Not everything that can be counted, counts. And not everything that counts can be counted.
Albert Einstein

Brief Summary of Accounting Theory

Bob Jensen at Trinity University

Accounting History in a Nutshell

Islamic Accounting

XBRL:  The Next Big Thing

Key Differences Between International (IFRS) and U.S. GAAP (SFAS)

Accounting Research Versus the Accountancy Profession

Learning at Research Schools Versus "Teaching Schools" Versus "Happiness"
With a Side Track into Substance Abuse

Why must all accounting doctoral programs be social
science (particularly econometrics) doctoral programs?

Why accountancy doctoral programs are drying up and
why accountancy is no longer required for admission or
graduation in an accountancy doctoral program

GMAT: Paying for Points

Accounting Journal Lack of Interest in Publishing Replications

Controversies in Setting Accounting Standards

Why Let the I.R.S. See What the S.E.C. Doesn't?

Radical Changes in Financial Reporting

Underlying Bases of Balance Sheet Valuation

Accrual Accounting and Estimation 

Controversy Over  the SEC's Rule 144a

FIN 48 Liability if Transaction Is Later Disallowed by the IRS

Controversy Over FAS 2 on Research and Development (R&D)

Earnings Management, Agency Theory, and Accounting Manipulations 

Goodwill Impairment Issues 

Purchase Versus Pooling: The Never Ending Debate

Off-Balance Sheet Financing (OBSF)

Insurance:  A Scheme for Hiding Debt That Won't Go Away

CDOs: A Scheme for Hiding Debt That Won't Go Away

Pensions and Post-retirement benefits:  Schemes for Hiding Deb

Leases:  A  Scheme for Hiding Debt That Won't Go Away 

Accounting for Executory Contracts Such as
Purchase/Sale Commitments and Loan Commitments

Debt Versus Equity (including shareholder earn-out contracts)

Intangibles and Contingencies:   Theory Disputes Focus Mainly on the Tip of the Iceberg

Intangibles:  An Accounting Paradox

Intangibles:  Selected References On Accounting for Intangibles

EBR:  Enhanced Business Reporting (including non-financial information)

The Controversy Over Revenue Reporting and HFV 

The Controversy Over Employee Stock Options as Compenation  

Accounting for Options to Buy Real Estate

The Controversy over Accounting for Securitizations and Loan Guarantees  

The Controversy Over Pro Forma Reporting

Triple-Bottom (Social, Environmental) Reporting  

Which is More Value-Relevant: Earnings or Cash Flows?

The Controversy Over Fair Value (Mark-to-Market) Financial Reporting

Online Resources for Business Valuations
See http://www.trinity.edu/rjensen/roi.htm

Understanding the Issues 

Issues of Auditor Independence 

Quality of Earnings, Restatements, and Core Earnings

Economic Theory of Accounting

Socionomics Theory of Finance and Fraud

Facts Based on Assumptions:  The Power of Postpositive Thinking

Mike Kearl's great social theory site

Bob Jensen's threads on GAAP comparisons (with particular stress upon derivative financial
instruments accounting rules) are at http://www.trinity.edu/rjensen/caseans/canada.htm
The above site also links to more general GAAP comparison guides between nations.

Implications of Bad Auditing on Capital Markets
and Client's Cost of Captial
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/fraud.htm#Governance

Great Minds in Management:  The Process of Theory Development --- http://www.trinity.edu/rjensen//theory/00overview/GreatMinds.htm

"Cornell Theory Center Aids Social Science Researchers," PR Web, June 19, 2006 --- http://www.prweb.com/releases/2006/6/prweb400160.htm

 

You can order back issues or relevant links management and accounting books and journals from MAAW --- http://maaw.info/

Free Access to Back Issues of The Accounting Review --- http://maaw.info/TheAccountingReview.htm 

Bob Jensen's threads on special purpose (variable interest) entities are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

"Visualization of Multidimensional Data" --- http://www.trinity.edu/rjensen/352wpVisual/000DataVisualization.htm 

Bob Jensen's threads on XBRL are at http://www.trinity.edu/rjensen/XBRLandOLAP.htm#XBRLextended 

Accounting for Electronic Commerce, Including Controversies on Business Valuation, ROI, and Revenue Reporting --- http://www.trinity.edu/rjensen/ecommerce.htm 

Comparisons of International IAS Versus FASB Standards --- http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf 

Bob Jensen's Enron Quiz (with answers) --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

"Corporate Reports Now Searchable Via EDGAR," SmartPros, June 16, 2006 --- http://accounting.smartpros.com/x53502.xml

Investors and analysts can now search the full text of every SEC document filed by companies within the last two years. They'll also be able to retrieve mutual fund filings by fund or share class.

The company filing search engine enables real-time, full-text searches of filings on the entirety of the SEC's EDGAR (Electronic Document, Gathering, Analysis and Retrieval) database of company filings for the last two years. The tool can be found at http://www.sec.gov/edgar/searchedgar/webusers.htm.

SEC Chairman Christopher Cox, a strong proponent of using the Internet to post dynamic financial reports and to serve as a tool for investors and analysts made the announcement in his opening remarks at the SEC's Interactive Data Roundtable in Washington, D.C.

"This new full-text search capability will give investors and analysts instant access to the specific information they want," said Cox.

The new mutual fund search capability was made possible when the SEC recently required that filings contain a unique numerical identifier for each fund and share class. Investors will be able to find relevant filings by searching for the name of their own fund. In the past, searching for information on particular funds and particular share classes within funds was very difficult, because a single prospectus might contain information about many mutual funds and share classes.

The SEC is asking users of this Web site feature to supply feedback, including suggestions for additional functions, so that further improvements to the site can be considered and implemented.

 

Paul Pacter has been working hard to both maintain his international accounting site and to produce a comparison guide between international and Chinese GAAP.  He states the following on May 26, 2005 at http://www.iasplus.com/index.htm 

May 26, 2005:  Deloitte (China) has published a comparison of accounting standards in the People's Republic of China and International Financial Reporting Standards as of March 2005. The comparison is available in both English and Chinese. China has different levels of accounting standards that apply to different classes of entities. The comparison relates to the standards applicable to the largest companies (including all non-financial listed and foreign-invested enterprises) and identifies major accounting recognition and measurement differences. Click to download:

 
 

 


The chronology of events leading up to European adoption if common international accounting standards --- http://www.iasplus.com/restruct/resteuro.htm

Large International Accounting Firm History --- http://en.wikipedia.org/wiki/Big_Four_auditors

This is a Good Summary of Various Forms of Business Risk  --- http://www.erisk.com/portal/Resources/resources_archive.asp 

  1. Enterprise Risk Management

  2. Credit Risk

  3. Market Risk

  4. Operational Risk

  5. Business Risk

  6. Other Types of Risk?

Accounting History in a Nutshell

Confucius is described, by Sima Qian and other sources, as having endured a poverty-stricken and humiliating youth and been forced, upon reaching manhood, to undertake such petty jobs as accounting and caring for livestock.

Early accounting was a knotty issue
South American Indian culture apparently used layers of knotted strings as a complicated ledger.

Two Harvard University researchers believe they have uncovered the meaning of a group of Incan khipus, cryptic assemblages of string and knots that were used by the South American civilization for record-keeping and perhaps even as a written language. Researchers have long known that some knot patterns represented a specific number. Archeologist Gary Urton and mathematician Carrie Brezine report today in the journal Science that computer analysis of 21 khipus showed how individual strings were combined into multilayered collections that were used as a kind of ledger.
Thomas H. Maugh, "Researchers Think They've Got the Incas' Numbers," Los Angeles Times, August 12, 2005 ---
http://www.latimes.com/news/science/la-sci-khipu12aug12,1,6589325.story?coll=la-news-science&ctrack=1&cset=true
 

Jensen Comment:  I'm told that accounting tallies in Africa and other parts of the world preceded written language.  However, tallies alone did not permit aggregations such as accounting for such things as three goats plus sixty apples.   Modern accounting awaited a combination of the Arabic numbering ( http://en.wikipedia.org/wiki/Arabic_numbers ) and a common valuation scheme for valuing heterogeneous items (e.g., gold equivalents or currency units) such that the values of goats and apples could be aggregated.  It is intriguing that Inca knot patterns were something more than simple tallies since patterns could depict different numbers and aggregations could possibly be achieved with "multilayered collections."


Accounting History (across hundreds of years)
 
A Change Fifty-Years in the Making, by Jennie Mitchell, Project Accounting WED Interconnect --- http://accounting.smwc.edu/historyacc.htm


Serious Accounting Historians May Find Some Things of Use Here
Advanced Papyrological Information System from Columbia University --- http://www.columbia.edu/cu/lweb/projects/digital/apis/

APIS is a collections-based repository hosting information about and images of papyrological materials (e.g. papyri, ostraca, wood tablets, etc) located in collections around the world. It contains physical descriptions and bibliographic information about the papyri and other written materials, as well as digital images and English translations of many of these texts. When possible, links are also provided to the original language texts (e.g. through the Duke Data Bank of Documentary Papyri). The user can move back and forth among text, translation, bibliography, description, and image. With the specially-developed APIS Search System many different types of complex searches can be carried out.

APIS includes both published and unpublished material. Generally, much more detailed information is available about the published texts. Unpublished papyri have often not yet been fully transcribed, and the information available is sometimes very basic. If you need more information about a papyrus, you should contact the appropriate person at the owning institution. (See the list of contacts under Rights & Permissions.)

APIS is still very much a work in progress; current statistics are shown in the sidebar at right. Other statistics are available on the statistics page in the project documentation. Curators of collections interested in becoming part of APIS are invited to communicate with the project director, Traianos Gagos.


More Than a Numbers Game: A Brief History of Accounting
Author: Thomas A. King
ISBN: 0-470-00873-3
Hardcover 242 pages
September 2006

Inspired by a 1998 speech by former SEC Chairman Arthur Levitt, this book addresses the why of accounting instead of the how, providing practitioners and students with a highly readable history of U.S. corporate accounting. Each chapter explores a controversial accounting topic. Author Thomas King is treasurer of Progressive Insurance.
SmartPros Newsletter, September 25, 2006


More Than a Numbers Game: A Brief History of Accounting
Author: Thomas A. King
ISBN: 0-470-00873-3
Hardcover 242 pages
September 2006

Inspired by a 1998 speech by former SEC Chairman Arthur Levitt, this book addresses the why of accounting instead of the how, providing practitioners and students with a highly readable history of U.S. corporate accounting. Each chapter explores a controversial accounting topic. Author Thomas King is treasurer of Progressive Insurance.
SmartPros Newsletter, September 25, 2006

Jensen Comment
The Chief Accountant of the SEC under Arthur Levitt was one of my heroes named Lynn Turner.

Let me close by citing Harry S. Truman who said, "I never give them hell; I just tell them the truth and they think its hell!"
Great Speeches About the State of Accountancy

"20th Century Myths," by Lynn Turner when he was still Chief Accountant at the SEC in 1999 --- http://www.sec.gov/news/speech/speecharchive/1999/spch323.htm

It is interesting to listen to people ask for simple, less complex standards like in "the good old days." But I never hear them ask for business to be like "the good old days," with smokestacks rather than high technology, Glass-Steagall rather than Gramm-Leach, and plain vanilla interest rate deals rather than swaps, collars, and Tigers!! The bottom line is—things have changed. And so have people.

Today, we have enormous pressure on CEO’s and CFO’s. It used to be that CEO’s would be in their positions for an average of more than ten years. Today, the average is 3 to 4 years. And Financial Executive Institute surveys show that the CEO and CFO changes are often linked.

In such an environment, we in the auditing and preparer community have created what I consider to be a two-headed monster. The first head of this monster is what I call the "show me" face. First, it is not uncommon to hear one say, "show me where it says in an accounting book that I can’t do this?" This approach to financial reporting unfortunately necessitates the level of detail currently being developed by the Financial Accounting Standards Board ("FASB"), the Emerging Issues Task Force, and the AICPA’s Accounting Standards Executive Committee. Maybe this isn’t a recent phenomenon. In 1961, Leonard Spacek, then managing partner at Arthur Andersen, explained the motivation for less specificity in accounting standards when he stated that "most industry representatives and public accountants want what they call ‘flexibility’ in accounting principles. That term is never clearly defined; but what is wanted is ‘flexibility’ that permits greater latitude to both industry and accountants to do as they please." But Mr. Spacek was not a defender of those who wanted to "do as they please." He went on to say, "Public accountants are constantly required to make a choice between obtaining or retaining a client and standing firm for accounting principles. Where the choice requires accepting a practice which will produce results that are erroneous by a relatively material amount, we must decline the engagement even though there is precedent for the practice desired by the client."

We create the second head of our monster when we ask for standards that absolutely do not reflect the underlying economics of transactions. I offer two prime examples. Leasing is first. We have accounting literature put out by the FASB with follow-on interpretative guidance by the accounting firms—hundreds of pages of lease accounting guidance that, I will be the first to admit, is complex and difficult to decipher. But it is due principally to people not being willing to call a horse a horse, and a lease what it really is—a financing. The second example is Statement 133 on derivatives. Some people absolutely howl about its complexity. And yet we know that: (1) people were not complying with the intent of the simpler Statements 52 and 80, and (2) despite the fact that we manage risk in business by managing values rather than notional amounts, people want to account only for notional amounts. As a result, we ended up with a compromise position in Statement 133. To its credit, Statement 133 does advance the quality of financial reporting. For that, I commend the FASB. But I believe that we could have possibly achieved more, in a less complex fashion, if people would have agreed to a standard that truly reflects the underlying economics of the transactions in an unbiased and representationally faithful fashion.

I certainly hope that we can find a way to do just that with standards we develop in the future, both in the U.S. and internationally. It will require a change in how we approach standard setting and in how we apply those standards. It will require a mantra based on the fact that transparent, high quality financial reporting is what makes our capital markets the most efficient, liquid, and deep in the world.


In her notes compiled in 1979, Professor Linda Plunkett of the College of Charleston S.C., calls accounting the "oldest profession"; in fact, since prehistoric times families had to account for food and clothing to face the cold seasons. Later, as man began to trade, we established the concept of value and developed a monetary system. Evidence of accounting records can be found in the Babylonian Empire (4500 B.C.), in pharaohs' Egypt and in the Code of Hammurabi (2250 B.C.). Eventually, with the advent of taxation, record keeping became a necessity for governments to sustain social orders.
James deSantis, A BRIEF HISTORY OF ACCOUNTING: FROM PREHISTORY TO THE INFORMATION AGE --- http://www.ftlcomm.com/ensign/historyAcc/ResearchPaperFin.htm 

 


Origins of Double Entry Accounting are Unknown

Recall that double entry bookkeeping supposedly evolved in Italy long before it was put into algebraic form in the book Summa by Luca Pacioli .  As a result the English term "Debit" really has a Latin origin.  

You can read the following at http://www.wikiverse.org/debit

**************
Debit is an accounting and bookkeeping term that comes from the Latin word debere which means "to owe." The opposite of a debit is a credit. Debit is abbreviated Dr while credit is abbreviated Cr.
**************

December 13, 2005 message from Robert Bowers [M.Robert.Bowers@WHARTON.UPENN.EDU]

In the 14th Century, the Phoenicians sent trading ships to Cathay (China) to trade for silk. Problem was, if a ship sank, the merchant prob sank (bankrupt) with it. So the merchants pooled their resources so if a ship sank no one merchant lost everything. Along with this, an Italian Count named Paole (seriously) set up a system of recordkeeping to keep track of the ventures. In this system, he created two registers, a Debit Register (DR), and a Credit Register (CR)

I'll bet 95% of all CPA's don't know that which makes me .... a trivia freak?

December 16, 2005  message from Robert B Walker [walkerrb@ACTRIX.CO.NZ]

Luca Pacioli did not invent double entry book-keeping. The rudiments of double entry book-keeping (DEBK) can be found in Muslim government administration in the 10th Century. (See Book-keeping and Accounting Systems in a tenth Century Muslim Administrative Office by Hamid, Craig & Clark in Accounting, Business & Financial History Vol 3 No 5 1995).

As I understand it Pacioli saw the technique being used by Arab traders and adapted and codified the technique allowing it to spread to Northern Europe where it became a* key component in Western economic dominance in the last 500 years.

This is logical if you think about it. DEBK is the greatest expression of applied algebra – that Arab word betraying the origin of the particular mathematical technique in which the world’s duality is reflected.

RW

* but not the key component as Werner Sombart would have it. But then his reason for wanting that to be was his extreme anti-semitism … but that is another story.

December 13, 2005 reply from Earl Hall [earl@PERSPLAN.COM]

From thefreedictionary.com

DR = Debit [Middle English debite, from Latin dbitum, debt; see debt.]

CR=Credit [French, from Old French, from Old Italian credito, from Latin crditum, loan, from neuter past participle of crdere, to entrust; see kerd- in Indo-European roots.]

Who am I to argue with a free dictionary? The answer is worth what I paid.


Accountancy and the da Vinci Code

April 12, 2007 message from Barry Rice [brice@LOYOLA.EDU

From the April 11 Brisbane Times:

Forgotten magic manual contains original da Vinci code
AFTER lying almost untouched in the vaults of an Italian university for 500 years, a book on the magic arts written by Leonardo da Vinci's best friend and teacher has been translated into English for the first time.

The world's oldest magic text, De viribus quantitatis (On the Powers of Numbers), was penned by Luca Pacioli, a Franciscan monk who shared lodgings with da Vinci.

Continued at http://www.brisbanetimes.com.au/articles/2007/04/10/1175971101054.html  .

E. Barry Rice, MBA, CPA
Director, Instructional Services
Emeritus Accounting Professor
Loyola College in Maryland
BRice@Loyola.edu
410-617-2478

www.barryrice.com 

Facebook me! http://www.facebook.com/p/Barry_Rice/20102311


The following is a controversial quotation from http://www.cbs.dk/staff/hkacc/BOOK-ART.doc 

"The power of double-entry bookkeeping has been praised by many notable authors throughout history. In Wilhelm Meister, Goethe states, "What advantage does he derive from the system of bookkeeping by double-entry! It is among the finest inventions of the human mind"... Werner Sombart, a German economic historian, says, "... double-entry bookkeeping is borne of the same spirit as the system of Galileo and Newton" and "Capitalism without double-entry bookkeeping is simply inconceivable. They hold together as form and matter. And one may indeed doubt whether capitalism has procured in double-entry bookkeeping a tool which activates its forces, or whether double-entry bookkeeping has first given rise to capitalism out of its own (rational and systematic) spirit".

If, for a moment, one considers the credibility crisis of practical accounting, it would be quite impossible to dismiss the following paradox: the conflict between the enthusiastic praise of the system's strength on the one hand, and on the other, the many financial failures in the real world. How can such a powerful system, even when applied meticulously, still result in disasters? Although it is hardly necessary to argue more in favour of double-entry book-keeping, I still want to underline the two qualities of the system which I find are valid explanations of the system's very important and world-wide role in financial development for five centuries.

The Logic of Double-Entry Bookkeeping, by Henning Kirkegaard
Department of Financial & Management Accounting 
Copenhagen Business School 
Howitzvej 60

 

Along this same double-entry thread I might mention my mentor at Stanford.
Nobody I know holds the mathematical wonderment of double-entry and historical cost accounting more in awe than Yuji Ijiri.  For example, see Theory of Accounting Measurement, by Yuji Ijiri (Sarasota:  American Accounting Association Studies in Accounting Research No. 10, 1975).  

Dr. Ijirii also extended the concept to triple-entry bookkeeping in (Sarasota:  Triple-Entry Bookkeeping and Income Momentum
American Accounting Association Studies in Accounting Research No. 18, 1982).
http://accounting.rutgers.edu/raw/aaa/market/studar.htm
tm 

Also see the following:

Brush up your Shakespeare:  Medieval manuscripts to hit Internet
Stanford University Libraries, the University of Cambridge and Corpus Christi College, Cambridge, will make hundreds of medieval manuscripts, dating from the sixth through the 16th centuries, accessible on the Internet.
"Medieval manuscripts to hit Internet," Stanford Report, July 13, 2005 ---
http://news-service.stanford.edu/news/2005/july13/parker-071305.html

A summary of the medieval times and literature is available at http://en.wikipedia.org/wiki/Medieval


Brush up your Shakespeare:  Medieval manuscripts to hit Internet
Stanford University Libraries, the University of Cambridge and Corpus Christi College, Cambridge, will make hundreds of medieval manuscripts, dating from the sixth through the 16th centuries, accessible on the Internet.
"Medieval manuscripts to hit Internet," Stanford Report, July 13, 2005 ---
http://news-service.stanford.edu/news/2005/july13/parker-071305.html

A summary of the medieval times and literature is available at http://en.wikipedia.org/wiki/Medieval

May 28, 2005  reply from Barbara Scofield [scofield@GSM.UDALLAS.EDU]

Thank you for the notice about the availability of the medieval manuscripts on the Internet through the project Parker on the Web at Stanford University. Two manuscripts are currently available, and on page 11 of the English translation of Matthew Paris's "English History From 1235 to 1273" I have already found references to accounting (see below).

Accountants are still using the principle "under whatever name it may be called" and entities are still making up new names for inconvenient economic events in the hopes of avoiding full disclosure.

At this Catholic liberal arts university Shakespeare is modern, and the medieval world is revered, so I'm interested in gaining some insight into the medieval worldview.

Barbara W. Scofield, PhD, CPA
Associate Professor of Accounting
University of Dallas
1845 E. Northgate Irving, TX 75062
Braniff 262
scofield@gsm.udallas.edu 

 


Ancient Finance from Harvard Business School

From Jim Mahar's blog on May 17, 2006 --- http://financeprofessorblog.blogspot.com/

 
The HBS Working Knowledge site has an interesting article by William Goetzmann on financial instruments back in the time of the Romans and Greeks. For instance on checks:

...bankers' checks written in Greek on papyri appeared in ancient Egypt as far back as 250 B.C. Papyri preserved well in Egypt thanks to its arid climate, but Goetzmann thinks it's safe to say such checks changed hands throughout the Mediterranean world . . . So the whole tradition of bank checks predates the current era and has its roots at least in Hellenistic Greek times," he says.


Going Concern and Accrual Accounting Evolved in the 1500s

Limited liability Corporations (divorced professional management from ownership shares)

Speculation Fever
Fraud and corruption festered and grew with the trading of joint stock, especially after 1600 A.D.  The South Seas Company scandal (reporting stock sales as income and paying dividends out of capital) led to England's Bubble Act in 1720 A.D. that focused on misleading accounting practices that helped managers rip off investors, especially by crediting stock sales to income.

Laissez-Faire Accounting survived endless debates and scandals until the Great Depression in 1933

After 1933, the AICPA and the SEC seriously attempted to generate accounting standards, enforce accounting standards, and provide academic justification for promulgated standards.

Wow Online Accounting History Book (Free)
Thank you David A.R. Forrester for providing a great, full-length, and online book:
An Invitation to Accounting History --- http://accfinweb.account.strath.ac.uk/df/contents.html 
Note especially Section B2 --- "
Rational Administration, Finance And Control Accounting:  the Experience of Cameralism" --- http://accfinweb.account.strath.ac.uk/df/b2.html 

Accounting history lecture worth noting --- http://newman.baruch.cuny.edu/digital/saxe/saxe_1978/baxter_79.htm

The for-free IASC comparison study of IAS 39 versus FAS 133 (by Paul Pacter) at http://www.iasc.org.uk/news/cen8_142.htm

The non-free FASB comparison study of all standards entitled The IASC-U.S. Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP
SECOND EDITION, (October 1999) at http://stores.yahoo.com/fasbpubs/publications.html 

In 1999 the Joint Working Group of the Banking Associations sharply rebuffed the IAS 39 fair value accounting in two white papers that can be downloaded from http://www.iasc.org.uk/frame/cen3_112.htm.

Also see the Financial Accounting Standards Board (FASB) and the International Federation of Accountants Committee (IFAC).

Side by Side: IAS 39 Compared with FASB Standards (FAS 133), by Paul Pacter, as published in Accountancy International Magazine, June 1999 --- http://www.iasc.org.uk/news/cen8_142.htm 
Also note "Comparisons of International IAS Versus FASB Standards" --- http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf

October 21, 2005 message from Scott Bonacker [lister@BONACKERS.COM]

I remember a thread or two asking for information on historical figures or accounting heros or something like that. I couldn't come up with the right key words to find it by searching the archives unfortunately.

When I saw this article, I thought this was someone that should be included:


"Mary T. Washington of Chicago stepped bravely beyond race and gender boundaries in 1943, becoming the first black female certified public accountant in the United States. Washington, 99 years old when she died in late July, first opened an accounting practice for African-American clients in her basement while working on her college degree.

Washington lived and led in a world not yet here, creating what her business partner later called an "underground railroad" for aspiring black CPAs.
...."

Read the rest at: 

http://www.sojo.net/index.cfm?action=magazine.article&issue=soj0511&article=051149
 

October 21, 2005 reply from Bob Jensen

Hi Scott,

Although there are probably various interesting sites such as those you mentioned, there are several sites that are of particular interest with respect to famous accounting practitioners and academics.

The OSU Accounting Hall of Fame
It should be noted that members elected to this Hall of Fame include famous accountants from around the world --- http://fisher.osu.edu/acctmis/hall/ 

U.K. Accounting Hall of Fame
Professors David Otley and Ken Peasnell of the Department of Accounting and Finance are two of the fourteen founding members of the British Accounting Association’s Hall of Fame. The ceremony took place at the British Accounting Association 2004 Annual conference at York in April 2004 --- http://www.lums.lancs.ac.uk/news/3806/ 

Michigan State Video Archive
I've not yet seen anything about other accounting Hall of Fame sites. Michigan State University has a video archive of famous accountants. These accountants were invited to campus and then taped live. I don't think any of this footage is available online, but it would be a nice thing to do now that digitization hardware is so inexpensive. Don Edwards (U. of Georgia) probably knows more about these videos than anybody else.

A few accountants who became famous in fields other than accounting are listed at http://www.educationwithattitude.com/catch/accounting.asp 

The above site missed my favorite accounting celebrity John Cleese
The Unofficial Monty Python Website --- http://www.educationwithattitude.com/catch/accounting.asp

Note especially The Accountancy Shanty (audio) at http://www.educationwithattitude.com/catch/accounting.asp 

Bob Jensen

October 23, 2005 reply from Tom Sentman [TSentman@MSN.COM]

Here is a historical figure for consideration. While not a CPA, Luca Pacioli is considered to be the father of accounting. Although he did not invent dual-entry accounting, he described the system as we know it today. I always use this question on my tests.

Visit http://acct.tamu.edu/smith/ethics/pacioli.htm  for more.

Cheers,

Tom Sentman


See Accounting History Publications list 1998 --- http://findarticles.com/p/articles/mi_qa3933/is_199905/ai_n8843886

A substantial listing of history papers is available from the Institute of Chartered Accountants --- http://www.icaew.co.uk/library/index.cfm?AUB=TB2I_27022

Accounting Historians Journal --- http://accounting.rutgers.edu/raw/aah/

The University of Sydney's Accounting Foundation provides some accounting history publications --- http://www.econ.usyd.edu.au/af /

History of Information Technology in Auditing (EDP Auditing) --- http://en.wikipedia.org/wiki/History_of_information_technology_auditing

For additional information on the history of accountancy and the accountancy profession see http://en.wikipedia.org/wiki/Accounting


Islamic Accounting

Islamic Accounting --- http://en.wikipedia.org/wiki/Islamic_accounting

The Differences of Conventional and Islamic Accounting --- Click Here

"Islamic Accounting: Challenges, Opportunities and Terror," AccountingWeb, October 5, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102651

Recent events, from the start of Ramadan, to the Pope’s controversial remarks about Islam, to the discovery of a new tape by two of the September 11 attackers, to the release of Bob Woodward’s latest book, have once more made Islam a topic of conversation. Beyond the headlines, however, exists a complex religious and social system that affects far more people than just Muslims. Islamic finance, particularly Islamic banking, insurance and accounting, is playing a growing role around the globe, especially in the business world.

Islamic accounting is generally defined as an alternative accounting system which aims to provide users with information enabling them to operate businesses and organizations according to Shariah, or Islamic law. With little doubt, the greatest challenges to Islamic accounting and finance in the United States stem from a lack of knowledge and understanding of Islam and the intricacies of its financial laws and concerns regarding terrorism, combined with the U.S. regulatory framework and guiding principles of American business. The Muslim and Islamic financial markets within the U.S. and around the world, currently represent an enormous opportunity for those willing to overcome these challenges.

Islam & Islamic Financial Laws

“To professional accountants who have been brought-up on the idea of accounting as an ‘objective’, technical and value-free discipline, the idea of attaching a religious adjective to accounting may seem embarrassing, unprofessional and even dangerous,” Dr. Shahul Hameed bin Mohamed Ibrahim says in Islamic Accounting – A Primer.

Both conventional and Islamic accounting provide information and define how that information is measured, valued, recorded and communicated. Conventional accounting provides information about economic events and transactions, measuring resources in terms of assets and liabilities, and communicating that information through financial statements users, typically investors, rely on to make decisions regarding their investments. Islamic accounting, however, identifies socio-economic events and transactions measured in both financial and non-financial terms and the information is used to ensure Islamic organizations of all types adhere to Shariah and achieve the socio-economic objectives promoted by Islam. This is not to say, or imply, Islamic accounting is not concerned with money, rather it is not concerned only with money.

Islamic accounting, in many ways, is more holistic. Shariah prohibits interest-based income or usury and also gambling, so part of what Islamic accounting does is help ensure companies do not harm others while making money and achieve an equitable allocation and distribution of wealth, not just among shareholders of a specific corporation but also among society in general. Of course, as with conventional accounting, this is not always achieved in practice, as an examination of the wide variances in wealth among the populations of Arab nations, particularly those with majority Muslim populations shows.

In addition, because a significant part of operating within Shariah means delivering on Islam’s socio-economic objectives, Islamic organizations have far wider interests and engage in more diverse activities than their non-Islamic counterparts.

Concerns About Terrorism

The diverse activities and interests organizations pursue under Shariah is a cause for concern when applying conventional accounting to Islamic organizations. After all, conventional accounting can be used to disguise unethical and even illegal activities within the very organizations they were intended to provide information about. Imagine how easy it is to overlook or just not identify such information when employing an accounting system not designed for use with the type of organization it is being applied to.

In the past, the issues raised by this mismatch focused on the ability of users beyond the Muslim world to make appropriate decisions regarding investments. Since September 11, 2001, however, the concern has changed from the potential loss of investment to the possibility of supporting terrorism.

This concern is particularly significant for non-profit organizations involved in providing humanitarian relief outside the U.S.. Fortunately, the U.S. Department of the Treasury (DoT) has issued updated Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-based Charities (Guidelines).

“The abuse of charities by terrorist organizations is a serious and urgent matter, and the Guidelines reinforce the need for the U.S. Government and the charitable sector alike, to keep this challenge at the forefront of our complementary efforts,” Pat O’Brien, Assistant Secretary for the Treasury’s Office of Terrorist Financing and Financial Crime, said in a statement announcing the updated guidelines. The Treasury Department is committed to protecting and enabling legitimate and vital charity worldwide, and will continue to work with the sector to advance our mutual goals.”

The Guidelines urge charities to take a proactive, risk-based approach to protecting against illicit abuse and are intended to be applied by those charities vulnerable to such abuse, in a manner commensurate with the risks they face and the resources with which they work. At the request of the charitable sector, the Guidelines contain extensive anti-terrorist financing guidance, as well as guidance on sound governance and financial practices that helps prevent the exploitation of charities.

Regulatory Issues

The regulatory environment Islamic individuals and organizations are most concerned with, considering the current political climate, are those relating to anti-terrorism and anti-money laundering. Yet the tensions arising from regulatory requirements within the U.S. related to American business practices often prove more difficult to resolve.

It is in trying to balance the expectations of distinct business cultures that the differences between conventional and Islamic accounting are most notable. For instance, depending upon the type of transactions the organizations are engaged in, the roles, responsibilities and rights assigned to each party can be contradictory and even in direct conflict. In some situations, such as transactions involving private equity, venture capital, profit sharing and liquidations, organizations and individuals employing conventional accounting may actually find they prefer Islamic accounting. Other issues, such as those related to taxation, require significant effort to resolve. The inherent flexibility of Shariah is a benefit under these circumstances, since the complexity of the American tax code is highly inflexible.

The number of Muslim consumers, investors and business owners has grown along with the Muslim American population which is currently estimated to be between six and seven million. Although demand for Islamic financial products and services has increased, both the supply and the number of providers remain insufficient. It should also be noted that Islamic orthodoxy, expressed as the desire to implement Shariah as the sole legal foundation of a nation, is actually associated with progressive economic principles, including increasing government for the poor, reducing income inequality and increasing government ownership of industries and industries, especially in the poorer nations of the Muslim world.

“While it is common to associate traditional religious beliefs with conservative political stances on a wide range of issues, this is only partly true,” said Robert V. Robinson, Chancellor’s Professor and chair of Indiana University’s Department of Sociology. “The Islamic orthodox are more conservative on issues having to do with gender, sexuality and the family, but more liberal or left on economic issues.

Islamic Accounting Web --- http://www.iiu.edu.my/iaw/

The Islamic Accounting Website is a project of the Department of Accounting, Kulliyah of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur. This project is under the direction of Dr. Shahul Hameed bin Mohamed Ibrahim, Assistant Professor and the current Head of the Department. The philosophy of the University is to Islamize knowledge to solve the crisis in Muslim thinking brought about by the secularization of knowledge and furthermore contributing as a centre of educational excellence to revive the dynamism of the Muslim Ummah in knowledge, learning and the professions. The Department of Accounting is fully committed to this vision and strives to Islamicise Accounting.

"ISLAMIC ACCOUNTING STANDARDS," by Shadia Rahman --- http://islamic-finance.net/islamic-accounting/acctg5.html

Sharing site of Dr Shahul Hameed Bin Hj Mohamed Ibrahim --- http://islamic-finance.net/islamic-accounting/

articles by the author

 

articles by other scholars

 Forthcoming Articles on Islamic Accounting


XBRL:  The Next Big Thing

December 6, 2005 message from Dennis Beresford [dberesfo@terry.uga.edu]

National Conference on Current SEC and PCAOB Developments. His talk is available at: http://www.sec.gov/news/speech/spch120505cc.htm 

He had three main messages:

1. Accounting rules need to be simplified. "The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules." "The sheer accretion of detail has, in time, led to one of the system's weaknesses - its extreme complexity. Convolution is now reducing its usefulness."

2. The concentration of auditing services in the Big 4 "quadropoly" is bad for the securities markets. The SEC will try to do more to encourage the use of medium size and smaller firms that receive good inspection reports from the PCAOB.

3. The SEC will continue to push XBRL. "The interactive data that this initiative will create will lead to vast improvements in the quality, timeliness, and usefulness of information that investors get about the companies they're investing in."

A very interesting talk - one that seems to promise a high level of cooperation with the accounting profession.

Denny

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


Two XBRL Videos

XBRL is no longer something we only play with in academe.  It is now available to investors around the world, although it may take a while for some companies to add the XBRL tags to their financial statements.  Some things that are now being done in XBRL such as time graphs and ratio graphs can be done with things other than XBRL.  What XBRL does, however, is make it possible to:

(1) Compare different companies in a Web browser

(2) Perform customized analyses if the XBRL statements are downloaded into Excel

(3) Conduct easy searches that do not yield thousands of unwanted and extraneous hits

Bob Jensen's New Video Tutorial on XBRL (about 30 minutes)
It's the XBRLdemos2005.wmv file at http://www.cs.trinity.edu/~rjensen/video/Tutorials/ 
But first read the following and watch the KOSDAQ video before watching the above video.

Question
What are the two most significant events in the history of accounting, financial reporting, and financial statement analysis? 

Answers
Double Entry Bookkeeping and XBRL

The origins of double entry bookkeeping are unknown.  It goes back over 100 years before Luca Pacioli  made it famous by algebraically describing it in the world's first algebra book called Summa written in 1494.  Pacioli's basic equation A=L+E simply shows how recorded asset values in total equal the double-entry sum of creditor liabilities plus owner equities in those assets.  For over 500 years accounting disputes mainly lie in defining the A, L, and E concepts and measuring them in financial statements.  Pacioli gave us the algebra without the crucial and operational definitions of terms.  Bob Jensen's brief summary of the history of accounting is at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

XBRL stands for eXtensible Business Reporting Language in XML that can now be interpreted by every Web browser such as Microsoft's Internet Explorer.  In the future, virtually every all academic disciplines such as Chemistry, Physics, and History will probably develop their own taxonomies for XML reporting on the Web.  Hence, we one day may have XCHEM, XPHYS, and XHIST eXtensible reporting languages

Whereas the famous HTML tags on data are not extensible and are more or less fixed in scope and time, XML extensible meta-tags will become the world's most popular way of creating customized "meta-tags" that attach to virtually every piece of Web data and describe attributes of each piece of data.  The history of data tags and meta-tags is briefly outlined at http://www.trinity.edu/rjensen/XBRLandOLAP.htm
I also highly recommend the XBRL history and news site at XBRL headquarters at http://www.xbrl.org/Home/

XBRL is a taxonomy for XML meta-tags to be placed on virtually every number in a set of financial statements.  For over a decade, efforts have been made by huge companies and accounting firms to develop standardized XBRL tags for key taxonomies in accounting.  These taxonomies may vary as to a particular set of accounting generally accepted accounting principles (GAAP) such as International GAAP or US GAAP.  Once a company or user selects which GAAP taxonomy to use, it's financial statements can be "marked up" with XBRL meta-tags that facilitate comparative financial statement analysis.  Users may also take any set of financial statements and add tags for a chosen set of GAAP tags.  For example, see Drag and Tag from Rivet Corporation --- http://www.rivetsoftware.com/
Also see http://www.xbrl.org/eu/CEBS-3/Rivet_Industry Day_Brussels_14 Sept 2005.pdf

Because adding XBRL meta-tags to a given set of financial statements is time consuming, most large companies are in the process of adding these tags to their own financial data so that investors will not have to do their own tagging.  The major stock exchanges of the world are now urging companies to send in their financial reports marked up in XBRL.  Soon they will require all listed companies to submit XBRL-tagged financial statements.

Bob Jensen's Old XBRL Video Tutorial called XBRLdemos.wmf
About four years ago (I can't remember exactly when) I prepared a XBRL tutorial on how to use XBRL in financial statement analysis.  The tutorial itself was actually developed by NASDAQ, Microsoft, and PwC in a NMP partnership.  NASDAQ selected 20 companies and marked up their financial statements in XBRL.  Microsoft wrote a fancy Excel program to analyze those financial statements in Excel.  PwC served up the data on the Web.  This NMP tutorial was intended to have a short life since the plan was eventually to use XBRL directly in Web browsers without having to use Excel.  Indeed, PwC no longer serves up this tutorial.  Bob Jensen probably has the only recorded history of this NMP tutorial on video in the file XBRLdemos.wfm at http://www.cs.trinity.edu/~rjensen/video/Tutorials/

Bob Jensen's New 2005 XBRL Video Tutorial called XBRLdemos2005.wmf
XBRL is now marked up on many financial statements on the Web and can be used for financial statement analysis in Web browsers.  I found a set of such statements for various (Star) companies on the Korean KOSDAQ stock exchange homepage. 

Before looking at my new video, I want you to first view the KOSDAQ Camtasia video at http://www.ubmatrix.com/solutions/WebHelp/KOSDAQDemo.html

After viewing this video, you can then go to my new Camtasia 2005 video XBRLdemos2005.wmv file at http://www.cs.trinity.edu/~rjensen/video/Tutorials/ 

My new video is mainly a tutorial about how I learned to use the XBRL financial statements made available by KOSDAQ for actual use by investors in companies listed on the KOSDAQ stock exchange.

In particular, my new video shows how to perform the following steps at the KOSDAQ site.

First
Watch the http://www.ubmatrix.com/solutions/WebHelp/KOSDAQDemo.html

Second
Watch my XBRLdemos2005.wmv file at http://www.cs.trinity.edu/~rjensen/video/Tutorials/ 

The KOSDAQ homepage is at http://www.ubmatrix.com/home/default.asp
           
Go to http://km.krx.co.kr/
     You do not have to install the Korean language pack
     Note that it may take some time for the upper menu to appear
     Click on the English button in the upper right corner after the menu appears

Third
Go directly to http://english.kosdaq.com/
     Click on the "XBRL Service" on the right side of the screen
     Click on a company's logo (ignore any pop ups to install a language pack)
     If you do not see a graph on the left side of a company's report,
             click on the button/instruction below the graph's border
     After you see a graph,
             click on the various financial statement line items to the right of the graph
            (Your mouse pointer will now be a small bar graph)

Go to the bottom of the page and click on "Ratios"
     If your pointer is still a small graph,
             click on the ratios that you want to see in the graph
    

Go to the bottom of the page and click on "Comparison"
     Options for comparisons are given (they are also demonstrated in my video)
    

Go to the bottom of the page and read about the Excel Analyzer
      See what you can download if you really get interested in the analysis options

 

October 30, 2005 reply from Deborah Johnson [Finance@WeFightFraud.com]

I followed the instructions you plan to give your students for Monday and found a few bugs you might want to know about.

The Demos link at XBRL.org  is not on the home page. They need to know that this site requires them to navigate to "Showcase" to find the Demo.

http://km.krx.co.kr/   selected English and then XBRL Services, then chose the company. The graph is only available if you agree to download and install additional software on your PC. If they do not have administrator rights, this is not going to be an option for your students. (say on college lab and classroom computers).

The company I selected, LG Micron, had an obvious defect in the financial data being presented for this demonstration. XBRL is clearly not going to minimize any human mistakes, and the printed financials will still have to be carefully scrutinized by management and the auditors. Do the math on the Trade Receivables at Net. Demerits for any student who doesn't find the error. If you go to the bottom of the table and select "Get these financials in XBRL" you may get an XML Parsing Error. This is probably a higher version of XMl required, and again the student would need administrator rights to upgrade the software or install patches and plug ins.

Regards,

Deborah Johnson

October 30, 2005 reply from Bob Jensen

Hi Deborah,

I agree with all your points and thank you for providing some clarifications.  With respect to needing administrative rights to view the graphs (say on college lab computers and on classroom computers), it behooves faculty to ask administrators to install the software that can be downloaded free by clicking below the graph frame for any company in the demo.

If students do not have administrative rights on a college lab or classroom computer, I guess this makes my video tutorial even more valuable since students can see what will happen if they try this on their own computers where they automatically have administrative rights.

Thanks,

Bob

 

 


Bob Jensen's threads on GAAP comparisons (with particular stress upon derivative financial instruments accounting rules) are at http://www.trinity.edu/rjensen/caseans/canada.htm
The above site also links to more general GAAP comparison guides between nations.

International Standards from the IASB --- Click Here
IASB homepage--- http://www.iasb.org/Home.htm 

U.S. Standards from the FASB (Free Downloads) --- http://www.fasb.org/public/ 
FASB homepage --- http://www.fasb.org/

Management Accounting Standards from the IMA (Free Downloads) --- http://www.imanet.org/publications_statements.asp#C
IMA homepage --- http://www.imanet.org/

Bob Jensen's summary of accounting theory and controversies --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

Comparison of IFRSs and US GAAP (Educators can provide free copies to students) --- http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf
Comparisons for other nations --- http://www.iasplus.com/country/compare.htm

From IAS Plus on March 14, 2007 --- http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf

Deloitte's IFRS Global Office has published a new Comparison of International Financial Reporting Standards and United States GAAP (PDF 208k, 36 pages) as of 28 February 2007. While this comparison is comprehensive, it does not attempt to capture all of the differences that exist or that may be material to a particular entity's financial statements. Our focus is on differences that are commonly found in practice. The significance of the differences enumerated in this pubilcation – and others not included – will vary with respect to individual entities depending on such factors as the nature of the entity's operations, the industry in which it operates, and the accounting policy choices it has made. We are pleased to grant permission for accounting educators and students to make copies for educational purposes.

 

Main News Site for International Accounting Happenings --- http://www.iasplus.com/index.htm 

KEY GROUPS
EFRAG
Europe
IFAC
IOSCO
US FASB
US SEC
US PCAOB
RESOURCES
Past News by Month
Reference Materials
Statistics Database
IFRS in Europe by 2005
UK Web-based IFRS Updates
Country/Region Use of IFRSs
IAASB Auditing Standards
Public Sector Standards
TOOLS
11-Year Calendar
Currency Converter
Loan Amortisation
News Headlines
Stock Market Indexes
Telephone Codes
Unit Conversions
World Electric Guide
World Phone Guide
World Time Clock
Worldwide Weather
DELOITTE'S IASPLUS WEBSITE
About IASPlus
Terms for Use
Privacy Policy
Abbreviations
IAS Plus Spanish
IAS Plus German
Paul Pacter and Deloitte provide a statistical database (with data about international accounting) at http://www.iasplus.com/stats/stats.htm

 

International Financial Reporting Standards (IFRS) Summary --- http://www.iasplus.com/standard/standard.htm

Use of IFRS varies by nation --- http://www.iasplus.com/country/useias.htm 

If you click on the Search tab and enter something like (IFRS AND China) to compare IFRS with the domestic standards of a given nation --- http://www.iasplus.com/index.htm


Standard Setting and Securities Markets:  U.S. Versus Europe

November 29, 2007 message from Pacter, Paul (CN - Hong Kong) [paupacter@DELOITTE.COM.HK]

Some similarities to Chair of SEC, but some important differences. SEC has direct regulatory powers over securities markets, entities that offer securities in those markets, broker/dealers in securities, auditors, and others. SEC can impose penalties on those it regulates.

In Europe there is no pan-European securities regulator equivalent to the SEC with direct regulatory powers similar to the SEC's. Rather, there are 27 securities regulators (one from each member state) who have that power. Here's a link to the list:

http://www.cesr-eu.org/index.php?page=members_directory&mac=0&id=

There is a coordinating body of European securities regulators called CESR (the Committee of European Securities Regulators (http://www.cesr-eu.org/) but CESR's role is advisory, not regulatory.

When the European Parliament adopts legislation (such as securitieslegislation) the legislation first has to be transposed (legally adopted) into the national laws of the Member States. Commissioner McCreevy's role is to propose policies and propose legislation to adopt those policies in Europe, oversee implementation of the legislation in the 27 Member States (plus 3 EEA countries), and (through both persuasion and some legal authority) try to ensure consistent and coordinated implementation. The Commissioner also has outreach and liaison responsibilities outside the European Union. Because there is no pan-European counterpart to the SEC Chairman, Commissioner McCreevy generally handles top level policy liaison between the SEC and Europe.

Like the Chair of the SEC, EU Commissioners are political appointees.

Paul Pacter

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


Question
Will the U.S. adopt all IFRS international standards while the European Union cherry picks which standards it will adopt?

From The Wall Street Journal Accounting Weekly Review on April 27, 2007

"SEC to Mull Letting U.S. Companies Use International Accounting Rules," by David Reilly, The Wall Street Journal, Page: C3 --- http://snipurl.com/WSJ0425

TOPICS: Accounting, Financial Accounting, Financial Accounting Standards Board, Securities and Exchange Commission

SUMMARY: The article describes the SEC's willingness to consider allowing U.S. companies to use USGAAP or International Financial Reporting Standards (IFRS) in their filings. This development stems from the initiative to allow international firms traded on U.S. exchanges to file using IFRS without reconciling to USGAAP-based net income and stockholders' equity as is now required on Form 20F. "SEC Chairman Christopher Cox said the agency remains committed to removing the reconciliation requirement by 2009. Such a move was the subject of an SEC roundtable and is being closely watched by European Union officials." The SEC will accept comments this summer on its proposal to eliminate the reconciliation requirements. If the agency does implement this change, then it will consider allowing U.S. companies the same alternative.

QUESTIONS:
1.) What is a "foreign private issuer" (FPI)? Summarize the SEC's current filing requirements for these entities.

2.) Why is the SEC considering allowing U.S. companies to submit filings under IFRS rather than U.S. GAAP?

3.) Why might the SEC's decision in this matter "spell the demise of USGAAP"?

4.) Define "principles-based standards" and contrast with "rules-based standards." Give an example in either USGAAP or IFRS requirements for each of these items.

5.) "Some experts don't think a move away from U.S. GAAP would necessarily be bad." Who do you think would hold this opinion? Who would disagree? Explain.

6.) Define the term convergence in relation to global standards. Who is working towards this goal?

Reviewed By: Judy Beckman, University of Rhode Island

Jensen Comment
Canada has already decided to adopt the IFRS in place of domestic Canadian standards.

Also see ""Strengthening the Transatlantic Economy," by José Manuel Barroso (European Commission President), April 27, 2007 --- http://www.iasplus.com/europe/0704barroso.pdf

Also don't assume that the European Union automatically adopts each IASB international standard. For example, the EU may not adopt IFRS 8 --- http://www.iasplus.com/standard/ifrs08.htm

 


iGAAP (International GAAP) 2007 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained (Third Edition)
Deloitte & Touche LLP (United Kingdom) has developed iGAAP 2007 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained (Third Edition), which has been published by CCH. This publication is the authoritative guide for financial instruments accounting under IFRSs. The 2007 edition expands last year's edition with further interpretations, examples, discussions from the IASB and the IFRIC, updates on comparisons of IFRSs with US GAAP for financial instruments, as well as a new chapter on IFRS 7 Financial Instruments Disclosures including illustrative disclosures. iGAAP 2007 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained (628 pages, March 2007) can be purchased through CCH Online or by phone at +44 (0) 870 777 2906 or by email: customer.services@cch.co.uk .
IAS Plus, March 24, 2007 --- http://www.iasplus.com/index.htm

Bob Jensen's tutorials on IAS 39 (Derivative Financial Instruments) are linked at http://www.trinity.edu/rjensen/caseans/000index.htm


CPA Examination candidates and accounting faculty should check out the free database at
http://www.cpa-exam.org/cpa/literature.htm

The Trinity University library has a single-user license (with an academic discount) for PwC’s Comperio --- http://www.pwcglobal.com/comperio
The single-user limitation really has not been problematic for us. Our Library guru wrote some front end code that lets any Trinity faculty member or student go directly into Comperio without having to remember a password

Comperio evolved out of a CD-Rom database that Price Waterhouse  sold under the name “Price Waterhouse Researcher.” Updated CDs were sent to us each quarter in the old days before things were as networked on the Web. Now it’s all Comperio on the Web.

Andersen had a competing CD database called Research Manager. That was bought out after Andersen fell, but I think it is now defunct (I could be wrong about this).

Now Comperio is the main commercial database available other than FARs --- http://www.fasb.org/fars/
I think each student can buy this from Wiley, but there have been numerous complaints about it.

PwC's Comperio Accounting Research Manager

Comperio is the most comprehensive on-line library of financial reporting and assurance literature in the world. Over 1,500 financial executives from around the world use Comperio on a daily basis. Comperio content includes AICPA, DIG, EITF, FASB, IAS, ISB and the SEC as well as pronouncements and standards from Australia, Belgium, Canada, New Zealand and the United Kingdom.

With Comperio, the answers you need are always available - right now, right at your fingertips. There is no software to install - just go to the Comperio website and start researching!

The entire online library can be immediately accessed by browsing a pronouncement or topic directly, or by searching the entire database for key words, topics or terms.

Visit the Comperio product information site at http://www.pwcglobal.com/comperio . You will find the necessary forms to order Comperio today or to request a 30-day free trial.

Andersen's old Accounting Research Manager is now updated and maintained by CCH. The AICPA has accounting research literature in the FARs database.

For national and international accounting rulings and online research, it is best to subscribe for a fee to one of the leading services shown below:

PwC Comperio --- http://www.pwcglobal.com/comperio

CCH Accounting Research Manager --- http://www.accountingresearchmanager.com/ARMMenu.nsf/vwHTML/ARMSplash?OpenDocument

AICPA FARs (marketed by Wiley) --- http://www.fasb.org/fars/

For looking up filings with the SEC, there are two major sources:

EDGAR --- http://www.sec.gov/edgar/quickedgar.htm

PwC EdgarScan --- http://edgarscan.pwcglobal.com/servlets/edgarscan 

It is possible to do comparative company financial analyses using the core earnings databases --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#CoreEarnings

Many IFRS and multiple nation standards and reviews are available from Deloitte's IAS Plus --- http://www.iasplus.com/index.htm

Free International Auditing Standards
All documents issued by IFAC and the International Auditing and Assurance Standards Board (IAASB) are now available for immediate download at no charge. Visitors must simply fill out a one-time registration to gain access to the documents. http://www.accountingweb.com/item/96952 


PwC has a new helper comparing U.S. GAAP with international (IFRS) GAAP --- http://www.pwc.com/extweb/pwcpublications.nsf/docid/74d6c09e0a4ee610802569a1003354c8

Download: Similarities and Differences - A comparison of IFRS and US GAAP (2005 update) [PDF file, 469k]

Download: Similarities and Differences - A comparison of IFRS and US GAAP (2004) [PDF file, 314k]

Download: publication order form [PDF file, 212k]

Other publications in the Similarities and Differences series are also available.


Updated in 2005:  Some Key Differences Between IFRs and U.S. GAAP --- http://www.iasplus.com/usa/ifrsus.htm
By way of example, consider FAS 133 versus IAS 39:

IAS 39 Option to designate any financial asset or financial liability to be measured at fair value through profit or loss ('fair value option')
  • IFRS: Option is allowed.
  • US: No such option.
  • Status: This option was added in the December 2003 revisions to IAS 39.

IAS 39 Option to designate loans and receivables as available for sale to be measured at fair value through equity ('available-for-sale option')

  • IFRS: Option is allowed.
  • US: No such option.
  • Status: This option was added in the December 2003 revisions to IAS 39.

IAS 39 Investments in unlisted equity instruments

  • IFRS: Measured at fair value if reliably measurable; otherwise at cost.
  • US: Measured at cost.
  • Status: Not currently being addressed.

IAS 39 Measurement of derivatives

  • IFRS: All derivatives are measured at fair value except that a derivative that is linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured is measured at cost.
  • US: All derivatives are measured at fair value (though the definition of a derivative is not identical to that of IAS 39).
  • Status: Not currently being addressed.

IAS 39 Multiple embedded derivatives in a single hybrid instrument

  • IFRS: Sometimes accounted for separately.
  • US: Always treated as a single compound embedded derivative.
  • Status: Not currently being addressed.

IAS 39 Reclassification of financial instruments into or out of the trading category

  • IFRS: Prohibited.
  • US: Permitted, but generally transfers into or from the trading category should be rare.
  • Status: Not currently being addressed.

IAS 39 Effect of selling investments classified as held-to-maturity

  • IFRS: Prohibited from using held-to-maturity classification for the next two years.
  • US: Prohibited from using held-to-maturity classification. SEC indicates that prohibition is generally for two years.
  • Status: Not currently being addressed.

IAS 39 Subsequent reversal of an impairment loss

  • IFRS: Required for loans and receivables, held-to-maturity, and available-for-sale debt instruments if certain criteria are met.
  • US: Prohibited for held-to-maturity and available-for-sale securities. Reversal of valuation allowances on loans is recognised in the income statement.
  • Status: Not currently being addressed.

IAS 39 Derecognition of financial assets

  • IFRS: Combination of risks and rewards and control approach. Can derecognise part of an asset. No "isolation in bankruptcy" test. Partial derecognition allowed only if specific criteria are complied with.
  • US: Derecognise assets when transferor has surrendered control over the assets. One of the conditions is legal isolation in bankruptcy. No partial derecognition.
  • Status: This is a subject that both Boards are likely to address in the future.

IAS 39 Use of "Qualifying SPEs"

  • IFRS: No such category of SPEs.
  • US: Necessary for derecognition of financial assets if transferee is not free to sell or pledge transferred assets.
  • Status: This is a subject that both Boards are likely to address in the future.

IAS 39 Offsetting amounts due from and owed to two different parties

  • IFRS: Required if legal right of set-off and intent to settle net.
  • US: Prohibited.
  • Status: Not currently being addressed.

IAS 39 Use of "partial-term hedges" (hedge of a fair value exposure for only a part of the term of a hedged item)

  • IFRS: Allowed.
  • US: Prohibited.
  • Status: Not currently being addressed.

IAS 39 Hedging foreign currency risk in a held-to-maturity investment

  • IFRS: Can qualify for hedge accounting.
  • US: Cannot qualify for hedge accounting.
  • Status: Not currently being addressed.

IAS 39 Hedging foreign currency risk in a firm commitment to acquire a business in a business combination

  • IFRS: Can qualify for hedge accounting.
  • US: Cannot qualify for hedge accounting.
  • Status: Not currently being addressed.

IAS 39 Assuming perfect effectiveness of a hedge if critical terms match

  • IFRS: Prohibited. Must always measure effectiveness.
  • US: Allowed for hedge of interest rate risk in a debt instrument if certain conditions are met – "Shortcut Method".
  • Status: Not currently being addressed.

IAS 39 Use of "basis adjustment"

  • IFRS:
    Fair value hedge: Required.
    Cash flow hedge of a transaction resulting in a financial asset or liability: Same as US GAAP.
    Cash flow hedge of a transaction resulting in a non-financial asset or liability: Choice of US GAAP or basis adjustment.
  • US:
    Fair value hedge: Required.
    Cash flow hedge of a transaction resulting in an asset or liability: Gain/loss on hedging instrument that had been reported in equity remains in equity and is reclassified into earnings in the same period the acquired asset or incurred liability affects earnings.
  • Status: Not currently being addressed.

IAS 39 Hedging gain or loss on net investment in a foreign entity

  • IFRS: The portion determined to be an effective hedge is recognised in equity.
  • US: Gains and losses relating to hedge ineffectiveness is recognised in profit or loss immediately.
  • Status: Not currently being addressed.

IAS 39 Macro hedging

  • IFRS: Fair value hedge accounting treatment for a portfolio hedge of interest rate risk is allowed if certain specified conditions are met.
  • US: Hedge accounting treatment is prohibited, though similar results may be achieved by designating specific assets or liabilities as hedged items.
  • Status: FASB does not have a project to address macro hedging.
Fair value accounting politics in the revised IAS 39

From Paul Pacter's IAS Plus on July 13, 2005 --- http://www.iasplus.com/index.htm

 
The European Commission has published Frequently Asked Questions – IAS 39 Fair Value Option (FVO) (PDF 94k), providing the Commission's views on the following questions:
  • Why did the Commission carve out the full fair value option in the original IAS 39 standard?
  • Do prudential supervisors support IAS 39 FVO as published by the IASB?
  • When will the Commission to adopt the amended standard for the IAS 39 FVO?
  • Will companies be able to apply the amended standard for their 2005 financial statements?
  • Does the amended standard for IAS 39 FVO meet the EU endorsement criteria?
  • What about the relationship between the fair valuation of own liabilities under the amended IAS 39 FVO standard and under Article 42(a) of the Fourth Company Law Directive?
  • Will the Commission now propose amending Article 42(a) of the Fourth Company Directive?
  • What about the remaining IAS 39 carve-out relating to certain hedge accounting provisions?

Bob Jensen's threads and tutorials on FAS 133 and IAS 39 are at http://www.trinity.edu/rjensen/caseans/000index.htm

IAS 39 Implementation Guidance

IAS 39 Amendments in 2005 --- http://snipurl.com/IAS39amendments


Convergence of foreign and domestic accounting rules could catch some U.S. companies by surprise
Although many differences remain between U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), they are being eliminated faster than anyone, even Herz or Tweedie, could have imagined. In April, FASB and the IASB agreed that all major projects going forward would be conducted jointly. That same month, the Securities and Exchange Commission said that, as soon as 2007, it might allow foreign companies to use IFRS to raise capital in the United States, eliminating the current requirement that they reconcile their statements to U.S. GAAP. The change is all the more remarkable given that the IASB was formed only four years ago, and has rushed to complete 25 new or revamped standards in time for all 25 countries in the European Union to adopt IFRS by this year. By next year, some 100 countries will be using IFRS. "We reckon it will be 150 in five years," marvels Tweedie. "That leaves only 50 out."
Tim Reason, "The Narrowing GAAP:  The convergence of foreign and domestic accounting rules could catch some U.S. companies by surprise," CFO Magazine December 01, 2005 ---
http://www.cfo.com/article.cfm/5193385/c_5243641?f=magazine_coverstory


Monumental Scholarship (The following book is not online.)
The Early History of Financial Economics 1478-1776
by Geoffrey Poitras (Simon Fraser University) --- http://www.sfu.ca/~poitras/photo_pa.htm 
(Edward Elgar,  Cheltenham, UK, 2000) --- http://www.e-elgar.co.uk/ 

Jack Anderson sent the following message:

A good book on accounting history in the U.S. is

A History of Accountancy in the United States by Gary John Previts and  Barbara Dubis Merino

 

It's available through The Ohio State University Press (see web site

http://www.ohiostatepress.org/cat97/previts.htm )

 

I'm unaware of a good history of international accounting but would like to hear of one.

 

Jack Anderson

 

The FASB's website is at http://www.iasb.org/ 

The future of the FASB and all national standard setters is cloudy due to the globalization of business and increasing needs for international standards.  The primary body for setting international standards was the International Accounting Standards Committee (IASC) that evolved into the International Accounting Standards Board (IASB) having a homepage at http://www.iasc.org.uk/  For a brief review of its history and the history of its standards, I recommend going to http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm#003.04.

In 2001, the IASC was restructured into the new and smaller International Accounting Standards Board (IASB).  The majority of the IASB members will be full-time, whereas the members of the IASC were only part-time and did not have daily face-to-face encounters with other Board members or the IASC staff.  The IASB will operate more like the FASB in the U.S.  

In the early years of its existence, the IASC tended to avoid controversial issues and there was nothing to back up its standards (except in the U.S. where lawyers will use almost anything to support litigation brought by investors against corporations).  

Times are changing at the IASC.  It has been restructured and is getting a much greater budget for accounting research.  Most importantly, IASC standards are becoming the standards required by large international stock exchanges (IOSCO).

The Global Reporting Initiative (GRI) was established in late 1997 with the mission of developing globally applicable guidelines for reporting on the economic, environmental, and social performance, initially for corporations and eventually for any business, governmental, or non-governmental organisation (NGO). Convened by the Coalition for Environmentally Responsible Economies (CERES) in partnership with the United Nations Environment Programme (UNEP), the GRI incorporates the active participation of corporations, NGOs, accountancy organisations, business associations, and other stakeholders from around the world business plan --- http://www.globalreporting.org/ 

Jagdish Gangolly recommends the following book:
Dollars & scholars, scribes & bribes: The story of accounting by Gary Giroux # Dame Publications, Inc (1996) # ASIN: B0006R6WQS --- http://snipurl.com/Giroux  

Jim McKinney recommends the following book;
It is not a lot more recent but I would consider the US centric text: A History of Accountancy in the United States: The Cultural Significance of Accounting by Previtz & Merino published in 1998. It is available in paperback.

SHARPEN YOUR UNDERSTANDING OF THE (2005) YEAR'S FINANCIAL REPORTING STANDARDS AND DEVELOPMENTS --- http://accountingeducation.com/index.cfm?page=newsdetails&id=141776

Accounting Research Versus the Accountancy Profession


Perhaps I'm old and tired, but I always think that the chances of finding out what really is going on are so absurdly remote that the only thing to do is to say hang the sense of it and just keep yourself occupied.

Douglas Adams

There are two explanations one can give for this state of affairs here. The first is due to the great English economist Maurice Dobb according to whom the theory of value was replaced in the United States by theory of price. May be, the consequence for us today is that we know the price of everything but perhaps the value of nothing. Economics divorced from politics and philosophy is vacuous. In accounting, we have inherited the vacuousness by ignoring those two enduring areas of inquiry.
Professor Jagdish Gangolly, SUNY Albany

The second is the comment that Joan Robinson made about American Keynsians: that their theories were so flimsy that they had to put math into them. In accounting academia, the shortest path to respectability seems to be to use math (and statistics), whether meaningful or not.
Professor Jagdish Gangolly, SUNY Albany


Question
Given the dire shortages of doctoral students in accountancy, should the requirement for doctoral degrees be eliminated in higher education?

Perhaps I'm old and tired, but I always think that the chances of finding out what really is going on are so absurdly remote that the only thing to do is to say hang the sense of it and just keep yourself occupied.
Douglas Adams

There are two explanations one can give for this state of affairs here. The first is due to the great English economist Maurice Dobb according to whom the theory of value was replaced in the United States by theory of price. May be, the consequence for us today is that we know the price of everything but perhaps the value of nothing. Economics divorced from politics and philosophy is vacuous. In accounting, we have inherited the vacuousness by ignoring those two enduring areas of inquiry.
Professor Jagdish Gangolly, SUNY Albany

The second is the comment that Joan Robinson made about American Keynsians: that their theories were so flimsy that they had to put math into them. In accounting academia, the shortest path to respectability seems to be to use math (and statistics), whether meaningful or not.
Professor Jagdish Gangolly, SUNY Albany

There are two sides to nearly every profession (as opposed to a narrow trade). The first one is the clinical side, and the second one is the research side. But this is not to say that the twain do not meet.

I advocate requiring that most (maybe not all) clinical instructors be grounded solidly in research. Requiring a PhD is a traditional way to get groundings in research. Probably more importantly is that doctoral studies are ways to motivate clinically-minded students to attempt to do research on clinical issues and make important contributions to the practicing profession.

I define “research” as a contribution to new knowledge. Among other things a good doctoral program should make scholars more appreciative of good research and critical of bad/superficial research that does not contribute to much of anything that is relevant, including research that should get Senator William Proxmire's  Golden Fleece Awards. Like urban cowboys, our academic accounting researchers are all hat (mathematical/statistical models) with no cows.

The problem with accountancy doctoral programs is that they’ve become narrowly bounded by accountics (especially econometrics and psychometrics) that in the past three decades have made little progress toward helping the clinical side of our profession of accountancy. This makes our doctoral programs very much unlike those in economics, finance, medicine, science, and engineering where many clinical advances in their disciplines have emerged from studies in doctoral programs.

The problem with higher education in accountancy is not that we require doctoral degrees in our major colleges and universities. The problem is that our doctoral programs shut out research methodologies that are perhaps better suited for making research discoveries that really help the clinical side of our profession. Accountics models just do not deal well with missing variables and nonstationarities that must be allowed for on the clinical side of accountancy. Humanities researchers face many of these same issues and have evolved a much broader arsenal of research methodologies that are verboten in accounting doctoral programs --- (See below).

The related problem is that our leading scholars running those doctoral programs have taken a supercilious view of the clinical side of our profession. Or maybe it’s just that these leaders do not want to take the time and trouble to learn the clinical side of the profession. Once again I repeat the oft-quoted referee of an Accounting Horizons rejection of Denny Beresford’s 2005 submission

I quote from http://www.trinity.edu/rjensen/Theory01.htm#AcademicsVersusProfession

*************
1. The paper provides specific recommendations for things that accounting academics should be doing to make the accounting profession better. However (unless the author believes that academics' time is a free good) this would presumably take academics' time away from what they are currently doing. While following the author's advice might make the accounting profession better, what is being made worse? In other words, suppose I stop reading current academic research and start reading news about current developments in accounting standards. Who is made better off and who is made worse off by this reallocation of my time? Presumably my students are marginally better off, because I can tell them some new stuff in class about current accounting standards, and this might possibly have some limited benefit on their careers. But haven't I made my colleagues in my department worse off if they depend on me for research advice, and haven't I made my university worse off if its academic reputation suffers because I'm no longer considered a leading scholar? Why does making the accounting profession better take precedence over everything else an academic does with their time?
**************

Joel Demski steers us away from the clinical side of the accountancy profession by saying we should avoid that pesky “vocational virus.” (See below).

The (Random House) dictionary defines "academic" as "pertaining to areas of study that are not primarily vocational or applied , as the humanities or pure mathematics." Clearly, the short answer to the question is no, accounting is not an academic discipline.
Joel Demski, "Is Accounting an Academic Discipline?" Accounting Horizons, June 2007, pp. 153-157

 

Statistically there are a few youngsters who came to academia for the joy of learning, who are yet relatively untainted by the vocational virus. I urge you to nurture your taste for learning, to follow your joy. That is the path of scholarship, and it is the only one with any possibility of turning us back toward the academy.
Joel Demski, "Is Accounting an Academic Discipline? American Accounting Association Plenary Session" August 9, 2006 --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

Too many accountancy doctoral programs have immunized themselves against the “vocational virus.” The problem lies not in requiring doctoral degrees in our leading colleges and universities. The problem is that we’ve been neglecting the clinical needs of our profession. Perhaps the real underlying reason is that our clinical problems are so immense that academic accountants quake in fear of having to make contributions to the clinical side of accountancy as opposed to the clinical side of finance, economics, and psychology.

Our problems with doctoral programs in accountancy are shared with other disciplines, notably education and nursing schools.
Bob Jensen's threads on controversies in higher education are at http://www.trinity.edu/rjensen/HigherEdControversies.htm


Question
Is accounting an "academic" discipline?

The (Random House) dictionary defines "academic" as "pertaining to areas of study that are not primarily vocational or applied , as the humanities or pure mathematics." Clearly, the short answer to the question is no, accounting is not an academic discipline.
Joel Demski, "Is Accounting an Academic Discipline?" Accounting Horizons, June 2007, pp. 153-157

Statistically there are a few youngsters who came to academia for the joy of learning, who are yet relatively untainted by the vocational virus. I urge you to nurture your taste for learning, to follow your joy. That is the path of scholarship, and it is the only one with any possibility of turning us back toward the academy.
Joel Demski, "Is Accounting an Academic Discipline? American Accounting Association Plenary Session" August 9, 2006 --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

Jensen Comment
Joel's lament is a bit confusing since for the past four decades, virtually all doctoral programs have replaced accounting professional content with mathematics, statistics, econometrics, psychometrics, and sociometrics content to a fault and to a point where very few accountants are interested in applying for accountancy doctoral programs --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

The decline in doctoral program graduates (to less than 100 per year in the United States) combined with the scientific requirements for publication in leading academic accounting research journals resulted in the academy serving the accountancy profession less and less over the past few decades:

http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

http://www.trinity.edu/rjensen/395wpTAR/03MainDocumentMar2007.htm

It would help if Joel would be more explicit about what types of basic "academic" research studies qualify as "accounting research" and why there is virtually none of it being produced according to his paper and his address to the AAA membership in August 2006. In particular, I would like to know what types of academic "accounting" publications set academic accounting apart from mathematical economics and mathematics disciplines such that these basic research contributions can still be called "accounting" research that is not applied (in the sense of his definition of "academic" research as not being applied).

Following Joel's paper is a paper by the same title "is Accounting an Academic Discipline?" by John C. Fellingham, Accounting Horizons, June 2007, pp. 159-163. John features the following quotation from Henry Rand Hatfield in 1924:

I am sure that all of us who teach accounting in the university suffer from the implied contempt of our colleagues, who look upon accounting as an intruder, a Saul among the prophets, a paria whose very presence detracts somewhat from the sanctity of the academic halls.
Henry Rand Hatfield, "An Historical Defense of Bookkeeping," Journal of Accountancy, 1924.

I consider this quotation to be inappropriate in 2007. Professor Hatfield was referring to the teaching of bookkeeping which is no longer the mundane vocational subject matter of college accounting in the past fifty or more years. I consider most of what we now teach in college accountancy to be very appropriate in service to the accountancy profession. You can read more about accounting education in Hatfield's time in the following historic papers:

Allen, C. E. (1927), "The growth of accounting instruction since 1900," The Accounting Review (June): 150-166 ---
http://maaw.info/TheAccountingReview.htm Click on the "Non USF User Link"

Atkins, P. M. (1928), "University instruction in industrial cost accounting," The Accounting Review,"  (December): 345-363 --- http://maaw.info/TheAccountingReview.htm  Click on the "Non USF User Link"

Atkins, P. M. (1929), "University instruction in industrial cost accounting,"  The Accounting Review (March): 23-32 ---
http://maaw.info/TheAccountingReview.htm  Click on the "Non USF User Link"

I guess what I'm really trying to say is that accountancy is a profession like law is a profession, medicine is a profession, architecture is a profession, engineering is a profession, pharmacy is a profession, etc. Why does the academy need to apologize for teaching to the profession of accountancy when in fact the academy is very proud to serve those other highly esteemed professions. I do not see schools of law and schools of medicine apologizing to the world for nobly serving those professions.

Both Demski and Fellingham made emotional appeals for academic accounting researchers to make noteworthy contributions to the "true academic disciplines" as quoted by Fellingham on Page 163. Not only should this be a goal, but in a sense they are arguing that this should be a primary goal far above the goal of serving the accountancy profession. I fail to note similar appeals being made by professors of law and medicine and engineering. These professions do distinguish between clinical versus research publications and teaching, but in general they do not further glorify their research if it cannot conceivably have some relevance to their professions. Indeed, even the most basic chemical and physiological research in medicine still takes place with an eye toward eventual relevance to human health.

I might also note that both law and medicine also publish some academic research that is not based upon esoteric mathematics and statistics. For example, historical and philosophical research methodologies are still allowed in their most prestigious academic law and science journals, which currently is not the case for leading academic accounting research journals.

By way of example, since Joel Demski took charge of the accounting doctoral program at the University of Florida, every applicant to that doctoral program cannot even matriculate into the program before pre-requisites of advanced mathematics are satisfied.

Students are required to demonstrate math competency prior to matriculating the doctoral program. Each student's background will be evaluated individually, and guidance provided on ways a student can ready themselves prior to beginning the doctoral course work. There are opportunities to complete preparatory course work at the University of Florida prior to matriculating our doctoral program. 
University of Florida Accounting Concentration  --- http://www.cba.ufl.edu/fsoa/docs/phd_AccConcentration.pdf

Why does every candidate have to qualify in advanced mathematics rather than allowing substitutes such as advanced philosophy or advanced legal studies?

I might also add that science and medicine academic journals also still place monumental priorities on replications of research findings. Leading academic accounting research journals will not even publish replications and mostly as a result it is very difficult to find replications of most of the top academic accounting research papers published by so-called leading accounting researchers --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication

More of my rants on this can be found in the following links:

http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

http://www.trinity.edu/rjensen/395wpTAR/03MainDocumentMar2007.htm


Question
Are college students good surrogates for real life studies?
The majority of behavioral experiments in accounting have used students as experimental subjects.

"Too Many Studies Use College Students As Their Guinea Pigs," by Carl Bialik, The Wall Street Journal, August 10, 2007; Page B1--- http://online.wsj.com/article/SB118670089203393577.html?mod=todays_us_marketplace

Many of the numbers that make news about how we feel, think and behave are derived from studying a narrow population: college students. It's cheap for social scientists to tap into the on-campus research pool -- everyone from psychology majors who must participate in studies for course credit to students who respond to posters promising a few bucks if they sign up.

Consider just three studies that have received press in the past month. In one, muscular men were twice as likely as their less well-built brethren to have had more than three sex partners -- at least according to 99 UCLA undergraduates. Another, an examination of six separate studies that tape-recorded college students' conversations, found that women, despite being stereotyped as relatively chatty, spoke just 3% more words each day than men. And in the third, 40 undergraduates at Washington University in St. Louis were 6% more likely to complete verbal jokes and 14% more likely to complete visual jests than 41 older study participants.

College students are "essentially free," says Brian Nosek, a psychology professor at the University of Virginia. "We walk out of our office, and there they are." The epitome of a convenience sample, they have become the basis for what some critics call the "science of the sophomore."

But psychologists may be getting what they pay for. College students aren't representative by age, wealth, income, educational level or geographic location. "What if you studied 7-year-old kids and made inferences about geriatrics?" asks Robert Peterson, a marketing professor at the University of Texas, Austin. "Everyone would say you can't do that. But you can use these college students."

Prof. Peterson scoured the literature for examples of studies that examined the same psychological relationships in students and nonstudents. In almost half of the 63 relationships he examined, there were major discrepancies between students and nonstudents: The two groups either produced contradictory results, or one showed an effect at least twice as great as the other.

In a follow-up study, not yet published, Prof. Peterson demonstrated that even college students are far from homogeneous. With help from faculty at 58 schools in 31 states, he surveyed undergraduate business students across the country and found that they vary widely from school to school. That means a professor studying the relationship between students' attitudes toward capitalism and business ethics at one school could reach a sharply different conclusion than a professor at another school.

"People have always been aware of this issue," Prof. Peterson says, but many have chosen to ignore it. A 1986 paper by David Sears, a UCLA psychology professor, documented the increased use of college students for research in the prior quarter century and explored the potential biases that might introduce. In the meantime, the use of college students has, if anything, risen, researchers say.

Authors of the recent studies on sex, chattiness and humor acknowledge the limitations of their research pool. But they argue that college students do just fine for purposes of studying basic cognitive processes. Others agree. "If you think all people have the same attitudes as introductory psychology students, that's really problematic," says Tony Bogaert, a psychology professor at Brock University in St. Catharines, Ontario. "But if you're looking at cognitive processes, intro psych students probably work OK."

After all, every study is hampered by possible differences between those who volunteer to participate and those who don't, whether they're college students or a broader group.

In any case, the fault often lies not with the researchers, who are careful not to overstate the impact of their findings, but with the news articles suggesting the numbers apply to all humanity. "Even if you only focus on college students, the results are still generalizable to millions of Americans," says David Frederick, a UCLA psychology graduate student and lead author of the study on muscularity and sex partners.

Prof. Nosek, a critic of the science of the sophomore, responds that college students are still developing their personalities and behavior. "There is no other time outside my life as an undergraduate where I thought it would be a good idea to wear all my clothes inside out," he says, or to "stay up for as many hours in a row as I could just to see what happens."

To widen the pool of people answering questions about, say, all-nighters, Prof. Nosek has submitted a proposal to the National Institutes of Health to fund the creation of an international, online research panel. That would build on studies his laboratory has already administered online at ProjectImplicit.net.

Online research has its own problems, but at least it taps into the hundreds of millions of people who are online globally, rather than just the hundreds of people enrolled in Psych 101.

"The scientific reward structure does not benefit someone who puts in the enormous effort" to create a representative research sample, Prof. Nosek says. "The way to change researchers' data habits is to make it easier to collect data in a more generalizable way."


Question
When should professors add practitioners to their courses?

"Mixing Theory and Practice on Defense Policy," by Andy Guess, Inside Higher Ed, August 8, 2007 --- http://www.insidehighered.com/news/2007/08/08/defense

In a class about United Nations regulations on the laws of war, the discussion turned inevitably to Star Trek.

When the U.N. authorizes sanctions against a particular nation, said Ilan Berman, the professor, the institution acts much like the Borg — in the show’s universe, a mechanized force of cyborg mercenaries bent on assimilating all of mankind. The analogy was lost on most of the class, but Berman drove the point home for those who didn’t regularly tune in to syndicated science fiction programs in the early 1990s: Each member nation must act as part of the collective.

The lecture, peppered as it was with the occasional pop culture reference, covered a lot of ground, from the U.S. national security strategy to the justifications for nations’ use of force. The students in the class — five were present on a Monday night in July for the elective — come from a range of backgrounds, several of them working full-time, but all in the program with an eye toward defense policy, whether in the government, consulting or think tanks.

In Washington, those are hardly unorthodox goals. Programs in defense or security studies churn out students every year in the nation’s capital, from well-known and respected institutions such as Johns Hopkins University’s School of Advanced International Studies and Georgetown University’s School of Foreign Service, and also outside the Beltway at places like Harvard (Kennedy) and Princeton (Wilson). The students in Berman’s class, tucked in a conference room on the seventh floor of a corporate office building in Fairfax, Va., are part of a relatively new experiment: What if a state school in Springfield, Mo., operated a satellite campus alongside the established players in defense studies?

So far, enrollments have been growing each year since the unit opened shop in 2005 within commuting distance from the city, sandwiched between a rapidly developing apartment complex and an office park. The Department of Defense and Strategic Studies, a part of Missouri State University, caters to students who want to break into Beltway defense circles with a public university price tag and the advantages of a more practical approach. In doing so, it offers a two-year M.S. degree that requires both coursework and internships.

Having access to actual practitioners in the classroom means, in this case, connections to defense and foreign policy officials in the government. As with others like it, the program has had a long revolving-doors tradition, starting from its original incarnation in the early 1970s at the University of Southern California, where it was founded by a former defense official who served on the SALT I delegation, William R. Van Cleave, and partially funded by the free-market Earhart Foundation. But unlike at similar departments elsewhere, Missouri State’s full-time faculty of three and its nine affiliated lecturers tend to come mainly from positions in Republican administrations and conservative-leaning institutions.

Continued in article

Jensen Comment
Some years back Professor Sharon Lightner (UC at San Diego) put together a really interesting online course for students, practitioners, and accounting standard setters in six different countries where the classes met synchronously.
"An Innovative Online International Accounting Course on Six Campuses Around the World" --- http://www.trinity.edu/rjensen/255light.htm


Question
Does faculty research improve student learning in the classrooms where researchers teach?
Put another way, is research more important than scholarship that does not contribute to new knowledge?

Major Issue
If the answer leans toward scholarship over research, it could monumentally change criteria for tenure in many colleges and universities.

AACSB International: the Association to Advance Collegiate Schools of Business, has released for comment a report calling for the accreditation process for business schools to evaluate whether faculty research improves the learning process. The report expresses the concern that accreditors have noted the volume of research, but not whether it is making business schools better from an educational standpoint.
Inside Higher Ed, August 6, 2007 --- http://www.insidehighered.com/news/2007/08/06/qt

"Controversial Report on Business School Research Released for Comments," AACSB News Release, August 3, 2007 --- http://www.aacsb.edu/Resource_Centers/Research/media_release-8-3-07.pdf

FL (August 3, 2007) ― A report released today evaluates the nature and purposes of business school research and recommends steps to increase its value to students, practicing managers and society. The report, issued by the Impact of Research task force of AACSB International, is released as a draft to solicit comments and feedback from business schools, their faculties and others. The report includes recommendations that could profoundly change the way business schools organize, measure, and communicate about research.

AACSB International, the Association to Advance Collegiate Schools of Business, estimates that each year accredited business schools spend more than $320 million to support faculty research and another half a billion dollars supports research-based doctoral education.

“Research is now reflected in nearly everything business schools do, so we must find better ways to demonstrate the impact of our contributions to advancing management theory, practice and education” says task force chair Joseph A. Alutto, of The Ohio State University. “But quality business schools are not and should not be the same; that’s why the report also proposes accreditation changes to strengthen the alignment of research expectations to individual school missions.”

The task force argues that a business school cannot separate itself from management practice and still serve its function, but it cannot be so focused on practice that it fails to develop rigorous, independent insights that increase our understanding of organizations and management. Accordingly, the task force recommends building stronger interactions between academic researchers and practicing managers on questions of relevance and developing new channels that make quality academic research more accessible to practice.

According to AACSB President and CEO John J. Fernandes, recommendations in this report have the potential to foster a new generation of academic research. “In the end,” he says, “it is a commitment to scholarship that enables business schools to best serve the future needs of business and society through quality management education.”

The Impact of Research task force report draft for comments is available for download on the AACSB website: www.aacsb.edu/research. The website also provides additional resources related to the issue and the opportunity to submit comments on the draft report. The AACSB Committee on Issues in Management Education and Board of Directors will use the feedback to determine the next steps for implementation.

The AACSB International Impact of Research Task Force
Chairs:
Joseph A. Alutto, interim president, and
John W. Berry, Senior Chair in Business, Max M. FisherCollege of Business, The Ohio State University

K. C. Chan, The Hong Kong University of Science and Technology
Richard A. Cosier, Purdue University
Thomas G. Cummings, University of Southern California
Ken Fenoglio, AT&T
Gabriel Hawawini, INSEAD and the University of Pennsylvania
Cynthia H. Milligan, University of Nebraska-Lincoln
Myron Roomkin, Case Western Reserve University
Anthony J. Rucci, The Ohio State University

Teaching Excellence Secondary to Research for Promotion, Tenure, and Pay ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#TeachingVsResearch

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


My letter to Kate

Now that the 2007 Annual Meetings are ended and it is public information that finance professor Erik Lie (University of Iowa) won the AICPA/AAA Notable Contributions to Accounting Literature Award, I feel compelled to make my letter to Kate written on May 17 public. This year I served on the Part 2 selection committee that chose Erik Lie from the list of candidates submitted to us by the Part 1 Screening Committee. Professor Lie's contribution was truly notable and deserving of this award for 2007.

But I have serious reservations about the Part 1 Screening Committee's choices over the past two decades. I think it's been a rigged game in which the Part 2 Selection Committee has no choice but to choose an esoteric "accountics" article published in an academic research journal.

My letter to Kate is entirely consistent with the long tidbit below received from Paul Williams on August 10, 2007 after the AAA 2007 Annual Meetings in Chicago. Kate was chair of our 2007 Selection Committee but not the 2007 Screening Committee.

You can read my letter to Kate http://www.trinity.edu/rjensen/2007NotableLiteratureAward.htm

An Analysis of the Contributions of The Accounting Review Across 80 Years: 1926-2005 --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
Co-authored with Jean Heck and forthcoming in the December 2007 edition of the Accounting Historians Journal.

Bob Jensen's threads on the sad state of academic accounting research --- http://www.trinity.edu/rjensen/Theory01.htm#AcademicsVersusProfession


David Dennis organized a discussion panel to address the state of academic research in accounting. I could not be at the AAA meetings this year. But Paul Williams was on the panel and sent out the following message to panel members.

Paul Williams (North Carolina State University) Weighs in Once Again on the Sad State of Accounting Research in the Academy. Paul gave me permission to post his email message to the panel members.

August 10, 2007 message from Paul Williams [Paul_Williams@ncsu.edu]

It is a source of constant frustration that there exists reams of "empirical evidence" that the US academy is as we trouble makers say it is.  For folks who claim to worship empirical evidence there is a great reluctance to consider it.  Jacci Rodgers and I have another paper that you didn't include that was published in The Accounting Historians Journal that dealt with authors during the same period of time as our editors' paper. 

We did a comparison of elite school graduates appearances as authors in TAR (The Accounting Review) with their proportion in the population of North American PhDs (a procedure that was biased in that it overstates the proportion of elite graduates who were in the effective population of people of publishing age).  In Table 3 of that paper we report the proportion of appearance by elite grads and their proportion of the total North American PhD population at the beginnning of each TAR editor's term starting with

Trumball, the first editor to have a published editorial board, the first number is proportion of appearances and the second is proportion of PhDs:

Editor
Trumball:         63.6/63.5

Griffin:             71.3/59.6

Hendrickson:    75/53.7

Keller:              61.1/50.3

Decoster:         63/45.2

Zeff:                 51.9/43.1

Sundem:            47.1/38

Kinney:             50.6/34.7

Abdel-khalik:     56.6/33

 

Through Zeff and Sundems' editorships we start to see the effects of the emergence of the many new doctoral programs that were created during the 1970s.  The dilution of elite school dominance proceeded apace through time as the elite became a smaller proportion of the total population.  I had a paper accepted in TAR by both Zeff and Sundem: both experiences were good.  Both Zeff and Sundem were open-minded and quite helpful during the process; the reviews were constructive. 

But this expected demographically induced trend dramatically reversed itself after Sundem's editorship.  Since that time the elite appearances among authors has hovered, Avogadro's number-like around the mid-60 percent mark -- the proportion that prevailed when Trumball was editor.  All of a sudden the virtues of scholarship that Zeff and Sundem were able to recognize in the work of people not trained at elite schools as conventional economists disappeared.  The ideologues took over by default because of TAR's fear of losing so much reputational ground to JAR and JAE.  TAR became a JAR and JAE clone.  It hasn't changed since. 

So why doesn't Bill McCarthy get enough good systems papers? Perhaps it's because we haven't been terribly interested, for nearly 25 years, in training in U.S. PhD programs people who could do quality systems, or sociological, or historical, or legal, or anthropological work in accounting.  As Jagdish Gangolly noted on the AECM, finance types reproduce like mosquitoes, but it is a struggle for anyone interested in some "causal delta" other than neoclassical economics to find a place to study. 

Today, with the exception of a couple of places, you have to go outside the United States.  Why submit a paper to TAR when the editorial process is not one to be trusted?  Those of us who have been in the AAA a long time have heard these promises of "inclusiveness" before.  They were hot air then, they're hot air now unless the TAR editorial process is willing to take a laxative and publish some papers that may not be the best (there are an awful lot of "main-stream" papers published that aren't very good, either). 

TAR has to signal it isn't telling us another fib and that involves more than just passively sitting around waiting for papers to come.  Trust has been lost and you won't get it back by chastising the mistrustful.  Wouldn't it be refreshing to see someone from the editorial board show up at conferences like IPA, APIRA, CPA, . . . etc. to press the flesh and find out what the rest of the world thinks?

It is perhaps not a coincidence that the only two papers ever published in TAR informed by critical literature (papers by Chua and Hines) were ushered through the review process by Sundem.  Nothing of that kind has ever appeared in TAR since. 

Even JAR published a paper by Peter Miller!

David: kudos on your item 8.  As the U.S. has become the O.E.C.D. country with the most skewed distribution of income and wealth and as our great experiment in democracy appears more and more each day to be less and less robust (see Prem Sikka's work on the extensiveness of accounting corruption), we get a scholarly community primarily fixated on individual career enhancement through the engineering of a linear model with an R-squared of seldom double digits explaining yet some other absurdity about why Nozickian justice is the sine qua non of human  existence.  

I have seen literally  thousands of those models over the years and no two have ever born any resemblance to each other. 

What kind of "models" are really only unique representations of themselves?  Thank you for organizing the panel and allowing me to participate. 

Paul

 Paul Williams

paul_williams@ncsu.edu

(919)515-4436


The Financial Accounting Standards Board recently approached Bloomfield about studying how to create financial accounting standards that will assist investors as much as possible, he quickly turned to the virtual world for answers.

"Theory Meets Practice Online: Researchers and academics are looking to online worlds such as Second Life to shed new light on old economic questions," by Francesca Di Meglio, Business Week, July 24, 2007 --- Click Here 

In fact, many economics researchers, including Bloomfield, professor of accounting at Cornell's Johnson Graduate School of Management, are using the virtual environment to test ideas involving staples of economics such as game theory, the effects of regulation, and issues involving money. Since 1989, Bloomfield has been running experiments in the lab in which he creates small game economies to study narrow issues. But when the Financial Accounting Standards Board recently approached Bloomfield about studying how to create financial accounting standards that will assist investors as much as possible, he quickly turned to the virtual world for answers.

"It would be very difficult to look at the complex issues that FASB is trying to address with eight people in a laboratory playing a very simple economic game," he says. "I started looking for how I could create a more realistic economy with more players dealing with a high degree of complexity. It didn't take me long to realize that people in virtual worlds are already doing just that."

. . .

At Indiana University, researcher Edward Castronova has posed the idea of creating multiple virtual economies to study the effects of different regulatory policies. At Indiana, Castronova is director of the Synthethic Worlds Initiative, a research center to study virtual worlds. "The opportunity is to conduct controlled research experiments at the level of all society, something social scientists have never been able to do before," the center's Web site notes (see BusinessWeek.com, 5/1/06, "Virtual World, Virtual Economies").

A virtual stock market is certainly not the only online entity that opens itself up to research. Marketers are already using the virtual world to test campaigns, packaging, and consumer satisfaction. Pepsi (PEP) famously tracks use of its products in There.com. Architects seek reaction to design. Starwood Hotels (HOT) test-marketed its new loft designs in Second Life (see BusinessWeek.com, 8/23/06, "Starwood Hotels Explore Second Life First").

Continued in article

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


Summarizing Academic Accounting Research for Practitioners

April 14, 2007 message from Ron Huefner [rhuefner@acsu.buffalo.edu]

The Journal of Accountancy (AICPA) has begun a new series of articles to review accounting research papers and explain them to practitioners. The April issue has an article on "Mining Auditing Research."

It summarizes about a dozen research articles, mostly from The Accounting Review, but also including articles from JAR, CAR, AOS, and the European Accounting Review.

The link for this article is: <http://aicpa.org/pubs/jofa/apr2007/boltlee.htm

This may be useful in bringing research findings into classes

Ron


March 2007 Updates on the Sad State of Accounting Research in Academe --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

Nearly two years ago I sent out an "Appeal" for accounting educators, researchers, and practitioners to actively support what I call The Accounting Review (TAR) Diversity Initiative as initiated by last year's American Accounting Association President Judy Rayburn --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

In it I noted that a bright ray of hope for changing narrow focus of The Accounting Review (TAR) was the appointment of Bill McCarthy as Associate Editor for purposes of introducing Accounting Information Systems research into TAR.

I now have an expanded paper written in partnership with Jean Heck --- http://www.trinity.edu/rjensen/395wpTAR\03MainDocumentMar2007.htm
The MS Word version is at http://www.trinity.edu/rjensen/395wpTAR\395wp.doc
This paper is forthcoming in the December 2007 edition of the Accounting Historians Journal

March 27, 2007 message from McCarthy, William [mccarthy@BUS.MSU.EDU]

This thread and other AECM posts regarding information technology research in accounting casts a grim picture for people who wish to do computer science related work aimed at the major accounting academic journals. This has been an "us vs. them" problem for most of my 30 years in AIS research.

While it is indeed true that JAR, JAE, and the other private accounting journals remain in the Stone Age as far as accounting technology issues are concerned, there have been significant steps taken by TAR to open up the main AAA journal to this kind of work. Dan Dhaliwal appointed me as an editor with the express purpose of having a person knowledgeable in information systems and computer science research methods available to the AIS research community for manuscript review and decision-making.

Surprisingly, as I have outlined at both the sectional and national AAA meetings, the problem has not been as much with "them" as it has been with "us," at least in the last 15 months or so. Quite simply, the number of AIS submissions to TAR has been alarmingly low. In Washington last August, I set a target of 12-18 for the AIS community for this academic year, a number I thought was modest and achievable. However, it does not look like we will come close to that at our present rate.

*

As I mentioned in Washington, the submission procedure is this:

*

Do the work and make sure it is rigorous according to accounting, IS, and/or computer science standards,

*

Submit the paper and note or show that it deals with an important accounting issue issue by using AIS, MIS or CS methods, and

*

Ask that the paper be assigned to me as the editor most familiar with IS and CS methods.

If you make a convincing case on these points and if the senior editor thinks it is high quality, then I get it, I assign the referees, and I get to make the consolidated judgment.

Paraphrasing the famous Canadian hockey player Wayne Gretzky, the AIS research and the accounting practice communities will miss on 100% of the good ideas that never get submitted to TAR. If we want change the face of accounting research, the time for action is now. Do the work and submit "that" paper. Additionally, send your name off to me as a possible referee, outlining your particular expertise in either methods or specific technologies.

Bill McCarthy,
Michigan State University

mccarthy@bus.msu.edu 
http://www.msu.edu/user/mccarth4 <https://mercury.bus.msu.edu/exchweb/bin/redir.asp?URL=http://www.msu.edu/user/mccarth4>

March 27, 2007 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Bill,

What we may be paying as the price for dragging doctoral education in accounting back to the Stone Age about 40 years ago, is the phenomenon you describe. People have become so disenchanted with TAR that they have found other more comfortable venues for pursuing their work. In spite of public declarations about the new openness, we have heard this before only to have it turn out to be disengenuous PR. I think your appeal here might encourage people to trust you once and submit a paper, BUT it better produce some postitive experiences.

Another issue is "rigor." Everything must be RIGOROUS, but most GOOD IDEAS aren't "rigorous". They are typically fraught with error, but they open new vistas and ways of thinking about things. The history of science is filled with tales of earth changing ideas that were not offered in a RIGOROUS way (we know Mendel fudged his data on sweet peas, so did Milliken and Keynes General Theory... was notoriously cobbled together). We have become so fixated on method and our public appearance as rigorous scientists that all accounting scholarship in the U.S. at least follows the same template. Our idea of rigor is, frankly, naïve, based more on appearance than substance. Robert Heilbroner once remarked that "Mathematics brought great rigor to economics.

Unfortunately it also brought mortis." Bill, you now have some power (?). Take some chances. What is the point of an academic discourse confined only to statistical model building where, simultaneously, replication is emphatically discouraged? Empirical rigor means doing it over and over by independent investigators with rigorous controls. We may not even be doing what we currently do "rigorously."

March 27, 2007 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Methodological hangups, fetish about quantitative rigour, phobia about normative research, all have afflicted most disciplines at one time or the other. We in accounting seem to have them all at the same time.

I remembering sitting on a doctoral committee with folks from psychology, and was frightened to discover my own prejudices after hearing a well known (Skinnerian) psychologist fellow committee member asked me to be a bit more understanding of methodologies used by others.

I have found the accounting crowd reward conformity with received wisdom from the self-anointed sages.

Much of my work has been normative, and therefore considered "unsuitable" for publications in better known accounting journals (statement made by editor of one of the top rated accounting journal). I feel driven out of the field years ago into Operations Research, Information Systems, Computing & Information Sciences.

In none of those fields have the journal editors/ referees used any litmus tests. On the other hand, the referees at an AAA section journal, (about 20 years ago) was bold enough to state that my paper was an insult to the excellent work done by others in the field (the paper was later published in a respected journal in IS with few changes; it was the last paper I submitted to any establishment accounting journals).

Bill's message gives me hope in a way I never imagined. As a test balloon, I will submit TAR one of our papers that I had targeted for a CSI journal.

We need a balance between rigour, relevance, and methodological purity. Above all, we need tolerance for work that differs from our own perspective on each of these. We also need a diversity of approaches to the issues in the papers.

Jagdish

Academics Versus the Profession

The real world is only a special case, and not a very interesting one at that.
--Attributed to C. E. Ferguson and forwarded by Ed Scribner

Imagination is not to be divorced from facts: it is a way of illuminating the facts. It works by eliciting the general principles which apply to the facts, as they exist, and then by an intellectual survey of alternative possibilities which are consistent with these principles. It enables men (sic) to construct an intellectual vision of a new world, and it preserves the zest of life by the suggestion of satisfying purposes.
Alfred North Whitehead in an address to the AACSB in 1927 and quoted in the paper by Bennis and O'Toole cited below.

During the past several decades, many leading B schools have quietly adopted an inappropriate --- and ultimately self-defeating --- model of academic excellence.  Instead of measuring themselves in terms of the competence of their graduates, or by how well their faculties understand important drivers of business performance, they measure themselves almost solely by the rigor of their scientific research. They have adopted a model of science that uses abstract financial and economic analysis, statistical regressions, and laboratory psychology.  Some of the research produced is excellent, but because so little of it is grounded in actual business practices. the focus of graduate business education has become increasingly circumscribed --- and less and less relevant to practitioners ...We are not advocating a return to the days when business schools were glorified trade schools.  In every business, decision making requires amassing and analyzing objective facts, so B schools must continue to teach quantitative skills.  The challenge is to restore balance to the curriculum and the faculty:  We need rigor and relevance.  The dirty little secret at most of today's best business schools is that they chiefly serve the faculty's research interests and career goals, with too little regard for the needs of other stakehollders.
Warren G. Bennis and James O'Toole, "How Business Schools Lost Their Way," Harvard Business Review, May 2005.
The article be downloaded for a fee of $6.00 ($3.70 to educators) --- http://harvardbusinessonline.hbsp.harvard.edu/b02/en/hbr/hbr_home.jhtml


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


The original Accounting Hall of Fame is maintained by Ohio State University --- http://fisher.osu.edu/departments/accounting-and-mis/hall-of-fame/

The distinguished set of members selected to date are listed at
http://fisher.osu.edu/departments/accounting-and-mis/hall-of-fame/membership-in-hall/  

At the forthcoming American Accounting Association (AAA) annual meetings in Washington DC this year on August 7, two new distinguished scholars will be inducted into the Accounting Hall of Fame.

June 22, 2006 message from Hall of Famer Dennis Beresford [dberesfo@terry.uga.edu]

Bob,

I don't know if you've seen the news yet, but Bob Kaplan and Bob Sterling will be this year's inductees to the Accounting Hall of Fame.

Denny

June 23, 2006 reply from Bob Jensen

Hi Denny,

Thanks for the update. Both Bob and Bob are more than worthy of this honor. Both accountancy professors have very distinguished teaching and research accomplishments. Although I do not want to detract from those most noteworthy accomplishments, I cannot resist this opportunity to point out that both Bob Sterling and Bob Kaplan are failed critics of the hijacking of the leading academic accounting research journals by the Accountics/Positivist Establishment. However, both of these scholars took vastly different approaches in their efforts to maintain diversity of research methods and topics in the leading research journals.

The Accountics/Positivist Establishment virtually ignored both Sterling and Kaplan!

The following quotations appear in the following two documents:

An "Appeal" for accounting educators, researchers, and practitioners to actively support what I call The Accounting Review (TAR) Diversity Initiative as initiated by American Accounting Association President Judy Rayburn --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

An Analysis of the Contributions of The Accounting Review Across 80 Years: 1926-2005 --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

 

Accountics is the mathematical science of (accounting) values.
Charles Sprague (1887) as quoted by McMillan (2003, 1)
 

As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.
Albert Einstein
 

PG. #390 NONAKA
The chapter argues that building the theory of knowledge creation needs to an epistemological and ontological discussion, instead of just relying on a positivist approach, which has been the implicit paradigm of social science. The positivist rationality has become identified with analytical thinking that focuses on generating and testing hypotheses through formal logic. While providing a clear guideline for theory building and empirical examinations, it poses problems for the investigation of complex and dynamic social phenomena, such as knowledge creation. In positivist-based research, knowledge is still often treated as an exogenous variable or distraction against linear economic rationale. The relative lack of alternative conceptualization has meant that management science has slowly been detached from the surrounding societal reality. The understanding of social systems cannot be based entirely on natural scientific facts.
Ikujiro Nonaka as quoted at Great Minds in Management: The Process of Theory Development --- http://www.trinity.edu/rjensen//theory/00overview/GreatMinds.htm 



 

Bob Sterling is rooted in economics and philosophy. He, like Tony Tinker, Barbara Marino, and Paul Williams, relied upon his roots in philosophy to attack the positivists from the standpoint of misinterpretation of the writings of Karl Popper --- http://en.wikipedia.org/wiki/Karl_Popper

 

Sterling wrote the following in "Positive Accounting: An Assessment," Abacus,Volume 26, Issue 2, September 1990:

*********Begin Quote
Positive accounting theory, using the book of the same name by Watts and Zimmerman (1986) as the primary source of information about that theory, is subjected to scrutiny. The two pillars — (a) value-free study of (b) accounting practices — upon which the legitimacy of that theory are said to rest (and the absence of which is said to make other theories illegitimate) are found to be insubstantial. The claim that authorities — economic and scientific — support the type of theory espoused is found to be mistaken. The accomplishments — actual and potential — of positive theory are found to have been nil, and are projected to continue to be nil. Based on these findings, the recommendation is to classify positive accounting theory as a 'cottage industry' at the periphery of accounting thought and reject its attempt to take centre stage by radically redefining the fundamental question of accounting.
*********End Quote

 

I might add that the above critique would've had zero chance of being published in The Accounting Review (TAR) or other leading U.S. accounting research journals. Professor Sterling always wrote with interesting and simple analogies. He stated that if anthropology research was limited to positivism, then the only research would be the study of anthropologists rather than anthropology.

In some ways, Bob Kaplan is the more interesting critic of the hijacking of academic accounting research by the Accountics/Positivist Establishment. This is because Professor Kaplan built his early reputation, while full time at Carnegie-Mellon University, as an accountics expert in mathematical model building. Later, after he took on joint appointments at Carnegie and the Harvard Business School, he became more involved in case method research. Now he's best noted as a case method researcher since moving full time to Harvard.

In 1986 Steve Zeff was President of the AAA. I had the honor of being appointed by Steve as Program Director for the 1986 AAA annual meetings in Times Square in NYC. I persuaded Bob Kaplan and Joel Demski to share a plenary session in debate of the hijacking of the leading academic accounting research journals by the Accountics/Positivist Establishment (although since the early 1900s the term "accountics" was no longer used in accounting in favor of the term "analytics").

Bob Kaplan's 1986 presentation lamented the fact that researchers using the case method could no longer get their research published in TAR or other leading accounting research journals. He also lamented that innovations generally had their seminal roots in discoveries of practitioners rather than researchers publishing in the leading academic accounting research journals. Whereas practitioners once took a keen interest in academic accounting research, this interest waned to almost nothing.

Joel Demski's presentation defended mathematical model building and analysis as the cornerstone of accounting as a a pure "academic discipline." I would not describe Joel as an evangelist of positivism relative to the extremes of Watts and Zimmerman. Joel typically has had less to say about positivism than he has about mathematical model building and economic information theory applied to accountancy. In this regard I would describe Joel as an ardent defender of accountics. Joel admitted in 1986 that it was very difficult to pinpoint discoveries in academe that were noteworthy in the practicing profession. However, he claimed that this was not a leading purpose of academic accounting research.

In some ways the 2006 AAA annual meetings this year in Washington DC may be a replay of the 1986 meetings in NYC. Taking Bob Kaplan's place at the August 8, 2006 plenary session will be ardent positivism critic Anthony Hopwood from the United Kingdom. His message is somewhat predictable and he will deliver it forcefully.

Joel Demski's (with John Fellingham) presentation at the August 9, 2006 plenary session is less predictable, but the title "Is Accounting an Academic Discipline?" provides some clues that Joel will remain an ardent defender of mathematical and statistical modeling as the core of academic accounting research. It will be interesting to compare what Joel had to say in 1986 versus what he says after 20 years after continued accountics/positivism hijacking of leading U.S. academic accounting research journals and, I might add, U.S. doctoral programs.

Ohio State University became one of the leading accountics/positivsim research centers. Under the noteworthy leadership of Tom Burns, OSU became one of the first major universities to drop traditional accounting courses from its doctoral programs in favor of sending students outside the College of Business to take graduate courses in mathematics, statistics, econometrics, psychometrics, and sociometrics. In this context, it is a pleasure that leaders at OSU, in conjunction with the outside Accounting Hall of Fame nominating committee members, sees fit this year to honor two ardent critics of the Accountics/Positivist Establishment.

 Hopefully some of you will heed my current "Appeal" for accounting educators, researchers, and practitioners to actively support what I call The Accounting Review (TAR) Diversity Initiative as initiated by American Accounting Association President Judy Rayburn --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm


I examined the Vision being promoted, since November 8, 2006, by CEOs of the largest accounting firms --- http://www.globalpublicpolicysymposium.com/CEO_Vision.pdf
It struck me as yet another example of how small the role of academe is in shaping the future of the profession of accountancy. I wonder if the professions of medicine and law would chart the future of their own professions with so little regard for schools of medicine and law. Large firms in accounting actively seek to hire our students and have great public relations with professors. However, when it comes to something as substantive as this it's very difficult to find where leaders of the profession charted this change in course by building upon academic accounting research. There are probably indirect links, but it would be surprising if the writers of this proposed huge change in policy were influenced heavily by published academic research. An exception might be the thrust toward XBRL, but the so-called leading academic accounting journals have paid scant attention to XBRL,

On one hand we could blame the leaders of the profession for avoiding academe in the generation of new vision for the future. On the other hand we could blame the accounting researchers and their top journals for addressing what they can study with scientific models rather than what the profession wants to be studied. My threads on this issue are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

"Largest Accounting Firms See Coming Revolution in Business Reporting," AccountingWeb, November 27, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102827

As part of the Global Public Policy Symposium in Paris, held on November 8 and attended by key players concerned with ensuring the quality and reliability of financial reporting worldwide, the Chief Executive Officers (CEOs) of PricewaterhouseCoopers (PwC) International, Grant Thornton International, Deloitte, KPMG International and Ernst & Young, published a joint statement of their vision of what the future might hold for financial reporting and the accounting profession.

Entitled “Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks,” the document envisions investors having access to real time company financial information through XBRL, financial statements that go beyond reporting past performance to projecting future performance based on information about business intangibles that are not currently measured, and a recommendation that companies choose to supplement regular audits with periodic forensic audits. The report may be viewed at www.globalpublicpolicysymposium.com/

“This essay is about one type of information and its importance to all actors in the global economy; information about the performance of management and companies that make and deliver goods and services, and compete for capital,” the symposium paper says.

In a letter to the Wall Street Journal published on November 8, the day their paper was released, the CEOs wrote that when the basics of current accounting procedures were written, the world’s investors were more a “private club than a global network. Auditors used fountain pens, capital stayed pooled in a few financial centers, and information moved by runner.” The world has changed since then.

In the short term, the letter says, it will be necessary to proceed as rapidly as possible with convergence in international accounting standards, and with overcoming national differences in oversight of auditors and in enforcement.

In the longer term, auditors themselves must evaluate the usefulness to investors of information provided in the current financial statement and footnote format and consider the inclusion of more nonfinancial information.

But, the CEOs say in the Journal letter, “All of these steps should include an emphasis on allowing auditors greater room to exercise judgment. Accountants and auditors are trained professionals who have the ability to apply the spirit of broad principles in deciding how to account for and report financial and other information. . . . Such [future] measures should also include an honest assessment of the “expectations gap,” relating to material fraud and the ability of auditors to uncover it at a reasonable cost.”

The paper looks forward to a world “where users increasingly will want to customize the information they receive” in which “the process for recording and classifying business information will be as important, if not more important, than the static formats in which today’s financial information is reported. Our jobs as auditors, must therefore change to increasing focus on those business processes.”

An “important enabler” of future reporting will be the Global XBRL Initiative, the paper says. XBRL users will be able to view company data in any language, any currency and under different accounting systems and get immediate answers to queries. “In fact the new world is already here for the approximately 40,000 companies that already use XBRL to input their data. . . . China, Spain, the Netherlands and the United Kingdom have required companies to use XBRL.”

The paper acknowledges that investors, analysts and others will still want standardized reports to be issued by public companies on a regular basis. But the CEOs say that investors have told them they want more relevant information to be included. “The large discrepancies between the “book” and “market” values of many, if not most, public companies similarly provide strong evidence of the limited usefulness of statements of assets and liabilities that are based on historical costs. A range of intangibles, such as employee creativity and loyalty and relationships with suppliers and customers, can drive a company’s performance, yet the value of these intangibles is not consistently reported."

In short, the CEO’s vision states “the same forces that are reshaping economies at all levels are driving the need to transform what kind of information various stakeholders want from companies, in what form, and at what frequency. In a world of “mass customization,” standard financial statements have less and less meaning and relevance. The future of auditing in such an environment lies in the need to verify that the process by which company-specific information is collected, sorted and reported is reliable and the information presented is relevant for decision making.”

Investors and regulatory bodies may expect auditors to go further than is reasonable to detect fraud and the paper recommends that all companies be subjected to a regular forensic audit, or be subjected to forensic audits on a random basis.

Another option would be introducing more choice regarding the intensity of audits for fraud. For example, since forensic audits are conducted primarily for the benefit of investors, one possibility would be to let shareholders decide on the intensity of the fraud detection effort
they want auditors to perform. Shareholders could be assisted in making this decision by disclosure in the proxy materials of the costs of the different levels of audits, as well as the historical experience of the company with fraud.

The CEO paper calls for both liability reform and scope of service reform.

Considering the “Brave New World” of auditing envisioned in the document and the scope of the questions it raises, “Global Capital Markets and the Global Economy” has received little attention in the financial press, Motley Fool reports. But, while approving the idea of more timely information flows for the investor, Fool says, “enough companies have trouble meeting their reporting obligations as it is. I would prefer to both maintain those reports and supplement them with additional data.”

That financial reporting will evolve and change is inevitable, the International Herald Tribune says, but whether large accounting firms will lead the dialogue is another matter that may be influenced by their “life-threatening litigation risks.”

"Accounting Firms Seek Overhaul," by Tad Kopinski, Institutional Shareholder Services ISS, November 20, 2006 ---
http://blog.issproxy.com/2006/11/accounting_firms_seek_overhaul.html  

Bob Jensen's threads on proposed reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm


Redesigning an MBA Curriculum Toward the Action:  Why Aren't Accountants Headed on the Same Paths?

"Wall Street Warms To Finance Degree With Focus on Math," by Ronald Alsop, The Wall Street Journal,  November 14, 2006; Page B7 --- Click Here

Just a few years ago, the University of California, Berkeley, found its master's degree in financial engineering a hard sell. Wall Street had cut back sharply on hiring, and many recruiters were still fixated on M.B.A. graduates.

"The doors were shut on us at the human-resource level on Wall Street," recalls Linda Kreitzman, executive director of the financial engineering program at Berkeley's Haas School of Business. "I had to go directly to managing directors to get our students placed after we started the program in 2001."

Now, in a turnabout, it's often the banks and hedge funds that are calling on Dr. Kreitzman and offering her graduates six-figure compensation packages. "They have come to realize they really need students with strong skills in financial economics, math and computer modeling for more complex products like mortgage- and asset-backed securities and credit and equity derivatives," she says. This fall, all 58 financial engineering students seeking internships found spots at such companies as Citigroup, Lehman Brothers and Merrill Lynch. Their projects will include credit portfolio valuation, artificial-intelligence trading models and structured fixed-income products.

While the master's in business administration certainly remains in high demand, companies are increasingly interested in other graduate-level credentials, including Ph.D.s and master's degrees in specific business fields. Deutsche Bank, for example, has hired Ph.D. and master-of-finance graduates in Europe for some time and is now recruiting more in the U.S. as well.

"We are continually looking for strong quantitative skills," says Kristina Peters, global head of graduate recruiting. With a master's degree in finance, "there tends to be more applied finance knowledge such as derivatives pricing."

Continued in article

Jensen Comment
The big question is where will auditing firms find accountants that can handle the exotic contracts written by the financial engineers?


The Sad State of English Literature Research

"Student Pressure and Your Average English Department," by Sanford Pinsker, The Irascible Professor, January 2, 2006 --- http://irascibleprofessor.com/comments-01-02-06.htm .

English professors reflect their graduate school training long after they "graduate" as newly minted Ph.D.s. The rub comes in if you happen to have been more deeply trained in literary theory than you were in literature, and you were taught to believe that theoreticians were much more interesting than novelists or poets.

The result is that many English professors of a certain age find it easier to get excited about multiculturalism than about great writers because they have read very few primary works of consequence. Asking these folk about literature reminds me of the Israeli army recruit who was asked if he could swim, "No," he replied, then quickly added "But I know the theory of it." English departments are likely to suffer through this joke for at least the next twenty more years, as professors who got tenure because they were savvy about Derrida and Foucault hang around to shape an English department curriculum that is longer on deserts than it is on meat-and-potatoes.

That's why advanced seminars in multiculturalism, Madonna, or "The Sopranos" are just a heart beat away from making it into the college catalogue. Those who remember an Irish poet named Yeats might remember what he said about things falling apart and the center not holding. That is what is occurring across the land as English department have a hard time resisting whatever fashionable bandwagon squeaks its way down the road.


The Sad State of Academic Accounting Research

February 3, 2006 message from Jagdish S. Gangolly [gangolly@INFOTOC.COM]

The well known mathematician GH Hardy once observed that he would be disappointed if any one found mathematics useful (I think he was referring to "Pure" mathematics), and that mathematics is to be enjoyed to appreciate its intrinsic beauty. Nevertheless, even "Pure" Mathematics Mathgematics is found useful by many. One pertinent example I can give is of non-Euclidean Geometry which has had a profound impact on data visualisation (See, for example, http://iv.slis.indiana.edu/sw/hyptree.html ).

While mathematical propositions are tautological and hence not "verifiable" in a positivist sense, the underlying axiom system can be examined to see if it corresponds to reality. That is how, for example, things work in Physics where replication is an essential and valued activity. In accounting research (especially of the financial accounting kind), replication is not well regarded, and unlike in Physics there is no "competition" to reach the top of the greasy pole or to prove each other wrong. The result is the mutual admiration society that we have reduced ourselves to, with a few citing each other and the rest of the world ignoring us all.

In human science such as ours is, research should be relevant and useful. We have an obligation to be evaluated by the society (all the stakeholders including the professional practice) at large about this. In this, in my opinion, we in academics have failed miserably.

Jagdish

February 4, 2006 reply from Bob Jensen

Hi Jagdish,

You have pointed to the heart of the mess in modern day academic accounting research. The pure mathematics term "mathgematics" reminds me of the historic term "accountics." After an intense turn-of-the-century debate over whether academic accounting research should become the "mathematical science of values," leading accounting researchers rejected this "accountics" idea. Both the term and the movement died out for the next 60 years.

In the 1960s the concept was born again without the revival of the word "accountics." You aptly and concisely described how accountics has taken over our top-tier journals that, in turn, have turned our doctoral programs into virtually a singular very narrow research skills curriculum.

I was greatly encouraged by Judy Rayburn's Presidential Address on August 10, 2005 and the publishing of her remarks in Accounting Education News, Fall 2005, pp. 1-4.

Accounting research is different from other business disciplines in the area of citations:  Top-tier accounting journals in total have fewer citations than top-tier journals in finance, management, and marketing.  Our journals are not widely cited outside our discipline.  Our top-tier journals as a group project too narrow a view of the breadth and diversity of (what should count as) accounting research.
Rayburn (2005b, Page 4)
 

I might add that Judy's points are mostly echoing Andy Bailey's 1994 Presidential Address in which he claimed the AAA journals were at a "crisis point." The AAA Publications Committees, TAR editors, and TAR referees ignored Andy's appeals to broaden the scope of topics and research methods that allowed in TAR. And after a long conversation with the current editor of TAR on February 2, 2006, I fear that Judy's appeals are also falling on deaf ears. TAR is not going to change in the near future with the exception of adding some AIS papers that Bill McCarthy, as the new AIS Associate Editor, allows to pass through the gates. TAR will expand to five issues per hear in 2006 and six issues per year after that. But accountics constraints will still dominate TAR in years to come.

February 4, 2006 reply from Jagdish S. Gangolly [gangolly@INFOTOC.COM]

Bob,

Mathgematics was an innocent typo on my part. Your response worried me that there might really be such a term, and so I googled it and went through each of those pages. And on each of those pages the problem was a similar typo. While I would love to put my stamp on lexicography, I need to improve my keyboarding skills first. (My Mac keyboard is driving me up the wall.)

Hardy used the term pure mathematics (he wrote a book with the same title that we used as text) in the same sense that Immanuel Kant used it in the "Critique of Pure Reason" -- uncontaminated by facts.

People were always uncomfortable with Euclid's fifth postulate which says that given a straight line and a point not on the line, it is possible to construct a straight line through the point that is parallel to the given line (there are other equivalent ways to state the postulate). For example, if you stand in the middle of railroad tracks in Kansas and look into the horizon along the tracks, it would appear to you that the two parallel tracks meet there, which would "invalidate" the postulate.

Mathematicians before Lobachevsky were trying to prove that the fifth postulate could be proved as a theorem from the first four (which we all know from grade school). Lobachevsky thought out of the box and showed that Euclidean Geometry was a special case of general non-Euclidean Geometries. Lobachevsky was not alone in this discovery. Gauss (German) and Bolyai (Hungarian) mathematicians independently developed the area.

By the way, the tracks seem to meet at the horizon in Kanbsas because earth is spherical. The non-Euclidean Geometry I referred to in the earlier message was spherical Geometry which is the staple of data visualisation in diverse fields as taxonomy, genetics, forestry,...; We can even use it in Accounting, for example, in visualising XBRL taxonomies.

Jagdish


So what is the history of accountics?

TAR Between 1926 and 1955: Ignoring Accountics

Accountics is the mathematical science of values.
Charles Sprague (1887) as quoted by McMillan (2003, 1)


 

Accounting professor Charles Sprague coined the word "accountics" in 1887. The word is not used today in accounting and has some alternative meanings outside our discipline. However, in the early 19th Century, accountics was the centerpiece of some forward thrusting unpublished lectures by Charles Sprague at Columbia University.  McMillan (2003, 11) stated the following:

These claims were not a pragmatic strategy to legitimize the development of sophisticated bookkeeping theories.  Rather, this development of a science was seen as revealing long-hidden realities within the economic environment and the double-entry bookkeeping system itself.  The science of accounts, through systematic mathematical analysis, could discover hidden thrust of the reality of economic value.  The term, “accountics,” captured the imagination of the members of the IA, connoting advances in bookkeeping that all these men were experiencing.

 

By 1900 there was a journal called Accountics according to Forrester (2003).  Both the journal and the term accountics had short lives, but belief that mathematical analysis and empirical research can “discover hidden thrust in the reality of economic value” underlies much of what has been published in TAR over the past three decades. Hence we propose reviving the term “accountics” in the context of research methods and quantitative analysis tools that have become popular in TAR and other leading accounting research journals.

The American Association of University Instructors of Accounting, which in December 1935 became the American Accounting Association, commenced unofficially in 1915, (Zeff 1966, 5).  It was proposed in October 1919 that the Association publish a Quarterly Journal of AccounticsBut this proposed accountics journal never got off the ground while leaders in the Association argued heatedly and fruitlessly about whether accountancy was a science. A quarterly journal called The Accounting Review was subsequently born in 1925 with its first issue being published in March of 1926.  Its accountics-like attributes did not commence in earnest until the 1960s.

Practitioner involvement, in a large measure, was the reason for changing the name of the Association by removing the words “University Instructors.” Practitioners interested in accounting education participated actively in AAA meetings. TAR articles in the first several decades were devoted heavily to education issues and accounting issues in particular industries and trade groups. Research methodologies were mainly normative (without mathematics), case, and archival (history) methods.  Anecdotal evidence and hypothetical illustrations ruled the day. The longest serving editor of TAR was a practitioner who determined what was published in TAR between 1929 and 1943.  In those years the AAA leadership actually mandated that TAR focus on development of accounting principles and to orient the papers to both practitioners and educators, Chatfield (1975, Page 4).

Following World War II, practitioners outnumbered educators in the AAA, (Chatfield 1975, 4). Leading partners from accounting firms took pride in publishing papers and books intended to inspire scholarship among professors and students. Some practitioners, particularly those with scholarly publications, were admitted over the years into the Accounting Hall of Fame formed by The Ohio State University. Accounting educators were generally long on practical experience and short on academic credentials such as doctoral degrees prior to the 1960s.

A major catalyst for change was the Ford Foundation that poured millions of dollars into first the study of collegiate business schools and second the funding of doctoral programs and students in business studies. Gordon and Howell (1959) reported that business faculty in colleges lacked research skills and academic esteem among their humanities and science colleagues. The Ford Foundation thereafter funded doctoral programs and top quality graduate students to pursue doctoral degrees in business and accountancy. This Foundation even funded publication of selected doctoral dissertations to give business discipline doctoral studies more visibility. Great pressures were also brought to bear on academic associations like the AAA to increase the academic standards for publications in journals like TAR.

Competitors to TAR were launched in the early 1960s, including the Journal of Accounting Research (1963), Abacus (1965) and The International Journal of Accounting Education and Research (1965). Clinging to its traditional normative roots and trade-article style would have made TAR appear to be a journal for academic luddites. Actually, many of the new mathematical approaches to theory development were fundamentally normative, but they were couched in the formidable language and rigors of mathematics. Publication of papers in traditional normative theory, history, and systems slowly ground to almost zero in the new age of accountics.

These new spearheads in accountics were not without problems.  It’s humorous and sad to go back and discover how naïve and misleading some of TAR’s bold and high risk thrusts were into quantitative methods.  Statistical models were employed without regard to underlying assumptions of independence, temporal stationarity, multicollinearity, homoscedasticity, missing variables, and departures from the normal distribution.  Mathematical applications were proposed for real-world systems that failed to meet continuity and non-convexity assumptions inherent in such models as linear programming and calculus optimizations.  Proposed applications of finite mathematics and discrete (integer) programming failed because the fastest computers in the world then, and now, could not solve most realistic integer programming problems in less than 100 years.

After financial databases provided a BETA covariance of each security in a portfolio with the market portfolio, a flood of capital market events studies were published by TAR and other leading accounting journals.  In the early years, accounting researchers did not challenge CAPM’s assumptions and limitations, limitations that, in retrospect cast doubt upon many of the findings based upon any single index of market risk, (Fama and French 1992).

Leading accounting professors have lamented as TAR’s preference for rigor over relevancy, (Zeff 1978; Lee 1997; and Williams 1999). Sundem (1987) provides revealing information about the changed perceptions of authors, almost entirely from academe, who submitted manuscripts for review between June 1982 and May 1986. Among the 1,148 submissions, only 39 used archival (history) methods and 34 of those submissions were rejected.  Also 34 used survey methods and 33 of those were rejected.  And 100 used traditional normative (deductive) methods with 85 of those being rejected.  Except for a small set of 28 manuscripts classified as using  “other” methods (mainly descriptive empirical according to Sundem), the remaining larger subset submitted manuscripts used methods that Sundem classified as follows for leading 1982-1986 submissions:

292 General Empirical

119 Capital Market

172 Behavioral

135 Analytical modeling

  97 Economic modeling

  40 Statistical modeling

  29 Simulation

What’s clear is that by 1982 accounting researchers got the message that having mathematical or statistical analysis in TAR publications made accountics virtually a necessary, albeit not sufficient, condition for acceptance for publication. It became increasingly difficult for a single editor to have expertise in all the above methods. In the late 1960s editorial decisions on publication shifted from the TAR editor alone to the TAR editor in conjunction with specialized referees and eventually associate editors, (Flesher 1991, 167). Fleming et al. (2000) wrote the following:

The big change was in research methods.  Modeling and empirical methods became prominent during 1966-1985, with analytical modeling and general empirical methods leading the way.  Although used to a surprising extent, deductive-type methods declined in popularity, especially in the second half of the 1966-1985 period.

Fleming et al. (2000, Page 48) report that education articles in TAR declined from 21% in 1966 to 8% before Issues in Accounting Education began to publish education articles. Garcha, Harwood, and Hermanson (1983) reported on the readership of TAR before any new specialty journals commenced in the AAA. They reported that among their AAA membership respondents, only 41.7% would subscribe if TAR was unbundled in terms of dollar savings from AAA membership dues. TAR apparently was not meeting the membership’s market test. Based heavily upon the written comments of respondents, the authors’ conclusions were, in part, as follows:

The findings of the survey reveal that opinions vary regarding TAR and that emotions run high.  At one extreme some respondents seem to believe that TAR is performing its intended function very well.  Those sharing this view may believe that its mission is to provide a high-quality outlet for those at the cutting-edge of accounting research.  The pay-off for this approach may be recognition by peers, achieving tenure and promotion, and gaining mobility should one care to move.  This group may also believe that trying to affect current practice is futile anyway, so why even try?

 

At the other extreme are those who believe that TAR is not serving its intended purpose.  This group may believe TAR should serve the readership interests of the audiences identified by the Moonitz Committee.  Many in the intended audience cannot write for, cannot read, or are not interested in reading the Main Articles which have been published during approximately the last decade.  As a result there is the suggestion that this group believes that a change in editorial policy is needed.

 

After a study by Abdel-khalik(1976) that revealed complaints about difficulties of following the increased quantitative methods jargon in TAR, editors did introduce abstracts in front of the articles to summarize major findings with less jargon, (Flesher 1991, 169). But the problem was simultaneously exacerbated when TAR stopped publishing commentaries and rebuttals that sometimes aid understanding of complicated research. Science journals are much better about encouraging commentaries and rebuttals.

The saddest and most revealing state of accountics research is the lack of interest of replicating the many findings of TAR's econometric and psychometric methodologies --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Relication

Bob Jensen


Scientific Method in Accounting Has Not Been a Method for Generating New Theories

The following is a quote from the 1993 President’s Message of Gary Sundem, President’s Message. Accounting Education News 21 (3). 3.
 

Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.

 

Question
What is the trend in the number of doctoral degrees awarded in accountancy in the United States?

Answer
It all depends on who you ask and whether or not the alma maters are AACSB accredited universities
(note that the AACSB accredits bachelors and masters degree programs but not doctoral programs per se).
The data suggest that there are a lot of ABD doctoral students who never complete the final hurdle of writing a dissertation, although this is only my speculation based upon the higher number of graduates that I would expect from the size of the enrollments.

On January 27, 2006, Jean Heck at Villanova sent me the following message:

This data is only for AACSB accredited schools, so the numbers you had for Accounting in the slide are a little bigger. I got these numbers straight from the AACSB data director.
   
     
  Accounting & Finance Historical Data 2000 - 2004
     
Accounting Full Time Enrollment Part Time Enrollment Degrees Conferred
2000 552 36 122
     
2001 585 80 102
     
2002 578 13 97
     
2003 694 12 103
     
2004 631 16 86
     
     
     
Finance      
2000 738 59 159
     
2001 771 109 129
     
2002 807 49 125
     
2003 939 40 136
     
2004 859 48 109

********************
Jensen Comment
Hasselback, J.R. (2006), Accounting Faculty Directory 2006-2007 (Prentice-Hall, Just Prior to Page 1) reports the following doctoral graduates in accounting:

1998–99 122 - 18%
1999–00 095 - 22%
2000–01 108 +14%
2001–02 099 - 08%
2002–03 069 - 30%

 

In Slide 23 of her Presidential Address at the American Accounting Association Annual Meetings in San Francisco on August 10, Judy Rayburn presented the following data regarding doctoral graduates in accounting --- http://aaahq.org/AM2005/menu.htm

145 Accounting Ph.D.s were awarded in 2002-2003, an increase over 2001-2002 estimates.
TABLE 3B
Accounting Ph.D’s Awarded 1998–99 Through 2002–03
Number of Graduates Rate of Growth
1998–99 185 – 3%
1999–00 195 + 5%
2000–01 115 – 41%
2001–02 110 – 4%
2002–03 145 + 32%

Data from the U.S. Department of Education
You can download an Excel spreadsheet of Doctor's degrees conferred by degree-granting institutions, by discipline division: Selected years, 1970-71 to 2002-03 --- http://nces.ed.gov/programs/digest/d04/tables/dt04_252.asp

Part of that spreadsheet is shown below:

Table 252.  Doctor's degrees conferred by degree-granting institutions, by discipline division: 
Selected years, 1970-71 to 2002-03
_ _ _ _ _ _
Discipline division 1998-99 1999-00 2000-01 2001-02 2002-03
_ _ _ _ _
Agriculture and natural resources ................. 1,231 1,168 1,127 1,148 1,229
Architecture and related services ....................... 123 129 153 183 152
Area, ethnic, cultural, and gender studies ................................... 187 205 216 212 186
Biological and biomedical sciences ....................................... 5,024 5,180 4,953 4,823 5,003
Business ........................................................... 1,201 1,194 1,180 1,156 1,251
         
Communication, journalism, and related programs .............................................. 347 347 368 374 394
Communications technologies .......................... 5 10 2 9 4
Computer and information sciences ........................... 801 779 768 752 816
Education ............................................... 6,394 6,409 6,284 6,549 6,835
Engineering ........................................... 5,432 5,390 5,542 5,187 5,276
         
Engineering technologies ................................ 29 31 62 58 57
English language and literature/letters ....................... 1,407 1,470 1,330 1,291 1,246
Family and consumer sciences/human sciences ........... 323 327 354 311 372
Foreign languages, literatures, and linguistics ......................... 1,049 1,086 1,078 1,003 1,042
Health professions and related clinical sciences ............................ 1,920 2,053 2,242 2,913 3,328
         
Legal professions and studies ................................... 58 74 286 79 105
Liberal arts and sciences,           
  general studies, and humanities ................................. 78 83 102 113 78
Library science .......................................... 55 68 58 45 62
Mathematics and statistics ........................................ 1,090 1,075 997 923 1,007
Multi/interdisciplinary studies ................................ 754 792 784 765 899
         
Parks, recreation, leisure and fitness studies ................... 137 134 177 151 199
Philosophy and religious studies .................................. 584 598 600 610 662
Physical sciences and science technologies ............................. 4,142 3,963 3,911 3,760 3,858
Psychology ......................................... 4,695 4,731 5,091 4,759 4,831
Public administration and social services ........................ 532 537 574 571 596
         
Security and protective services .................................... 48 52 44 49 72
Social sciences and history ........................................ 3,855 4,095 3,930 3,902 3,850
Theology and religious vocations .................... 1,440 1,630 1,461 1,350 1,321
Transportation and materials moving ..................... 0 0 0 0 0
Visual and performing arts ............................... 1,130 1,127 1,167 1,114 1,293
Not classified by field of study ................... 6 71 63 0 0

 

 


Question
Why is supply of doctoral faculty, and possibly all business faculty, not a sustainable process?

Jensen Answer
See Below


Question
Why do accounting doctoral students have to be more like science students than medical students and law students?

Jensen Answer
With the explosion of demand for accounting faculty, production of only about 100 doctoral graduates from AACSB schools is no longer a sustainable process. Perhaps the time has come to have a Scholarship Track and a Research Track in accounting doctoral studies. One of the real barriers to entry has been the narrow quantitative method and science method curriculum now required in virtually all doctoral programs in accountancy. Many accounting professionals who contemplate returning to college for doctoral degrees are not interested and/or not talented in our present narrow Ph.D. curriculum.

In my opinion this will work only if our most prestigious universities take the lead in lending prestige to Scholarship Track doctoral students in accounting. Case Western is one university that has already taken a small step in this direction. Now lets open this alternative to younger students who have perhaps only had a few years experience in accounting practice,

In the January 30, 2006 edition of New Bookmarks I presented tables of the numbers of doctoral graduates in all disciplines with particular stress on those in accounting, finance, and business in general. As baby boomers from the World War II era commence to retire, the AACSB International predicts a crisis shortage of new faculty to take their place and to meet the growth in popularity of business programs in universities. In August 2002, the AACSB International Management Education Task Force (METF) issued a landmark report, “Management Education at Risk.” The  2002 report on this is available at http://www.aacsb.edu/publications/dfc/default.asp
 

In particular, note the section on Rethinking Doctoral Education quoted below.

Rethinking Doctoral Education

Several issues in doctoral education are in need of rethinking in light of doctoral faculty shortages.  They include vertical orientation, strategies for sourcing doctoral faculty, the relevance of curricula, rewards and promotion, accreditation standards, and leveraging technology.

Vertical Orientation

Doctoral education is built on vertical orientation to disciplines, requiring prospective applicants to choose their field at the point of entry.  Many doctoral programs train students in narrowly defined research agendas, giving them little, if any, exposure to research problems and methodologies outside their discipline.  In parallel, most hiring adheres to traditional departmental tracks, with few instances of cross-departmental appointments because they are inherently challenging to the structure of most business schools.  Among the schools that are exceptions is IMD, in Switzerland, which eliminated departmental and rank distinctions.

Meanwhile, advancement in business knowledge and thinking requires research frameworks that can span functional and industry boundaries.  And businesses continue to call for more cross-functional education in undergraduate and MBA programs.  There is inevitable and healthy tension between training and theory in vertical disciplines, on the one hand, and the evolving issues of the marketplace that tend to defy such neat categorization, on the other.

There is little question that schools need to add to their doctoral curricula research training that encompasses questions and methodologies across vertical boundaries.  Unless some shifts are instituted, the training ground for researchers in business will become less relevant to the knowledge advances the marketplace needs and demands, and to the teaching and learning needs within business schools.

Strategies for Sourcing Doctoral Faculty

To preserve the inimitable scholarship role of business academics, faculty resources need to be better leveraged.  Business schools must address pervasive doctoral shortages creatively by reaching beyond traditional sources for doctoral faculty.  Though not without challenges, the following are among possible alternative sources of doctoral faculty:

Along with tapping new sources for doctoral faculty, such strategies may have the added benefit of increasing the "practice" flavor of curricula.

A concurrent approach to support continued, vibrant scholarship of business research faculty is a productivity-enhancement strategy, rather than a focus on faculty supply.  The reason for suggesting that approaches to enhance productivity are needed is that reduced teaching loads alone do not ensure increased faculty research contributions.  Possible such approaches include faculty development in best research practices; greater flexibility in faculty employment relationships, to facilitate researcher collaboration and mobility across institutions; a multilevel faculty model that fine-tunes faculty assignments to fit their competencies; and differentiated performance accountability and rewards around these assignments.

The quest for sustained research productivity also hinges on our definition of research.  EQUIS, the business school accreditation program offered by the European Foundation for Management Development, has proposed an expanded definition of research to include research, development, and innovation (RDI).  RDI includes activities related to the origination, dissemination, and application of knowledge to practical management.

I have always been one to distinguish scholarship from research. One can be a scholar by mastering some important subset of what is already known. A researcher must attempt to contribute new knowledge to this subset. Every academic discipline has an obligation to conduct research in an effort to keep the knowledge base dynamic and alive. However, this does not necessarily mean that every tenured professor must have been a researcher at some point along the way as long as the criteria for tenure include highly significant scholarship. This tends not to be the model we work with in colleges and universities in modern times. But given the extreme shortages in accounting doctoral students, perhaps the time has come to attract more scholars into our discipline. It will require a huge rethinking of curriculum and thesis requirements, and I do think there should be a thesis requirement that demonstrates advanced scholarship. I also think that the curriculum should cover a variety of disciplines without aspirations to produce Super CPAs to teach accounting. Possibly universities will even generate some doctoral theses other than the present ones that everybody hopes, including the authors, that nobody will read.

Medical schools have used these two tracks for years. Some medical professors are highly skilled clinically and teach medicine without necessarily devoting 80% of their time in research labs. Other medical professors spend more than 80% of their time in research labs. In law, the distinction is less obvious, but I think when push comes to shove there are many law professors who have mastered case law without contributing significantly to what the legal profession would call new knowledge. Other law professors are noted for their contributions to new theory.

Along these lines follows an obligation to teach “professionalization” in an effort to attract doctoral students
Donald E. Hall finishes his series with proposals to change the dissertation process and a call to teach “professionalization.”
"Collegiality and Graduate School Training," by Donald E. Hall, Inside Higher Ed, January 24, 2006 --- http://www.insidehighered.com/workplace/2006/01/24/hall

This emphasis on conversational skills and commitments allows us then to fine tune also our definition of what “professionalization” actually means. Certainly in the venues above — the classroom and in research mentorship — we work to make our students more aware of the norms and best practices of academic professional life. But the graduate programs that are most concerned with meeting their students’ needs attend also to that professionalization process by offering seminars, roundtables, workshops, and other activities to students intent on or just thinking about pursuing an academic career. In all of these it is important to note that aspiring academics are not only entering the conversation represented by their research fields, but also the conversation of a dynamic and multi-faceted profession.

This does mean encouraging literal conversations among graduate students and recent graduates who have taken a wide variety of positions — from high profile academic, to teaching centered, to those in the publishing industry and a wide variety of non-academic fields. I started this essay by noting that when I was a graduate student I had never heard from or about individuals who had taken jobs like the one I eventually took. Certainly I could have sought out those individuals on my own (though I didn’t know them personally, since they were not part of my cohort group), but it is also true that those individuals were not generally recognized as ones to emulate.

One hopes, given the terrible prospects that most new Ph.D.’s face today as they enter the academic job market, that such snobbishness has waned. However, I still would not go so far as to say that we should tell students that “any job” is better than “no job” or that they should simply “take what they can get.” Some individuals would be terribly mismatched with certain positions — weak teachers who live for research should not take positions at teaching universities unless they are willing to re-prioritize and devote their energies to improving their pedagogies. Similarly, I have known superb teachers with poor research habits and skills who have taken wholly inappropriate positions at prestigious universities and then lost those jobs for low research productivity during third year or tenure reviews (unfortunately, they sometimes got their jobs in the first place because they were able to — and were counseled to — market themselves within certain highly sought-after identity political fields but with no recognition of their own individual needs or abilities). A discussion of who will be happy and will succeed where must be part of any broad conversation on the academic profession, whether that conversation takes place in seminars, workshops, or with groups of students about to “go on the market.”

Indeed, it is vital to invite students into conversation on these matters as often and as early as possible. At the beginning of every meeting of every graduate class I teach, I ask if there are any questions on the minds of the students regarding their program, general professional issues or processes, or the often unexplained norms of academic life. Even if students are sometimes too shy to ask what they really want to know in class, their recognition of my willingness to address such issues means they often show up during office hours to ask what they consider an embarrassing question (“how much do assistant professors typically make?” or “what do you say in a cover letter when you send out an article for consideration?”). We have to let students know that we are willing to share information with them in an honest and practical manner. We should be “open texts” for them to read and learn from in their own processes of professional interpretation and skill-building.

I believe it would be useful to build some of the expectations above into the desired outcomes of our graduate programs. In fact, I haven’t heard of any programs that articulate specific goals for professionalization processes, but I think we should be asking what specifically we wish the end product to be of those seminars, workshops, and other conversations about academic life. I would offer that an overarching goal might be to help our students become more supple and skilled participants in the wide variety of conversations that comprise an academic career. By necessity, acquiring this conversational skill means learning the value of being both multi-voiced and open to the perspectives of others.

This bears some explanation. By multi-voiced I am not implying that students should learn to be Machiavellian or duplicitous. Rather, I mean that all of us who are thriving in our careers have learned to speak within a wide variety of contexts and to choose our language carefully depending upon the venue. I would never speak in class as I do in some of my more theoretically dense writings. I would never speak to administrators from other departments as I do to those in my home department who use the same terms and points of reference. And finally I would never speak to the public exactly as I would to a scholarly audience at a conference. Being multi-voiced in this way means being aware of your conversation partners’ needs and placing their need to understand above your own desire to express yourself in intellectually self-serving ways.

And this is, in fact, an important component of being open to the perspectives of others. Yet that openness also means allowing one’s own beliefs, values, and opinions to be challenged and transformed by contact with those of conversation partners. This does not mean being unwilling to defend one’s beliefs (whether on matters of social justice or minute points of interpretation), but it does mean being able to position oneself at least partially outside of oneself in the process of conversational exchange. It certainly means working to understand how the general public perceives the academy (and the debate over tenure, for example). It means trying to see the world through the eyes of a different generation of professors who may not use the same methodologies or theoretical touchstones in their work. It means seeing one’s own sacredly held positions as ones that exist in a landscape of positions, many of which are also sacredly held.

Continued in article


December 11, 2005 message from David Albrecht [albrecht@PROFALBRECHT.COM]

At Bowling Green, much institutional emphasis is being placed on having undergraduates conduct or participate in research. Of course, I'm pretty sure the program is slanted toward the hard sciences. An economics professor here is active in this area. She suggests that I get involved.

I'd love to get involved, there are significant rewards being tossed about.

On what would my undergraduates do research?

Please help me.

David Albrecht

December 12, 2005 reply from Bob Jensen

Hi David,

At the college of business level, you might suggest that your college become involved in the highly popular National Conferences on Undergraduate Research (NCUR). This affords students the opportunity to travel a bit and make presentations with other students at the excellent NCUR conferences. It also is an opportunity to promote your college and its faculty. Your social and physical science colleges may already be involved with NCUR --- http://www.ncur.org/ 

As far as research goes, I think it would be great to have students write responses to FASB, GASB, and IASB exposure drafts and other invitations to comment. Undergraduate research is not as esoteric as PhD research and leaves some room for normative methodology.

Along these lines I had an opportunity to view two absolutely absurd referee reports sent to a professor, not me, with respect to a submission. His submission suggested, among other things, that some accounting faculty should spend more time responding to standard setters' invitations to comment on matters that need more applied research. For lack of a better term, I will call this applied research in accounting.

The reports of both referees were highly critical of professors trying to publish applied research in any AAA journals (including Accounting Horizons which they assert is read mostly by academics rather than practitioners). Perhaps they might make an allowance for Issues in Accounting Education, but no mention is made for IAE in these referee reports.

I think the following quotation (listed as the Number 1 criticism) from one of the referee reports pretty much sums up the sad state of academic accounting research today.

I quote:

*************
1. The paper provides specific recommendations for things that accounting academics should be doing to make the accounting profession better. However (unless the author believes that academics' time is a free good) this would presumably take academics' time away from what they are currently doing. While following the author's advice might make the accounting profession better, what is being made worse? In other words, suppose I stop reading current academic research and start reading news about current developments in accounting standards. Who is made better off and who is made worse off by this reallocation of my time? Presumably my students are marginally better off, because I can tell them some new stuff in class about current accounting standards, and this might possibly have some limited benefit on their careers. But haven't I made my colleagues in my department worse off if they depend on me for research advice, and haven't I made my university worse off if its academic reputation suffers because I'm no longer considered a leading scholar? Why does making the accounting profession better take precedence over everything else an academic does with their time?
**************

Both referees imply that studying accounting standards will take our researchers away from what's really important in accounting academe, namely publishing empirical and analytical research on problems that lend themselves to esoteric statistics and mathematics. The irony is that most of the esoteric research published research along those lines is more or less focused on trivial hypotheses of little interest in and of themselves. Certainly our academic friends in economics and finance are not subscribing to our accounting research journals. We, of course, subscribe to their esoteric journals.

Once again I make my case that that academic research hypotheses published in top accounting research journals cannot be of much interest since all top accounting research journals in academe have a policy against publication of replication studies. What value can the findings have of the replication studies are of no interest? See http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication

The bottom line is that real scientists, economists, medical researchers, and legal researchers would laugh the above two arrogant AAA journal referees off the face of the planet. I'm certainly glad that medical researchers focus on professional practice problems and insist on replication. I'm certainly glad that biology researchers focus on microbes that are helping or hindering life on earth. I'm certainly glad that legal research is almost entirely focused on real world case law. No respectable academic discipline, other than accounting, divorces itself from the practice of its own profession. I think this is the main reason academic accounting research is held is such low esteem both by practitioners and by other academic disciplines. We've become a sick joke.

What the two idiots, who are typical arrogant referees for AAA journals, are doing, David, is leaving a whole lot of room for Bowling Green's undergraduates to conduct research on the important problems of the academic profession while they themselves go off and play in the sandbox of research that their own top journals conclude is not worth replicating. I suggest to you David that there is ample room for your undergraduates do applied research that may benefit the profession. Just do not expect the arrogant "philosophers" who guard the gates of our academic accounting research journals to allow any of this research pass into the gates of heaven.

I think the two referee reports mentioned above are exactly what the current AAA President (Judy Rayburn) and the Past President (Jane Mutchler) are trying in vain to overcome by changing the refereeing policy of the AAA's leading journals. I'm certain the prejudices of our arrogant ivory tower academics are so ingrained that these two women are fighting losing battles.

I suggest that you, David, conduct a lab experiment in your undergraduate classes. Bring a scale to each class and have the students weigh the last four issues of The Accounting Review. Then have students weigh the last four issues of Accounting Horizons. You must first tear out only the research articles themselves since both journals do publish some items that are not research submissions to the journals. Please publish this comparative study on the AECM. I think the results will speak for themselves about the sad state of applied research in accounting academe.

Imagine the how academe might be shaken up if an AAA Doctoral Consortium were entirely devoted one year to taking up current issues facing the FASB, GASB, and IASB. The very foundations of academe might crumble if we let outsiders into the tightly controlled esoteric program of the Doctoral Consortium and corrupt the research biases of our new doctoral graduates in accountancy.

Send your undergraduate researchers marching forward David. The accounting world will be a better place. The profession is getting very little help from unreplicated research articles that pass through the gates diligently guarded by arrogant and narcisstic AAA journal referees.

Bob Jensen

December 12, 2005 reply from McCarthy, William [mccarthy@BUS.MSU.EDU]

On Monday 12 December 2005, David Fordham wrote on AECM:

...

No matter how good it is, no matter what its form, systems research will not be published in accounting journals given the current editorship and review staff

...

David and other AECM system researchers:

This has been generally true in the past and there are certainly still a host of accounting journals that underestimate the importance of accounting information systems (AIS) research. Additionally, it is still true that almost all accounting academics remain clueless about the different kinds of methodologies that AIS, MIS, and computer science researchers generally use. Thus, accounting systems people (like Dave and I plus many AECM members) are forced to live in an academic world that understands neither “the what” nor “the how” of AIS research and teaching.

However, the American Accounting Association (in general) and The Accounting Review (in particular) are taking steps to narrow this gap in understanding. Dan Dhaliwal, the senior editor of The Accounting Review (TAR) has appointed me – a known maverick in accounting circles and a long-time champion of AIS research and teaching -- as an editor for TAR.

That was the good news; now the bad (sort of) news. Since the announcement in August of a systems champion at the Review, we have seen no changes because systems people are not submitting manuscripts. I know that gearing up takes a while, but in the interim, I think we need to speak less of our underprivileged past status and concentrate more on how we are going to attack the myriad of problems that accounting faces today with systems-informed thinking and systems-informed methods. If you fervently believe that the practice of accounting benefits little from what TAR, JAR, JAE, et al. produce, and you also believe that accounting practice could benefit tremendously from improvements researched and suggested by good AIS people and computer scientists, you need to get busy.

I am going to give a speech on this at the AAA Information Systems Section mid-year meeting on January 7th, 2006, but in the interim, I hope people can use their inter-term break time to get the flow to TAR increased. Let’s get going!!

Bill McCarthy
Michigan State

Dennis Beresford, former Chairman of the Financial Accounting Standards Board and current Ernst & Young Professor of Accounting at the University of Georgia, had much to recommend on how academic accountants could improve.  His luncheon speech on August 10, 2005 at the AAA Annual Meetings in San Francisco is provided at http://www.trinity.edu/rjensen//theory/00overview/BeresfordAAAspeech2005.htm
I snipped the above URL to
http://snipurl.com/Beresford2005

My apologies for some formatting that was lost when I converted Denny's DOC file into a HTM file.

December 12, 2005 reply from David Albrecht

What is applied research?

I've never been able to figure this one out.

David Albrecht

December 13, 2005 reply from Bob Jensen

Hi David,

First let me point out that for over three decades, Denny Beresford has been appealing for more applied research among accounting educators.  Two days ago I requested and received his permission to post his luncheon speech at the annual 2005 AAA meetings in San Francisco.  His somewhat emotional appeal is at  http://snipurl.com/Beresford2005

You can obtain various definitions of applied research by going to
http://www.google.com/advanced_search?hl=en
Type in the following in one of the search boxes:

        Define "Applied Research"

Among the many definitions the one I like is that basic research is "the  systematic, intensive study directed toward the practical application of knowledge and problem solving."
www.unlv.edu/depts/cas/glossary.htm

 The key word in this definition is "practical application."  In the context of the accountancy profession I think of this is as discovery of practical applications that can be put into place by practicing accountants and their firms.  Included here are practical applications for standard setters such as the FASB, GASB, and IASB.

By way of example, I would include virtually all of the applied research papers published by Ira Kawaller on the practical applications of derivative financial instruments and accounting for derivative financial instruments --- http://www.kawaller.com/articles.shtml  

By way of a particular example, I like Ira's applied research on when to use dollar-offset versus regression tests of hedge effectiveness.  Hedge effectiveness testing is required for hedge accounting per Paragraph 62 in FAS 133.  The FASB does not prescribe how such testing should be done in practice.  It only says such testing is required.  Ira makes some practical  suggestions at http://www.kawaller.com/pdf/AFP_Regression.pdf

I contend that most ABC costing research is of an applied nature since most published papers and the seminal discoveries of ABC by the John Deere Company back in the 1940s are intended for practical application.

Lines between basic research and applied research in accounting are really  confusing because it is common to associate quantitative methods and/or historical methodology with basic research.  Basic research should not be confused with tools and methods of research.  Basic research quite simply is a research discovery, new knowledge, that has no perceived application in practice or at best has some hope for possible discovery of practical applications in future applied research.

I suspect that the discovery of the structure of DNA by Watson and Crick is conceived as basic research.  Applied researchers later on found ways to put this to use in practice such as the practice of using DNA evidence in criminal cases. 

I suspect that portfolio theory in the 1959 doctoral dissertation of Harry Markowitz at Princeton would be considered basic research that later led to the CAPM model and Options Pricing Model applied in practice.  The discovery by Markowitz was totally impractical until simplified index models were later discovered when trying to apply Markowitz theory to actual portfolio choices.

The best examples of basic versus applied research discoveries probably come from the discipline of mathematics.  Theoretical mathematicians like to prove things with no thought as to possible relevance to anything in the real world.

 It is much more difficult to find truly basic research discoveries in accountancy.  We should be grateful that we do not have to select Nobel Prize Winners in accountancy.  The Ball and Brown study got the first Seminal Contribution Award from the AAA.  But this is an application of capital market research discovered previously by researchers in finance and economics.  Capital markets studies have mostly applied models developed in finance, econometrics, and statistics.   

What I am saying is that it is possible to apply theory and test hypotheses without intending to have the discoveries be put directly into practice in a profession.  For example an events study such as the discovery by George Foster that the publication of a Barrons' paper by Abe Briloff was highly correlated with a plunge in share prices of McDonalds Corporation tells us something about an association between Briloff's accounting publication and capital market events.  But correlation is not causation.  Foster's study could not really tell us if the accounting issue (dirty pooling) or the mere fact that Briloff said something negative about McDonalds in Barrons actually caused the plunge in share prices.

The bottom line here is that the basic versus applied research distinction in mathematics and science does not carry over well into accounting.  I prefer to make the distinction more along the lines of research not having versus having a direct impact on practicing accountants.  For example, Ira's paper on hedge effectiveness techniques had immediate and direct impact on having firms use dollar-offset testing for retrospective data and regression for prospective data.  Companies actually follow Ira's recommendations when implementing FAS 133 rules. 

So what makes Ira's study different from those of Ball and Brown, Beaver, and Foster?  I guess the distinction lies in the "take home" for practicing accountants and standard setters.  Most capital markets research discoveries do not provide the CPA on the street with something to immediately place into practice or take out of practice.  The Ira Kawaller studies linked above provide CFOs with strategies for hedging and CAOs/CPAs with strategies for implementing FAS 133.

Now the question is:  What is Denny Beresford asking us to provide to the standard setters?  I think what he's asking for is more along the lines of Ira Kawaller's practical-application contributions.  If Ira's studies had been done before FAS 133 was issued, the standard itself in Paragraph 62 might have suggested or even required specific types of hedge effectiveness testing.  Instead Paragraph 62 of FAS 133 offered no suggestions for how to test for effectiveness.  This has led to thousands of variations, often inconsistent, of hedge effectiveness testing in practice.

Both while he was Chairman of the FASB and after he became a professor of accounting at Georgia, Denny Beresford has consistently been appealing for the academy to conduct research that will have more direct benefit in the writing of accounting standards.  This of course entails a considerable effort in learning the issues faced by standard setters on particular complicated issues like the thousands of different types of derivative financial instruments actually used in practice.  Most academic accountants shun learning about such contracts and instead turn to tried and true regression models of data found in existing databases like those provided by Compustat and Audit Analytics.  My conclusion is that this so-called basic research is actually easier than making creative contributions to practicing accountants, i.e. providing them with discoveries that they did not make themselves in practice.  This is so tough that it is why the academy tends to avoid Denny's appeal.

I repeat and lament the sad state of the accountancy academy as reflected in the following quotation from a referee that closed the gate on publishing a paper of a very close friend of mine:

I quote:

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

1. The paper provides specific recommendations for things that accounting academics should be doing to make the accounting profession better. However (unless the author believes that academics' time is a free good) this would presumably take academics' time away from what they are currently doing. While following the author's advice might make the accounting profession better, what is being made worse? In other words, suppose I stop reading current academic research and start reading news about current developments in accounting standards. Who is made better off and who is made worse off by this reallocation of my time? Presumably my students are marginally better off, because I can tell them some new stuff in class about current accounting standards, and this might possibly have some limited benefit on their careers. But haven't I made my colleagues in my department worse off if they depend on me for research advice, and haven't I made my university worse off if its academic reputation suffers because I'm no longer considered a leading scholar? Why does making the accounting profession better take precedence over everything else an academic does with their time?

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

My bottom line conclusion is that the referee acting superior above is really scared to death that he or she cannot be creative enough to make a practical suggestion to the FASB that the FASB itself has not already discovered. 

          Bob Jensen

January 19, 2006 reply from Paul Williams [williamsp@COMFS1.COM.NCSU.EDU]

This type of review is all too common and is symptomatic of what the accounting academy has become. I recall a panel discussion that was organized for an AAA annual meeting (I believe it was the last time we held it in Washington) to air an issue that Bill Cooper was animated about at that time -- data sharing and the bigger problem of research impropriety. One of the panelists was a scientist from John Hopkins who had just started a research ethics journal. As part of this program editors of many leading accounting journals were invited to give their perspectives on the problem of replication and potential research malfeasance. Of course none thought there was any problem.

One editor (still an editor of one of the most prominent journals)  responding to the scientist's contention that the scholarly enterprise is to ultimately seek knowledge, concurred, but added, (paraphrased, but pretty close) "An alternative hypothesis is that the academic enterprise is a game constructed to identify the cleverest people so we know who to give the money to."

His smirk revealed a great deal about what he believed to be the silly idea that scholarship was about knowledge. The reviewer's reply above is evidence that the hypothesis about an academic game is more believable than one in which the academic enterprise in accounting has understanding anything as its objective. And the profession is certainly culpable. It created professorships and awarded them to the winners of this game. It funded the JAR conferences. It dropped out of the AAA. This may be because the profession has never had any great respect for scholarship, at least not in my lifetime. Medical scholarship is not about creating profit opportunities for doctors; neither is legal scholarship about creating profit opportunities for lawyers. Perhaps this is why we now have, as Ray Chambers opined in his Abacus article in 1999 (just before he passed away) that we had created vast tomes of incoherent rules "...as if for a profession of morons."


The shift from Gemeinschaft to Gesellschaft.

"Notes from the Underground," by Scott McLemee, Inside Higher Ed, January 18, 2006 --- http://www.insidehighered.com/views/2006/01/18/mclemee

“Knowledge and competence increasingly developed out of the internal dynamics of esoteric disciplines rather than within the context of shared perceptions of public needs,” writes Bender. “This is not to say that professionalized disciplines or the modern service professions that imitated them became socially irresponsible. But their contributions to society began to flow from their own self-definitions rather than from a reciprocal engagement with general public discourse.”

Now, there is a definite note of sadness in Bender’s narrative – as there always tends to be in accounts of the shift from Gemeinschaft to Gesellschaft. Yet it is also clear that the transformation from civic to disciplinary professionalism was necessary.

“The new disciplines offered relatively precise subject matter and procedures,” Bender concedes, “at a time when both were greatly confused. The new professionalism also promised guarantees of competence — certification — in an era when criteria of intellectual authority were vague and professional performance was unreliable.”

But in the epilogue to Intellect and Public Life, Bender suggests that the process eventually went too far. “The risk now is precisely the opposite,” he writes. “Academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic). The agenda for the next decade, at least as I see it, ought to be the opening up of the disciplines, the ventilating of professional communities that have come to share too much and that have become too self-referential.”

The above quotation does not contain beginning and ending parts of the article


I loved the Marx Brothers Analogy in This One:  It shows what happens when government runs a business

"Is This Any Way to Run a Railroad? You think you've got problems? Amtrak's got an overpaid workforce. Its trains and tracks are falling apart. Worse, the carrier's balance sheet is a flat-out mess," by John Goff, CFO Magazine, November 2005 --- http://www.cfo.com/article.cfm/5077873/c_5101083?f=magazine_featured

As Marx Brothers movies go, Go West isn't much. The aging comedy team was running out of ideas, and it shows: the plot is predictable and the gags are stale. Yet there is one memorable scene in the 1940 film. In it, the boys — desperate to keep a steam-powered locomotive chugging along — feed the entire train to itself, car by car, piece by piece, caboose to tender.

Management at the National Railroad Passenger Corp., better known as Amtrak, performed a similar sacrifice in 2001. Four years into an effort to wean itself from federal operating subsidies, the rail carrier was running on empty. Executives had already started diverting funds earmarked for capital projects to help plug operating holes. But even that wasn't enough, and soon, Amtrak's management began cannibalizing the railroad. Recalls Cliff Black, Amtrak's director of media relations: "We mortgaged everything."

Things got so bad that the railroad took out a loan on New York's Pennsylvania Station to cover three months of expenses. It was a move the U.S. Office of Management and Budget called "a financial absurdity equivalent to a family taking out a second mortgage on its home to pay its grocery bills." Eventually, Amtrak conceded it couldn't break even, and Congress continued pumping funds back into the rail operator.

The damage to the balance sheet had been done, however. During the five-year plan, the carrier's debt load nearly tripled, from $1.7 billion to $4.8 billion. Once dubbed the "Glide Path to Profitability," Amtrak's intended march to self-sufficiency is termed something else by current CFO David Smith. "I call it the slippery slope to hell," he says.

Since taking the reins last November, Smith has personally spent considerable time in purgatory — stuck awaiting vital federal funding for the carrier while politicians dither over the future of passenger rail service. "Amtrak's never had full support from any Administration. And it has no ongoing real capital budget," notes James Coston, chairman of Corridor Capital LLC, which specializes in finance and development for intercity and commuter rail systems. "So each year, they go up to Capitol Hill with a tin cup."

And that cup remains far from full. Last February, for example, the White House announced it intended to cut off Amtrak's billion-dollar-plus annual subsidy — which covers about half the railroad's total budget — unless the carrier agreed to a radical restructuring. Both the House and the Senate defied the Administration, calling for subsidies ranging from $1.17 billion to $1.45 billion for 2006 (the carrier generated $1.9 billion in revenues last year against $2.9 billion in costs). But the details have yet to be ironed out, and it's still unclear just how much money Amtrak will get.

Amid the revenue uncertainty, Smith must somehow pay down Amtrak's borrowings, upgrade its information technology and financial skills, and wring concessions from entrenched unions. He is also charged with mapping out long-term capital investments on the railroad's antiquated infrastructure — a tall order when you don't actually know what funds will be available to finance the repairs. And he must do all this under the scrutiny of an Administration whose purported goal, says Amtrak president and CEO David Gunn, is "to destroy Amtrak."

It is, in sum, a nearly impossible to-do list. But judging from his efforts so far, Smith has what it takes to defy long odds: steadiness, belief, and a certain imperviousness to the Coliseum crowd. Some observers say his first year on the job could be used as a case study for grace under fire. Says Coston: "I can't imagine a tougher job than being CFO at Amtrak."

December 5, 2005 reply from Paul Williams

Bob, Come on! This kind of argument is unfair. You sound like the folks at Rochester. Outcomes I like I attribute to market forces and the private sector; outcomes I don't like are the fault of government meddling. I defy anyone to draw a line that demarcates private from public outcomes. The intertwining of government and economics is today the same as it has always been. Abandoning the messy world of political economy for the mathematically elegant imaginary world of mere economics makes for a nice living for a lot of mathematicians. Since my paycheck is drawn on the account of the State of North Carolina I am legally a government employee. NC State's Centennial Campus is living testament to the impossibility, in a meaningful scientific sense (as opposed to a rhetorical sense), of the distinction between pubic and private. All that exists are organizations within a context of constraints and incentives mutually determined by economic, political, and social forces (if force is the right metaphor).

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

December 6, 2005 reply from Bob Jensen

From the KPMG Audit Report on September 30, 2004 --- http://www.amtrak.com/pdf/04financial.pdf The Company (Amtrak) has a history of substantial operating losses and is highly dependent upon substantial Federal government subsidies to sustain its operations. There are currently no Federal government subsidies authorized or appropriated for any period subsequent to the fiscal year ending September 30, 2005 (“fiscal year 2005”). Without such subsidies, Amtrak will not be able to continue to operate in its current form and significant operating changes, restructuring or bankruptcy may occur. Such changes or restructuring would likely result in asset impairments.

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

I guess I have to agree Paul that the difference between Amtrak and other businesses, like farmers, dependent upon government subsidies is largely semantic (rhetorical). In a sense, Amtrak is less like Fanny Mae since Amtrak's debt is not guaranteed by the Federal government. It is also less like the U.S. Post Office since Amtrak did sell equity (that has nearly been wiped out by huge deficits). Like the Post Office, Amtrak does negotiate directly with the government for appropriations to a particular business. But unlike the Post Office, I think Amtrak can set prices without an act of Congress.

The lines are indeed fuzzy between government enterprises, private enterprises directly subsidized, private enterprises indirectly subsidized, and the theoretical private firms that have no government subsidies. There may not be any such private firms in modern times since nearly every product or service is indirectly subsidized somewhere along the supply chain.

One possible distinction between public and private enterprises is whether the government is obligated to pay creditors off in full if the enterprise fails. I gather that this is the case for NC state universities, the U.S. Post Office, and Fannie Mae (even though Fanny Mae also sells equity shares). Debt guarantees are not assured in the case of Amtrak such that Amtrak is closer to being private in this context. In this context, classifying public versus private enterprises becomes a sliding scale as to what portion of the debt is guaranteed by the government. Pension guarantees cloud this issue since these are a form of insurance that enterprises must buy into to become partly covered.

I'm not certain where your argument bears much fruit if we don't have some distinction between public and private. If subsidies make every enterprise a government enterprise, wouldn't all businesses become government enterprises? It would not be helpful to have no definition of private enterprise since many equity owners and creditors can still fail and do every day in firms where the government does not guarantee repayment of all debt.

One problem of debt guarantees like we have in Fanny Mae and the Post Office is that managers of those companies can be tempted put their companies in extremely high levels of debt risk because creditors are always willing to loan to the hilt if the government guarantees repayment. Then cowboy managers might be tempted to borrow great amounts to pay for highly inefficient operating costs or make extremely high risk investments (as Fannie Mae did with billions invested in losing manufactured housing mortgages).

When I started this thread I mistakenly thought that Amtrak's debt was guaranteed by the government. What amazes me is how Amtrak is still able to borrow money to finance losing operations. Creditors (who are largely in Canada and France) must have faith that the U.S. government will not allow Amtrak to fail in spite of Amtrak's bleak future for ever earning a profit. Apparently the close association of Amtrak and government make it not like Penn Central in the eyes of lenders.


A huge corporate finance textbook
From Jim Mahar's Blog on October 17, 2005 --- http://financeprofessorblog.blogspot.com/

Vernimmen.com --- http://vernimmen.com/

What a great site!

When I was gone I received a message from the authors of Corporate Finance by Vernimmen, Quiry, Le Fur, and Salvi.

The book, newsletter, and website are all very interesting and useful.

The book is 48 chapters (about 1000 pages) full of corporate finance. I have to agree with the authors "It is a book in which theory and practice are constantly set off against each other...."

I really like it. Especially the emphasis not so much on techniques ("which tend to shift and change over time."

VERY WELL DONE!

Moreover, the authors also put out a monthly newsletter and have a web site that could stand alone as one of the best in the business.

Vernimmen.com --- http://vernimmen.com/

Jensen Comment:
Perhaps intermediate accounting textbooks will one day follow this lead of contrasting theory and practice.


Accentuate the Obvious
Not every scientist can discover the double helix, or the cellular basis of memory, or the fundamental building blocks of matter. But fear not. For those who fall short of these lofty goals, another entry in the "publications" section of the ol' c.v. is within your reach. The proliferation of scientific journals and meetings makes it possible to publish or present papers whose conclusion inspires less "Wow! Who would have guessed?" and more "For this you got a Ph.D.?" In what follows (with thanks to colleagues who passed along their favorites), names have been withheld to protect the silly.
Sharon Begley, "Scientists Research Questions Few Others Would Bother to Ask," The Wall Street Journal, May 27, 2005; Page B1 --- http://online.wsj.com/article_print/0,,SB111715390781744684,00.html
Jensen Comment:  Although some of the studies Begley cites are well-intended, her article does remind me of some of the more extreme studies that won Senator Proxmire's Golden Fleece Awards --- http://www.taxpayer.net/awards/goldenfleece/about.htm
Also see http://www.encyclopedia.com/html/G/GoldenF1l.asp
Accounting research in top accounting journals seldom is not so much a fleecing as it is a disappointment in drawing "obvious" conclusions that practicing accountants "would not bother to ask."  Behavioral studies focus on what can be studied rather than what is interesting to study.  Studies based on analytical mathematics often start with assumptions that guarantee the outcomes.  And capital markets event studies either "discover" the obvious or are inconclusive.


A Populist Movement in Accounting Research

At the 2005 American Accounting Association meetings in San Francisco, the 2005-2006 President, Judy Rayburn from the University of Minnesota, gave a luncheon speech about the State of the AAA.  The AAA is not in the best of shape and comparisons are made with other academic associations in business studies such as finance and management.

What is especially interesting is the current populist movement going on in the AAA.  It is built upon the argument that the AAA journals and meeting programs became too detached from the accounting profession and problems within the profession.  There is a strong movement rising to change the editorial biases of the AAA’s top journals that have been tightly controlled by positivists demanding great rigor in empirical and analytical studies.  One problem is that such demands for rigor have limited researchers to rather uninteresting problems that derive outcomes of little surprise or interest.  In many respects there is a current populist movement with respect to the entire academic tenure and performance evaluation process.   You can read a bit more about this at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession  

 

August 23, 2005 message from Tracey Sutherland [tracey@AAAHQ.ORG]

Given the lively discussion about Judy Rayburn's luncheon talk in San Francisco, I thought some would be interested in her PowerPoint slides which are posted on the AAA website -- you'll find them at http://aaahq.org/AM2005/menu.htm  . It was great to see many of you at the Annual Meeting -- special thanks to folks for discussing ideas for some of the teaching/learning related sessions developed by the VP for Education -- a session on using games in teaching accounting was an outcome of conversations on AECM.

Best regards, Tracey

Jensen Comment:  Katherine Schipper's Presidential Lecture slides are also available"

Katherine Schipper's Presidential Lecture
(PowerPoint Slides)
Judy Rayburn's President's Talk
(PowerPoint Slides)

I suspect the AAA is holding off on Denny Beresford's speech until it is determined if Accounting Horizons is going to publish his paper.

Cynthia Cooper’s plenary speech on Wednesday is proprietary and will not be published by the AAA. You can, however, find some of her remarks in various places if you run a search on Google. There is a basketball star by that same name, so I suggest you run the search on “Cooper” AND “Worldcom”.

Cooper was one of Time Magazine's 2002 "Persons of the Year" --- http://www.time.com/time/personoftheyear/2002/

Also see http://www.findarticles.com/p/articles/mi_m4153/is_6_60/ai_111737943

August 23 reply from Ken Crofts [kcrofts@CSU.EDU.AU]

Judy Rayburn’s slides . . . are also interesting, particularly drop in membership of AAA over the years.

Ken


The philosophy of science is a dying discipline
The philosophy of science is a dying discipline in part because it added philosophical terminology and discourse that did not have enough value added to scientists themselves as they got on with the work at hand, particularly social scientists.

Social scientists have moved on from debates over the scientific paradigm. I highly recommend examining how sociologists now proceed without getting all hung up on positivist or anti-positivist dogma --- http://www.trinity.edu/mkearl/methods.html#ms 

I particularly like the following quotation from the above document:

Methodology entails the procedures by which social research, whether  quantitative and qualitative, are conducted and ultimately evaluated--in other words, how one's hypotheses are tested. Getting more specific, researchers' methodologies guide them in defining, collecting, organizing, and interpreting their data. Often the major breakthroughs in our understanding of social processes occur because of the novelty of the data used, the techniques by which it is gathered, or by the model or question directing its acquisition and/or interpretation.  And let's hear it for the findings that don't support the hypotheses at the Journal of Articles in Support of the Null Hypothesis and in the Index of Null Effects and Replication Failures.

Defining one's data: Precisely how does one go about and measure such theoretical concepts as altruistic behavior, esprit de corps, or anomie?  Even such apparent "no brainers" as religiosity, happiness, or social class reveal how methodological adequacy and validity are a function of the clarity of one's theory and its part.  Further, theory tends to be built into our measurement tools.  When, for instance, one measures temperature with a thermometer it is not the temperature per se that one sees but rather a phenomenon (mercury rising within a column) theoretically related to it.

For strategies for data collection see Bill Trochim's Research Methods Tutorials, including material on:

Thinking about using the web for conducting a survey?  Available online is Matthias Schonlau, Ronald D. Fricker, Jr., and Marc N. Elliott's Conducting Research Surveys via E-mail and the Web.

August 22, 2005 reply from Paul Williams at North Carolina State University

To add a bit more to Michael, Ron, and Bob's comments: Even Popper, by the time he died wasn't a Popperian, but an evolutionary epistimologist. Even he had to recognize the implications of the linguistic turn and, particularly, Paul Feyerabend's (a student of Popper) destruction of the pretenses of method. Bob is right that philosophy of science is a dead horse replaced by a sociology and history of science. Even scientists don't follow the scientific method. Underlying every theory are propositions that don't enter into the specific experiment or hypothesis being tested. I am with Ron, and many others, that rigor is not obtained by running experiments within the context of a theory that has absolutely pernicious underlying presuppostions.
Capital market theory and principal/agent theory are such theories.


The pernicious underlying proposition that is both empirically false (as evolutionary biologists and anthropologists have provided ample evidence of the kind you would consider rigorous) and morally repugnant is that of humans' nature. What we in accounting seem never to consider is what ramifications such presuppositions have for the very culture in which we live. As Ed Arrington labeled it, Watts and Zimmerman are merely Hobbes in drag. Hobbesian human nature was constructed to argue for Leviathan -- self- government is beyond the ken of humans engaged in a war of all against all. Certainly a libertarian philosophy is untenable in a Hobbesian world. Solipsistic, vicious self-maximizers. The
project of the Scottish Enlightenment (of which Thomas Jefferson was a diligent student) was to produce a human being who was capable of being free of the rule of Kings or absolute sovereigns.
 

Jagdish provided us a reference to Sumantra Ghoshal's article "Bad Management Theories Are Destroying Good Management Practices." The bad management theories he speaks of are those of agency theory. Why accounting should have been preoccupied for the last 35 years in substance testing a theory of human nature is one of the great mysteries. Principal/agent theory is a bad theory based on its own empirical pretensions. What kind of Rsquares have we produced? Most of human behavior is left unexplained by the theory. And after this last stock market bubble, does anyone seriously believe in capital market efficiency?
 

How good a "scientific" theory do you have when after 40 years of testing you are still back at square one? And if capital markets aren't efficient, what does that do to the 30 years of "information content" studies predicated on the assumption that markets were at least semi-strong efficient? Let me ask this question, of you and everyone else: How much of what you believe do you believe on the basis of the "empirical evidence?" Very little. Indeed, believing you are a Popperian is a belief not based on empirical evidence. No one did an experiment and proved that Popper was
right.


But what makes capital market theory and principal agent theory bad is what it forces me to believe about myself and Michael and Ron and You, which I will not, nor do I have to, accept. To quote from Michael Shermer's The Science of Good and Evil: "Still, something profound happened in the last 100,000 years that made us -- and no other species -- moral animals to a degree unprecedented in nature (p. 31)." Accounting is a human practice.


It's objects are not atoms, or quarks, or stars, or planets. It's objects are also its subjects (the double hermeneutic that our physicists friends don't have to deal with). A human practice that investigates itself as if human capacities are as impoverished as neo-classicists would have us believe they are (both in terms of doing good and evil) might be missing something exceedingly important to it.

 


Kurt Kleiner, "Most scientific papers are probably wrong," New Scientist, August 30, 2005 --- http://www.newscientist.com/article.ns?id=dn7915&feedId=online-news_rss091

Most published scientific research papers are wrong, according to a new analysis. Assuming that the new paper is itself correct, problems with experimental and statistical methods mean that there is less than a 50% chance that the results of any randomly chosen scientific paper are true.

John Ioannidis, an epidemiologist at the University of Ioannina School of Medicine in Greece, says that small sample sizes, poor study design, researcher bias, and selective reporting and other problems combine to make most research findings false. But even large, well-designed studies are not always right, meaning that scientists and the public have to be wary of reported findings.

"We should accept that most research findings will be refuted. Some will be replicated and validated. The replication process is more important than the first discovery," Ioannidis says.

In the paper, Ioannidis does not show that any particular findings are false. Instead, he shows statistically how the many obstacles to getting research findings right combine to make most published research wrong.

Massaged conclusions Traditionally a study is said to be "statistically significant" if the odds are only 1 in 20 that the result could be pure chance. But in a complicated field where there are many potential hypotheses to sift through - such as whether a particular gene influences a particular disease - it is easy to reach false conclusions using this standard. If you test 20 false hypotheses, one of them is likely to show up as true, on average.

Odds get even worse for studies that are too small, studies that find small effects (for example, a drug that works for only 10% of patients), or studies where the protocol and endpoints are poorly defined, allowing researchers to massage their conclusions after the fact.

Surprisingly, Ioannidis says another predictor of false findings is if a field is "hot", with many teams feeling pressure to beat the others to statistically significant findings.

But Solomon Snyder, senior editor at the Proceedings of the National Academy of Sciences, and a neuroscientist at Johns Hopkins Medical School in Baltimore, US, says most working scientists understand the limitations of published research.

"When I read the literature, I'm not reading it to find proof like a textbook. I'm reading to get ideas. So even if something is wrong with the paper, if they have the kernel of a novel idea, that's something to think about," he says.

Journal reference: Public Library of Science Medicine (DOI: 10.1371/journal.pmed.0020124)

Jensen Comment:  By analogy, this is a black eye against top accounting research journals that refuse to publish replication studies.  It is a special problem for accounting behavior studies where sample sizes and validity are enormous problems.  It may be less of a problem in capital market studies where sample sizes are often huge.  But problems of poor study design and missing variables in models are an enormous in accounting research that tries to be scientific.

Always subject a research conclusion to the so-what test! Even without technical skills you often can question that which your common sense tells you is not correct, although you may have to endure slings and arrows of paranoids in doing so.  Sometimes a child's question is the best kind of question --- http://imagine.gsfc.nasa.gov/docs/ask_astro/answers/011021a.html

Never be overwhelmed by CAPM studies.  The CAPM is such a simplified model (reducing market risk to one index) that most studies based on CAPM are probably correct versus incorrect by sheer chance.  The problem with multiple-index models, in turn, is that there are all sorts of specification problems due missing variables and other things such as the following:

multicollinearity (http://seamonkey.ed.asu.edu/~alex/computer/sas/collinear.html ),

homoscedasticity ( http://davidmlane.com/hyperstat/A121947.html ),

nonstationarity (http://sepwww.stanford.edu/oldsep/matt/sdi/nstat/Fig/paper_html/node1.html)

And there are many other problems that editors often overlook among "members of the club." 

One common problem in our studies that have huge sample sizes is that statistical inference is nonsense.  For example, suppose that we sample 50,000 men and 50,000 women to see if there is a difference in IQ.  Infinitesmal differences may be deemed "statistically significant."  I once had to critique a paper by a renowned researcher in accounting who somehow just did not understand this problem with large samples.

 


Year 2005 American Accounting Association Annual Meeting in San Francisco August 5-10, 2005
The AAA meetings were very good this year except for the first plenary session. Bravo to Tracie, Dee, and their helpers for great logistics. The Hilton did a great job. Bravo to Jane and her helpers for a great program.

I think Katherine's plenary (Tuesday) session on disclosures will be posted by the AAA. Katherine made reference to quite a lot of academic research. She might also make her PowerPoint file available at the FASB.

I hope the AAA will also post Denny's terrific luncheon speech. If not, I think Denny will share it in some way with all of us on the AECM.

A highlight of the meetings for me was the XBRL workshop conducted by Glen, Roger, and Skip. Eric Cohen also participated with a great demo of Rivet Software's Dragon Tag software which finally makes it possible to teach XBRL hands on to students.

Another highlight was the great debate between Katherine Schipper (for fair value accounting) versus more negative positions taken by Ross Watts and Zoe-Vanna Palmrose. All three did a great (actually unforgettable) job on Monday afternoon.

This 2005 AAA meeting set a record with nearly 2,700 registrations plus over 500 registered guests. This topped the previous record which was also set in San Francisco some years ago. Such a registration number is very high considering that there are only about 8,000 worldwide members of the AAA --- http://aaahq.org/about/financials/KeyIndicators8_31_04.PDF

I returned to Trinity University from New Hampshire today. Trinity is still seeking somebody to fill my chair (the Jesse H. Jones Distinguished Professor of Business Chair) after I retire in May 2006. Anyone interested in applying should contact Dan Walz at 210-999-7289 or dwalz@trinity.edu I am very grateful to have had the privilege to fill it for 24 years.

Life is good!

August 13, 2005 reply from Glen Gray [glen.gray@CSUN.EDU]

Gee, thanks for your kind words regarding our XBRL workshop.

For those who want to know more about XBRL, you should:

See XBRL cover story in August 2005 Journal of Accountancy at http://www.aicpa.org/pubs/jofa/aug2005/tie.htm 

Visit http://www.xbrl.org  -- includes general and technical information about XBRL

Check out the 5-years of XBRL abstracts at http://bryant2.bryant.edu/~xbrl/index.html 

Review FAQs at http://xbrl.edgar-online.com/x/faqs/  , which cover a broad range of XBRL questions

Visit http://www.xbrlspy.org/  , a blog-like coverage of XBRL 

Check out the free XBRL teaching materials that will be available (Sept 1) at www.eycarat.ku.edu/XBRLClassMaterials

Bob Jensen's threads on XBRL are at http://www.trinity.edu/rjensen/XBRLandOLAP.htm#TimelineXBRL

Bob Jensen's threads on fair value reporting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#FairValue

August 15, 2005 reply from McCarthy, William [mccarthy@BUS.MSU.EDU]

I agree that some of the annual meeting sessions mentioned already were quite good this year, but for me, the clear highlight of the convention was the policy speech given by new AAA president Judy Rayburn at the Wednesday luncheon.

Judy made a strong case for expanding the scope and volume of the AAA journal set by using comparisons to publication trends and citation trends in management, marketing, and finance. She also mentioned some specific AAA committee work that was going to assess these matters. Judy finished by coming down to the floor and answering all individual questions on rather difficult matters such as the acceptability of research paradigms from other countries and disciplines, and the effect of expansion on AAA section journals.

Many attendees did not have a ticket to the Wednesday luncheon, but I am sure Judy's slides will be made available to all.

Bill McCarthy
Michigan State

August 15, 2005 reply from Ali Mohammad J. Abdolmohammadi

I agree with Bill. While I found many presentations to be excellent this year, I was particularly impressed with Judy Rayburn's luncheon policy speech on Wednesday. I found the speech to be honest and gutsy. My nonscientific observation of the crowd was that the speech resonated well with the majority. It'll take a lot of hard work to make serious changes to the current publication culture of AAA journals, but it is well worth trying.

Ali Mohammad J. Abdolmohammadi, DBA, CPA
http://web.bentley.edu/empl/a/mabdolmohamm/ 
John E. Rhodes Professor of Accounting
Bentley College
175 Forest Street
Waltham, MA 02452


Fraudulent Conferences that Rip Off Colleges:  Do you really want to participate in these frauds?
I've written about this before, but I want to elaborate.  Academics either unwittingly or willingly sometimes allow themselves to get caught up in fraudulent "conferences."  Spam is on the rise for these frauds.  The degree of fraudulence varies.  At worst, there is no conference and organizers merely charge an exorbitant fee that allows the paper to be "refereed"  and published in a conference proceedings, thereby giving a professor a "publication."  See http://lists.village.virginia.edu/lists_archive/Humanist/v18/0633.html

Even when the conferences meet, they may be fraudulent.  Generally these conferences are held in places where professors like to travel in Europe, South America, Latin America, Las Vegas, Canada, the Virgin Islands, or other nice locations for vacations that accompany a trip to a conference paid for by a professor's employer.  The professor gets credit for a presentation and possibly a publication in the conference proceedings. 

But wait a minute!  Here are some warning signs for a fraudulent conference:

  1. Even though there is a high registration fee, there are no conference-hosted receptions, luncheons, or plenary sessions.  The conference organizer is never called to account for the high registration fee.  The organizer may allude to the cost of meeting rooms in a hotel, but often the meeting rooms are free as long as the organizer can guarantee a minimum number of guests who will pay for rooms in the hotel.
     

  2. All or nearly all submissions are accepted for presentation.
     

  3. The only participants in most presentation audiences are generally other presenters assigned to make a presentation in the same time slot.  There is virtually no non-participating audience.  Hence only a few people are in the room and each of them take turns making a presentation.  Most are looking at their watches and hoping to get out of the room as soon as possible.
     

  4. Presenters present their papers and then disappear for the rest of the conference.  There is virtually no interaction among all conference presenters.
     

  5. The papers presented are often journal rejects that are cycled conference after conference if the professor can find a conference that will accept anything submitted on paper.  Check the dates on the references listed for each paper.  Chances are the papers have few if any references from the current decade.
     

  6. These conferences are almost always held in popular tourist locations and are often scheduled between semesters for the convenience of adding vacation time to the trip.  They are especially popular in the summer.

Bob Jensen's threads on various types of fraud in academe are at http://www.trinity.edu/rjensen/FraudReporting.htm

August 17, 2005 reply from Jagdish Patha

Bob:

I was about to be fleeced by one such conference cheat claiming himself some Dr.----. generally organizes conferences at almost all the exotic locations of US, Cancun, Venice etc. This organizer double blind peer reviewed my submission (almost 35-40 pages) within 52 hours! Asked for per page charges if required to be placed in "proceedings" which happens to be a CD-ROM. This organizer has also got 4-5 journals which can ultimately accommodate any paper written from any angle of any sphere of business. You may get into any journal of your choice which will claim to be "double blind peer reviewed'!

I wish there should be some agency of regulators who can tame them. These people are bogus, there conferences are bogus and often I feel that what will be the face of a person who will come out and claim a paper presented and published in such bogus outlet to be considered suitable for tenure and promotion!

Jagdish Pathak, PhD
Guest Editor- Managerial Auditing Journal (Special Issue)
Associate Professor of Accounting & Systems Accounting & Finance Area
Odette School of Business
University of Windsor 401 Sunset Windsor, N9B 3P4, ON Canada

August 17, 2005 reply from David Albrecht

My answer is at the bottom of the paper, but please read my supporting argument.

Generally speaking I am not in favor of my department funding conference presentations for other faculty. I just don't think much is gained from it, and it is a very expensive CV line. I'd say that a lot of sponsored conferences haven't distinguished themselves from the rip-offs. However, the research-oriented faculty at my school are funded to attend conferences and conference presentations are the name of the game. So like it or not, I have to play the game.

But are quality conferences, such as AAA conferences, a rip-off? Is the phrase quality conference an oxymoron for the AAA? Here's my experience at the recent AAA in San Francisco. Tell me what you think.

I'm really upset with people making presentations, but then refusing by their actions to share their paper with members of the audience. I attended research presentations at eight of the nine time slots in SF, and tried to surf over to a simultaneous session a couple of times. In all of the sessions I attended, only 2 of 30 presenters had copies of the paper to distribute. The responsible presenters (both in education-related sessions) were Freddie Choo and the co-authoring team of Elizabeth Haywood, Dorothy McMullen and Donald Wygal. In the non-education related sessions I attended, there were no available copies of any paper. I then had to approach each presenter afterward and ask for a copy of the paper to be sent to me (seems reasonable that they would be available, as the papers had to be submitted 8-9 months in advance). Not one of the non-education presenters has sent anything to me. This is my usual experience. A few years ago I asked for a copy of a conference paper, and was assured that I would be sent one. Stereotypically, I received an e-mail two years later informing me that the paper was now available in some journal's most recent edition, and I was free to track it down. Of course, I was thanked for my interest in the paper.

Most of the time when someone says that I will sent a copy of the paper, it is an empty promise apparently designed to get rid of me. I hardly ever get one.

If one of the purposes of the AAA is to share research, then why are most of the presenters so proprietary and reluctant to share details? I don't think that much knowledge is shared when a presenter makes a very brief presentation using ineffective public speaking methods and then has no copy of the paper to share.

I've attended three conferences so far this year, two of which I had to pay for myself. In the Ohio AAA regional (BGSU paid for this one) there were no copies available, but Tim Fogarty was very good in sending me a copy of each of his papers presented. I learned so much from actually reading the papers. At a second conference, I think I was the only presenter at the conference to bring copies for attendees. I asked a few people for a copy his/her paper, but I have yet to be sent one. In the third conference, the SF AAA, I haven't received any requested papers from any concurrent session presenter* except for Tom Buttross, and his paper is education-related.

The teaching-related forums put on by the T&C section (the best section of the AAA, IMHO) were good, and it's my guess that about 20% had some write-up or paper to share at the forums. I picked up material there from Torben Thomson, the co-authoring team of Graeme Dean, Sandra Van Der Laan and Cameron Esslemont, the co-authoring team of Patsy Lee, Cheryl Prachyl and Carol Sullivan, the team of Gary Siegel & Gail Kucuiba, the team of Paul Mihalek, Milo Peck and Patricia Poli, the team of Elsie Ameen, Daryl Guffey and Cynthia Jackson, the team of Violet Rogers and Aileen Smith, the team of Michael Garner, Karen Papke-Shields, Ellen Pettingill and Denise Rotondo, and the sole author Christie Johnson. Well, maybe the rate is closer to 10%.

Following the conference, I've received materials from teaching forum participants George Schmelzle, Wendy Tietz, Gail Kucuiba, Yan Bao and Angela Lee. If I've misclassified anyone, I'm sorry.

My point is, the lid seems to be open for people eager to share their teaching ideas, but when it comes to the research-oriented presenters I'm SOL. Ironic, given that the major reason I attended AAA was to get caught up on financial reporting and auditing research ideas. Oh, I got my money's worth from the people mentioned above (as well as Thomas Calderon and Denny Beresford), but I really wish the conference would have been more research-oriented.

So, are AAA conferences rip-offs? Not entirely, but pretty much so. And since I spend my own money to attend them, I'm much less likely to attend one in the future.

David Albrecht

August 17, 2005 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

David,

Although I agree that a paper should be available to you, I do not agree that the paper should be available in paper form. Rather, the links to the papers should be provided by the author. Requiring the author to haul papers to the conference is unreasonable, imo, but I think the authors should provide a handout with the title of the paper, the abstract, author information, and a link to the paper. As Bob Jensen mentioned in an earlier posting, an author can easily put a file on his/her web server. Personally, I would prefer to see links to the papers on an electronic version of the AAA program, but many argue that such availability could be construed to be a “publication” of the paper. I find this reasoning suspect because no one has a problem with SSRN postings.

I missed this AAA conference for the first time in years, and I really regret not being able to go. I find the meetings very useful, not only for the various sessions, but also from a networking perspective. This year, I heard there were also excellent CPE sessions. Far from being a “rip-off,” the AAA annual meeting is a valuable resource that takes incredible time on the part of the faculty volunteers who organize that meeting with the help of the AAA staff.

Amy Dunbar

UConn

August 18, 2005 reply from Bob Jensen

Hi David,

Although I disagree with the general negativism of your opinions about the AAA annual meetings, I will begin with one item of support.  Years ago when these meetings were held in San Diego, a CD recording company recorded every session (concurrent sessions to panel discussions to luncheons to plenary sessions).  The company had a booth were participants could buy the CD after each session at a rather modest cost  The sad part was that there was almost no demand to buy the CDs, especially the CDs from the research presentation sessions.  The reasons for this are unknown.  My own conclusion is that this is no fault of the AAA.  The problem is accounting research itself.  Most of it is just not very interesting whether or not it is presented at an AAA meeting.

The CD recording company lost a bundle on this venture and since then no effort is made to record AAA meeting sessions other than occasional plenary and luncheon sessions that are captured by the AAA itself on video as part of the projection system for large audiences.

There is a general lack of interest in accounting research.  Amy mentioned the SSRN working paper series --- http://www.ssrn.com/ . The big sellers in SSRN are economics and finance papers.  Demand for accounting research is dismal, especially when you factor out those papers billed as accounting papers that are economics research papers in accounting clothing.  I can't get the ranking system to work this morning, but the last time I looked there was not a single accounting paper in the SSRN listing of top downloads ---
http://papers.ssrn.com/sol3/topten/topTenResults.cfm?groupingtype=3&groupingId=1

I discuss problems with accounting research at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession
The biggest problem is that our accounting journals themselves do not even judge it worthy to publish research  replications.  If our findings were really of interest our journals would be like science journals that actively seek out replications of findings in science.

Your comments focus on whether the benefit of sending a professor to the AAA meetings justifies the cost.  If we had interactive teleconferencing or Webcasting of sessions available, perhaps you would be correct in terms of the sessions themselves.  But this fails to weigh in the many other benefits of the AAA meetings, benefits that include the following:


I think you're asking too much in benefits from of the AAA meetings.  Such meetings serve many audiences from Glendale Community College to Ivy League research centers.  Such meetings serve many interests from teaching ideas to empirical/analytical research methods to issues of great concern in accountancy and business in the real world (that "other world").   Such meetings serve many audiences from the U.S. to Europe, to India, to Africa, to Russia to Japan to China to Kangaroo and Kiwi lands.

All we can expect from the AAA meetings are peep holes to opportunities, knowledge, and happenings in our corner on the world of teaching and research and professional practice.

Lastly David, I might add that the annual AAA meetings pass the market test.  Thousands of people would not take the time, trouble, and cost to come to these meetings from all over the world if they were not serving an important purpose.  You have every right to protest in an effort to make the meetings better.  However, I’m afraid that you must first demonstrate how to make accounting research itself better.

Bob Jensen

August 18, 2005 reply from Ruth Bender [r.bender@CRANFIELD.AC.UK]

The European Accounting Association has the papers available for download from its website before the conference and for a week after the conference has ended. My experience was that about 90% of what I wanted was available, and a couple of other authors who I emailed for papers were happy to oblige. Likewise, when I was emailed for a paper about a month after the conference, I sent it by return.

The great advantage of having downloads available before the conference was that it meant that the discussion at sessions could be a bit better informed.

Mind you, I do wish you'd stop putting down the 'Fraudulent Conferences'. One of my minor enjoyments on a wet English morning is looking at that conference email and working out which exotic locations I could possibly get Cranfield to pay for me to visit :-)

Regards Ruth

Dr Ruth Bender
Cranfield School of Management


Thursday, April 28, 2005
The Chronicle of Higher Education
Business Schools' Focus on Research Has Ensured Their Irrelevance, Says Scathing Article
By KATHERINE S. MANGAN

Business schools are "institutionalizing their own irrelevance" by focusing on scientific research rather than real-life business practices, according to a blistering critique of M.B.A. programs that will be published today in the May issue of the Harvard Business Review.

The article, "How Business Schools Lost Their Way," was written by Warren G. Bennis and James O'Toole, both prominent professors at the University of Southern California's Marshall School of Business. Mr. Bennis is also the founding chairman of the university's Leadership Institute, and Mr. O'Toole is a research professor at Southern Cal's Center for Effective Organizations.

Mr. Bennis and Mr. O'Toole conclude that business schools are too focused on theory and quantitative approaches, and that, as a result, they are graduating students who lack useful business skills and sound ethical judgment. The authors call on business schools to become more like medical and law schools, which treat their disciplines as professions rather than academic departments, and to expect faculty members to be practicing members of their professions.

"We cannot imagine a professor of surgery who has never seen a patient or a piano teacher who doesn't play the instrument, and yet today's business schools are packed with intelligent, highly skilled faculty with little or no managerial experience," the two professors write. "As a result, they can't identify the most important problems facing executives and don't know how to analyze the indirect and long-term implications of complex business decisions."

While business deans pay lip service to making their courses more relevant, particularly when they are trying to raise money, their institutions continue to promote and award tenure to faculty members with narrow, scientific specialties, the authors contend.

"By allowing the scientific-research model to drive out all others, business schools are institutionalizing their own irrelevance," the authors write.

Most business problems cannot be solved neatly by applying hypothetical models or formulas, they say. "When applied to business -- essentially a human activity in which judgments are made with messy, incomplete, and incoherent data -- statistical and methodological wizardry can blind rather than illuminate."

Not surprisingly, the head of the association that accredits business schools in the United States disagrees with the authors' assessment. John J. Fernandes, president and chief executive officer of AACSB International: the Association to Advance Collegiate Schools of Business, said most business schools today are making an effort to teach broad skills that are directly applicable to real-world business practices.

He pointed out that in 2003, the association updated its accreditation standards to emphasize the teaching of "soft skills" like ethics and communication, and to require that business schools assess how well students are learning a broad range of managerial skills.

"I think the authors are looking at a very limited group of business schools that emphasize research," said Mr. Fernandes. "Most schools have done an excellent job of producing graduates with a broad range of skills who can hit the ground running when they're hired."

Mr. Bennis and Mr. O'Toole are not convinced. They say that business schools, which in the early 20th century had the reputation of being little more than glorified trade schools, have swung too far in the other direction by focusing too heavily on research. The shift began in 1959, they say, when the Ford and Carnegie Foundations issued scathing reports about the state of business-school research.

While the Southern Cal professors say they do not favor a return to the trade-school days, they think business schools, and business professors, have grown too comfortable with an approach that serves their own needs but hurts students.

"This model gives scientific respectability to the research they enjoy doing and eliminates the vocational stigma that business-school professors once bore," the article concludes. "In short, the model advances the careers and satisfies the egos of the professoriate."

The authors point out a few bright spots in their otherwise gloomy assessment of M.B.A. education. The business schools at the University of California at Berkeley and the University of Dallas are among those that emphasize softer, nonquantifiable skills like ethics and communication, they write. In addition, some business schools operate their own businesses, such as the student-run investment fund offered by Cornell University's S.C. Johnson Graduate School of Management.


Learning at Research Schools
Versus "Teaching Schools"
Versus "Happiness"
With a Side Track into Substance Abuse


If you connect students to the real world, will they be happier?
Somehow it's nice to know that accountancy schools are not alone in this dilemma!

"If You Teach Them, They Will Be Happy," by Jennifer Epstein, Inside Higher Ed, June 19, 2007 --- http://www.insidehighered.com/news/2007/06/19/lawstudents

Law students — and the lawyers they become — are notoriously unhappy, but the interests of their professors could make all the difference in helping them through law school and in preparing them to be good lawyers.
A study published this month in the Personality and Social Psychology Bulletin compared recent classes at two law schools with almost identical average undergraduate grade-point averages and LSAT scores and found that students at the school that encouraged its professors to be good teachers rather than good scholars reported higher levels of well-being and competence, and scored higher on bar exams.

The study, “Understanding the Negative Effects of Legal Education on Law Students: A Longitudinal Test of Self-Determination Theory,” was conducted by Kennon M. Sheldon, a psychology professor at the University of Missouri at Columbia, and Lawrence S. Krieger, a law professor at Florida State University.

Students at both law schools entered with similar statistics: average undergraduate GPAs around 3.4 and LSAT averages near 156. The schools differed significantly, however, in overall ranking. Law School 1 (LS1), with a good reputation and an emphasis on faculty scholarship, ranked in the second tier (as defined by the study) while Law School 2 (LS2), with an emphasis on hiring and training faculty to be good teachers, ranked in the fourth tier.

Twenty-four percent of the Law School 2 graduates who took the bar exam in the summer of 2005 had “high” scores above 150, compared to 14 percent of Law School 1 graduates. Nearly half of Law School 1’s graduates, meanwhile, had “low” scores – below 130 – on the bar exam, compared with 22 percent of Law School 2’s graduates. Though the scoring statistics are representative of each law school overall, rather than just those students who participated in the study, they are “strongly suggestive that the teaching and learning at LS2 may be more effective,” the authors wrote.

Krieger, one of the authors, said in an interview that it was “almost shocking” to see “how significantly the fourth tier students outperformed the second tier law students on the bar.” But, he added, “it makes sense psychologically – the students at the fourth tier school were happier – and it makes sense that they would have learned more from better teachers.”

By the third year of law school, students at Law School 2 reported significantly higher levels of “subjective well-being,” autonomy and competence than students at Law School 1.

But Ann Althouse, a professor at the University of Wisconsin Law School in Madison said that though it is “intuitively right that the school that emphasizes teaching is the one with students who are happier and score better,” those students may not be better off in the long run.

She said that if all a law school expects of its faculty is to teach, then they can “put more time into teaching students to be lawyers, but not necessarily how to think like lawyers.”

In February, Althouse, a blogger on law and current events, was a month-long guest columnist for The New York Times. In one column, she wrote that while “law should connect to the real world … that doesn’t mean we ought to devote our classes to the personal expression of law students.” Rather, she said, law professors should “deny ourselves the comfort of trying to make [law students] happy and teach them what they came to learn: how to think like lawyers.”

Continued in article

June 23, 2007 reply from Dan Stone, Univ. of Kentucky [dstone@UKY.EDU]

Hi all,

Regarding Ken Sheldon & Lawrence Krieger's law school study (actually, they have published two studies on this topic: the one that Bob cites is their second published study.)

Professor Althouse's assertion that the students at the teaching school may not be learning "how to think like lawyers" suggests that she has not read this study carefully. The students at the teaching school were not only happier they also scored HIGHER on the bar exam. Therefore, unless Professor Althouse argues that the bar exam doesn't test critical thinking skills her argument doesn't accord to the data.

So, perhaps one need not be unhappy to be a competent professional? Perhaps at least some professor-induced suffering merely creates unhappiness and doesn't improve the quality of the "product"? Ok, now I am overstepping the data.....

FYI, I saw Ken present this paper a few weeks ago at the self-determination theory conference and was left wondering if similar results hold for professional accountancy programs. I chatted with Ken about this and he is also interested this topic.

Relatedly, there is some evidence that lawyers have higher alcohol and drug use rates than do some other professionals (though I can't recall the cites just now).

Best,

Dan Stone

Reply from Bob Jensen

Thank you Dan for that helpful and somewhat personalized reply. Here are a couple of citations of possible interest with respect to lawyer substance abuse:

Title:  Substance Abuse in Law Schools: A Tool Kit for Law School Administrators
Authors: Orgena Lewis Singleton JD, Alfred "Cal" Baker L.C.D.C., more...
Publication Date: December 2005, American Bar Association
ISBN: 1-59031-628-2
Topics: Law School, Law Students, Lawyer Assistance Programs, Legal Education & Admissions to the Bar
URL:  Click Here
Also see "Torts, Trials and ... Treatments," by Elia Powers, Issues in Higher Ed, January 4, 2007 --- http://www.insidehighered.com/news/2007/01/04/lawschool

The ABA report argues that the quality of the legal profession is affected by lawyers who “are impaired as a result of abuse of alcohol and drugs.” One of the co-authors who spoke at Wednesday’s meeting in Washington, Cal Baker, is a recent law school graduate and director of a company that provides chemical dependency treatments.

Baker, a recovering alcoholic, said alcohol and drug abuse are the two top problems he sees among law students. (Other panelists said students often report depression and extreme anxiety, as well as substance abuse issues. ) He said he would have been unable to recover from his condition while in school, because nearly all the planned social activities were centered around bar nights.

One of the largest hurdles, Baker said, is convincing students that admitting their drinking problems won’t lead to disciplinary action. Many who have previous alcohol-related citations are concerned about their professional futures.

Continued in article

I do not know of comparable studies in the accounting profession. I do know that substance abuse is a problem on two levels for accountants, particularly auditors who are away from home a lot of the time. At level one is the professional away from home more than many other professionals. At level two is the family of a professional who is absent from home much of the time.

Some large CPA firms have hot lines where professionals and their family members can seek counseling with complete confidentiality and possible anonymity. These hot lines link directly with medical and family counseling professionals who are outside the firm itself but are paid by the firm. I'm told that an overwhelming proportion of the problems dealt with are substance abuse and troubled family members.

I suspect that these are problems that are not dealt with at all well in our schools of accountancy. One problem is that we want to attract students to this profession and do not like to dwell on the dark side of this profession's troubles. There are substance abuse problems in all professions. It would be interesting to study whether some professions tend to keep substance abuse problems in dark closets more than other professions. For example, perhaps there is more perceived sensitivity among clients/patients who are more afraid of substance abusers in accounting and medicine relative to law. That is only a personal observation and not something that I've studied. My guess is that substance abuse is highest among physicians and highest in terms of keeping their dependencies secret.

A more general site on substance abuse is provided at http://www.ndsn.org/links.html

June 25, 2007 reply from Bill Dent [billdent@tx.rr.com]

Bob—

I don’t know about other states, but the Texas State Board of Public Accountancy acknowledges the problem as evidenced by the following link on their website:

http://www.tsbpa.state.tx.us/pi8.htm 

Bill Dent

WILLIAM C. DENT, CPA (Retired)

Indirectly this relates to the current accounting doctoral program controversies described at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

It also relates to the issues of whether it is best to spoon feed students --- http://www.trinity.edu/rjensen/265wp.htm

June 19, 2007 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Bob,

In some ways, the situation in accounting is similar to that in law. In others, there is substantial difference.

In law there are essentially two tiers in law schools: those that are quite bar exam oriented, and those that emphasize legal theory and philosophy. The kinds of placements they have are also very different. The students at second sort of schools do clerkships with well known or almost-well known judges, while those at the first sort of schools do not. The students at the second sort of schools get hired by the large well known law firms (for example, on the Wall Street) doing structured finance and M&A work, whereas the first kind often may do work that could be considered menial (uncontested divorces, fixing speeding tickets/DUI, etc.). Of course there are crossovers.

Often, students at the second sort of schools do not practice at all, but have a profound impact on the profession, and there are some who practice only occasionally (Tribe, Dershowitz,...).

I agree with Ann Althouse that the second sort of schools teach students to think like lawyers whereas the first kind teach them to be lawyers.

In accounting, on the other hand, I think we have only one kind of schools (the equivalent of second sort have no professional accounting programs), and they teach students to BE accountants rather) than to think like accountants.

This situation is convenient for many. It is much easier to teach one to be like someone than to teach one to think like some one.

Jagdish

June 23, 2007 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Dan,

I am not familiar with the Sheldon/Krieger studies, but will read them soon.

However, I interact with law school faculty often, and ask them questions just to find out how we in accounting can learn from them. I also have an abiding interest in the relationship between jurisprudence and accounting, and it is one of the few psychic benefits I have enjoyed being an accounting academic.

The law school market is pretty much a differentiated market. I think the missions of the top tier schools and others are very different, and both conform to their missions well; there are no pretensions as we have among the accounting schools where there is a race to reach the greasy pole no matter what one's comparative advantages are.

It is difficult to find students from non-top schools doing clerkships with supreme court justices, or the top law firms recruiting from such schools.

* The top tier schools emphasise law as an interdisciplinary field rather than a field confined to narrowly defined learning of existing laws.

* The top tier schools emphasise more critical analyses of certain aspects of law such as constitutional law, international law, jurisprudence... and de-emphasise other aspects such as administrative law, criminal procedure,... as the other schools do.

* Many students graduating from top schools do not enter law practice, and even when they do, they enter very different practices where critical thinking, interdisciplinary, and liberal arts type skills predominate. Many enter government and public service. Many also enter the academia. Over my career I have had dozens of friends and colleagues who went to top law schools (Harvard, Stanford, Cambridge, ...), and they have established their presence as scholars even outside their narrow domain. On the other hand, most law academics that I have known from non-top schools, on the other hand, have been in areas such as tax law, business law,..., generally not considerer the intellectual centers of gravity of law.

I do not mean to be an elitist when I make the above observations. In fact, one of my heroes in law, the late Don Berman, a Harvard educated lawyer at Northeastern, specialised in tax law. If I dig deep, I am sure I can find some law academics from non-top schools who were brilliant scholars in areas of law that are considered scholarly. The point I make is that the two types of schools are just different.

About a dozen years ago, I was trying to establish relationships with a local (non-top) law school to introduce our students in accounting to topics such as the relationship between constitutional law and accounting, and the role of jurisprudence in accounting. I got no where, and we were in fact on different wavelengths. On the other hand, more recently we did try to establish relationships for tax students and it has worked out very well. Our graduate tax students take some tax courses at the law school and it has helped them tremendously.

I attend law sort of conferences (usually at the intersection of law and computer science), and almost all participants are from the top tier law schools. Some from other law schools too attend, but usually to meet CPE requirements to keep their licenses current. I also am an avid reader of law literature (specially in constitutional law and jurisprudence) and there too just about every author is from a top tier law school.

There is nothing wrong in this dichotomy. Those from non-top law schools have performed brilliantly in the corporate world, and once in a while they do spectacular jobs for their clients (see OJ Simpson's dream team)Sometimes they also excel as legal scholars

Another difference I find between the alums at the two types of schools is that the contribution to legal literature from the top law schools is disproportionately large. Ronald Dworkin, Lawrence Tribe, and Richard Posner in the US, or Joseph Raz and HLA Hart in Britain,... one has to stretch one's imagination to come up with those from non-top tier law schools who come close.

And there is no cartel in law as we have in accounting. Good scholarship gets recognised no matter where it originates, and gatekeepers are generally powerless; quite unlike in accounting.

There is learning at both kinds of schools, they are just different. Trying to compare them is like comparing apples and oranges, or worse, like comparing apple to an ape.

I'll try to collect my thoughts on what we in accounting can learn from legal education at both levels and post them to AECM one of these days.

Regards,

Jagdish

 

 


Why accountancy doctoral programs are drying up and
why accountancy is no longer required for admission or
graduation in an accountancy doctoral program

 

 

Question
How long does it take to get an accounting doctorate?

 

Answer
The answer varies with respect to how long it takes to get both the undergraduate degree plus the requisite masters degree (or at least 150 credits required in most states). Assuming the student is full time and on track as an accounting major this makes it about 5.5 years before entering a doctoral program, although some masters programs only require one year for the masters degree for undergraduate accounting majors. To that we must add about four years of doctoral studies. This adds up to 9.5 years of full time study in college give or take a year. To this we must add the typical 1-5 years of experience most doctoral students spend in practice between attainment of a masters degree and eventual matriculation into a doctoral program.

The good news is that, unlike masters of accountancy and MBA programs, virtually all accountancy doctoral programs provide free tuition and rather generous living allowances from start to finish, although some of the time doctoral students must work as teaching and/or research assistants. Often fellowships in the fourth year allow students to devote full time to finishing their doctoral thesis.

Accountancy doctoral programs take at least four years in most cases for former accounting majors because entering students typically must take advanced mathematics, statistics, econometrics, and psychometrics prerequisites for doctoral seminars in accounting --- http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Students who get doctorates in fields other than accounting can typically get a doctoral degree in less than 9.5 years of full-time college. For example, an economics PhD can realistically spend only 7.5 years in college. He or she can then enter a bridge program to become a business, finance, or even an accounting professor under the AACSB's new Bridge Program, but that program may take two or more years part time. There just does not appear to be a short track into accounting tenure track positions. But the added years may be worth it since accounting faculty salaries are extremely high relative to most other academic disciplines. The high salaries, in part, are do to the enormous shortage of accounting doctoral graduates relative to the number of tenure-track openings in major colleges and universities --- http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

 

 

"Exploring Ways to Shorten the Ascent to a Ph.D.," by Joseph Berger, The New York Times, October 3, 2007 --- http://www.nytimes.com/2007/10/03/education/03education.html

 

Many of us have known this scholar: The hair is well-streaked with gray, the chin has begun to sag, but still our tortured friend slaves away at a masterwork intended to change the course of civilization that everyone else just hopes will finally get a career under way.

We even have a name for this sometimes pitied species — the A.B.D. — All But Dissertation. But in academia these days, that person is less a subject of ridicule than of soul-searching about what can done to shorten the time, sometimes much of a lifetime, it takes for so many graduate students to, well, graduate. The Council of Graduate Schools, representing 480 universities in the United States and Canada, is halfway through a seven-year project to explore ways of speeding up the ordeal.

For those who attempt it, the doctoral dissertation can loom on the horizon like Everest, gleaming invitingly as a challenge but often turning into a masochistic exercise once the ascent is begun. The average student takes 8.2 years to get a Ph.D.; in education, that figure surpasses 13 years. Fifty percent of students drop out along the way, with dissertations the major stumbling block. At commencement, the typical doctoral holder is 33, an age when peers are well along in their professions, and 12 percent of graduates are saddled with more than $50,000 in debt.

These statistics, compiled by the National Science Foundation and other government agencies by studying the 43,354 doctoral recipients of 2005, were even worse a few years ago. Now, universities are setting stricter timelines and demanding that faculty advisers meet regularly with protégés. Most science programs allow students to submit three research papers rather than a single grand work. More universities find ways to ease financial burdens, providing better paid teaching assistantships as well as tuition waivers. And more universities are setting up writing groups so that students feel less alone cobbling together a thesis.

Fighting these trends, and stretching out the process, is the increased competition for jobs and research grants; in fields like English where faculty vacancies are scarce, students realize they must come up with original, significant topics. Nevertheless, education researchers like Barbara E. Lovitts, who has written a new book urging professors to clarify what they expect in dissertations; for example, to point out that professors “view the dissertation as a training exercise” and that students should stop trying for “a degree of perfection that’s unnecessary and unobtainable.”

There are probably few universities that nudge students out the door as rapidly as Princeton, where a humanities student now averages 6.4 years compared with 7.5 in 2003. That is largely because Princeton guarantees financial support for its 330 scholars for five years, including free tuition and stipends that range up to $30,000 a year. That means students need teach no more than two courses during their schooling and can focus on research.

“Princeton since the 1930s has felt that a Ph.D. should be an education, not a career, and has valued a tight program,” said William B. Russel, dean of the graduate school.

And students are grateful. “Every morning I wake up and remind myself the university is paying me to do nothing but write the dissertation,” said Kellam Conover, 26, a classicist who expects to complete his course of study in five years next May when he finishes his dissertation on bribery in Athens. “It’s a tremendous advantage compared to having to work during the day and complete the dissertation part time.”

But fewer than a dozen universities have endowments or sources of financing large enough to afford five-year packages. The rest require students to teach regularly. Compare Princetonians with Brian Gatten, 28, an English scholar at the University of Texas in Austin. He has either been teaching or assisting in two courses every semester for five years.

“Universities need us as cheap labor to teach their undergraduates, and frankly we need to be needed because there isn’t another way for us to fund our education,” he said.

That raises a question that state legislatures and trustees might ponder: Would it be more cost effective to provide financing to speed graduate students into careers rather than having them drag out their apprenticeships?

But money is not the only reason Princeton does well. It has developed a culture where professors keep after students. Students talk of frequent meetings with advisers, not a semiannual review. For example, Ning Wu, 30, a father of two, works in Dr. Russel’s chemical engineering lab and said Dr. Russel comes by every Friday to discuss Mr. Wu’s work on polymer films used in computer chips. He aims to get his Ph.D. next year, his fifth.

While Dr. Russel values “the critical thinking and independent digging students have to do, either in their mind for an original concept or in the archives,” others question the necessity of book-length works. Some universities have established what they call professional doctorates for students who plan careers more as practitioners than scholars. Since the 1970s, Yeshiva University has not only offered a Ph.D. in psychology but also a separate doctor of psychology degree, or Psy.D., for those more interested in clinical work than research; that program requires a more modest research paper.

OTHER institutions are reviving master’s degree programs for, say, aspiring scientists who plan careers in development of products rather than research.

Those who insist on dissertations are aware that they must reduce the loneliness that defeats so many scholars. Gregory Nicholson, completing his sixth and final year at Michigan State, was able to finish a 270-page dissertation on spatial environments in novels like Kerouac’s “On the Road” with relative efficiency because of a writing group where he thrashed out his work with other thesis writers.

Continued in article

 

Bob Jensen's threads on accountancy doctoral programs are at the following three links:

 


The Fall 2007 Edition of Accounting Education News (AEN from the American Accounting Association) --- 
http://aaahq.org/pubs/AEN/2007/Fall2007.pdf

Two important things to note:

In his first President's Message, Gary Previts mentions the Plumlee report on the dire shortage of accountancy doctoral students and provides a link to the AAA's new site providing resources for research and experimentation on "Future Accounting Faculty and Programs Projects" --- http://aaahq.org/temp/phd/index.cfm
Note especially the Accounting PhD Program Info link with a picture) and the PhD Project link (at the bottom):

Welcome to the preliminary posting of a new resource for the community participating in and supporting accounting programs, students, faculty, and by that connection practitioners of accounting. We plan to build this collection of resources for the broad community committed to a vital future for accounting education. This page is an initial step to creating a place where we can come together to gather resources and share data and ideas.
Making A Difference: Careers in Academia
Powerpoint slides created by Nancy Bagranoff and Stephanie Bryant for the 2007 Beta Alpha Psi Annual Meeting. Permission granted for use and adaptation with attribution.
GradSchools.com
Accounting PhD Program Info

New Research Projects by the AAA on the Trends and Characteristics of Accounting Faculty, Students, Curriculum, and Programs

Part I: Future of Accounting Faculty Project (Report December, 2007)
Part II: Future of Accounting Programs Project

Part I will describe today's accounting academic workforce, via demographics, work patterns, productivity, and career progression of accounting faculty, as well as of faculty in selected peer disciplines using data from the national survey of postsecondary faculty (NSOPF) to establish trends, and a set of measures will be combined to benchmark the overall status of accounting against (approximately) 150 fields. This project will provide context and data to identify factors affecting the pipeline and workplace.

Part II will focus on expanding understanding of the characteristics of accounting faculty, students, and accounting programs, and implications of their evolving environment. The need for the Part I project illustrates how essential it is for the discipline and profession of accounting that we establish a more standard and comprehensive process for collecting, analyzing, and reporting data about accounting students, doctoral students, faculty, curriculum, and programs.

More Resources on the Changing Environment for Faculty:

The Reshaping of America's Academic Workforce
David W. Leslie, TIAA-CREF Institute Fellow
The College of William and Mary
TIAA Institute Research Dialogue Series, 2007

Jim Hasselback's* 2007 Analysis of Accounting Faculty Birthdates
*Copyrighted – requests for use to J. R. Hasselback

  • Among U.S. Accounting Academics -- 53.4% are 55 or older

From the Integrated Postsecondary Education System (IPEDS)

  • 34.8% of all full-time faculty in the U.S. are non-tenure-track -- nearly 2 in 5 of all full-time appointments
  • Between 1993 and 2003 the proportion of all new full-time hires into "off-track" appointments increased each year from 50% to nearly 3 in 5 (58.6%)
  • Reported in J. Schuster & M. Finkelstein (Fall, 2006). "On the Brink: Assessing the Status of the American Faculty," Thought & Action 51-62.

Supply and Demand for Accounting PhDs

American Accounting Association PhD Supply/Demand Resource Page
A collection of resources, links, and reports related to the pipeline of future Accounting faculty. Highlights include:

  • Report of the AAA/APLG Committee to Assess the Supply and Demand of Accounting PhDs
  • Link to the Doctoral Education Resource Center of AACSB International (Association to Advance Collegiate Schools of Business)
  • AICPA's Journal of Accountancy's article "Teaching for the Love of It"

Deloitte Foundation Accounting Doctoral Student Survey

Survey Results (Summer, 2007)
Data collected by survey of attendees of the 2007 AAA/Deloitte J. Michael Cook Doctoral Consortium

The PhD Project and Accounting Doctoral Students Association

The PhD Project is an information clearinghouse created to increase the diversity of business school faculty by attracting African Americans, Hispanic Americans and Native Americans to business doctoral programs and by providing a network of peer support. In just 12 short years, the PhD Project has been the catalyst for a dramatic increase in the number of minority business school faculty—from 294 to 842, with approximately 380 more candidates currently immersed in doctoral studies.

The PhD Project Accounting Doctoral Students Association is a voluntary association offering moral support and encouragement to African-American, Hispanic-American, and Native American Accounting Doctoral Students as their pursue their degrees and take their places in the teaching and research profession, and serve as mentors to new doctoral students.

PhD Project Surveys of Students, Professors, and Deans
Results of a survey among students to understand the impact of minority professors on minority and non-minority students.

Accounting Firms Supporting the AAA and Accounting Programs, Faculty, and Students

Related Organizations Sharing Interest in Accounting Faculty and Programs

 

Professor Dan Deines at Kansas State University has a handful of Outstanding Educator Awards, including one from the AICPA. Beginning on Page 5 of the Fall 2007 edition of AEN, Dan discusses the Taylor Research and Consulting Group study of accounting education commissioned by the AICPA in 2002. The study identifies barriers to students that prevent many top students from majoring in accounting. Dan then describes a pilot program initiated by KSU in reaction to the Taylor Report. I think accounting educators outside KSU may attend some of the pilot program events.

Bob Jensen's threads on the shortage of doctoral students in accountancy are shown below.

 


Questions
Why must all accounting doctoral programs be social science (particularly econometrics) doctoral programs?
What's wrong with humanities research methodologies?
What's wrong about studying accounting in accounting doctoral programs?
Why are we graduating so many new assistant professors of accounting who do not know any accounting?
Hint: Similar problems exist in languages and education school PhD programs


Question
What drastic move is the AACSB International (accrediting body)  taking to deal with the shortage of graduating students from business doctoral programs (including accountancy doctoral programs)?
Hint:
It's called a “Postdoctoral Bridge to Business”

Answer

With many business schools reporting difficulty attracting Ph.D. faculty members, the Association to Advance Collegiate Schools of Business has announced the first participating institutions in new “Postdoctoral Bridge to Business” programs — short-term programs that will train new Ph.D.’s in fields outside business for faculty jobs at business schools. The programs are starting at the Grenoble Ecole de Management, Tulane University, the University of Florida, the University of Toledo and Virginia Tech.
Inside Higher Ed, September 20, 2007 --- http://www.insidehighered.com/news/2007/09/20/qt

Bob Jensen's threads on alleged reasons why there are such shortages in accountancy doctoral programs can be found at http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

A cynic might conclude that this is a correctional option for naive students who earned an economics PhD in an Economics Department rather than lucky students who earned virtual economics PhDs in accountancy doctoral programs.

A realist might term this the "Bridge Over Troubled Waters" that leads to higher salaries for "90-Day Wonders" in business/accounting education --- http://www.urbandictionary.com/define.php?term=90+day+wonder

This reminds me of the Harvard math professor (I can't recall which one at the moment) who said:  "Accounting is a fascinating discipline. I think I might take a couple of hours to master it."


Question
The faculty shortage in nursing schools is even more severe than that of accounting schools. Why are there "bridges over troubled waters" in schools of nursing in the same context as the new bridges being built for non-accounting PhDs mentioned above?

Answer with a Question
Would you really want an economics PhD who took a crash course in nursing teaching the nurses who serve you?

Answer with an Answer --- http://nln.allenpress.com/pdfserv/i1536-5026-028-04-0223.pdf
The fact of the matter is that the law of supply and demand works better in schools of accounting than in schools of nursing. In general, accounting educators are among the highest paid faculty on campus. The number of unfilled tenure-track job openings in schools of accounting combined with starting salaries in excess of $130,000 per year are the main reasons that the AACSB International's "
Postdoctoral Bridge to Business" just might work, although I seriously doubt whether any of the bridged students will be able to teach upper division financial accounting, auditing, and tax courses.

The fact is that the law of supply and demand works lousy in nursing schools. In spite of shortages of qualified faculty, nursing educators remain among the lowest paid faculty on campus. A Nursing International's "Postdoctoral Bridge to Nursing" probably would not work, and given my cynacism about 90-0Day Wonders it is some comfort to me that there is no such bridge over troubled waters in nursing schools.

 


Question
What do accounting schools and nursing schools have in common?

"The Nursing Education Dilemma," by Elia Powers, Inside Higher Ed, June 22, 2007 --- http://www.insidehighered.com/news/2007/06/22/nursing

The market for nursing graduates remains hot, and plenty of students are vying for those open positions. Enrollment in entry-level baccalaureate nursing programs increased by nearly 8 percent in 2006 from the previous year, which marked the sixth straight year of gains. Community College programs are also seeing increases in applications and enrollments.
It’s all positive news for the health care industry, which has suffered from a well-documented nursing shortage since the 1990s, when many hospitals cut their staffs and some colleges cut back their programs.

But for colleges of nursing, the increasing demand to accommodate more students presents a dilemma: Who will teach them?

When it comes to clinical nursing courses, college programs are bound to strict faculty-to-student ratios, set by individual states. One instructor to every 10 or 12 students is a fairly common ratio. So even as administrators and state lawmakers seek more slots for students, there’s a ceiling on expansion unless more faculty are recruited or produced.

That’s not happening quickly. A survey released last year by the American Association of Colleges of Nursing identified at least 637 faculty vacancies at more than 300 nursing schools with baccalaureate or graduate programs — or what amounts to a nearly 8 percent faculty vacancy rate. The majority of the openings are tenure-track positions that require applicants have a doctorate, the survey shows.

Meanwhile, there continues to be a backlog of students. In 2006, more than 38,000 nursing school candidates deemed “qualified” by the AACN were turned away from entry-level baccalaureate programs, while a total of 50,783 nursing school applicants enrolled and registered in courses. When the new students are added to the pool of all students enrolled, total enrollment rises to 133,578.

Nearly three quarters of the colleges that responded to the AACN survey pointed to faculty shortages as a reason for not accepting the applicants. Community colleges are turning away 3.3 “qualified” applicants for every one turned away by four-year institutions, said Roxanne Fulcher, director of health professions policy at the American Association of Community Colleges.

At many nursing schools, wait lists are shrinking after years of growth, officials say, not because slots are opening up, but because students are becoming frustrated that their chances of enrolling are dim.

Continued in article

Question
What do accounting schools and nursing schools have in common?

"The Nursing Education Dilemma," by Elia Powers, Inside Higher Ed, June 22, 2007 --- http://www.insidehighered.com/news/2007/06/22/nursing

The market for nursing graduates remains hot, and plenty of students are vying for those open positions. Enrollment in entry-level baccalaureate nursing programs increased by nearly 8 percent in 2006 from the previous year, which marked the sixth straight year of gains. Community College programs are also seeing increases in applications and enrollments.
It’s all positive news for the health care industry, which has suffered from a well-documented nursing shortage since the 1990s, when many hospitals cut their staffs and some colleges cut back their programs.

But for colleges of nursing, the increasing demand to accommodate more students presents a dilemma: Who will teach them?

When it comes to clinical nursing courses, college programs are bound to strict faculty-to-student ratios, set by individual states. One instructor to every 10 or 12 students is a fairly common ratio. So even as administrators and state lawmakers seek more slots for students, there’s a ceiling on expansion unless more faculty are recruited or produced.

That’s not happening quickly. A survey released last year by the American Association of Colleges of Nursing identified at least 637 faculty vacancies at more than 300 nursing schools with baccalaureate or graduate programs — or what amounts to a nearly 8 percent faculty vacancy rate. The majority of the openings are tenure-track positions that require applicants have a doctorate, the survey shows.

Meanwhile, there continues to be a backlog of students. In 2006, more than 38,000 nursing school candidates deemed “qualified” by the AACN were turned away from entry-level baccalaureate programs, while a total of 50,783 nursing school applicants enrolled and registered in courses. When the new students are added to the pool of all students enrolled, total enrollment rises to 133,578.

Nearly three quarters of the colleges that responded to the AACN survey pointed to faculty shortages as a reason for not accepting the applicants. Community colleges are turning away 3.3 “qualified” applicants for every one turned away by four-year institutions, said Roxanne Fulcher, director of health professions policy at the American Association of Community Colleges.

At many nursing schools, wait lists are shrinking after years of growth, officials say, not because slots are opening up, but because students are becoming frustrated that their chances of enrolling are dim.

Continued in article

 


Rankings of Universities in Terms of Doctoral Student Placements
The journal PS: Political Science & Politics has just published
an analysis that suggests that there is not a direct relationship between the general reputation of a department and its success at placing new Ph.D.’s; some programs far exceed their reputation when it comes to placing new Ph.D.’s while others lag. The analysis may provide new evidence for the “halo effect” in which many experts worry that general (and sometimes outdated) institutional reputations cloud the judgment of those asked to fill out surveys on departmental quality. And while the analysis was prepared about political science, its authors believe the same approach could be used in other fields in the humanities and social sciences, with the method more problematic in other areas because fewer Ph.D. students aspire to academic careers.
Scott Jaschik, "A Ranking That Would Matter," Inside Higher Ed, August 21, 2007 --- http://www.insidehighered.com/news/2007/08/21/ranking
 

Jensen Comment
The big problem here is defining what constitutes "a top job" or a "a good job." There are so many elements in job satisfaction, many of which are intangible and cannot be quantified, that I'm suspect of any study that purports to identify top jobs. Obviously prestigious universities have a bias for hiring prestigious university graduates. But this is often due to the reputations of the graduate student's teachers and thesis advisors. And the quality of the dissertation may have a great deal of impact on hiring even if the degree is from No-name University. Also prestigious universities tend to have the highest GMAT applicants, but this is not always the case. Often the highest GMAT applicants are really tremendous graduates.

In disciplines having great shortages of doctoral graduates, especially doctoral graduates in accounting and finance, findings from political science do not necessarily extrapolate.

Be that as it may, the findings of the above study come as no surprise to me. Particularly in accounting, some prestigious universities have taken a nose dive in terms of reputations of faculty supervising dissertations. And students may not have access to the most reputable faculty, especially faculty who are too busy with consulting and world travel. For example, a few years ago I encountered a doctoral student in accounting at the University of Chicago who claimed that it was very difficult to even find a faculty member who would supervise a dissertation. But if he ever graduates from Chicago, he will have the Chicago halo around his head. In fairness, I've not had recent information regarding what is happening with doctoral students in accounting at the University of Chicago. Certainly it is still a very reputable university in terms of its business studies and research programs.

Also there is a problem in accountancy that mathematics-educated accountancy doctoral graduates from prestigious universities may know very little about accountancy and additionally have troubles with the English language. On occasion prestige-university graduates do not get the "top jobs" where accountancy is spoken.

Beyond Research Rankings," by Luis M. Proenza, Inside Higher Ed, May 17, 2007 --- http://www.insidehighered.com/views/2007/05/17/proenza

Controversies in media rankings of colleges are discussed at
http://www.nytimes.com/2007/06/20/education/20colleges.html

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

 


All is Not Well in Modern Languages Education
Proposal to integrate languages with literature, history, culture, economics and linguistics
Proposal to use fewer adjuncts who now teach language courses
The MLA created a special committee in 2004 to study the future of language education and its report, being issued today
(May 24, 2007) is in many ways unprecedented for the association in that it is urging departments to reorganize how languages are taught and who does the teaching. In general, the critique of the committee is that the traditional model has started with basic language training (typically taught by those other than tenure-track faculty members) and proceeded to literary study (taught by tenure-track faculty members). The report calls for moving away from this “two tiered” system, integrating language study with literature, and placing much more emphasis on history, culture, economics and linguistics — among other topics — of the societies whose languages are being taught.
Scott Jaschik, Inside Higher Ed, May 24, 2007 --- http://insidehighered.com/news/2007/05/24/mla

Who Teaches First-Year Language Courses?
Rank Doctoral-Granting Departments B.A.-Granting Departments
Tenured or tenure-track professors 7.4% 41.8%
Full-time, non-tenure track 19.6% 21.1%
Part-time instructors 15.7% 34.7%
Graduate students 57.4% 2.4%

 


All is Not Well in Programs for Doctoral Students in Departments/Colleges of Education
The education doctorate, attempting to serve dual purposes—to prepare researchers and to prepare practitioners—is not serving either purpose well. To address what they have termed this "crippling" problem, Carnegie and the Council of Academic Deans in Research Education Institutions (CADREI) have launched the Carnegie Project on the Education Doctorate (CPED), a three-year effort to reclaim the education doctorate and to transform it into the degree of choice for the next generation of school and college leaders. The project is coordinated by David Imig, professor of practice at the University of Maryland. "Today, the Ed.D. is perceived as 'Ph.D.-lite,'" said Carnegie President Lee S. Shulman. "More important than the public relations problem, however, is the real risk that schools of education are becoming impotent in carrying out their primary missions to prepare leading practitioners as well as leading scholars."
"Institutions Enlisted to Reclaim Education Doctorate," The Carnegie Foundation for Advancement in Teaching --- http://www.carnegiefoundation.org/news/sub.asp?key=51&subkey=2266

The EED does not focus enough on research, and the PhD program has become a social science doctoral program without enough education content. Middle ground is being sought.


All is Not Well in Programs for Doctoral Students in Departments/Colleges of Business, Especially in Accounting
The problem is that not enough accounting is taught in what have become social science doctoral programs
See http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

Partly the problem is the same as with PhD programs in colleges of education.
The pool of accounting doctoral program applicants is drying up, especially accounting doctoral program pool that is increasingly trickle-filled with mathematically-educated foreign students who have virtually no background in accounting. Twenty years ago, over 200 accounting doctoral students were being graduated each year in the United States. Now it's less than one hundred graduates per year, many of whom know very little about accounting, especially U.S. accounting. This is particularly problematic for financial accounting, tax, and auditing education requiring knowledge of U.S. standards, regulations, and laws.

Accounting doctoral programs are social science research programs that do not appeal to accountants who are interested in becoming college educators but have no aptitude for or interest in the five or more years of quantitative methods study required for current accounting doctoral programs.

To meet the demand of thousands of colleges seeking accounting faculty, the supply situation is revealed by Plumlee et al (2006) as quoted at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

There were only 29 doctoral students in auditing and 23 in tax out of the 2004 total of 391 accounting doctoral students enrolled in years 1-5 in the United States.

The answer here it seems to me is to open doctoral programs to wider humanities and legal studies research methodologies and to put accounting back into accounting doctoral programs.

Partly the problem is the same as with “two-tiered” departments of modern languages
The huge shortage of accounting doctoral graduates has bifurcated the teaching of accounting. Increasingly, accounting, tax, systems, and auditing courses are taught by adjunct part-time faculty or full-time adjunct faculty who are not on a tenure track and often are paid much less than tenure-track faculty who teach graduate research courses.

The short run answer here is difficult since there are so few doctoral graduates who know enough accounting to take over for the adjunct faculty. If doctoral programs open up more to accountants, perhaps more adjunct faculty will enter the pool of doctoral program prospects. This might help the long run problem. Meanwhile as former large doctoral programs (e.g., at Illinois, Texas, Florida, Indiana, Wisconsin, and Michigan) shrink more and more, we’re increasingly building two-tier accounting education programs due to increasing demand and shrinking supply of doctoral graduates in accountancy.

We’re becoming more and more like “two-tier” language departments in our large and small colleges.

Practitioners in  education schools generally are K-12 teachers and school administrators. In the case of accounting doctoral programs, our dual mission is to prepare college teachers of accountancy as well as leading scholars. Our accounting doctoral programs are drying up (less than 100 per year now graduating in the United States, many of whom know virtually no accounting) primarily because our doctoral programs have become five years of social science and mathematics concentrations that do not appeal to accountants who might otherwise enter the pool of doctoral program admission candidates.

Note that the above Carnegie study also claims that education doctoral programs are also failing to "prepare researchers." I think the same criticism applies to current accountancy doctoral programs in the United States. We're failing in our own dual purpose accountancy doctoral programs and need a concerted effort to become a "degree of choice" among the accounting professionals who would like to move into academe in a role other than that of a low-status and low-paid adjunct professor.

In the United States, following the Gordon/Howell and Pierson reports, our accounting doctoral programs and leading academic journals bet the farm on the social sciences without taking the due cautions of realizing why the social sciences are called "soft sciences." They're soft because "not everything that can be counted, counts. And not everything that counts can be counted."

Leading academic accounting research journals commenced accepting only esoteric papers with complicated mathematical models and trivial hypotheses of zero interest to accounting practitioners --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Accounting doctoral programs made a concerted effort to recruit students with mathematics, economics, and social science backgrounds even though these doctoral candidates knew virtually nothing about accountancy. To compound the felony, the doctoral programs dropped all accounting requirements except for some doctoral seminars on how to mine accounting data archives with econometric and psychometric models and advanced statistical inference testing.

I cannot find the exact quotation in my archives, but some years ago Linda Kidwell complained that her university had recently hired a newly-minted graduate from an accounting doctoral program who did not know any accounting. When assigned to teach accounting courses, this new "accounting" professor was a disaster since she knew nothing about the subjects she was assigned to teach.

In the year following his assignment as President of the American Accounting Association Joel Demski asserted that research focused on the accounting profession will become a "vocational virus" leading us away from the joys of mathematics and the social sciences and the pureness of the scientific academy:

Statistically there are a few youngsters who came to academia for the joy of learning, who are yet relatively untainted by the vocational virus. I urge you to nurture your taste for learning, to follow your joy. That is the path of scholarship, and it is the only one with any possibility of turning us back toward the academy.
Joel Demski, "Is Accounting an Academic Discipline? American Accounting Association Plenary Session" August 9, 2006 --- http://bear.cba.ufl.edu/demski/Is_Accounting_an_Academic_Discipline.pdf

Accounting professors are no longer "leading scholars" if they focus on accounting rather than mathematics and the social sciences --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

When Professor Beresford attempted to publish his remarks, an Accounting Horizons referee’s report to him contained the following revealing reply about “leading scholars” in accounting research:

1. The paper provides specific recommendations for things that accounting academics should be doing to make the accounting profession better. However (unless the author believes that academics' time is a free good) this would presumably take academics' time away from what they are currently doing. While following the author's advice might make the accounting profession better, what is being made worse? In other words, suppose I stop reading current academic research and start reading news about current developments in accounting standards. Who is made better off and who is made worse off by this reallocation of my time? Presumably my students are marginally better off, because I can tell them some new stuff in class about current accounting standards, and this might possibly have some limited benefit on their careers. But haven't I made my colleagues in my department worse off if they depend on me for research advice, and haven't I made my university worse off if its academic reputation suffers because I'm no longer considered a leading scholar? Why does making the accounting profession better take precedence over everything else an academic does with their time?
As quoted in Jensen (2006a) ---
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession


Advice to students planning to take standardized tests such as the SAT, GRE, GMAT, LSAT, TOEFL, etc.
See Test Magic at http://www.testmagic.com/
There is a forum here where students interested in doctoral programs in business (e.g., accounting and finance) and economics discuss the ins and outs of doctoral programs.


Question
Does faculty research improve student learning in the classrooms where researchers teach?
Put another way, is research more important than scholarship that does not contribute to new knowledge?

Major Issue
If the answer leans toward scholarship over research, it could monumentally change criteria for tenure in many colleges and universities.

AACSB International: the Association to Advance Collegiate Schools of Business, has released for comment a report calling for the accreditation process for business schools to evaluate whether faculty research improves the learning process. The report expresses the concern that accreditors have noted the volume of research, but not whether it is making business schools better from an educational standpoint.
Inside Higher Ed, August 6, 2007 --- http://www.insidehighered.com/news/2007/08/06/qt

"Controversial Report on Business School Research Released for Comments," AACSB News Release, August 3, 2007 --- http://www.aacsb.edu/Resource_Centers/Research/media_release-8-3-07.pdf

FL (August 3, 2007) ― A report released today evaluates the nature and purposes of business school research and recommends steps to increase its value to students, practicing managers and society. The report, issued by the Impact of Research task force of AACSB International, is released as a draft to solicit comments and feedback from business schools, their faculties and others. The report includes recommendations that could profoundly change the way business schools organize, measure, and communicate about research.

AACSB International, the Association to Advance Collegiate Schools of Business, estimates that each year accredited business schools spend more than $320 million to support faculty research and another half a billion dollars supports research-based doctoral education.

“Research is now reflected in nearly everything business schools do, so we must find better ways to demonstrate the impact of our contributions to advancing management theory, practice and education” says task force chair Joseph A. Alutto, of The Ohio State University. “But quality business schools are not and should not be the same; that’s why the report also proposes accreditation changes to strengthen the alignment of research expectations to individual school missions.”

The task force argues that a business school cannot separate itself from management practice and still serve its function, but it cannot be so focused on practice that it fails to develop rigorous, independent insights that increase our understanding of organizations and management. Accordingly, the task force recommends building stronger interactions between academic researchers and practicing managers on questions of relevance and developing new channels that make quality academic research more accessible to practice.

According to AACSB President and CEO John J. Fernandes, recommendations in this report have the potential to foster a new generation of academic research. “In the end,” he says, “it is a commitment to scholarship that enables business schools to best serve the future needs of business and society through quality management education.”

The Impact of Research task force report draft for comments is available for download on the AACSB website: www.aacsb.edu/research. The website also provides additional resources related to the issue and the opportunity to submit comments on the draft report. The AACSB Committee on Issues in Management Education and Board of Directors will use the feedback to determine the next steps for implementation.

The AACSB International Impact of Research Task Force
Chairs:
Joseph A. Alutto, interim president, and
John W. Berry, Senior Chair in Business, Max M. FisherCollege of Business, The Ohio State University

K. C. Chan, The Hong Kong University of Science and Technology
Richard A. Cosier, Purdue University
Thomas G. Cummings, University of Southern California
Ken Fenoglio, AT&T
Gabriel Hawawini, INSEAD and the University of Pennsylvania
Cynthia H. Milligan, University of Nebraska-Lincoln
Myron Roomkin, Case Western Reserve University
Anthony J. Rucci, The Ohio State University

Teaching Excellence Secondary to Research for Promotion, Tenure, and Pay ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#TeachingVsResearch

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


The Parable Of Being In The Wrong Paradigm
May 30, 2007 parable by David Albrecht [albrecht@PROFALBRECHT.COM]

Sorry to revive this thread (need a favor) after it seemed to die 10 days ago. I present this parable with apologies to Ed Scribner, our resident parable teller.

I call this The Parable Of Being In The Wrong Paradigm.

A certain professor is the sad-sack of accounting higher education. It seems as if he's always been a member of an out-of-power paradigm. He started off college as a music major. He then switched to chemistry to Spanish to creative writing to history to political science. After graduation he discovered his degree qualified him to operate the french frier at a fast food joint. Friends, unhappy with his unhappiness, advised him to pursue an MBA degree. Our professor switched to an MA in accounting.

After this graduation he failed to secure an accounting or auditing job with the Big 8-7-6-5-4, probably due to a combination of not being young enough and wearing a colored shirt to his interviews. He wanted a true job, but it was not to be for him. Count him out of the Big 8-7-6-5-4 paradigm, his first experience with the wrong paradigm.

But lo and behold, a small school hired him to teach accounting. He enjoyed it so much that he decided to pursue an accounting doctorate for that academic union card. On the bright side, he learned new ways of thinking, new ways to approach a problem, and mental flexibility (this trait gets him in trouble, though). On the dark side he tried to pass himself off as a quantoid, but he wasn't. Nor was his degree from a powerful elite university. So count him out of the elite accounting school paradigm, and count him out of a top level salary. He is again a member of the wrong paradigm.

He's been a bust as a research/publishing hound, never hitting a top four journal. Some of his pubs were practitioner oriented and out of favor in his department. His last publication was too many years ago. He hit with the Journal of Excellence in College Teaching, but was told by his dean that it wouldn't count because his article wasn't about accounting (and the journal is too lowly ranked anyway). So, count him out of the dominant accounting research paradigm and from getting annual raises from his department. He is again a member of the wrong paradigm.

He was curious fellow, though, and always eager to contribute to making things better. Intrigued by how students learned, he researched it (but never got anything published, of course). He invested the results of the research back into his classrooms and became a popular teacher. As he continued to learn about how students learn, he became more popular. Eventually, students had to line up to get into one of his classes. The department chair responded by putting in a special registration process to keep excess students away from his classes and into other sections. The lucky students in his classes thrived in his learning-centered environment, it seems that they had been hungry to learn for a long time. The traditional paradigm ("tell them and then test them") is alive and well at at his school, though. He had to endure peer-to-peer evaluations of his teaching from professors who had difficulty in helping students learn. One accounting professor, notorious for his long lectures and lethal use of Power Point, came into our professor's classroom on one of his more non-traditional approach days. After a few minutes, the notorious accounting professor angrily steamed out of the classroom, giving our professor the the lowest score ever on a peer evaluation of teaching. It seems our professor didn't cover enough content. So count him out of another dominant accounting professor paradigm, and again a member of the wrong paradigm.

Despite being considered the worst accounting professor (0 for 4) by his department, he received his university's highest award for contributing to student learning.

One day he was asked how it felt not to be a part of the crowd or a dominant accounting paradigm. He replied that not being in a correct paradigm feels like not being invited to a party. He took solace, though from reading posts to AECM. Contributors seemed to be out of at least one power paradigm, just like him. They discussed it aud nauseum, year after year. Eventually he concluded that the more people lament the power of a dominant paradigm, the more things stay the same. It is like the weather--people can talk about it a lot but no one can do anything to change it. Leaving his computer, our professor went back to work, changing the world one student at a time.

David Albrecht


What's wrong about studying accounting in accounting doctoral programs?
May 2, 2007 message from Bob Jensen to the AECM Listserv

I have a former student and very good friend who’s interested in applying for an accounting doctoral program. He’s a good student who became a better student each year of his five year program. He’s somewhat experienced as a tax accountant.

But he’s not especially interested in a doctoral program that is heavy in quantitative methods (dare I say “accountics?”).

I have a couple of suggestions for him. But before I reply to him I would like some other suggestions from the AECM regarding full-time doctoral programs that are heavier on accounting and taxation skills and a bit lighter on the quantitative methods focus of most (all?) respected accounting doctoral programs at the moment.

You may send your suggestions privately to me or share them on the AECM if you choose to do so.

Please let me know if I can forward your suggestions under your name or if I should make your suggestions to him anonymous.

I do recommend this young man for a doctoral program. He’s become very passionate about becoming an accounting educator.

Thanks,

Bob Jensen

May 2, 2007 reply from Michael Haselkorn [MHASELKORN@bentley.edu]

Bob,

He should check out Bentley College’s new PhD program. Feel free to use my name.

Mike Haselkorn

May 2, 2007 reply from Randy Kuhn [jkuhn@bus.ucf.edu]

Bob,

I would definitely recommend your student speak to some of the professors at UCF (Central Florida in Orlando) like Robin Roberts and Steve Sutton. The general approach for the PhD program here is to provide as much exposure as possible to all areas of accounting scholarship and let the student decide what area best suits them. We take five accounting seminars that include a general overview of research (Kuhn, Burrell & Morgan, etc.), behavioral accounting, accounting information systems, financial archival, and sociological. A nice mix overall. Most of us take electives outside the College of Business in psychology, sociology, education, etc. for our minor as well as for the methods requirements. We can choose a more quantitative approach but no one in the last three classes went that route. Of the nine students in the last two classes, seven came from public accounting (six audit, one tax). The program has definitely enlightened all of us to other views of accounting, research, education, and the world in general. We only accept students every other year and I believe there are one or two spots left for the Fall 2007 class. If you think our program might fit your student, then I strongly recommend that he contact Robin ASAP.

Thanks,

Randy

May 2, 2007 reply from Steve Sutton [ssutton@bus.ucf.edu]

Bob,

I’ve watched this discussion with some interest. I’m always reluctant to speak of our own PhD program in this forum because it can be taken and interpreted the wrong way. Our PhD program has carved a niche out that is different from the ‘glamour’ programs. If we have a student who applies and wishes to do “accountics” type work, we generally steer them towards a more appropriate program.

Our program has basically focused on audit, tax and systems with a focus on behavioral and public policy research. We have what I believe to be some very accomplished and bright scholars working with our students, but our research is primarily behavioral from an individual (psychology-based), organizational (sociology), and societal (critical and radical humanist perspectives) perspective(s). We believe dialogue about the professions, accounting institutions, ethical implications and the philosophy underlying all of those is critical to the role of accounting academics.

That said, a PhD is still a research degree and not a technical degree. We assume that a student that has attained an undergraduate and masters level education in accounting has the technical accounting knowledge. The PhD is about how to look at accounting with a critical thinking mind and question the rules, processes and institutions—and to ask if there is a better way.

We educate our PhD students in the traditional areas as we believe this is critical to be good colleagues and appreciating each other’s research. But we do a lot in non-traditional areas also. You might find the structure of the programming interesting (or you may not): http://www.graduate.ucf.edu/CurrentGradCatalog/content/Degrees/ACAD_PROG_94.cfm#BUPHD-ACCOUNTING 

Hope you’re enjoying retirement in the mountains. This is the time of year I miss New England.

Steve G. Sutton
KPMG Professor
Dixon School of Accounting, UCF

www.bus.ucf.edu/ssutton/ 

May 2, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

Bob,

What are your friend's aspirations? If he could describe his ideal faculty position, including the sort of research (if any) he would like to pursue, what would that be? (He may be uncertain, which is fine.)

Recommending a set of inputs is easier if the desired output is clear.

Richard Sansing

May 2, Reply from Bob Jensen

Hi Richard,

I think (surmising at this point) that he might aspire to teach accounting/tax in a small liberal arts college where publishing in top research journals is not deemed more important than a dedication for teaching accounting and inspiring liberal arts students to pursue a career in accountancy.

In spite of what some of us more familiar with research universities think, there are many such liberal arts and even smaller state-supported colleges that still place the highest emphasis on teaching and youth inspiration.

What I've discovered is that all colleges want evidence of continued scholarship, but some are much more willing to accept publication in what we might call lower-tiered journals.

Then again, this young man showed such increased aptitude for accounting theory. It may be possible that in the course of his doctoral program he gets fired up for higher level research. His father is a good statistician and systems analyst in a top university. His mother is a teacher.

Bob Jensen

May 2, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

Bob,

I would encourage your friend to think about the real option aspect of this decision. He should be very confident of his decision to not pursue a Ph.D. at a research-oriented program before bypassing that option. If he studies at Chicago and makes an informed decision not to pursue "mainstream" academic research, then he will be over-trained for his dream job at the kind of liberal arts college you describe. But he also has the option of pursuing the research route. But if he studies at a place that puts less emphasis on research methods, he has limited his options at the outset.

Richard Sansing

May 2, 2007 reply from Bob Jensen

Hi Richard,

I used to think that way. Then I had one student named XXXXX who had similar goals to YYYYY, although XXXXX was a much more brilliant math student according to the Mathematics Department at Trinity University. I made a special effort to have XXXXX admitted to an "accountics" doctoral program without having as much as one week of experience in accounting practice. XXXXX did not even intern and went straight from our Trinity University masters program to an accounting doctoral program.

To my utter disappointment XXXXX dropped out after the end of the first semester. He said he was just not interested in getting an econometrics PhD in an accounting doctoral program. He wanted an accounting PhD and discovered that he would have four or five years of econometrics, statistics, and psychometrics.

Honestly Richard, I'm not making this up. XXXXX enrolled in this accounting doctoral program about three years ago if my memory serves me correctly. With his exceptional math skills XXXXX was capable of getting his accounting (ergo econometrics PhD). He just wasn't interested in econometrics before he applied for the doctoral program, when he was in the doctoral program, or when he withdrew from the doctoral program.

I did not do XXXXX or that doctoral program any favors by pushing XXXXX in the way that you would probably have pushed XXXXX. Now when it comes to YYYYY, we have a similar situation except I don't think YYYYY has the exceptional math skills of XXXXX. YYYYY admits that he's more like his mother than his father in this regard.

YYYYY, like XXXXX, really wants to study accountancy rather than econometrics. If XXXXX wanted to be an econometrics PhD, however, he probably would have stuck it out in the accountancy doctoral program because economics PhDs are a dime a dozen relative to accounting econometricians masquerading as accountants.

My point, Richard, is that sometimes "keeping options open" is not the best advice for some types of students, especially accounting students who really do not want to become statisticians, econometricians, psychometricians, and management scientists. We've pretty much taken the study of accountancy out of doctoral programs. Those entering doctoral programs learn very little accounting beyond what they learned before entering the program.

What accountancy doctoral programs lack is imagination. Why can't there be a joint accounting/JD doctoral program in law and accountancy? Why can't there be an accounting/philosophy doctoral program? Why must virtually all accountancy doctoral programs be accounting/ECONOMICS doctoral programs for economists who want higher starting salaries?

That's my $.02.

Bob Jensen

May 2, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

1. Yes, sometimes options expire out of the money. A bad outcome ex post does not imply a bad decision ex ante.

2. Not everything you learn has to be learned in a classroom. I've learned a lot about non-profit organizations over the last ten years without ever taking a class on the subject.If it is (relatively) harder to learn about research methods on your own than it is to learn about institutional detail on your own, a program that focuses on economics and research methods is likely the most efficient way to learn. There is also an economy of scale issue. If I have five doctoral students interested in five different topics, a program that focuses on methods rather than subjects seems like the way to go; each student can learn about the institutional issues that interest them in another way.

Richard Sansing

May 2, 2007 reply from Bob Jensen

Hi Richard

Plumlee et al. (2006) discovered that there were only 29 doctoral students in auditing and 23 in tax out of the 2004 total of 391 accounting doctoral students enrolled in years 1-5 in the United States.

With the excessive shortage of new PhDs in accounting (especially in auditing, tax, and systems), I think those who get a PhD with accounting skills will have pretty good "options" to become teachers and may even become the highest paid teachers in smaller colleges.

And you have difficulty separating yourself from the fundamental profit maximization economics assumption that plagues virtually all economics models. You assume that all accounting graduates who elect to go into academe want the highest salaries and probably the lowest teaching loads possible. In fact, there are students like XXXXX and YYYYY who truly want the psychic rewards of teaching rather than earn the highest dollar and the lowest teaching load.

What may be my most important point in this exchange with you is that there are many smaller colleges that would rather have dedicated teachers of accounting rather than failed econmetricians belatedly wanting to teach accounting because they were denied tenure in a top university's accounting/econometrics program.

And your latter assumption is that accounting can be self taught. Actually most anything can be self taught, including Egon Balas who became a well known Carnegie-Mellon mathematics professor after having taught himself mathematics during ten years of solitary confinement in a Hungarian prison. But why should an accounting doctoral student have to spend four or five years studying dreaded econometrics when their first love is learning accounting, tax, auditing, or systems?

And you might've been interested in learning accountancy after you earned an economics doctorate. But there are many econometrics professors in accounting departments who do not share your view. Let me once again dredge up the best example of the Accounting Horizon's referee who rejected a paper submitted by Denny Beresford.

When Professor Beresford attempted to publish his paper appealing for accounting researchers to have more interest in the accounting profession, an Accounting Horizons referee’s report to him contained the following revealing reply about “leading scholars” in accounting research:

Begin Quote
*****************

1. The paper provides specific recommendations for things that accounting academics should be doing to make the accounting profession better. However (unless the author believes that academics' time is a free good) this would presumably take academics' time away from what they are currently doing. While following the author's advice might make the accounting profession better, what is being made worse? In other words, suppose I stop reading current academic research and start reading news about current developments in accounting standards. Who is made better off and who is made worse off by this reallocation of my time? Presumably my students are marginally better off, because I can tell them some new stuff in class about current accounting standards, and this might possibly have some limited benefit on their careers. But haven't I made my colleagues in my department worse off if they depend on me for research advice, and haven't I made my university worse off if its academic reputation suffers because I'm no longer considered a leading scholar? Why does making the accounting profession better take precedence over everything else an academic does with their time?
As quoted at http://www.trinity.edu/rjensen/theory/00overview/theory01.htm#AcademicsVersusProfession

*****************
End Quote

 

Particularly relevant in this regard is Dennis Beresford’s address to the AAA membership at the 2005 Annual AAA Meetings in San Francisco


Begin Quote
*****************
In my eight years in teaching I’ve concluded that way too many of us don’t stay relatively up to date on professional issues. Most of us have some experience as an auditor, corporate accountant, or in some similar type of work. That’s great, but things change quickly these days.

Beresford (2005
)
*****************
End Quote

I'm glad that you like accounting and tax. Unfortunately, may of your econometrics friends in accounting academe hate having to teach such courses as intermediate accounting, advanced accounting, auditing, or introductory tax courses. And they interpret accounting theory as minimal accounting and maximal economic theory.

Bob Jensen

May 2, 2007 reply from Randy Kuhn [jkuhn@BUS.UCF.EDU]

When being recruited I recall my PhD coordinator showing me statistics about the number of accounting PhD students graduating each year and the general declining trend, down to around 70-75 per year. The AAA placement center at the national conference last year listed over 300 job postings. What a dilemma and not getting any better given that many of the baby boomers still have yet to retire.

The Plumlee et al. (2006) study paints an even bleaker picture. The general lack of students specializing in non-financial areas should raise a huge red flag. Will our non-financial accounting classes eventually be taught by professors outside their research area and interest? What kind of higher education will that provide? I have been fervently recruiting friends in public accounting. My approach to date has been to drop a bug in their ear during the worst of busy season then keep plugging away. So far, only one success. Many would love to enter academia but the thought of giving up four years of compensation is unpalatable and just not feasible for their families. The barriers to entry are great. Successful recruiting will take a concerted effort by us all.

May 2, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

---Bob Jensen wrote:

And you have difficulty separating yourself from the fundamental profit maximization economics assumption that plagues virtually all economics models. You assume that all accounting graduates who elect to go into academe want the highest salaries and probably the lowest teaching loads possible. In fact, there are students like XXXXX and YYYYY who truly want the psychic rewards of teaching rather than earn the highest dollar and the lowest teaching load.

---

Nonsense. From a purely financial perspective, an academic career for an accoutant is a big negative NPV. But I wouldn't trade careers with anyone.

Richard Sansing

May 3, 2007 reply from Bob Jensen

Hi Richard,

Negative NPV makes no sense to me for new accounting PhDs. With universities paying over $180,000 (including summer stipends) as starting salaries plus generous amounts of free time for personal consulting fees and textbook writing, I have a difficult time calculating a negative NPV. And consulting opportunities are relatively easy to get in top universities because the elite names of those universities are a draw for faculty opportunities to consult and write books.

Most Harvard, Wharton, MIT, NYU, and Stanford professors that I know make more in consulting and royalties than their paltry salaries over $200,000 per year plus relatively generous travel allowances. The very top universities also provide incidental funding for research ranging from $10,000 to $30,000 each year (plus summer stipends in the range of $40,000 to $60,000).

When you make the NPV calculations you must also factor in the current fringe benefits averaging 30% of starting salaries. This includes health care and TIAA-CREF contributions. The 30% probably does not even count sabbatical leaves, discounts for child care, and entertainment opportunities such as concerts and theatre.

Sure an accounting or finance professor may have cut off chances of winning the CEO lottery, but this is a low-probability career track. Becoming a partner in a large CPA firm can be lucrative, but not necessarily on a present value basis considering the first ten years at relatively low salary (around $50,000-$60,000 per year) and the necessity to buy into (usually by borrowing) the partnership for those lucky few (less than 10% of the staff accountants) who are eventually invited to become partners.

If our recent undergraduates really took the trouble to compare the NPVs, I think newly-minted accounting professors have a comparable or even better outlook if the competing alternatives are weighted by the relatively low probabilities of becoming an executive partner in a large CPA firm. Smaller CPA firms are harder to compare, because they vary to such a huge extent. Some partners of small CPA firms net over a million dollars each year and many others barely scrape out a living in their home offices.

When you couple this with the wonderful lifestyle opportunities and sabbatical leaves, I always thought of myself as having lived in tall cotton for 40 years before I retired. Now I live in grass that's becoming too tall since I've put off mowing.

Bob Jensen

May 3, 2007 reply from Randy Kuhn [jkuhn@BUS.UCF.EDU]

CPA firm salary ranges obviously vary by location, but really not all that much honestly. Here in Orlando, staff auditors fresh out of school or even experienced hires from smaller firms into the new Big 6 are receiving offers of $50 with $2-3k signing bonuses this semester. This is consistent across the more popular disciplines (audit, tax, business advisory). Business advisory (business process & IT audit/consulting) starts to pull ahead at the manager stage and takes 1-2 years less per level for promotion. Whereas audit typically takes 12 years for partner, business advisory can be as quick as 9 years with a greater probability of making partner due to the demand/supply (not many hybrids out there that know financial, business process, and IT). As a 2nd year advisory manager (10 yrs exp) my base was $100k two years ago while the first-year audit senior manager with comparable experience received less than $90k which I think is on the low-end. The month I started the PhD program, one of my friends in a nearby office made audit partner at the age of 34 receiving a bump in salary from $150k to $225k with the promotion. Not sure about his loan though.

May 3, 2007 message from Bob Jensen

Hi Richard (Sansing),

I’m still trying to find a PhD program that extends beyond the blinders of the social science research paradigm. I need to look a little closer at Bentley’s new program. Also there are a few AIS tracks in existing programs, but my guess is that the AIS majors still have to take the econometrics qualifying courses and exams.

Your NPV sidetrack took us off the main issue regarding why our leading academic journals and virtually all of our accounting doctoral programs define accounting research as a social science that requires the requisite skills in advanced statistics, econometrics, psychometrics, sociometrics, etc.

The fact of the matter is that our current doctoral programs are critically unable to meet demand according to the AACSB and Plumlee et al --- http://www.trinity.edu/rjensen/395wpTAR/03MainDocumentMar2007.htm
The supply is steadily dwindling with less than 100 graduates per year (and less than 20 a year in auditing, tax, and systems). The demand is at least ten times the supply and probably higher. Accounting education programs will soon be to the point were virtually all of the instructors have no doctorates or have only doctorates in economics, law, education, etc.

The problem as I pointed out in earlier correspondence is a mismatch between accounting graduates who want to study and do research in accounting but have neither the aptitude nor an interest in becoming social scientists (and in particular econometricians studying capital markets). 

Accounting doctoral programs increasingly have ignored other research paradigms outside the social science paradigm. For example, I do not find humanities or legal research paradigm choices being offered in any accounting doctoral program. Philosophy departments, history departments, and law schools give doctorates to students who have few, if any, social science research skills.

Is there any university in the U.S. where a doctoral student can major in accounting history without having to become a social scientist? Is there a doctoral program in the U.S. where a student can major in accounting philosophy? Is there any doctoral program in the U.S. that uses a law school research paradigm?

And lastly, I would like to point out that our leading journals and award selection committees tend to ignore submissions based upon any research paradigm other than a social science research paradigm.

The AICPA and the AAA jointly award a "Notable Contributions to Accounting Literature Award" of $2,500 and a plaque at the AAA's annual meetings. For the past 20 years, these awards have virtually all gone to empirical research using positivist research methodologies.

This year I'm on the Selection Committee for the first time. The fact that the Screening Committee only gave us empirical studies to select from for the 2007 award to be granted in Chicago makes me wonder why only empirical studies are candidates for Selection Committee evaluation.

The criteria for the award are embedded in the following paragraphs at http://aaahq.org/awards/nominat3.htm

Begin Quote
**************
The Screening Committee for the Joint AICPA/AAA Notable Contributions to Accounting Literature Award invites nominations of outstanding articles, books, monographs, or other publications for consideration. Nominations from regular and irregular (e.g., AICPA-sponsored research studies or monographs) publications, as well as from nonaccounting publications, may be submitted as long as the nominated work is relevant to accounting. Both academic and practitioner nominations will be accepted.

Nominated items must have been published within the years 2002 to 2006. Each nomination must be accompanied by a brief supporting statement (no more than 150 words) summarizing reasons for the nomination that are consistent with the award selection criteria. These criteria include: uniqueness and potential magnitude of contribution to accounting education, practice and/or future accounting research; breadth of potential interest; originality and innovative content; clarity and organization of exposition; and soundness and appropriateness of methodology.

End Quote
**************

This important award can go to both research and other scholarly literature contributions in accountancy. The Award's research literature is not restricted to empirical research and positivist methods. What is curious to me is why only this subset of the literature is repeatedly the only winning subset.

What is even more curious this is why even the literature pieces forwarded this year are only esoteric empirical research studies of dubious value to "accounting education and practice." I say of "dubious value" in the sense of highly simplified modeling assumptions and no replication of the findings by other researchers.

Shouldn't the award winning literature item be at least independently replicated if it is an empirical research study? My previous lament over lack of replication in academic accounting research can be found at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication

The accountics bias seems to be rearing up repeatedly in this award process for the past two decades. Is it because of narrowness in the nomination process? Have members of the AAA given up nominating literature that is not of an esoteric accountics nature? Is it because only empirical research is deemed notable by the Screening Committees?

For more on the accountics bias in academe, go to http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Also see the various commentaries at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

May 3, 2007 reply from Paul Williams [Paul_Williams@NCSU.EDU]

I agree that the conversation has drifted a bit from the original question, but if Bob's friend has been following this discussion, he might be inclined to think ill of his prospects for doing what he wants. It is largely the case now that U.S. PhD programs are as Jagdish and Bob have characterized them.

There are a few places in the U.S. where Bob's friend might be able to pursue an interest in accounting. Central Florida and South Florida are PhD programs that offer some diversity of faculty talent that provide a doctoral student with flexibility for pursuing whatever interest excites them.

North Texas and Case Western Reserve are other places. There are probably others, but they are fewer and farther between than they were when I went through the experience. If Bob's friend is adventuresome, there are many excellent doctoral opportunities at schools outside the U.S. For example, the University of Alberta has a diverse faculty, which allows the pursuit of interests that would simply not be tolerated in most U.S. doctoral programs.

Then there are schools in the UK and Australia. Adelaide, Wollongong, Cardiff, Strathclyde, Essex, the list goes on. These places afford someone a different experience from many US programs and provide much greater freedom to follow one's intellectual bliss than the stultifying places that are the U.S. "elite."

Paul

May 11, 2007 reply from Sue P. Ravenscroft [ACCT] [sueraven@iastate.edu]
Sue gave me permission to forward a somewhat laundered version of her original message. It confirms what I've been arguing aud nauseum. The number of accounting student doctoral graduates in the U.S. plunged to less than 100 per year to meet an exploding demand for accounting professors. A major cause of the shortage of applicants to doctoral programs is that these econometrics programs do not interest most accountants in the pool of possible applicants to such doctoral programs.  Nearly all available accounting doctoral programs (not just Tier I programs) are no longer accounting programs and have no dedicated accounting courses. They’re literally social science methodology programs with most emphasis on econometrics and no choices for other research methodologies --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Dear Bob,

I was just contacted by a wonderful young woman, who graduated from Iowa State University last year. She is bright, personable, hard-working, and interested in going into a PhD program. She is NOT interested in doing a highly quantitative economics-based program, but can handle the math and statistics needed for behavioral research. I feel fortunate in the timing of her inquiry, because I observed the discussion about a young man you know who is looking into doctoral schools, and the subsequent advice from Sansing that he consider only a Tier One school because of the "alleged choices" such schools provide versus the counter-advice of actually getting training to do what one loves.

The young woman has already received the Tier One type advice and was totally taken aback and turned off by it. The assistant professor who gave her that advice told her she should take two years of college level advanced math courses and then apply, because she is definitely bright enough to go to a Tier One school and should not even consider going to a Tier Two type institution. Her goal was to enter a program in fall of 2008. After that set-back she wrote me, and I was far more encouraging.......I told her that I had just seen a rather long (albeit sometimes almost hostile) exchange about the types of programs available and the wisdom of going to the "Tier One" schools even if that wasn't where one's interest or heart lay.....This student is a wise young woman and doesn't want to be trained to do something she doesn't want to do.....

So, I am writing to ask if you have a final listing of schools that might be more open to a variety of research approaches.....If so, could you please write to me (address above or to her). I would be ever so grateful.

Thank you very much.

Best regards,

Sue Ravenscroft

May 15, 2007 reply from Dana Carpenter [dcarpenter@MATCMADISON.EDU]

I have followed the need a favor thread with great interest. I am in my mid 40'sand have taught at community colleges (with a few years at bachelor granting universities) for 20 years following 3 years with KPMG. I have always wanted to get my doctorate for personal actualization and would be interested in teaching at a regional university. I scored 99 percentile on the verbal portion of the GMAT but just average on the Mathematics. Two years ago I was told during an interview with a very prestigous school that with a few semesters of calculus I could probably gain admission to their Ph. D Program. I was also admitted to a Ph. D in management at a different college. I decided against both options. I would definitely be interested in a DBA or some of the teaching oriented or blended accounting Ph. D's that have been discussed. In my situation (with fewer years left in my career) I am really not interested in a professorship at a Top Tier University. For the same reasons I hesitate to give up a job I love and earn no income for 4 or 5 years at a minimum. I would be interested in your response to the Accounting DBA question as well as specific ideas as to programs or perhaps a different field with a concentration in accounting.

Dana Carpenter
(608) 246-6590

May 4, 2007 reply from Bob Jensen

Your experience, Dana, is very typical of the many students at all ages who are turned off by having to study five years of social science research to obtain a tenure track position to be an accounting professor.

To my knowledge, the distinction between a PhD and a DBA from a Tier 1 research university is about as marked as the distinction between ketchup vs. catsup. Both doctoral degrees are intended to instill research skills in students intent on careers in academia. The DBA used to entail a more rounded set of business courses (management, organization behavior, finance, marketing, etc.) but I think most accounting PhD and DBA programs have dropped required courses except for a few research seminars and possibly some social science (especially economics) and statistics courses.

The DBA used to focus more on the "application of theory" as opposed to the "development of new theory" in a PhD program --- http://dr-hy.com/Menu-Bar/mVita/DBA-vs-PHD.html
In my opinion, these distinctions between the two degrees have largely evaporated. The U.S. Department of Education and the National Science Foundation recognize numerous research-oriented doctoral degrees such as the D.B.A. as "equivalent" to the Ph.D. and do not discriminate between them --- http://en.wikipedia.org/wiki/Doctor_of_Business_Administration
Certainly the distinction between DBA versus PhD in business schools  is not as great as the distinction between EED and PhD in schools of education.

Probably the best known business school that offers DBA and PhD degrees is the Harvard Business School. If you major in a traditional business area (e.g., accounting, marketing, management strategy, information technology) you get a DBA. If you major in business economics, health policy, or organization behavior you get a PhD. The actual distinction between the two designations is not at all clear to me. About the only thing I can tell is that some HBS doctoral students get ketchup on their hamburgers and others get catsup.

Most certainly, having a DBA will not change the criteria for obtaining tenure later in life. I do not know of any serious university that will put higher weightings on teaching performance for DBA faculty versus higher weightings on research for PhD faculty.

Amy Dunbar provided a link to a good listing of international doctoral programs --- http://aaahq.org/ata/_ATAMenu/phd-programs.htm 

Questions raised are how large each program is and what have been the trends in growth or shrinkage. As new doctoral programs came on line, the very large doctoral programs such as those in Illinois, Michigan, Texas, Indiana, and Michigan State greatly reduced doctoral program size in the 1986-2005 period. What used to be large programs shrank greatly in size. Some smaller programs like Rice have gone out of accounting doctoral programs entirely. Some like Minnesota seem to have disappeared without making any official announcements.

A listing of the history of U.S. accounting doctoral programs is provided in your free Prentice-Hall  Hasselback Accounting Faculty Directory (at least in the hard copy version). The Doctoral Program History table is on the page preceding the start of the alphabetized listing of accounting faculty by college. In don't think this table is available in Jim's Online Directory at http://rarc.rutgers.edu/raw/hasselback/

There are some errors in the Hasselback table that are due mainly to failures of some programs to accurately report their own data to Jim. But except for Penn State, I think the recent undercounting is relatively minor.

Jim also provides the totals by year. The last column is generally way off for the most recent year because of reporting time lags. However, the preceding columns are relatively accurate.

In the past twenty years, the most accounting doctoral graduates reported for the U.S. was 207 in 1988. The least was 69 in 2003. It has not been over 100 since 2001.

The depressing Plumlee et al (2006) study is probably more accurate for the year 2004. Further analysis is provided at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm 

Bob Jensen

May 11, 2007 reply from Bob Jensen

A summary listing of non-traditional programs was provided by Paul Williams in the listing of messages at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

The snipped version is http://snipurl.com/1jb1g

One of the subsequent messages that I sent to my Student YYYYY is shown below:

Message from Bob Jensen to YYYYY

I’m particularly happy that you’re now motivated to become an accounting educator. I loved this profession.

First and foremost is your GMAT score that determines almost everything regarding admission to any respectable doctoral program. Consider all your options for having as high a score as possible.

Second you need to honestly evaluate your aptitude for statistics and mathematics. Nearly all accounting doctoral programs are tantamount to econometrics programs these days with great stress on econometrics models of capital markets data.

I don’t know if you followed the recent AECM lively exchange on this topic or not. You can read some of the messages at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

A listing of doctoral programs is provided at
http://aaahq.org/ata/_ATAMenu/phd-programs.htm

I know you are somewhat interested in taxation. In nearly all instances, taxation doctoral students still have to master the econometrics requirements of capital markets research.

If you are looking for the handful of programs that allow you to customize your program and possibly cut back on the econometrics hurdles, I recommend that you look into the following programs, messages about which appear at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

Bentley College (Boston) This is a new program that I don’t yet know much about. Bentley is a very good accounting and finance college, although I would not expect it to be strong for a tax concentration.

Case Western University (Cleveland)
University of Central Florida (Orlando)
University of South Florida (Tampa)
University of North Texas (Denton)

Various programs outside the U.S. (Please scroll down to the informative message from Paul Williams in this regard) --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

If I can be of further help, please let me know.

Bob Jensen

 

May 12, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

--- Sue Ravenscroft wrote (to Bob Jensen, who then posted it here):

I feel fortunate in the timing of her inquiry, because I observed the discussion about a young man you know who is looking into doctoral schools, and the subsequent advice from Sansing that he consider only a Tier One school because of the "alleged choices" such schools provide versus the counter-advice of actually getting training to do what one loves.

---

For those interested in what I actually said, as opposed to how it is characterized above, I repeat it below.

"I would encourage your friend to think about the real option aspect of this decision. He should be very confident of his decision to not pursue a Ph.D. at a research-oriented program before bypassing that option. If he studies at Chicago and makes an informed decision not to pursue "mainstream" academic research, then he will be over-trained for his dream job at the kind of liberal arts college you describe. But he also has the option of pursuing the research route. But if he studies at a place that puts less emphasis on research methods, he has limited his options at the outset."

Later in the same thread, I also said:

"My point was that the decision Bob's friend makes regarding a Ph.D. program will significantly affect the opportunities that he or she faces upon graduation, which will in turn affect subsequent academic opportunties as well. Unless one is very sure about what what one's preferences will be in the future, the course of action that preserves options has a lot to recommend it. Whether one ultimately prefers a career that features both research and teaching, or wants to teach and do no research, it would be nice to have the skill set needed to make have a real choice."

Richard Sansing

May 12, 2007 reply from Bob Jensen

Hi Richard,

Even better advice would be to avoid accounting altogether if you want to be a top researcher in a Tier 1 accounting research university. Consider the role model examples. Ron Dye (Northwestern Accounting Professor) has his doctorate and undergraduate degrees in mathematics and economics with almost no accounting. Some of our other top accounting researchers have management science, mathematics, econometrics, and psychometric doctorates with very little in the way of accountancy education and/or experience in accounting practice. What accounting they learned is when having to teach a little about it after they became professors.

I'm not trying to be facetious or cynical here. Those of us that majored in accounting for five years had to take a lot more time in college to earn a doctorate in an accounting doctoral program. It is actually quite costly in time and opportunity cost to first become an accountant and then enter one of our present accounting doctoral programs. It is far more efficient to major in economics and then earn an econometrics doctorate from a prestigious Economics Department. Equally great is to earn a doctorate in computer science.

The only risk of not having an accounting background as far as I can tell is the risk of not getting tenure in a Tier 1 accounting university. Without accounting, it is more difficult for tenure rejects to become accounting teachers in Tier 2 and Tier 3 colleges and universities. Those universities typically require more knowledge of accountancy.

Accounting majors realistically face 12 years of full-time undergraduate and graduate studies before graduating with a doctorate in an accounting program. On top of that, accounting doctoral programs prefer that doctoral candidates have 1-5 years of accounting practice experience. This adds up to 13-17 years to graduate from an accounting doctoral program.

An economics major can earn an economics doctorate in seven years of full-time studies before graduating with a doctorate from an Economics Department. If she or he bothers to earn a MBA degree along the way, it may take eight years to complete the doctorate. Under new AACSB rules, doctoral graduates in economics, statistics, mathematics, psychology, etc. are fully qualified to become accounting professors.

I must admit that I reasoned exactly like you, Richard, until I pushed Student XXXXX into a Tier 1 accounting doctoral program that he withdrew from after his first semester in spite of his being a brilliant math student (double major with accounting).This unfortunate outcome made me think more seriously about why the pool for accounting doctoral students is drying up.

Once again consider the Plumlee et al findings:  Plumlee et al. (2006) discovered that there were only 29 doctoral students in auditing and 23 in tax out of the 2004 total of 391 accounting doctoral students enrolled in years 1-5 in the United States. The number of graduates has shrunk to less than 100 per year.

If the Tier 1 accounting doctoral programs (and in fact virtually all accounting doctoral programs) require that all applicants have the advanced mathematics, statistics, and economics, we have in fact added possibly two more years to a five-year accounting program just to enter the accounting doctoral program applicant pool. Alternately, an applicant might be admitted provisionally into an accounting doctoral studies program and take the two years of econometrics preparatory courses in what becomes tantamount to a six or seven year doctoral full-time studies program in graduate school.

My conclusions are as follows.

1. To become an accounting professor in a Tier 1 accounting program it is far more efficient and possibly more effective (toward tenure) to earn social science, mathematics, or statistics doctorate outside accounting in a highly prestigious university. Accounting doctoral programs are actually inefficient alternatives to becoming an accounting professor in a Tier 1 accounting program unless you cannot get into a highly prestigious non-accounting doctoral program.

2. The pool of applicants for accounting doctoral programs is drying up. Accountants with 1-5 years of experience typically want to study accounting if they choose to enter a doctoral program. Since virtually all accounting doctoral programs in the United States are social science (particularly econometrics) programs with few if any accounting courses, these programs do not appeal to accountants. These doctoral programs might appeal to economists and statisticians, but it is far more efficient to earn economics and statistics doctorates from Departments of Economics and Statistics.

Thus I gave the wrong advice to my Student XXXXX who was a brilliant dual major in accounting and mathematics. Instead of recommending a doctoral program in accounting (where he really did not want a forced feeding of econometrics), I should've recommended that he go directly into a prestigious mathematics doctoral program. Then he could ultimately apply to become an accounting professor in a Tier 1 accounting research university after getting his mathematics doctorate.

Since the number of graduates from accounting doctoral programs is less than 100 students per year, Tier 1 research universities are often forced to seek top graduates from non-accounting doctoral programs such as econometrics and management science programs in prestigious universities.

Isn't it sad that for some accounting professors like me, majoring in accounting was wasted time.

Bob Jensen

May 13, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

Bob,

I suspect that Ron Dye would recommend studying under Ron Dye at Kellogg's accounting Ph.D. program! One way to find out-- I'll ask him and post his response.

Some of your analysis seems exaggerated. I came into the doctoral program with a very weak math background. In my three years of coursework, roughly 1/3 of my classes were accounting research seminars and 2/3 were math and economics classes. When you say:

"If the Tier 1 accounting doctoral programs (and in fact virtually all accounting doctoral programs) require that all applicants have the advanced mathematics, statistics, and economics, we have in fact added possibly two more years to a five-year accounting program just to enter the accounting doctoral program applicant pool."

you are double counting. You take those "tools" courses during the five-year accounting doctoral program, not in addition to it.

I think that trying to become an accounting researcher without taking the accounting research seminars and attending the weekly accounting research workshops would be very difficult.

I would ask someone considering an accounting academic career what sort of questions they would like to answer. Much of this thread has framed the questions in negative terms "How do I avoid course X during my doctoral program?" rather than in positive terms "How do I learn how to answer question Y?"

Richard Sansing

May 14, 2007 reply from Bob Jensen

Hi Richard,

"Three years" is bad advice these days! Your college (Dartmouth) does not have a doctoral program. Let me use as a benchmark what I view as a typical accounting doctoral program in the 21st Century. The University of Florida writes that it takes 4-5 years to complete an accounting PhD for students entering with strong mathematics backgrounds. Students who must additionally take the "mathematics preparatory courses" must anticipate six or seven years of full-time effort.

Apparently your experience (advice?) differs from the advice given by the accounting professor who advised Sue's accounting graduate to take two more years "advanced mathematics" before applying to accounting doctoral programs.

It also differs from my experience trying to place some top accounting graduates in accounting doctoral programs in recent years. Nearly all who were admitted had significantly stronger mathematics credentials than those that were rejected.  Most programs now advise applicants that (even those with math credentials and masters degrees) the accounting doctoral program will take 4-5 years (See the University of Florida statement quoted below).

In fact most universities make a concerted effort to recruit accounting doctoral program candidates who do not have accounting degrees. Virtually every accounting doctoral program has a mathematics matriculation requirement that is now quite formidable (possibly more so for applicants today than for us applicants in the 20th Century). Consider the following statement at the Fisher School of Accounting Website at the University of Florida.

Note in particular the suggested admission alternatives of "economics, engineering, mathematics, operations research, psychology, and statistics." No mention is made of such undergraduate degrees as history, philosophy, or other humanities degrees, and I suspect that unless a humanities graduate is very strong in mathematics, the chances are zero of being admitted to most any U.S. accounting doctoral program even among humanities graduates that are actively recruited by top law schools. By the way, top law schools in particular recruit accounting graduates more aggressively than accounting doctoral programs in my opinion. One of the major reasons for the shrinking pool of applicants to accounting doctoral programs is the now preferred option to go to law school (including some who want to specialize in tax and eventually teach tax at the college level with a JD credential).

Begin Quote
*************

University of Florida Ph.D. in Business Administration - Accounting

Ph.D. Program - Accounting Concentration

This program is open to all applicants who have completed an undergraduate degree. Individuals with a degree in a non-business discipline (e.g., economics, engineering, mathematics, operations research, psychology, statistics) are encouraged to apply.

Program Details (pdf)

Students are required to demonstrate math competency prior to matriculating the doctoral program. Each student's background will be evaluated individually, and guidance provided on ways a student can ready themselves prior to beginning the doctoral course work. There are opportunities to complete preparatory course work at the University of Florida prior to matriculating our doctoral program.

The accounting concentration is designed to be completed in four to five years. The first year of the program is essentially lockstep with doctoral students in economics and finance. Starting in the second year, individual course work is designed by the student in consultation with his or her supervisory committee and the accounting graduate coordinator. Other than the Accounting Seminars (listed below) there are no specific required courses after the first year of the program.

Accounting Seminars:

ACG 7939 Theoretical Constructs in Accounting
ACG 7979 Accounting Readings and Replication
ACG 7885 Empirical Research Methods in Accounting
ACG 7979 Accounting Readings and Research Project
ACG 7887 Research Analysis in Accounting

Ph.D. Co-Major Program with the Department of Statistics

A program of study for a single degree in which a student satisfies co-major requirements in two separate academic disciplines that offer the Ph.D.

 

End Quote
*************

Is there any accounting doctoral program in the United States that encourages humanities graduates to apply? Is there an accounting doctoral program in the entire United States that has a co-major with the Department of Philosophy or the Department of History?

As of today, The University of Florida graduated four accounting PhDs since Year 2000. As far as I can tell, none of them were undergraduate accounting majors. Degrees in engineering, economics, and mathematics most likely hastened completion of their doctoral degrees in accounting at Florida in less than six or seven years. I mention Florida only because Florida is not a unique accounting doctoral program in this regard. I commend Florida for being more honest than some when stating the program requirements.

The bottom line is that I don't think that the doctoral program that you (Richard) entered "with a very weak math background" and completed in three years makes you a relevant role model for today's applicants to doctoral programs. My reading is that today you could not even be admitted to the University of Florida accounting doctoral program unless you completed the "preparatory course work at the University of Florida prior to matriculating our doctoral program." We (you and me) are no longer role models in that regard for applicants to accounting doctoral programs.

In my case I was admitted to the doctoral program but then had to take all those extra undergraduate math, operations research, economics, and statistics courses while in the program. My PhD graduation would've been hastened at Stanford if I had majored in mathematics or statistics instead of accounting as an undergraduate. I perhaps then could've graduated in three years instead of the five full (and delightful) years that I spent in Palo Alto. Now I think it requires six or seven years in Palo Alto for candidates who must take the preparatory undergraduate courses. In my day we did not have all those accounting research seminars at the graduate level.

Bob Jensen

May 13, 2007 reply from

Bob,

You are not confused. And I am not brainwashed. ;-)

My point, as you well know, is that when we do research using archival data we need math skills. Different types of research appear to be rewarded differently, as evidenced by the salary differentials across the schools at a university.

Amy

May 14, 2007 reply from Bob Jensen

Hi Amy,

You wrote that "when we do research using archival data we need math skills."

To which I respectfully reply as follows:

Not everything that can be counted, counts. And not everything that counts can be counted.
Albert Einstein

I think that you're confining doctoral scholarship to archives that can be counted and overlooking the archives, possibly the most relevant archived information, that cannot be counted.

In the United States, following the Gordon/Howell and Pierson reports, our accounting doctoral programs and leading academic journals bet the farm on the social sciences without taking the due cautions of realizing why the social sciences are called "soft sciences." They're soft because "not everything that can be counted, counts. And not everything that counts can be counted."

It seems to me that history scholars have a much longer history of analyzing archival data than most any other type of scholars, I wonder what the discipline of history would’ve become if every history scholar over the past 1,000 years had to have two years of preparatory “advanced mathematics” before entering a doctoral program in history.

It seems to me that legal scholars have a very long and scholarly history of doing research on archival data, especially court records, I wonder what the discipline of law would’ve become if every legal scholar over the past 1,000 years had to have two years of preparatory “advanced mathematics” before entering a JD program.

Many of our serious professional problems needing research in accounting are closer to law than economics. Particularly vexing are the issues of how to account for complex contracts (e.g., those with derivatives, contingencies, and intangibles) in settings where the contracts are being written to deceive investors and creditors. Must years of advanced mathematics and econometrics necessary conditions for conducting academic research to help the profession with these contracts?

Where would we be in medicine, law, and most other professions if it was dictated on high that all their doctoral programs had to require advanced mathematics? Would they find themselves in the mess we have today in academic accounting in the United States where the pool of potential doctoral candidates is drying up?

Would we find ourselves in the mess of having to rely on adjuncts to teach more of the accounting courses than our tenure-track faculty who bargained for minimal teaching and maximal salaries and benefits so they could conduct econometric and psychometric research with models of dubious relevance to the practicing profession?

Why is it that virtually all of our doctoral programs in accounting are now being shunned by so many accounting professionals who would like to teach accounting, auditing, tax, or AIS but are turned off by having to first take preparatory courses in advanced mathematics and not have the opportunity for studying accounting in accounting doctoral programs?

In academic accounting we’ve almost all been seduced by frustrated economists in the U.S. who found a way to secure a monopoly by putting up barriers to entry that shrinks the supply of accounting doctoral graduates and lifts the salaries of accounting professors to the highest levels in every university. Most of us, especially me, have benefited from these barriers to entry. But in the process, we’ve widened the schism between professors of accounting and the accounting profession and students of accounting.

These barriers to entry to doctoral programs have frustrated practicing accountants to a point where doctoral programs like the one at the University of Florida are in many cases more appealing to non-accountants ("economics, engineering, mathematics, operations research, psychology, and statistics") who can matriculate into the program with their advanced mathematics skills and graduate from the program without every having studied the things we teach our undergraduates and masters students in accounting. In fairness, the current body of eight accounting doctoral students at the University of Florida has three candidates with undergraduate degrees in accounting. Others include a mathematics major, a statistics major, a finance major, a commerce major, and a student who majored in economics. The finance major also earned a masters of accounting degree.

It seems to me that in the United States after the Gordon/Howell and Pierson reports our accounting doctoral programs and leading academic journals bet the farm on the social sciences without heeding the due cautions of realizing why the social sciences are called "soft sciences." They're soft because "not everything that can be counted, counts. And not everything that counts can be counted."

Why is it that only outside the United States various accounting doctoral programs in prestigious universities have seen the light regarding diversity of research methodologies in academic accountancy?

Bob Jensen

May 13, 2007 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]

--- Bob Jensen wrote:

Even better advice would be to avoid accounting altogether if you want to be a top researcher in a Tier 1 accounting research university. Consider the role model examples. Ron Dye (Northwestern Accounting Professor) has his doctorate and undergraduate degrees in mathematics and economics with almost no accounting. Some of our other top accounting researchers have management science, mathematics, econometrics, and psychometric doctorates with very little in the way of accountancy education and/or experience in accounting practice. What accounting they learned is when having to teach a little about it after they became professors.

--- end of quote ---

Here is Ron's response, along with the question that I posed to him.

About the question: by and large, I think it is a mistake for someone interested in pursuing an academic career in accounting not to get a phd in accounting. If you look at the "success" stories, there aren't many: most of the people who make a post-phd transition fail. I think that happens for a couple reasons. 1. I think some of the people that transfer late do it for the money, and aren't really all that interested in accounting. While the $ are nice, it is impossible to think about $ when you are trying to come up with an idea, and anyway, you're unlikely to come up with an idea unless you're really interested in the subject. 2. I think, almost independent of the field, unless you get involved in the field at an early age, for some reason it becomes very hard to develop good intuition for the area - which is a second reason good problems are often not generated by "crossovers."

The bigger thing - not related to the question you raise - but maybe you could add to the discussion is that there are, as far as I can tell, not a lot of new ideas being put forth by anyone in accounting nowadays (with the possible exception of John Dickhaut's neuro stuff). In most fields, the youngsters are supposed to come up with the new problems, techniques, etc., but I see a lot more mimicry than innovation among newly minted phds now.

Anyway, for what it's worth....

Ron

May 14, 2007 reply from Bob Jensen

Hi Richard,

I thank you for obtaining a reply from Ron Dye. He's one among a number of leading researchers who became an accounting professor without having a background in accounting. He's also one of the finest mathematics researchers in academic accounting.

What is especially interesting to me is Ron's conclusion that essentially our highly touted and highly selective accounting doctoral programs (with the highest-paid graduates in academe) in the United States are pretty much failures if we define research as the creation of new and innovative knowledge. I love his choice of the word  "mimicry" in his following conclusion:

Begin Quote
**********************

The bigger thing - not related to the question you raise - but maybe you could add to the discussion is that there are, as far as I can tell, not a lot of new ideas being put forth by anyone in accounting nowadays (with the possible exception of John Dickhaut's neuro stuff). In most fields, the youngsters are supposed to come up with the new problems, techniques, etc., but I see a lot more mimicry than innovation among newly minted phds now.

**********************
End Quote

I might add that John Dickhaut is nowhere close to being a newly-minted doctoral student. He's an old guy who got his PhD at Ohio State in 1970 before Ohio State transitioned into its present highly mathematical accounting doctoral program. This illustrates how innovative research can come from graduates of accounting doctoral programs that do not (at least way back then) require advanced mathematics.

I suggested that Ron Dye's route to becoming an accounting academic was more efficient in the sense of taking less time (three  years in an economics doctoral program at Carnegie built upon his mathematics undergraduate degree) rather than the route of entering an accounting doctoral program where it now takes 4-5 years built upon a mathematics undergraduate degree or 6-7 years built upon a typical accounting undergraduate degree if the student has to take the two years of preparatory mathematics required by many of our top accounting doctoral programs.

In terms of accountics, I think our econometrics-based accounting doctoral programs are probably better for us than doctoral programs in the economics departments because accounting doctoral students are more likely to conduct research on archival databases that are more of interest in accounting than are the databases of interest to economics departments. The downside is that the econometrics studies published in leading accounting research journals by graduates of accounting doctoral programs have probably reflected mostly "mimicry" lamented by Professor Dye.

In his message Professor Dye does not recommend that his streamlined route to becoming an accounting professor (without an accounting education background) serve as a role model. I tend to agree, although I now have newer doubts. I'm currently evaluating publications submitted for the 2007 AICPA/AAA Notable Contributions to Literature Award. The Award's Screening Committee filtered out all submissions that were not accountics papers. Among those accountics papers submitted to our Selection Committee by the Screening Committee, many of the authors do not have accounting backgrounds and some of the submissions are from such journals as Management Science and the Journal of Financial Economics. My recommendation for the award will actually be a finance professor's paper that made it through the Screening Committee. Sadly we have to go to finance and management science graduates to find our most notable contributions to accounting literature.

This is consistent with Ron's claim that among graduates of accounting doctoral programs "I see a lot more mimicry than innovation among newly minted phds now." Even some of our so-called Seminal Contributions to Accounting Research Award-winning studies mimicked a lot from prior research of economics and finance professors

Thanks to Ron Dye's reply, I'm even more concerned about our doctoral programs in accounting and our leading academic accounting journals --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Thanks for the favor Richard!

Bob Jensen

 

May 3, 2007 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

1.
Students consider many factors before deciding to enter an accounting PhD program, some of them random and/or serendipitous (as in my case; my would-be advisor in Operations Research passed away within four months of my stay in the program). But we need to ask why there are no takers inspite of the astronomical salaries we offer, while outstanding candidates are begging to be admitted into Phd programs in disciplines where tenure-track positions are almost non-existent, or where a doctoral degree is only ticket to years of serfdom as Postdocs.

The simple answer is that our field, AS WE PORTRAY IT, is just not exciting to a young inquiring mind. In accounting there is no Fermat's last theorem to be proved (as in mathematics), nor Hilbert's entscheidungsproblem to be solved (as in Computing), nor the mind-body problem (as in philosophy), nor new chemicals to be synthesised (chemistry), grammar of lost languages to be discovered (anthropology), genes to be targeted (medicine)....

A long time ago, Yuji Ijiri tried to convince us that there were fundamental problems in accounting that are equally challenging. How many of us even remember them today, or even have heard of them?

Most of us have sought to use statistics the same way a drunk uses a lamp post -- more for support than for illumination (apologies to Mark Twain).

I personally think that often, these days, people get into a PhD for a wrong reason, and some times live to regret it.

We accounting academics, especially in the so-called research universities, are living a lie, thanks to AACSB. We portray ourselves as scholars and yet rarely interact with the scholarly community on our campuses. We claim to be academics in a professional discipline and yet hardly interact with the profession in a meaningful way. Aren't we like race horses with blinders on and no jockies?

2.
The shortage of PhD students in non-financial areas is also rigged. We make it clear to the students which side of the toast is buttered. We dump on journals in accounting other than those in the financial area which publish the so-called "mainstream" (I prefer the term stale) research. Then we make life difficult at tenure time for those who have not toed the party line. We tolerate third rate pedagogy as long as it releases time for prima donnas to indulge in stale irrelevant research. Then we squabble over what is "real" research, and why what every one else is doing is not that. Is this a recipe for recruiting young inquiring minds into our discipline?

I left the corporate world in the early seventies because I was fascinated with the problems I had to deal with there (mostly in operations) and the promise that Operations Research offered. Today, however, As someone at the front end of the baby boom generation, I sometimes wonder if, were I shopping today for a PhD program, I would leave the corporate world if my success depended on toeing the party line.

Jagdish

May 13, 2007 reply from Roger Debreceny [Roger@DEBRECENY.COM]

Just a plug for the Shidler PhD program. Given the strategic direction of the Shidler College in international management, our PhD program is somewhat different than the usual program. The program is in International Management, with specializations in accounting, marketing, MIS and so on. Details at http://shidler.hawaii.edu/Programs/Graduate/PhDinInternationalManagement/PhDOverview/tabid/382/Default.aspx . We're always looking for high quality candidates,

Roger Debreceny
Shidler College Distinguished Professor of Accounting
School of Accountancy
Shidler College of Business
University of Hawai`i at Mānoa
2404 Maile Way, Honolulu, HI 96822, USA

roger@debreceny.com     rogersd@hawaii.edu 
Office: +1 808 956 8545 Cell: +1 808 393 1352
www.debreceny.com 

May 13, 2007 reply from Dan Stone, Univ. of Kentucky [dstone@UKY.EDU]

Please add the Univ. of Kentucky to the list of doctoral programs that seek students interested in, and support, a variety of research methods and topics. For example, among the 12 doctoral students in residence currently, we have students pursuing research related to:

1. XBRL

2. Accounting issues related to environmental sustainability 3. Knowledge management in professional service firms 4. Applications of self-determination theory to motivating accounting professionals 5. Accounting methods to aid economic development in emerging economies 6. Corporate social responsibility (CSR) reporting

Information about the Univ. of Kentucky doctoral program is available at:

http://gatton.uky.edu/Programs/ACC/DoctoralDegreeInformation.html

We typically admit 2-3 students per year to the program.

Happy Mother's Day!

Dan Stone (dstone@uky.edu)
Director of Graduate Studies
University of Kentucky

June 12, 2007 reply from doctoral student Randy Kuhn [jkuhn@BUS.UCF.EDU]

Later this week, I will be attending the AAA doctoral consortium held in Tahoe each year as a representative of the University of Central.

Later this week, I will be attending the AAA doctoral consortium held in Tahoe each year as a representative of the University of Central Florida. A few minutes ago I received the message below from one of the professors who will be presenting to the doctoral candidates. Apparently, some of the students attending do not feel his non-archival style of research is worth discussing at the consortium and complained to one of the organizers prompting a well-established professor from an elite private institution to essentially justify his place on the agenda BEFORE we even arrive. I find this behavior not only completely rude and disrespectful but just plain anti-academic from many angles. These folks are complaining about one article out of 21. Should I email the organizer complaining that two-thirds of the material on the agenda is from a neo-classical, efficient markets slant in which I have no interest? My head was spinning in circles for hours trying to grapple with the analytical models that ultimately told me what I already intuitively knew. I’m game for new experiences and will embrace the opportunity to learn about others’ research. Isn’t that what academia is supposed to be about? In the back of my mind I kind of hope one of the complainers is my roommate so I can bore him to tears each night discussing how accounting choices exist, are made by people, are quite often not rational, and have mega impacts to society. Ok enough of my diatribe, see the lengthy note to the consortium participants below.

-Randy

June 12, 2007 reply from doctoral student Randy Kuhn [jkuhn@BUS.UCF.EDU]

Boy, did I misconstrue the original email from the professor. I emailed the professor to express my interest in his subject matter and he responded by stating that he did not mean to imply students had complained negatively about his articles. Rather, several students complained about the overwhelming econometrics-based research on the agenda and lack of diversity in the consortium curriculum. Big oopsy on my part! That is a much brighter situation!

June 12, 2007 reply from Sue P. Ravenscroft [sueraven@IASTATE.EDU]

Randy,

Thanks for the update....I am delighted to hear that doctoral students are finally expressing some dissatisfaction at the constrained nature of what is considered "good" research! As we attempt to replace the retiring professoriate, we need to attract more people, which should mean that we become more catholic in our research approaches, rather than more restrictive.

Sue Ravenscroft

June 12, 2007 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Randy, et al.,

This is encouraging. When I attended the doctoral consortium the only thing that was on the agenda was EMH. The consortium has historically been an avenue for the ideologues (just check out who the faculty at that thing have been over the years). At the one I attended, Sandy Burton was invited for what appeared to be the sole purpose of humiliating him because of his "naïve" beliefs about accounting and security markets (he was invited to be the "normative" that the "positives" aimed to purge from the academy).

The tide may be turning. Given your interests, there are some recent books you might find useful.

Bent Flyvbjerg, "Making Social Science Matter," Cambridge University Press, 2001. Relying on research mainly from cognitive psych and sociology he makes the case that, "Predictive theories and universals cannot be found in the study of human affairs. Concrete, context-dependent knowledge is therefore more valuable than the vain search for predictive theories and universals (p. 73)."

A much better book than The Black Swan is David Orrell's (Oxford U. PhD in mathematics), "The Future of Everything: The Science of Prediction," Thunder's Mouth Press, 2007. Using the phenomena of weather, securities markets, and genetic variablility as examples he argues that complexity makes such phenomena "uncomputable," thus predicting them with mathematical precision is impossible. Those wanting to understand Bob's animus to "accountics" might find this a useful read.

Related, but specific to environmental science is Orrin H. Pilkey and Linda Pilkey-Jarvis, "useless arithmetic: Why Environmental Scientists Can't Predict the Future," Columbia University Press, 2007.

Paul

 

June 13, 2007 reply from Mac Wright [mac.wright@VU.EDU.AU]

Dear Randy, et al.,

Another book which might lend an interesting direction to a discourse on the SEC is Clarke, F., Dean, G., Oliver, K. Corporate Collapse – Accounting, regulatory and ethical failure, Cambridge University Press, Cambridge, 2003.

While directed at the Australian regulatory framework, the argument could be applied with equal validity to the SEC.

Kind regards,
Mac Wright
Co-Ordinator Aviation Program
Victoria University
Melbourne Australia

Fabio's Grad School Rulez (not humor) --- http://orgtheory.wordpress.com/grad-skool-rulz/


GMAT: Paying for Points
Test-prep services can be a big help as applicants prepare for the B-school admissions exam. Here, a rundown of some well-known players
by Francesca Di Meglio
Business Week, May 22, 2007
http://www.businessweek.com/bschools/content/may2007/bs20070522_855049.htm

If you're thinking of applying to B-school, then you're likely also wondering how to conquer the Graduate Management Admission Test (GMAT)—and whether a commercial test-preparation service, which can cost upwards of $1,000, is right for you.

Although admissions committees, even at the best-ranked B-schools, will tell you that your GMAT score is only one of many criteria for getting accepted, you still should plan on earning between 600 and a perfect 800, especially if you're gunning for the A-list. (To find the average and median GMAT scores of accepted students in individual programs, scan the BusinessWeek.com B-school profiles.)

. . .

One popular option is consulting a test-prep company that provides everything from group instruction to online courses. Here's an overview of the most popular GMAT test-preparation services in alphabetical order. For more opinions on the various test-prep services from test takers themselves, visit the BusinessWeek.com B-School forums, where this subject comes up a lot. And you can also check out BusinessWeek.com's newly updated GMAT Prep page --- http://www.businessweek.com/bschools/gmat/

Continued in article

Jensen Comment
The above article then goes on to identify the main commercial players in GMAT coaching for a fee, including those with coaching books, coaching CDs, coaching Websites, coaching courses, and one-on-one coaching tutorials with a supposed expert near where you live. The Business Week capsule summaries are rather nice summaries about options, costs, pros and cons of each coaching option.

Kaplan --- http://www.kaptest.com/

Manhattan GMAT --- http://www.manhattangmat.com/gmat-prep-global-home.cfm

Princeton Review --- http://www.princetonreview.com/mba/default.asp

Veritas --- http://www.veritasprep.com/

Business Week fails to mention one of the better sites (Test Magic) , in my viewpoint, for GMAT, SAT, GRE, and other test coaching:

Advice to students planning to take standardized tests such as the SAT, GRE, GMAT, LSAT, TOEFL, etc.
See Test Magic at http://www.testmagic.com/
There is a forum here where students interested in doctoral programs in business (e.g., accounting and finance) and economics discuss the ins and outs of doctoral programs.

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


 

A scientist in any serious scientific discipline, such as genetics, would be in serious trouble if his fellow scientists were unable to confirm or replicate his claim to have found the gene for fatness. He would gain a reputation as being 'unreliable' and universities would be reluctant to employ him. This self-imposed insistence on rigorous methodology is however missing from contemporary epidemiology; indeed the most striking feature is the insouciance with which epidemiologists announce their findings, as if they do not expect anybody to take them seriously. It would, after all, be a very serious matter if drinking alcohol really did cause breast cancer.
James Le Fanu --- http://www.open2.net/truthwillout/human_genome/article/genome_fanu.htm
Bob Jensen's threads on replication are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication

Natural blondes are going extinct. It's a published fact!
Suppose this study had actually been reported a leading accounting research journal such as The Accounting Review.
Keep in mind that leading accounting research journals do not publish replication studies.
As a result few accounting researchers conduct replication studies since they cannot be published.
The logical deduction becomes that accountants would forever think that natural blondes are going extinct.

From the WSJ Opinion Journal on March 6, 2006

"Media outlets around the world, from CBS, ABC and CNN to the British tabloids" all fell for a hoax--a fake study from the World Health Organization claiming blondes are going extinct.

The Washington Post reported http://www.washingtonpost.com/wp-dyn/articles/A30318-2002Oct1.html
(Actually I think the story was removed with some very red faces)

"The decline and fall of the blonde is most likely being caused by bottle blondes, who researchers believe are more attractive to men than true blondes," said CBS "Early Show" co-host Gretchen Carlson.

"There's a study from the World Health Organization--this is for real--that says that blondes are an endangered species," Charlie Gibson said on "Good Morning America," prompting Diane Sawyer to say she's "going the way of the snail darter." . . .

"We've certainly never conducted any research into the subject," WHO spokeswoman Rebecca Harding said yesterday from Geneva. "It's been impossible to find out where it came from. It just seems like it was a hoax."

The health group traced the story to an account Thursday on a German wire service, which in turn was based on a two-year-old article in the German women's magazine Allegra, which cited a WHO anthropologist. Harding could find no record of such a man working for the WHO.

Hey, if you're a journalist, we've got a great human-interest story for you: Did you hear about the blonde who invented the solar flashlight? --- http://www.zelo.com/blonde/no_brains.asp

Now you see how ridiculous the accounting journal policy of not publishing replications becomes. Hopefully this published story in a leading U.S. newspaper (I mean The Washington Post that broke the Watergate scandal) the next time you read the findings in a leading accounting research journal.


A Fraudulent Paper Published in Nature, a Prestigious Science Journal
Another Case for Better Replication in Research Reporting

"'Grape harvest dates are poor indicators of summer warmth', as well as about scientific publication generally," by Douglas J. Keenan, Informath, November 3, 2006 ---  http://www.informath.org/apprise/a3200.htm 

That is, the authors had developed a method that gave a falsely-high estimate of temperature in 2003 and falsely-low estimates of temperatures in other very warm years. They then used those false estimates to proclaim that 2003 was tremendously warmer than other years.

The above is easy enough to understand. It does not even require any specialist scientific training. So how could the peer reviewers of the paper not have seen it? (Peer reviewers are the scientists who check a paper prior to its publication.) I asked Dr. Chuine what data was sent to Nature, when the paper was submitted to the journal. Dr. Chuine replied, “We never sent data to Nature”.

I have since published a short note that details the above problem (reference below). There are several other problems with the paper of Chuine et al. as well. I have written a brief survey of those (for people with an undergraduate-level background in science). As described in that survey, problems would be obvious to anyone with an appropriate scientific background, even without the data. In other words, the peer reviewers could not have had appropriate background.

What is important here is not the truth or falsity of the assertion of Chuine et al. about Burgundy temperatures. Rather, what is important is that a paper on what is arguably the world's most important scientific topic (global warming) was published in the world's most prestigious scientific journal with essentially no checking of the work prior to publication.

Moreover—and crucially—this lack of checking is not the result of some fluke failures in the publication process. Rather, it is common for researchers to submit papers without supporting data, and it is frequent that peer reviewers do not have the requisite mathematical or statistical skills needed to check the work (medical sciences largely excepted). In other words, the publication of the work of Chuine et al. was due to systemic problems in the scientific publication process.

The systemic nature of the problems indicates that there might be many other scientific papers that, like the paper of Chuine et al., were inappropriately published. Indeed, that is true and I could list numerous examples. The only thing really unusual about the paper of Chuine et al. is that the main problem with it is understandable for people without specialist scientific training. Actually, that is why I decided to publish about it. In many cases of incorrect research the authors will try to hide behind an obfuscating smokescreen of complexity and sophistry. That is not very feasible for Chuine et al. (though the authors did try).

Finally, it is worth noting that Chuine et al. had the data; so they must have known that their conclusions were unfounded. In other words, there is prima facie evidence of scientific fraud. What will happen to the researchers as a result of this? Probably nothing. That is another systemic problem with the scientific publication process.


This is replication doing its job
Purdue University is investigating “extremely serious” concerns about the research of Rusi Taleyarkhan, a professor of nuclear engineering who has published articles saying that he had produced nuclear fusion in a tabletop experiment, The New York Times reported. While the research was published in Science in 2002, the findings have faced increasing skepticism because other scientists have been unable to replicate them. Taleyarkhan did not respond to inquiries from The Times about the investigation.
Inside Higher Ed, March 08, 2006 --- http://www.insidehighered.com/index.php/news/2006/03/08/qt
The New York Times March 9 report is at http://www.nytimes.com/2006/03/08/science/08fusion.html?_r=1&oref=slogin 
 

Question
What is an "out of sample" test?
Hint: It's related to the concept of "replication" that almost seems to be unheard of in academic accounting research?

From Jim Mahar's Blog on June 29, 2006 --- http://financeprofessorblog.blogspot.com/

I am a big fan of so called "out of sample" tests. When researchers find some anomaly within a data set and then others test for the presence in the same data set, we really do not learn much if they find the same thing. But when a new data set is used for the test, we have a much better understanding of the possible anomaly.

In the current JFQA there is just such an article by Richard Grossman and Stephen Shore. Using a data set that goes from 1870 to 1913 for British stocks, the authors find no small firm effect, and only a limited value effect.

In their own words:

 
"Unlike modern CRSP data, stocks that do not pay dividends do not outperform stocks that pay small dividends during this period. But like modern CRSP data, there is a weak relationship between dividend yield and performance for stocks that pay dividends. In sum, the size and reversal anomalies present in modern data are not present in our historical data, while there is some evidence for a value anomaly."
Which makes me wonder how many other things we think we "know" we really don't.

The current version of the paper is not listed on SSRN, but a past version of the paper is available (at least right now) here.

The evidence lies in lack of interest in replication
I wrote the following on December 1, 2004 at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

Faculty interest in a professor’s “academic” research may be greater for a number of reasons. Academic research fits into a methodology that other professors like to hear about and critique. Since academic accounting and finance journals are methodology driven, there is potential benefit from being inspired to conduct a follow up study using the same or similar methods. In contrast, practitioners are more apt to look at relevant (big) problems for which there are no research methods accepted by the top journals.

Accounting Research Farmers Are More Interested in Their Tractors Than in Their Harvests

For a long time I’ve argued that top accounting research journals are just not interested in the relevance of their findings (except in the areas of tax and AIS). If the journals were primarily interested in the findings themselves, they would abandon their policies about not publishing replications of published research findings. If accounting researchers were more interested in relevance, they would conduct more replication studies. In countless instances in our top accounting research journals, the findings themselves just aren’t interesting enough to replicate. This is something that I attacked at http://www.trinity.edu/rjensen/book02q4.htm#Replication

At one point back in the 1980s there was a chance for accounting programs that were becoming “Schools of Accountancy” to become more like law schools and to have their elite professors become more closely aligned with the legal profession. Law schools and top law journals are less concerned about science than they are about case methodology driven by the practice of law. But the elite professors of accounting who already had vested interest in scientific methodology (e.g., positivism) and analytical modeling beat down case methodology. I once heard Bob Kaplan say to an audience that no elite accounting research journal would publish his case research. Science methodologies work great in the natural sciences. They are problematic in the psychology and sociology. They are even more problematic in the professions of accounting, law, journalism/communications, and political “science.”

We often criticize practitioners for ignoring academic research Maybe they are just being smart. I chuckle when I see our heroes in the mathematical theories of economics and finance winning prizes for knocking down theories that were granted earlier prizes (including Nobel prices). The Beta model was the basis for thousands of academic studies, and now the Beta model is a fallen icon. Fama got prizes for showing that capital markets were efficient and then more prizes for showing they were not so “efficient.” In the meantime, investment bankers, stock traders, and mutual funds were just ripping off investors. For a long time, elite accounting researchers could find no “empirical evidence” of widespread earnings management. All they had to do was look up from the computers where their heads were buried.

Few, if any, of the elite “academic” researchers were investigating the dire corruption of the markets themselves that rendered many of the published empirical findings useless.

Academic researchers worship at the feet of Penman and do not even recognize the name of Frank Partnoy or Jim Copeland.

Bob Jensen


Question
In science it is somewhat common for published papers to subsequently be withdrawn because the outcomes could not be replicated. In the history of accounting research has any published paper ever been "withdrawn" or “retracted” because the results could not be replicated?

"Columbia researcher retracts more studies," The New York Times via PhysOrg, June 15, 2006 --- http://www.physorg.com/news69601046.html

A Columbia University researcher has reportedly retracted four more scientific papers because the findings could not be replicated.

Chemistry Professor Dalibor Sames earlier this year retracted two other papers and part of a third published in a scientific journal, The New York Times reported Thursday. All of the papers involved carbon-hydrogen bond activation research.

Although Sames is listed as senior author on all of the papers, one of his former graduate students -- Bengu Sezen -- performed most of the experiments, the Times said.

Sames said each experiment has been repeated by at least two independent scientists who have not been able to replicate the results.

Sezen, a doctoral student in another field at the University of Heidelberg in Germany, disputed the retractions, questioning whether other members of Sames's group had tried to exactly repeat her experiments, the newspaper said.

The retraction of one paper, published in the journal Organic Letters in 2003, appeared Thursday, while the three others published in The Journal of the American Chemical Society in 2002 and 2003 are to be formally retracted later this month, the Times said.

Jensen Comment
What's disappointing and inconsistent is that leading universities pushed accounting research into positivist scientific methods but did not require that findings be verified by independent replication. In fact leading academic accounting research journals discourage replication by their absurd policies of not publishing replications of published research outcomes. They also do not publish commentaries that challenge underlying assumptions of purely analytical research. Hence I like to say that academic accounting researchers became more interested in their tractors than their harvests.

My threads on the dearth of replication/debate and some of the reasons top accounting research journals will not publish replications and commentaries are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Relication 

June 17, 2006 reply from Jagdish S. Gangolly [gangolly@INFOTOC.COM]

Bob,

I have not heard of any one in accounting retracting his/her work. It does not surprise me because of what I see to be the philosophical suppositions of most empirical accounting researchers.

In my opinion, most of us in empirical accounting research are, in many ways, stuck with the philosophical suppositions of late 19th and early 20th century positivists of the Vienna school, the most vocal proponent of the ideas whose work I am familiar with is A.J. Ayer. In his view of the world, a synthetic (that is, not an analytical) sentence must be verifiABLE to be considered a scientific statement, and is added to the stock of science when verified.

The physical sciences have passed by this view, and in fact, in my opinion, regard the latter-day positivist Popperian ideas of falsificationism to be the ideal. Here, a sentence is scientific if it is FalsifIABLE. The stock of sentences that are not repeatedly falsified is science in some sense. Therefore, in most physical sciences, when a statement is falsified (by not being replicable) is treated as nonsense rather than science. For example, when the theory about cold fusion in the Utah experiments met failure in repeated attempts to replicate them, the theory was treated as nonsensical and not scientific.

The unfortunate thing is that verification (or falsification) is misinterpreted by most, since I don't think either Ayer or Popper intended their views to form a theory of meaning.

The above approach has had a whole host of severe critics. My shortlist would include C.S. Peirce, William James, Quine (though a verificationist he did not accept logical positivism), Feyerabend, Davidson, and a bunch of others.

We have twisted the meaning of Popperian as well as Logical positivist thought to consider "scientific propositions" as those "veriFIED" or "not falsiFIED". Philosopher of those schools, on the other hand used veriFIABILITY and falsiFIABILITY as criterion to answer the question whether a proposition is scientific or not. We mistake an epistemic community for a theory of meaning. While it might help reaffirm our belief in our epistemic community to do so, it certainly would not provide our community a resilient philosophical foundation. It also would make us more of a theological community.

Regards to all,

Jagdish

 


My 67th birthday April 30, 2005 commentary on how research in business schools has run full circle  since the 1950s.  We've now completed the circle of virtually no science (long on speculation without rigor) to virtually all science (strong on rigor with irrelevant findings) to criticisms that science is not going to solve our problems that are too complex for rigorous scientific methods.

The U.S. led the way in bringing accounting, finance, and other business education and research into respectability in separate schools or colleges the business (so called B-schools) within top universities of the country.  The movement began in the 1960s and followed later in Europe after leading universities like Harvard, Chicago, Columbia, Chicago, Pennsylvania, UC Berkeley and Stanford showed how such schools could become important sources of cash and respectability. 

A major catalyst for change was the Ford Foundation that put a large amount of money into first the study of business schools and second the funding of doctoral programs and students in business studies.  First came the Ford-Foundation's Gordon and Howell Report (Gordon, R.A., & Howell, J.E. (1959). Higher education for business. New York: Columbia University Press) that investigated the state of business higher education in general.  You can read the following at http://siop.org/tip/backissues/tipoct97/HIGHHO~1.HTM

The Gordon and Howell report, published in 1959, examined the state of business education in the United States. This influential report recommended that managerial and organizational issues be studied in business schools using more rigorous scientific methods. Applied psychologists, well equipped to undertake such an endeavor, were highly sought after by business schools. Today, new psychology Ph.D.s continue to land jobs in business schools. However, we believe that this source of academic employment will be less available in the future because psychologists in the business schools have become well established enough to have their own "off-spring," who hold business Ph.D.s. More business school job ads these days contain the requirement that applicants possess degrees in business administration.

Prior to 1960, business education either took place in economics departments of major universities or in business schools that were viewed as parochial training programs by the more "academic" departments in humanities and sciences where most professors held doctoral degrees.  Business schools in that era had professors rooted in practice who had no doctoral degrees and virtually no research skills.  As a result some universities avoided having business schools altogether and others were ashamed of the ones they had. 

The Gordon and Howell Report concluded that doctoral programs were both insufficient and inadequate for business studies.  Inspired by the Gordon and Howell Report, the Ford Foundation poured millions of dollars into universities that would upgrade doctoral programs for business studies.  I was one of the beneficiaries of this initiative.  Stanford University obtained a great deal of this Ford Foundation money and used a goodly share of that money to attract business doctoral students.  My relatively large fellowship to Stanford (which actually turned into a five-year fellowship for me) afforded me the opportunity to get a PhD in accounting.  The same opportunities were taking place for other business students at major universities around the country.

Another initiative of the Gordon and Howell Report was that doctoral studies in business would entail very little study in business.  Instead the focus would be on building research skills.  In most instances, the business doctoral programs generally sent their students to doctoral studies in other departments in the university.  In my own case, I can only recall having one accounting course at Stanford University.  Instead I was sent to the Mathematics, Statistics, Economics, Psychology, and Engineering (for Operations Research) graduate studies.  It was tough, because in most instances we were thrown into courses to compete head-to-head with doctoral students in those disciplines.  I was even sent to the Political Science Department to study (critically) the current research of Herb Simon and his colleagues at Carnegie Mellon.  That experience taught me that traditional social science researchers were highly skeptical of this new thrust in "business" research. 

Another example of the changing times was at Ohio State University when Tom Burns took command of doctoral students.  OSU took the Stanford approach to an extreme to where accounting doctoral students took virtually all courses outside the College of Business.  The entire thrust was one of building research skills that could then be applied to business problems.

The nature of our academic research journals also changed.  Older journals like The Accounting Review (TAR) became more and more biased and often printed articles that were better suited for journals in operations research, economics, and behavioral science.  Accounting research journal relevance to the profession was spiraling down and down.  I benefited from this bias in the 1960s and 1970s because I found it relatively easy to publish quantitative studies that assumed away the real world and allowed us to play in easier and simpler worlds that we could merely assume existed somewhere in the universe if not on earth.  In fairness, I think that our journal editors today demand more earthly grounding for even our most esoteric research studies.  But in the many papers I published in the 1960s and 1970s, I can only recall one that I think made any sort of practical contribution to the profession of accounting (and the world never noticed that paper published in TAR).

I even got a big head and commenced to think it was mundane to even teach accounting.  In my first university I taught mostly mathematical programming to doctoral students.  When I got a chair at a second university, I taught mathematical programming and computer programming (yes FORTRAN and COBOL) to graduate students.  But my roots were in accounting (as a CPA), my PhD was in accounting (well sort of), and I discovered that the real opportunities for an academic were really in accounting.  The reasons for these opportunities are rooted the various professional attractions of top students to major in accounting and the shortage of doctoral faculty across the world in the field of accountancy.  So I came home so to speak, but I've always been frustrated by the difficulty of making my research relevant to the profession.  If you look at my 75+ published research papers, you will find few contributions to the profession itself.  I'm one of the guilty parties that spend most of my life conducting research of interest to me that had little relevance to the accounting profession.

I was one of those accounting research farmers more interested in my tractors than in my harvests.  Most of my research during my entire career devoted to a study of methods and techniques than on professional problems faced by accounting standard setters, auditors, and business managers.  I didn't want to muck around the real world gathering data from real businesses and real accounting firms.  It was easier to live in assumed worlds or, on occasion, to study student behavior rather than have to go outside the campus. 

What has rooted me to the real world in the past two decades is my teaching.  As contracting became exceedingly complex (e.g., derivative financial instruments and complex financial structurings), I became interested in finding ways of teaching about this contracting and in having students contemplate unsolved problems of how to account for an increasingly complex world of contracts.

In accounting research since the 1950s we've now completed the circle of virtually no science (long on speculation without rigor) to virtually all science (strong on rigor with irrelevant findings) to criticisms that science is not going to solve our problems that are too complex for rigorous scientific methods.  We are also facing increasing hostility from students and the profession that our accounting, finance, and business faculties are really teaching in the wrong departments of our universities --- that our faculties prefer to stay out of touch with people in the business world and ignore the many problems faced in the real world of business and financial reporting.  For more on this I refer you to  http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

Things won’t change as long as our "scientists" control our editorial boards, and they won’t give those up without a huge fight. I’m not sure that even Accounting Horizons (AH) is aimed at practice research at the moment. The rigor hurdles to get into AH are great as of late. Did you compare the thicknesses of the recent AH juxtaposed against the latest Accounting Review? Hold one in each of each in your hands.

What will make this year’s AAA plenary sessions interesting will be to have Katherine defending our economic theorists and Denny Beresford saying “we still don’t get it.” Katherine is now a most interesting case since, in later life, she’s bridging the gap back to practice somewhat. Denny’s an interesting case because he came out of practice into academe only to discover that, like Pogo, “the enemy is us.”

I think what is misleading about the recent HBR article is that focusing more on practice will help us solve our “big” problems. If you look at the contributions of the HBR toward solving these problems in the last 25 years, you will find their contributions are superficial and faddish (e.g., balanced score card). The real problem in accounting (and much of business as well), is that our big problems don’t have practical solutions. I summarize a few of those at http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews 
Note the analogy with “your favorite greens.”

Focusing on practice will help our teaching. We can never say “never” when it comes to research, but I pretty much stand by my claims at http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews 

So what can we conclude from having traveled the whole circle from virtually no scientific method to virtually all scientific method to new calls to back off of scientific method and grub around in the real world?  What do we conclude from facing up to the fact that research rigor and our most pressing problems don't mix?

My recommendation at the moment is to shift the focus from scientific rigor to cleverness and creativity in dealing with our most serious problems.  We should put less emphasis on scientific rigor applied to trivial problems.  We should put more emphasis on clever and creative approaches to our most serious problems.  For example, rather than seek optimal ways to classify complex financial instruments into traditional debt and equity sections on the balance sheet, perhaps we should look into clever ways to report those instruments in non-traditional ways in this new era of electronic communications and multimedia graphics.  Much of my earlier research was spent in applying what is called cluster analysis to classification and aggregation.  I can envision all sorts of possible ways of extending these rudimentary efforts into our new multimedia world.

Bob Jensen on my 67th birthday on April 30, 2005

 


A December 5, 2002 reply from David Stout about the replications thing --- an AAA journal editor’s inside perspective!  

Note that I think that a big policy weakness is that the policy of accounting research journals to not publish confirming replications (even in abstracted form) is that this policy discourages efforts to perform confirming replications.    

But the most serious problem is that the findings themselves may not be interesting enough for researchers to perform replications whether or not those replications will be published. Are the findings so uninteresting that researchers aren’t really interested in seeking truth?

Bob Jensen

-----Original Message-----
From: David E. Stout [mailto:david.stout@villanova.edu]
Sent:
Thursday, December 05, 2002
To: Jensen, Robert
Subject: Re: Are we really interested in truth?

I read through the material you sent (below)--one thing caught my eye: the issue of REPLICATIONS. This is a subject about which I am passionate. When I assumed the editorship of Issues, I had to appear before the AAA Publications Committee to present/defend a plan for the journal during my (then) forthcoming tenure. One of my plans was to institute a "Replications Section" in the journal. (The sad reality, beyond the excellent points you make, is that the lack of replications has a limiting effect on our ability to establish a knowledge base. In short, there are not many things where, on the basis of empirical research, we can draw firm conclusions.) After listening to my presentation, the chair of the Publications Committee posed the following question: "Why would we want to devote precious journal space to that which we already know?" To say the least, I was shocked--a rather stark reality check you might say. The lack of replications precludes us, in a very real sense, from "knowing." 

I applaud your frank comments regarding the whole issue of replications, and their (proper) place within the conduct of "scientific" investigations. You made my day!


------
David E. Stout
Villanova University

 


December 15, 2004 message from Dennis Beresford [dberesfo@TERRY.UGA.EDU

In a recent issue of Golf World, a letter writer was commenting on the need for professional golfers to be more "entertaining."  He went on to say:

"Fans pay top dollar to attend tournaments and to subscribe to cable coverage.  Not many would pay to see an accountant work in his office or watch The Audit Channel."

That's probably a true comment.  On the other hand, wouldn't at least some of us have liked to watch The Audit Channel and see what was being done on Enron, WorldCom, HeathSouth, or some of the other recent interesting situations?

Denny Beresford

December 15, 2004 reply from Bob Jensen

You know better than the rest of us, Denny, that academic accounting researchers won't tune in to watch practitioners on the Audit Channel. They're locked into the SciFi Channel.

Bob Jensen


December 1, 2004 message from Dennis Beresford [dberesfo@TERRY.UGA.EDU
Denny is now a professor of accounting at the University of Georgia.  For ten years he was Chairman of the Financial Accounting Standards Board and is a member of the Accounting Hall of Fame.

I've enjoyed the recent "debate" on AECM relating to the Economist article about the auditing profession.  I'm delighted to see this interest in such professional issues.  But I'm concerned that academic accountants, by and large, aren't nearly enough involved in actually trying to help solve professional issues.  Let me give an illustration, and I'd certainly be interested in reactions.

Last night our Beta Alpha Psi chapter was fortunate to have Jim Copeland as a guest speaker.  Jim retired as the managing partner of Deloitte a couple of years ago and he continues to be a leading voice in the profession through, among other things, his role in chairing a major study by the U.S. Chamber of Commerce on the auditing profession.  Jim also serves as a director of three major corporations and on their audit committees.  In short, he is the kind of person that all students and faculty should be interested in meeting and hearing.

Students turned out in fairly large numbers, as did quite a few practitioners who always are there to further their recruiting efforts.  However, only four faculty members attended (out of a group of about 18) and this included our department head and the BAP advisor, both of whom were pretty much obligated to be there. No PhD students attended.  I'm sure that some faculty members had good excuses but most simply weren't sufficiently interested enough to attend.  Perhaps at some other schools more faculty would have been there but my own experience in speaking to about 100 schools over the years would indicate that this lack of interest is pretty common.

On the other hand, this coming Friday a very young professor from another university will present a research workshop and I expect that nearly all faculty members and PhD students will be there.  The paper being discussed is replete with formulas using dubious (in my humble view) proxies for real world economic matters that can't be observed directly.  The basic conclusion of the paper is that companies are more inclined to give stock options rather than cash compensation because options don't have to be charged to expense.  Somehow I thought that this was a conclusion that was pretty clear to most accountants and business people well before now.

I've heard some faculty members say that they feel obligated to attend such workshops even if they aren't particularly interested in the paper being discussed.  They want to show support for the person who is visiting as well as reinforce the importance of these events to the PhD students.  I certainly understand that thinking and tend to share it.  However, for the life of me I can't understand why faculty members don't feel a similar "obligation" to show respect for a person like Jim Copeland, one of the most important people in the accounting profession in recent years and someone who is making a personal sacrifice to visit our school.

My purpose in this brief note is not to belittle the research paper.  But I simply observe that it would be nice if there were a little more balance between interest in professional matters and such high level research among faculty members at research institutions.  As the Economist article noted, and as should be clear to all of us in the age of Sarbanes-Oxley, etc., there are tremendous issues facing the accounting profession.  Rather than simply complaining about things, it seems to me that academics could become more familiar with professionals and the issues they face and then try to work with them to help resolve those issues.

When is the last time that you called an auditor or corporate accountant and asked him or her to have lunch to just kick around some of the tremendously interesting issues of the day?

Denny Beresford

December 1, 2004 reply from Bob Jensen  (The evidence lies in lack of interest in replication)

Hi Denny,

Jim gave a plenary session at the AAA meetings in Orlando. You may have been in the audience. I thought Jim’s presentation was well received by the audience. He handled himself very well in the follow up Q&A session.

I think academics have some preconceived notions about the auditing “establishment.” They may be surprised at some of the positions taken by leaders of that establishment if they took the time to learn about those positions. I summarized some of Jim’s more controversial statements at http://www.trinity.edu/rjensen/book04q3.htm#090104  
Note that he proposed eliminating the corporate income tax (but he said he hoped none of his former partners were in the audience).

Faculty interest in a professor’s “academic” research may be greater for a number of reasons. Academic research fits into a methodology that other professors like to hear about and critique. Since academic accounting and finance journals are methodology driven, there is potential benefit from being inspired to conduct a follow up study using the same or similar methods. In contrast, practitioners are more apt to look at relevant (big) problems for which there are no research methods accepted by the top journals.

Accounting Research Farmers Are More Interested in Their Tractors Than in Their Harvests

For a long time I’ve argued that top accounting research journals are just not interested in the relevance of their findings (except in the areas of tax and AIS). If the journals were primarily interested in the findings themselves, they would abandon their policies about not publishing replications of published research findings. If accounting researchers were more interested in relevance, they would conduct more replication studies. In countless instances in our top accounting research journals, the findings themselves just aren’t interesting enough to replicate. This is something that I attacked at http://www.trinity.edu/rjensen/book02q4.htm#Replication

At one point back in the 1980s there was a chance for accounting programs that were becoming “Schools of Accountancy” to become more like law schools and to have their elite professors become more closely aligned with the legal profession. Law schools and top law journals are less concerned about science than they are about case methodology driven by the practice of law. But the elite professors of accounting who already had vested interest in scientific methodology (e.g., positivism) and analytical modeling beat down case methodology. I once heard Bob Kaplan say to an audience that no elite accounting research journal would publish his case research. Science methodologies work great in the natural sciences. They are problematic in the psychology and sociology. They are even more problematic in the professions of accounting, law, journalism/communications, and political “science.”

We often criticize practitioners for ignoring academic research Maybe they are just being smart. I chuckle when I see our heroes in the mathematical theories of economics and finance winning prizes for knocking down theories that were granted earlier prizes (including Nobel prices). The Beta model was the basis for thousands of academic studies, and now the Beta model is a fallen icon. Fama got prizes for showing that capital markets were efficient and then more prizes for showing they were not so “efficient.” In the meantime, investment bankers, stock traders, and mutual funds were just ripping off investors. For a long time, elite accounting researchers could find no “empirical evidence” of widespread earnings management. All they had to do was look up from the computers where their heads were buried.

Few, if any, of the elite “academic” researchers were investigating the dire corruption of the markets themselves that rendered many of the published empirical findings useless.

Academic researchers worship at the feet of Penman and do not even recognize the name of Frank Partnoy or Jim Copeland.

Bob Jensen

As you recall, this thread was initiated when Denny Beresford raised concern about the University of Georgia's accounting faculty lack of interest in listening to an on-campus presentation by the recently retired CEO of Deloitte & Touche (Jim Copeland).  A leading faculty member from another major research university raises much the same concern.  Jane F. Mutchler is the J. W. Holloway/Ernst & Young Professor of Accounting at Georgia State University.  She is also the current President of the American Accounting Association.


"President's Message," Accounting Education News, Fall 2004, Page 3.  This is available online to paid subscribers but cannot be copied due to a terrible policy established by the AAA Publications Committee.  Any typos in the following quotation are my own at 4:30 this morning.

I raise these questions because I worry that we are all too quick to blame all the problems on the practitioners.  But we must remember that we were the ones responsible for the education of the practitioners.  And unless we analyze the issues and the questions I raised, I fear that we won't make any changes ourselves.  So it is important that we examine our approaches to the classes we are teaching and ask ourselves if we are doing all we canto assure that our students are being made aware of the pressures they will face in practice and if we are helping them develop the skills they need to appropriately deal with those pressures.  In my mind these issues need to be dealt with in every class we teach.  It will do no good to simply mandate new stand alone ethics courses where issues are examined in isolation.  

Continued in  Jane’s Message to the Membership of the American Accounting Association

December 5, 2004 reply from Stone, Dan [Dan.Stone@UKY.EDU

I enjoyed Denny's commentary on the interplay between accounting research and practice, and, Jane's AAA President's statement on this issue.

A few thoughts:

1. Yes, accounting research is largely, though not entirely, divorced from accounting practice. This is no coincidence or anomaly. It is by design. Large sample, archival, financial accounting research -- which dominates mainstream academic accounting -- is about the role of accounting information in markets. It is not about understanding the institutions and individuals who produce and disseminate this information, or, the technologies that make its production possible. We could have an accounting scholarship takes seriously issues of accounting practice. The US institutional structures of accounting scholarship currently eliminate this possibility. Change these institutional structures and we change accounting scholarship.

2. There is a particular and peculiar hubris of financial accounting academics to assume that all accounting scholarship is, or should be, about financial accounting. Am I reading this into Denny's argument? Am I reading beyond the text here?

The unity model of accounting scholarship increasingly, which says that all accounting scholarship is or should be about financial accounting, is no coincidence or anomaly. It is by design. The top disseminators of accounting scholarship in the US increasingly publish, and the major producers of accounting scholars increasingly produce scholars who know about, only 1 small sub-area of accounting -- financial, archival accounting. Change the institutional structures of the disseminators and the producers and we change accounting scholarship.

Best,

Dan Stone 
Gatton Endowed Chair 
University of Kentucky 
Lexington, Kentucky

December 6, 2004 reply from Paul Williams [williamsp@COMFS1.COM.NCSU.EDU

To add to Dan's observations. He is correct that until we change the structure of the US academy nothing is going to change re practice. As Sara Reiter and I argued (with evidence) in our AOS piece, accounting in the academy has been transformed from an autonomous, professional discipline into a lab practice for a discipline for which lab practices are incidental to the main activity, i.e, accounting is an empirical sub discipline of a sub discipline of a sub discipline for which empirical work is irrelevant. The purpose of scholarship in accounting is now purely instrumental -- to create politically correct academic reputations. 

The powers that be are not interested in accounting research for its intrinsic value or for improving practice broadly understood, but only as a means to enhance their own careers (to get "hits" in the major journals). The profession is not powerless to assist in changing that structure. For example, KPMG funds (or at least used to) the JAR conferences. Stop doing that!! Why subsidize that which is doing you more harm than good? The profession has abandoned the AAA in droves -- in the mid-60s the AAA had nearly 15,000 members, 2/3 of which were practitioners. Now we are approximately 8,000 of which only about 1/7 are practitioners. If practitioners aren't happy about the academy they are not powerless to engage it. 

Bob sent us an excerpt from Jane Mutchler's presidential address suggesting things that should be done. They already have been. At the Critical Perspectives conference in New York in 2002 there were numerous sessions devoted to how academics have failed in their educational responsibilities (someone credentialed Andy Fastow). Do the firms help fund that conference? Of course not -- too left wing. Accounting Education: An International Journal dedicated an entire issue to accounting education after Enron, as has the European Accounting Review. Have any AAA journals done so? The insularity of the US academy is evident in that Jane doesn't seem aware that there already has been significant activity for at least the last three years, but none of it as visible as that which is promoted by AAA. Let's have genuine debates in Horizons where others besides those vetted for political correctness are permitted to speak to the issues. 

Let me remind you of the Briloff affair -- Abe wrote a piece for Horizons critical of the COSO report. Abe argued that the "problem" was not just small firms with small auditors. Was Abe right? Less than two years after he wrote that article we had Enron, WorldCom, Tyco, Andersen's implosion, etc. See the special issue of Critical Perspectives on Accounting, "AAA, Inc." to see first hand how the structure of the academy handles candid discussion of the profession's problems. If people aren't happy with the way the AAA manages the academy, they are not powerless to change it. The structure stays the same because of the apathy of the membership. It only takes 100 signatures to challenge for an AAA office. Since less than 100 people bother to vote (out of 8,000) it wouldn't take much effort for someone with the resources to effect significant changes. Denny could get his colleagues' attention and get them interested in attending his guests' talks by running for president of AAA -- I will gladly sign his petition to be put on the ballot for 2005. That will shake them up! Change won't happen unless enough members of the academy recognize that we have some very real, serious problems that require candid, adult conversation and a willingness to accept responsibility. 

Realize that there are more of us than there are of them (that is the whole idea of the current structure - to keep the number of them very, very small). Change the executive committee, select editors of the AAA journals that aren't committed to the narrow notion of rigor that now predominates and, as Dan says, things will change. There are plenty of qualified, thoughtful people who could manage an academy more dedicated to the practice of accounting (in all its many manifestations besides financial reporting, likely the most insignificant of accounting's functions). It just takes people with the political and financial leverage to put their efforts into altering that intellectually oppressive structure. PFW

December 1, 2004 reply from Jagdish Gangolly [JGangolly@UAMAIL.ALBANY.EDU

I could not agree more. May be most "top" journals suffer a case of "analysis paralysis". In a practical field such as accounting, how do we know what relevant problems are if we have little contact with the real world (and I would not count sporadic consulting as contact).

There are ways in which the academia and industry mingle in a meaningful way. In the areas I am interested in (computationally oriented work in information systems and auditing), for example, I have found a very healthy relationship between the academia and industry, and in fact far more exciting research reported in computing journals during the past three years than in accounting/auditing journals during the past 30. (I can think of work in computational auditing done by folks at Eindhoven and Delloitte & Touche; work on role-based access control at George Mason and Singlesignonnet, work on formal models of accounting systems as discrete dynamical systems done also at Delloitte and Eindhoven, work on interface of formal models of accounting systems and back-end databases done at Promatis and Goethe-Universität Frankfurt & University of Karlsruhe, to name just a few). In fact it has got to a point where I attend AAA meetings only to meet old friends and have a good time, and not for intellectual stimulation. For that, I go to computing meetings.

The reason for the schism between academia and the profession in accounting, in my opinion, is the almost total lack of accountability in academic accounting research. Once the control of "academic" journals have been wrested, research is pursued not even for its own sake, but for the preservation of control and perpetuation of ones genes. We have not had a Kuhnian paradigm shift for close to 40 years in accounting, because we haven't found the need for anomalies. We use "academic" journals the same way that the proverbial Mark Twain's drunk uses a lamp post, more for support than for illumination.

Respectfully submitted,

Jagdish

December 1, 2004 reply from Paul Williams [williamsp@COMFS1.COM.NCSU.EDU

Bob is right that the accounting academy in the US (not so much the rest of the world) is driven mainly by the interests of methidoliters -- those that suffer from a terminal case of what McCloskey described as the poverty of economic modernism. Sara Reiter and I had a study published in AOS last summer that included an analysis of the rhetorical behavior of the JAR conferences through time to see if the discursive practices of the "leading" forum were conducive to progressive critique -- all sciences "advance" via destruction -- received wisdom is constantly under assault. When the JAR conferences started practiioners and scholars from other disciplines like law and sociology were invited to participate. These were the people that asked the most troublesome questions, the ones who provided the most enervating critique. How did the geniuses at JAR deal with the problem of heretics in the temple? They simply stopped inviting practitioners and scholars from other disciplines. The academy in the US is an exceedingly closed society of only true believers. Accounting academics are now more interested in trying to prove that an imaginary world is real, rather than confront a world too messy for the methods (and, it must be noted, moral and political commitments) to which they unshakeably devoted REGARDLESS OF WHAT THE EMPIRICAL EVIDENCE SAYS! (As Bob notes, who in their right mind can still say market efficiency without a smirk on their face. The stock exchange, after all, has members. Does anyone know of any group of "members" that writes the rules of the organization to benefit others equally to themselves? Invisible hands, my a..)

But it must be said the profession is not without guilt in all of this. I avoid listening to big shots from the Big 4 myself because they are as predictable as Jerry Falwell. Accountants have a license, which is a privilege granted to them by the public to serve the broad society of which they are citizens. But whenever you hear them speak, all they do is whine about the evils of government regulation, the onerous burden of taxes on the wealthy (I have never heard a partner of a Big 4 firm complain that taxes were too regressive); they simply parrot the shiboleths that underlay the methodologies of academics. No profession has failed as spectacularly as accounting has just done. If medicine performed as poorly as public accounting has just done in fulfilling its public responsibilities, there would be doctor swinging from every tree. Spectacular audit failures, tax evasion schemes for only the wealthiest people on the planet, liability caps, off-shore incorporation, fraud, etc., a profession up to its neck in the corruption that Bob mentioned. But have we heard one word of contrition from this profession? Has it dedicated itself to adopting the skeptical posture toward its "clients" required of anyone who wants to do a thorough audit? Don't think so. All we still hear is the problem ain't us, it all those corrupt politicians, etc. (Who corrupted them?). And PWC has the gall to run ads about a chief courage officer -- do these guys have no shame? If the profession wants to engage with the academy with an open mind and the courage to hear the truth about itself, the courage to really want to become a learned profession (which it isn't now), then maybe we could get somewhere. But for now, both sides are comfortable where they are -- the chasm serves both of their exceedingly narrow interests. 

There are now 7 volumes of Carl's essays. Thanks to Yuji Ijiri's efforts, the AAA published the first 5 volumes as Studies in Accounting Research #22, Essays in Accounting Theory. A sixth volume, edited by Harvey Hendrickson, Carl Thomas Devine Essays in Accounting Theory: A Capstone was published by Garland Publishing in 1999. A seventh volume was being edited by Harvey when he died. I was asked to finish Harvey's work and that volume, Accounting Theory: Essays by Carl Thomas Devine has been published by Routledge, 2004. Carl also had a collection of Readings in Accounting Theory he compiled mainly for his teaching during his stint in Indonesia (I think). Those were mimeographed as well, but, to my knowledge, have never been published. I have copies of those 4 volumes but their condition is not good -- paper is yellowed and brittle. Thoughtful, curious, imaginative, humble, and kind -- we don't see the likes of Carl much anymore. His daughter Beth told me that he even approach his death with the same vibrant intellectual curiousity he brought to everything. 

PFW

December 6, 2004 reply from Ed Scribner [escribne@NMSU.EDU

Seems to me that most folks on this list take a pretty harsh view of the accounting research "establishment" for being closed, methodology-driven, irrelevant to practice, self-serving, and just generally in the wrong paradigm. Yet I see things like the following in the JAR and the AR that appear relevant and "practice-oriented" to me.

--- Journal of Accounting Research, Volume 42: Issue 3 "Auditor Independence, Non-Audit Services, and Restatements: Was the U.S. Government Right?"

Abstract Do fees for non-audit services compromise auditor's independence and result in reduced quality of financial reporting? The Sarbanes-Oxley Act of 2002 presumes that some fees do and bans these services for audit clients. Also, some registrants voluntarily restrict their audit firms from providing legally permitted non-audit services. Assuming that restatements of previously issued financial statements reflect low-quality financial reporting, we investigate detailed fees for restating registrants for 1995 to 2000 and for similar nonrestating registrants. We do not find a statistically significant positive association between fees for either financial information systems design and implementation or internal audit services and restatements, but we do find some such association for unspecified non-audit services and restatements. We find a significant negative association between tax services fees and restatements, consistent with net benefits from acquiring tax services from a registrant's audit firm. The significant associations are driven primarily by larger registrants.

---

I also see articles on topics other than financial accounting. Are these just window-dressing?

Journal editors are always saying that they want work that has "policy implications." Yet it seems to me that important questions in accounting tend to be more complicated than, "Does this medication cause nausea in the control group?" Tough questions are tough to address rigorously.

What are some examples of specific questions (susceptible to rigorous research) that academia should be addressing but is not?

Ed "Paton's Advocate" (am I alone?)

P.S. Many years ago a senior faculty member told me the "top" journals were a closed society, and hitting them was a matter of whom you knew. I made some naïve reply to the effect that the top journals reflected the best work--"the cream rises to the top." Next morning I found in my mailbox photocopies of the tables of contents of then-recent JARs, along with the editorial board, with lines drawn connecting names on the board with names of authors, as if it were a "matching question" on an exam.

December 1, 2004 reply from Bob Jensen

Hi Paul,

During one of the early JAR conferences that I attended had an assistant professor present a behavioral research study. A noted psychologist, also from the University of Chicago, Sel Becker, was assigned to critique the paper.

Sel got up and announced words to the affect that this garbage wasn't worth discussing.

I'm not condoning the undiplomatic way Sel treated a colleague. But this does support your argument as to why experts from other disciplines were no longer invited to future JAR conferences.

Bob Jensen

December 1, 2004 reply from Roger Collins [rcollins@CARIBOO.BC.CA

Paul makes some excellent points. Sociologists are interesting to listen to because they tend to get folks' backs up (and if they didn't want to do that they probably wouldn't be sociologists in the first place). That's especially the case in accounting where both the profession and the academics are (with notable exceptions) hidebound in their own way.  If you want a new perspective on things, get a sociologist to comment, throw away any half of what's been said and the remainder will still be an interesting pathway to further thought, whichever half you choose.

The scorn that certain academics in other areas show for accounting academics (and indeed, business academics in general) may be justified (sometimes? often?)- but no-one ever built bridges out of scorn. I think that if Sel Becker was really interested in advancing the cause of academic enquiry he would have figured out that whatever was going on was, from his point of view, an immature contribution and taken the time to give his views on the gap between the contribution and the issues he considered important, and identify some "road map" to move from one position to another.

But then, Sel is a "big, important" person. (From what I can gather), instead of taking a little time to build bridges he indulged in a spot of academic tribalism. Trashing a colleagues paper (isn't that something a noted member of the Rochester School was famous for?) is cheap in terms of effort and may generate some petty self-satisfaction; it may even be justified if the presenter is arrogant in turn -but again, arrogance is a destroyer rather than a builder.

On the other hand, the JAR reaction is just as bad if not worse.  Closing one's ears to criticism will only lead to the prettification of the academy; the dogmatists will have won.

Question - is there a way of enticing the various parties out of their bunkers ? If there is, what are the chances that the "generals" of the profession and academia won't use their power to squash the proposals of the "subalterns" ?

Some years ago a University of Alberta prof. had the temerity to suggest that the local oil companies' financial statements weren't all that they should have been. He was promptly jumped on from every direction. Why ? I suspect, because there is a general (not inevitably true) assumption that business schools are the "cash cows" of the university, and other academics tolerate them on that basis. (Nowadays, pharmaceutical research departments seem to be vying for that label). Maybe the only way out is poverty; poor accounting profs will have less to lose and more reason to explore..

Regards - tongue partly in cheek,

Roger Roger Collins 
UCC (soon to be TRU) School of Business.

December 2, 2004 reply from Paul Williams [williamsp@COMFS1.COM.NCSU.EDU

How do we bridge the chasm?

Good question. We won't be able to do that in the US until we change the structure of the AAA. I was on Council when the great debate over Accounting Horizons occurred. Jerry Searfoss, a person who served time on both sides of the chasm, was a vigorous proponent for creating a medium through which academe and practice could communicate. If you peruse the editorial board of the first issues of Horizons, it reflected this eclectic approach to scholarship. What happened to it? Look at Horizons now. Its editorial board looks just like the editorial board at The Accounting Review and its editor is a University of Chicago PhD! The AAA has a particular structure -- an organizational culture that reproduces itself generation after generation. Horizons, as originally conceived by people like Searfoss, Sack, Mautz, etc., posed a threat to the overwhelmingly anal retentive, ideological commitments (the shadow of William Paton still chills the intellectual climate of the US academy) of the organization. Anti-bodies were quickly mobilized and, voila, Horizons looks just like TAR (two years ago a plan to eliminate Horizons and Issues and roll them into one ill-defined journal was proposed). This body will protect itself at all costs (even declining membership, banal research, etc. will not dissuade them from jumping over the cliff). 

The only way to change that is to create a structure that fosters a place where Sel Beckers and Big 4 partners can say what they have to say IN PRINT and be forced to defend it as often as the Dopuchs, Demskis, Watts and Zimmermans, and Schippers of the world (who never have to defend themselves in print). That will only happen when the selection of executive committees, editors, etc. is democratic. As long as the Politburo structure of the AAA exists and the culture of fear and suspicion of ideas remains, nothing will change. Good models for what the journals should look like are the proceedings of conferences like Tinker's Critical Perspectives conference, Lee Parker's APIRA, and the IPA sponsored by Manchester. Those conferences are so much more exhilirating than the AAA meetings. I'm like Jagdish -- I go to AAA to see old friends and work for the Public Interest Section. The "technical" sessions are of little interest. When the AAA gives Seminal Contribution Awards to "contributions" lifted wholesale from the radical Lockean/monetarist wing of economics, how can you take such an organization seriously. This is particularly true when there are genuinely seminal contributions possessed by the discipline itself, e.g., Ijiri's work, Paton's Accounting Theory, Andy Stredry's budget work, Bill Cooper's QM applications, Sterling/Edwards and Bell/Chambers, etc. (the copyrights on these tell you how long it has been since accounting acted like an autonomous discipline!). 

PFW

December 2 reply from Paul Williams (after a request that he elaborate on Bill Paton)

While Carl Devine was still alive, I used to visit him whenever I could. When Jacci Rodgers and I did our work on editorial boards at The Accounting Review I consulted Carl about how the review process worked at TAR since the first time TAR published the members of an editorial board was 1967 (I beleive). According to Carl, Paton edited TAR for many years after its founding via a process that was, shall we say, less than transparent. According to Carl, Paton and Littleton between them virtually hand picked the AAA presidents for years. You can see a pattern of early presidencies -- one president not from one of the elite 15, then two from, then one, etc. This encouraged the illusion that the AAA was open to everyone, but in fact it was pretty tightly controlled. Now there is no attempt whatsoever to create the illusion of an open organization -- every president for the last 30 years (save one or two) is an elite school grad. It was never permitted to veer too far from the nucleus of schools that founded it. 

Everyone should be familiar with Paton's politics -- he was conservative in the extreme (he published a book that was a rather rabid screed on the evils of Fabian socialism). There were competing root metaphors for accounting during the era of Paton, e.g., the institutionalism of DR Scott (whose spin on the role of accounting seems prescient now that we have a few years separating us from him), there was the accounting as fulfilling social needs of Littleton etc. But what clearly has emerged triumphant was the radical free market ideology of Paton. So, even though accounting seems clearly part of the regulatory apparatus and part of the justice system in the US, the language we use to talk about what accountants are for is mainly that of efficent markets, rational economic actors, etc. No wonder Brian West is able to build such a persuasive case that accounting currently has no coherent cognitive foundation, thus, is not a "learned" profession. Accounting enables market functions in a world of economic competitors whose actions are harmoniously coordinated by the magic fingers of invisible hands (a metaphor that Adam Smith didn't set too much stock in -- it was merely an off-hand remark to which he never returned). Carl Devine has a very useful essay in Essays in Accounting theory, volume six, edited by Harvey Hendrickson (Garland) where he provides an insightful analysis of the contributions to theory of those persons of his generation and his generation of mentors (he particularly admired Mattesich.) 

Carl noted that Paton was a very effective rhetorician, so was perhaps more influential than his ideas really merited (like the relative influence of the contemporaries Malthus and Ricardo; Ricardo, the much better writer overshadowed Malthus in their day). Paton influenced a disproportionate number of the next generation of accounting academics; he was, after all, a classicaly trained economist. 

There is, in my view, absolutely no compelling reason why accountants should be the least bit concerned with new classical economic theory, but Paton, because of his influence, set the US academy on a path that brings us to where we are today. It is an interesting thought experiment (ala Trevor Gambling's buddhist accounting) to imagine what we would be doing and talking about if we had taken the institutionalists, or Ijiri's legal imagery more seriously. But, as they say here in NC, "It is what it is." 

PFW

December 2, 2004 reply from Bob Jensen

Bill Paton was all-powerful on the Michigan campus and was considered an economist as well as an accountant.  For a time under his power, a basic course in accounting was in the common core for all majors.  One of the most noted books advocating historical cost is called Introduction to Corporate Accounting Standards by William Paton and A.C. Littleton (Sarasota:  American Accounting Association, 1940).  Probably no single book has ever had so much influence or is more widely cited in accounting literature than this thin book by Paton and Littleton .  See http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#UnderlyingBases

Later on Paton changed horses and was apologetic about once being such a strong advocate of historical cost.  He subsequently favored fair value accounting, while his co-author clung to historical cost.  However, Paton never became widely known as a valuation theorist compared to the likes of Edwards, Bell , Canning, Chambers, and Sterling .  (In case you did not know this, former FASB Board Member and SEC Chief Accountant Walter Scheutz is also a long-time advocate of fair value accounting.)

You can read about the Hall of Fame’s Bill Paton at
 http://fisher.osu.edu/Departments/Accounting-and-MIS/Hall-of-Fame/Membership-in-Hall/William-A.-Paton 

Bob Jensen

December 2, 2004 reply from Jagdish Gangolly [JGangolly@UAMAIL.ALBANY.EDU

My earlier posts unfortunately may have implied that every onbe I mentioned continued to be a historical cost advocate -- that is not true. Paton changed his mind, as Bob mentioned.

The point I was trying to make there was the approach to theory building in accounting (something that crudely initates the axiomatic approach) that Paton essentially started. However, Paton had a "theory" in the sense of a set of axioms, but no theorems. In other words it was a sort of laundry list of axioms with out a detailed study of their collective implications (this is what struck me most while I was a student, but that might have been my problem since I came to accounting via applied mathematics/statistics). In fact most of the work of Paton & Littleton, Ijiri, Sprouse & Moonitz,... never really followed through their thoughts to their logical conclusions. One reason might have been that they did not really state their axioms in logic. Mattesich, as I understand, went a bit further, but he must have realised that a field like accounting where most sentences are deontic (normative, stated in English sentences in the imperative mood) rather than alethic (descriptive, stated in English sentences in the indicative mood). In normative systems, as even Hans Kelsen has admitted, there is no concept of truth and therefore logical deduction as we know it is not possible.

I think this becomes clear in one of the later books of Mattesich on Instrumental Reasoning (all but ignored by accountants because it is more philosophical, but in my opinion one of his most fascinating works).

I would not put Paul Grady, Carman Blough,... in the same group. For Paul Grady, for example, accounting "principles" were no more than a grab bag of mundane rules.

Leonard Spacek, one of my heroes, on the other hand, tried to emphasize accounting as communication of rights people had to resources UNDER LAW. He also emphasized fairness as an objective.

One reason for this chasm between practice and academia is that almost all practice is normatively based, whereas in the academia in accounting, for the past 40 years we have cared just about only for descriptive work of the naive positivist kind.

I hate peddling my work, but those interested might like to take a look at an old paper of mine (I consider it the best that I ever wrote) where some of these issues are discussed :

Generally Accepted Accounting Principles: Perspectives from Philosophy of Law, J. Gangolly & M. Hussein Critical Perspectives on Accounting, vol. 7 (1996), pp. 383-407.

I think we need to realise that we are not the only discipline that has gone astray from the original lofty goals.

Consider economics in the United States. In Britain, at least till the 70s (I haven't kept in touch since then), it was considered important that Economics teaching devoid of political and philosophical discussions was some how deficient; probably the main reason popular Oxford undergraduate major is PPE (Politics, Philosophy, Economics, with Economics taking the third seat). Specially in the US, attempts to make Economics value-free (wertfrei) have, to an extent also succeeded in making it a bit sterile. In his critique of Ludwig von Mises, Murray Rothbard ("Praxeology, Value Judgments, and Public Policy") states:

"The trouble is that most economists burn to make ethical pronouncements and to advocate political policies - to say, in effect, that policy X is "good" and policy Y "bad." Properly, an economist may only make such pronouncements in one of two ways: either (1) to insert his own arbitrary, ad hoc personal value judgments and advocate policy on that basis; or (2) to develop and defend a coherent ethical system and make his pronouncement, not as an economist, but as an ethicist, who also uses the data of economic science."

Or, that Economics is the "value-free handmaiden of ethics".

In accounting too, the positivists have worked hard over the past forty years or so to make it pretentiously value-free (remember disparaging references to non-descriptive work, and Carl Nelson's virtual jihad to rid accounting of "fairness" as an objective?). The result has been that it is perhaps not unfair to speak of "fair" in the audit reports just cheap talk.

Renaissance in accounting will come only when we look as much at Politics and Law as at Economics to inspire research.

Jagdish

December 3, 2004 reply from Paul Williams

For many subscribers this thread may have started to fray; to them I apologize, but I have to chime in to add a contrarian view to Bob's contention that Paton, Edwards and Bell ,etc. were advocates of fair value accounting. Fair value accounting is (in my view) a classic case of eliding into a use of a concept as if it were what we traditionally understood it to be while radically redefining it (see Feyerabend's analysis of Galileo's use of this same ploy). None of the early theorists were proponents of fair value accounting. 

They may have been advocates of replacement cost or opportunity cost, but never of "fair value," which is a purely hypothetical number generated through heroic assumptions about an undivinable future. As Carl Devine famously said, "No one has ever learned anything from the future." All subscribed to the principle that accounting should report only what actually occurred during a period of time -- this was the essence of E&B's argument that accounting data are for evaluating decisions; its value lies in its value as feedback and accounting data, therefore, categorically should not be generated on assumptions about the outcomes resulting from decisions that have already been made. The significant accomplishment of these theorists was to provide a defense of accounting's avoidance of subjective values. i.e., the accounting was in its essence objective (anyone remember Five 

Monographs on Business Income, particularly Sidney Alexander's critique of accounting measures of profit?). Now we accept seemingly without question the radical transformation of accounting affected by FASB to a system of nearly exclusively subjective values, i.e., your guess is as good as mine. In spite of the optimism people seem to express, we have no technology (nor would a believer in rational expectations theory ever expect there to be) that can divine the economic future. Perhaps a renaissance of some of these old ideas is overdo. I believe it was Clarence Darrow who opined that "Contempt for law is brought about by law making itself ridiculous." As writers of LAW (kudos to Jagdish's paper) the FASB seems to make accounting more ridiculous by the day.

 PFW

December 3, 2004 reply from David Fordham

For those who don't know, Paul is an FSU alum, and Bob is a former Seminole, too, although they pre-dated me and may have had some professional interaction with Carl Devine. ...

David Fordham

December 3, 2004 reply from Bob Jensen

Hi David,

I arrived on the faculty at FSU in 1978. Carl was a recluse for all practical purposes. I don' think anybody had contact with him except a very devoted Ed McIntyre. Paul Williams was very close to Ed and may also have had some contact.  (Paul later reminded me that Carl grew interested in discussing newer directions with Ed Arrington.)

I think Carl was still actively writing and to the walls. His labor of love may have been lost if Ed and Paul didn't strive to share Carl's writings with the world. Carl was a classic scholar who'd lived most of his life in libraries.

Carl could've added a great deal to our intellectual growth and historical foundations if he participated in some of our seminars. He was a renaissance scholar.

It would've been interesting to know how Carl's behavior might've changed in the era of email. Scholars who asked him challenging questions might've gotten lengthy replies (Carl was not concise) that he would not provide face-to-face.

Bob Jensen

Decemeber 3, 2004 reply from Mclelland, Malcolm J [mjmclell@INDIANA.EDU

It almost seems there's a consensus on the AECM listserv on all this! Given the widespread interest and existng intellectual wherewithal among AECMs to do it, maybe it's time to start up the "Journal of Neo-Classical Accounting Theory"? Revisiting Edwards, Bell, Sterling, Chambers, Paton, et al. certainly seems worthwhile; especially if it can be fit into or reconciled with the more recent literature in accounting and finance.

Best regards,

Malcolm

Malcolm J. McLelland, Ph.D. 
mjmclell@indiana.edu
  
website: http://www.uic.edu/~mclellan  
research: http://ssrn.com/author=154711 

December 1, 2004 reply from Glen Gray [glen.gray@CSUN.EDU]

Your story does surprise me. A few years ago I convinced Barry Melancon (President) and Louis Matherne (at that time, Director of IT) from the AICPA to come to L.A. and speak at a dinner meeting of the L.A. chapter of the California Society of CPAs. The meeting was at UCLA, not my campus, however, the chapter offered to waive the $35 dinner charge for any CSUN faculty who want to attend. Other than myself, one (out of about 20) other faculty member attended the dinner. I asked some of the faculty members why they did not attend. The most common answer was something like “We know what he (Barry) is going to say—use more computers in your accounting courses.”

December 1, 2004 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU

Two thoughts in response:

First, I agree with the gist of your sentiment. Hanging around real world accountants can inform both our teaching and research, and most of us underinvest in such activities.

Second, the effect of "citizenship" considerations looks like an easy cost-benefit tradeoff to me. Seminars are attended only by faculty and doctoral students, so one's presence in the room is more noticable for a research seminar than a presentation attended by lots of undergraduates. Furthermore, the personal cost of attending a daytime event is much less than a nightime event. So if one is driven by citizenship considerations, I expect many more faculty to attend the daytime research seminar than the nightime practitioner presentation.

Richard C. Sansing 
Associate Professor of Business Administration 
Tuck School of Business at Dartmouth 
 
email: Richard.C.Sansing@dartmouth.edu

December 1, 2004 reply from Chuck Pier [texcap@HOTMAIL.COM]

Dennis,

I think that you have put your finger on, or maybe stumbled onto, one of the major splits in academic accounting today. You happen to be looking at this situation from one of the "research" universities. Most all of us (I use the term "us" to refer to academic accountants) have been associated with a research university. However, many of us have only been there as students during our doctoral studies. These universities place heavy premiums on both their faculties and students for what we call "basic research" that is quite replete with formulas and theories and the like. Faculty are tenured, promoted and financially rewarded to produce cutting edge research that is published in the top journals, and doctoral students are judged on their ability to analyze and conduct similar research.

On the other hand, many of "us" teach in "teaching universities" that place more emphasis on teaching and "professional" research. In other words, research that has a direct application to either the accounting profession or the teaching of accounting. There is usually not a penalty exerted on those who chose to do the more academic research, but there is also not any special rewartds for that research either.

I feel that many of "us" at teaching schools attend the lectures that you describe with a lot more regularity than your experience at your university. For example, at my school we have a weekly meeting during the fall of our Beta Alpha Psi chapter that inculeds a presentation on a topic by one of the firms in our area. These firms include all of the big four, as well as other national, regional, and local firms. The presentations run the gamut from interview techniques for the students to the latest updates on SOX or forensic accounting. As with any sample, some are better than others and many are appropriate to just the students. Despite the uneveness of the presentations I would estimate that at least 80% of our tenure track faculty are at each meeting, with the missing 20% having some other engagement and unable to attend. There is not a single member of our faculty that routinely does not attend. These meetings are not mandatory, but most of us feel that it supports both or students and the presenters, who hire our students to attend.

I am not trying to indite or point fingers at either side of the academic accounting community but it is obvious that we each have separate priorities. I for one chose the institution that I am at for the very reason that we do have a heavy emphasis on the practioneer and the undergraduate student. I know that many would abhor what I do and could not picture themselves here. They, like me have decided what they like and what they are best suited for. I do feel that at times we who are not at the big research schools feel that we are overlooked, but I wouldn't trade my place with anyone else. I think that I am providing a good service and enjoy the opportunities that it presents.

Chuck

December 3, 2004 reply from Robin A Alexander [alexande.robi@UWLAX.EDU

Interesting. I too came from a math background and finally realized there was no accounting theory in the scientific sense. I also came to suspect it was not a system of measurement either because to be so, there has to be something to measure independent of the measuring tool. Rather it seemed to me accounting defined, for instance, income rather than measured it.

Robin Alexander 

December 3, 2004 reply from Bob Jensen

Hi Robin,

I think the distinction lies not so much on "independence" of the measuring tool as it does on behavior induced by the measurements themselves, although this may be what you had in mind in your message to us.

Scientists measure the distance to the moon without fear that behavior of either the earth or the moon will be affected by the measurement process. There may some indirect behavioral impacts such as when designing fuel tanks for a rocket to the moon. In natural science, except for quantum mechanics, the measurers cannot re-define the distance to the moon for purposes of being able to design smaller fuel tanks.

In economics, and social science in general, behavior resulting from measurements is often more impacted by the definition of measurement itself. Changed definitions of inflation or a consumer price index might result in wealth transfers between economic sectors. Plus there is the added problem that measurements in the social sciences are generally less precise and stable, e.g., when people change behavior just because they have been "measured" or diagnosed.

Similarly in accounting, changed definitions of what goes into things like revenue, eps, asset values, and debt values may lead to wealth transfers. The Silicon Valley executives certainly believe that lowering eps by booking stock options will affect share prices vis-a-vis merely disclosing the same information in a footnote rather than as a booked expense. Virtually all earnings management efforts on the part of managers hinges on the notion that accounting outcomes affect wealth transfers. In fact if they did not do so, there probably would not be much interest in accounting numbers See "Toting Up Stock Options," by Frederick Rose, Stanford Business, November 2004, pp. 21 --- http://www.gsb.stanford.edu/news/bmag/sbsm0411/feature_stockoptions.shtml

Early accounting theorists such as Paton, Littleton, Hatfield, Edwards, Bell, Chambers, etc. generally believed there was some kind of optimal set of definitions that could be deduced without scientifically linking possible wealth transfers to particular definitions. And it is doubtful that subsequent events studies in capital market empiricism will ever solve that problem because human behavior itself is too adaptive. Academic researchers are still seeking to link behavior with accounting numbers, but they're often viewed as chasing moving windmills with lances thrust forward.

Auditors are more concerned about being faithful to the definitions. If the definition says book all leases that meet the FAS 13 criteria for a capital lease, then leases that meet those tests should not have been accounted for as operating leases. The audit mission is to do or die, not to question why. The FASB and other standard setters are supposed to question why. But they are often more impacted by the behavior of the preparers than the users. The behavior of preparers trying to circumvent accounting standards seems to have more bearing than the resulting impacts on wealth transfers that defy being built into a conceptual framework. Where science fails accounting in this regard is that the wealth transfer process is just too complicated to model except in the case of blatant fraud that lines the pockets of a villain.

It is not surprising that accounting "theory" has plummeted in terms of books and curricula. Theory debates never seem to go anywhere beyond unsupportable conjectures. I teach a theory course, but it has degenerated to one of studying intangibles and how preparers design complex contracts such as hedging and SPE contracts that challenge students into thinking how these contracts should be accounted for given our existing standards like FAS 133 and FIN 46. One course that I would someday like to teach is to design a new standard (such as a new FAS 133) and then predict how preparers would change behavior and contracting. Unfortunately my students are not interested in wild blue yonder conjectures. The CPA exam is on their minds no matter where I try to fly. They tolerate "theory" only to the point where they are also learning about existing standards. In their minds, any financial accounting course beyond intermediate should simply be an extension of intermediate accounting.

Bob Jensen


"The Accounting Cycle:  The Conceptual Framework for Financial Reporting Op/Ed,"  by J. Edward Ketz, SmartPros, September 2006 --- http://accounting.smartpros.com/x54322.xml 

The Financial Accounting Standards Board and the International Accounting Standards Board have joined forces to flesh out a common conceptual framework. Recently they issued some preliminary views on the "objectives of financial reporting" and the "qualitative characteristics of decision-useful financial reporting information" and have asked for comment.

To obtain "coherent financial reporting," the boards feel that they need "a framework that is sound, comprehensive, and internally consistent" (paragraph P3). In P5, they also state their hope for convergence between U.S. and international accounting standards.

P6 indicates a need to fill in certain gaps, such as a "robust concept of a reporting entity." I presume that they will accomplish this task later, as the current document does not develop such a "robust concept."

Chapter 1 presents the objective for financial reporting, and the description differs little from what is in Concepts Statement No. 1. This objective is "to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions." The emphasis lay with capital providers, as it should. If anything, I would place greater accent on this aspect, because in the last 10 years, so many managers have defined the "business world" as including managers and excluding investors and creditors. To our chagrin, we learned that managers actually believed this lie, as they pretended that the resources supplied by the investment community belonged to the management team.

FASB and IASB further explain that these users are interested in the cash flows of the entity so they can assess the potential returns and the potential variability of those returns (e.g., in paragraph OB.23). I wish they had drawn the logical conclusion that financial reporting ought to exclude income smoothing. Income smoothing leads the user to assess a smaller variance of earnings than warranted by the underlying economics; income smoothing biases downward the actual variability of the earnings and thus the returns.

Later, in the basis of conclusions, the document addresses the reporting of comprehensive income and its components (see BC1.28-31). Currently, FASB has four items that enter other comprehensive income: gains and losses on available-for-sale investments, losses when incurring additional amounts to recognize a minimum pension liability, exchange gains and losses from a foreign subsidiary under the all-current method, and gains and losses from derivatives that hedge cash flows.

The purported reason for this demarcation between earnings and other comprehensive income rests with the purported low reliability of measurements of these four items; however, the real reason for these other comprehensive items seems to be political. For example, FASB capitulated in Statement No. 115 when a number of managers objected to reporting gains and losses on available-for-sale securities because that would create volatility in earnings. (I find it curious how FASB caters to the whims of managers but claims that the primary rationale for financial reporting is to serve the investment community.) Because one has a hard time reconciling other comprehensive income with the needs of investors and creditors, it would serve the investment community better if the boards eliminate this notion of comprehensive income.

Two IASB members think that an objective for financial reporting should encompass the stewardship function (see AV1.1-7). Stewardship seems to be a subset of economic usefulness, so this objection is pointless. It behooves these two IASB members to explain the consequences of adopting a stewardship objective and how these consequences differ from the usefulness objective before we can entertain their protestation seriously.

Sections BC1.42 and 43 ask whether management intent should be a part of the financial reporting process. Given management intent during the last decade, I think decidedly not. Management intent is merely a license to massage accounting numbers as managers please. Fortunately, the Justice Department calls such tactics fraud.

Chapter 2 of this document concerns qualitative characteristics. For the most part, this presentation is similar to that in Concepts Statement No. 2, though arranged somewhat differently. Concepts 2 had as its overarching qualitative characteristics relevance and reliability. This Preliminary Views expounds relevance, faithful representation, comparability, and understandability as the qualitative characteristics.

The discussion on faithful representation is interesting (QC.16-19) inasmuch as they distinguish between accounts that depict real world phenomena and accounts that are constructs with no real world referents. They explain that deferred debits and credits do not possess faithful representation because they are merely the creation of accountants. I hope that analysis applies to deferred income tax debits and credits.

Verifiability implies similar measures by different measurers (QC.23-26). I wish FASB and IASB to include auditability as an aspect of verifiability; after all, if you cannot audit something, it is hardly verifiable. Yet, the soon to be released standard on fair value measurements includes a variety of items that will prove difficult if not impossible to audit.

Understandability is obvious, though the two boards feel that users with a "reasonable knowledge of business and economic activities" can understand financial statements. I no longer agree. Such a person might employ a profit analysis model or ratio analysis on a set of financial statements and mis-analyze a firm's condition because he or she did not make analytical adjustments for off-balance sheet items and other fanciful tricks by managers. This includes so many of Enron's investors and creditors. No, to understand financial reporting today, you must be an expert in accounting and finance.

Benefits-that-justify-costs acts as a constraint on financial reporting. While this criterion is acceptable, too often the boards view costs only from the perspective of the preparers. I wish the boards explicitly acknowledged the fact that not reporting on some things adds costs to users. When a business enterprise engages in aggressive accounting, the expert user needs to employ analytical adjustments to correct this overzealousness. These adjustments consume the investor's economic resources and thus involve costs to the investment community.

In the basis-for-conclusions section, FASB and IASB explain that the concept of substance over form is included in the concept of faithful representation (see paragraphs BC2.17 and 18). While I don't have a problem with that, I think they should at least emphasize this point in Chapter 2 rather than bury it in this section. Substance over form is a critically important doctrine, especially as it relates to business combinations and leases, so it deserves greater stress.

On balance, the document is well written and contains a good clarification of the objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. I offer the criticisms above as a hope to strengthen and improve the Preliminary Views.

My most important comment, however, does not address any particular aspects within the document itself. Instead, I worry about the usefulness of this objective and these qualitative characteristics to FASB and IASB. To enjoy coherent financial reporting, there not only is need for a sound, comprehensive, and internally consistent framework, we also must have a board with the political will to utilize the conceptual framework. FASB ignored its own conceptual framework in its issuance of standards on:

* Leases (Aren't the financial commitments of the lessee a liability?) * Pensions (How can the pension intangible asset really be an asset as it has no real world referent?) * Stock options (Why did the board not require the expensing of stock options in the 1990s when stock options clearly involve real costs to the firm?), and * Special purpose entities (Why did the board wait for the collapse of Enron before dealing with this issue?).

Clearly, the low power of FASB -- IASB likewise possesses little power -- explains some of these decisions, but it is frustrating nonetheless to see the board ignore its own conceptual framework. Why engage in this deliberation unless FASB is prepared to follow through?

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries.


December 7, 2004 message from Carnegie President [carnegiepresident@carnegiefoundation.org

A different way to think about ... Professional Education This month's Carnegie Perspective is written by Carnegie Senior Scholar William Sullivan, whose extensively revised second edition of Work and Integrity was just released by Jossey-Bass. The Perspective is based on the book's argument that in today's environment of unrelenting economic and social pressures, in which professional models of good work come under increasing strain, the professions need their educational centers more than ever as resources and as rallying points for renewal.

Since our goal in Carnegie Perspectives is to contribute to the dialogue on issues and to provide a different way to think and talk about concerns, we have opened up the conversation by creating a forum—Carnegie Conversations—where you can engage publicly with the author and read and respond to what others have to say.

However, if you would prefer that your comments not be read by others, you may still respond to the author of the piece through CarnegiePresident@carnegiefoundation.org .

If you would like to unsubscribe to Carnegie Perspectives, use the same address and merely type unsubscribe in the subject line of your email to us.

We look forward to hearing from you.

Sincerely,

Lee S. Shulman President 
The Carnegie Foundation for the Advancement of Teaching

Preparing Professionals as Moral Agents By William Sullivan

Breakdowns in institutional reliability and professional self-policing, as revealed in waves of scandals in business, accounting, journalism, and the law, have spawned a cancerous cynicism on the part of the public that threatens the predictable social environment needed for a healthy society. For professionals to overcome this public distrust, they must embrace a new way of looking at their role to include civic responsibility for themselves and their profession, and a personal commitment to a deeper engagement with society.

The highly publicized unethical behavior that we see today by professionals is still often thought by many—physicians, lawyers, educators, scientists, engineers—as "marginal" matters in their fields, to be overcome in due course by the application of the value-neutral, learned techniques of their profession. But this conventional view fails to recognize that professionals' "problems" arise outside the sterile, neutral and technical and instead lie within human social contexts. These are not simply physical environments or information systems. They are networks of social engagement structured by shared meanings, purposes, and loyalties. Such networks form the distinctive ecology of human life.

For example, a doctor faced with today's lifestyle diseases—obesity, addictions, cancer, strokes—rather than with infectious biological agents, soon realizes that he or she must take into account how individuals, groups, or whole societies lead their lives. Or in education, it is often assumed that schools can improve student achievement by setting clear standards and then devising teaching techniques to reach them. But this approach has been confounded when it encounters students who do not see a relationship between academic performance and their own goals, or when the experience of students and parents has made trusting school authorities appear a dubious bargain.

In order to "solve" the apparently intractable problems of health care, education, public distrust, or developing a humane and sustainable technological order, the strategies of intervention employed by professionals must engage with, and if possible, strengthen, the social networks of meaning and connection in people's lives—or their efforts will continue to misfire or fail. And not only will they be less effective in meeting the needs of society and the individuals who entrust their lives to their care, but they will also find in their midst colleagues who do not uphold the moral tenets of the profession.

The idea of the professional as neutral problem solver, above the fray, which was launched with great expectations a century ago, is now obsolete. A new ideal of a more engaged, civic professionalism must take its place. Such an ideal understands, as a purely technical professionalism does not, that professionals are inescapably moral agents whose work depends upon public trust for its success.

Since professional schools are the portals to professional life, they bear much of the responsibility for the reliable formation in their students of integrity of professional purpose and identity. In addition to enabling students to become competent practitioners, professional schools always must provide ways to induct students into the distinctive habits of mind that define the domain of a lawyer, a physician, nurse, engineer, or teacher. However, the basic knowledge of a professional domain must be revised and recast as conditions change. Today, that means that the definition of basic knowledge must be expanded to include an understanding of the moral and social ecology within which students will practice.

Today's professional schools will not serve their students well unless they foster forms of practice that open possibilities of trust and partnership with those the professions serve. Such a reorientation of professional education means nothing less than a broadening and rebalancing of professional identity. It means an intentional abandonment of the image of the professional as superior and detached problem-solver. It also requires a positive engagement. Professional education must promote the opening of professional life to meet clients and patients as also fellow citizens, persons with whom teachers, physicians, lawyers, nurses, accountants, engineers, and indeed all professionals share a larger, common "practice"—that of citizen, working to contribute particular knowledge and specialized skills toward improving the quality of life, perhaps especially for those most in need.

Professional schools have too often held out to their students a notion of expert knowledge that remains abstracted from context. Since the displacement of apprenticeship on the job by academic training in a university setting, professional schools have tilted the definition of professional competence heavily toward cognitive capacity, while downplaying other crucial aspects of professional maturity. This elective affinity between the academy's penchant for theoretical abstraction and the distanced stance of problem solving has often obscured the key role played by the face-to-face transmission of professional understanding and judgment from teacher to student. This is the core of apprenticeship that must not be allowed to wither from lack of understanding and attention.

A new civic awareness within professional preparation could go a long way toward awakening awareness that the authentic spirit of each professional domain represents more than a body of knowledge or skills. It is a living culture, painfully developed over time, which represents at once the individual practitioner's most prized possession and an asset of great social value. Its future worth, however, will depend in large measure on how well professional culture gets reshaped to answer these new needs of our time

 


"The Practitioner-Professor Link," by Bonita K. Peterson, Christie W. Johnson, Gil W. Crain, and Scott J. Miller, Journal of Accountancy, June 2006 --- http://www.aicpa.org/pubs/jofa/jun2005/kramer.htm


EXECUTIVE SUMMARY
PERIODIC FEEDBACK FROM PRACTITIONERS to faculty about the strengths and weaknesses of their graduates and their program can help to positively influence the accounting profession.

CPAs ALSO CAN INSPIRE STUDENTS’ education by providing internship opportunities for accounting students, or serving as a guest speaker in class.

MEMBERSHIP ON A UNIVERSITY’S ACCOUNTING advisory council permits a CPA to interact with faculty on a regular basis and directly affect the accounting curriculum.

SERVING AS A “PROFESSOR FOR A DAY” is another way a CPA can promote the profession to accounting students and answer any questions they have.

CPAs CAN SUPPORT STUDENTS’ PROFESSIONAL development by providing advice on proper business attire and tips for preparing resumes, and conducting mock interviews.

CPAs CAN SHARE EXPERIENCES with a professor to cowrite an instructional case study for a journal, which can reach countless students in classrooms across the world.

ORGANIZING OR CONTRIBUTING to an accounting education fund at the university can help fund a variety of educational purposes, such as student scholarships and travel expenses to professional meetings.

PARTICIPATION BY PRACTITIONERS in the education of today’s accounting students is a win-win-win situation for students, CPAs and faculty.

 


 

 

Controversies in Setting Accounting Standards

 


SEC Seeks Stronger GASB
Securities and Exchange Commission Chairman Christopher Cox wants the Governmental Accounting Standards Board to have more clout, he said Wednesday in a speech at a community town hall meeting in Los Angeles.
SmartPros, July 19, 2007 --- http://accounting.smartpros.com/x58440.xml


Neutrality Concept in Accounting Standard Setting

In Concepts Statement No. 2, the FASB asserts it should not issue a standard for the purpose of achieving some particular economic behavior. Among other things, this statement implies that the board should not set accounting standards in an attempt to bolster the economy or some industry sector. Ideally, scorekeeping should not affect how the game is played. But this is an impossible ideal since changes in rules for keeping score almost always change player behavior. Hence, accounting standards cannot be ideally neutral. The FASB, however, actively attempts not to not take political sides on changing behavior that favors certain political segments of society. In other words, the FASB still operates on the basis that fairness and transparency in the spirit of neutrality override politics. However, there is a huge gray zone that, in large measure, involves how companies, analysts, investors, creditors, and even the media react to new accounting rules. Sometimes they react in ways that are not anticipated by the FASB.

Questions
Is there a problem with how GAAP covers one's Fannie?
Would fair value accounting help in this situation?

"Fannie Execs Defend Accounting Change Friday," by Marcy Gordon, Yahoo News, November 16, 2007 --- http://biz.yahoo.com/ap/071116/fannie_mae_accounting.html 

Fannie Mae executives on Friday defended a change in the way the mortgage lender discloses losses on home loans amid concern from analysts that it could mask the true impact of the credit crisis on its bottom line.

The chief financial officer and other executives of the government-sponsored company, which reported a $1.4 billion third-quarter loss last week, held a conference call with Wall Street analysts to explain the recent change.

Analysts peppered the executives with questions in a skeptical tone. The way Fannie discloses its mortgage losses, addressed in an article published online by Fortune, raises extra concern among analysts given that Fannie Mae was racked by a $6.3 billion accounting scandal in 2004 that tarnished its reputation and brought government sanctions against it.

Moreover, the skepticism from Wall Street comes as Fannie seeks approval from the government to raise the cap of its investment portfolio.

The chief financial officer, Stephen Swad, said in the call that some of the $670 million in provisions for credit losses on soured home loans that Fannie Mae wrote off in the third quarter likely would be recovered.

"We book what we book under (generally accepted accounting principles) and we provide this disclosure to help you understand it," Swad said.

Shares of Fannie Mae fell $4.30, or 10 percent, to $38.74 on Friday, following a 10 percent drop the day before.

"Fannie Shares Continue Plunge," by Mike Barris,  The Wall Street Journal, November 16, 2007 --- http://online.wsj.com/article/SB119522620923495790.html

Shares of Fannie Mae skidded further Friday, after falling 10% Thursday amid worries over the way the mortgage giant reports credit losses and a gloomy outlook for the housing market.

The latest decline in the company's share price came as Chief Financial Officer Stephen Swad on Friday attempted to alleviate investor concerns about the company's credit losses.

In morning trading, Fannie shares were at $41.30, down $1.75, or 4%. The shares had fallen as much as 14% early in the day before recovering somewhat. Shares of Fannie's counterpart, Freddie Mac, also fell, down $1.98, or 4.8%, to $39.91.

Thursday's drop came after Fortune magazine's Web site reported a change in the method Fannie uses to report credit losses.

Last week, the nation's biggest investor in home-mortgage loans reported that its credit losses in the year's first nine months equaled 0.04% of the company's $2.8 trillion of mortgages and related securities owned or guaranteed, up from 0.018% a year earlier. That was in line with the company's forecast.

But the company changed its method of presenting the figure, excluding unrealized losses on certain loans that were marked down to reflect current market conditions. Including those unrealized losses, the rate for this year's first nine months was 0.075%, up from 0.023% a year before.

Fannie officials said the change was made to separate realized losses from ones that haven't been realized and depend on fluctuating market values for loans. A report from J.P. Morgan Chase & Co. analyst George Sacco said the new method is similar to that used by Freddie Mac. Fannie officials noted that both the realized and unrealized losses were reflected in the earnings reported last week.

Fannie's stock had already been falling for a few weeks amid worries about how hard Fannie would be hurt by rising mortgage defaults. At an investment conference Thursday in New York, Wells Fargo & Co.'s chief executive, John Stumpf, predicted more pain for mortgage lenders in the year ahead as falling home prices cut the value of collateral, saying the nationwide decline in housing is the worst since the Great Depression.

Thursday, Fannie shares dropped $4.78, or 10%, to $43.04.

On Friday, Mr. Swad tried to explain further how the company was accounting for potential losses.

Last week, Fannie Mae reported roughly $670 million in credit losses in the third quarter related to certain charge-offs recorded when delinquent loans were purchased from mortgage-backed securities trusts. Mr. Swad explained Friday that portions of the credit losses would likely be recovered.

Though these third quarter losses were charged off, they are not considered realized losses, Mr. Swad said, because the loans backing these securities could still be "cured." Mr. Swad said the company was "required to take a charge when the market estimate is below our purchase price." The company's experience, he added, "has shown that the majority of these loans don't result in any realized losses." But he declined to be more specific about what percentage of the loans would eventually "cure."

Fannie last week released earnings for the first three quarters of the year. It reported an additional unrealized loss of $955 million in the value of private-label securities backed by subprime and Alt-A mortgages through the end of the third quarter. This was in addition to $376 million the company had previously accounted as a loss for these securities this year.

November 16, 2007 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

For the record, there was no "accounting change" as per this headline. A headline of "Fannie Mae follows GAAP" probably wouldn't be quite as sexy but it would be 100% accurate. The company's clear explanation of what it is required to do under GAAP is covered in the conference call that is available on Fannie Mae's web site for those accounting aficionados who want to learn more about AICPA Statement of Position 03-03 that requires companies repurchasing loans to record them at fair value. So the answer to your question is that fair value accounting apparently only complicated analysts' understanding in this case.

Denny Beresford

November 17, 2007 reply from Bob Jensen

Hi Denny,

Your comment sheds a lot of light on this apparent gap between analyst expectations and GAAP rules in this case. The SEC, FASB, and the IASB are pushing hard and steady toward fair value accounting with FAS 155, 157, and 159 just being intermediary steps along the way. At least in this case, however, required fair value accounting is allegedly contributing to the plunge in Fannie Mae’s share values.

This is another example of the unpredictability of the Neutrality Concept in standard setting. You point out (see below) that FASB seriously considers neutrality for every new standard and interpretation with the goal of having scorekeeping not affect how the game is played, but in athletics and business it is virtually impossible to change how something is scored without affecting policies and strategies. For example, when long shots in basketball commenced to earn three points rather than two points it fundamentally changed the game of basketball.

Perhaps this is all an example of what you, in 1989, termed "relevant financial information may bring about damaging consequences." (see a quote from your article below). It would have been interesting if the media reporters in 2007 had cited your 1989 article in this beating Fannie Mae is now taking by adhering to GAAP.

Bob Jensen

"How well does the FASB consider the consequences of its work?" by Dennis Beresford, All Business, March 1, 1989 ---
http://www.allbusiness.com/accounting/methods-standards/105127-1.html

Neutrality is the quality that distinguishes technical decision-making from political decision-making. Neutrality is defined in FASB Concepts Statement 2 as the absence of bias that is intended to attain a predetermined result. Professor Paul B. W. Miller, who has held fellowships at both the FASB and the SEC, has written a paper titled: "Neutrality--The Forgotten Concept in Accounting Standards Setting." It is an excellent paper, but I take exception to his title. The FASB has not forgotten neutrality, even though some of its constituents may appear to have. Neutrality is written into our mission statement as a primary consideration. And the neutrality concept dominates every Board meeting discussion, every informal conversation, and every memorandum that is written at the FASB. As I have indicated, not even those who have a mandate to consider public policy matters have a firm grasp on the macroeconomic or the social consequences of their actions. The FASB has no mandate to consider public policy matters. It has said repeatedly that it is not qualified to adjudicate such matters and therefore does not seek such a mandate. Decisions on such matters properly reside in the United States Congress and with public agencies.

The only mandate the FASB has, or wants, is to formulate unbiased standards that advance the art of financial reporting for the benefit of investors, creditors, and all other users of financial information. This means standards that result in information on which economic decisions can be based with a reasonable degree of confidence.

A fear of information

Unfortunately, there is sometimes a fear that reliable, relevant financial information may bring about damaging consequences. But damaging to whom? Our democracy is based on free dissemination of reliable information. Yes, at times that kind of information has had temporarily damaging consequences for certain parties. But on balance, considering all interests, and the future as well as the present, society has concluded in favor of freedom of information. Why should we fear it in financial reporting?

Continued in article

 

Bob Jensen's threads on standard setting are at http://www.trinity.edu/rjensen/Theory01.htm

Bob Jensen's threads on Accrual Accounting and Estimation are at http://www.trinity.edu/rjensen/Theory01.htm#AccrualAccounting

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

Bob Jensen's threads on Fannie Mae's enormous problem (the largest in history that led to the firing of KPMG from the audit and a multiple-year effort to restate financial statemetns) with applying FAS 133 --- http://www.trinity.edu/rjensen/caseans/000index.htm#FannieMae


Standard Setting and Securities Markets:  U.S. Versus Europe

November 29, 2007 message from Pacter, Paul (CN - Hong Kong) [paupacter@DELOITTE.COM.HK]

Some similarities to Chair of SEC, but some important differences. SEC has direct regulatory powers over securities markets, entities that offer securities in those markets, broker/dealers in securities, auditors, and others. SEC can impose penalties on those it regulates.

In Europe there is no pan-European securities regulator equivalent to the SEC with direct regulatory powers similar to the SEC's. Rather, there are 27 securities regulators (one from each member state) who have that power. Here's a link to the list:

http://www.cesr-eu.org/index.php?page=members_directory&mac=0&id=

There is a coordinating body of European securities regulators called CESR (the Committee of European Securities Regulators (http://www.cesr-eu.org/) but CESR's role is advisory, not regulatory.

When the European Parliament adopts legislation (such as securitieslegislation) the legislation first has to be transposed (legally adopted) into the national laws of the Member States. Commissioner McCreevy's role is to propose policies and propose legislation to adopt those policies in Europe, oversee implementation of the legislation in the 27 Member States (plus 3 EEA countries), and (through both persuasion and some legal authority) try to ensure consistent and coordinated implementation. The Commissioner also has outreach and liaison responsibilities outside the European Union. Because there is no pan-European counterpart to the SEC Chairman, Commissioner McCreevy generally handles top level policy liaison between the SEC and Europe.

Like the Chair of the SEC, EU Commissioners are political appointees.

Paul Pacter

Key differences between U.S. and International Standards --- http://www.trinity.edu/rjensen/Theory01.htm#FASBvsIASB


Question
Is a major overhaul of accounting standards on the way?

Hint
There may no longer be the tried and untrusted earnings per share number to report!
Comment
It would be interesting to see a documentation of the academic research, if any, that the FASB relied upon to commence this blockbuster initiative. I recommend that some astute researcher commence to probe into the thinking behind this proposal.

"Profit as We Know It Could Be Lost With New Accounting Statements," by David Reilly, The Wall Street Journal, May 12, 2007; Page A1 --- http://online.wsj.com/article/SB117893520139500814.html?mod=DAT

Pretty soon the bottom line may not be, well, the bottom line.

In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.

ACCOUNTING OVERHAUL

Get a glimpse of what new financial statements could look like, according to an early draft recently provided by the Financial Accounting Standards Board to one of its advisory groups.The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting -- from clerks to chief executives -- to relearn how to compile and analyze information that shows what is happening in a business.

This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.

At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.

The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.

There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.

"The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

Such opposition doesn't surprise many accounting experts. Net income is "the basis for bonuses and judgments about what a company's stock is worth," says Stephen A. Zeff, an accounting professor at Rice University. "I just don't know what the markets would do if companies stopped reporting a bottom line somewhere." In the U.S., professional investors and analysts have taken a more nuanced view, perhaps because the manipulation of numbers was more pronounced in U.S. markets.

That said, net profit has been around for some time. The income statement in use today, along with the balance sheet, generally dates to the 1940s when the SEC laid out regulations on financial disclosure. But many companies have included net profit in one form or another since the 1800s.

In its fourth annual report, General Electric Co. provided investors with a consolidated balance sheet and consolidated profit-and-loss account for the year ended Jan. 31, 1896. The company, whose board at the time included Thomas Edison, generated "profit of the year" -- what today would be called net income or net profit -- of $1,388,967.46.

For the moment, net profit will probably exist in some form, although its days are likely numbered. "We've decided in the interim to keep a net-income subtotal, but that's all up for discussion," the FASB's Mr. Herz says.


Accounting Rule Is Eased for Foreign Companies
Federal regulators tentatively agreed Wednesday to ease an accounting requirement for foreign companies that trade on United States exchanges. The action by the Securities and Exchange Commission paves the way for a related change that would allow public companies to choose between international and United States accounting standards when reporting financial results. The step taken by the S.E.C. on Wednesday would eliminate a requirement for foreign companies to reconcile their financial results with United States standards called generally accepted accounting principles, or GAAP. Foreign companies, which already adhere to what are called international financial reporting standards, say the S.E.C. mandate is burdensome and costly. The change, which awaits formal adoption after a 75-day public comment period, would apply to 2008 annual reports, which are submitted in early 2009.
Associated Press, "Accounting Rule Is Eased for Foreign Companies," The New York Times, June 21, 2007 --- http://www.nytimes.com/2007/06/21/business/worldbusiness/21sec.html


From The Wall Street Journal Accounting Weekly Review on March 30, 2007

Accounting Standard Setters--Independent and Tough
by Robert E. Denham
Mar 26, 2007
Page: A13
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB117486496797748456.html?mod=djem_jiewr_ac
 

TOPICS: Accounting, Financial Accounting Standards Board, Governmental Accounting

SUMMARY: Robert E. Denham is Chairman of the Financial Accounting Foundation (FAF), the oversight organization of trustees for the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). In this editorial page discussion, he responds to concerns expressed in a March 9, 2007, editorial by former SEC Chairman Arthur Levitt, Jr. Mr. Denham discusses the benefits of stable funding that has been achieved for the FASB through Sarbanes-Oxley requirements and wishes for such a resource for the GASB. He comments on the fact that the FASB and the GASB recently have taken "concrete steps to improve user input to the standard-setting process." He also describes how the Boards have faced enormous opposition at times from corporations and Congressional leaders to do things that have in hindsight turned out to be "the right thing to do. "As they demonstrated in standing up to corporate and governmental pressure on options expensing, the trustees act to protect the independence of the standards setters when they are attacked by special interest groups seeking to block or reverse the decisions of the boards. Students may answer questions by referring to the organizations' web sites at http://www.fasb.org/faf/ http://www.fasb.org/ http://www.gasb.org/

QUESTIONS: 
1.) What is the Financial Accounting Foundation? What is its role in relation to the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB)?

2.) Why is it important that the FASB and GASB operate on an independent basis? How did implementation of the Sarbanes-Oxley law improve that ability for the FASB?

3.) What challenges do the FASB and GASB face in setting standards that are controversial? How does independence help in facing those challenges? Glean all you can from the articles or from your own knowledge.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Standards Deviation
by Arthur Levitt, Jr.
Mar 09, 2007
Page: A15

 


"Accounting Firms Seek Overhaul," by Tad Kopinski, Institutional Shareholder Services ISS, November 20, 2006 ---
http://blog.issproxy.com/2006/11/accounting_firms_seek_overhaul.html

The six biggest international audit firms have called for a complete overhaul of corporate financial reporting as the U.S. and Europe move toward convergence of international audit standards.

In a Nov. 8 report, the accounting firms propose to replace static quarterly financial statements with real-time, Internet-based reporting that encompasses a wider range of performance measures, including non-financial ones. The report was signed by the chiefs of PricewaterhouseCoopers International, Grant Thornton International, Deloitte, KPMG International, BDO International, and Ernst & Young. The report can be downloaded here.

"We all believe the current model is broken," Mike D. Rake, KPMG's chairman, told the Financial Times. "There are significant shortcomings to U.S. GAAP [Generally Accepted Accounting Principles] and issues of concern with International Financial Reporting Standards. We're not in a very happy situation."

Rake noted that quarterly reporting and the short-term focus on companies' ability to meet Wall Street earnings expectations helped foster accounting scandals. The firms have been working on their proposals for more than a year.

The large discrepancy between the "book" and "market" values of many listed companies is clear evidence that the content of traditional financial statements is of limited use, the report said. The audit firms recommend using non-financial measures that would provide more valuable indications of a company's future prospects, such as customer satisfaction, product or service defects, employee turnover, and patent awards.

The report said the following developments need to occur to ensure capital market stability, efficiency, and growth:

--Investor needs for information are well defined and met;
--The roles of the various stakeholders in these markets--financial statement preparers, regulators, investors, standards setters, and auditors--are aligned and supported by effective forums for continuous dialogue;
--The auditing profession is vibrant, sustainable, and provides sufficient choice for all stakeholders in these markets;
--A new business-reporting model is developed to deliver relevant and reliable information in a timely way;
--Large, collusive frauds are more and more rare; and
--Information is reported and audited pursuant to globally consistent standards.
 

ICGN Expresses Concerns Over Convergence

Meanwhile, the International Corporate Governance Network (ICGN) has expressed concerns about a draft proposal on harmonizing international and U.S. accounting standards. The ICGN argues that the draft doesn't pay sufficient attention to shareholder rights and the stewardship role of boards and investors.

"Convergence must be there to raise standards," ICGN Executive Director Anne Simpson told the Financial Times. "Convergence for its own sake is not of value."

The ICGN letter was in response to a request for comment by the International Accounting Standards Board (IASB) and its U.S. counterpart, the Financial Accounting Standards Board (FASB) on a discussion paper on harmonization objectives. The IASB and the FASB have been working on harmonizing the two accounting systems since October 2002 and have set 2008 as the goal for finalizing the process.

Unlike the current IASB auditing framework, the discussion paper endorses a model more similar to U.S. standards, dropping a key shareowner safeguard embedded in U.K.-style standards, the ICGN noted. Rather than focusing audits on past transactions, the discussion paper calls for audits to focus on "decision-usefulness" that can affect company cash flows, the letter said.

"We are concerned that this emphasis on the ability to forecast the future does not fully capture the requirements of stewardship, which is concerned with monitoring past transactions and events," Mark Anson, the CEO of Hermes Pensions Management who chairs the ICGN, wrote in the Nov. 2 letter. (A Hermes affiliate is a part owner of ISS.)

"In many jurisdictions, financial statements provide significant input into the decisions we make as shareholders, by providing an account of past transactions and events and the current financial position of the business," the ICGN letter noted. "In de-emphasizing things that are particularly [relevant to shareholders' risks and rights], the standards setters could achieve the perverse effect of actually increasing the cost of capital."

The ICGN includes more than 400 institutional and private investors, corporations, and advisers from 38 countries with capital under management in excess of $10 trillion, according to its Web site. The ICGN letter also was signed by Claude Lamoureux, CEO of the Ontario Teachers' Pension Plan.

A copy of the IASB discussion paper, which was published in July, can be downloaded here.

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#FairValue

Bob Jensen's threads on troubles in the big international accounting firms are at http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's threads on proposed reforms are at
http://www.trinity.edu/rjensen/FraudProposedReforms.htm


Question
Will the U.S. adopt all IFRS international standards while the European Union cherry picks which standards it will adopt?

From The Wall Street Journal Accounting Weekly Review on April 27, 2007

"SEC to Mull Letting U.S. Companies Use International Accounting Rules," by David Reilly, The Wall Street Journal, Page: C3 --- http://snipurl.com/WSJ0425

TOPICS: Accounting, Financial Accounting, Financial Accounting Standards Board, Securities and Exchange Commission

SUMMARY: The article describes the SEC's willingness to consider allowing U.S. companies to use USGAAP or International Financial Reporting Standards (IFRS) in their filings. This development stems from the initiative to allow international firms traded on U.S. exchanges to file using IFRS without reconciling to USGAAP-based net income and stockholders' equity as is now required on Form 20F. "SEC Chairman Christopher Cox said the agency remains committed to removing the reconciliation requirement by 2009. Such a move was the subject of an SEC roundtable and is being closely watched by European Union officials." The SEC will accept comments this summer on its proposal to eliminate the reconciliation requirements. If the agency does implement this change, then it will consider allowing U.S. companies the same alternative.

QUESTIONS:
1.) What is a "foreign private issuer" (FPI)? Summarize the SEC's current filing requirements for these entities.

2.) Why is the SEC considering allowing U.S. companies to submit filings under IFRS rather than U.S. GAAP?

3.) Why might the SEC's decision in this matter "spell the demise of USGAAP"?

4.) Define "principles-based standards" and contrast with "rules-based standards." Give an example in either USGAAP or IFRS requirements for each of these items.

5.) "Some experts don't think a move away from U.S. GAAP would necessarily be bad." Who do you think would hold this opinion? Who would disagree? Explain.

6.) Define the term convergence in relation to global standards. Who is working towards this goal?

Reviewed By: Judy Beckman, University of Rhode Island

Jensen Comment
Canada has already decided to adopt the IFRS in place of domestic Canadian standards.

Also see ""Strengthening the Transatlantic Economy," by José Manuel Barroso (European Commission President), April 27, 2007 --- http://www.iasplus.com/europe/0704barroso.pdf

Also don't assume that the European Union automatically adopts each IASB international standard. For example, the EU may not adopt IFRS 8 --- http://www.iasplus.com/standard/ifrs08.htm

Bob Jensen's threads on differences between the international and U.S. standards are summarized at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#FASBvsIASB


Complicated Accounting Rules and Employee Pressures

November 7, 2006 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

I am teaching a class, Research for Accounting Professionals, and I have been thinking about how to prepare my students for the "real world." I am looking for some insight re: the apparent increased pressure on accountants. For example, some say that the financial reporting environment is rivaling the tax world for the number of new rules that come out every year. I counted the number of statements issued since per year and found that the 1980s was the busiest period, with 1982 being the highest year with 18 statements. Does anyone know why that was? If the number of statements isn't increasing, is it the guidance from SEC that has increased, or is the pressure coming from the SOX environment with its emphasis on internal controls? Has the internal control guidance stepped up? Or is the pressure simply the same pressure that all business people are facing from increased global competition?

1 1973
2 1974
9 1975
2 1976
6 1977
4 1978
10 1979
10 1980
9 1981
18 1982
7 1983
4 1984
6 1985
3 1986
6 1987
4 1988
3 1989
2 1990
2 1991
5 1992
4 1993
2 1994
7 1995
3 1996
4 1997
3 1998
3 1999
3 2000
4 2001
4 2002
3 2003
4 2004
1 2005
5 2006

Amy Dunbar
University of Connecticut
School of Business
Department of Accounting
2100 Hillside Road, Unit 1041 Storrs, CT 06269

November 8, 2006 reply from Bob Jensen

Hi Amy,

I don’t think you can compare numbers of FASB/SEC statements with any sort of confidence. How do you compare FAS 133 (incredibly complex) with FAS 157 (relatively simple)? The problem is not the number of new standards but the way new standards merely add to a growing mountain of previous standards that does not go away --- the mountain just grows higher and higher.

Our students must face an exceedingly complex world of technology. They must have skills in pivot tables, client databases, knowledge databases, ERP, and things that were just not crashing down on our graduates in the 1980s.

I personally think that a negative externality of technology has been increased risk of fraud that increases pressures on auditors. For example, technology has made it lucrative to steal IDs. Now we have huge conspiracies to steal those IDs, as witnessed by the recent reporting of a gang, including hotel owners, managers, and employees, that were stealing IDs at multiple hotels. Internal controls have just not kept pace with the level of theft risks and temptations, and our graduates are under pressures to invent newer  internal controls in complicated IT systems. Hacker/Cracker criminals themselves are extremely sophisticated and skilled. Our networked enemies can be anywhere on the globe.

Pressures are coming from a wide variety of interacting causes, not the least of which is SOX which is basically aimed at improving audit quality. What you had back in the 1980s was auditing sham! Firms like Andersen were removing much of the detail testing and trench work out of the audits, thereby taking much of the pressure off of auditors in the field --- http://www.trinity.edu/rjensen/fraud001.htm#RiskBasedAuditing
The world’s worst audit in history, WorldCom, brought this sham into the light.

The audit scandals (spread rather evenly among firms), litigation losses, the nose dive of reputation of the CPA profession, and SOX turned much of this around and now the audit firms are trying to restore the professionalism of their work with a dramatic increase in funding to do the job. But the pressures are bound to increase as well if auditors really try to do professional work.

You have audit firms being fired (the way KPMG was fired from Fannie Mae and E&Y was fired from TIAA/CREF). You have clients paying millions upon millions to restate financial statements because of bad auditing (e.g., Fannie is spending over $100 million to produce restatements). This is bound to pressure auditors assigned to do the job right. One of my former students brought in by PwC to help generate Fannie’s restatements said that he had to become an expert on valuing derivatives using a Bloomberg terminal (as part of the restatement effort). How many of our accounting education programs teach students how to value interest rate swaps on a Bloomberg terminal?

But mostly I think the pressure is on our graduates to deal with incredibly tough contracts that their professors and their supervisors themselves do not understand. Pressure is put on our green-as-grass new graduates to understand and explain contract complexity all the way up the food chain in their firms.

Below is a message that I received yesterday from a recent graduate who went to work immediately for AT&T rather than one of the big auditing firms. It helps explain how our young graduates encounter contracts that do not appear in our textbooks and how they must have skills and knowledge well beyond what we taught in the past Century.

 

Hey again Dr. Jensen,

I have another derivatives situation! Do you know anything about zero coupon bonds that are puttable? I guess they are a relatively new transaction type that banks are trying to push. I guess the theory is that you sacrifice some additional risk (by allowing the bondholder to put to you) in return for a lower interest rate than a typical zero coupon bond. It is my interpretation that written options don't count for hedge accounting status unless they offset another derivative instrument (FAS 133, P 396-401). It is also my interpretation that this is a situation which would create a difference in the bond value which would be reflected as an income statement (other income/expense) effect.

However, I think the financial components of the situation are over my head, and my boss is trying to tell me that he thinks that all of this transaction would either run through interest expense or there would be a huge increase in income in the first period represented (with no MTM throughout). I don't understand these arguments. Do you have any idea what he is getting at?

I am really grateful for any help you can provide, but I am starting to feel bad about emailing you. I have always assumed that you enjoyed these kind of discussions, but if you don't please don't feel obligated to answer. Just let me know - I don't want to disturb your retirement!

As always, hope things are well.

Thanks again so much.

Andrew

 My response to him is too long to repeat here, but you can read a bit more about puttable bond accounting at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Each new message from a frustrated former student makes me happier that I’m retired in the high hills.  I would not want to be one of these young men and women today.

Bob Jensen

November 8, 2006 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Years ago, I suggested one of my doctoral students (now a colleague) to prepare a graph that shows how the various standards are related. The result was the graph attached.

Here, we represent each standard as a point, equidistant from each other, on the circumference of a circle. Then we draw an arrow from standard A to standard B if standard A amended Standard B. The result is the attached graph. It looks more like an oval because I had to compress the image to fit powerpoint slide.

The graph helps us understand the dynamics of standards, forces us to ask questions as to why standards may be frequently revised, why interpretation of "the GAAP" as opposed to standards becomes difficult, and behooves us to ask what needs to be done.

This sort of a graph is used in information retrieval as well as exploratory data analysis. I teach using this figure in my statistics course for accountants (and not Accounting "Theory" course).

Those interested in my first class of the semester, please go to the following link:

http://www.albany.edu/acc/courses/acc522.fall2006/classnotes/acc522sept142006.ppt 

Hope I am not too far off the mark.

Regards,

Jagdish

November 8, 2006 reply from Jim Formosa [Jim.Formosa@NSCC.EDU]

I believe that SOX and the PCOAB shocked the FASB for a while and I am not sure that the shock has worn off. I remember reading in several journals that, with the advent of the PCOAB, the FASB became tentative. Then I believe you have to consider the FASB process which requires drafting and approvals with the constant threat of legislative interference at the federal level. Many have questioned the long-term efficacy of the FASB process itself. I believe in full disclosure and feedback in the rule making process but it should not take years - expensing options as only one of several examples.

I have also read that many believe the FASB is fast becoming a dinosaur that has outlived its usefulness- it will certainly be interesting.

Jim Formosa, M.S., CPA
Certified Senior WebCT Trainer
Associate Professor of Accounting
Nashville Community College 615-353-3420 FAX 615-356-1213

November 8, 2006 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

1. Codification is a neanderthal concept and a vestige of the disastrous Napoleonic rule in Europe. It is expensive, does nothing to resolve whatever ambiguities that might be present (in fact it might exacerbate them), has high maintenance, and totally ignores all the developments in information technologies over the past century. In fact, in my humble opinion, codification is the accounting equivalent of Iraq (I am, of course, exaggerating here). What is needed is NOT radical reconstitutive surgery of the body of accounting standards (as in Iraq) by first disemboweling them, but a philosophical reflection of the way we draft standards (and how we use them) that is informed by the developments in information technology.

In my humble opinion, the emerging technologies surrounding the semantic web initiative of W3C is the way to go, but that involves considerable research investments.

Years ago I tried a dialogue with some firms (and also with FASB through some friends) about supporting research in the area, but my plea fell on deaf ears (except for Arthur Andersen - their Litigation Support people, who showed considerable interest before they tragically disbanded).

2. Your second question as to why people still refer to SASes rather than their codification, I think I can safely rest my case in 1. above. Codification adds little value at great cost. Codification is for the lazy people who want their thinking done for them.

If the standards are drafted well, codification is a trivial task. One can have an algorithm for codification in less than a semester of a competent doctoral student's time. Drafting the standards well is another matter, and is a profoundly intellectual activity. We can not do that without adequate theories of language competence, language use, reasoning, and theories of textual interpretation (similar to legal hermeneutics). And having examined the standards as well as EDGAR filings over the past few years, I can safely say that we in accounting are quite lacking in each of these.

Regards,

Jagdish

November 8, 2006 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Bob,

1. That accounting standards standards have become complex over the years is true. It is also perhaps true that they are nowadays better drafted compared with the philosophical ramblings in very early "standards". However, I personally don't think they are anywhere close to the tax code in complexity (and of course length. For example, section 10 of SFAS 133, a relatively long paragraph for SFASes, is dwarfed by, for example section 351 of the Tax code, a relatively average paragraph).

I will not resort to midieval torture of the reader by reproducing the two sections side-by-side. But the elegance of the tax code and the lack thereof is there plainly to be seen.

One of the problems with drafting in accounting standards is in the way definitions are stated. In accounting, the definitions are often given by examples rather than definitions with exceptions to the definitions. That is not the only problem. There are a slew of problems that I wrote about in an article titled "Some thoughts on the Engineering of Financial Accounting Standards" that I wrote a long time ago (in the second volume on AI in Accounting edited by Miklos Vasarhelyi.

It would be an interesting exercise comparing the complexities between the two texts after developing appropriate metrics. I am not sure accounting standards would measure up to the tax code, but I am no expert in either field. Perhaps some one like Amy who is one in both can enlighten us.

Jagdish

November 9, 2006 reply from Bob Jensen

Jagdish,

Codification with enforcement suppresses some types of atrocious behavior. For example, thousands of CEOs commenced to steal from investors by backdating stock options until disclosure rules were put in place.

Without codification and enforcement there's anarchy. With excess codification freedom and creativity is suppressed. It's just very, very difficult to set the bar optimally because Arrow's Impossibility Theorem proved it to be impossible --- http://en.wikipedia.org/wiki/Impossibility_theorem 

We are thus doomed to forever debate codes of behavior ad infinitum.

As usual you make good points. However, financial contracting is so complex that I'm like Amy is with tax accounting. I cannot imagine trying to account on a subjective judgment basis without codification. Without codification comparability is virtually impossible with exotic financial structurings.

It's possible to reduce the problem with simplified rules/laws such as eliminating 90% of the personal tax code with a new flat tax, eliminating accrual accounting in favor of cash flow financial reporting, or reporting on a "fair value" basis for all assets and liabilities. But the social impacts of a flat tax are contentious. Cash flow reporting is a license for CEOs to mislead and manipulate investors with cash flow timing manipulations. Fair value reporting creates more fiction than fact (such as wild earnings fluctuations of perfect hedges that eliminate cash flow or FX risk).

Codification sets parameters on major types of behavior. What is "right" versus "wrong" becomes anarchy if those parameters become subjective variables. The never-ending debate becomes one of deciding what are the "major types of behavior" to be codified since it is impractical and undesirable to set a parameter for every element of behavior. In the case of financial structuring we keep inventing new "major types." For example, the interest rate swap was invented in 1984 and quickly became a major way to raise capital before it even had to be disclosed (FAS 119) and eventually booked (FAS 133) in Year 2000.

We are thus doomed to forever debate codes of behavior and accounting standards ad infinitum.

My threads containing earlier arguments on this issue (e.g., Beresford versus Ketz) are shown below.

Bob Jensen


March 28, 2006 message from Denny Beresford [DBeresfo@TERRY.UGA.EDU]

A House of Representatives subcommittee is going to have a public hearing on Wednesday that has the objective of discussing "ways to promote more transparent financial reporting, including current initiatives by regulators and industry."

See the press release at:
http://financialservices.house.gov/news.asp?FormMode=release&id=777&NewsType=1  for further details.

Denny Beresford

House Committee on Financial Services --- http://snipurl.com/BakerSub

Baker Subcommittee to Advocate Transparency in Financial Reporting

The Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, chaired by Rep. Richard H. Baker (LA), will convene for a hearing entitled Fostering Accuracy and Transparency in Financial Reporting. The hearing will take place on Wednesday, March 29 at 10 a.m. in room 2128 of the Rayburn building.

Members of the Subcommittee are expected to discuss ways to promote more transparent financial reporting, including current initiatives by regulators and industry.

For the capital markets to operate most efficiently, information about public companies must be understandable, accessible, and accurate. Corporate statements are mathematical summaries meant to convey a company’s condition. The four basic documents which must be filed with the U.S. Securities and Exchange Commission (SEC) are at the heart of investor disclosure: the income statement, the cash flow statement, the balance sheet, and the statement of changes in equity.

Among the current initiatives to improve the clarity and usefulness of public company information is a trend away from quarterly earnings forecasting, the use of technology to decrease complexity, and a review of the various accounting standards and how they interact.

Subcommittee Chairman Baker said, "If U.S. markets are to remain on top in an increasingly competitive global marketplace, we need to move away from the complex and cumbersome and explore technological and other methods of enhancing the clarity, accuracy, and efficiency of our accounting system. At the same time, we need to look at whether earnings forecasting and the beat-the-street mentality, which appears to have contributed to some of the executive malfeasance of the past several years, truly serves the best interest of investors or the goal of long-term economic growth."

The corporate scandals several years ago revealed weaknesses in the financial reporting system. While many companies were violating financial reporting requirements, regulatory complexity also may have contributed to some lapses in compliance.

Fraud, general manipulation of statements, and regulatory complexity all contribute to a reduction in the usefulness of financial statements and all may obfuscate the picture of companies’ financial health. A number of recent studies have argued against the practice of predicting future quarterly earnings, concluding that the drive to “make the numbers” can lead to poor business decisions and the manipulation of earnings.

Congress, regulators, and the industry subsequently have assessed financial reporting failures and have reacted with efforts aimed at strengthening the system, including many provisions of The Sarbanes-Oxley Act of 2002.

More recent initiatives by regulators to streamline financial reporting standards and accounting include:

Public Companies have been filing financial statements with the SEC since the passage of the Securities Exchange Act of 1934.

March 28, 2006 reply from Bob Jensen

Hi Denny,

 I know that we disagree on the principles based standards initiative. My negative position on this is outlined somewhat at
http://snipurl.com/JensenPBS

I just don't think the principles based Ten Commandments are sufficient to discard all statutes on felony law. I don't think we can discard all FDA rules on drug testing and replace them with principles based guidelines for pharmaceutical companies to follow. The same can be said for environmental protection regulations, child protective services, and whatever. Sometimes we need detailed rules so we have better guidance as to what is right and what is wrong in specific and complex circumstances.

You and I go back to the old days (and we passed the CPA exam). GAAP was much less complex and could virtually be memorized. We go back to the days when much was left to "auditor judgment."

But we also go back to the days when CEOs were not fanatics about hitting analyst forecasts. We go back to days when top-tier management compensation did not swing heavily an eps number. We go back to the days when debt was debt and equity was equity. More importantly we go back to the days when an auditor could actually understand contracts being written.

In the past CEOs respected auditor decisions and did not threaten auditors like in so many companies are doing today. Too many times in recent years we've seen where virtually all big auditing firms have caved in to pressures from large clients such as the way KPMG caved in on Fannie Mae and Andersen caved in on various big clients --- http://www.trinity.edu/rjensen/fraud001.htm#others

 I think that less complex principles based standards will only increase conflicts between clients and auditors. Neither will know that rules (albeit complex rules as in the case of derivatives, leases, VIEs, and pensions) are being broken if there are no detailed rules to be broken.

 I think the absence of detailed rules greatly increase inconsistencies in "auditor judgment." I think absence of detailed rules takes away auditor bargaining chips when dealing with clients.

I guess my bottom line conclusion is that the global world of contracting, risk management, and mezzanine debt is totally unlike the simpler world back in the old days when we were auditor whippersnappers.

 Bob Jensen


Principles-Based Versus Rules-Based Accounting Standards

"Standing on Principles In a world with more regulation than ever, can the accounting rulebook be thrown away?" byAlix Nyberg Stuart, CFO Magazine September 01, 2006 ---
http://www.cfo.com/article.cfm/7852613/c_7873404?f=magazine_featured

As Groucho Marx once said, "Those are my principles, and if you don't like them...well, I have others."

Groucho would enjoy the heated stalemate over principles-based accounting. Four years after the Sarbanes-Oxley Act required the Securities and Exchange Commission to explore the feasibility of developing principles-based accounting standards in lieu of detailed rules, the move to such standards has gone exactly nowhere. ad

Broadly speaking, principles-based standards would be consistent, concise, and general, requiring CFOs to apply common sense rather than bright-lines. Instead of having, say, numerical thresholds to define when leases must be capitalized, a CFO could use his or her own judgment as to whether a company's interest was substantial enough to put a lease on the balance sheet. If anything, though, accounting and auditing standards have reached new levels of nitpickiness. "In the current environment, CFOs are second-guessed by auditors, who are then third-guessed by the Public Company Accounting Oversight Board [PCAOB], and then fourth- and fifth-guessed by the SEC and the plaintiffs' bar," says Colleen Cunningham, president and CEO of Financial Executives International (FEI).

Indeed, the Financial Accounting Standards Board seems to have taken a principled stand in favor of rule-creation. The Board continues to issue detailed rules and staff positions. Auditors have amped up their level of scrutiny, in many cases leading to a tripling of audit fees since 2002. And there is still scant mercy for anyone who breaks the rules: the annual number of restatements doubled to more than 1,000 between 2003 and 2005, thanks to pressure from auditors and the SEC. The agency pursued a record number of enforcement actions in the past three years, while shareholder lawsuits, many involving accounting practices, continued apace, claiming a record $7.6 billion in settlements last year and probably more in 2006.

Yet the dream won't die. On the contrary, principles are at the heart of FASB's latest thinking about changes to its basic accounting framework, as reflected in the "preliminary views" the board issued in July with the International Accounting Standards Board (IASB) as part of its plan to converge U.S. and international standards. Principles-based accounting has been championed by FASB chairman Robert Herz, SEC commissioner Paul Atkins, SEC deputy chief accountant Scott Taub, and PCAOB member Charlie Niemeier in various speeches over the past six months. And they're not just talking about editing a few lines in the rulebook.

"We need FASB, the SEC, the PCAOB, preparers, users, auditors, and the legal profession to get together and check their respective agendas at the door in order to collectively think through the obstacles," says Herz. "And if it turns out some of the obstacles are hardwired into our structure, then maybe we need some legal changes as well," such as safe harbors that would protect executives and auditors from having their judgments continually challenged. Even the SEC is talking about loosening up. Most at the agency favor the idea of principles instead of rules, says Taub, even knowing that "people will interpret them in different ways and we'll have to deal with it."

Standards Deviation Why lawmakers are so set on principles and what exactly those principles would look like is all a bit hazy right now. "Post-Enron, the perception was that people were engineering around the accounting rules. We looked around the world and saw that England had principles-based accounting and they didn't have scandals there, so we decided this was the way to go," recounts CVS Corp. CFO David Rickard, a Financial Accounting Standards Advisory Committee (FASAC) member.

But Rickard considers the approach "naive." His firsthand experience with principles-based accounting, as a group controller for London-based Grand Metropolitan from 1991 to 1997, left him unimpressed. "We had accounting rules we could drive trucks through," he says.

Would such a change be worth the trouble? A recent study that compared the accrual quality of Canadian companies reporting under a relatively principles-based GAAP to that of U.S. companies reporting by the rules suggests that there may be no effective difference between the two systems. The authors, Queen's University (Ontario) professors Daniel B. Thornton and Erin Webster, found some evidence that the Canadian approach yields better results, but conclude that "stronger U.S. oversight and greater litigation risk" compensate for any differences.

U.S. GAAP is built on principles; they just happen to be buried under hundreds of rules. The SEC, in its 2003 report on principles-based accounting, labeled some standards as being either "rules" or "principles." (No surprise to CFOs, FAS 133, stock-option accounting, and lease accounting fall in the former category, while FAS 141 and 142 were illustrative of the latter.) The difference: principles offer only "a modicum" of implementation guidance and few scope exceptions or bright-lines. ad

For FASB, the move to principles-based accounting is part of a larger effort to organize the existing body of accounting literature, and to eliminate internal inconsistencies. "Right now, we have a pretty good conceptual framework, but the standards have often deviated from the concepts," says Herz. He envisions "a common framework" with the IASB, where "you take the concepts," such as how assets and liabilities should be measured, and "from those you draw key principles" for specific areas of accounting, like pensions and business combinations. In fact, that framework as it now stands would change corporate accounting's most elemental principle, that income essentially reflects the difference between revenues and expenses. Instead, income would depend more on changes in the value of assets and liabilities (see "Will Fair Value Fly?").

For its part, the SEC has also made clear that it does not envisage an entirely free-form world. "Clearly, the standard setters should provide some implementation guidance as a part of a newly issued standard," its 2003 report states.

The catch is that drawing a line between rules and principles is easier said than done. Principles need to be coupled with implementation guidance, which is more of an art than a science, says Ben Neuhausen, national director of accounting for BDO Seidman. That ambiguity may explain why finance executives are so divided on support for this concept. Forty-seven percent of the executives surveyed by CFO say they are in favor of a shift to principles, another 25 percent are unsure of its merits, and 17 percent are unfamiliar with the whole idea. Only 10 percent oppose it outright, largely out of concern that it would be too difficult to determine which judgments would pass muster.

A Road to Hell? As it stands now, many CFOs fear that principles-based accounting would quickly lead to court. "The big concern is that we make a legitimate judgment based on the facts as we understand them, in the spirit of trying to comply, and that plaintiffs' attorneys come along later with an expert accountant who says, 'I wouldn't have done it that way,' and aha! — lawsuit! — several billion dollars, please," says Rickard.

Massive shareholder lawsuits were a concern for 36 percent of CFOs who oppose ditching rules, according to CFO's survey, and regulators are sympathetic. "There are institutional and behavioral issues, and they're much broader than FASB or even the SEC," says Herz, citing "the focus on short-term earnings, and the whole kabuki dance around quarterly guidance."

Continued in article


"The Accounting Cycle: Herz Encourages Simpler Accounting: Again, Bah, Humbug!" by: J. Edward Ketz, SmartPros, December 2005 --- http://accounting.smartpros.com/x50933.xml

Robert Herz, chairman of the Financial Accounting Standards Board, spoke at the AICPA National Conference on Current SEC and PCAOB Developments* on December 6. Similar to the speech by SEC Chairman Christopher Cox on the previous day, Mr. Herz directed his comments to the proposition "that we need to reduce the complexity of our reporting system." The proposition may be true, but Herz did little to advance the cause in his speech.

In particular, Robert Herz merely asserted his beliefs without adding any logic or any evidence that the reporting system is too complex. Worse, he touts principles-based accounting as the savior for the world of financial reporting, but again provides no argumentation to support his hypothesis. Maybe it’s because there is none. (Read the full speech.)

Given that we have two chairmen making some brash comments about the complexity of accounting, let’s investigate this further. Is complexity really bad? Is complexity really the major problem with financial reporting?

Is complexity bad?

Suppose a patient visits his or her general practitioner about some medical problem. After some initial testing, the general practitioner refers the patient to a specialist. The patient obtains a copy of the referral letter, but has difficulty reading it. Should a government agency intervene, complaining that the letter is "too complex" and require medical doctors to apply plain English?

I think the answer is obvious -- of course not. When one doctor writes to another physician, he or she may employ scientific jargon. They are both trained in biology, chemistry, and medicine. The complex vocabulary and the complex theories that they utilize actually improve the communication process. The additional complexity allows a doctor to make more precise statements about the patient's condition and about possible solutions to the medical problem. Requiring plain English statements would create greater ambiguity and distort the communication process.

Of course, when the doctor talks with the patient, he or she must use plain English. Because the patient does not have medical training, the patient will not understand the more precise language and therefore the communication process will suffer if the physician employs medical language. As the physician employs the less precise language of everyday English, the patient will learn more about the medical problem and possible future tests. Some communication with a less precise language is better than virtually no communication with a more powerful language designed for experts.

While the analogy isn't perfect, it fits the accounting scenario. When business enterprises report on their financial condition and on their results during the past year (or quarter), they can more precisely convey their message by applying a more precise accounting language. This text, however, is meant for those trained in finance and in accounting. Complexity can actually improve the communication process when the recipient is a sophisticated user.

Naïve financial statement readers may not understand the language of accounting, but they are not necessarily hurt by that situation. Just as general practitioners can revert from a medical language to everyday language when they speak with patients, financial analysts and brokers can employ plain English when they speak with clients. In this manner, the messages contained in an annual (or quarterly) report become disseminated to a wide audience.

More precise language and better economic theories will improve the communication between business enterprises and sophisticated users, even if the reports are complex. Sophisticated users can then translate the messages into plain English and convey these stories to naïve users.

Is complexity really the major problem?

When remonstrating the overly complex accounting rules and when touting principles-based accounting, Chairman Herz points to "bright lines" as an example of what's wrong with current-day standards. I agree with him that such bright lines constitute a problem, but the problem isn’t the complexity introduced by these bright lines. The problem is that these bright lines are arbitrary and capricious. Instead of relying upon economic theory, the FASB (and the SEC whenever it enters the skirmish) has invented these bright lines that have no meaning and no empirical referent.

Consider leases: the FASB created the 90 percent cutoff point for deciding whether a lessee had to capitalize a lease, but it never informed us why. If the present value of the future cash commitments equals 89.9 percent of the property's fair value, then the lease is an operating lease; but if it equals 90 percent, then the lease is a capital lease. What economic theory does the FASB rest its decision on? No theory at all. The board randomly and recklessly introduced this bright line into the literature.

If the board really wanted to improve financial reporting, then it would require lessees to capitalize all leases that had duration greater than one year. You introduce no fictitious bright lines and ironically, you simplify the accounting! More importantly, the rule would require corporations to tell it as it is rather than distort the economic reality of the lease.

Continued in article

Jensen Comment
Although there is a ground swell of support for both principles-based accounting standards and greatly simplified standards, I'm inclined to be against both movements.  Business contracting, especially risk diffusion and management contracting, is becoming so complex that I think principles-based standards and greatly simplified standards are moves in the wrong direction.  Powerful new financial analysis tools in networked communications, meta-tagging (e.g., XBRL), and database sharing (eventually object-oriented database elements) will be greatly harmed if complex standards do not accompany complex contracting.  I think Professor Ketz has taken a bold stand in the above article, and I personally take the same stance.  This, of course, puts me at odds with the current and many former directors of standard setting bodies (e.g., the FASB and the IASB), including my very good friend Dennis Beresford who sides with Bob Herz and probably influenced Bob Herz.  See http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

I'm not necessarily arguing in favor of more bright lines.  We can perhaps avoid these bright lines with more details, albeit complex details, about contracts, hedging strategies, hedging effectiveness, mezzanine debt contracts, VIEs, etc.  Years ago Bill Beaver (in an innovative unpublished working paper) argued in favor of database reporting to get around some of the bright lines problems.  This is more complex reporting, but we can have develop the technologies needed to analyze database reporting.  What we cannot do is do away with complex standards to deal with how complex contracts are reported in the databases.  The standards are what makes comparisons between databases possible.

The analogy relating accounting to medicine is on target.  In this era of DNA advances in medicine, we do not want medical standards to become less complex in a more complex world of knowledge.  We hope the standards become more complex to match the increased complexity of our understanding.  Similarly, we hope the standards of accounting become more complex to match the increased complexity of contracts around the world.

 

"The Accounting Cycle: Herz Encourages Simpler Accounting: Again, Bah, Humbug!" by: J. Edward Ketz, SmartPros, December 2005 --- http://accounting.smartpros.com/x50933.xml

Robert Herz, chairman of the Financial Accounting Standards Board, spoke at the AICPA National Conference on Current SEC and PCAOB Developments* on December 6. Similar to the speech by SEC Chairman Christopher Cox on the previous day, Mr. Herz directed his comments to the proposition "that we need to reduce the complexity of our reporting system." The proposition may be true, but Herz did little to advance the cause in his speech.

In particular, Robert Herz merely asserted his beliefs without adding any logic or any evidence that the reporting system is too complex. Worse, he touts principles-based accounting as the savior for the world of financial reporting, but again provides no argumentation to support his hypothesis. Maybe it’s because there is none. (Read the full speech.)

Given that we have two chairmen making some brash comments about the complexity of accounting, let’s investigate this further. Is complexity really bad? Is complexity really the major problem with financial reporting?

Is complexity bad?

Suppose a patient visits his or her general practitioner about some medical problem. After some initial testing, the general practitioner refers the patient to a specialist. The patient obtains a copy of the referral letter, but has difficulty reading it. Should a government agency intervene, complaining that the letter is "too complex" and require medical doctors to apply plain English?

I think the answer is obvious -- of course not. When one doctor writes to another physician, he or she may employ scientific jargon. They are both trained in biology, chemistry, and medicine. The complex vocabulary and the complex theories that they utilize actually improve the communication process. The additional complexity allows a doctor to make more precise statements about the patient's condition and about possible solutions to the medical problem. Requiring plain English statements would create greater ambiguity and distort the communication process.

Of course, when the doctor talks with the patient, he or she must use plain English. Because the patient does not have medical training, the patient will not understand the more precise language and therefore the communication process will suffer if the physician employs medical language. As the physician employs the less precise language of everyday English, the patient will learn more about the medical problem and possible future tests. Some communication with a less precise language is better than virtually no communication with a more powerful language designed for experts.

While the analogy isn't perfect, it fits the accounting scenario. When business enterprises report on their financial condition and on their results during the past year (or quarter), they can more precisely convey their message by applying a more precise accounting language. This text, however, is meant for those trained in finance and in accounting. Complexity can actually improve the communication process when the recipient is a sophisticated user.

Naïve financial statement readers may not understand the language of accounting, but they are not necessarily hurt by that situation. Just as general practitioners can revert from a medical language to everyday language when they speak with patients, financial analysts and brokers can employ plain English when they speak with clients. In this manner, the messages contained in an annual (or quarterly) report become disseminated to a wide audience.

More precise language and better economic theories will improve the communication between business enterprises and sophisticated users, even if the reports are complex. Sophisticated users can then translate the messages into plain English and convey these stories to naïve users.

Is complexity really the major problem?

When remonstrating the overly complex accounting rules and when touting principles-based accounting, Chairman Herz points to "bright lines" as an example of what's wrong with current-day standards. I agree with him that such bright lines constitute a problem, but the problem isn’t the complexity introduced by these bright lines. The problem is that these bright lines are arbitrary and capricious. Instead of relying upon economic theory, the FASB (and the SEC whenever it enters the skirmish) has invented these bright lines that have no meaning and no empirical referent.

Consider leases: the FASB created the 90 percent cutoff point for deciding whether a lessee had to capitalize a lease, but it never informed us why. If the present value of the future cash commitments equals 89.9 percent of the property's fair value, then the lease is an operating lease; but if it equals 90 percent, then the lease is a capital lease. What economic theory does the FASB rest its decision on? No theory at all. The board randomly and recklessly introduced this bright line into the literature.

If the board really wanted to improve financial reporting, then it would require lessees to capitalize all leases that had duration greater than one year. You introduce no fictitious bright lines and ironically, you simplify the accounting! More importantly, the rule would require corporations to tell it as it is rather than distort the economic reality of the lease.

Continued in article

Jensen Comment
Although there is a ground swell of support for both principles-based accounting standards and greatly simplified standards, I'm inclined to be against both movements.  Business contracting, especially risk diffusion and management contracting, is becoming so complex that I think principles-based standards and greatly simplified standards are moves in the wrong direction.  Powerful new financial analysis tools in networked communications, meta-tagging (e.g., XBRL), and database sharing (eventually object-oriented database elements) will be greatly harmed if complex standards do not accompany complex contracting.  I think Professor Ketz has taken a bold stand in the above article, and I personally take the same stance.  This, of course, puts me at odds with the current and many former directors of standard setting bodies (e.g., the FASB and the IASB), including my very good friend Dennis Beresford who sides with Bob Herz and probably influenced Bob Herz.  See http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

I'm not necessarily arguing in favor of more bright lines.  We can perhaps avoid these bright lines with more details, albeit complex details, about contracts, hedging strategies, hedging effectiveness, mezzanine debt contracts, VIEs, etc.  Years ago Bill Beaver (in an innovative unpublished working paper) argued in favor of database reporting to get around some of the bright lines problems.  This is more complex reporting, but we can have develop the technologies needed to analyze database reporting.  What we cannot do is do away with complex standards to deal with how complex contracts are reported in the databases.  The standards are what makes comparisons between databases possible.

The analogy relating accounting to medicine is on target.  In this era of DNA advances in medicine, we do not want medical standards to become less complex in a more complex world of knowledge.  We hope the standards become more complex to match the increased complexity of our understanding.  Similarly, we hope the standards of accounting become more complex to match the increased complexity of contracts around the world.


"The Accounting Cycle:  The Conceptual Framework for Financial Reporting Op/Ed,"  by J. Edward Ketz, SmartPros, September 2006 --- http://accounting.smartpros.com/x54322.xml 

The Financial Accounting Standards Board and the International Accounting Standards Board have joined forces to flesh out a common conceptual framework. Recently they issued some preliminary views on the "objectives of financial reporting" and the "qualitative characteristics of decision-useful financial reporting information" and have asked for comment.

To obtain "coherent financial reporting," the boards feel that they need "a framework that is sound, comprehensive, and internally consistent" (paragraph P3). In P5, they also state their hope for convergence between U.S. and international accounting standards.

P6 indicates a need to fill in certain gaps, such as a "robust concept of a reporting entity." I presume that they will accomplish this task later, as the current document does not develop such a "robust concept."

Chapter 1 presents the objective for financial reporting, and the description differs little from what is in Concepts Statement No. 1. This objective is "to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions." The emphasis lay with capital providers, as it should. If anything, I would place greater accent on this aspect, because in the last 10 years, so many managers have defined the "business world" as including managers and excluding investors and creditors. To our chagrin, we learned that managers actually believed this lie, as they pretended that the resources supplied by the investment community belonged to the management team.

FASB and IASB further explain that these users are interested in the cash flows of the entity so they can assess the potential returns and the potential variability of those returns (e.g., in paragraph OB.23). I wish they had drawn the logical conclusion that financial reporting ought to exclude income smoothing. Income smoothing leads the user to assess a smaller variance of earnings than warranted by the underlying economics; income smoothing biases downward the actual variability of the earnings and thus the returns.

Later, in the basis of conclusions, the document addresses the reporting of comprehensive income and its components (see BC1.28-31). Currently, FASB has four items that enter other comprehensive income: gains and losses on available-for-sale investments, losses when incurring additional amounts to recognize a minimum pension liability, exchange gains and losses from a foreign subsidiary under the all-current method, and gains and losses from derivatives that hedge cash flows.

The purported reason for this demarcation between earnings and other comprehensive income rests with the purported low reliability of measurements of these four items; however, the real reason for these other comprehensive items seems to be political. For example, FASB capitulated in Statement No. 115 when a number of managers objected to reporting gains and losses on available-for-sale securities because that would create volatility in earnings. (I find it curious how FASB caters to the whims of managers but claims that the primary rationale for financial reporting is to serve the investment community.) Because one has a hard time reconciling other comprehensive income with the needs of investors and creditors, it would serve the investment community better if the boards eliminate this notion of comprehensive income.

Two IASB members think that an objective for financial reporting should encompass the stewardship function (see AV1.1-7). Stewardship seems to be a subset of economic usefulness, so this objection is pointless. It behooves these two IASB members to explain the consequences of adopting a stewardship objective and how these consequences differ from the usefulness objective before we can entertain their protestation seriously.

Sections BC1.42 and 43 ask whether management intent should be a part of the financial reporting process. Given management intent during the last decade, I think decidedly not. Management intent is merely a license to massage accounting numbers as managers please. Fortunately, the Justice Department calls such tactics fraud.

Chapter 2 of this document concerns qualitative characteristics. For the most part, this presentation is similar to that in Concepts Statement No. 2, though arranged somewhat differently. Concepts 2 had as its overarching qualitative characteristics relevance and reliability. This Preliminary Views expounds relevance, faithful representation, comparability, and understandability as the qualitative characteristics.

The discussion on faithful representation is interesting (QC.16-19) inasmuch as they distinguish between accounts that depict real world phenomena and accounts that are constructs with no real world referents. They explain that deferred debits and credits do not possess faithful representation because they are merely the creation of accountants. I hope that analysis applies to deferred income tax debits and credits.

Verifiability implies similar measures by different measurers (QC.23-26). I wish FASB and IASB to include auditability as an aspect of verifiability; after all, if you cannot audit something, it is hardly verifiable. Yet, the soon to be released standard on fair value measurements includes a variety of items that will prove difficult if not impossible to audit.

Understandability is obvious, though the two boards feel that users with a "reasonable knowledge of business and economic activities" can understand financial statements. I no longer agree. Such a person might employ a profit analysis model or ratio analysis on a set of financial statements and mis-analyze a firm's condition because he or she did not make analytical adjustments for off-balance sheet items and other fanciful tricks by managers. This includes so many of Enron's investors and creditors. No, to understand financial reporting today, you must be an expert in accounting and finance.

Benefits-that-justify-costs acts as a constraint on financial reporting. While this criterion is acceptable, too often the boards view costs only from the perspective of the preparers. I wish the boards explicitly acknowledged the fact that not reporting on some things adds costs to users. When a business enterprise engages in aggressive accounting, the expert user needs to employ analytical adjustments to correct this overzealousness. These adjustments consume the investor's economic resources and thus involve costs to the investment community.

In the basis-for-conclusions section, FASB and IASB explain that the concept of substance over form is included in the concept of faithful representation (see paragraphs BC2.17 and 18). While I don't have a problem with that, I think they should at least emphasize this point in Chapter 2 rather than bury it in this section. Substance over form is a critically important doctrine, especially as it relates to business combinations and leases, so it deserves greater stress.

On balance, the document is well written and contains a good clarification of the objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. I offer the criticisms above as a hope to strengthen and improve the Preliminary Views.

My most important comment, however, does not address any particular aspects within the document itself. Instead, I worry about the usefulness of this objective and these qualitative characteristics to FASB and IASB. To enjoy coherent financial reporting, there not only is need for a sound, comprehensive, and internally consistent framework, we also must have a board with the political will to utilize the conceptual framework. FASB ignored its own conceptual framework in its issuance of standards on:

* Leases (Aren't the financial commitments of the lessee a liability?) * Pensions (How can the pension intangible asset really be an asset as it has no real world referent?) * Stock options (Why did the board not require the expensing of stock options in the 1990s when stock options clearly involve real costs to the firm?), and * Special purpose entities (Why did the board wait for the collapse of Enron before dealing with this issue?).

Clearly, the low power of FASB -- IASB likewise possesses little power -- explains some of these decisions, but it is frustrating nonetheless to see the board ignore its own conceptual framework. Why engage in this deliberation unless FASB is prepared to follow through?

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries.

 


Suggestions for accountancy from the Directors of the SEC and the FASB

From The Wall Street Journal Accounting Weekly Review on December 9, 2005

TITLE: SEC's Cox Wants Simpler Rules, More Competition for Accounting
REPORTER: Judith Burns
DATE: Dec 06, 2005
PAGE: C3
LINK: http://online.wsj.com/article/SB113381176660114298.html
TOPICS: Accounting, Auditing, Auditing Services, Public Accounting, Sarbanes-Oxley Act, Securities and Exchange Commission

SUMMARY: Questions relate to helping students understand the status various influences on the accounting profession from the AICPA, the SEC, the FASB, and the legislature via the Sarbanes-Oxley Act.

QUESTIONS:
1.) Where did SEC Chairman Christopher Cox describe the ways in which he wants to see change in the accounting and auditing professions? What is the purpose of that organization? (Hint: you may find out about the organization's mission via its web site at www.aicpa.org 

2.) In accordance with law, how is the Securities and Exchange Commission (SEC) responsible for accounting and reporting requirements in the United States? Hint: you may investigate the SEC's mission via its web site at www.sec.gov 

3.) What are the issues associated with complex accounting rules? Who establishes those rules? In what way are those rules influenced by the SEC?

4.) The SEC has named an interim chairman of the Public Company Accounting Oversight Board (PCAOB). How is this speech's topic related to the process of change in leadership at the PCAOB?

5.) Commissioner Cox indicated his concern over the fact that only 4 public accounting firms perform audit and accounting work for most of the publicly traded companies in the U.S. and that regulators may have contributed to that concentration. How is that the case? What might regulators do to change that situation?

"SEC's Cox Wants Simpler Rules, More Competition for Accounting," by Judith Burns, The Wall Street Journal, December 6, 2005; Page C3 --- http://online.wsj.com/article/SB113381176660114298.html

U.S. securities regulators hope to make accounting rules less complicated while increasing competition in a field now dominated by just four firms, Securities and Exchange Commission Chairman Christopher Cox said.

Addressing a meeting of the American Institute of Certified Public Accountants, Mr. Cox called for clearer, more straightforward accounting rules, saying that would benefit investors, public companies and accountants.

"Plain English is just as important in accountancy," he said.

Mr. Cox also raised concern about concentration in the U.S. accounting profession, with the Big Four firms -- Deloitte & Touche LLP, Ernst & Young LLP, KPMG and PricewaterhouseCoopers -- handling the vast majority of public-company audits. He said this "intense concentration" isn't desirable, adding that regulators need to consider whether their rules are inhibiting competition in the field.

SEC Commissioner Paul Atkins, who also addressed the meeting, acknowledged that regulators were surprised by the cost of internal-control rules that took effect for the largest U.S. companies last year, and he said he hopes such costs will be lower this year.

The rules stem from the Sarbanes-Oxley Act, passed by Congress in 2002. They mandate that public companies make an annual examination of their internal controls related to financial reporting, subject to review by these companies' outside auditors.

The SEC is "at an early stage" in considering who should head the Public Company Accounting Oversight Board now that William McDonough, its former chairman, has stepped down, Mr. Atkins said.

Last week the SEC named oversight board member Bill Gradison, a member of Congress, as interim oversight board chairman. Mr. Atkins said Mr. Gradison, an Ohio Republican, could be in the running as a permanent chair "if he wants to be."

In repeated speeches, Dennis Beresford, former Chairman of the FASB, has called for simplification of accounting standards and guidelines.  For example see the following reference:
"Can We Go Back to the Good Old Days?" by Dennis R. Beresford, The CPA Journal --- http://www.nysscpa.org/cpajournal/2004/1204/perspectives/p6.htm 

 

December 6, 2005 message from Dennis Beresford [dberesfo@terry.uga.edu]

National Conference on Current SEC and PCAOB Developments. His talk is available at: http://www.sec.gov/news/speech/spch120505cc.htm 

He had three main messages:

1. Accounting rules need to be simplified. "The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules." "The sheer accretion of detail has, in time, led to one of the system's weaknesses - its extreme complexity. Convolution is now reducing its usefulness."

2. The concentration of auditing services in the Big 4 "quadropoly" is bad for the securities markets. The SEC will try to do more to encourage the use of medium size and smaller firms that receive good inspection reports from the PCAOB.

3. The SEC will continue to push XBRL. "The interactive data that this initiative will create will lead to vast improvements in the quality, timeliness, and usefulness of information that investors get about the companies they're investing in."

A very interesting talk - one that seems to promise a high level of cooperation with the accounting profession.

Denny

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


Convergence of foreign and domestic accounting rules could catch some U.S. companies by surprise
Although many differences remain between U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), they are being eliminated faster than anyone, even Herz or Tweedie, could have imagined. In April, FASB and the IASB agreed that all major projects going forward would be conducted jointly. That same month, the Securities and Exchange Commission said that, as soon as 2007, it might allow foreign companies to use IFRS to raise capital in the United States, eliminating the current requirement that they reconcile their statements to U.S. GAAP. The change is all the more remarkable given that the IASB was formed only four years ago, and has rushed to complete 25 new or revamped standards in time for all 25 countries in the European Union to adopt IFRS by this year. By next year, some 100 countries will be using IFRS. "We reckon it will be 150 in five years," marvels Tweedie. "That leaves only 50 out."
Tim Reason, "The Narrowing GAAP:  The convergence of foreign and domestic accounting rules could catch some U.S. companies by surprise," CFO Magazine December 01, 2005 ---
http://www.cfo.com/article.cfm/5193385/c_5243641?f=magazine_coverstory


David Fordham wrote the following after a very long and very interesting illustration of corporate accounting:

*****************
Seeing businesses in Europe, I'm learning that the European laws are to accountants what weight lifting is to the Mr. Atlas competition. The really good European accountants are without peer when it comes to working within the system to turn a profit under the rules. So this begs the question: should we more agressively teach accountants how to help their managers? Would we be more valuable as "trusted partners" to management if we could be more helpful in this way?
******************

Jensen Comment:

First I would note that in Europe most financing was and still is raised from banks who work in close partnership with companies. As in Japan, these banks are almost insiders that can get most any kind of information they want irrespective of accounting rules.

Until the IASB wanted to crack into the U.S. Stock exchanges, the IAS standards were pretty much milk toast. If the former IASC (it was IASC in those days) standards had replaced the FASB standards, U.S. Corporations would have been ecstatic with IASC off-balance sheet financing opportunities and opportunities to create hidden reserves and manage earnings. European companies are notorious for managing earnings with hidden reserves.

Whether the two Davids (Albrecht and Fordham) like it or not, the FASB has struggled to make management of earnings and the hiding of debt more difficult in the U.S. The standards are now almost incomprehensible (especially for derivatives, SPEs, mezzanine financing, re-insurance, etc.) because U.S. companies countered the FASB standards with ever-increasing exotic financial contracts.

Before complaining about the complexity of FASB standards, first take a serious look at the absolute nightmare of complexity of the financial and insurance contracting. Especially look at the absolutely ridiculous derivative financial instrument contracts that are intentionally designed to be too complex for accountants or trust investors to understand --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds 

Many exotic contracts are relatively new. We now have over $100 trillion in interest rate swaps that were not even invented until 1984.

One of my favorite quotations is a 1994 quotation from Denny Beresford while, as Chairman of the FASB, he was making a presentation in NYC at the annual AAA meetings. He was at the time being extremely pressured by the SEC to issue what became FAS 133 in 1998.

The quotation went something like this:

*******************
"The Director of the SEC, Arthur Levitt, tells me the three main problems for the SEC and FASB are derivatives, derivatives, and derivatives. I had to ask some experts to tell me what a derivative is, because until now I thought a derivative was something a person my age takes when prunes don't quite do the job. John Stewart of Arthur Andersen tells me that there are over 1,000 kinds of complex derivative contracts . . . "
********************

Once again, David, my main point to you is that accounting standards outside the U.S., Canada, Australia, and New Zealand, did not have to be too complex since most financing was raised from insiders (mostly banks) who had inside information sources. The countries with the complex standards rely more on equity investors who only get the information provided to the public by companies. The FASB has declared that protection of the public investors is its number one priority (as is also the case with the SEC).

The real problem we are now facing is that corporations no longer take accounting seriously other than as something to get around. This has led to an ever-increasing game where the FASB discovers misleading accounting, writes a new standard or interpretation, and subsequently discovers how corporations are re-writing contracts to get around the new standard.

Will this vicious cycle ever cease? Not as long as corporate managers continue to view accounting as an opportunity to creatively paint rosy portraits.

David Albrecht asked:
"Has anyone a good definition of financial statement transparency?"

Jensen reply:
Here's one paper that discusses the problem of transparency ---http://www.accenture.com/xdoc/en/ideas/outlook/6_2005/pdf/share_value.pdf
The snipped version is
http://snipurl.com/ShareholderValue

October 18, 2005 reply from Bender, Ruth [r.bender@CRANFIELD.AC.UK]

I just want to point out that the UK, which is in Europe, doesn't meet Bob's description of mostly bank finance. Our financing is much like that of the US - mostly equity, and our lenders are kept at arm's length from the board.

And a lot of our accountants are howling at the way IFRS change the accounts. It's not that people are trying to hide things by using lax standards (although, from my experience as an auditor, I know that this does of course happen). It's the fact that we and others don't understand accounts any more! I'm doing some research at the moment that involves interviewing experienced CFOs of large listed companies. Almost all of them are complaining that the IFRS, being 'market' facing, are making a nonsense of the numbers, because in most cases there isn't a market, and so they are having to use poor proxies. It's taking us away from factually based accounts and into a world of estimates - which in some ways makes earnings management easier, not harder! That was the gist of the FT article that David cited.

Incidentally, there is a really interesting paper about the fundamental differences between US and UK approaches to financial regulation and standards, that sets out why convergence is going to be a problem - if it ever happens. The title is "Where economics meets the law: US reporting systems compared to other markets" and you can download it from the ICAEW's website at
http://www.icaew.co.uk/members/index.cfm?AUB=TB2I_79757|MNXI_79757

Outline is:

"In particular the paper examines: * the evolution of the US financial reporting model; * contrasting approaches to accounting and auditing: 'principles' versus 'prescription'; * shareholder rights and the governance function of annual financial statements; * investor behaviour and corporate governance; * accounting convergence with the US or recognition of the differences.

Divided by common language is the first in the Beyond the myth of Anglo-American corporate governance series which aims to:

Challenge commonly held assumptions regarding the perceived similarity of US and UK corporate governance systems; Identify possible areas for convergence and, where not practical, clarify why elements of one system may not be appropriate for incorporation into another; Anticipate developments and set out challenges for future thinking about the US and UK models and encourage transatlantic dialogue."

Regards

Dr Ruth Bender
Cranfield School of Management UK

 


Dr. Ijiri was one of my major professors in the doctoral program at Stanford.  I'm naturally drawn to things he writes.  He is one of the long-time advocates of historical cost based accounting.  He is in fact much more dedicated to it than Bill Paton (but not Ananias Littleton) where Paton and Littleton are best known advocates of historical cost accounting.  The following is the lead article in the Journal of Accounting and Public Policy, July/August 2005, pp. 255-279.

US accounting standards and their environment:
A dualistic study of their 75-years of transition

Yuji Ijiri
Tepper School of Business, Carnegie Mellon University

Abstract
This article examines the 75-year transition of the US accounting standards and their environment.  It consists of three parts, each having two themes: Part (1) Past changes: 1. The first market crash and the second market crash; 2. Facts-based accounting and forecasts-based accounting,  Part (II) Present issues: 3. The reform legislation (Sarbanes-Oxley Act) and the reform administration; 4. Procedural fairness and pure fairness, and Part (III) Future trends: 5. Forecast protection and forecast separation; 6. Principles-based systems and rules-based systems.  These themes are each examined from dualistic perspectives by contrasting two fundamental concepts or principles.  The article concludes with the strong need to focus on "procedural fairness" in establishing accounting standards as well as in implementing the reform legislation and administration, in contrast to "pure fairness" that is almost impossible to achieve by anyone.


Accounting Rules So Plentiful "It's Nuts"
There are perhaps 2,000 accounting rules and standards that, when written out, possibly exceed the U.S. tax code in length. Yet, there are only the Ten Commandments. So Bob Herz, chairman of the rule-setting Financial Accounting Standards Board, is asked this: How come there are 2,000 rules to prepare a financial statement but only 10 for eternal salvation? "It is nuts," Herz allows. "But you're not going to get it down to ten commandments because the transactions are so complicated. . . . And the people on the front lines, the companies and their auditors, are saying: 'Give me principles, but tell me exactly what to do; I don't want to be second-guessed.' " Nonetheless, the FASB (pronounced, by accounting insiders, as "FAZ-bee") is embarking on efforts to simplify and codify accounting rules while improving them and integrating them with international standards.
"Accounting Rules So Plentiful 'It's Nuts' ; Standards Board Takes on Tough Job to Simplify, Codify," SmartPros, June 8, 2005 --- http://accounting.smartpros.com/x48525.xml


Jensen Comment:  Shyam Sunder (Yale University) is the 2005 President-Elect of the American Accounting Association --- http://aaahq.org/about/Nominees2005.htm

From Jim Mahar's blog on July 18 2005 --- http://financeprofessorblog.blogspot.com/

SSRN-Social Norms versus Standards of Accounting by Shyam Sunder --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=725821

A few highlights from the paper:

"Historically, norms of accounting played an important role in corporate financial reporting. Starting with the federal regulation of securities, accounting norms have been progressively replaced by written standards....[and]enforcement mechanisms, often supported by implicit or explicit power of the state to impose punishment. The spate of accounting and auditing failures of the recent years raise questions about the wisdom of this transition from norms to standards....It is possible that the pendulum of standardization in accounting may have swung too far, and it may be time to allow for a greater role for social norms in the practice of corporate financial reporting."

"The monopoly rights given to the FASB in the U.S. (and the International Accounting Standards Board or IASB in the EU) deprived the economies, and their rule makers, from the benefits of experimentation with alternative rules and structures so their consequences could be observed in the field before deciding on which rules, if any, might be more efficient. Rule makers have little idea, ex ante, of the important consequences (e.g., the corporate cost of capital) of the alternatives they consider."

"Given the deliberate and premeditated nature of financial fraud and misrepresentation (and other white color crimes), "clarifications of the rules invite and facilitate evasion"

And my favorite!

"Indeed the U.S. constitution, a document that covers the entire governance system for the republic, has less than 5,000 words. The United Kingdom has no written constitution. A great part of the governance of both countries depends on norms. Do accountants deal with greater stakes?"

BTW: I like the prescriptions called for as well, but will allow you to read those (pages 20 to 22 of paper)

Cite: Sunder, Shyam, "Social Norms versus Standards of Accounting" (May 2005). Yale ICF Working Paper No. 05-14. http://ssrn.com/abstract=725821


Let me close by citing Harry S. Truman who said, "I never give them hell; I just tell them the truth and they think its hell!"
Great Speeches About the State of Accountancy

"20th Century Myths," by Lynn Turner when he was still Chief Accountant at the SEC in 1999 --- http://www.sec.gov/news/speech/speecharchive/1999/spch323.htm

It is interesting to listen to people ask for simple, less complex standards like in "the good old days." But I never hear them ask for business to be like "the good old days," with smokestacks rather than high technology, Glass-Steagall rather than Gramm-Leach, and plain vanilla interest rate deals rather than swaps, collars, and Tigers!! The bottom line is—things have changed. And so have people.

Today, we have enormous pressure on CEO’s and CFO’s. It used to be that CEO’s would be in their positions for an average of more than ten years. Today, the average is 3 to 4 years. And Financial Executive Institute surveys show that the CEO and CFO changes are often linked.

In such an environment, we in the auditing and preparer community have created what I consider to be a two-headed monster. The first head of this monster is what I call the "show me" face. First, it is not uncommon to hear one say, "show me where it says in an accounting book that I can’t do this?" This approach to financial reporting unfortunately necessitates the level of detail currently being developed by the Financial Accounting Standards Board ("FASB"), the Emerging Issues Task Force, and the AICPA’s Accounting Standards Executive Committee. Maybe this isn’t a recent phenomenon. In 1961, Leonard Spacek, then managing partner at Arthur Andersen, explained the motivation for less specificity in accounting standards when he stated that "most industry representatives and public accountants want what they call ‘flexibility’ in accounting principles. That term is never clearly defined; but what is wanted is ‘flexibility’ that permits greater latitude to both industry and accountants to do as they please." But Mr. Spacek was not a defender of those who wanted to "do as they please." He went on to say, "Public accountants are constantly required to make a choice between obtaining or retaining a client and standing firm for accounting principles. Where the choice requires accepting a practice which will produce results that are erroneous by a relatively material amount, we must decline the engagement even though there is precedent for the practice desired by the client."

We create the second head of our monster when we ask for standards that absolutely do not reflect the underlying economics of transactions. I offer two prime examples. Leasing is first. We have accounting literature put out by the FASB with follow-on interpretative guidance by the accounting firms—hundreds of pages of lease accounting guidance that, I will be the first to admit, is complex and difficult to decipher. But it is due principally to people not being willing to call a horse a horse, and a lease what it really is—a financing. The second example is Statement 133 on derivatives. Some people absolutely howl about its complexity. And yet we know that: (1) people were not complying with the intent of the simpler Statements 52 and 80, and (2) despite the fact that we manage risk in business by managing values rather than notional amounts, people want to account only for notional amounts. As a result, we ended up with a compromise position in Statement 133. To its credit, Statement 133 does advance the quality of financial reporting. For that, I commend the FASB. But I believe that we could have possibly achieved more, in a less complex fashion, if people would have agreed to a standard that truly reflects the underlying economics of the transactions in an unbiased and representationally faithful fashion.

I certainly hope that we can find a way to do just that with standards we develop in the future, both in the U.S. and internationally. It will require a change in how we approach standard setting and in how we apply those standards. It will require a mantra based on the fact that transparent, high quality financial reporting is what makes our capital markets the most efficient, liquid, and deep in the world.


Landmark Exposure Draft containing joint proposals to improve and align accounting for business combinations

"IASB and FASB Publish First Major Exposure Draft Standard," AccountingWeb, July 11, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=101084

The International Accounting Standards Board (IASB), based in London, and the US Financial Accounting Standards Board (FASB) have announced publication of an Exposure Draft containing joint proposals to improve and align accounting for business combinations. The proposed standard would replace IASB’s International Financial Reporting Standard (IFRS) 3, Business Combinations and the FASB’s Statement 141, Business Combinations.

Sir David Tweedie, IASB Chairman and Bob Herz, FASB Chairman, emphasized the value of a single standard to users and preparers of financial statements of companies around the world as it improves comparability of financial information. "Development of a single standard demonstrates the ability of the IASB and the FASB to work together,” Tweedie continued.

Continued in article


"Can We Go Back to the Good Old Days?" by Dennis R. Beresford, The CPA Journal --- http://www.nysscpa.org/cpajournal/2004/1204/perspectives/p6.htm 

Recently I visited my pharmacy to pick up eyedrops for my two golden retrievers. Before he would give me the prescription, the pharmacist insisted I sign a form on behalf of Murphy and Millie, representing that they had been apprised of their rights under the new medical privacy rules. This ludicrous situation is a good illustration of how complicated life has gotten.

I was still shaking my head later that same day when I was clicking mindlessly through the 150 or so channels that my local cable TV service makes available to me. I happened to land on The Andy Griffith Show, and the few minutes I spent with Andy, Barney, Opie, and Aunt Bea got me thinking about the Good Old Days. Wouldn’t it be nice, I thought, to go back to the Good Old Days of the profession in the early 1960s when I graduated from college?

Back then, accounting was really simple. The Accounting Principles Board hadn’t issued any standards yet, and FASB didn’t exist. So we didn’t have 880 pages listing all of the current rules and guidance on derivative financial instruments, for example. The totality of authoritative GAAP at that time fit in one softbound booklet about one-third the size of the new derivatives guidance.

In those Good Old Days, the SEC had been around for quite a while but it rarely got excited about accounting matters. Neither mandatory quarterly reporting nor management’s discussion and analysis (MD&A) had yet come into being, for example. And annual report footnotes could actually be read in an hour or so.

The country had eight major accounting firms, and becoming a partner in one was a truly big deal. Lawsuits against accounting firms were rare, and almost none of them resulted in substantial damages against the accountants.

In short, accounting seemed more like a true profession, with good judgment and experience key requirements for success.

Of course, however much we might like to return to simpler times, it’s easier said than done. And most of us would never give up the many benefits of progress, such as photocopiers, personal computers, e-mail, the Internet, and cellphones. But I think that accounting rules may have become more complicated than necessary.

Let me start with a mea culpa. You may remember the famous line from the comic strip Pogo: “We have met the enemy, and he is us!” Well, you may be tempted to rephrase that quote to “We have met the enemy, and he is … Beresford!”

I plead guilty to having led the development of 40 or so new accounting standards over my time at FASB. A number of them had pervasive effects on financial statements, and some have been costly to apply. I always tried to be as practical as possible, however, although probably few would say that I was 100% successful in meeting that objective.

In any event, more-recent accounting standards and proposals seem to be getting increasingly complicated and harder to apply. Even the best-intentioned accountants have difficulty keeping up with all of the changes from FASB, the AICPA, the SEC, the EITF, and the IASB. And some individual standards, such as those on derivatives and variable-interest entities, are almost impossible for professionals, let alone laypeople, to decipher.

Furthermore, these days, companies are subject to what I’ll call quadruple jeopardy. They have to apply GAAP as best they can, but they are then subject to as many as four levels of possible second-guessing of their judgments.

First, the external auditors must weigh in. Second, the SEC will now be reviewing all public companies’ reports at least once every three years. Third, the PCAOB will be looking at a sample of accounting firms’ audits, and that could include any given company’s reports. Finally, the plaintiff’s bar is always looking for opportunities to challenge accounting judgments and extort settlements. Broad Principles Versus Detailed Rules

I suspect that all this second-guessing is what leads many companies and auditors to ask for more-detailed accounting rules. But we may have reached the point of diminishing returns. In response to the complexity and sheer volume of many current standards, some have suggested that accounting standards should be broad principles rather than detailed rules. FASB and the SEC have expressed support for the general notion of a principles-based approach to accounting standards. (It’s kind of like apple pie and motherhood: Who can object to broad principles?) Of course, implementing such an approach is problematic.

In 2002, FASB issued a proposal on this matter. And last year the SEC reported to Congress on the same topic. Specific things that FASB suggested could happen include the following:

Standards should always state very clear objectives. Standards should have a clearly defined scope and there should be few, if any, exceptions (e.g., for certain industries). Standards should contain fewer alternative accounting treatments (e.g., unrealized gains and losses on marketable securities could all be run through income rather than the various approaches used at present). FASB also said that a principles-based approach probably would include less in the way of detailed interpretive and implementation guidance. Thus, companies and auditors would be expected to rely more on professional judgment in applying the standards.

The SEC prefers to call this approach “objectives-based” rather than “principles-based.” SEC Chief Accountant Donald Nicolaisen recently repeated the SEC’s support for such an approach, agreeing with the notion of clearly identifying and articulating the objective for each standard. Although he also suggested that objectives-based standards should avoid bright-line tests such as lease capitalization rules, he called for “sufficiently detailed” implementation guidance, including real-world examples.

Although FASB and the SEC may have reached a meeting of the minds on the overall notion of more general principles, they may disagree on the key point of how much implementation guidance to provide. FASB thinks that a principles-based approach should include less implementation guidance and rely more on judgment, while the SEC thinks that “sufficiently detailed” guidance is needed, and I suspect that would make it difficult to significantly reduce complexity in some cases.

In any event, FASB recently said that it may take “several years or more” for preparers and auditors to adjust to a change to less detail. Meantime, little has changed with respect to individual standards, which if anything are becoming even harder to understand and apply.

I’ve heard FASB board members say that FASB Interpretation (FIN) 46, on variable-interest entities (VIE), is an example of a principles-based standard. I assume they say this because FIN 46 states an objective of requiring consolidation when control over a VIE exists. But the definition of a VIE and the rules for determining when control exists are extremely difficult to understand.

FASB recently described what it meant by the operationality of an accounting standard. The first condition was that standards have to be comprehensible to readers with a reasonable level of knowledge and sophistication. This doesn’t seem to be the case for FIN 46. Many auditors and financial executives have told me that only a few individuals in the country truly know how to apply FIN 46. And those few individuals often disagree among themselves!

Such complications make it difficult to get decisions on many accounting matters from an audit engagement team. Decisions on VIEs, derivatives, and securitization transactions, to name a few, must routinely be cleared by an accounting firm’s national experts. And with section 404 of the Sarbanes-Oxley Act (SOA) and new concerns about auditor independence, getting answers is now even harder. For example, in the past, companies would commonly consult with their auditors on difficult accounting matters. But now the PCAOB may view this as a control weakness, under the assumption that the company lacks adequate internal expertise. And if auditors get too involved in technical decisions before a complex transaction is completed, the SEC or the PCAOB might decide that the auditors aren’t independent, because they’re auditing their own decisions.

When things become this complicated, I wonder whether it’s time for a new approach. Maybe we do need to go back to the Good Old Days.

Internal Controls

Today, financial executives are probably more concerned about internal controls than new accounting requirements. For the first time, all public companies must report on the adequacy of their internal controls over financial reporting, and outside auditors must express their opinion on the company’s controls. Many people have questioned whether this incredibly expensive activity is worth the presumed benefit to investors. While one might argue that the section 404 rules are a regulatory overreaction, shareholders should expect good internal controls. And audit committees, as shareholders’ representatives, must demand those good controls. So this has been by far the most time-consuming topic at all audit committee meetings I’ve attended in the past couple of years.

Companies and auditors are spending huge sums this year to ensure that transactions are properly processed and controlled. Yet the most perfect system of internal controls and the best audit of them might not catch an incorrect interpretation of GAAP. A good example of this was contained in the PCAOB’s August 2004 report on its initial reviews of the Big Four’s audit practices. The report noted that all four firms had missed the fact that some clients had misapplied EITF Issue 95-22. As the New York Times (August 27, 2004) noted, “The fact that all of the top firms had been misapplying it raised issues of just how well they know the sometimes complicated rules.”

Responding to a different criticism in that same PCAOB report, KPMG noted, “Three knowledgeable informed bodies—the firm, the PCAOB, and the SEC—had reached three different conclusions on proper accounting, illustrating the complex accounting issues registrants, auditors and regulators all face.”

Fair Value Accounting

Even those who are very confident about their understanding of the current accounting rules shouldn’t get complacent: Fair value accounting is right around the corner, making things even harder. In fact, it is already required in several recent standards.

To be clear, I’m not opposed in general to fair value accounting. It makes sense for marketable securities, derivatives, and probably many other financial instruments. But expanding the fair value concept to many other assets and liabilities is a challenge.

Consider this sentence from FASB’s recent exposure draft on fair value measurements: “The Board agreed that, conceptually, the fair value measurement objective and the approach for applying that objective should be the same for all assets and liabilities.” In that same document, FASB said, “Users of financial statements generally have agreed that fair value information is relevant.”

So the overall objective of moving toward a fair value accounting model seems clear. Of course, that doesn’t necessarily mean that we will get there soon. In fact, in the same exposure draft the board said that it would continue to use a project-by-project approach to decide on fair value or some other measure. But in reality the board has been adopting a fair value approach in most recent decisions:

SFAS 142, on goodwill, requires that impairment losses for certain intangible assets be recognized based upon a decline in the fair value of the asset. SFAS 143, on asset retirement obligations, requires that these liabilities be recorded initially at fair value rather than what the company expects to incur. SFAS 146, on exit or disposal activities, calls for the fair value of exit liabilities to be recorded, not the amount actually expected to be paid. FIN 45, on guarantees, says that a fair value must be recorded even when the company doesn’t expect to have to make good on a guarantee. A fair value approach is also integral to other pending projects, including the conditional asset retirement obligation exposure draft. Under such a standard, a company might have to record a fair value liability even when it doesn’t expect to incur an obligation. Fair value is also key to projects on business combination purchase procedures; differentiating between liabilities and equity; share-based payments (stock options); and the tremendously important revenue recognition project.

I have three major concerns about such pervasive use of fair value accounting. First, in many cases determining fair value in any kind of objective way will be difficult if not impossible. Second, the resulting accounting will produce answers that won’t benefit users of financial statements. Third, those answers will be very difficult to explain to business managers, with the result that accounting will be further discredited in their minds.

The approach that FASB is using for what I would call operating liabilities is particularly troubling. Take, for example, a company that owns and operates a facility that has some asbestos contamination. The facility is safe and can be operated indefinitely, but if the company wanted to sell the property it would have to remediate that contamination. The company has no plans to sell the property. But FASB’s exposure draft on conditional asset retirement obligations calls for the company to estimate and record a fair value liability. This would be based on what someone else would charge now to assume the obligation to clean up the problem at some unspecified future date. The board admits that it might be difficult to determine what the fair value would be in this case, and companies could omit the liability if they simply couldn’t make a reasonable estimate.

Although FASB and the SEC expect most companies to be able to make a reasonable estimate, in reality I think that will be possible only rarely. Even more important, does it really make sense to record a liability when the company might believe that there is only a 5% chance that it will have to be paid? Consider how this line of reasoning might apply to litigation. Presently, liabilities are recorded only when it’s probable that a loss has been incurred and that a reasonable estimate of the loss can be made. So if a company were sued for $1 billion but there were only a 1% chance that it would lose, nothing would be recorded. The fair value approach would seem to call for a liability of $10 million in this case, based on 1% of $1 billion.

One might think this kind of accounting will apply only in the distant future, but FASB is due to release its proposal on purchase accounting procedures in the next few months, and I understand that the proposal will require exactly this kind of accounting.

In addition to the very questionable relevance of this, I don’t know how anyone would ever be able to reasonably determine the 1% likelihood I assumed. How would an auditor attest to the reliability of financial statements whose results depend significantly on such assumptions? And where would an auditor go to obtain objective audit evidence against which to evaluate such assumptions?

Fair value definitely makes sense in certain instances, but FASB seems intent on extending the notion beyond the boundaries of common sense. FASB also seems to have an exaggerated notion of what companies and auditors are actually capable of doing. Perhaps we should consider FASB’s faith in the profession to be a compliment. Rather than feeling complimented, however, I think that this just makes many of us long for the Good Old Days.

Fair Value Accounting and Revenue Recognition

Currently, asset retirement obligations and exit costs apply to only a few companies, and even guarantees are not an everyday issue. All companies, however, have revenues—or at least they hope to have them. And for the past year or so, FASB has been engaged in a complete rethinking of revenue recognition. This, of course, was precipitated by the numerous SEC enforcement cases on improper revenue recognition. Most cases, however, involved failure to follow existing standards, and most cases also resulted in premature recognition of revenue.

Now there’s no doubt that the current revenue accounting rules are overly complicated, with many specific rules depending on the type of product or service being sold. But FASB’s current thinking would replace these rules with an asset and liability–oriented approach based on fair value accounting. This may well make revenue accounting even more complicated than the detailed rules that we are at least used to working with.

For example, assume product A is being sold to a customer. It costs $50 to produce product A and the customer has agreed to pay a nonrefundable $100 in exchange for the company’s promise to deliver this hot product next month. What should the company record at month-end?

Most accountants would probably think first of the traditional approach and conclude that the earnings process had not been completed. Because product A hasn’t been completed and shipped to the customer, the $100 credit is unearned income. Some aggressive accountants would probably say that the company should record the sale now because the $100 is nonrefundable. In that case the company would probably also record a liability for the $50 cost that will be incurred next month.

FASB has a surprise for both. The board is presently thinking about whether revenue for what it calls the “selling activity”—the difference between the $100 received and the assumed fair value of the obligation to deliver the product—should be recorded now. This assumed fair value would be the estimated amount that other companies would charge to produce product A. In other words, it’s the hypothetical amount a company would have to pay someone else to assume the obligation to produce the product. The company would have to make this assumption even though it is 100% sure that it will make the product itself rather than have someone else make it.

If one could ever determine what other companies would charge, I suspect that the amount would be higher than the $50 expected cost, because another company probably would require a risk premium to produce a product that it isn’t familiar with. It would want to earn a profit as well. Let’s assume in this case that the fair value could be determined as $80. If so, the company would record now $20 of revenue and profit for what FASB calls the selling activity. Next month it would record the $80 remaining amount of revenue, along with the $50 cost actually incurred. It’s unclear when the company would record sales commissions, delivery costs, and similar expenses, but I assume these would have to be allocated somehow.

Given that this project was added to FASB’s agenda in large part because of premature recognition of revenue in some SEC cases—Enron recognized income based on the supposed fair value of energy contracts extending 30 years into the future—it is ironic that the project may well mandate recognition earlier than most accountants would consider appropriate. That kind of premature revenue recognition is now generally prohibited, but other examples could follow, depending on the outcome of this FASB project.

Although the revenue recognition project is still in an early stage and both my understanding and the board’s positions could change, FASB seems determined to use some sort of fair value approach to revenue recognition in many cases. If this happens, we will all be wishing for the Good Old Days to return.

Is All That EITF Guidance Really Necessary?

In early 2004, FASB’s board members began reviewing all EITF consensus positions. A majority of board members now have to “not disagree” with the EITF before those positions become final and binding on companies. This gives FASB more control over the EITF process, and it should prevent the task force from developing positions that the board sees as inconsistent with existing GAAP.

Although I think the task force has done a great deal of good over its 20-year existence (I was a charter member), I think it’s time to challenge whether everything that the EITF does is necessary or even consistent with its original purpose. Too many of the task force’s topics in recent years can’t really be called “emerging issues.” Rather, the task force often takes up long-standing issues where it thinks that some limitations need to be placed on professional judgment.

For example, a couple of years ago the SEC became concerned about the accounting for certain investments in other companies. For years we’ve had standards that call for recognition of losses when market value declines are “other than temporary.” The EITF discussed this matter at eight meetings over two years and also relied on a separate working group of accounting experts. Earlier this year, a final consensus position was issued. It includes a lengthy abstract that tells companies what factors to consider, including the following matters:

Evidence to support the ability and intent to continue to hold the investment; The severity of the decline in value; How long the decline has lasted; and The evidence supporting a market price recovery. So now we have a “detailed rule” on this matter. Will this result in more consistency in practice? Will investors and other users of financial statements receive better information as a result? Is the result worth the additional effort?

Moreover, after two years of effort on this project, FASB had to reconsider the whole thing because no one had considered the effect on debt securities held as available for sale by financial institutions. So now the board is developing even more specifics to deal with the unintended consequences of the rule.

Again, I support the EITF, and I believe it has generally done a great job. The members try to develop practical ways to deal with current problems. Nonetheless, both the task force and FASB may need to more carefully challenge whether all of the EITF’s projects are really needed. If FASB actually issued relatively broad standards, there probably would be a need for the EITF to provide supplemental guidance on some issues. But we now seem to have the worst of all worlds, with quite detailed accounting standards being accompanied by even more detailed EITF guidance.

A Multitude of Challenges

I don’t intend to seem overly critical of FASB and others who are working to improve financial reporting. It’s a tough job, and the brickbats always outnumber the bouquets. If I didn’t strongly support accounting standards setting I wouldn’t have spent 10 Qs years on the inside of the process. Still, those years at FASB, as well as my time before and after, have caused me to develop strong views on these issues. And I truly do believe that standards have gotten just too complicated.

The announced move to broader principles is one I fully support. That job won’t be easy, but it has to be tried or the sea of detail will become even deeper in the near future. FASB needs to actually start doing this and not allow its actions to speak otherwise. And companies, auditors, and regulators need to support such a move and resist the temptation to seek answers to every imaginable question. Furthermore, companies and auditors may have to become more principled before a principles-based approach will work.

Part of this process could be for the EITF to be more judicious in what it takes on. Also, I urge FASB to reevaluate its attitude toward fair value accounting. I believe FASB is moving much faster in this area than preparers, auditors, and users of financial statements can accommodate. Furthermore, the SEC and other regulators may not yet be on board with this new thinking.

In the final analysis, we won’t be able to return to my so-called Good Old Days. But we have to make sure that what accounting and accountants can do is meaningful and operational. We never want to look back and ask, “Remember the Good Old Days, when accounting was important?”

-------------------------------------------------------------------------------- 
CPA Journal Editorial Board member Dennis R. Beresford, CPA, was recently named the 2005 recipient of the Gold Medal for Distinguished Service from the AICPA. He received the award on October 26, during the fall meeting of the Institute’s governing council in Orlando. Beresford is the Ernst & Young Executive Professor of Accounting at the J.M. Tull School of Accounting at the University of Georgia, Terry College of Business. From 1987 to 1997, he was chairman of FASB. Prior to joining FASB, he was national director of accounting standards for Ernst & Young.ecently I visited my pharmacy to pick up eyedrops for my two golden retrievers. Before he would give me the prescription, the pharmacist insisted I sign a form on behalf of Murphy and Millie, representing that they had been apprised of their rights under the new medical privacy rules. This ludicrous situation is a good illustration of how complicated life has gotten.

 


From the FASB in July 2004 "FASB Response to SEC Study on the Adoption of a Principles-Based Accounting System" --- http://www.fasb.org/response_sec_study_july2004.pdf 

Introduction

In July 2003, the staff of the Securities and Exchange Commission (SEC) submitted to Congress its Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System (the Study). The Study includes the following recommendations to the Financial Accounting Standards Board (FASB or Board):

1. The FASB should issue objectives-oriented standards.

2. The FASB should address deficiencies in the conceptual framework.

3. The FASB should be the only organization setting authoritative accounting

guidance in the United States.

4. The FASB should continue its convergence efforts.

5. The FASB should work to redefine the GAAP hierarchy.

6. The FASB should increase access to authoritative literature.

7. The FASB should perform a comprehensive review of its literature to identify standards that are more rules-based and adopt a transition plan to change those standards.

The Board welcomes the SEC’s Study and agrees with the recommendations. Indeed, a number of those recommendations relate to initiatives the Board had under way at the time the Study was issued.1 The Board is committed to continuously improving its standard-setting process. The Board’s specific responses to the recommendations in the Study are described in the following sections of this paper.

Objectives-Oriented Standards

In the Study, the SEC staff recommends that "those involved in the standard-setting

process more consistently develop standards on a principles-based or objectives-oriented

basis" (page 4).2 According to the Study (page 4), an objectives-oriented standard would

have the following characteristics:

Be based on an improved and consistently applied conceptual framework;

Clearly state the accounting objective of the standard;

Provide sufficient detail and structure so that the standard can be operationalized and applied on a consistent basis;1

Minimize exceptions from the standard;

Avoid use of percentage tests ("bright-lines") that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard.

The “objectives-oriented” approach to setting standards described above (and expanded
upon in the Study) is similar to the principles-based approach described in the Board’s
Proposal. After discussing the comments received on its Proposal, the Board agreed that
its conceptual framework needs to be improved. This is because an internally consistent
and complete conceptual framework is critical to a standard-setting approach that places
more emphasis on the underlying principles that are based on that framework. Pages 8
and 9 of this paper further describe the Board’s activities related to the conceptual
framework; the following sections address the other characteristics of an objectivesoriented
approach addressed in the Study.


Format and Content of Standards

The Board agrees with the Study’s recommendation to improve the format and content of its standards. In particular, The Board agrees that the objective and underlying principles  of a standard should be clearly articulated and prominently placed in FASB standards. In response to comments received on its Proposal, the Board agreed that although its existing standards are based on concepts and principles, the understandability of its standards could be improved by writing its standards in ways that (a) clearly state the accounting objective(s), (b) clearly articulate the underlying principles, and (c) improve the explanation of the rationale behind those principles and how they relate to the conceptual framework.

The Board is working on developing a format for its standards that will encompass the attributes of an objectives-oriented standard described in the Study, for example, describing the underlying objective of the standard in the introductory paragraphs, using bold type to set off the principles,3 and providing a glossary for defined terms.

In addition, the Board is working with a consultant to identify changes in the organization and exposition of its standards that will increase the understandability of those standards.  Accounting standards by their nature will include many specific technical terms; however, the Board believes it can do a better job simplifying the language used in its standards to describe how to account for complex transactions. In addition, the Board will strive to apply other effective writing techniques to enhance constituents’ understanding of FASB standards.

When discussing proposed accounting standards or specific provisions of a standard, many of the Board’s constituents comment on whether a standard is "operational."  Because that term can mean different things to different people, the Board decided to define the term operational for its purposes. The Board uses the term operational to mean the following:

A provision/standard is comprehensible by a reader who has a reasonable level of knowledge and sophistication,

The information needed to apply the provision/standard is currently available or can be created, and 

The provision/standard can be applied in the manner in which it was intended. The Board believes that if its standards are more understandable, they also will be more operational.

Implementation Guidance

As noted in the Board’s Proposal, an approach to setting standards that places more emphasis on principles will not eliminate the need to provide interpretive and implementation guidance for applying those standards. Thus, the Board agrees that some amount of implementation guidance is needed in objectives-oriented standards in order for entities to apply those standards in a consistent manner. The Board uses the term implementation guidance to refer to all of the guidance necessary to explain and operationalize the principles (that is, the explanatory text in the standards section, the definitions in the glossary, and guidance and examples included in one or more appendices that help an entity apply the provisions in the standards section). The Board believes that the amount of necessary guidance will vary depending on the nature and complexity of the arrangements that are the subject of the standard. The Board believes that there should be enough guidance such that a principle is understandable, operational, and capable of being applied consistently in similar situations. Judgment is required to decide how much guidance is needed to achieve those objectives, without providing so much guidance that the overall standard combined with its implementation guidance becomes a collection of detailed rules. Therefore, the amount and nature of implementation guidance will vary from standard to standard. 

The Board believes that its primary focus should be providing broadly applicable implementation guidance, not providing guidance on relatively narrow and less pervasive issues, including, for example, issues that are specific to certain entities or industries. When developing that implementation guidance, the Board plans to apply the same guidelines that underpin objectives-oriented standards. For example, rather than consisting of a list of rules or bright lines, the implementation guidance would explain or expand on the principle(s) or objectives in the standard. 4.

Continued in the report

 


From the FASB in October 2002 --- http://www.fasb.org/fasac/results2002.pdf 

Results of the 2002 Annual FASAC Survey

FASAC's annual survey on the priorities of the FASB provides valuable perspectives and observations about the Board's process and direction. The 2002 survey asked Council members, Board members, and other interested constituents to provide their views about the FASB's priorities, the financial reporting issues of tomorrow, principles-based standards, and the FASB's international activities.

Key observations and conclusions from the responses to the 2002 survey are:

Twenty-two current Council members, 7 Board members, and 9 other constituents responded to the survey.

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

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

Bob Jensen's threads on accounting for electronic commerce are at http://www.trinity.edu/rjensen/ecommerce.htm 


There is a complete saga of attempts to establish a conceptual framework of accounting.  See 
http://www.wku.edu/~halljo/attempts.html
 

Methods for setting accounting standards all have advantages and disadvantages.  It is not possible to set optimal standards for all stakeholders.  Arrow's Impossibility Theorem applies, which means that what is optimal for one constituency must be sub-optimal for other constituencies.  Accounting standards are usually expensive to implement, and the benefits of any new standard must be weighed against its costs to preparers and users of financial statements.

Deductive Accounting Theory (Mathematical Methods)