aren't the rules required to be implemented sooner?

5. (Advanced) What are the rules for non-U.S. banks? How are they similar to the U.S. rules? How do they differ?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Banks Outside U.S. Get New Rules on Accounting for Bad Loans
by Michael Rapoport
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"FASB Approves Move Requiring Banks to Book Loan Losses More Quickly," by Michael Rapoport, The Wall Street Journal, April 28, 2016 ---
http://www.wsj.com/articles/fasb-approves-move-requiring-banks-to-book-loan-losses-more-quickly-1461780911?mod=djem_jiewr_AC_domainid

Accounting rule makers on Wednesday agreed in principle to require U.S. banks to book losses on soured loans much more quickly, a move that would force banks to set aside more in reserves for failed loans and thus cut into their profits.

The long-discussed change approved by the Financial Accounting Standards Board, which sets accounting rules for U.S. companies, is intended to require banks to be more conservative and disclose more about the risks of their loans, in the wake of problems that surfaced during the financial crisis.

Banks will have to record all losses they project over the lifetime of their loans as soon as the loans are made. That is sharply different from the current approach, in which banks wait to record losses until there is evidence a loss has actually occurred. Many observers believe the go-slower approach led banks to record losses too little and too late during the crisis, leaving investors in the dark about the banks’ true condition.

The move is expected to force banks to significantly boost their loan-loss reserves, reducing profits. Estimates vary widely as to how much, but the Office of the Comptroller of the Currency estimated in 2013 that the FASB’s change, which it had proposed in 2012, would lead banks to boost reserves by 30% to 50% industrywide.

Banks that are publicly traded would have to adopt the FASB’s change beginning in 2020, with privately held banks following in 2021, though any bank could choose to implement the new approach as early as 2019.

The move “will significantly improve this area of financial reporting” and lead to banks providing information “that better meets the needs of investors,” FASB Chairman Russell Golden said.

Wednesday’s move authorizes the FASB’s staff to draft a final version of the new rule, which is subject to ratification by the board and could undergo technical changes. The board is expected to formally issue the new rule in June.

Banks generally haven’t resisted the idea that loan losses should be booked more quickly, but the FASB’s change has been criticized by some banks, especially smaller community banks, who argued it would be too costly and burdensome for them and could deter them from extending new loans. The FASB has tried to address some of the banks’ concerns, saying community banks could rely on methods already at their disposal to project future loan losses, instead of having to use the expensive, complex computer models they feared they’d have to use.

In a statement Wednesday, the American Bankers Association said it still believes the costs for most banks “will be much greater than what FASB estimates, because addressing these changes on an ongoing basis will require more complex and controlled systems.”

The International Accounting Standards Board, the FASB’s global counterpart that sets accounting rules for most countries outside the U.S., made a similar change in 2014 that will affect non-U.S. banks beginning in 2018. The IASB’s change won’t require banks to book all losses upfront, however -- the only losses that non-U.S. banks will have to book immediately are those based on the probability that a loan will default in the next year.

Continued in article

From the Wall Street Journal Accounting Weekly Review on May 5, 2016

The Hottest Metric in Finance: ROIC
by: David Benoit
May 04, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Statement Analysis, ROIC

SUMMARY: ROIC is all the rage. The popularity of return on invested capital is evidence of the influence activists have come to wield in boardrooms. For ROIC lovers, which also include traditional stock pickers, the measure is the best way to distill what activists view as the most critical skill of management: how they allocate capital. The typical ROIC equation divides a company's operating income, adjusted for its tax rate, by total debt plus shareholder equity minus cash. It aims to show how much new cash is generated from capital investments.

CLASSROOM APPLICATION: This is an excellent article to use when covering ROIC in financial accounting and financial statement analysis classes.

QUESTIONS: 
1. (Introductory) What is ROIC? What is its definition of this term?

2. (Advanced) How can ROIC be used by corporations? How can it be used by investors and other outside parties?

3. (Advanced) What is an activist? The article reported that the use of ROIC placated activists. What does that mean? How were they placated? Why didn't other financial information placate them? What does ROIC show to activists?

4. (Advanced) Why do some parties love ROIC? What are some of the issues or potential problems associated with ROIC?

5. (Advanced) Should management of companies be focused on ROIC? What are some problems that could result if management focuses on ROIC?

Reviewed By: Linda Christiansen, Indiana University Southeast

"The Hottest Metric in Finance: ROIC," by David Beno, The Wall Street Journal, May 4, 2016 ---
http://www.wsj.com/articles/the-hottest-metric-in-finance-roic-1462267809?mod=djem_jiewr_AC_domainid

Last year, General Motors Co. fended off a group of activist investors with the help of an esoteric financial metric to which it had previously paid little heed.

The century-old auto maker began publicly touting the statistic, known as return on invested capital, or ROIC. It tied compensation to a 20% target and said that above a $20 billion cushion, cash it couldn’t earn that return on would be handed back to shareholders.

The steps placated the activists.

GM’s move underscores that, as much as a financial metric can be, ROIC is all the rage.

The popularity of the figure is also more evidence of the influence activists have come to wield in boardrooms. For ROIC lovers, which also include traditional stock pickers, the measure is the best way to distill what activists view as the most critical skill of management: how they allocate capital.

The typical ROIC equation divides a company’s operating income, adjusted for its tax rate, by total debt plus shareholder equity minus cash. It aims to show how much new cash is generated from capital investments.

For example, at GM, over the four quarters ended in March, adjusted operating earnings were $11.4 billion, up from $8.1 billion a year earlier. The denominator shrank as GM reduced, partly via buybacks, its equity, even though debt went up. ROIC rose to 28.5% from 19.5%, showing it was earning more with less.

“ROIC provides the clearest picture of how we are managing our capital and our business,” said GM Chief Financial Officer Chuck Stevens. “It’s really starting to become part of the DNA of our decisions.”

Continued in article

Jensen Comment
The EIBTDA is a misleading ratio with trumped by earnings ratios more popular with investors such as P/E ratios and e.p.s. trends

"The Relative and Incremental Explanatory Power of Earnings and Alternative (to Earnings) Performance Measures for Returns"
by Jennifer Francis, Katherine Schipper, and Linda Vincent
Contemporary Accounting Research
Volume 20, Issue 1, pages 121–164, Spring 2003

Abstract
We analyze the ability of earnings and non-earnings performance metrics to explain the variability in annual stock returns for industries where we identify, ex ante, an allegedly preferred (for valuation purposes) summary performance metric. We identify three industries where earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash from operations (CFO) are preferred, and three industries where specific non-GAAP performance metrics are preferred. As a benchmark, we also examine the ability of EBITDA and CFO to explain returns for seven industries for which earnings is the preferred metric. Results for the benchmark earnings industries show that earnings dominates EBITDA and CFO in explaining returns. All other results are inconsistent with the view that perceptions of preferred metrics are reflected in actual aggregate investment behaviors.

WARNING USE OF EBITDA MAY BE DANGEROUS TO YOUR CAREER
by ALFRED M. KING
Strategic Finance
http://go.galegroup.com/ps/anonymous?id=GALE%7CA78355003&sid=googleScholar&v=2.1&it=r&linkaccess=fulltext&issn=1524833X&p=AONE&sw=w&authCount=1&isAnonymousEntry=true

Using EBITDA (earnings before interest, taxes, depreciation, and amortization) in financial analysis may be dangerous to your career prospects. It's one of the most flawed concepts to be adopted by the financial community. Finance professionals rightly focus on cash flows. Valuations are based on the present value of future cash flows. Standard discounted cash flow valuation techniques taught in all finance and MBA programs have stood the test of time. They have served us well. Many investors and security analysts have also focused on price/earnings (PIE) ratios. The assumption is that if Company "A" is now earning $2.00 per share and the stock is $30.00, then the 15 PIE ratio can: 1) be compared to other stocks and 2) used to forecast future stock prices. To use a P/E ratio for comparative purposes, assume Company "A" is in the auto parts business. All its competitors are selling at PIE ratios between 13 and 17. Thus you might reasonably conclude that the stock is fairly priced on a current basis. Using a PIE ratio for forecasting purposes is simple: If the stock is likely to earn $2.40 a share next year, it would be expected to sell for about $36 a share (15 * 2.40 = 36), assuming the PIE ratio holds constant. So, cash flow and price/earnings analyses are two tools with which financial professionals are familiar. They work. But now we have detected an intruder on our financial radar: The rapid approach of EBITDA is closing fast on cash flow and price/earnings. It's time to shoot the enemy out of the sky before we suffer another defeat. HOW EBITDA IS BEING USED EBITDA is being used by security analysts because its "answers" appear more attractive. For example, if a company has $4 million of after-tax earnings and one million shares outstanding, the earnings per share are $4. If the stock is in a popular field such as media, it might sell today for a PIE of 35x earnings, or $140 per share. But substitute EBITDA for earnings per share, and you could easily get $7 per share or $7 million overall. Then, using the same current price of the stock,...

Bob Jensen's Threads on Return on Business Valuation, Business Combinations, 
Investment (ROI), and Pro Forma Financial Reporting ---
http://faculty.trinity.edu/rjensen/roi.htm

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 10, 2016

As Cyberthreats Mount, Internal Audit Can Help Play Defense
by: Deloitte Risk Journal Editor
May 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Cyber Crime, Internal Audit

SUMMARY: Bolstered by technology expansion, a surge in data growth, evolving business models and motivated attackers, the threat from cyberattacks is significant and continuously evolving. One estimate suggests that cybercrime could cost businesses more than $2 trillion by 2019, nearly four times the estimated 2015 expense. In response to the increasing threat, many audit committees and boards have set an expectation for internal audit to perform an independent and objective assessment of the organization's capabilities of managing the associated risks. A first step in meeting this expectation is for internal audit to conduct a cyber risk assessment and distill the findings into a concise report for the audit committee and board, which can provide the basis for a risk-based, multiyear internal audit plan to help manage cyber risks.

CLASSROOM APPLICATION: This is an excellent article to show students how accountants can add great value to their organizations beyond the traditional job duties.

QUESTIONS: 
1. (Introductory) What is cybercrime? What are the costs to businesses? What companies can be affected?

2. (Advanced) What is internal audit? What are the traditional duties of internal auditors? Why is internal audit an important function in businesses?

3. (Advanced) How is the article suggesting the internal audit function increase its duties beyond its traditional function? How can internal auditors help in the battle?

4. (Advanced) How are the ideas in the article a natural fit for internal auditors? Should these tasks be done by internal auditors or would a specialized cybercrime group be a better fit? Please give reasons for your answer.

5. (Advanced) Which of the ideas interest you the most? Why? Which of the ideas seem to be the most effective against cybercrime? Is there anything you would not consider? What additional ideas do you have for accountants and internal auditors to assist in the battle against cybercrime?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
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by Deloitte Risk Journal Editor
Sep 18, 2014
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"As Cyberthreats Mount, Internal Audit Can Help Play Defense," by Deloitte Risk Journal Editor, The Wall Street Journal, May 10, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/05/10/as-cyberthreats-mount-internal-audit-can-help-play-defense/?mod=djem_jiewr_AC_domainid

Bolstered by technology expansion, a surge in data growth, evolving business models and motivated attackers, the threat from cyberattacks is significant and continuously evolving. One estimate suggests that cybercrime could cost businesses more than $2 trillion by 2019, nearly four times the estimated 2015 expense.* In response to the increasing threat, many audit committees and boards have set an expectation for internal audit to perform an independent and objective assessment of the organization’s capabilities of managing the associated risks. A first step in meeting this expectation is for internal audit to conduct a cyber risk assessment and distill the findings into a concise report for the audit committee and board, which can provide the basis for a risk-based, multiyear internal audit plan to help manage cyber risks.

“The forces driving business growth and efficiency are also opening pathways to cyber assaults,” says Michael Juergens, an Advisory managing principal at Deloitte & Touche LLP. “Internet, cloud, mobile and social technologies—now mainstream—are platforms inherently oriented for sharing. At the same time, outsourcing, contracting and remote workforces are shifting operational control,” he adds.

Many organizations are addressing cyberthreats with multiple lines of defense. For example, business units and the information technology (IT) function at many organizations integrate cyber risk management into day-to-day decision-making and operations, which comprises an organization’s first line of defense. Making up a second line of defense are information and technology risk management leaders who develop governance and oversight protocols, monitor security operations and take action as needed, often under the direction of the chief information security officer (CISO).

“Increasingly, many companies are recognizing the compelling need for a third line of cyber defense—independent review of security measures and performance by the internal audit function,” says Sandy Pundmann, an Advisory managing partner at Deloitte & Touche LLP. “Internal audit should play an integral role in assessing and identifying opportunities to strengthen enterprise security. Advising stakeholders on trends and leading practices in cyber and other areas is a growing expectation for internal audit leaders,” she adds.

At the same time, internal audit has a duty to inform the audit committee and board that the controls for which they are responsible are in place and functioning correctly—a growing concern across boardrooms as directors face potential legal and financial liabilities. Since many organizations have cyber readiness initiatives still in flight, some internal audit departments have elected to defer audit procedures until these projects are completed. While this may allow for a deeper level review, deferring cyber assurance procedures may not be the right answer.

Cyber Risk Assessment Framework

Many internal audit functions have developed and tested procedures for evaluating components of the organization’s preparedness for cyberthreats. These targeted audits, such as attack and penetration procedures, are valuable, but do not provide assurance across the spectrum of cyber risks. To provide a comprehensive view of an organization’s ability to be secure, vigilant and resilient in the face of cyber risks, internal audit should consider taking a broad programmatic approach to cyber assurance and not perform only targeted audits, which could provide a false sense of security.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 10, 2016

Update: FASB Simplifies the Accounting for Share-based Payments
by: Deloitte Risk Journal Editor
May 06, 2016
Click here to view the full article on WSJ.com

TOPICS: Compensation, FASB, Financial Accounting, Share-Based Payments

SUMMARY: Several aspects of the accounting for employee share-based payment transactions should become less complex under the FASB's update known as ASU 2016-09. Issued on March 30, 2016, the ASU, which applies to public and nonpublic entities, simplifies the accounting treatment for share-based payments related to income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance, which is part of the Board's simplification initiative, also contains two practical expedients under which nonpublic entities can use the simplified method to estimate the expected term of an award and make a one-time election to switch from fair value measurement to intrinsic value measurement for liability-classified awards.

CLASSROOM APPLICATION: This article could be used as an update on the topic for financial accounting classes.

QUESTIONS: 
1. (Introductory) What is a share-based payment? How do companies use these types of payments? Why do companies choose to issue them? What other options do they have?

2. (Introductory) What is the FASB? What are its duties and areas of authority?

3. (Advanced) How did the FASB change the rules regarding share-based payments? What are the reasons for these changes? How do the changes differ from the previous rules?

4. (Advanced) How are each of the parties involved affected by the changes to these rules? Who is helped by these changes?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Update: FASB Simplifies the Accounting for Share-based Payments," by Deloitte Risk Journal Editor, The Wall Street Journal, May 6, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/05/06/update-fasb-simplifies-the-accounting-for-share-based-payments/?mod=djem_jiewr_AC_domainid

The following article supersedes an April 8 report on guidance issued by the FASB as it relates to accounting for share-based payments. The update, released in a recent Deloitte Heads Up newsletter, contains revisions that reflect subsequent discussions with the FASB and SEC staffs related to entities’ changes to the net-settlement terms of their share-based payment arrangements from the minimum statutory tax rate to a higher rate up to the maximum statutory tax rate. The revised article notes that such changes would not be accounted for as a modification.

Several aspects of the accounting for employee share-based payment transactions should become less complex under the FASB’s update known as ASU 2016-09.¹ Issued on March 30, 2016, the ASU, which applies to public and nonpublic entities, simplifies the accounting treatment for share-based payments related to income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.

The new guidance, which is part of the Board’s simplification initiative,² also contains two practical expedients under which nonpublic entities can use the simplified method³ to estimate the expected term of an award and make a one-time election to switch from fair value measurement to intrinsic value measurement for liability-classified awards.

Accounting for Income Taxes

Under current guidance, when a share-based payment award is granted to an employee, the fair value of the award is generally recognized over the vesting period, and a corresponding deferred tax asset is recognized to the extent that the award is tax-deductible. The tax deduction is generally based on the intrinsic value at the time of exercise (for an option) or on the fair value upon vesting of the award (for restricted stock), and it can be either greater (excess tax benefit) or less (tax deficiency) than the compensation cost recognized in the financial statements. All excess tax benefits are recognized in additional paid-in capital (APIC), and tax deficiencies are recognized either in the income tax provision or in APIC to the extent that there is a sufficient “APIC pool” related to previously recognized excess tax benefits.

Under the ASU, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement.⁴ This change eliminates the notion of the APIC pool and significantly reduces the complexity and cost of accounting for excess tax benefits and tax deficiencies. In addition, excess tax benefits and tax deficiencies are considered discrete items in the reporting period they occur and are not included in the estimate of an entity’s annual effective tax rate.

The ASU’s guidance on recording excess tax benefits and tax deficiencies in the income statement also has a corresponding effect on the computation of diluted earnings per share (EPS) when an entity applies the treasury stock method.⁵ An entity that applies such method under current guidance estimates the excess tax benefits and tax deficiencies to be recognized in APIC in determining the assumed proceeds available to repurchase shares.

However, under the ASU, excess tax benefits and tax deficiencies are excluded from the calculation of assumed proceeds since such amounts are recognized in the income statement. In addition, the new guidance affects the accounting for tax benefits of dividends on share-based payment awards, which will now be reflected as income tax expense or benefit in the income statement rather than as an increase to APIC.

Further, the ASU eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable.

Continued in article

Boeing's Buyback Spending Makes Some Analysts Jittery
by: Jon Ostrower
May 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Cash, Cash Management, Stock Buybacks

SUMMARY: Boeing Co., the world's biggest plane maker by deliveries, has spent $19 billion buying back its own stock over the past three years, a spending spree that worries analysts who think the airplane-building cycle may be near its peak. The plane maker has been directing almost all of its free cash back to shareholders, boosting buybacks and dividends with the proceeds from record deliveries of its passenger jets.

CLASSROOM APPLICATION: This article offers a good case study for stock buybacks and cash management in general.

QUESTIONS: 
1. (Introductory) What is a stock buyback? Why do some companies choose to participate in stock buybacks?

2. (Advanced) How do stock buybacks affect a company's financial statements? How is the transaction entered into the company's financial records? What accounts are affected?

3. (Advanced) How is a business affected by the stock buyback? How does it affect the company's stock price? How does it affect the company's strategies and options for growth?

4. (Advanced) Why are some parties opposed to stock buybacks? What are possible disadvantages or negative ramifications?

5. (Advanced) Besides buying stock, what is the Boeing doing with its cash? What is management's strategy behind each of these actions?

6. (Advanced) Do you agree with Boeing's strategies? Why or why not? How can these actions help the company? How could they hinder the company? How are various stakeholders affected by these actions?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Boeing's Buyback Spending Makes Some Analysts Jittery," by Jon Ostrower, The Wall Street Journal, May 11, 2016 ---
http://www.wsj.com/articles/boeings-buyback-spending-makes-some-analysts-jittery-1462920092?mod=djem_jiewr_AC_domainid

Boeing Co. , the world’s biggest plane maker by deliveries, has spent $19 billion buying back its own stock over the past three years, a spending spree that worries analysts who think the airplane-building cycle may be near its peak.

The plane maker has been directing almost all of its free cash back to shareholders, boosting buybacks and dividends with the proceeds from record deliveries of its passenger jets.

While many investors like having excess cash returned via buybacks, some Boeing analysts worry the company is unwisely borrowing from the future. The worry is what will happen to cash flow if sales fall from their current very high levels.

Some analysts and investors watching Boeing’s plans are jittery about the path for cash flows to keep rising through the end of the decade to pay for buybacks and research and development.

“The upward trajectory on cash runs out next year,” said Robert Stallard, managing director at RBC Capital Markets. He said Boeing should be preserving its cash, citing a coming cut in the production of its profitable 777 jet and the billions of dollars Boeing and rival Airbus Group SE spent to right their recent jetliner programs.

A Boeing spokesman said that “the strong core operating performance across our business continues to generate significant cash flow and financial strength.” He said that strength, combined with a healthy growth outlook, provides the company with a foundation to continue its balanced cash deployment strategy where it can invest in “innovative products, technology and delivering returns to shareholders.”

Boeing ended the first quarter with $7.9 billion in cash and forecasts approximately $10 billion in operating cash flow in 2016, and signals it expects that to climb through the remainder of the decade. It had revenue of $96.1 billion in 2015.

The company said both its capital expenditures and research and development spending is up in 2016 and its production increases are plotted through the end of the decade. It anticipates returning an additional $10.5 billion over the next two years or so.

 

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 10, 2016

Kraft Heinz’s Profit Gets Boost From Cost-Cutting Efforts
by Annie Gasparro
May 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Budgeting, Managerial Accounting, Zero-Based Budgeting

SUMMARY: Kraft Heinz Co. said its quarterly profit jumped 37.7% to $896 million, as cost-cutting efforts at the packaged-foods giant worked better than expected and its sales trends turned a corner. The company's goal is to improve profitability by shrinking department budgets, eliminating jobs, and increasing the efficiency of manufacturing its plethora of packaged-food brands, from its namesake ketchup to Velveeta cheese. The private-equity firm that bought Heinz in 2013 is known for pushing its companies to slash expenses using a method called zero-based budgeting, which calls for departments to justify every cost at the start of each year.

CLASSROOM APPLICATION: This is a good example of a company's use of zero-based budgeting, as well as use of examining and cutting costs in an effort to increase net income. This is a rare article on zero-based budgeting that you can save for coverage of that topic.

QUESTIONS: 
1. (Introductory) What is zero-based budgeting? How is Kraft Heinz using this type of budgeting?

2. (Advanced) What are the benefits of zero-based budgeting? What are potential problems or limitations with its use?

3. (Advanced) What businesses and organizations are most likely to use this type of budgeting? What entities could be helped by use of it? What entities do not use it? Why don't all entities use this tool?

4. (Advanced) As you advance in management, would you advocate the use of zero-based budgeting? Why or why not?

5. (Advanced) Why is the company focusing on cutting costs? How does this add value to the organization and its stakeholders?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Kraft Heinz's Profit Gets Boost From Cost-Cutting Efforts." by Annie Gasparro, The Wall Street Journal, May 5, 2016 ---
http://www.wsj.com/articles/kraft-heinz-sales-hurt-by-currency-headwinds-1462395761?mod=djem_jiewr_AC_domainid

Kraft Heinz Co. said its quarterly profit jumped 37.7% to $896 million, as cost-cutting efforts at the packaged-foods giant worked better than expected and its sales trends turned a corner.

The company was formed last July by the merger of Kraft Foods Group and H.J. Heinz, with the goal of improving profitability by shrinking department budgets, eliminating jobs, and increasing the efficiency of manufacturing its plethora of packaged-food brands, from its namesake ketchup to Velveeta cheese.

On Wednesday, Kraft Heinz said its sales for the first quarter fell 3.8% to $6.57 billion, hurt by the stronger U.S. dollar decreasing the value of revenue earned abroad. Excluding that and divestitures, Kraft Heinz’s sales rose 1.1%, showing signs of improvement, though the company cautioned that changing consumer tastes and volatile commodity costs pose hurdles.

“We are off to a good start; good, not great,” said Chief Executive Bernardo Hees on a conference call Wednesday. “As expected, some headwinds hung around, including consumption trends in some key categories that held us back.”

But, he added, “our savings are coming in faster than we were expecting,” and “big bets” on product launches are gaining traction—like removing artificial coloring from Kraft’s iconic boxed macaroni and cheese, and launching a series of new Heinz barbecue sauces, such as Texas Bold & Spicy and Carolina Tangy Vinegar.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 20, 2016

Bid to Make Audit Reports More Useful to Investors Is Rebooted
by: Michael Rapoport
May 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit Reports, Auditing, PCAOB

SUMMARY: The Public Company Accounting Oversight Board agreed on a revamped proposal to overhaul and expand the audit report - the opinion included in each company's annual report in which the auditor attests that the company is presenting its finances accurately. The proposal is aimed at making the audit report more useful to investors, as opposed to the current, mostly boilerplate, opinion that critics say gives investors little information about a company's true condition. Like the 2013 plan, the new proposal would retain the current report's pass-fail model but would require auditors to tell investors about each audit's "critical audit matters" - the toughest, most complex decisions they have to make in evaluating that company's financial statements.

CLASSROOM APPLICATION: This update is very useful for an auditing class.

QUESTIONS: 
1. (Introductory) What is an audit report? What is its purpose?

2. (Introductory) What is the PCAOB? What are its duties and areas of responsibility?

3. (Advanced) What are the details of the PCAOB proposal? How does the proposal differ from the current rules?

4. (Advanced) Why is the PCAOB making this proposal at this time? What are the reasons for the changes? What are the potential benefits of the changes?

5. (Advanced) How could the changes affect accounting firms? How could they affect users of the financial statements and audit reports?

6. (Advanced) Do you agree with the proposed changes to the audit report? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Bid to Make Audit Reports More Useful to Investors Is Rebooted," by Michael Rapoport, The Wall Street Journal, May 10, 2016 ---
http://www.wsj.com/articles/audit-regulator-to-issue-revised-proposal-for-overhauling-audit-reports-1462984906?mod=djem_jiewr_AC_domainid

Public Company Accounting Oversight Board revamps proposal to require auditors to report more of what they find

The government’s audit regulator is taking another shot at requiring auditors to tell investors more about what they find when they review a company’s financial statements.

The Public Company Accounting Oversight Board agreed Wednesday on a revamped proposal to overhaul and expand the audit report—the opinion included in each company’s annual report in which the auditor attests that the company is presenting its finances accurately.

The proposal, which updates a never-enacted 2013 plan, is aimed at making the audit report more useful to investors, as opposed to the current, mostly boilerplate, opinion that critics say gives investors little information about a company’s true condition.

Like the 2013 plan, the new proposal would retain the current report’s pass-fail model but would require auditors to tell investors about each audit’s “critical audit matters”—the toughest, most complex decisions they have to make in evaluating that company’s financial statements.

In the words of several board members, they are the decisions that “keep the auditor up at night.”

The new proposal narrows the definition of what constitutes a critical audit matter, in response to concerns from auditors and others that the 2013 proposal had defined them too broadly.

Under the new proposal, they would be limited to those matters that an auditor would be required to tell the company’s audit committee about, and the materiality of an issue would have to be considered.

“I believe we have come to the right approach,” PCAOB Chairman James Doty said.

The new proposal also would add some language and disclosures to the audit report, notably one about how long the auditor has worked for the company—decades, in some cases.

Some critics believe an auditor’s long tenure in working with a particular company can lead to coziness between the auditor and client that would jeopardize the auditor’s ability to perform a tough, impartial audit.

The Center for Audit Quality, which represents public-company auditors, is “encouraged” by the PCAOB’s revised proposal, said Cindy Fornelli, the group’s executive director. The CAQ had recommended a narrower focus for critical audit matters, and “we believe this is a move in the right direction,” she said.

The proposal doesn’t include one element the PCAOB proposed in 2013: a requirement that auditors expand their purview to evaluating the accuracy of statements a company makes in other areas of its annual report apart from the financial statements, such as the “management’s discussion and analysis” section. The board is still considering that issue, but separately from the audit-report proposal, board members said.

Many other countries already require the sorts of additional disclosures in the audit report that the PCAOB is considering. U.S. auditors, investors and other observers have broadly agreed that changes to the report are needed, but they haven’t been able to agree on the details. The PCAOB original August 2013 proposal drew nearly 250 comment letters and prompted lengthy debate, but no action was ever taken on enacting it.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 20, 2016

Selling Your S Corporation: A Focus on Alternative Tax Structures
by: Deloitte Risk Journal Editor
May 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Built-In Gains, Corporate Taxation, S Corporations

SUMMARY: One of the newly permanent tax provisions of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) includes a favorable five-year recognition period for built-in gains following a conversion from a C to S corporation. Generally, the built-in gains tax imposes a corporate level tax, at the highest marginal rate applicable to corporations, on the portion of gain that existed as of the C to S conversion date. The built-in gains recognition period had generally been ten years although certain sale transactions were tested as if the built-in gains recognition period had been seven or five years since 2009 due to continuing extensions of certain temporary tax provisions. The provisions of the PATH Act are effective for taxable years beginning after December 31, 2014. Making this provision permanent eliminates the uncertainty that the prior temporary provisions would be extended and allows S corporations to properly and timely consider their options with sale transactions.

CLASSROOM APPLICATION: This update article is appropriate for corporate taxation classes.

QUESTIONS: 
1. (Introductory) What is the PATH Act? When was it passed? What topics does it cover?

2. (Advanced) What is an S corporation? How does it differ from other types of corporations?

3. (Advanced) What are built-in gains? How are these gains taxed? How does the PATH Act change how these gains are taxed?

4. (Advanced) What are the reasons for these changes? How will the changes affect S corporations? How will owners of S corporations be affected?

5. (Advanced) What other recent tax law changes have affected S corporation shareholders? How will those changes affect business strategy and decision-making?

6. (Advanced) What is a deemed asset sale and how does it affect the decisions of S corporation owners?

7. (Advanced) How does section 338(h)(10) affect purchases and sales of S corporations? What are some tax planning strategies investors can use?

8. (Advanced) What other tax considerations should investors consider when buying or selling S corporations?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Selling Your S Corporation: A Focus on Alternative Tax Structures," by Deloitte Risk Journal Editor, The Wall Street Journal, May 12, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/05/12/selling-your-s-corporation-a-focus-on-alternative-tax-structures/?mod=djem_jiewr_AC_domainid

Over 20 key tax provisions were made permanent as a result of the recent Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which was signed by President Obama on December 18, 2015. Importantly for S corporation owners, one of the newly permanent tax provisions includes a favorable five-year recognition period for built-in gains following a conversion from a C to S corporation. Generally, the built-in gains tax imposes a corporate level tax, at the highest marginal rate applicable to corporations, on the portion of gain that existed as of the C to S conversion date. The built-in gains recognition period had generally been ten years although certain sale transactions were tested as if the built-in gains recognition period had been seven or five years since 2009 due to continuing extensions of certain temporary tax provisions. The provisions of the PATH Act are effective for taxable years beginning after December 31, 2014. Making this provision permanent eliminates the uncertainty that the prior temporary provisions would be extended and allows S corporations to properly and timely consider their options with sale transactions.

The shortened built-in gains recognition period is meaningful to many small business owners and “gives S corporation shareholders more flexibility regarding the timing and tax structure of a sale transaction and could significantly influence the net value derived by these company owners,” according to James Calzaretta, a partner with Deloitte Tax LLP.

Evolving Tax Landscape

Other recent tax law changes have also had an impact on S corporation shareholders and will likely affect their business decisions. Effective January 1, 2013, the highest marginal ordinary and capital gains tax rates increased to 39.6% and 20% respectively and certain sources of capital gain income may be subject to an additional 3.8% net investment income tax.

“Based on the ever changing tax reform, it is important for sellers to be up to date on current tax laws related to S corporation shareholders,” observes Ryan Stecz, partner, Deloitte Tax LLP.

Transaction Tax Structure Considerations

Several S corporation disposition alternatives are available that should be considered when planning for the sale of the S corporation. Owners should compare these various options so that the potential tax impacts and other implications can be analyzed. One such alternative is a “deemed asset sale” by way of a section 338(h)(10) election.

“Often times a buyer is focused on finding a way to achieve a fair market value tax basis in the assets acquired, so it is important for a seller to be knowledgeable about structure alternatives available and whether it may be possible to drive incremental value in a transaction,” according to Mr. Stecz.

Benefits and Risks of a Section 338(h)(10) Election

The U.S. Tax Code allows corporate buyers and sellers of the stock of an S corporation to make a section 338(h)(10) election so that a qualified stock purchase* will be treated as a deemed asset purchase for federal income tax purposes. A section 338(h)(10) election is a joint election that requires agreement between and among all of the selling shareholders and the prospective corporate buyer.

As a result of a section 338(h)(10) election, a stock sale for legal purposes will be treated as an asset sale for tax purposes for both the buyer and seller. A deemed asset sale will adjust the tax basis of the S corporation’s assets in the hands of the buyer to fair market value. As a result, the buyer may benefit from incremental tax benefits, including amortization and depreciation of the assets’ purchase price for federal income tax purposes, along with resulting future tax deductions—for the amount paid—over the tax life of the acquired assets.¹

It is possible that the buyer’s tax benefits may substantially outweigh the potentially incremental (or additional) tax costs to sellers resulting from the election, notes Mr. Stecz. “Buyers may be willing to reimburse selling shareholders for any incremental costs incurred. Sellers who understand the potential benefits resulting from the step-up transaction may also be in a position to negotiate a higher purchase price by clearly articulating those benefits to potential buyers,” he says.

The deemed asset sale treatment may have negative tax consequences that selling shareholders should consider. By agreeing to make a section 338(h)(10) election, selling shareholders may subject themselves to various federal and state taxes that a straight stock sale—one without such election—would not generate.

Following are additional deemed asset sale considerations.

—Some of the gains from a deemed asset sale may be taxed at ordinary rates. For example, purchase price allocated to fixed assets may result in ordinary gain due to depreciation recapture. Similarly, gains associated with the difference between the fair market value of inventory may also be taxed at ordinary rates. On the other hand, assumption of certain liabilities might result in additional ordinary deductions to the S corporation today that were disallowed in prior years under the economic performance rules.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 20, 2016

California Lawmaker: Vanguard Should Pay No State Taxes
by: Sarah Krouse
May 13, 2016
Click here to view the full article on WSJ.com

TOPICS: Revenue Recognition, State and Local Taxes, State and Local Taxes

SUMMARY: California Assemblyman Mike Gatto is concerned investors will have to pay more to park their money with indexing pioneer Vanguard as a result of claims made by a former company lawyer. So he proposed a bill that would exempt Vanguard from California taxes. A former Vanguard lawyer has alleged the company was able to keep its fees low in part because it avoided some state and federal taxes for decades. The claims hinge on the way Vanguard manages its mutual funds "at cost" rather than the higher price a third party would demand. That practice allows it to pass on savings to investors, but the attorney has alleged Vanguard should pay a tax on what its profit would be had it not provided those at-cost services.

CLASSROOM APPLICATION: This is a rare article that discusses state and local taxation. It can be used in corporate tax classes.

QUESTIONS: 
1. (Introductory) What are the facts of this case? What did Vanguard's former lawyer report?

2. (Advanced) What entities pay sales tax and which do not pay? What are some of the reasons an entity would not pay state taxes?

3. (Advanced) On what income is Vanguard allegedly avoiding state tax? What is the charge "at cost" mean? Why was Vanguard criticized for those charges?

4. (Advanced) What are the details of the proposed legislation? Should it be passed? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

"California Lawmaker: Vanguard Should Pay No State Taxes," by Sarah Krouse, The Wall Street Journal, May 13, 2016 ---
http://www.wsj.com/articles/california-official-vanguard-should-pay-no-state-taxes-1463074431?mod=djem_jiewr_AC_domainid  

One California politician has a new way mutual fund giant Vanguard Group can keep its fees low: pay no state taxes.

California Assemblyman Mike Gatto is concerned investors will have to pay more to park their money with indexing pioneer Vanguard as a result of claims made by a former company lawyer. So he proposed a bill in February that would exempt Vanguard from California taxes.

The Malvern, Pa.-based manager of trillions in savings is known for its passively managed, lower-cost funds that track the market. Vanguard is able to push down what it charges investors because the company is owned by its mutual fund shareholders, an unusual structure in the asset management industry.

But the former company lawyer, David Danon, has alleged Vanguard was also able to keep its fees low in part because it avoided some state and federal taxes for decades. The claims hinge on the way Vanguard manages its mutual funds “at cost” rather than the higher price a third party would demand.

That practice allows it to pass on savings to investors, but Mr. Danon has alleged Vanguard should pay a tax on what its profit would be had it not provided those at-cost services.

He brought a mix of lawsuits and whistleblower claims against Vanguard in several states as well as to the Securities and Exchange Commission and Internal Revenue Service.

A New York lawsuit was dismissed last year because of the nature of Mr. Danon’s position at Vanguard. In Texas, Vanguard paid some back taxes last year without penalty, though the company didn’t specify how much. Vanguard said the payment followed a “routine audit” and was “unrelated to the allegations concerning Vanguard’s at-cost model in the lawsuit that was dismissed in New York.”

Mr. Danon received a “confidential informant” payment of about $117,000 from Texas, according to documents viewed by The Wall Street Journal.

Mr. Gatto said he proposed the bill after reading news stories that suggested the fund firm may have to raise its fees if the whistleblower’s efforts are successful and Vanguard’s tax bill grows.

“It seems like they had their hearts in the right place. They weren’t trying to game the system,” he said of Vanguard, adding that he didn’t discuss the proposal with the company.

A spokeswoman for Vanguard said in a statement that the firm wasn’t involved with the bill’s drafting and didn’t hear about it until it had been introduced. The company pays its “fair and appropriate” amount of state and federal taxes, she said.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 20, 2016

IASB Chair Rings Alarm Over Use of Non-GAAP Measures
by: Tatyana Shumsky
May 12, 2016
Click here to view the full article on WSJ.com

TOPICS: GAAP, IASB, Non-GAAP Reporting

SUMMARY: The IASB chairman said the IASB should do more to cool the popularity of non-standard accounting metrics. While reducing the use of such measures is primarily the task of securities regulators, there is space of accounting standards setters to supplement those efforts, he said. The growing use of measures outside of Generally Accepted Accounting Principles (GAAP) to present a more favorable picture of company performance, is a concern for investors and regulators. U.S. securities regulators require public companies to file financial reports using GAAP standards. While companies can supplement those figures with non-standard accounting metrics or adjusted figures, they must reconcile that information with the results reported under standard accounting rules.

CLASSROOM APPLICATION: This article features comments and concerns of the IASB chair regarding the non-GAAP, which we can add to pro forma reporting discussions.

QUESTIONS: 
1. (Introductory) What is IASB? What is its area of authority?

2. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

3. (Advanced) What in non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

4. (Advanced) If a company chooses to report non-GAAP financial results, must it also report financial information on a GAAP basis? Why or why not?

5. (Advanced) What does the chair of the IASB think about non-GAAP reporting? Is the IASB involved with GAAP reporting? What is he suggesting for international reporting?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

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"IASB Chair Rings Alarm Over Use of Non-GAAP Measures," by Tatyana Shumsky, The Wall Street Journal, May 12, 2016 ---
http://blogs.wsj.com/cfo/2016/05/11/iasb-chair-rings-alarm-over-use-of-non-gaap-measures/?mod=djem_jiewr_AC_domainid

Accounting rule setters should play a larger role reining in the use of non-standard measures, said Hans Hoogervorst, chairman of the International Accounting Standards Board.

The growing use of measures outside of Generally Accepted Accounting Principles (GAAP) to present a more favorable picture of company performance, is a concern for investors and regulators, said the chairman in remarks made to the annual conference of the European Accounting Association in Maastricht.

More than 88% of companies in the S&P 500 currently use non-standard accounting metrics in their earnings releases, Mr. Hoogervorst said. Of those, 82% reported an increase in net income “and are clearly designed to present results in a more favorable light.”

There is growing evidence “of these measures becoming increasingly misleading,” Mr. Hoogervorst said.

U.S. securities regulators require public companies to file financial reports using GAAP standards. While companies can supplement those figures with non-standard accounting metrics or adjusted figures, they must reconcile that information with the results reported under standard accounting rules.

The IASB should do more to cool the popularity of non-standard accounting metrics, Mr. Hoogervorst said. While reducing the use of such measures is primarily the task of securities regulators, there is space of accounting standards setters to supplement those efforts, he said.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on May 20, 2016

Abercrombie: Pro Forma Results Aren't Cool
by: Miriam Gottfried
May 16, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, GAAP, Non-GAAP Reporting, Pro Forma Reporting

SUMMARY: Abercrombie's same-store sales declined 11%, 8% and 3%, in the fiscal years ending January 2014, 2015 and 2016, respectively. Earnings also have slumped. But Abercrombie has become adept at getting investors to ignore major costs by training them to focus on so-called pro forma figures. These have stripped out charges related to restructuring business units, the impairment of the value of certain stores and what Abercrombie has called its "profit improvement initiative." That includes changing its merchandise assortment, beefing up its marketing, closing underperforming stores and investing in e-commerce. Abercrombie is one of a long list of companies that have been using pro forma metrics to paint a brighter results picture. Reported earnings among S&P 500 companies were 25% lower than pro forma figures in 2015. That was the widest difference since 2008.

CLASSROOM APPLICATION: This article provides a good example of a company using pro forma or non-GAAP financial reporting.

QUESTIONS: 
1. (Introductory) What are the facts regarding Abercrombie's financial reporting? How does it compare with the rest of the apparel retail industry?

2. (Advanced) What in non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) What is pro forma financial reporting? Why is it called pro forma?

4. (Advanced) Why would Abercrombie choose to participate in pro forma reporting? What are the advantages? What benefits does it offer the company? How are users of this information affected?

5. (Advanced) What is the financial health of the company? What steps should management be taking? How should investors react?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Abercrombie: Pro Forma Results Aren't Cool," by Miriam Gottfri, The Wall Street Journal, May 16, 2016 ---
http://www.wsj.com/articles/abercrombie-pro-forma-results-arent-cool-1463333527?mod=djem_jiewr_AC_domainid

Abercrombie’s pro forma earnings have been significantly higher than its reported earnings for the past three years, and investors shouldn’t buy its adjustments

Like a recalcitrant high-school student, Abercrombie & Fitch always seems ready with an excuse. And its latest one may not keep it out of detention.

Apparel retailers have had a brutal first quarter, with Macy’s, Nordstrom and Kohl’s among the hardest hit. Abercrombie, which reports results later this month, is no stranger to pain. The teen-apparel retailer’s same-store sales declined 11%, 8% and 3%, in the fiscal years ending January 2014, 2015 and 2016, respectively.

Earnings also have slumped. But Abercrombie has become adept at getting investors to ignore major costs by training them to focus on so-called pro forma figures. These have stripped out charges related to restructuring business units, the impairment of the value of certain stores and what Abercrombie has called its “profit improvement initiative.” That includes changing its merchandise assortment, beefing up its marketing, closing underperforming stores and investing in e-commerce.

Abercrombie is one of a long list of companies that have been using pro forma metrics to paint a brighter results picture. Reported earnings among S&P 500 companies were 25% lower than pro forma figures in 2015. That was the widest difference since 2008. The Securities and Exchange Commission is weighing whether to curb use of adjusted earnings figures.

. . .

At Abercrombie, reported earnings were just 46% of pro forma ones the past two fiscal years. In the fiscal year ended January 2014, they were 98%.

Abercrombie says it provides pro forma measures to help investors better understand its operating performance. But the adjustments are questionable: Riding the waves of popularity among a notoriously fickle demographic is core to being a teen retailer.

Abercrombie pushed that envelope further in the most recent fiscal year. It excluded from pro forma earnings $20.6 million in charges related to a write-down of its inventory. Absent that, annual pro forma net income would have been $57 million, instead of the $78 million in its earnings release. Abercrombie’s reported net income, on the other hand, was $35.6 million.

The write-down makes sense. As part of its turnaround strategy, the company abandoned its logo-adorned merchandise for a subtler look.

Continued in article

From the Wall Street Journal Accounting Weekly Review on May 27, 2016

Fewer Shareholders Pay U.S. Taxes on Dividends
by: Richard Rubin
May 19, 2016
Click here to view the full article on WSJ.com

TOPICS: Corporate Taxation, Dividends, Double taxation, Individual Taxation

SUMMARY: A new study showing that a shrinking fraction of shareholders of U.S. corporations pay taxes on dividends is bolstering a drive to revamp the corporate tax system. The specter of double taxation, which animates complaints about today's U.S. corporate tax code, is receding. Tax-exempt and tax-preferred entities-such as 401(k) plans and other retirement accounts-own more than 75% of U.S. corporate stock, nearly opposite the prevailing pattern from 50 years ago. The study is emboldening Senate Finance Chairman Orrin Hatch, who says he is within weeks of releasing a proposal that would largely end the remaining double taxation of corporate dividends by shifting the burden from highly mobile corporations to less mobile shareholders.

CLASSROOM APPLICATION: This is a good update to individual and corporate tax classes on the taxing of dividends.

QUESTIONS: 
1. (Introductory) What are dividends? How do they relate to corporate income?

2. (Advanced) How are dividends taxed at the corporate level? How are dividends taxed are the receiver level? How is this considered to be double taxation?

3. (Advanced) What did the Tax Policy Center study reveal? What are the reasons for this report? How has the conditions changed from previous years?

4. (Advanced) What are the details of Senator Hatch's plan to address these dividend tax issues? What reasons does he offer in support of his plan?

5. (Advanced) How would the proposed change affect the various taxpayers who are involved?

6. (Advanced) What is the likelihood that the proposal will become law? What are the reasons for your answer?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Fewer Shareholders Pay U.S. Taxes on Dividends by: Richard Rubin, The Wall Street Journal, May 19, 2016 ---
http://www.wsj.com/articles/fewer-shareholders-pay-u-s-taxes-on-dividends-1463615621?mod=djem_jiewr_AC_domainid

New study is bolstering drive to shift tax burden from corporations to investors

A new study showing that a shrinking fraction of shareholders of U.S. corporations pay taxes on dividends is bolstering a drive to revamp the corporate tax system.

The specter of double taxation, which animates complaints about today’s U.S. corporate tax code, is receding, according to a new study from the Tax Policy Center. Tax-exempt and tax-preferred entities—such as 401(k) plans and other retirement accounts—own more than 75% of U.S. corporate stock, nearly opposite the prevailing pattern from 50 years ago, the study said.

The study is emboldening Senate Finance Chairman Orrin Hatch (R., Utah), who says he is within weeks of releasing a proposal that would largely end the remaining double taxation of corporate dividends by shifting the burden from highly mobile corporations to less mobile shareholders.

Sen. Hatch’s plan would let companies deduct dividends, lowering their effective corporate tax rate as a backdoor way to reduce the U.S.’s world-high top statutory tax rate of 35%. Individual taxable shareholders’ dividends would be taxed as ordinary income instead of at lower capital-gains rates. Those taxes would be directly withheld by companies when they pay dividends to investors.

“It’s a huge mistake to locate the high tax at the corporate level and the low tax or the zero tax at the shareholder level,” Michael Graetz, a law professor at Columbia University, said at a congressional hearing this week. “We’ve got the tax in exactly the wrong place.”

That feature may be a major political stumbling block for Mr. Hatch, whose plan will have trouble advancing in an election year under divided government. Any big change would disrupt businesses and shareholders that enjoy tax advantages now. Beyond that, a plan that lowers corporations’ effective tax rates and places the burden elsewhere will be hard to sell publicly.

“The politics of this are just unbelievably daunting,” said Peter Merrill, a principal in the national economics and statistics group at PwC LLP.

The new Tax Policy Center study, from Steve Rosenthal and Lydia Austin, documents the growth of tax-advantaged investing. Just 24% of corporate stock is owned by taxable individuals, down from 84% in 1965. The remaining 76% includes tax-exempt investors such as endowments, mostly exempt foreign investors and retirement plans, which pay a second layer of tax at ordinary income-tax rates, but benefit from what can be decades of tax deferral.

“We can either strengthen corporate taxes by closing corporate loopholes or shift taxes more aggressively to the shareholder level,” said Mr. Rosenthal, whose organization is a project of the Urban Institute and Brookings Institution. “Shifting taxes to shareholders is much more difficult if few shareholders pay tax.”

From 2010 to 2014, public companies with positive domestic pretax book income paid 32.2% of that income as dividends and another 43.4% as share repurchases, according to Mr. Merrill. Under Mr. Hatch’s plan, companies would have greater incentives to increase dividends and substitute payouts for buybacks.

Continued in article

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From the Wall Street Journal Accounting Weekly Review on May 27, 2016