New Bookmarks
Year 2009 Quarter 1: January 31 to March 31 Additions to
Bob Jensen's Bookmarks
Bob Jensen at
Trinity University
For
earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Tidbits Directory ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Click here to search Bob Jensen's web site if you have key words to enter ---
Search Site.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/.
Choose a Date
Below for Additions to the Bookmarks File
March 31
February 28
January 31
March 31, 2009
Bob Jensen's New Bookmarks on
March 31, 2009
Bob Jensen at
Trinity University
For
earlier editions of Fraud Updates go to
http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at
http://www.searchedu.com/.
Bob Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Many useful accounting sites (scroll down) ---
http://www.iasplus.com/links/links.htm
Accounting program news items for colleges are posted at
http://www.accountingweb.com/news/college_news.html
Sometimes the news items provide links to teaching resources for accounting
educators.
Any college may post a news item.
Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of
appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm
Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting)
---
http://www.heritage.org/research/features/BudgetChartBook/index.html
Humor Between March 1 and March 31, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor033109
Humor Between February 1 and February 28, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor022809
Humor Between January 1 and January 31, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013109
"FASB Advances GAAP Codification Plan,"
Journal of Accountancy, March 31, 2009 ---
http://www.journalofaccountancy.com/Web/20091591.htm
FASB took
another step forward in its plan to codify U.S. GAAP with the release Friday
of an exposure draft on changes to the GAAP hierarchy.
FASB is
taking comments on the
proposal until May 8.
In the draft, the standard setter reiterates the planned July 1 effective
date for the FASB Accounting Standards Codification to become
the single source of authoritative U.S. accounting and reporting standards,
except for SEC rules and interpretive releases.
The 20-page
proposal would modify FASB Statement no. 162, The Hierarchy of Generally
Accepted Accounting Principles. The proposal would establish only two
levels of GAAP—authoritative and nonauthoritative.
As of July 1, the FASB
Accounting Standards Codification (ASC) would supersede all
then-existing, non-SEC accounting and reporting standards for
nongovernmental entities. The FASB ASC disassembled and reassembled
thousands of nongovernmental accounting pronouncements (including those of
FASB, the Emerging Issues Task Force, and the AICPA) to organize them under
roughly 90 topics and include all accounting standards issued by a standard
setter within levels A–D of the current U.S. GAAP hierarchy. The ASC also
includes relevant portions of authoritative content issued by the SEC, as
well as selected SEC staff interpretations and administrative guidance
issued by the SEC.
FASB points
out in the exposure draft that it decided to include in the codification the
AICPA Technical Inquiry Service (TIS) Section 5100, Revenue Recognition,
paragraphs 38–76, which may result in an accounting change for private
entities that had not previously applied the guidance. FASB provided
specific transition provisions for private entities affected by the change.
Visit the
AICPA Web site’s
GAAP Codification
page to review resources related to the codification project.
Accounting Standards Codification Site (free but registration required)
---
http://asc.fasb.org/asccontent&trid=2273304&nav_type=left_nav
It just gets deeper and deeper for Deloitte
Question
Why would four universities (Carnegie-Mellon, Pittsburgh, Bowling Green, and
Ohio Northern) invest hundreds of millions dollars in a fraudulent investment
fund and what makes this fraud different from the Madoff and Stanford fund
scandals?
One of the reasons is that the fraudulent Westridge Capital Management Fund
was audited by the reputable Big Four firm of Deloitte.
It seems to be
Auditing 101 to verify that securities investments actually exist and have not
be siphoned off illegally. Purportedly, Paul R. Greenwood and Stephen Walsh
siphoned off hundreds of millions to fund their lavish personal lifestyles
Koch
recently told state lawmakers that Iowa officials believed they had "covered the
bases" but that "obviously, something went wrong." He and Cochrane, in an
interview, said that there was no apparent problem with Westridge that would
raise concerns. Numerous government regulatory agencies had audited the company
and the venerable Deloitte and Touche
firm was Westridge's auditor. The company's investment
returns did not raise suspicion because they generally followed market trends:
The firm gained and lost money when the rest of the market did.
Stephen C. Fehr, "Iowa, N.D. victims of investment fraud," McClatchy-Tribune
News Service, March 16, 2009 ---
http://www.individual.com/story.php?story=97917687
As with the investors who lost
$65 billion in the Madoff Fund, word of mouth from respected people and
institutions seem to weigh more than factual analysis for countless investors?
Rabbi Ragan says a good man runs this fund? If Carnegie-Mellon's investing in it
it most be safe? Yeah Right!
Various other investors and investment funds allegedly lost millions in the
Greenwood-Walsh Fund Fraud ---
http://www.nytimes.com/2009/02/26/business/26scam.html?scp=1&sq=paul
greenwood&st=cse
The Pennsylvania Employees’ Retirement System was saved in the nick of time
from investing nearly a billion dollars in the fund upon discovering that the
National Futures Association began an investigation of the Greenwood-Walsh Fund.
For other duped investors it was too late.
But in some cases the auditing
firm is reputable and has deep pockets.
"A 4th University Is
Missing Money in Alleged $554-Million Swindle,"
by Paul Fain, Chronicle of Higher Education, March 19, 2009 ---
Click Here
Ohio Northern University is the fourth
higher-education institution to announce that it is seeking to recoup money
in an alleged $554-million investment fraud, university officials
said today.
Ohio Northern’s endowment had $10-million invested
with two Wall Street veterans who face criminal charges for allegedly using
investors’ money as a “personal piggy bank,” spending at least $160-million
on mansions, horses, rare books, and collectible toys.
Also tied up in the
apparent swindle
is $65-million from the University of Pittsburgh, $49-million from Carnegie
Mellon University, and
$15-million from Bowling Green State University.
Securities lawyers say little value from the original investments will be
recovered. Officials from all of the universities say the potential losses
will have no immediate impact on their operations.
Most college endowments rely on outside investment
consultants to help direct their money. Hartland & Company, a financial firm
in Cleveland, steered the now-missing investments by Ohio Northern and
Bowling Green to the firm running the allegedly-fraudulent scheme. Pitt and
Carnegie Mellon relied on the advice of Wilshire Associates, a major
California-based consulting firm.
Paul R. Greenwood and Stephen Walsh, the two Wall
Street traders who owned the suspect firm, face charges of securities fraud,
wire fraud, and conspiracy. Federal regulators have also sued the men, and
are pursuing their assets.
"Pitt, CMU money managers arrested in fraud FBI says they misappropriated
$500 million for lavish lifestyles," by Jonathon Silver, Pittsburgh
Post-Gazette, February 26, 2009 ---
http://www.post-gazette.com/pg/09057/951834-85.stm
Two East Coast investment managers sued for fraud
by the University of Pittsburgh and Carnegie Mellon University
misappropriated more than $500 million of investors' money to hide losses
and fund a lavish lifestyle that included purchases of $80,000 collectible
teddy bears, horses and rare books, federal authorities said yesterday.
As Pitt and Carnegie Mellon were busy trying to
learn whether they will be able to recover any of their combined $114
million in investments through Westridge Capital Management, the FBI
yesterday arrested the corporations' managers.
Paul Greenwood, 61, of North Salem, N.Y., and
Stephen Walsh, 64, of Sands Point, N.Y., were charged in Manhattan -- by the
same office prosecuting the Bernard L. Madoff fraud case -- with securities
fraud, wire fraud and conspiracy.
Both men also were sued in civil court by the U.S.
Securities and Exchange Commission and the Commodity Futures Trading
Commission, which alleged that the partners misappropriated more than $553
million and "fraudulently solicited" $1.3 billion from investors since 1996.
The Accused
Paul Greenwood and Stephen Walsh are accused of
misappropriating millions from investors. Here is a look at some of their
biggest personal purchases:
• HOME: Mr. Greenwood, a horse breeder, owned a
horse farm in North Salem, N.Y., an affluent community that counts David
Letterman as a resident.
• BEARS: Mr. Greenwood owns as many as 1,350
Steiff toys, including teddy bears costing as much as $80,000.
• DIVORCE: Mr. Walsh bought his ex-wife a $3
million condominium as part of their divorce settlement.
"This is huge," said David Rosenfeld, associate
regional director of the SEC's New York Regional Office. "This is a truly
egregious fraud of immense proportions."
Lawyers for the defendants either could not be
reached or had no comment.
Mr. Greenwood and Mr. Walsh, longtime associates
and former co-owners of the New York Islanders hockey team, ran Westridge
Capital Management and a number of affiliated funds and entities.
As late as this month, the partners appeared to be
doing well. Mr. Greenwood told Pitt's assistant treasurer Jan. 21 that they
had $2.8 billion under management -- though that number is now in question.
And on Feb. 2, Pitt sent $5 million to be invested.
But in the course of less than three weeks,
Westridge's mammoth portfolio imploded in what federal authorities called an
investment scam meant to cover up trading losses and fund extravagant
purchases by the partners.
An audit launched Feb. 5 by the National Futures
Association proved key to uncovering the alleged deceit and apparently
became the linchpin of the case federal prosecutors are building.
That audit came about in an indirect way. The
association, a self-policing membership body, had taken action against a New
York financier. That led to a man named Jack Reynolds, a manager of the
Westridge Capital Management Fund in which CMU invested $49 million; and Mr.
Reynolds led to Westridge.
"We just said we better take a look at Jack
Reynolds and see what's happening, and that led us to Westridge and WCM, so
it was a domino effect," said Larry Dyekman, an association spokesman.
"We're just not sure we have the full picture yet."
Mr. Reynolds has not been charged by federal
authorities, but he is named as a defendant in the lawsuit that was filed
last week by Pitt and CMU.
"Greenwood and Walsh refused to answer any of our
questions about where the money was or how much there was," Mr. Dyekman
continued.
"This is still an ongoing investigation, and we
can't really say at this point with any finality how much has been lost."
The federal criminal complaint traces the alleged
illegal activity to at least 1996.
FBI Special Agent James C. Barnacle Jr. said Mr.
Greenwood and Mr. Walsh used "manipulative and deceptive devices," lied and
withheld information as part of a scheme to defraud investors and enrich
themselves.
The complaint refers to a public state-sponsored
university called "Investor 1" whose details match those given by Pitt in
its lawsuit.
The SEC's Mr. Rosenfeld said the fraud hinged not
so much on the partners' investment strategy but on the fact that they are
believed to have simply spent other people's money on themselves.
"They took it. They promised the investors it would
be invested. And instead of doing that they misappropriated it for their own
use," Mr. Rosenfeld said.
Not only do federal authorities believe Mr.
Greenwood and Mr. Walsh used new investors' funds to cover up prior losses
in a classic Ponzi scheme, they used more than $160 million for personal
expenses including:
• Rare books bought at auction;
• Steiff teddy bears purchased for up to $80,000 at
auction houses including Sotheby's;
• A horse farm;
• Cars;
• A residence for Mr. Walsh's ex-wife, Janet Walsh,
53, of Florida, for at least $3 million;
• Money for Ms. Walsh and Mr. Greenwood's wife,
Robin Greenwood, 57, both of whom are defendants in the SEC suit. More than
$2 million was allegedly wired to their personal accounts by an unnamed
employee of the partners.
"Defendants treated investor money -- some of which
came from a public pension fund -- as their own piggy bank to lavish
themselves with expensive gifts," said Stephen J. Obie, the Commodity
Futures Trading Commission's acting director of enforcement.
It is not clear how Pitt and CMU got involved with
Mr. Greenwood and Mr. Walsh. But there is at least one connection involving
academia. The commission suit said Mr. Walsh represented to potential
investors that he was a member of the University at Buffalo Foundation board
and served on its investment committee.
Mr. Walsh is a 1966 graduate of the State
University of New York at Buffalo where he majored in political science.
He was a trustee of the University at Buffalo
Foundation, but the foundation did not have any investments in Westridge or
related firms.
Universities, charitable organizations, retirement
and pension funds are among the investors who have done business with Mr.
Greenwood and Mr. Walsh.
Among those investors are the Sacramento County
Employees' Retirement System, the Iowa Public Employees' Retirement System
and the North Dakota Retirement and Investment Office, which handles $4
billion in investments for teachers and public employees.
The North Dakota fund received about $20 million
back from Westridge Capital Management, but has an undetermined amount still
out in the market, said Steve Cochrane, executive director.
Mr. Cochrane said Westridge Capital was cooperative
in returning what money it could by closing out their position and sending
them the money.
"I dealt with them exclusively all these years,"
Mr. Cochrane said.
"They always seemed to be upfront and honest. I
think they're as stunned and as victimized as we are, is my guess."
He said Westridge Capital had done an excellent job
over the years.
The November financial statement indicated that the
one-year return from Westridge Capital was a negative 11.87 percent, but the
five-year annualized rate of return was a positive 8.36 percent.
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Deloitte is getting deeper and deeper into new lawsuits, one of which is
the huge Washington Mutual (WaMu) failed bank lawsuit ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
Bob Jensen's threads on Deloitte are at
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
It Just Gets Deeper and Deeper for KPMG
"Subprime Suit Accuses KPMG of Negligence: A trustee for New Century
Financial claims KPMG partners ignored lower ranks' concerns about the lender's
accounting for loan reserves," by Sarah Johnson, CFO.com, April 2, 2009
---
http://www.cfo.com/article.cfm/13431126/c_2984368?f=FinanceProfessor/SBU
Two complaints filed in federal courts yesterday
claim that KPMG auditors were complicit in allowing "aggressive accounting"
to occur under their watch at New Century Financial, the mortgage lender
that collapsed two years ago at the beginning of the subprime-mortgage mess.
The plaintiff, a New Century trustee, alleges that
misstated financial reports were filed with the audit firm's rubber stamp
because of its partners' fears of losing the lender's business. "KPMG acted
as a cheerleader for management, not the public interest," one of the
complaints says. The trustee further accuses the firm of "reckless and
grossly negligent audits."
The plaintiff's law firm, Thomas Alexander &
Forrester LLP, filed one action against KPMG LLP in California and another
in New York against KPMG International. With the authority to "manage and
control" its member firm, KPMG International failed to "ensure that audits
under the KPMG name" lived up to the quality control and branding value that
"it promised to the public," the lawsuit alleges.
Similar litigation has been unsuccessful in holding
international auditing firms responsible for their affiliated but
independent members. For example, a lawsuit that Thomas Alexander filed
against BDO Seidman in a negligence case involving Banco Espirito Santo's
financial statements resulted in a $521 million win for the plaintiff,
pending an appeal. A case against BDO International is expected to go to
trial later this year after an appeals court ruled that a jury should have
decided whether it should have also been considered liable in the Banco
case. Initially, a lower-court judge had dismissed the international
organization from the case.
the international arm was intitially ruled as not
being c, accused of also , the trial against BDO International for the same
matter has yet to occur; courts have yet to decide whether BDO International
could be held liable in the same matter after the international firm was but
lawyers have been unable to get a judgment against BDO International in the
same case. Steven Thomas, a partner at the law firm, did not immediately
return CFO.com's request for comment.
KPMG resigned as New Century's auditor soon after
the Irvine, California-based lender filed for bankruptcy protection in 2007.
The auditor's role in the firm's failure has been questioned since then, by
New Century's unsecured creditors and the bankruptcy court.
In the new lawsuit, KPMG LLP is accused of not
giving credence to lower-level employees' concerns about their client's
accounting flaws and not finishing its audit work before giving its final
opinion — an account the firm disputes. In 2005, for instance, a partner was
said to have "silenced" one of the firm's specialists who had questioned New
Century's "incorrect accounting practice." The partner allegedly said, "I am
very disappointed we are still discussing this.... The client thinks we are
done. All we are going to do is piss everybody off."
Dan Ginsburg, KPMG LLP spokesman,says the above
account is taken out of context and that the firm had followed its normal
process; the firm's national office had already reviewed and signed off on
the issue being disputed.
Furthermore, Ginsburg says any claims that the firm
gave in to its client's demands "is unsupportable." He adds, "any
implication that the collapse of New Century was related to accounting
issues ignores the reality of the global credit crisis. This was a business
failure, not an accounting issue."
New Century's business was heavy on loaning
subprime-level mortgages, but its accounting methods did not fully recognize
the risk of doing so, the lawsuit alleges. It also says the firm violated
GAAP by using inaccurate loan-reserve calculations by taking out certain
factors to keep its liability numbers down and its net income falsely
propped up. KPMG is accused of ignoring this GAAP violation and advising the
firm on how to get around the rules. The complaint says this was a $300
million mistake.
In its most recent inspection of KPMG, the Public
Company Accounting Oversight Board noted two occasions when the firm did not
do enough audit work to be able to confidently trust its clients' allowances
for loan losses.
Bob Jensen's threads on KPMG legal woes ---
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
Congratulations to Janek Ratnatunga, Norman Gray and Bala K.R. (Kashi)
Balachandran
"Researchers Win Award in Management Accounting," Journal of Accountancy,
April 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Apr/ManagementAccountingAward.htm
Janek Ratnatunga, Norman Gray and Bala K.R. (Kashi)
Balachandran are the winners of the first Greatest Potential Impact on
Practice Award for research in management accounting, an award given by the
American Accounting Association’s Management Accounting Section and
sponsored by the AICPA, the Chartered Institute of Management Accountants
and the Society of Management Accountants of Canada.
The award, which recognizes academic papers
considered to be most likely to have a significant impact on management
accounting practice, was presented in January at the AAA MAS Midyear Meeting
in Florida.
Their paper, “The Capability Economic Value of
Intangible and Tangible Assets (CEVITA): The Valuation and Reporting of
Strategic Capabilities,” was originally published in Management Accounting
Research, CIMA’s research journal, and introduces a new technique for
measuring and reporting the impact of tangible and intangible asset
combinations on the value creation potential, or strategic capability of a
business.
Ratnatunga is the head of the School of Commerce at
the University of South Australia. He has also held academic positions at
the University of Melbourne, Monash University and the University of
Canberra in Australia and the universities of Washington, Richmond and Rhode
Island in the United States. Previously, he practiced as a chartered
accountant with KPMG.
Now retired, Gray previously was the head of the
Airborne Early Warning and Control Division of the Defence Materiel
Organization within the Department of Defence in Australia.
Balachandran is a professor of accounting and
operations management at New York University Stern School of Business. He
received his bachelor of engineering in mechanical engineering from the
University of Madras, India, and attended the University of California,
Berkeley, for his master of science in industrial engineering and Ph.D. in
operations research.
March 13, 2009 message from Zafar Khan
Why was Sarbanes-Oxley enacted?
Zafar Khan, Ph.D.
Professor
Eastern Michigan University
March 14, 2009 reply from Bob Jensen
Hi Zafar,
Sarbanes (SOX) was enacted to keep
investors from abandoning the U.S. stock market after enormous scandals
like Enron, WorldCom, and other huge scandals that revealed CPA audits
themselves were becoming both substandard and non-profitable ---
http://www.trinity.edu/rjensen/FraudEnron.htm
To make money, auditing firms themselves
were profiting from irresponsible audit cost cutting and non-audit
consulting that compromised their auditing independence. Inside
corporations, internal controls for responsible financial reporting had
broken down or never existed in the first place.
Sarbanes forced auditors to become more
independent and also made it possible to double or triple audit fees,
thereby restoring auditing to profitable services rather than services
that lost money for auditing firms trying to be responsible auditors.
SOX also created the PCAOB that got
serious about reviewing auditor performance (including fining Deloitte a
million dollars). Many of the large and smaller CPA firms failed the
PCAOB tests early on and soon cleaned up their audit practices with the
PCAOB breathing down their backs.
Among other things SOX increased
government funding for the SEC and the FASB (which before SOX received
no taxpayer funding). This, in turn, made the FASB less dependent upon
sales of publications. The FASB then made many publications free
electronically, most notably free distribution of standards and
interpretations. The IASB, sadly, still depends upon publication revenue
such that IFRS are not free unless you play games like download the
equivalent Hong Kong accounting standards.
See
http://en.wikipedia.org/wiki/Sarbanes_and_Oxley
A variety of complex factors
created the conditions and culture in which a series of large
corporate frauds occurred between 2000-2002. The spectacular,
highly-publicized frauds at Enron (see
Enron scandal), WorldCom, and Tyco exposed significant problems
with conflicts of interest and incentive compensation practices. The
analysis of their complex and contentious root causes contributed to
the passage of SOX in 2002. In a 2004 interview, Senator Paul
Sarbanes stated:
|
The Senate Banking Committee
undertook a series of hearings on the problems in the
markets that had led to a loss of hundreds and hundreds of
billions, indeed trillions of dollars in market value. The
hearings set out to lay the foundation for legislation. We
scheduled 10 hearings over a six-week period, during which
we brought in some of the best people in the country to
testify...The hearings produced remarkable consensus on the
nature of the problems: inadequate oversight of accountants,
lack of auditor independence, weak corporate governance
procedures, stock analysts' conflict of interests,
inadequate disclosure provisions, and grossly inadequate
funding of the Securities and Exchange Commission. |
|
-
Auditor conflicts of interest:
Prior to SOX, auditing firms, the primary financial "watchdogs"
for investors, were self-regulated. They also performed
significant non-audit or consulting work for the companies they
audited. Many of these consulting agreements were far more
lucrative than the auditing engagement. This presented at least
the appearance of a conflict of interest. For example,
challenging the company's accounting approach might damage a
client relationship, conceivably placing a significant
consulting arrangement at risk, damaging the auditing firm's
bottom line.
-
Boardroom failures: Boards of
Directors, specifically Audit Committees, are charged with
establishing oversight mechanisms for financial reporting in
U.S. corporations on the behalf of investors. These scandals
identified Board members who either did not exercise their
responsibilities or did not have the expertise to understand the
complexities of the businesses. In many cases, Audit Committee
members were not truly independent of management.
-
Securities analysts' conflicts of interest:
The roles of securities analysts, who make buy and sell
recommendations on company stocks and bonds, and investment
bankers, who help provide companies loans or handle mergers and
acquisitions, provide opportunities for conflicts. Similar to
the auditor conflict, issuing a buy or sell recommendation on a
stock while providing lucrative investment banking services
creates at least the appearance of a conflict of interest.
-
Inadequate funding of the SEC:
The SEC budget has steadily increased to nearly double the
pre-SOX level.
In the interview cited above, Sarbanes
indicated that enforcement and rule-making are more effective
post-SOX.
-
Banking practices: Lending to
a firm sends signals to investors regarding the firm's risk. In
the case of Enron, several major banks provided large loans to
the company without understanding, or while ignoring, the risks
of the company. Investors of these banks and their clients were
hurt by such bad loans, resulting in large settlement payments
by the banks. Others interpreted the willingness of banks to
lend money to the company as an indication of its health and
integrity, and were led to invest in Enron as a result. These
investors were hurt as well.
-
Internet bubble: Investors
had been stung in 2000 by the sharp declines in technology
stocks and to a lesser extent, by declines in the overall
market. Certain
mutual fund managers were alleged to have advocated the
purchasing of particular technology stocks, while quietly
selling them. The losses sustained also helped create a general
anger among investors.
-
Executive compensation: Stock
option and bonus practices, combined with volatility in stock
prices for even small earnings "misses," resulted in pressures
to manage earnings. Stock options were not treated as
compensation expense by companies, encouraging this form of
compensation. With a large stock-based bonus at risk, managers
were pressured to meet their targets.
Pay Me More and More and More
Sadly, SOX did not attack the root problems that led to the subsequent
subprime lending scandals. These root problems included
pay-for-performance compensation plans that motivated mortgage brokers,
real estate appraisers, banks, and investment banks to screw both
shareholders and home owners.
Pass the Trash
Added to this was Congressional pressure on Fannie Mae and Freddie Mack
to buy hopeless mortgages that had almost no chance of being repaid.
Banks commenced a practice of passing the trash to Freddie, Fannie, and
Wall Street investment banks that, in turn, passed the trash to their
customers in CDOs that were intended to diversify the bad loan risks
(but failed to do so when the real estate bubble burst).
SOX has worked in countless ways, but
not all ways
There are countless success stories where SOX led to better internal
controls and better auditing with more substantive testing in place of
lousy analytical reviews. However, SOX did almost nothing to prevent
fraud in the mortgage brokering and banking sectors.
You can read more about subprime sleaze at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
You can read more about auditing
professionalism at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism
Fiduciaries turned into whores
One of the most sad things for me is the way that CPA auditing firms
failed to signal the public that banks were filling up on toxic loans.
Equally unprofessional were the credit rating agencies like Standard and
Poors and Moody’s that in essence became Wall Street’s whores.
Why regulations fail and
succeed in the turning of the carousel
The main problem with government
regulations on industry is that industry eventually runs the regulators
(e.g., the Federal Reserve, SEC, FDA, FAA, FCC, etc.) until some
enormous scandals force the regulators to use the powers entrusted to
them. Then we get new regulations that industry eventually figures out
how to circumvent. Then we wait for more huge scandals. And so the
carousel goes round and round.
Socialism bypasses the regulation
process by owning and running the industries. Then the abuses really
begin
The
inherent vice of capitalism is the unequal sharing of the blessings. The
inherent blessing of socialism is the equal sharing of misery.
Winston Churchill
May 14, 2009 reply from Zafar Khan
[zkhan@EMICH.EDU]
Hi Bob, one can always depend upon you to set the
record straight. Otherwise, some might continue to believe that this (SOX)
was another gratuitous government intervention to disrupt the smooth
functioning of our self correcting financial markets.
I also read in a recent post that the government
should not do anything about executive compensation despite the obscene
abuse of power by the executives of public companies who have enriched
themselves while running their companies into the ground because the market
will in the end sort it out. My humble response to that is dream on.
Zafar Khan, Ph.D.
Professor
Eastern Michigan University
March 15, 2009 reply from Bob Jensen
Hi again Zafar,
After the fall of Andersen you would've
thought CPA auditors would've "self corrected" without having SOX since
their reputations had hit bottom.
In 2003 a former professor of accounting
at the University of Illinois and long-time executive partner with
Andersen told accounting professors that the CPA firm executives "still
didn't get it." This is probably why we needed SOX and the PCAOB to help
them "get it." Art Wyatt’s plenary session speech at the 2003 American
Accounting Association annual meetings is at
http://aaahq.org/AM2003/WyattSpeech.pdf
Art is also a former AAA President and a member of the Accounting Hall
of Fame. His opinions have a lot of clout in both the CPA profession and
academe.
From “Topics for Class Debate” at
http://www.trinity.edu/rjensen/FraudRotten.htm
This might be a good topic of debate for an ethics and/or fraud course.
The topic is essentially the problem of regulating and/or punishing many
for the egregious actions of a few. The best example is the major
accounting firm of Andersen in which 84,000 mostly ethical and highly
professional employees lost their jobs when the firm's leadership
repeatedly failed to take action to prevent corrupt and/or incompetent
audits of a small number audit partners. Clearly the firm's management
failed and deserves to be fired and/or jailed for obstruction of justice
and failure to protect the public in general and 83,900 Andersen
employees. A former
Andersen executive partner,
Art Wyatt, contends that Andersen's leadership did not get the message
and that leadership in today's leading CPA firms is still not (just
before SOX) getting the message ---
http://aaahq.org/AM2003/WyattSpeech.pdf
Bob Jensen's threads on auditing professionalism are at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism
Free IEASB Standards (but not IASB Standards
themselves)
The International Accounting Education Standards Board
(IAESB) has released the 2009 edition of its Handbook of International Education
Pronouncements. The Handbook contains the IAESB's eight International Education
Standards (IESs), including the IAESB Framework for International Education
Pronouncements and Introduction to International Education Standards, as well as
three International Education Practice Statements. The handbook can be
downloaded free of charge in PDF format from the IFAC Online Bookstore
www.ifac.org/store .
Printed copies can be ordered now for shipment in early April.
Deloitte's IASB Plus, March 27, 2009 ---
http://www.iasplus.com/index.htm
January 22, 2009 message from Patricia Walters
[patricia@DISCLOSUREANALYTICS.COM]
IFRS standards (usually referred to as the "bound
volume") are only available for a fee because sales of publications is one
of the IASB's primary revenue streams.
That said, academics can get an on-line
subscription to the IASB (ability to download the standards, etc) for
(the dues fee of ) $25 if you join the IAAER and your
students can get a subscription for their dues fee of only $20.
http://www.iaaer.org/join/index.htm
This is a great deal.
Regards
Pat
January 22, 2009 reply from Dick van Offeren
[dvanofferen@GMAIL.COM]
The IAAER-fee is worth every single penny.
In the Netherlands we teach local and IASB-rules.
IFRS is obligatory only for consolidated annual reports of listed companies.
Besides IFRS we have the commercial code and local Standards for non-listed
companies and parent companies statements only. This hodgepodge of sometimes
conflicting standards makes teaching financial accounting and reporting a
great challenge. However, it makes clear that financial accounting is a
professional activity where professional judgements are to be made. There is
no single mechanical rule that can be applied in all cases.
In my view the accounting profession can only reach
a higher level when prominent accounting scholars lead the way.
I really like this discussion and this (AECM)
listserv.
Regards,
Dick van Offeren
Leiden University the Netherlands
Can the 2008 investment banking failure be traced to a math error?
The first major model of systematic risk and
diversification theory was the 1959 Princeton thesis of Harry Markowitz. But the
model was totally impractical since we could not and still cannot
invert matrices with huge numbers of rows and columns. Along came Bill Sharpe
and others who tried to approximate the Markowitz model with the much more
practical CAPM. With simplification a model almost always sacrifices accuracy
and robustness. The CAPM has had some good applications and some disastrous
applications such as the Trillion Dollar Bet disaster of Long Term Capital
Management ---
http://www.trinity.edu/rjensen/2008Bailout.htm#LTCM
Whenever I get news about increased interest in
mathematical models (especially economics and finance) professors on Wall
Street, I think back to "The Trillion Dollar Bet" in 1993 (Nova
on PBS Video) a bond trader, two Nobel Laureates, and their doctoral
students who very nearly brought down all of Wall Street and the U.S. banking
system in the crash of a hedge fund known as
Long Term Capital Management where the biggest and most prestigious firms
lost an unimaginable amount of money ---
http://en.wikipedia.org/wiki/LTCM
The blame for bad decisions that use models must fall on
the analysts who apply the model and not on the people that merely derive the
seminal model as long as the model builders point out all know limitations of
their models. There are some instances of research that should perhaps be banned
such as research that could put cheap and effective biological weapons of mass
destruction in the hands of any teenager in the world who has a basement
laboratory or effective date rape drugs that can be generated quickly, cheaply,
and easily from bananas and tomatoes.
There is also a question of enforcement of a ban on
research and model building. For example, if we’d had a ban on development of
nuclear fission in the U.S., what would’ve prevented Russia, Germany, and Japan
from development of nuclear fission in 1940? If David Li was not allowed to
invent the credit risk diversification model, who’s to say that China could not
invent such a model?
I think the limitations of Li’s model were well known to
the bankers who used the disastrous model. In reality it is like the Black Swan
theory that a model has a known miniscule (epsilon) chance of disaster but the
rewards of using the model seemed to greatly outweigh the risks ---
http://en.wikipedia.org/wiki/Black_Swan_Theory
The CDO bond risks
became compounded when so many investment banks commenced to crumble mortgage
contracts into diversified CDO bonds dictated by David Li’s model. CDO bond
sellers and holders commenced to use this model that essentially leaves out the
covariance terms for interactive defaults on investments. The chances that
everything would blow up seemed negligible at the time. Probably the best
summary of what happens appears in “In Plato’s Cave.”
Also see
"In Plato's Cave: Mathematical models are
a powerful way of predicting financial markets. But they are fallible" The
Economist, January 24, 2009, pp. 10-14 ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster: The Formula That Killed Wall Street ---
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html
Some highlights:
"For five years, Li's formula, known as a
Gaussian copula function, looked like an unambiguously positive
breakthrough, a piece of financial technology that allowed hugely
complex risks to be modeled with more ease and accuracy than ever
before. With his brilliant spark of mathematical legerdemain, Li made it
possible for traders to sell vast quantities of new securities,
expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond
investors and Wall Street banks to ratings agencies and regulators. And
it became so deeply entrenched—and was making people so much money—that
warnings about its limitations were largely ignored.
Then the model fell apart." The article goes on to show that correlations
are at the heart of the problem.
"The reason that ratings agencies and investors
felt so safe with the triple-A tranches was that they believed there was
no way hundreds of homeowners would all default on their loans at the
same time. One person might lose his job, another might fall ill. But
those are individual calamities that don't affect the mortgage pool much
as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and
tranching still hadn't solved all the problems of mortgage-pool risk.
Some things, like falling house prices, affect a large number of people
at once. If home values in your neighborhood decline and you lose some
of your equity, there's a good chance your neighbors will lose theirs as
well. If, as a result, you default on your mortgage, there's a higher
probability they will default, too. That's called correlation—the degree
to which one variable moves in line with another—and measuring it is an
important part of determining how risky mortgage bonds are."
I would highly recommend reading the entire thing that gets much more
involved with the actual formula etc.
The
“math error” might truly be have been an error or it might have simply been a
gamble with what was perceived as miniscule odds of total market failure.
Something similar happened in the case of the trillion-dollar disastrous 1993
collapse of Long Term Capital Management formed by Nobel Prize winning
economists and their doctoral students who took similar gambles that ignored the
“miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM
The
rhetorical question is whether the failure is ignorance in model building or
risk taking using the model?
Also see
"In Plato's Cave: Mathematical models are a
powerful way of predicting financial markets. But they are fallible" The
Economist, January 24, 2009, pp. 10-14 ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Bob Jensen's threads on the economic crisis and recovery ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Do you know the difference between
Market
Risk Beta and Downside Risk Beta? ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1360708
New Off Balance Sheet Financing Vehicles
Accounting for the Shadow Economy
Property is much more than a body of norms. It is also a huge information system
that processes raw data until it is transformed into facts that can be tested
for truth, and thereby destroys the main catalysts of recessions and panics --
ambiguity and opacity.
See below
There are trillions of dollars of off balance sheet
obligations that cannot be easily accounted for.
Hernando de Soto
A Lesson for Auditors: Accounting for the shadow economy
"Toxic Assets Were Hidden Assets: We can't afford to allow shadow
economies to grow this big," by Hernando de Soto, The Wall Street
Journal, March 25, 2009 ---
http://online.wsj.com/article/SB123793811398132049.html?mod=djemEditorialPage
The Obama administration has finally come
up with a plan to deal with the real cause of the credit crunch: the
infamous "toxic assets" on bank balance sheets that have scared off
investors and borrowers, clogging credit markets around the world. But if
Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global
economic crisis, his rescue plan must recognize that the real problem is not
the bad loans, but the debasement of the paper they are printed on.
Today's global crisis -- a loss on paper
of more than $50 trillion in stocks, real estate, commodities and
operational earnings within 15 months -- cannot be explained only by the
default on a meager 7% of subprime mortgages (worth probably no more than $1
trillion) that triggered it. The real villain is the lack of trust in the
paper on which they -- and all other assets -- are printed. If we don't
restore trust in paper, the next default -- on credit cards or student loans
-- will trigger another collapse in paper and bring the world economy to its
knees.
If you think about it, everything of
value we own travels on property paper.
At the beginning of the decade there was
about $100 trillion worth of property paper representing tangible goods such
as land, buildings, and patents world-wide, and some $170 trillion
representing ownership over such semiliquid assets as mortgages, stocks and
bonds. Since then, however, aggressive financiers have manufactured what the
Bank for International Settlements estimates to be $1 quadrillion worth of
new derivatives (mortgage-backed securities, collateralized debt
obligations, and credit default swaps) that have flooded the market.
These derivatives are the root of the
credit crunch. Why? Unlike all other property paper, derivatives are not
required by law to be recorded, continually tracked and tied to the assets
they represent. Nobody knows precisely how many there are, where they are,
and who is finally accountable for them. Thus, there is widespread fear that
potential borrowers and recipients of capital with too many nonperforming
derivatives will be unable to repay their loans. As trust in property paper
breaks down it sets off a chain reaction, paralyzing credit and investment,
which shrinks transactions and leads to a catastrophic drop in employment
and in the value of everyone's property.
Ever since humans started trading, lending
and investing beyond the confines of the family and the tribe, we have
depended on legally authenticated written statements to get the facts about
things of value. Over the past 200 years, that legal authority has matured
into a global consensus on the procedures, standards and principles required
to document facts in a way that everyone can easily understand and trust.
The result is a formidable property system
with rules and recording mechanisms that fix on paper the facts that allow
us to hold, transfer, transform and use everything we own, from stocks to
screenplays. The only paper representing an asset that is not centrally
recorded, standardized and easily tracked are derivatives.
Property is much more than a body of
norms. It is also a huge information system that processes raw data until it
is transformed into facts that can be tested for truth, and thereby destroys
the main catalysts of recessions and panics -- ambiguity and opacity.
To bring derivatives under the rule of law,
governments should ensure that they conform to six longstanding procedures
that guarantee the value and legitimacy of any kind of paper purporting to
represent an asset:
- All documents and the assets and
transactions they represent or are derived from must be recorded in
publicly accessible registries. It is only by recording and continually
updating such factual knowledge that we can detect the kind of overly
creative financial and contractual instruments that plunged us into this
recession.
- The law has to take into account the
"externalities" or side effects of all financial transactions according
to the legal principle of erga omnes ("toward all"), which was
originally developed to protect third parties from the negative
consequences of secret deals carried out by aristocracies accountable to
no one but themselves.
- Every financial deal must be firmly
tethered to the real performance of the asset from which it originated.
By aligning debts to assets, we can create simple and understandable
benchmarks for quickly detecting whether a financial transaction has
been created to help production or to bet on the performance of distant
"underlying assets."
- Governments should never forget that
production always takes priority over finance. As Adam Smith and Karl
Marx both recognized, finance supports wealth creation, but in itself
creates no value.
- Governments can encourage assets to
be leveraged, transformed, combined, recombined and repackaged into any
number of tranches, provided the process intends to improve the value of
the original asset. This has been the rule for awarding property since
the beginning of time.
- Governments can no longer tolerate
the use of opaque and confusing language in drafting financial
instruments. Clarity and precision are indispensable for the creation of
credit and capital through paper. Western politicians must not forget
what their greatest thinkers have been saying for centuries: All
obligations and commitments that stick are derived from words recorded
on paper with great precision.
Above all, governments should stop
clinging to the hope that the existing market will eventually sort things
out. "Let the market do its work" has come to mean, "let the shadow economy
do its work." But modern markets only work if the paper is reliable.
Continued in article
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm
Off Balance Sheet Vehicles
The Mother of All Ponzi Schemes According to Top Liberal (Progressive)
Economists
The Latest Bailout Plan’s a Disaster According to
Paul Krugman and
James K. Galbraith
And yet American policy-makers appear convinced
that more debt can rescue an economy already drowning in it. If we can just keep
the leverage party going, all will be well. $787 billion to fund “stimulus,”
another $9 trillion committed to guarantee bad debts, 0% interest rates and
quantitative easing to drive more lending, new
off balance sheet vehicles
to hide from the public the toxic assets they’ve absorbed. All of it to be
funded with debt, most of it the responsibility of taxpayers. If I may offer
just one reason this will all fail: rising interest rates. Interest rates need
only revert to their historical median in order to hammer asset values, and
balance sheets, into oblivion.
"Added Debt Won't Rescue the Great American Ponzi
Scheme," Seeking Alpha, March 23, 2009 ---
http://seekingalpha.com/article/127261-added-debt-won-t-rescue-the-great-american-ponzi-scheme?source=article_sb_picks
Bob Jensen's threads on off-balance sheet financing (OBSF) are at
http://www.trinity.edu/rjensen/Theory01.htm#OBSF2
Bob Jensen's threads on the bailout mess ---
http://www.trinity.edu/rjensen/2008Bailout.htm
"Fair Disclosure and Investor Asymmetric Awareness in Stock Markets,"
by Zhen Liu, SSRN, March 12, 2009 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1358637
Link Forwarded by Jim Mahar
The U.S. Security and Exchange Commission
implemented Regulation Fair Disclosure in 2000. The regulator aims to reduce
information asymmetry among investors, and expects public forums to subsume
the forbidden information channel of selective forums. We show that even
with cooperative managers and effective technology, current public forums is
problematic if participants have asymmetric awareness. Namely, when a
participant is aware of more uncertainties than are other participants, with
zero incentives to share the insights, he would search information privately
rather than raising questions in public forums. This causes inefficient
information production compared to "unfair'' selective disclosure. Since
asymmetric awareness is assumed away in rational expectations models, these
models cannot justify the value of insightful questions. Nevertheless, using
a standard quote-driven market model, we can compare the effect of the
regulation on the price behavior and investors' welfare when awareness is
either symmetric or asymmetric, and derive detailed implications. Empirical
predictions are presented and they can match some intriguing empirical
findings. Finally, we discuss the regulator's consideration on investor
awareness.
. . .
At first glance, fair disclosure seems the best
remedy for the information asymmetry caused by selective disclosure, without
sacrificing the availability of high quality information. However,
practitioners have argued that the regulation has produced some undesirable
side effects:
1. The ambiguous definition of material
information makes issuers reluctant to provide "immaterial" information
in private .
2. Professionals may be unable to obtain
information because of ineffective technology utilized in public
communications.
3. Professionals 'with the most perception,
intuition, or experience are not willing to share their insights with
other investors under fair disclosure, so that less information can be
revealed.
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm
Auditor "going concern" warnings seen peaking in 2009 ---
http://www.trinity.edu/rjensen/GoingConcernIssues.htm
The number of "going concern" warnings by corporate
auditors could hit an all-time high this year, as the U.S. recession has put the
survival of hundreds of companies in doubt, the chief executive of accounting
firm Grant Thornton predicted on Thursday.
Emily Chasan, Reuters, February 26, 2009 ---
http://www.reuters.com/article/ousiv/idUSTRE51Q0F620090227
Every year, U.S. auditors are required to say when
they have substantial doubt about whether a company can survive for another
12 months. Auditors' so-called "going concern opinions" are included in
companies' Form 10-K annual reports filed with U.S. regulators, and
sometimes can put companies in violation of their loan covenants.
"I'm sure we will see a very high percentage --
much higher than ever before -- of companies receiving going concern
opinions," Ed Nusbaum, chief executive of Grant Thornton, said in an
interview.
Auditors must make their decisions over the next
few weeks, and Nusbaum, who heads the sixth-largest U.S. accounting firm,
measured by revenue, said there is a risk that many will "get it wrong" this
year.
"As we've seen over the last three or four months,
markets can change so dramatically," Nusbaum said. "There's no doubt that
many going concern opinions will be issued for companies that will survive,
and likewise there will be companies that don't get going concern opinions
that won't survive."
Automaker General Motors Corp (GM.N) said on
Thursday it expects to receive a going concern opinion from its auditors
this year, but many more companies should also expect to receive such
opinions, Nusbaum said.
While he did not have exact numbers, he said
auditors have never before considered giving so many going concern opinions.
"So many companies are being dramatically impacted
by the recession, whether it's the fair market value of securities, or a
slowdown in manufacturing or oil prices," Nusbaum said.
Nusbaum said investors should expect a slew of
going concern opinions in automotive, manufacturing, financial services and
retail companies.
In fact, the issuance of auditor going concern
opinions has climbed sharply since 2001, according to a December study by
professors at the University of Arkansas and Texas A&M University.
The study showed that going concern opinions were
issued for 52 percent of distressed and subsequently bankrupt companies in
2001, and that the proportion rose to 72 percent after December 2001.
After the collapse of Enron and its auditor Arthur
Andersen, the risk that auditors could be sued for failing to issue a going
concern opinion is something that auditors keep in mind when making
decisions about the issue, Nusbaum said.
"The risk of litigation is significant and in many
cases the only option is to issue a going concern opinion ... there is a
legal motivation," Nusbaum said.
But ultimately the trouble in the credit markets
and uncertainty about how the economy can recover has put both companies and
auditors in a tough position this year, Nusbaum said.
Continued in article
Question
How many companies on Moody's new "Bottom Rung" also get
going concern exceptions in auditor reports?
For example, GM already has a going concern exception from Deloitte. But will
Ford Motor Company on the "Bottom Rung" also get a going concern exception?
"Moody's Aims to Be Ahead on Defaults," by Jeffrey McCracken, The Wall
Street Journal, March 10, 2009 ---
http://online.wsj.com/article/SB123664643956778537.html?mod=todays_us_money_and_investing
Pilloried for missing credit problems in the
nation's mortgage markets, credit-ratings firm Moody's Investors Service is
trying to get ahead of corporate bankruptcies. The firm on Tuesday is
publishing a list called the Bottom Rung, detailing the companies that
Moody's says are most likely to default on their debts.
With 283 companies, the list holds nearly every
sector of the economy. The dominant industries on this at-risk list include
much of the U.S. auto industry, the casino sector, and many retail chains,
newspapers and broadcast-TV and radio-station networks. Energy firms,
airlines and restaurant chains appear often.
The Moody's Corp. unit rates debt on about 2073
companies, sizing up each company's ability to pay what it owes. The Bottom
Rung, which Moody's began compiling a few months ago and will update
monthly, represents roughly the riskiest 20% of all companies it tracks,
ranked by those with the lowest credit ratings.
Moody's estimates about 45% of the Bottom Rung
companies will default in the next year. Combined these firms have more than
$260 billion in bond and bank debt. A default ranges from filing for
bankruptcy to a distressed debt-exchange to missing a debt payment.
"Sounds like Moody's may be trying to get out in
front on defaults, given they were perhaps a little behind on subprime
mortgages and commercial mortgage-backed securities," said David Resnick,
managing director at investment banking firm Rothschild Inc. which works on
many corporate bankruptcies and restructurings.
Moody's and credit-rating rival Standard & Poor's
Corp., were criticized by the Senate in hearings late last year about the
effectiveness of the ratings agencies.
Sen. Robert Menendez (D. N.J.), said at the time it
seems that the agencies "are playing both coach and referee" in giving
advice to issuers of debt.
Yet in trying to predict or warn about coming
defaults, Moody's is also pushing into a grey zone, singling out some
companies that say they're in decent fiscal health. On Monday, imaging
company Eastman Kodak objected to the characterization that it rests on "the
bottom rung."
"Any speculation, however informed, suggesting that
Kodak is less than financially sound, is irresponsible," wrote Eastman Kodak
spokesman David Lanzillo in an email statement. "Kodak is financially solid
and we are taking the right actions to ensure that we remain a strong and
enduring competitor. We ended 2008 with more than $2.1 billion in cash on
our balance sheet, a manageable debt balance, and no significant debt
payments likely until late 2010."
The Spanish-language media company Univision
Communications Inc. also said its inclusion on the list wasn't warranted.
"Univision has more than ample liquidity to operate
the business in the current environment, and has sufficient cash on hand to
meet all obligations and debt maturities, including repayment of the asset
sale bridge due in March 2009. There are no other debt maturities until the
later part of 2011."
Some of the names on the list aren't so surprising,
such as General Motors Corp. and Chrysler LLC. But some less-obvious names
like information-technology giant Unisys Corp., OSI Restaurant Partners,
owner of the Outback Steakhouse restaurant chain and the MGM Mirage casino
empire are also included. One name not on the list, but likely to be added
when it is first updated next month, is Clear Channel Communications, which
Monday was downgraded four notches by Moody's. All these companies declined
to comment or did not return a request for comment.
To compile the list, Moody's chose the companies
with the lowest credit ratings -- those rated B3 or below -- whose ratings
were either negative or under review. That rating is the 16th lowest on
Moody's 21-step ratings system.
Applying that methodology retroactively to 2008
would have yielded about 157 companies, Moody's officials said, 60 of which
would have eventually defaulted.
"Even though it seems like we've had a lot of
defaults already this shows we aren't even close to the peak. There is a lot
of bad news to come," said David Keisman, Moody's senior vice president of
corporate finance. "Our thought was that in this cycle, with all that's
happened, we are going to have a lot of bad news. What we can't have is
surprise bad news."
Moody's, S&P and other rating agencies are all
forecasting corporate defaults will skyrocket this year to three or four
times the default rate of 2008, perhaps eclipsing all-time high default
rates of the early 1930s.
The list is rapidly growing. Moody's said 73 new
companies were added in January and February. Among the new entries:
national retailer Bon-Ton Stores Inc., telecommunications company Global
Crossing Inc. and auto-seat maker Lear Corp.
Also dotting the list are multi-billion-dollar
private-equity backed leverage buyouts, such as Harrah's Entertainment,
Burlington Coat Factory and Univision Communications.
"That's not surprising given a lot of
private-equity deals were done in 2006 and 2007 that projected business
would keep performing at high levels and then were levered off that," said
Mr. Resnick of Rothschild.
Another 24 companies left the list recently, 23 of
them because they defaulted or the ratings on them were withdrawn. Many of
those companies also filed for bankruptcy, such as Trump Entertainment
Resorts and the Tribune Co. newspaper chain. Only the Landry's Restaurant
Inc. chain made a move up and off the list.
Mr. Keisman said Moody's analysts are calling the
companies on the list to let them know they will be on it.
"It's not an editorial platform. It is very data
driven. We are just being pro-active. This is like a slow-motion collapse
and this shows so much more in the way of bad news is coming," he said.
The 'Bottom Rung' -- Companies at Greatest
Risk of Defaulting
Moody's Investors
Service is launching a list called the "Bottom Rung," which details
283 companies that are at risk of defaulting on their debt. Below
are the 30 largest companies on the list, based on rated debt.
|
|
|
|
|
|
Loading...
|
Allison Transmission, Inc.
|
B3
|
B3
|
Negative
|
$4.60
|
Automotive: Parts
|
AMR Corp.
|
Caa1
|
Caa1
|
Negative
|
$1.62
|
Transportation Services:
Airline
|
Building Materials
Corporation of America
|
Caa1
|
B3
|
Negative
|
$1.55
|
Manufacturing: Finished
Products
|
Chrysler LLC
|
Ca
|
Ca
|
Negative
|
$9.00
|
Automotive: Passenger
|
Citadel Broadcasting Corp.
|
Caa3
|
Caa2
|
Negative
|
$2.29
|
Media: Broadcast Tv & Radio
Stations
|
Claire's Stores, Inc.
|
Caa3
|
Caa3
|
Negative
|
$2.59
|
Retail: Department Stores
|
Dana Holding Corp.
|
Caa1
|
Caa1
|
Rating under reveiw
|
$2.08
|
Automotive: Parts
|
Dole Food Company, Inc.
|
Caa1
|
B3
|
Negative
|
$1.51
|
Natural Products Processor:
Agriculture
|
Eastman Kodak Co.
|
B3
|
B3
|
Negative
|
$2.10
|
Technology: Hardware
|
Ford Motor Co.
|
Caa3
|
Caa3
|
Negative
|
$31.55
|
Automotive: Passenger
|
Freescale Semiconductor, Inc.
|
Ca
|
Caa1
|
Negative
|
$10.20
|
Technology: Semiconductor
|
General Motors Corp.
|
Ca
|
Ca
|
Negative
|
$38.56
|
Automotive: Passenger
|
Georgia Gulf Corp.
|
Caa2
|
Caa2
|
Negative
|
$1.98
|
Chemicals: Commodity Chemical
|
Hawker Beechcraft Acquisition
Co.
|
B3
|
B3
|
Negative
|
$2.85
|
Aircraft & Aerospace:
Equipment
|
Idearc, Inc.
|
Caa3
|
Caa2
|
Negative
|
$9.29
|
Media Publishing: Books
|
Lear Corp.
|
Caa2
|
Caa2
|
Rating under reveiw
|
$2.30
|
Automotive: Parts
|
Level 3 Communications, Inc.
|
Caa1
|
Caa1
|
Rating under reveiw
|
$1.87
|
Telecommunications: Wireline
|
Michaels Stores, Inc.
|
B3
|
B3
|
Negative
|
$3.93
|
Retail: Specialty
|
OSI Restaurant Partners, Inc.
|
Ca
|
Caa1
|
Rating under reveiw
|
$2.11
|
Restaurants: Family Dining
|
R.H. Donnelley Corp.
|
Caa2
|
Caa1
|
Negative
|
$3.48
|
Media: Printing - Holdco
|
Reader's Digest Association,
Inc.
|
Caa3
|
Caa3
|
Negative
|
$2.21
|
Media Publishing: Newspapers
& Magazines
|
Realogy Corp.
|
Caa3
|
Caa3
|
Negative
|
$7.56
|
Services: Consumer
|
Rite Aid Corp.
|
Caa2
|
Caa2
|
Negative
|
$6.80
|
Retail: Drug Stores
|
Source Interlink Companies
Inc.
|
Caa1
|
Caa1
|
Negative
|
$1.63
|
Media Publishing: Newspapers
& Magazines
|
Swift Transportation Co.,
Inc.
|
Caa1
|
Caa1
|
Negative
|
$2.98
|
Transportation Services:
Trucking
|
Tenneco Inc.
|
B3
|
B3
|
Negative
|
$1.83
|
Automotive: Parts
|
Univision Communications,
Inc.
|
B3
|
B3
|
Negative
|
$10.09
|
Media: Diversified Media - Fc
|
US Airways Group, Inc.
|
Caa1
|
Caa1
|
Negative
|
$1.60
|
Transportation Services:
Airline
|
Visteon Corp.
|
Caa1
|
Caa2
|
Negative
|
$3.20
|
Automotive: Parts
|
Western Refining, Inc.
|
B3
|
B3
|
Negative
|
$1.40
|
Energy: Oil - Refining &
Marketing
|
Sources: Moody's Investors Service
Bob Jensen's threads on auditor professionalism are at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism
We need honest accounting more than ever, not fantasy teases for investors
This is a pretty good article on how players (banks), umpires (regulators),
and fans (like billionnaires Stever Forbes and Warren Buffet) have
inappropriately blamed the scorekeepers (accounts) for the demise of the big
banks. In fact the December 30, 2008 research report calls this attribution of
blame just plain wrong (and self-serving).
The wonderful December 30, 2008 research report of the SEC shows that fair value
accounting is neither the cause nor the cure for the banking crisis. The
liquidity problem of the holders of the toxic investments is caused by trillions
of dollars invested in underperforming (often zero performing) of bad
investments mortgages or mortgaged-backed bonds that have to be written down
unless auditors agree to simply lie about values. That is not likely to happen,
but client pressures on auditors to value on the high side for many properties
will be heavy handed.
The wonderful full SEC report that bankers and
regulators do not want to read can be freely downloaded at
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf
"We Need Honest Accounting: Relax regulatory capital rules if need
be, but don't let banks hide the truth," by James A. Chanos, The Wall
Street Journal, March 24, 2009 ---
http://online.wsj.com/article/SB123785319919419659.html?mod=djemEditorialPage
Mark-to-market (MTM) accounting is under
fierce attack by bank CEOs and others who are pressing Congress to suspend,
if not repeal, the rules they blame for the current financial crisis. Yet
their pleas to bubble-wrap financial statements run counter to increased
calls for greater financial-market transparency and ongoing efforts to
restore investor trust.
We have a sorry history of the banking
industry driving statutory and regulatory changes. Now banks want accounting
fixes to mask their recklessness. Meanwhile, there has been no
acknowledgment of culpability in what top management in these financial
institutions did -- despite warnings -- to help bring about the crisis.
Theirs is a record of lax risk management, flawed models, reckless lending,
and excessively leveraged investment strategies. In the worst instances,
they acted with moral indifference, knowing that what they were doing was
flawed, but still willing to pocket the fees and accompanying bonuses.
MTM accounting isn't perfect, but it does
provide a compass for investors to figure out what an asset would be worth
in today's market if it were sold in an orderly fashion to a willing buyer.
Before MTM took effect, the Financial Accounting Standards Board (FASB)
produced much evidence to show that valuing financial instruments and other
difficult-to-price assets by "historical" costs, or "mark to management,"
was folly.
The rules now under attack are neither as
significant nor as inflexible as critics charge. MTM is generally limited to
investments held for trading purposes, and to certain derivatives. For many
financial institutions, these investments represent a minority of their
total investment portfolio. A recent study by Bloomberg columnist David
Reilly of the 12 largest banks in the KBW Bank Index shows that only 29% of
the $8.46 trillion in assets are at MTM prices. In General Electric's case,
the portion is just 2%.
Why is that so? Most bank assets are in
loans, which are held at their original cost using amortization rules, minus
a reserve that banks must set aside as a safety cushion for potential future
losses.
MTM rules also give banks a choice. MTM
accounting is not required for securities held to maturity, but you need to
demonstrate a "positive intent and ability" that you will do so. Further, an
SEC 2008 report found that "over 90% of investments marked-to-market are
valued based on observable inputs."
Financial institutions had no problem in
using MTM to benefit from the drop in prices of their own notes and bonds,
since the rule also applies to liabilities. And when the value of the
securitized loans they held was soaring, they eagerly embraced MTM. Once
committed to that accounting discipline, though, they were obligated to
continue doing so for the duration of their holding of securities they've
marked to market. And one wonders if they are as equally willing to forego
MTM for valuing the same illiquid securities in client accounts for margin
loans as they are for their proprietary trading accounts?
But these facts haven't stopped the charge
forward on Capitol Hill. At a recent hearing, bankers said that MTM forced
them to price securities well below their real valuation, making it
difficult to purge toxic assets from their books at anything but fire-sale
prices. They also justified their attack with claims that loans, mortgages
and other securities are now safe or close to safe, ignoring mounting
evidence that losses are growing across a greater swath of credit. This
makes the timing of the anti-MTM lobbying appear even more suspect. And not
all financial firms are calling for loosening MTM standards; Goldman Sachs
and others who are standing firm on this issue should be applauded.
According to J.P. Morgan, approximately
$450 billion of collateralized debt obligations (CDOs) of asset-backed
securities were issued from late 2005 to mid-2007. Of that amount, roughly
$305 billion is now in a formal state of default and $102 billion of this
amount has already been liquidated. The latest monthly mortgage reports from
investment banks are equally sobering. It is no surprise, then, that the
largest underwriters of mortgages and CDOs have been decimated.
Commercial banking regulations generally
do not require banks to sell assets to meet capital requirements just
because market values decline. But if "impairment" charges under MTM do push
banks below regulatory capital requirements and limit their ability to lend
when they can't raise more capital, then the solution is to grant temporary
regulatory capital "relief," which is itself an arbitrary number.
There is a connection between efforts over
the past 12 years to reduce regulatory oversight, weaken capital
requirements, and silence the financial detectives who uncovered such
scandals as Lehman and Enron. The assault against MTM is just the latest
chapter.
Instead of acknowledging mistakes, we are
told this is a "once in 100 years" anomaly with the market not functioning
correctly. It isn't lost on investors that the MTM criticisms come, too, as
private equity firms must now report the value of their investments. The
truth is the market is functioning correctly. It's just that MTM critics
don't like the prices that investors are willing to pay.
The FASB and Securities and Exchange
Commission (SEC) must stand firm in their respective efforts to ensure that
investors get a true sense of the losses facing banks and investment firms.
To be sure, we should work to make MTM accounting more precise, following,
for example, the counsel of the President's Working Group on Financial
Markets and the SEC's December 2008 recommendations for achieving greater
clarity in valuation approaches.
Unfortunately, the FASB proposal on March
16 represents capitulation. It calls for "significant judgment" by banks in
determining if a market or an asset is "inactive" and if a transaction is
"distressed." This would give banks more discretion to throw out "quotes"
and use valuation alternatives, including cash-flow estimates, to determine
value in illiquid markets. In other words, it allows banks to substitute
their own wishful-thinking judgments of value for market prices.
The FASB is also changing the criteria
used to determine impairment, giving companies more flexibility to not
recognize impairments if they don't have "the intent to sell." Banks will
only need to state that they are more likely than not to be able to hold
onto an underwater asset until its price "recovers." CFOs will also have a
choice to divide impairments into "credit losses" and "other losses," which
means fewer of these charges will be counted against income. If approved,
companies could start this quarter to report net income that ignores sharp
declines in securities they own. The FASB is taking comments until April 1,
but its vote is a fait accompli.
Obfuscating sound accounting rules by
gutting MTM rules will only further reduce investors' trust in the financial
statements of all companies, causing private capital -- desperately needed
in securities markets -- to become even scarcer. Worse, obfuscation will
further erode confidence in the American economy, with dire consequences for
the very financial institutions who are calling for MTM changes. If need be,
temporarily relax the arbitrary levels of regulatory capital, rather than
compromise the integrity of all financial statements.
Bob Jensen's threads about all this bull crap blaming of the bean counters
can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
FASB Eases Fair-Value Rules
Amid Lawmaker Pressure
April 2, 2009
message from Ganesh M. Pandit
[profgmp@HOTMAIL.COM]
The FASB has voted to relax the fair value accounting rules.
http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc&refer=home
Ganesh M Pandit
Adelphi University
April 2, 2009 reply from Bob Jensen
Hi
Ganesh,
The
FASB, now offers an audio file has an audio explanation of why they’re
making special fair value accounting allowances for banks. It is linked at
the FASB home page.---
http://www.fasb.org/
Be
patient. This audio file loads very slowly.
It may have long pauses while it loads new segments, but these pauses will
vary with your bandwidth.
It
is not streaming audio and can be easily saved as a file.
It probably
should be shared with all accounting students!
April 2, 2009—
Audio of Today's Press Conference with Robert Herz, Teresa Polley, and
Russell Golden on Fair Value and OTTI Actions
(Posted: 04/02/09)
"FASB Eases
Fair-Value Rules Amid Lawmaker Pressure (Update3)," by Ian Katz, Bloomberg
News, April 2, 2009 ---
http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc&refer=home
The Financial Accounting Standards Board, pressured
by U.S. lawmakers and financial companies, voted to relax fair-value rules
that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are
inactive.
The changes to so-called mark-to-market accounting
allow companies to use “significant” judgment when gauging the price of some
investments on their books, including mortgage-backed securities. Analysts
say the measure may reduce banks’ writedowns and boost their first-quarter
net income by 20 percent or more. FASB voted 3-2 to approve the rules at a
meeting today in Norwalk, Connecticut.
“Congress clearly indicated that some easing was
probably appropriate in this instance,” House Democratic Leader Steny Hoyer
of Maryland said today in a Bloomberg Television interview.
House Financial Services Committee members pressed
FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which
requires banks to mark assets each quarter to reflect market prices, saying
the rule unfairly punished financial companies. FASB’s proposals, made four
days later, spurred criticism from investor advocates and
accounting-industry groups, which say fair-value forces companies to
disclose their true financial health.
Financial shares rose after the FASB move.
Citigroup rose 4 percent to $2.79 at 11:46 a.m. in New York Stock Exchange
composite trading. Bank of America Corp. added 5.5 percent to $7.44.
JPMorgan Chase & Co. rose 1 percent to $28.36.
Seeking Suspension
Blackstone Group LP Chairman Stephen Schwarzman,
the American Bankers Association and 65 lawmakers in the House of
Representatives last September urged that fair-value accounting, mandated by
FASB, be suspended. William Isaac, chairman of the Federal Deposit Insurance
Corp. from 1981 to 1985, has called fair value “extremely and needlessly
destructive” and “a major cause” of the credit crisis. Robert Rubin, the
former Citigroup senior counselor and Treasury secretary, said Jan. 27 the
rule has done “a great deal of damage.”
“Good decision,” Citigroup Chairman Richard Parsons
said of FASB’s move. The market for mortgages and other assets was not
working, so something had to change, Parsons said in a New York interview
today.
Banks rely on competitors’ asset sales to help
determine the fair-market value of similar securities they hold on their own
books. FASB’s staff conceded their March 17 proposal led to a “presumption”
that all security sales are “distressed” unless evidence proves otherwise.
Such an interpretation may have allowed financial companies to ignore
transactions in valuing their assets.
‘Orderly’ Transactions
FASB staff said banks should only disregard
transactions that aren’t “orderly,” including situations in which the
“seller is near bankruptcy” or needed to sell the asset to comply with
regulatory requirements. Responding to criticism from investor and
accounting groups, the staff said in a report today it was not FASB’s intent
“to change the objective of a fair-value measurement.”
Fair-value “provides the kind of transparency
essential to restoring public confidence in U.S. markets,” former Securities
and Exchange Commission Chairman Arthur Levitt said in an interview
yesterday.
Levitt is co-chairman, along with former SEC head
William Donaldson, of the Investors’ Working Group, a non-partisan panel
formed to recommend improvements to regulation of U.S. financial markets.
Other members of the group, which met in New York yesterday, include
Brooksley Born, former chairman of the Commodity Futures Trading Commission,
and Bill Miller, chief investment officer of Legg Mason Capital Management
Inc.
‘Deeply Concerned’
“The group is deeply concerned about the apparent
FASB succumbing to political pressures, which prevent U.S. investors from
understanding the true obligations of U.S. financial institutions,” Levitt
said. Levitt is a senior adviser at buyout firm Carlyle Group and a board
member at Bloomberg LP, the parent of Bloomberg News.
Fair-value requires companies to set values on most
securities each quarter based on market prices. Wells Fargo and other banks
argue the rule doesn’t make sense when trading has dried up because it
forces companies to write down assets to fire-sale prices.
By letting banks use internal models instead of
market prices and allowing them to take into account the cash flow of
securities, FASB’s changes could raise bank industry earnings by 20 percent,
according to Robert Willens, a former managing director at Lehman Brothers
Holdings Inc. who runs his own tax and accounting advisory firm in New York.
Companies weighed down by mortgage-backed
securities, such as New York-based Citigroup, could cut their losses by 50
percent to 70 percent, said Richard Dietrich, an accounting professor at
Ohio State University in Columbus.
FASB rejected requests from banks to let them apply
the fair-value change to their year-end financial statements for 2008. While
the new standard takes effect for earnings reports filed at the end of June,
FASB said companies could apply it to their first-quarter financial
statements.
"FASB's
FSP Decisions: Bigger than Basketball?" Seeking Alpha, April 2, 2009
---
http://seekingalpha.com/article/129189-fasb-s-fsp-decisions-bigger-than-basketball
Finally,
the FASB held its long-anticipated meeting on the two
FSPs that would have gutted fair value reporting as it
exists. There's been more hoopla (and hope-la) about
these two amendments than in all of March Madness.
Briefly, here's what transpired, as best as I could tell
from the webcast of the meeting:
1. FSP 157-e, the
proposal which would have provided a direct route to
Level 3 modeling of fair values whenever there was a
problem with quoted prices, will be quite different from
the original plan. There will be indicators of inactive
markets in the final FSP, but they'll only be indicators
for a preparer to consider - and more importantly, their
presence WILL NOT create a presumption of a distressed
price for securities in question. That part of the
proposal would have greased the skids for Level 3
modeling. Not now.
There will be added required
disclosures, which were not in the exposure draft. One
that I caught: quarterly "aging" disclosures of the
securities that are in a continuous loss position for
more than 12 months and less than 12 months. As
discussed in last week's report on the proposals, these
now-annual disclosures are useful for assessing
riskiness of assets that could become a firm's next
other-than-temporary impairment charge.
Bottom line:
investors didn't lose here.
2. FSP FAS 115-a, 124-a,
and EITF 99-20-b, the proposal that softens the
blow of recognizing other-than-temporary impairments,
was essentially unchanged from the original proposal. It
remains a chancre on the body of accounting literature.
The credit portion of an other-than-impairment loss will
be recognized in earnings, with all other attributed
loss being recorded in "other comprehensive income," to
be amortized into earnings over the life of the
associated security. That's assuming the
other-than-temporary impairment is recognized at all,
because the determination will still be largely driven
by the intent of the reporting entity and whether it's
more likely than not that it will have to sell the
security before recovery. This is a huge mulligan for
banks with junky securities.
If OTT charges are taken, the
full amount of the impairment will be disclosed on the
income statement with the amount being shunted into
other comprehensive income shown as a reduction of the
loss, leaving only the credit portion to be recognized
in current period earnings.
Bottom
line: Investors
lost on this vote, and they will have to pay more
attention to OCI in the future, as it becomes a more
frequently-used receptacle for unwanted debits. When
investors note these "detoured charges" in earnings,
they should skip the detour and factor the full charge
into their evaluation of earnings. A small victory for
investors: the original proposal would have included
other-than-temporary impairments on equity securities.
The final decision will affect only debt securities.
There was a third, much less-heralded FSP voted upon at
the meeting:
3. FSP FAS 107-a and APB 28-a,
which will make the now-annual fair value disclosures
for all financial instruments required on a quarterly
basis. This will be required beginning in the second
quarter, with early implementation allowed in the first
quarter.
All three FSPs will become
effective in the second quarter, with early
implementation allowed in the first quarter. Note: any
firm electing early adoption of the impairment FSP
cannot wait until later to adopt the FSP 157-e fair
value amendment. If they change the way they recognize
impairments, they also have to change how they consider
the calculation of fair values.
Some board members expressed hope that this was
the last of the "emergency amendments" to take
place at the end of a reporting period. It seems
too much to hope for; there could more ahead,
depending on how meddlesome the G-20 would like
to be. Remember when IFRS in the United States
was a hot topic? To a very large degree, that
sprouted from a trans-Atlantic summit meeting
between the EU and the White House. The same
thing could happen again if the G-20 gang
decides they know accounting better than the
standard-setters.
Jensen Comment
It’s another one of those 3-2 FASB votes that gets Tom Selling hot under the
collar. Guess which Board members voted yes?
I’m less
critical of the so-called “easing of fair value rules” because I always thought
it was possible to estimate cash flows and build a model under Level 3 of FAS
157. To me this is all smoke and mirrors that lend added justification for banks
to underestimate their bad debt reserves. When the lawsuits roll in there will
be more authoritative support for inflating income of banks ---
that’s what its all about isn’t it?
Banks need to
attract more investors to their manure piles. It’s a whole new springtime for
maggots to pursue outrageous leveraging.
The best
illustration of the smoke and mirrors part comes from the incomprehensible FASB
audio mp3 file on April 2. Try to get your best students to make any sense out
of that magic lantern show!
April 2, 2009—
Audio
of Today's Press Conference with Robert Herz, Teresa Polley, and Russell Golden
on Fair Value and OTTI Actions
(Posted: 04/02/09)
April 3, 2009 reply from Dennis
Beresford
[dberesfo@TERRY.UGA.EDU]
One of the IASB board members is
on my campus today and he fully expects the IASB to follow the FASB's lead,
which he strongly disagrees with. For the record, I think the FASB's action
was much needed clarification of the intent of SFAS 157 and I applaud its
efforts. This was not at all a situation of "bowing to pressure" but rather
one of realizing that earlier guidance hadn't been applied in the intended
manner. The FASB clearly accelerated its work in response to Congressional
concerns but moving too slowly has been a fault of the FASB from the
beginning, including the 10 1/2 years I was there.
Bob Jensen
From The Wall
Street Journal Accounting Weekly Review on April 1, 2009
This case was published one day prior to the FASB decision to ease the rules on
fair value accounting for banks.
Accounting Rules Should Avoid Impairment
by Michael
Rapoport
The Wall Street Journal
Apr 01, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123853741935475351.html?mod=djem_jiewr_AC
TOPICS: Available-for-Sale,
FASB, Financial Accounting, Financial Accounting Standards
Board, Mark-to-Market, Mark-to-Market Accounting
SUMMARY: Accounting
rule makers will vote Thursday on proposals to soften
"mark-to-market" accounting, the controversial rules requiring
companies to peg their investments' value to the market's ups
and downs. Many banks blame the rules for worsening their
current problems, by locking in losses that they say are merely
temporary.
CLASSROOM
APPLICATION: Financial institutions continue to criticize
the mark-to-market accounting rules. This article reports on the
proposal to soften those rules, keeping our classes current on
the issue. Additionally, this article offers an opportunity to
discuss an opinion piece, which takes the slant that the
criticism of these rules is "largely bogus." You could use this
article as an opportunity to discuss opinion pieces versus
articles that report only news with no commentary, as well as
ask the students their opinions on whether they agree with the
writer.
QUESTIONS:
1. (Introductory) What changes have been proposed
regarding mark-to-market accounting? What body votes on these
proposals?
2. (Advanced) Why is mark-to-market accounting such a
big issue in the business world? What claims do financial
institutions make regarding mark-to-market? What do
mark-to-market supporters say?
3. (Advanced) What are "available-for-sale"
investments? What is the current accounting treatment for these
assets? Please explain the changes under the proposal. How would
the change affect financial reporting and investors?
4. (Introductory) What is the FASB? What concerns does
the writer have regarding FASB independence? Do you think those
concerns are legitimate?
5. (Introductory) What is the position of the writer in
this article? How does this article differ from news stories?
Why do newspapers publish these types of articles? Do you agree
with the writer? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED
ARTICLES:
No Easy Answers
by Paul Gigot
Mar 30, 2009
Online Exclusive
Move to Ease 'Mark' Rule May Subvert Treasury Plan
by Heidi N. Moore
Apr 01, 2009
Online Exclusive
Banks, Grasping for Good News, Look to FASB Ruling for a Boost
by David Gaffen
Apr 02, 2009
Online Exclusive
|
Bob Jensen’s threads
on accounting valuation are at
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
Hi Tom,
Your latest Onion
piece is a good starting point for a “blank paper” beginning for the debate on
fair value accounting ---
http://accountingonion.typepad.com/theaccountingonion/2009/04/a-new-title.html
But it overlooks
some of the major problems, particularly problems in current (replacement) cost
accounting that are summarized at
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
One of the main
problems with exit value accounting is the huge problem of measuring covariance
of exit value of one item with interactive values of other items, particularly
covariance with intangible items.
Another huge problem
with exit value accounting is that installation costs are often enormous, have
future economic benefit, and have zero exit value because they cannot be put
back on the market. This includes installation costs and costs of obtaining
Government Agency approval of drugs, mining permits, oil drilling permits, etc.
Replacement costs
also have huge problems as summarized below.
Market Value Accounting:
Entry Value (Current Cost, Replacement Cost)
Accounting
Beginning in 1979, FAS 33 required large corporations to provide a
supplementary schedule of condensed balance sheets and income statements
comparing annual outcomes under three valuation bases --- Unadjusted Historical
Cost, Price Level Adjusted (PLA) Historical Cost, and Current Cost Entry Value
(adjusted for depreciation and amortization). Companies complained heavily that
users did not obtain value that justified the cost of implementing FAS 33.
Analysts complained that the FASB allowed such crude estimates that the FAS 33
schedules were virtually useless, especially the Current Cost estimates. The
FASB rescinded FAS 33 when it issued FAS 89 in 1986.
Current cost accounting by whatever name (e.g., current or replacement cost)
entails the historical cost of balance sheet items with current (replacement)
costs. Depreciation rates can be re-set based upon current costs rather than
historical costs.
Beginning in 1979, FAS 33 required large corporations to provide a
supplementary schedule of condensed balance sheets and income statements
comparing annual outcomes under three valuation bases --- Unadjusted Historical
Cost, PLA-Adjusted historical cost, and Current Cost Entry Value (adjusted for
depreciation and amortization). Companies are no longer required to generate FAS
33-type comparisons. The primary basis of accounting in the U.S. is unadjusted
historical cost with numerous exceptions in particular instances. For example,
price-level adjustments may be required for operations in hyperinflation
nations. Exit value accounting is required for firms deemed highly likely to
become non-going concerns. Exit value accounting is required for personal
financial statements (whether an individual or a personal partnership such as
two married people). Economic (discounted cash flow) valuations are required for
certain types of assets and liabilities such as pension liabilities. Hence in
the United States and virtually every other nation, accounting standards do not
require or even allow one single basis of accounting. Beginning in January 2005,
all nations in the European Union adopted the IASB's international standards
that have moved closer and closer each year to the FASB/SEC standards of the
United States.
Advantages of Entry Value (Current Cost, Replacement Cost) Accounting
- Conforms to capital
maintenance theory that argues in favor of matching current revenues with
what the current costs are of generating those revenues. For example, if
historical cost depreciation is $100 and current cost depreciation is $120,
current cost theory argues that an excess of $20 may be wrongly classified
as profit and distributed as a dividend. When it comes time to replace the
asset, the firm may have mistakenly eaten its seed corn.
- If the accurate
replacement cost is known and can be matched with current selling prices,
the problems of finding indices for price level adjustments are avoided.
- Avoids to some extent
booking the spread between selling price and the wholesale "cost" of an
item. Recording a securities “inventory” or any other inventory at exit
values rather than entry values tends to book unrealized sales profits
before they’re actually earned. There may also be considerably variability
in exit values vis-à-vis replacement costs.
Although I am not in general a current cost (replacement
cost, entry-value) advocate, I think you and Tom are missing the main theory
behind the passage of the now defunct FAS 33 that leaned toward replacement cost
valuation as opposed to exit valuation.
The best illustration in favor of replacement cost
accounting is the infamous Blue Book used by automobile and truck dealers that
lists composite wholesale trading for each make and model of vehicle in recent
years. The Blue Book illustration is relevant with respect to business equipment
currently in use in a company since virtually all that equipment is now in the
“used” category, although most of it will not have a complete Blue Book per se.
The theory of Blue Book pricing in accounting is that each
used vehicle is unique to a point that exit valuation in particular instances is
very difficult since no two used vehicles have the same exit value in a
particular instances. But the Blue Book is a market-composite hundreds of dealer
transactions of each make and model in recent months and years on the wholesale
market.
Hence I don’t have any idea about what my 1999 Jeep
Cherokee in particular is worth, and any exit value estimate of my vehicle is
pretty much a wild guess relative to what it most likely would cost me to
replace it with another 1999 Jeep Cherokee from a random sample selection among
2,000 Jeep dealers across the United States. I merely have to look up the Blue
Book price and then estimate what the dealer charges as a mark up if I want to
replace my 1999 Jeep Cherokee.
Since Blue Book pricing is based upon actual trades that
take place, it’s far more reliable than exit value sticker prices of vehicles in
the sales lots.
Conclusion
It is sometimes the replacement market of actual transactions that makes a Blue
Book composite replacement cost more reliable than an exit value estimate of
what I will pay for a particular car from a particular dealer at retail. Of
course this argument is not as crucial to financial assets and liabilities that
are not as unique as a particular used vehicle. Replacement cost valuation for
accounting becomes more defensible for non-financial assets.
Disadvantages of Entry Value (Current Cost,
Replacement Cost) Accounting
-
Discovery of accurate replacement costs is
virtually impossible in times of changing technologies and newer production
alternatives. For example, some companies are using data processing
hardware and software that no longer can be purchased or would never be
purchased even if it was available due to changes in technology. Some
companies are using buildings that may not be necessary as production
becomes more outsourced and sales move to the Internet. It is possible to
replace used assets with used assets rather than new assets. Must current
costs rely only upon prices of new assets?
-
Discovering current costs is prohibitively
costly if firms have to repeatedly find current replacement prices on
thousands or millions of items.
-
Accurate derivation of replacement cost is
very difficult for items having high variations in quality. For example,
some ten-year old trucks have much higher used prices than other used trucks
of the same type and vintage. Comparisons with new trucks is very difficult
since new trucks have new features, different expected economic lives,
warranties, financing options, and other differences that make comparisons
extremely complex and tedious. In many cases, items are bought in basket
purchases that cover warranties, insurance, buy-back options, maintenance
agreements, etc. Allocating the "cost" to particular components may be quite
arbitrary.
-
Use of "sector" price indices as surrogates
compounds the price-index problem of general price-level adjustments. For
example, if a "transportation" price index is used to estimate replacement
cost, what constitutes a "transportation" price index? Are such indices
available and are they meaningful for the purpose at hand? When FAS 33 was
rescinded in 1986, one of the major reasons was the cost and confusion of
using sector indices as surrogates for actual replacement costs.
- Current costs tend to
give rise to recognition of holding gains and losses not yet realized.
Market Value Accounting:
Exit Value (Liquidation, Fair Value) Accounting
Whereas entry value is what it will cost to replace an item, exit value is
the value of disposing of the item. It can even be negative in some instances
where costs of clean up and disposal make to exit price negative. Exit value
accounting is required under GAAP for personal financial statements (individuals
and married couples) and companies that are deemed likely to become non-going
concerns. See "Personal Financial Statements," by Anthony Mancuso, The CPA
Journal, September 1992 ---
http://www.nysscpa.org/cpajournal/old/13606731.htm
Some theorists advocate exit value accounting for going concerns as well as
non-going concerns. Both nationally (particularly under FAS 115 and FAS 133) and
internationally (under IAS 32 and 39 for), exit value accounting is presently
required in some instances for financial instrument
assets and liabilities. Both the FASB and the IASB have exposure drafts
advocating fair value accounting for all financial instruments.
FASB's Exposure
Draft for Fair Value Adjustments to all Financial Instruments
On December 14, 1999 the FASB issued Exposure Draft 204-B entitled
Reporting Financial Instruments and Certain Related Assets and
Liabilities at Fair Value.
If an item is
viewed as a financial instrument rather than inventory, the
accounting becomes more complicated under FAS 115. Traders in
financial instruments adjust such instruments to fair value with all
changes in value passing through current earnings. Business firms
who are not deemed to be traders must designate the instrument as
either available-for-sale (AFS) or hold-to-maturity (HTM). A HTM
instrument is maintained at original cost. An AFS financial
instrument must be marked-to-market, but the changes in value pass
through OCI rather than current earnings until the instrument is
actually sold or otherwise expires. Under international standards,
the IASB requires fair value adjustments for most financial
instruments. This has led to strong reaction from businesses around
the world, especially banks. There are now two major working group
debates. 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.
·
Financial
Instruments: Issues Relating to Banks (strongly argues for required fair value adjustments of
financial instruments). The issue date is August 31, 1999.
·
Accounting for financial Instruments for Banks
(concludes that a modified form of historical cost is optimal for bank
accounting). The issue date is October 4, 1999. |
Advantages of Exit Value (Liquidation, Fair Value) Accounting
-
In the case of financial assets and
liabilities, historical costs may be meaningless relative to current exit
values. For example, a forward contract or swap generally has zero
historical cost but may be valued at millions at the current time. Failure
to require fair value accounting provides all sorts of misleading earnings
management opportunities to firms. The above references provide strong
arguments in favor of fair value accounting.
-
-
Exit value does not require arbitrary cost
allocation decisions such as whether to use FIFO or LIFO or what
depreciation rate is best for allocating cost over time.
-
- In many instances exit
value accounting is easier to compute than entry values. For example, it is
easier to estimate what an old computer will bring in the used computer
market than to estimate what is the cost of "equivalent" computing power is
in the new computer market.
-
-
Exit value reporting is not deemed
desirable or practical for going concern businesses for a number of reasons that
I will not go into in great depth here.
Disadvantages of Exit Value (Liquidation, Fair
Value) Accounting
· Operating
assets are bought to use rather than sell. For example, as long as no
consideration is being given to selling or abandoning a manufacturing plant,
recording the fluctuating values of the land and buildings creates a misleading
fluctuation in earnings and balance sheet volatility. Who cares if the value of
the land went up by $1 million in 1994 and down by $2 million in 1998 if the
plant that sits on the land has been in operation for 60 years and no
consideration is being given to leaving this plant?
· Some assets like
software, knowledge databases, and Web servers for e-Commerce cost millions of
dollars to develop for the benefit of future revenue growth and future expense
savings. These assets may have immense value if the entire firm is sold, but
they may have no market as unbundled assets. In fact it may be impossible to
unbundle such assets from the firm as a whole. Examples include the Enterprise
Planning Model SAP system in firms such as Union Carbide. These systems costing
millions of dollars have no exit value in the context of exit value accounting
even though they are designed to benefit the companies for many years into the
future
.
· Exit value
accounting records anticipated profits well in advance of transactions. For
example, a large home building company with 200 completed houses in inventory
would record the profits of these homes long before the company even had any
buyers for those homes. Even though exit value accounting is billed as a
conservative approach, there are instances where it is far from conservative
.
· Value of a
subsystem of items differs from the sum of the value of its parts. Investors may
be lulled into thinking that the sum of all subsystem net assets valued at
liquidation prices is the value of the system of these net assets. Values may
differ depending upon how the subsystems are diced and sliced in a sale.
· Appraisals of
exit values are both to expensive to obtain for each accounting report date and
are highly subjective and subject to enormous variations of opinion. The U.S.
Savings and Loan scandals of the 1980s demonstrated how reliance upon appraisals
is an invitation for massive frauds. Experiments by some, mostly real estate
companies, to use exit value-based accounting died on the vine, including
well-known attempts decades ago by TRC, Rouse, and Days Inn.
· Exit values are
affected by how something is sold. If quick cash is needed, the best price may
only be half of what the price can be by waiting for the right time and the
right buyer.
· Financial
contracts that for one reason or another are deemed as to be "held-to-maturity"
items may cause misleading increases and decreases in reported values that will
never be realized. A good example is the market value of a fixed-rate bond that
may go up and down with interest rates but will always pay its face value at
maturity no matter what happens to interest rates.
·
Exit value markets are often thin and inefficient
markets.
Economic Value (Discounted Cash Flow, Present
Value) Accounting
There are over 100 instances where present GAAP requires that historical cost
accounting be abandoned in favor of discounted cash flow accounting (e.g., when
valuing pension liabilities and computing fair values of derivative financial
instruments). These apply in situations where future cash inflows and outflows
can be reliably estimated and are attributable to the particular asset or
liability being valued on a discounted cash flow basis.
Advantages of Economic Value (Discounted Cash Flow, Present Value) Accounting
-
Economic value is based upon management's
intended use for the item in question rather than upon some other use such
as disposal (Exit Value) or replacement (Entry Value).
- Economic value conforms
to the economic theory of the firm.
- Real options valuation models in place of present
value models under uncertainty ---
http://www.trinity.edu/rjensen/realopt.htm
Disadvantages of Economic Value (Discounted Cash Flow, Present Value)
Accounting
-
How does one allocate a portion of the cash
flows of General Motors to a single welding machine in Tennessee? Or how
does one allocate the portion of the sales price of a single car to the
robot that welded a single hinge on one of the doors? How does one allocate
the price of a bond to the basic obligation, the attached warrants, the call
option in the fine print, and other possible embedded derivatives in the
contract? The problem lies in the arbitrary nature of deciding what system
of assets and liabilities to value as a system rather than individual
components. Then what happens when the system is changed in some way? In
order to see how complex this can become, note the complicated valuation
assumptions in a paper entitled "Implementation of an Option Pricing-Based
Bond Valuation Model for Corporate Debt and Its Components," by M.E. Barth,
W.R. Landsman, and R.J. Rendleman, Jr., Accounting Horizons, December
2000, pp. 455-480.
-
Cash flows are virtually impossible to
estimate except when they are contractually specified. How can Amazon.com
accurately estimate the millions and millions of dollars it has invested in
online software?
-
Even when cash flows can be reliably
estimated, there are endless disputes regarding the appropriate discount
rates.
- Endless disputes arise
as to assumptions underlying economic valuations.
Bob Jensen’s threads
on accounting valuation are at
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
FAS 141(R)-1 ---
http://www.fasb.org/pdf/fsp_fas141r-1.pdf
Title: Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies
Date Issued: April 1, 2009
Jensen Comment
This is an illustration of a principles based "standard" that will be very
difficult to implement and virtually impossible to consistently apply among
different firms.
PwC recommends the following on January 20, 2009 ---
Click Here
The proposal
offers four advantages for reporting losses on
non-trading debt securities:
-
Credit and non-credit losses would be reported
separately and prominently in a redesigned income
statement. This enhances transparency by providing
more information about changes in fair value.
Only
incurred losses are recorded in net income. This is
consistent with accounting for credit losses on
loans and eliminates an inconsistency in how
incurred losses are reported.
Continues to report debt securities at fair value.
Reduces effect of temporary market volatility on net
income. Swings in earnings will be moderated in both
falling and rising markets—essentially buffering the
extremes of bull and bear emotion.
|
|
There are various instances where fair value accounting is required
for non-financial as well as financial items under current standards. These
include the following:
- Personal financial statements such as those used in death settlements,
divorces, and credit applications
- Business firms where auditors question going-concern assumptions (such
as the 2008 annual report of General Motors)
- Business combinations
- Goodwill and intangible asset impairment assessments
- Long-lived asset impairment assessments
- Asset retirement obligations
- Costs associated with exit or disposal activities
Under international accounting standards, it is possible to update fixed
assets like real estate to fair values on occasion such as every five or ten
years. This is not as acceptable under FASB standards.
Hi again Tom,
I know Walter very well and have argued this point with him before,
especially in the context of FAS 123. ---
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
If General Electric buys a
factory robot for $10 million and pays another $10 million for installation
in a plant producing wind turbines, suppose the following:
Historical Cost: $20 million
(early in 2008) with an estimated productive life of 15 years
Replacement Cost: $30 million (with the increase attributed in large
measure to increased robot demand due to environmental and energy
legislation in 2009)
Exit Value: $0 with the loss caused mainly by immense transaction costs of
dismantling, transporting, and re-assembly that make buying a new robot
cheaper than moving a used robot.
Value in Use: Unknown because of unknown discount rates, covariances with
other tangible and intangible items, and inseparability of future cash flows
attributable to one robot in one factory. In terms of covariance, if wind
turbines have the GE boiler plate, the value in use of the robot is much
higher than if wind turbines have the Yugo boiler plate.
From what I know of Walter’s
position, Walter will place $0 exit value on the balance sheet for this
robot. Unless this wind turbine plant is deemed a non-going concern, the $0
exit value is the worst possible valuation in terms of error in estimating
value in use and earnings. Under a double entry system, growth company
earnings will nearly always get clobbered by exit values relative to
stagnant companies. In a sense Replacement (Current) Cost companies also get
clobbered for non-financial assets that can be used effectively and
efficiently for many years of production without replacement. Of course
Replacement Cost accounting conforms to Capital Maintenance Theory ---
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
I‘ve never agreed with Walter on
exit valuation except in the case of financial instruments and derivative
financial instruments and non-going concerns.
Some
might argue that all partionings of balance sheet item values into
components are arbitrary. We should only generate aggregated line items such
as Factory 1 value, Factory 2, value, etc. Or perhaps we cannot partition
value any further than one line item called Value of General Electric. Of
course this cannot be reliably measured from thin trades of a miniscule
proportion of marginal trades day-to-day on the stock market (called the
blockage valuation problem). Nor can it be reliably estimated via economic
models due to unknown future cash flows, unknown discount rates, unknown and
unstable values of intangibles, unknown environmental and labor legislation,
and the thinnest possible market for the purchase of the entire conglomerate
of General Electric as a whole.
For a time Baruch Lev strongly
advocated using market share prices for valuing intangibles, but his models
proved be particularly unstable and lacked robustness ---
http://www.trinity.edu/rjensen/Theory01.htm#TheoryDisputes
Furthermore they put the cart before the horse. Accounting reports are
supposed to help decision makers make market decisions. Lev’s approach works
backwards by using market values to make accounting decisions.
The FASB and IASB both want
financial reporting in terms of value in use. The trouble is that for most
non-financial balance sheet items the only person with a valuation estimate
worth considering is the Wizard of Oz. Witness how badly Bank America
overvalued Merrill Lynch when the toxic Merrill Lynch was purchased by B of
A in 2008. CEO Lewis should've consulted the Wizard of Oz before agreeing to
an outrageous purchase price. The point here is that experts in huge
corporations make huge mistakes when valuing companies to buy and sell. The
markets are just too thin at this level of aggregation.
The FASB and IASB both want
financial reporting in terms of value in use. The trouble is that for most
non-financial balance sheet items the only person with a valuation estimate
worth considering is the Wizard of Oz.
Bob Jensen
Of
course, historical cost as we know it is highly corrupted. On Page 1166,
Mary Barth states:
Second, few financial statement
amounts are stated at historical cost. Assets and liabilities are typically
initially measured at the value established by an exchange, which is their
cost. But, some type of remeasurement is pervasive. The only amounts in
financial statements today that are always historical costs are those for
cash and land in the transaction currency. Essentially all other amounts
reflect changes in time, events, or circumstances since the transaction
date. Amounts for short-term assets and liabilities, e.g., inventory,
receivables, and accounts payable, are historical costs if they have not
been impaired. However, once an entity recognizes an impairment of inventory
or an allowance for uncollectible accounts receivable, the amounts are no
longer historical costs. Also, entities depreciate or amortize long-term
assets and revalue them or write them down when they are impaired, and
amortize issue premium or discount on long-term debt. They also remeasure
many financial instruments at fair value. Impaired, amortized, revalued, or
otherwise remeasured amounts are not historical costs. Thus, framing the
measurement debate in financial reporting as historical cost versus fair
value misleads and obfuscates the issues.
"Global Financial Reporting: Implications for U.S.," by Mary
Barth, The Accounting Review,
Vol. 83, No. 5, September 2008 ---
Not free at
http://www.atypon-link.com/AAA/doi/pdfplus/10.2308/accr.2008.83.5.1159
Question
What is the current huge tax incentive for buying back debt such as non-toxic
bonds that have plunged in value?
From The Wall Street Journal Accounting Weekly Review on March 20,
2009
Debt Buybacks Garner a Tax Incentive
by Michael
Aneiro
The Wall Street Journal
Mar 12, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123677884637794739.html?mod=djem_jiewr_AC
TOPICS: Bond
Prices, Bonds, Debt, Early Retirement of Debt, Financial
Accounting, Tax Laws, Taxation
SUMMARY: "With
bond prices continuing to fall and companies struggling, more
issuers may look to buy back their own debt...A new tax break
makes such debt purchases more attractive...[because the]
stimulus legislation allows companies...to delay...taxes [on the
gains] until 2014 and then spread the tax out over a five-year
period....This week, homebuilder Hovnanian Enterprises said it
had paid $105 million to repurchase $315 million of its
unsecured senior notes....The company used proceeds from a $145
million 2008 tax refund to help fund the note repurchase." In
the related article, repurchases by closely held Glencore
International AG has resulted in speculation that the company is
in poor financial condition. Those concerns also initially rose
in 2008 "...following a marked increase in the cost of insuring
its debt against default."
CLASSROOM
APPLICATION: The articles can be used to introduce students
to early extinguishments of debt and debt features such as
insuring against default.
QUESTIONS:
1. (Introductory) How do debt repurchases create a
gain, particularly in the current economic climate?
2. (Introductory) What recent tax law change made debt
repurchase more attractive to companies such as Hovnanian
Enterprises and GE Capital?
3. (Advanced) What do you think generated the $145
million tax refund to Hovnanian Enterprises that was used to
finance the debt repurchase?
4. (Advanced) Why are debt repurchases a reasonable way
to use cash in the current economic environment? Alternatively,
what at are the risks associated with this step?
5. (Advanced) Refer to the related article. Explain the
market reaction to news that Glencore International AG bought
back its debt. Include in your answer, a comment on the role in
insuring against default by debt issuers.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
Glencore Buys Back Own Debt
by Andrea Hotter
Mar 12, 2009
Page: C3
|
"Debt Buybacks Garner a Tax Incentive," by Michael Aneiro, The Wall Street
Journal, March 12, 2009 ---
http://online.wsj.com/article/SB123677884637794739.html?mod=djem_jiewr_AC
With bond prices continuing to fall and companies
struggling, more issuers may look to buy back their own debt.
Repurchasing debt can be an especially beneficial
use of cash for companies during a downturn, when consumer demand slows and
other capital investments are unlikely to offer immediate returns.
A new tax break makes such debt purchases more
attractive for companies. Debt forgiven through buybacks is usually taxed as
income, but stimulus legislation allows companies that repurchase debt to
delay those taxes until 2014, and then to spread the tax out over a
five-year period.
Several companies in troubled industries such as
housing and casinos lobbied for the tax break, just as some issuers in those
industries are starting to avail themselves of the chance to repurchase
debt.
This week, home builder Hovnanian Enterprises said
it had paid $105 million to repurchase $315 million of its unsecured senior
notes, resulting in a $210 million gain in its latest quarter and a
corresponding increase in stockholders' equity. The company used proceeds
from a $145 million 2008 tax refund to help fund the note repurchase.
Underscoring how quickly debt value has
deteriorated, Hovnanian just last May sold $600 million of five-year notes
that pay an 11.5% coupon at 99 cents on the dollar. Those notes have since
faded to 71 cents on the dollar, according to bond trading platform
MarketAxess.
Last week, General Electric unit GE Capital offered
to buy back $1.46 billion of its bonds as a way to boost its financial
flexibility and possibly make it easier to participate in new government
financing programs.
Unlike distressed debt exchanges, where companies
invite investors to trade in large blocks of bonds at a steep discount to
face value in exchange for new notes, debt buybacks tend to rarely be
announced until after they are conducted. Evidence of any significant uptick
so far is elusive.
"The buyback issue has kind of been percolating in
the background," said Christopher Garman of Garman Research. "The tax issue
is helpful on the margins but doesn't carry a lot of broader market impact.
Still, you could see more companies starting to look to buy back debt."
But as defaults continue to rise, for some
particularly at-risk companies looking to buy back debt while they burn
through cash, the tax breaks mightn't come soon enough to matter.
"If they're around to file income taxes again,
that's great," said Vicki Bryan, an analyst at bond research firm
GimmeCredit. "But between now and then, it's a horse race: How fast can they
buy back debt until they come down to a minimum amount of cash?"
Jensen Comment
There seems to be some moral hazard in this particular bailout legislation.
Suppose homebuilder Hovnanian Enterprises insiders anticipate declaring Chapter
11 bankruptcy. The company pays $105 million to repurchase $315 million of its
unsecured senior notes and garners proceeds from a $145 million 2008 tax refund
to help fund the note repurchase. The extra cash from the tax refund is then
used to pay $40 million in bonuses to employees before bankruptcy is declared.
Second Life (3-D) Virtual Worlds in Ernst & Young Training Programs
March 12, 2005 message from Steve Hornik
Ernst & Young Uses Avatars to Test the Use of Virtual
Worlds as a Way to Enhance Training for New Auditors.
E&Y set up a virtual warehouse where they could train employees on Inventory
counting. The article and the video highlight the benefits of using Second
Life for doing such training. Some of the lessons learned from the article
are:
* Ernst & Young found 3-D learning better prepared new auditors by
giving them real-world experience. It compared the results with new auditors
who took a traditional instructor-led class.
* 3-D learning is a cost-effective alternative to on-site training
sessions because it can deliver the two goals of the meeting: training the
employees and creating camaraderie and collaboration.
* 3-D learning captures learning digitally, providing a record of what
has been informal, on-the-job training. It is a good tool to capture the
knowledge of retiring employees.
* 3-D learning is a good way for adults to learn because they can retain
more knowledge.
* Don't underestimate the time and effort needed to introduce learners
to this new platform. Plan to help your learners through the initial set-up
and orientation. Once they've been properly introduced, most enjoy the
experience.
* Consult with others working in this space. Old instructional design
approaches simply don't work in the virtual world.
The link to full article (make sure to watch the video) is at:
http://www.outsourcing-journal.com/mar2009-acs.html?email011369
_____________________________
Dr. Steven Hornik
University of Central Florida
Dixon School of Accounting
407-823-5739
Second Life: Robins Hermano
http://mydebitcredit.com
yahoo ID: shornik
Bob Jensen's threads Second Life are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife
Something Bad About the IASB
There was markedly less harmony between the two panelists when it came to
International Financial Reporting Standards. Hewitt said there's no doubt that
creating a single worldwide set of accounting rules is the correct thing to do.
It reflects the reality that nations depend on one another for imports and
exports, and that U.S. companies would have greater access to overseas capital.
Turner, though, cuffed the International Accounting Standards Board for bowing
to pressure from France president Nicolas Sarkozy and other European Union
leaders to relax fair-value accounting rules. Since last October, IASB has come
under fire for sidestepping due process to rush out a rule allowing financial
institutions to reclassify some loans as a way of avoiding marking those assets
to market and avoid losses generated by a drop in asset value. "IASB has not
shown that it can develop high-quality standards without political
interference," Turner said. "Until it can, IFRS is not ready for prime time."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits
auditors and financial statement preparers for successfully fighting fraud,"
CFO.com, March 5, 2009 ---
http://www.cfo.com/article.cfm/13234318/c_13234460
Thank you to Glen Gray for this link.
Something Good About the FASB
"IASB has not shown that it can develop high-quality
standards without political interference," Turner said. "Until it can, IFRS is
not ready for prime time." Turner indicated that even then he would not support
IFRS for U.S. companies, rejecting Hewitt's notion that the nature of
international business today demands it. In fact, IFRS would make American
companies less competitive, he insisted. "If we make our markets look like
everyone else's, and they're only as transparent as everyone else's, there's no
reason for [investors] to allocate their money to U.S. markets," he said. "But
if our markets have, as they always have had, greater transparency, and
investors get the information to make better decisions, then there is a reason."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits
auditors and financial statement preparers for successfully fighting fraud,"
CFO.com, March 5, 2009 ---
http://www.cfo.com/article.cfm/13234318/c_13234460
Bob Jensen's threads on the FASB vs. IASB issue are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Jensen Comment
The implication here has to be that Lynn Turner does not that IASB standards in
the U.S. will provide the same level of transparency as FASB standards, at least
not until we see some dramatic improvements in IASB standards.
Something Bad About the FASB
Actually, Turner said he gives credit to "practicing
accountants" — financial-statement preparers and auditors — for overseeing a
dramatic falloff in financial fraud cases compared to the years immediately
following the Enron and WorldCom scandals. "There's a change from 10 years ago,
and accountants do deserve some credit," he said. "Certainly some of the audit
firms get a lot of credit for what they've done in standing behind fair value
and trying to get the numbers right." He had no such praise for FASB. Although
the board is currently rewriting FAS 140 to eliminate QSPEs, it has "done an
absolutely miserable, abysmal job, especially in the balance sheet area."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits
auditors and financial statement preparers for successfully fighting fraud,"
CFO.com, March 5, 2009 ---
http://www.cfo.com/article.cfm/13234318/c_13234460
Jensen Comment
Whereas the FASB at least tackled the SPE problem and lost, the IASB on the
international front has had its head completely in the sand.
Bob Jensen's threads on QSPEs, VIEs, SPEs, etc. ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Questions
Did the FASB's amended fair value guidelines give the players (banks), umpires
(regulators), and fans (notably shareholders like Steve Forbes and Warren
Buffett seeking a new stock market bubble) the overvalued wine they were
seeking? Will the new guidelines mostly increase client pressures on auditors to
sign off on fantasy financial statements?
Although the new FASB Guidelines for estimating fair value under FAS 157 and FAS
115 in "broken markets" expands client/auditor discretion for some types of
assets having long-term value such as real estate, it's asking a lot to have
auditors agree once again to rosy valuation of sorry-looking toxic investments
such as the value of a mortgage that's about to wither on the vine. You can't
squeeze sweet grape juice from shriveled homeowners, let alone fine wine. It
may, however, be that higher value on foreclosed properties in bank inventories
will lead to some partying over banks' financial statements.
The wonderful December 30, 2008 research report of the SEC shows that fair value
accounting is neither the cause nor the cure for the banking crisis. The
liquidity problem of the holders of the toxic investments is caused by trillions
of dollars invested in underperforming (often zero performing) of bad
investments mortgages or mortgaged-backed bonds that have to be written down
unless auditors agree to simply lie about values. That is not likely to happen,
but client pressures on auditors to value on the high side for many properties
will be heavy handed.
The wonderful full SEC report that bankers and
regulators do not want to read can be freely downloaded at
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf
The FASB probably did its best to maintain integrity in the face of massive
political pressures. I hope the IASB is able to resist the same pressures in the
international arena. To me the new FASB Guidelines are mostly old wine in new
bottles since FAS 157 previously gave considerable discretion in valuing items
in broken markets.
"Expedited fair value guidance may ease pressure on banks,"
AccountingWeb, March 17, 2009 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=107232
Following a hearing at a
House Financial Services subcommittee last week, the Financial Accounting
Standards Board (FASB) agreed to expedite release of their proposed guidance
for the application of FAS 157 "Fair Value Measurement." The proposed
guidance was published for public comment on March 17th and will be voted on
by the Board on April 2. If approved, the FASB recommends that the guidance
be effective for interim and annual periods ending after March 15, 2009.
According to CFO.com, FASB chairman, Robert H. Herz, chairman of the
Financial Accounting Standards Board (FASB), told legislators, "We can have
the guidance in three weeks, but whether that will fix everything is another
[issue]."
SB's proposal give more detailed guidance for
valuing assets that would be classified as Level 3 under FAS 157, where
values are assigned in the absence of an active market or where a sale has
occurred in distressed circumstances when prices are temporarily weighed
down. The new guidance allows companies to use their own models and
estimates and exercise "significant judgment" to determine whether a market
exists or whether the input is from a distressed sale. Under FAS 157,
financial instruments' fair values cannot be based on distressed sales.
FASB had planned to issue the proposed guidance by
the end of the second quarter. A study on mark-to-market accounting
standards conducted by the Securities and Exchange Commission (SEC), which
was mandated by the Emergency Economic Stabilization Act of 2008, concluded
that more application guidance to determine fair values was needed in
current market conditions. On February 18, Herz announced that FASB agreed
with the SEC study and would develop additional guidance.
Thomas Linsmeier, FASB board member, said that they
hoped that the new guidance could lead to more accurate and possibly higher
values, CFO.com reports. "What we are voting on will hopefully elevate fair
values to a more reasonable price so investors are more comfortable
investing in the banking system," he said.
Edward Yingling, president of the American Bankers
Association, said in a statement he welcomed the proposal but expressed
caution about the ways it might be used by auditors, MarketWatch says.
"While we welcome today's news, it will be important to look at the details
of the written proposal to see how fully it improves the guidance. It will
also be imperative to examine the practical effect the proposal will have
based on the various ways it is interpreted."
The FASB proposal recommends that companies take
two steps to determine whether there an active market exists and whether a
recent sale is distressed before applying their own models and judgment:
Step 1: Determine whether there are factors
present that indicate that the market for the asset is not active at the
measurement date. Factors include:
- Few recent transactions (based on volume and
level of activity in the market). Thus, there is not sufficient
frequency and volume to provide pricing information on an ongoing basis.
- Price quotations are not based on current
information.
- Price quotations vary substantially either
over time or among market makers (for example, some brokered markets).
- Indices that previously were highly correlated
with the fair values of the asset are demonstrably uncorrelated with
recent fair values.
- Abnormal (or significant increases in)
liquidity risk premiums or implied yields for quoted prices when
compared to reasonable estimates of credit and other nonperformance risk
for the asset class.
- Significant widening of the bid-ask spread.
- Little information is released publicly (for
example, a principal-to-principal market).
If after evaluating all the factors the sum of the
evidence indicates that the market is not active, the reporting entity shall
apply step 2.
Step 2: Evaluate the quoted price (that is,
a recent transaction or broker price quotation) to determine whether the
quoted price is not associated with a distressed transaction. The reporting
entity shall presume that the quoted price is associated with a distressed
transaction unless the reporting entity has evidence that indicates that
both of the following factors are present for a given quoted price:
- There was a period prior to the measurement
date to allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities (for example, there
was not a regulatory requirement to sell).
- There were multiple bidders for the asset.
The proposed guidance also provides examples of
measurement approaches in the event that the observable input is from a
distressed sale.
At Monday's meeting, Herz deflated any beliefs that
FASB's new guidance will be a panacea for the many ills of the U.S. economy.
"There's not much accounting can do other than help people get the facts and
use their best judgment," he said.
The International Accounting Standards Board, which
sets accounting rules followed by more than 100 countries, plans to publish
a draft rule to replace and simplify fair-value accounting rules. Critics
say the rules have exacerbated the credit crunch by forcing write-downs. "We
plan to replace it, the whole thing. We want to stop patching up the
standard and we want to write a new one. We are aware that the current model
is too complex. We need to simplify.... We will move to exposure draft
hopefully within the next six months," said Philippe Danjou, a member of the
IASB board.
Professor Schiller at Yale asserts housing prices are still overvalued
and need to come down to reality
The median value of a U.S. home in 2000 was
$119,600. It peaked at $221,900 in 2006. Historically, home prices have
risen annually in line with CPI. If they had followed the long-term trend,
they would have increased by 17% to $140,000. Instead, they skyrocketed by
86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the
criminal pushing of loans by lowlife mortgage brokers, the greed and hubris
of investment bankers and the foolishness and stupidity of home buyers. It
is now 2009 and the median value should be $150,000 based on historical
precedent. The median value at the end of 2008 was $180,100. Therefore, home
prices are still 20% overvalued. Long-term averages are created by periods
of overvaluation followed by periods of undervaluation. Prices need to fall
20% and could fall 30%.....
Watch the video on Yahoo Finance ---
Click Here
See the chart at
http://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
Also see Jim Mahar's blog at
http://financeprofessorblog.blogspot.com/2009/02/shiller-house-prices-still-way-too-high.html
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost
allocation accounting, the above analysis by Professor Schiller is sobering.
It suggests how much policy and widespread fraud can generate misleading
"fair values" in deep markets with many buyers and sellers, although the
housing market is a bit more like the used car market than the stock market.
Each house and each used car are unique, non-fungible items that are many
times more difficult to update with fair value accounting relative to
fungible market securities and new car markets.
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
Don't Blame Fair Value Accounting Standards (Except in Terms of Executive
Bonus Payments) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting
"IASB Enhances Financial Instruments Disclosures," SmartPros,
March 5, 2009 ---
http://accounting.smartpros.com/x65784.xml
The International Accounting Standards Board (IASB)
today issued amendments that improve the
disclosure requirements about fair value measurements
and reinforce existing principles for disclosures about the
liquidity risk associated with financial
instruments.
The amendments form part of the IASB’s focused
response to the financial crisis and addresses the G20 conclusions aimed at
improved transparency and enhanced accounting guidance. The improvements
also reflect discussions by the IASB’s Expert Advisory Panel on measuring
and disclosing fair values of financial instruments when markets are no
longer active.
Responding to the calls of policymakers, many
investor groups and other interested parties, the IASB is bringing the
disclosure requirements of International Financial Reporting Standards (IFRSs)
more closely into line with US standards. The amendments to IFRS 7 Financial
Instruments: Disclosures introduce a three-level hierarchy for fair value
measurement disclosures and require entities to provide additional
disclosures about the relative reliability of fair value measurements. These
disclosures will help to improve comparability between entities about the
effects of fair value measurements. In addition, the amendments clarify and
enhance the existing requirements for the disclosure of liquidity risk. This
is aimed at ensuring that the information disclosed enables users of an
entity’s financial statements to evaluate the nature and extent of liquidity
risk arising from financial instruments and how the entity manages that
risk.
The amendments to IFRS 7 apply for annual periods
beginning on or after 1 January 2009. However, an entity will not be
required to provide comparative disclosures in the first year of
application.
Introducing the amendments, Sir David Tweedie,
Chairman of the IASB, said: The financial crisis has shown that a clear
understanding of how entities determine the fair value of financial
instruments, particularly when only limited information is available, is
crucial to maintaining confidence in the financial markets. The additional
disclosure requirements and the three-level hierarchy will help to increase
the clarity of the information. The amendments will also enhance the
disclosures about the liquidity risks associated with financial instruments.
The proposals build on the advice we have received from the IASB’s Expert
Advisory Panel. For more information about measures undertaken by the IASB
in response to the financial crisis, visit
www.iasb.org
Bull Crap About Fair Value Accounting
Congress is
also be readying legislation to suspend doctors' cancer diagnoses for the next
two years to "help" with the health care crisis.
Ed Scribner
(paraphrased)
Here are three bull
crap teaching cases on this matter. At least two prominent billionaires (Warren
Buffet and Steve Forbes) are totally ignoring the wonderful December 30, 2008
SEC research report that concludes that suspension of fair value accounting for
banks will hurt rather than help solve the banking crisis. But nobody seems to
be listening to anything from the SEC these days. The outstanding SEC research
report is
at
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf
Especially note the review of 22 bank failures beginning around Page 100.
It appears that
Warren Buffett and Steve Forbes are still holding billions of shares of equity
stock that tanked. They will stoop to almost any bull crap accounting rules that
will help lure investors back into the stock market. For example, Warren Buffet
lost $25 billion in share value. He wants you and millions of others to help
create a new stock market bubble. Coloring book fantasy accounting might help
them regain their lost billions.
Bull Crap Teaching Case 3
From The Wall Street Journal Accounting Weekly Review on March 13, 2009
Buffett's Unmentionable Bank Solution
by Holman
W. Jenkins Jr.
Mar 11, 2009
Click here to view the full article on WSJ.com
TOPICS: Disclosure
Requirements, Fair Value Accounting, Mark-to-Market,
Mark-to-Market Accounting, Banking, Disclosure
SUMMARY: In
a CNBC program on Monday, Warren Buffet called for suspension of
mark-to-market accounting for regulatory capital purposes. This
article emphasize that "market-to-market accounting is fine for
disclosure purposes". It also notes that "CNBC, sadly, has been
playing a loop of Mr. Buffet that...leaves out his most
important point. Nobody cares about the merits of mark-to-market
in the abstract, but how it impacts our current banking crisis."
CLASSROOM
APPLICATION: Understanding mark-to-market accounting, bank
regulatory processes, and the purposes of financial reporting
can be covered extremely well using this opinion page editorial.
QUESTIONS:
1. (Introductory) What is mark-to-market accounting?
2. (Advanced) How can banks' capital ratios be
insufficient and banks be reported as insolvent under
mark-to-market accounting, even if "their assets continue to
perform"? In your answer, define insolvency and compare the
notions of impairment of an asset versus the market value of an
asset.
3. (Introductory) What is the difference between using
financial reports for regulatory purposes and using them for
disclosure purposes? In your answer, comment on the definition
of "general purpose financial statements".
4. (Advanced) Why does regulatory reporting "require
actions that might make no sense in the circumstances"? In your
answer, comment on how regulatory reporting results in
requirements to raise capital.
5. (Advanced) Refer again to your answer to question 3
above. Explain the implications of raising capital for current
shareholders.
6. (Advanced) Define the concept of moral hazard.
According to these Opinion page editors, how must regulators
change their approach to handling our current banking crisis to
avoid the problem of moral hazard? How does that differ from
using a system of regulatory capital requirements for banks?
Reviewed By: Judy Beckman, University of Rhode Island
|
Bull Crap Teaching Case 2
Forbes serves up barf --- No it's worse than barf!
It's clear that Forbes never read the excellent December 2008 SEC research
report on this topic.
"Obama Repeats Bush's Worst Market Mistakes: Bad accounting rules are the
cause of the banking crisis," by Steve Forbes, The Wall Street Journal, March 6,
2009 ---
http://online.wsj.com/article/SB123630304198047321.html?mod=djemEditorialPage
What is most astounding about President Barack
Obama's radical economic recovery program isn't its breadth, but its
continuation of the most destructive policies of the Bush administration.
These Bush policies were in themselves repudiations of Franklin Delano
Roosevelt, Mr. Obama's hero.
The most disastrous Bush policy that Mr. Obama is
perpetuating is mark-to-market or "fair value" accounting for banks,
insurance companies and other financial institutions. The idea seems
harmless: Financial institutions should adjust their balance sheets and
their capital accounts when the market value of the financial assets they
hold goes up or down.
That works when you have very liquid securities,
such as Treasurys, or the common stock of IBM or GE. But when the credit
crisis hit in 2007, there was no market for subprime securities and other
suspect assets. Yet regulators and auditors kept pressing banks and other
financial firms to knock down the book value of this paper, even in cases
where these obligations were being fully serviced in the payment of
principal and interest. Thus, under mark-to-market, even non-suspect assets
are being artificially knocked down in value for regulatory capital (the
amount of capital required by regulators for industries like banks and life
insurance).
Banks and life insurance companies that have
positive cash flows now find themselves in a death spiral. Of the more than
$700 billion that financial institutions have written off, almost all of it
has been book write-downs, not actual cash losses. When banks or insurers
write down the value of their assets they have to get new capital. And the
need for new capital is a signal to ratings agencies that these outfits
might deserve a credit-rating reduction.
So although banks have twice the amount of cash on
hand that they did a year ago, they lend only under duress, or apply onerous
conditions that would warm Tony Soprano's heart. This is because they know
that every time they make a loan or an investment there is a risk of a book
write-down, even if the loan is unimpaired.
If this rigid mark-to-market accounting had been in
effect during the banking trouble in the early 1990s, almost every major
commercial bank in the U.S. would have collapsed because of shaky Latin
American and commercial real estate loans. We would have had a second Great
Depression.
But put aside for a moment the absurdity of trying
to price assets in a disrupted or non-existent market, of not distinguishing
between distress prices and "normal" prices. Regulatory capital by its
definition should take the long view when it comes to valuation; day-to-day
fluctuations shouldn't matter. Assets should be kept on the books at the
price they were obtained, as long as the assets haven't actually been
impaired.
Continued in article
Jensen Comment
By now investors know which large banks are stuck with trillions of dollars in
non-performing loans. Wrapping them gold ribbons by reporting them way above
market value is hardly going to induce investors to go out an buy enormous
amounts of common shares of CitiBank, Bank of America, Wells Fargo, and JP
Morgan. This artificial gilding of capital ratios does nothing to solve the
problem of detoxifying the poison of non-performing loans and poisonous
collateralized bonds.
This type of naive and dangerous reasoning was started on September 19, 2008
by former FDIC director Bill Isaac ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting
It's certain that FAS 157 needs some amending for broken markets, but what
Isaac and Forbes are proposing serve as no basis for improvements on FAS 157.
After Isaac proposed elimination of fair value accounting for troubled banks,
Congress ordered, in no uncertain terms, the SEC to do a research study on what
was causing so many bank failures like the huge failures of WaMu and Indy Mac.
Although the SEC has been disgraced for a lot of reasons as of late, the
particular study that emerged in a very short period of time (December 2008) is
an excellent study of why banks were failing.
In particular, beginning on Page 100 of the study the SEC reports on why 22
large-size, medium-size, and small-size banks failed. It turns out that most
assets and liabilities of banks are not marked to market in the first place.
Secondly, fair value adjustments downward has not been the problem of recent
bank failures. The problem is non-performing loans, dangerous management of
financial risk, fraud in property valuations (which was especially bad at WaMu),
and performance-based reward systems that induced bank employees to screw their
companies and their shareholders.
If you want to blame accountants, blame the auditors for not raising going
concern questions about the failed banks ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Blame them for badly understating bad debt reserves.
But don't blame them or the FASB/IASB standard setters for fair value
accounting.
And this is from an old accounting professor who favors fair value accounting
for financial and derivative financial instruments but fights against fair value
accountign for non-financial investments ---
http://www.trinity.edu/rjensen/theory01.htm#FairValue
I'll bet you 99-1 odds that Steve Forbes never read this excellent SEC study:
"Report and Recommendations Pursuant to Section 133 of the Emergency Economic
Stabilization Act of 2008: Study on Mark-To-Market Accounting"
The full report can be freely downloaded at
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf. (pdf)
March 6, 2009 reply from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
Bob,
Congress is holding a hearing on market value
accounting next week -
http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr031209.shtml
I understand that one Congressman is readying
legislation to suspend market value accounting for two years in order to
"help" with the economic crisis.
On a somewhat related point, see the recent speech
by the Comptroller of the Currency who would like to use the allowance for
loan losses of banks to squirrel away amounts in good times that can then be
drawn on in bad times like these -
http://www.occ.treas.gov/ftp/release/2009-16a.pdf
Along with GM's going concern qualification,
accounting is truly front page news again - after fading into the background
a little a couple of years after SOX. We are indeed living in interesting
times although with the value of my portfolio being what it is "living" may
be putting too positive a spin on it!
Denny
March 6, 2009 reply from Ed Scribner
[escribne@NMSU.EDU]
Denny,
That same Congressman may also
be readying legislation to suspend doctors' cancer diagnoses for the next
two years to "help" with the health care crisis.
Ed
March 6, 2009 reply from Richard C. Sansing
[Richard.C.Sansing@TUCK.DARTMOUTH.EDU]
Thanks for a Friday afternoon chuckle. I see many
potential applications of the same idea. Can we help address global warming
by suspending the use of thermometers?
Richard Sansing
Bull Crap Teaching Case 1
From The Wall Street Journal Accounting Weekly Review on
Bank Capital Gets Stress Test
by Deborah
Solomon and Jon Hilsenrath
Feb 26, 2009
Click here to view the full article on WSJ.com
http://online.wsj.com/article/SB123557705225772665.html?mod=djem_jiewr_AC
TOPICS: Bad
Debts, Banking, Financial Analysis, Financial Statement Analysis
SUMMARY: The
Obama administration is proposing new bank capital requirement tests that
will be designed to assess whether "...banks can survive even if the
unemployment rate rises above 10% and home prices fall by another
25%....worse than most economists and the Federal Reserve currently expect."
If banks fail to demonstrate sufficient capital to weather those
circumstances, they may either raise additional funds privately or accept
further investment from the U.S. government. "The government's investment
would come in the form of convertible preferred shares, which institutions
could choose to convert into common equity at any time....Officials said
they expect banks would convert the shares to common equity as needed to
help protect against losses."
CLASSROOM APPLICATION: Questions
help students to understand the meaning of capital beyond the balance sheet
definition of assets - liabilities = equity and to understand the
relationship between economic forecasting and bank capital requirements. The
article also discusses the use of preferred shares versus common stock and
the use of convertible preferred shares.
QUESTIONS:
1. (Introductory)
Define bank capital in terms of the balance sheet equation.
2. (Advanced)
What tests are used to assess a bank's health based on the level of its
capital or equity? (Hint: for background information and an international
perspective, you may investigate the Basel and Basel II Accords of the Basel
Committee on Banking Supervision of the Group of Ten nations. See the
related articles.)
3. (Introductory)
How can economic and financial advisors relate the potential unemployment
rate and mortgage default rate in the U.S. economy to banks' capital needs?
4. (Advanced)
If financial institutions fail capital requirement tests based on new
thresholds as outlined by the Obama administration, the U.S. government may
invest in "...convertible preferred shares, which institutions could choose
to convert into common equity at any time." Define and describe the
differences between preferred and common shares. Also define convertibility
features.
5. (Introductory)
Why might financial institutions not want to issue common shares of stock
but be allowed to do so by converting preferred shares whenever they so
choose?
6. (Introductory)
What is the difference between financial institutions issuing stock to the
U.S. government in the ways described in this article and nationalizing our
financial institutions?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Rules on Capital Roil U.S. Bankers
by Damian Paletta
Nov 01, 2006
Page: C3
http://online.wsj.com/article/SB116234873761209749.html
by Damian Paletta and Alistair MacDonald
Mar 04, 2008
Page: 03/04
"Bank Capital Gets Stress Test," by Deborah Solomon and Jon Hilsenrath, The
Wall Street Journal, Feb 26, 2009
http://online.wsj.com/article/SB123557705225772665.html?mod=djem_jiewr_AC
The Obama administration, in unveiling details of
its financial-rescue plan, laid out a dark economic scenario it expects
banks to be able to withstand, the starting point for what could become a
significant new infusion of government cash into the banking system.
To ensure banks can survive even if the
unemployment rate rises above 10% and home prices fall by another 25%, the
administration will require some institutions to either raise private money
or accept a bigger investment from the U.S. government. U.S. officials don't
expect the economy to deteriorate that sharply, but they want to be sure
banks are prepared nonetheless.
The first step in the latest effort to shore up the
banking sector will be a series of "stress tests" to assess whether the
largest U.S. banks can survive a protracted slump. The tests aren't expected
to be finished until April. Banks will then have up to six months to address
any shortfall.
Unlike the Bush administration's effort to pump
$250 billion into banks, the Obama team didn't commit a set amount of money
to the effort and President Barack Obama said Tuesday it is likely that
banks will need additional funds beyond the $700 billion rescue package
approved by Congress last fall.
The government's investment would come in the form
of convertible preferred shares, which institutions could choose to convert
into common equity at any time. Regulators and investors have become more
concerned about the amount of common stock banks hold, since that is a
bank's first line of defense against losses.
To ensure their balance sheets are strong, the
biggest banks will be required to undergo a tough assessment, including
whether they have the right type of capital. Officials said they expect
banks would convert the shares to common equity as needed to help protect
against losses.
A bank's capital is its cushion against losses, a
buffer that ensures its depositors and other lenders will get paid even if
the bank runs into trouble.
Economists said most of the nation's largest banks
will likely have to raise capital under the economic assumptions that
regulators plan to use. The stress test assumes an unemployment rate
averaging 8.9% in 2009 and 10.3% in 2010. Because that is an average for a
whole year, the test envisions the jobless rate reaching higher than those
levels on a monthly basis during these stretches. It was 7.6% in January
Under some circumstances, the government might end
up owning majority stakes in banks.
"I think you'll find most firms need more capital
and that Bank of America and Citigroup are going to need a boatful of new
capital," said Douglas Elliott, a fellow at the Brookings Institution.
Discuss Would nationalizing banks improve or worsen
the crisis? Share your thoughts at Journal Community.Banks that get a
government investment will have to comply with strict executive-compensation
restrictions, including curtailed bonuses for top executives and earners.
The securities will pay a 9% dividend -- higher than the 5% banks are
required to pay under the Bush-era program -- and banks would be restricted
in paying dividends and from buying back their own stock. The securities
would automatically convert to common stock after seven years.
Banks that have already sold preferred shares to
the government as part of the $250 billion program would also be able to
swap the preferred shares for convertible securities that can convert to
common shares.
Administration officials said the effort is an
attempt to avoid nationalizing banks and to make sure institutions can lend
money. While officials said most banks are considered well capitalized,
uncertainty about economic conditions is hindering their ability to lend
money or attract private capital.
Treasury Secretary Timothy Geithner sought to knock
down speculation that the government may nationalize banks, saying such a
move is "the wrong strategy for the country and I don't think it's the
necessary strategy." Mr. Geithner, speaking on The NewsHour with Jim Lehrer,
said there may be situations where the government provides "exceptional
support" but that the best outcome is if the banks "are managed and remain
in private hands."
U.S. officials will demand that financial
institutions test the resilience of their portfolios and capital against a
grim, though not catastrophic, economic landscape. The test assumes a 3.3%
contraction in gross domestic product in 2009, which would be the worst
performance since 1946. And it assumes home-price declines of another 22% in
2009 and 7% in 2010.
That would be worse than most economists and the
Federal Reserve currently expect. Private economists on average forecast a
2% contraction in economic output this year and a 2% rebound next year, with
the jobless rate remaining below 10%.
Some private forecasters said they can imagine
worse.
"I don't have any problem believing the
unemployment rate is going to move to 12% or that vicinity," said Laurence
Meyer, vice chairman of Macroeconomic Advisers LLC, a forecasting firm whose
models are widely used in Washington and New York.
Mr. Meyer said regulators had to strike a delicate
balance in designing their test. If they painted a truly grim scenario --
the economy contracted by 9% in 1930, 6% in 1931 and 13% in 1932 -- it could
force banks to raise more capital than they are capable of raising, driving
them further into the government's arms.
"You don't want to know the answer to some of the
questions you might ask," Mr. Meyer said.
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/theory01.htm
Bob Jensen's threads on the bailout mess ---
http://www.trinity.edu/rjensen/2008Bailout.htm
A Small But Important Step in Breaking the Accountics
Stranglehold on Accountancy Doctoral Programs
"A Profession's Response to a Looming Storage (sic,
I think they meant shortage): Closing
the Gap in the Supply of Accounting Faculty," by Michael Ruff, Jay C. Thibodeau,
and Jean C. Bedard, Journal of Accountancy, March 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Mar/AccountingFaculty.htm
March 10, 2009 reply from Roger Debreceny
[roger@DEBRECENY.COM]
The website for the ADS program is
http://www.adsphd.org/
. The list of participating institutions is at
http://www.adsphd.org/participatingschools.asp
Doyle Williams is chairing this effort. He has been
strong in holding the line, saying, for example, that if a student starts in
auditing and tax and then decides to switch to financial accounting, they
must give up their scholarship. Of course, the reality is that capital
markets research can be applied to many decision frames and the centrifugal
forces are so strong that we will see:
1) Students using capital markets approaches to
study auditing (think audit fees) or tax
2) Switching to largely financial accounting, capital markets research
after graduation
Having said that, I think this will apply to only a
minority (albeit a significant minority) of students. It was a great
experience to interact with other faculty and potential students in December
last year. I think we can see this effort as an important first step in
righting the listing ship of accounting academia.
Roger
Bob Jensen's threads on the doctoral program mess are at
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
From The Wall Street Journal Accounting Week in
Review on April 3, 2009
New Tax Breaks to Be Aware Of
by Tom Herman
The Wall Street Journal
Apr 01, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123854758647076375.html?mod=djem_jiewr_AC
TOPICS: Insurance
Stocks, IRA Contributions, Job-Search Costs, Ponzi Schemes,
Social Security Taxes, Taxation
SUMMARY: Procrastinators
scrambling to finish tax returns should be aware of new and old
twists that could limit what they pay to Uncle Sam.
Unfortunately, even when Congress tries to offer Americans tax
relief, the result is often so complex that it requires the
assistance of high-priced experts trained in the translation of
tax-law gibberish. The related article discusses the differences
between taxation of singles and married couples.
CLASSROOM
APPLICATION: In the spirit of the April tax season, some tax
tips are offered to readers. The topics in the article are a few
of many covered in an individual taxation class, and can be used
to discuss those points. The related article adds some
information regarding the difference between married and single
taxpayers. But it would be good to show students how some
seemingly minor deductions or credits can make a big difference
to individual taxpayers, especially in a recession.
QUESTIONS:
1. (Introductory) What are the deductions related to
losses from Ponzi schemes? What are the requirements for
investors to take the deduction? How much is allowed?
2. (Introductory) What was the recent decision
regarding the tax treatment of the sale of some insurance
stocks? To what years does the decision apply? What could be the
impact of the government's appeal? What should taxpayers do in
this situation?
3. (Introductory) How are job-search costs treated for
tax purposes? Why did the writer mention this deduction in the
article? What lesson does this show to tax preparers and
taxpayers?
4. (Introductory) What should taxpayers note about
social security taxes if they have changed jobs last year? Why
is this an issue?
5. (Advanced) The writer mentions several times that
some of the tax rules are so complicated that taxpayers need to
pay a professional for advice. Why do you think that tax rules
are not drafted so that most taxpayers can understand them
easily? What problems do the complicated rules create? How does
this affect your personal tax situation?
6. (Advanced) What are the best tax tips offered in
this article? How does this article change the way you think
about taxes? How do you keep up with tax changes and information
relevant to your tax returns?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED
ARTICLES:
Taxes for Newlyweds
by Anna Prior
Mar 28, 2009
Online Exclusive
|
Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm
Questions
What do airline fares and Congressional budgets have in common?
Answer
There are a lot of surprises that are revealed only after you're struck with the
deceptions (especially about baggage fees in both instances).
What you end up with is not necessarily what you'd planned on getting.
In 2009 the airline seat demand is expected to drop off
a cliff for a variety of reasons, not the least of which is the economy.
Beware of increasingly deceptive ticket deals.
Travel companies say that by
the end of this year, consumers will be able to comparison shop for airfares
that for the first time will include the fees airlines have been tacking on to
advertised fares only after you hit the "buy" button. Already
TripAdvisor.com and
FlyingFees.com
offer elementary tools for calculating fees, and advanced
technology that can fold fees into fare quotes at travel agencies, online
vendors and airline Web sites is likely to hit the market later this year.
"Airfare Quotes That Lay Bare Hidden Fees: Sites Build Tools to Compare
the Actual Costs of Flights; When Baggage Tips the Scale," by Scott Macartney,
The Wall Street Journal, March 10, 2009 ---
http://online.wsj.com/article/SB123664662318478683.html?mod=todays_us_personal_journal
Shop for airline tickets online or through a travel
agent and the price quotes you get don't tell the whole story these days.
But that's about to change.
Travel companies say that by the end of this year,
consumers will be able to comparison shop for airfares that for the first
time will include the fees airlines have been tacking on to advertised fares
only after you hit the "buy" button. Already TripAdvisor.com and
FlyingFees.com offer elementary tools for calculating fees, and advanced
technology that can fold fees into fare quotes at travel agencies, online
vendors and airline Web sites is likely to hit the market later this year.
"This has tremendous potential to turn air-travel
shopping on its end," said Kyle Moore, vice president of product marketing
for Sabre Travel Network.
A $200 ticket on one airline may look like a good
deal, but could ultimately be more expensive than a $250 ticket on another
carrier if that first airline charges fees for checking baggage,
transporting pets or unaccompanied minors. Even perks like seats with extra
legroom, priority security-line privileges or
one-day passes to an airport lounge can significantly boost the price of a
ticket.
Airlines have found customers willing to pay more at the airport when fees are separate from fares. Folding fees into fares could limit airlines' ability to dig deeper into traveler wallets.
Sabre Holdings Corp. and Amadeus IT Group SA, two leading airline booking companies, say they'll have tools out to travel agents, Web sites and airlines beginning later this year that will add fees consumers plan to use into ticket prices, showing bottom-line prices much as car-rental companies were pressured into showing the total price of a rental with all fees, taxes and surcharges included.
Rough early attempts to fold fees into prices give travelers a better idea of the fees they may incur, but still leave a lot of the math to travelers. TripAdvisor, a company owned by Expedia Inc. that built a following collecting travelers' hotel and destination reviews, added airline ticket search capabilities to its site on Feb. 27 and unveiled a "fee estimator" that can re-rank prices based on how many bags you plan to check. The fee estimator, developed in-house by TripAdvisor, can also calculate expected fees for each flight for meals, drinks, snacks and
"Customers are looking for
clarity in pricing," says Bryan Saltzburg, general manager of new
initiatives for TripAdvisor.
Without fees, a $193 round-trip fare between New
York and Fort Lauderdale for travel later this month on US Airways Group
Inc. looks cheaper than a $197 fare at JetBlue Airways Corp., for example.
But if you're checking two bags, you'll pay $80 in fees on US Airways and
only $40 on JetBlue.
The fee estimator takes into account whether you
have elite status at an airline that may exempt you from some fees. But
there are lots of limitations. TripAdvisor's estimator only works for
domestic flights and does not price out the costs of overweight or oversized
luggage, priority seating, pets, unaccompanied minors or other charges.
TripAdvisor says it concentrated on the most frequently incurred fees; more
fees may be coming.
Continued in article
Bob Jensen's threads on consumer fraud and reporting
are at
http://www.trinity.edu/rjensen/FraudReporting.htm
Jensen Comment
Add-on fee collecting greatly complicates product costing since most of these
fees are in essence for separate products and services. But the products are in
no way independent since the all depend on the purchase of the main ticket. Also
these products share many common fixed costs such as the cost of baggage
handling. The airline needs a baggage system to serve both the "free baggage"
that is part of the ticket price and the "fee baggage" that is charged baggage
not covered in the price of a ticket. Cost accounting and pricing decisions are
very complicated and offer an opportunity for new case studies in cost and
managerial courses. Add this to the problem of frequent flier liabilities and
you may write up a case that nobody can solve. Those incomprehensible telephone
bills demonstrated that consumers really hate complicated billings with lots of
hidden surprises in the fine print.
Question
Why doesn't anybody ask the obvious question
that, since the Federal government now owns 80% of AIG, the taxation of AIG is
in a sense an intra-company transfer payment?
Setting AIG in the IRS's sights is not quite the
same as aiming at General Electric's tax shelters.
I don't think Watts and Zimmerman ever envisioned
such government ownership complications of positive accounting theory. Shooting
at AIG with the right hand is a little like shooting off 80% of the left hand.
From The Wall Street Journal Accounting Weekly Review on March 27, 2009
AIG's Bonus Unit Now in IRS's Sights
by Jesse
Drucker and Carrick Mollenkamp
The Wall Street Journal
Mar 24, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123785925883921027.html?mod=djem_jiewr_AC
TOPICS: Tax
Avoidance, Taxation
SUMMARY: Watts
and Zimmerman, in making arguments know under the general
heading as "positive accounting theory," express the notion that
large sized companies tend to choose certain accounting policies
and practices because they become noticed by government
regulators. Such seems to be the problem for AIG who may not
have chosen conservatively in structuring deals with foreign
entities to generate foreign tax credit benefits. The article
describes an example of structuring an offshore AIG subsidiary,
which obtains financing from a foreign bank and generates
interest income by loaning the funds to another AIG subsidiary.
AIG then can deduct the interest payments to reduce U.S. taxes.
However, the foreign bank receives ownership in the first
subsidiary as collateral for the loan and "overseas tax
authorities treat the offshore AIG subsidiary as being owned by
the foreign bank..." resulting in the interest payments from AIG
being "treated as intracompany dividends...and exempt from
foreign tax."
CLASSROOM
APPLICATION: The business purpose test for structured
transactions is the basis for challenging the AIG offshore
entities developed by the unit that paid the bonuses generating
taxpayer and lawmaker outrage. The article also refers to
disclosure of challenges to tax positions required under FASB
Interpretation No. 48.
QUESTIONS:
1. (Introductory) Summarize one example transaction in
which AIG structured an entity to generate a foreign tax credit.
2. (Introductory) What business benefit helped to
generate profits from the foreign subsidiaries established by
AIG?
3. (Advanced) Why may the IRS challenge these
structured transactions? In your answer, comment on the business
purpose for establishing these entities and explain the
importance of that notion of business purpose.
4. (Advanced) "In a securities filing, AIG said it
expects the IRS to challenge tax benefits from several other
transactions." Why must such a disclosure be made in a
securities filing?
Reviewed By: Judy Beckman, University of Rhode Island
|
"AIG's Bonus Unit Now in IRS's Sights," by Jesse Drucker, The Wall Street
Journal, ---
http://online.wsj.com/article/SB123785925883921027.html?mod=djem_jiewr_AC
Some of the same banks that got government-funded
payouts to settle contracts with American International Group Inc. also
turned to the insurer for help cutting their income taxes in the U.S. and
Europe, according to court records and people familiar with the business.
The Internal Revenue Service is challenging some of
the tax deals structured by AIG Financial Products Corp., the same unit of
the New York company that has caused political ire over $165 million in
employee bonuses.
The company paid $61 million last year in disputed
taxes stemming from the deals but sued the U.S. government last month in
federal court in New York, seeking a refund, according to filings in the
case.
Banks that worked with AIG on tax deals include
Crédit Agricole SA of France, Bank of Ireland and Bank of America Corp.,
according to AIG's lawsuit. The banks declined to comment.
In general, AIG's tax deals permitted U.S.
companies and foreign banks to effectively claim credit in their home
country for a single tax payment, partly through the use of an offshore AIG
subsidiary. In its lawsuit against the government, the insurer said it was
told by the IRS that AIG hadn't shown that the transactions "had sufficient
economic substance and business purpose" to justify tax benefits. The IRS
declined to comment.
The tax-structuring operation started by AIG in the
1990s was even bigger than AIG's credit-default-swaps business, according to
a person familiar with the matter.
An AIG spokesman declined to discuss the
tax-cutting transactions in detail but asserted that the tax benefits were
proper and justified. AIG wants to "ensure that it is not required to pay
more than its fair share of taxes," a company spokeswoman said.
More AIG Workers to Return $50 Million of
BonusesWealth: Bus Tours of the Rich and InfamousSoros: Credit Default Swaps
Need Stricter RegulationDefenders of these arrangements say that taking
advantage of differences between tax laws in the U.S. and overseas is simply
smart business, arguing that the deals weren't explicitly prohibited by IRS
regulations at the time.
New versions of these foreign-tax-credit deals
effectively stopped in 2007 after the IRS proposed regulations to end them.
The agency has formed a special team of agents and attorneys to examine such
transactions. AIG wound down its tax unit last year following the proposed
regulations.
Cross-border tax transactions are drawing increased
scrutiny from U.S. and European tax officials, who are seeking to limit
deals that help firms to play one nation's tax laws against another. This
month, U.K. tax authorities said they were reviewing documents that show how
Barclays PLC structured offshore deals for clients.
Last week, IRS Commissioner Douglas Shulman told
the Senate Finance Committee that the agency is "aggressively pursuing"
so-called "foreign tax-credit generators." Those are the sort of deals that
the IRS is challenging at AIG, court records in two cases show.
Mr. Shulman didn't identify specific companies,
though such a transaction "really perverts the foreign tax credit," he said.
The foreign-tax-credit transactions took numerous
forms. In one version, an offshore AIG subsidiary would borrow money from an
overseas bank and also earn investment income overseas. The AIG unit would
pay foreign taxes on that investment income and earn a foreign tax credit in
the U.S., according to court records involving companies using these deals
that have been challenged by the IRS and people who have worked on such
deals.
Another AIG unit would then pay interest to the
foreign bank, deducting those payments from its U.S. taxes. Meanwhile, the
foreign bank was exempt from tax on that interest because overseas tax
authorities treated the bank as simultaneously owning the AIG subsidiary.
That effectively gave the foreign bank credit for taxes paid by the AIG
subsidiary.
Because the foreign bank got a tax exemption
overseas, it could charge lower interest costs on the cash loaned to AIG,
according to people familiar with the transactions.
AIG helped set up a complex transaction for
France's Crédit Agricole in the late 1990s that generated roughly $17.8
million in tax savings for AIG and unspecified tax savings for Crédit
Agricole, according to court filings by AIG in its suit against the IRS. The
bank declined to comment.
Last year, Crédit Agricole's Calyon
investment-banking unit got $3.3 billion in payouts as part of the U.S.
government's rescue of AIG.
"If people are going to get taxpayer money, then
there definitely should be a measure of corporate social responsibility, to
put it bluntly," said Reuven S. Avi-Yonah, a former corporate tax attorney
who is director of the international tax program at the University of
Michigan's law school.
Continued in article
"Former BDO Seidman vice chair pleads guilty to tax fraud,"
AccountingWeb, March 20, 2009 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=107235
Adrian Dicker, a United
Kingdom chartered accountant and former vice chairman and board member at a
major international accounting firm, has pleaded guilty to conspiring with
certain tax shelter promoters to defraud the United States in connection
with tax shelter transactions involving clients of the accounting firm and
the law firm Jenkens & Gilchrist (J&G), the Justice Department and Internal
Revenue Service (IRS) announced. In the hearing before U.S. Magistrate Judge
Theodore H. Katz in the Southern District of New York, Dicker, who is a
resident of Princeton Junction, NJ, also pleaded guilty to tax evasion in
connection with a multi-million dollar tax shelter that Dicker helped sell
to a client of the accounting firm.
According to the information and the guilty plea,
between 1995 and 2000, Dicker was a partner in the New York office of the
accounting firm which he identified during his guilty plea as BDO Seidman.
From early 1999 through October 2000, Dicker was on the firm's Board of
Directors, and through October 2003 he served as a retired partner director.
From 1998 until 2000, Dicker was one of the leaders of the firm's "Tax
Solutions Group" (TSG), a group led by the firm's chief executive officer,
Dicker, and another New York-based tax partner. The activities of the TSG
were devoted to designing, marketing, and implementing high-fee tax
strategies for wealthy clients, including tax shelter transactions.
According to the information and the guilty plea,
Dicker and the other two TSG managers used a bonus structure that handsomely
rewarded the accounting firm personnel involved in the design, marketing,
and implementation of the TSG's transactions, including: the individual who
referred the client to TSG personnel; the TSG member who pitched and closed
the sale; other TSG members; and TSG management. From July 1999, Dicker, the
CEO, and the other TSG manager earned and shared equally 30 percent of the
net profits of the TSG. Dicker earned approximately $6.7 million in net TSG
profits, as well as salary and bonuses between 1998 and 2000. In addition,
the CEO of the firm doled out additional bonuses from the profits earned as
a result of the sale of the tax shelter products. Moreover, the firm made
the sale of the tax shelter products a focal point of its aggressive "value
added" product promotion activities, using a "Tax $ells" logo and other
marketing hype to induce employees to generate additional tax shelter sales.
According to the information and the guilty plea,
while serving as a manager of the TSG, Dicker, along with other TSG
partners, engaged in the design, marketing, and implementation of two
different tax shelter transactions with the Chicago office of the law firm
of Jenkens & Gilchrist, as well as an international bank with its U.S.
headquarters in New York. As a member of TSG and the accounting firm's tax
opinion committee - which reviewed the tax opinions issued in connection
with tax shelter transactions sold by the accounting firm and J&G - Dicker
knew that the tax shelter transactions he helped vet and sell would be
respected and allowed by the IRS only if the client had a substantial
non-tax business purpose for entering the transaction, and the client had a
reasonable possibility of making a profit through the transaction. Dicker
and his co-conspirators knew and understood that the clients entering into
the tax shelter transactions being marketed and sold with J&G had neither a
substantial non-tax business purpose nor a reasonable possibility of earning
a profit, given the large amount of fees being charged by the accounting
firm and J&G to enter the transaction. Those fees were set by the
co-conspirators as a percentage of the tax loss being sought by the tax
shelter clients. Dicker also knew that the clients who purchased the tax
shelter had no non-tax business reasons for entering into the transactions
and their pre-planned steps.
According to the information and the guilty plea,
in order to make it appear that the tax shelter clients of Dicker, other TSG
members, and J&G had the requisite business purpose and possibility of
profit, Dicker and his co-conspirators reviewed and approved the use of a
legal opinion letter issued by J&G that contained false and fraudulent
representations purportedly made by the clients about their motivations for
entering into the transactions. In addition, Dicker and his co-conspirators
created and used, or approved of the creation and use of, other documents in
the transactions that were false, fraudulent, and misleading in order to
paint a picture for the IRS that was patently untrue - that is, that the
clients had a legitimate non-tax business purpose for entering the
transaction and executing the preplanned steps of the transaction. Dicker
also admitted during his plea that TSG members created and placed into
client files certain paperwork that falsely conveyed fabricated business
purposes and rationales for clients entering into the shelters. The false
paperwork was created to mislead and defraud the IRS.
Continued in article
Bob Jensen's threads on accounting firms are at
http://www.trinity.edu/rjensen/Fraud001.htm
IFRSs from a financial analyst's viewpoint
The cover story of the Winter 2009 issue of
The
Investment Professional presents a range of
viewpoints – primarily those of professional investors and analysts – on the
benefits and shortcomings of requiring IFRSs for all US SEC registrants. The
Investment Professional is the quarterly journal of The New York Society of
Security Analysts, Inc (NYSSA). The article,
The
Hard Sell – SEC in a Quandary over Its Push for IFRS (PDF 551k),
is copyright 2009 by NYSSA and is posted on IAS Plus with
their kind permission. Here is a brief excerpt:
Deloitte's IAS Plus, March 9, 2009 ---
http://www.iasplus.com/index.htm
Bob Jensen's threads on the controversial abandonment of U.S. GAAP in favor
of international GAAP ---
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
The Politics of IFRS versus U.S. GAAP
March 8, 2009 message from David Albrecht
[albrecht@PROFALBRECHT.COM]
Last night, I blogged two essays
(
http://profalbrecht.wordpress.com) dealing with
the push for global financial markets and the free flow of the capital
across national borders. The push for GFS (a global financial system)
started in the early 1960s and has gained widespread acceptance.
It is the push for GFS that has resulted in:
(1) the rise of IFRS, adopted by over 100 countries. The
pressure from Europe for the U.S. to adopt IFRS is immense. A recent
Accountancy Age editorial asserted that if the U.S. does not immediately
accept and implement IFRS, then GFS will be derailed and there is no hope of
the world emerging from its current economic downturn.
(2) push for the U.S. to accept foreign auditor opinions
in financial statements of companies that are listed in the U.S. The
Sarbanes Oxley Act of 2002 explicitly requires the PCAOB to inspect such
audit firms. Christopher Cox, who chaired the SEC until one month ago,
overlooked these provisions and publicly stated that the SEC would accept
foreign government inspection and certification of these auditors. In her
confirmation hearings, members of the Senate Banking Committee expressed
frustration with Cox's stand on this issue and asked Schapiro what she would
do. She replied that she would enforce the law and saw no need for a change
in the law. Foreign Minister Charley McCreevey stated that enforcement of
this provision of SOX will have a significant negative impact on the
implentation of GFS.
(3) a push for coordinated regulation of primary and
secondary securities markets in the U.S. and Europe. Just prior to his
stepping down, Christopher Cox seemed to back off from this (Denny Beresford
alerted us to Cox's speech on this).
Anyway, it has just been reported (
http://www.guardian.co.uk/business/2009/mar/08/regulators-securities-and-exchange-commission
) that:
"Britain and America are heading for an embarrassing
showdown at next month's G20 financial summit in London as Mary Schapiro,
the recently appointed head of the
Securities and Exchange Commission, has signaled
she will abandon efforts to seek a convergence of financial regulation
between the US and Europe. "
There is a tremendous amount of tension that is affecting international
relations between the U.S. and the E.U., all centered around Global
Financial Markets and its goal of free flow of capital and various issues
related to implementation, such as IFRS, auditor regulation and even
securities regulation by individual governments. We can see that various
European governments are lobbying Mary Schapiro not to appoint Charlie
Niemeier as Chief Accountant of the SEC (and when has appointment of chief
accountant ever mattered so much to Europe?)
It is my opinion that the issues of the debate over GAAP v. IFRS can best be
understood after a thorough study of the history and issues related to GFS
and the free flow of capital.
I wish my doctoral studies in the late 80s had included at least some
exposure to the push for GFS, which apparently had gained a goodly measure
of orthodoxy by that time.
A book that is a key part of my education about GFS is Capital Rules,
by Rawi Abdelal. Rawi Abdelal is the Joseph C. Wilson Professor of Business
Administration at Harvard Business School. It is, as they say, a real page
turner. I wish I read it two years ago when it was published.
David Albrecht
Bob Jensen's threads on IFRS versus U.S. GAAP are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
Capital Requirement in Bank Regulation ---
http://en.wikipedia.org/wiki/Capital_ratio
The capital requirement is a bank regulation, which
sets a framework on how banks and depository institutions must handle their
capital. The categorization of assets and capital is highly standardized so
that it can be risk weighted[clarification needed]. Internationally, the
Basel Committee on Banking Supervision housed at the Bank for International
Settlements influence each country's banking capital requirements. In 1988,
the Committee decided to introduce a capital measurement system commonly
referred to as the Basel Accord. This framework is now being replaced by a
new and significantly more complex capital adequacy framework commonly known
as Basel II. While Basel II significantly alters the calculation of the risk
weights, it leaves alone the calculation of the capital. The capital ratio
is the percentage of a bank's capital to its risk-weighted assets. Weights
are defined by risk-sensitivity ratios whose calculation is dictated under
the relevant Accord.
Each national regulator normally has a very
slightly different way of calculating bank capital, designed to meet the
common requirements within their individual national legal framework.
Most developed countries and Basel I and II,
stipulate lending limits as a multiple of a banks capital eroded by the
yearly inflation rate.
The 5 C's of Credit, Character, Cash Flow,
Collateral, Conditions and Capital, have been replaced by one single
criterion. While the international standards of bank capital were laid down
in the 1988 Basel I accord, Basel II makes significant alterations to the
interpretation, if not the calculation, of the capital requirement.
Examples of national regulators implementing Basel
II include the FSA in the UK, BAFIN in Germany, and OSFI in Canada.
An example of a national regulator implementing
Basel I, but not Basel II, is in the United States.[verification needed]
Depository institutions are subject to risk-based capital guidelines issued
by the Board of Governors of the Federal Reserve System (FRB). These
guidelines are used to evaluate capital adequacy based primarily on the
perceived credit risk associated with balance sheet assets, as well as
certain off-balance sheet exposures such as unfunded loan commitments,
letters of credit, and derivatives and foreign exchange contracts. The
risk-based capital guidelines are supplemented by a leverage ratio
requirement. To be adequately capitalized under federal bank regulatory
agency definitions, a bank holding company must have a Tier 1 capital ratio
of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%,
and a leverage ratio of at least 4%, and not be subject to a directive,
order, or written agreement to meet and maintain specific capital levels. To
be well-capitalized under federal bank regulatory agency definitions, a bank
holding company must have a Tier 1 capital ratio of at least 6%, a combined
Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at
least 5%, and not be subject to a directive, order, or written agreement to
meet and maintain specific capital levels. These capital ratios are reported
quarterly on the Call Report or Thrift Financial Report.
Different International
Implementations
Regulators in each country
have some discretion on how they implement capital
requirements in their jurisdiction.
For example, it has been
reported that Australia's
Commonwealth Bank is measured as having 7.6% Tier 1
capital under the rules of the
Australian Prudential Regulation Authority, but this
would be measured as 10.1% if the bank was under the
jurisdiction of the UK's
Financial Services Authority. This demonstrates that
international differences in implementation of the rule can
vary considerably in their level of strictness.
Common capital ratios
- Tier 1 capital ratio =
Tier 1 capital / Risk-adjusted assets >=6%
- Total capital (Tier 1
and Tier 2) ratio = Total capital (Tier 1 and Tier 2) /
Risk-adjusted assets >=10%
- Leverage ratio = Tier 1
capital / Average total consolidated assets >=5%
- Common stockholders’
equity ratio = Common stockholders’ equity / Balance
sheet assets
Listed below are
the capital ratios in
Citigroup at the end of 2003
Ratios
At year-end |
2003 |
Tier 1 capital |
8.91% |
Total capital (Tier
1 and Tier 2) |
12.00% |
Leverage (1) |
5.56% |
Common
stockholders’ equity |
7.67% |
- (1) Tier 1 capital
divided by
adjusted average assets.
Components of
Capital Under Regulatory Guidelines
In millions of
dollars at year-end |
2003 |
Tier 1
capital |
Common
stockholders’ equity |
$
96,889 |
Qualifying
perpetual preferred stock |
1,125 |
Qualifying
mandatorily redeemable securities of subsidiary
trusts |
6,257 |
Minority interest |
1,158 |
Less: Net
unrealized gains on securities available-for-sale
(1) |
(2,908) |
Accumulated net
gains on cash flow hedges, net of tax (751) (1,242) |
(751) |
Intangible assets: (2) |
Goodwill |
(27,581) |
Other disallowed
intangible assets |
(6,725) |
50% investment in
certain subsidiaries (3) |
(45) |
Other |
(548) |
Total Tier 1
capital |
66,871 |
Tier 2
capital |
Allowance for
credit losses (4) |
9,545 |
Qualifying debt
(5) |
13,573 |
Unrealized
marketable equity securities gains (1) |
399 |
Less: 50%
investment in certain subsidiaries (3) |
(45) |
Total Tier 2
capital |
23,472 |
Total capital (Tier
1 and Tier 2) |
$
90,343 |
Risk-adjusted
assets (6) |
$750,293 |
"How Stressed is Your Bank?" by Stephen Gandel, Time Magazine,
March 2, 2009 ---
http://www.time.com/time/business/article/0,8599,1880499-1,00.html
Citigroup
.038 = Assets/Equity = $150,000,000,000/$2,000,000,000,000
Loan losses: Even after making a government deal, the bank is still on the
hook for the first $40 billion in loan losses in the pool it has insured.
Citi also has $277 billion in other, nonhousing consumer loans, such as
credit cards and student debt. Roubini estimates that about 17% of consumer
loans will go unpaid nationwide. That translates into a $47 billion river of
red ink. Add in everything else (commercial real estate, corporate loans),
and Citigroup will have to swallow $106 billion in loan losses by the end of
2010.
Capital cushion: Thanks to the Troubled Asset
Relief Program (TARP), Citigroup now has $151 billion in equity, up from
$113 billion a year ago. Alas, it will have a $76 billion hit from bad
loans. Along with a projected bottom-line loss of $3.5 billion, that drops
the bank's capital to $70.5 billion.
Prognosis: On the way to the ICU. Citigroup has a
projected leverage ratio of just 3.8% — far lower than what it would need to
be considered well capitalized. How much would the U.S. have to give the
bank to nurse it back to good health? About $22 billion.
JPMorgan Chase
.078 = Assets/Equity =
$166,000,000,000/$2,100,000,000,000
Loan losses: JPMorgan largely avoided the troubled subprime-lending game.
Not so Washington Mutual, which JPMorgan acquired in 2008 in an
FDIC-brokered deal. With housing prices still falling, many of those WaMu
loans are going unpaid. JPMorgan has $105 billion in credit card loans,
which could cost the company some $18 billion. And there is an additional
$262 billion in corporate and commercial loans, which, according to Roubini,
could tally $26 billion more in red ink. All told, it's a $97 billion loss
for JPMorgan.
Capital cushion: JPMorgan has $23 billion in its
rainy-day fund for such losses. Not enough. Shareholders' equity will drop
to $121 billion, from the current $167 billion.
Prognosis: Looking good. JPMorgan is in better
shape than other big banks are. Its post-test leverage ratio drops to 6.4%,
from nearly 8% — still a picture of financial health.
Bank of America
.046 = Assets/Equity
=$176,000,000,000/ $2,000,000,000,000
Loan losses: BofA's buyout of mortgage broker Countrywide means the bank has
$400 billion in home loans outstanding — more than its competitors. Worse,
Countrywide, by nearly all accounts, had shockingly low lending standards.
Chalk up a higher-than-average $40 billion in losses there. On top of that,
BofA has made $87 billion in loans to commercial real estate developers.
Roubini predicts 17% of those loans will go bad as developers hit the skids.
For BofA, that's $15 billion more in losses. Toss in $55 billion in
commercial- and consumer-loan losses, and you get $121 billion in lending
deficits by the end of 2010.
Capital cushion: BofA has put away $23 billion to
cover future losses, and it has more equity — $177 billion — than JPMorgan
or Citigroup. But that might not be enough to preserve it without government
help.
Prognosis: Prepare the transfusion. BofA is still
on the monitor, but it's not far from being healthy again. It has a stressed
leverage ratio of 4.6%. Just $7.3 billion in new capital would put BofA back
on its feet. And with Uncle Sam finalizing its deal to guarantee $118
billion of BofA debt, the bank may already be on the mend. (See
the top 10 financial-crisis buzzwords.)
Wells Fargo
.076 = Assets/Equity =
$99,000,000,000/$1,300,000,000,000/
Loan losses: When Wells Fargo acquired Wachovia late last year, it more than
doubled its loan book. In good times, that would be a major coup. These
days, it's major trouble. Home buyers owe the bank $360 billion, up from
about $150 billion just three months ago. Next, Wells has $154 billion in
commercial real estate loans, as well as $200 billion in other types of
commercial debt. Apply Roubini's overall 13% loss projection, and the
conclusion is that Wells may be sitting on a $117 billion loss.
Capital cushion: The good news for Wells is that it
has been aggressive in identifying problem loans — $37 billion from Wachovia
alone. Wells officials argue that will lead to lower losses than its
competitors'. But if not, the bank could be in trouble.
Even after the $25 billion Wells got from the
government last year, it has just under $100 billion in equity, trailing
other major banks by more than 50%.
Prognosis: Defibrillator. Stat! Wells Fargo is
generally considered one of the banks that are least likely to fail. But our
stress test says otherwise. Even with its $58 billion loan-loss buffer,
Wells is still in the hole for $59 billion, or 60% of its capital. With $40
billion remaining and an expected $5 billion in income, the bank could sink
to a less-than-rosy leverage ratio of 3.7%.
Bob Jensen's threads on the bailout mess are at
http://www.trinity.edu/rjensen/2008Bailout.htm
Question
Should companies be allowed to outsource internal auditing to their external
auditors?
An Enron Message
Shari Thompson in the early 1990s was an African
American internal auditor in Enron trying her best to be a good auditor.
She gave me permission to forward two of her messages
that I received out of the blue from her. For those of you that still hold deep
abiding sympathies for Andersen's top management, I suggest that you read both
of these messages, especially Message 2.
Message 1 appears below. Note that this message contains
a lot more messaging than just her message to me. That messaging is very
critical of some BYU professors and arguments that internal auditing might be
outsourced to external auditors.
My main Enron and WorldCom fraud document (especially
note Enron's Timeline) ---
http://www.trinity.edu/rjensen/FraudEnron.htm
This Timeline will soon be updated for Shari's assertion that Enron outsourced
internal auditing to Andersen in 1994.
My Enron Quiz will soon be updated for Shari's messages
---
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
Bob Jensen's threads on professionalism and auditor
independence are at (scroll down) --- http://www.trinity.edu/rjensen/Fraud001.htm
Message 1 from Shari Thompson to Bob Jensen
-----Original Message-----
From: Thompson, Shari [mailto:shari.thompson@pvpl.com]
Sent: Friday, February 27, 2009 2:33 PM
To: 'dboje@nmsu.edu' ;
rjensen@trinity.edu
Subject: Please update your Enron blog (from former Enron Internal Auditor)
Why is it that everyone who
chronologizes Enron's fall misses a hugely significant, contributing factor
to Enron's demise? That is, that Enron's entire internal audit department
was systematically eliminated by Andersen, when the internal audit function
was outsourced to Andersen. This outsourcing was instrumental in allowing
Lay/Skilling/Fastow to commit accounting fraud undetected for a long period
of time.
The outsourcing of Enron's
internal audit function is one of the most festering flaws in the debacle,
yet no one has sufficiently reported it. As a former Enron senior internal
auditor, I have brought this flaw to the attention of reporters and bloggers
over the years since 2001. To no avail, however. Some of them respond
"interesting, I never knew that." But that's it. No one follows up and
reports on the incestuous relationship Enron had with Andersen as the
"internal" audit department.
Now we have three professors
concluding that companies should outsource internal audit to external
auditors. Please be cognizant enough to add the rest of the story, so that
the Finance world can clearly connect the dots between outsourcing internal
audit and accounting fraud.
http://www.cfo.com/article.cfm/13111528
Shari Thompson CIA
Direct 402.829.5248 Mobile 402.740.4012
_____________________________________________
From: Thompson, Shari
Sent: Friday, February 27,
2009 1:28 PM
To: 'richard.chambers@theiia.org'
; 'edward.nusbaum@gt.com ';
'douglas_prawitt@byu.edu ';
'nsharp@mays.tamu.edu ';
'davidwood@byu.edu'
Subject: Thank you to IIA President Richard Chambers
Good afternoon Mr. Chambers,
I just read an article about
professors at Brigham Young and Texas A&M claiming that companies gain from
having external auditors perform their internal audits. I was a senior
internal auditor for Enron and subsidiaries (before outsourcing to Andersen)
for 24 years (1981 to 2004). I can attest that having companies use their
external auditor as internal auditor is a toxic and deceptive practice.
Thank you so much for voicing
your disagreement with this conclusion. Please keep up the fight to not
have this practice become acceptable again.
____________________________________________________________
Mr. Nusbaum:
You've changed your tune much
from your 2006 letter to the SEC when you advocated " Equally without
question is that these early experiences with implementation have been
costly, but we cannot and should not go back."
http://www.sec.gov/news/press/4-511/enusbaum051006.pdf
____________________________________________________________
Messieurs Prawitt, Wood, and
Sharp:
I am shocked and appalled at
your "findings." Has someone at KPMG, PWC, E&Y or D&T paid you enormous
sums of money in return for your publishing such a ludicrous recommendation
to outsource internal audit to external auditors? How could you even
preliminarily come to such an incestuous conclusion?
I invite you to talk to me
about real world consequences of the unintelligence of outsourcing internal
audit to externals. Blending the two functions is purely a management's
self-serving act. The very phrase "outsourcing internal audit" is an
oxymoron, and the terms "outsource" and "internal audit" should be forever
mutually exclusive.
I'm 50 years old, an expert
internal auditor that worked for Enron and its subsidiaries for 24 of my 28
years in the auditing industry. And yet I-as well as hundreds of my former
Enron colleagues, and untold others around the world-have no 401k nor ESOP
savings to show for all my years of hard work. Why? Because of the very
thing you recommend-outsourcing internal audit.
When I was a college student
years ago, I enjoyed engaging in theoretical debates with my professors.
However, they were wise enough to caveat their opinions with warnings that
they'd never worked-or hadn't worked for some time-in corporate America.
Unfortunately, you lack the sageness to recognize the limitations of your
insulated confines of collegiate life.
You state: "Our results
indicate that, prior to SOX, outsourcing the work of the IAF to the external
auditor is associated with lower accounting risk as compared to keeping the
IAF in-house or outsourcing the work of the IAF to a third party other than
the external auditor."
* Must I remind you
that the lack of accounting controls is precisely what tanked Enron?
* Must I remind you
of why were there were no controls? Because Lay, Fastow and Skilling
hired Andersen to perform both internal and external audits. Lay,
Fastow, and Skilling knew that Andersen's heads would willingly
participate in accounting fraud cover-up as long as Enron paid them
well. And they also knew that any Andersen soul brave enough to dissent
would be summarily removed from the Enron account, or from Andersen
altogether.
* Do you know that a
few months before the outsourcing to Andersen, one of my former internal
audit colleagues discovered irregularities in Enron's accounting
transactions related to a bank in New York? A few months later, after
the internal auditors discussed the matter with Lay, Lay outsourced the
entire audit function. This outsourcing came after several yearly sales
pitches by Andersen, where Andersen requested the internal auditing
job. It's clear that Lay felt the internal auditors were getting too
close to uncovering fraud. So he outsourced the function to a bunch of
yes-men.
I can only conclude that you
obviously have been recently cut in on Lay's, Skilling's or Fastow's Enron
bounty.
Shari Thompson CIA
Direct 402.829.5248
Mobile 402.740.4012
Message 2 from Shari Thompson to Bob Jensen
Hi Bob,
Thanks for your reply. I should mention that I
really like your website, and have referred to it many times over the years.
It was very helpful when studying for the CIA exam—some of the exam study
guides don’t do near a good job as your site in explaining accounting
theory, especially the complexities introduced changed since I was in
college…
But, to your question, the internal auditors came
from a number of the (back then anyway) big 8, and also many of us were from
industry. Like for instance, I’ve never worked for a public accounting firm.
(Could have something to do with when I graduated in 1980 many of publics
wouldn’t hear of hiring a female, let alone a African American female. But
that’s another story.) So anyway, the internal audit department in Enron
Houston was initially formed in 1986 as a combining of all the audit
departments of Enron subsidiaries around the nation. So we came from all
over. I came in from Omaha, others from Enron subsidiaries on the East
Coast, Texas and Oklahoma. The goal after the “merger” of HNG & InterNorth
was to centralize the audit function. So, there weren’t an inordinate amount
of internal auditors from Andersen as from any other public accounting firm.
I’ve not read Eichenwald’s book. I’ll check it out.
Actually the department was eliminated as far as
being an effective, functional department. That is, it was eliminated by
Enron’s replacing us “real” internal auditors with fake Andersen “internal”
auditors. So technically the department still existed in name only, but was
functionally ineffective since it was outsourced to Andersen. This
outsourcing happened in 1994. I had, at that time, worked for an Enron
subsidiary in Omaha for about a year, so I wasn’t at risk of losing my job.
Everyone else in the Houston office, however, was told by Andersen that they
had 12 months to get their CPA’s or they were out. Many of them that had
CPA’s quit anyway, because they didn’t like the environment of the
Andersen-run department. We didn’t know what was going on, we just knew
something wasn’t right, and didn’t like it. So most of the real auditors
quit, or were run out by Andersen leaning on them to get their CPA. The CPA
requirement was just a ploy to get the real auditors out as fast as
possible.
An interesting development: While writing this
email, one of the author’s (Doug Prawitt) of the article that prompted my
email called. He explained to me that the CFO.com reporter omitted key
pieces of his interview. Namely, that he did not recommend outsourcing to
externals, and that this finding is one of thousands of points of
information in their study. I apologized for the email-trigger finger, but
he said he enjoyed the opportunity to meet me. And hopes to talk to me again
about my experience at Enron, which I welcome. I am definitely enjoying the
opportunity to communicate with you as well.
Regards,
Shari
Note from Bob Jensen
My main Enron and WorldCom fraud document (especially
note Enron's Timeline) ---
http://www.trinity.edu/rjensen/FraudEnron.htm
This Timeline will soon be updated for Shari's assertion that Enron outsourced
internal auditing to Andersen in 1994.
My Enron Quiz will soon be updated for Shari's messages
---
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
Bob Jensen's threads on professionalism and auditor
independence are at (scroll down) --- http://www.trinity.edu/rjensen/Fraud001.htm
Fair Value Estimate Subjectivity in Price Swaps
At least in theory, yield curves should be constructed with yields that rely on
common conventions. Put another way, the yield curve built, assuming standard
settlement assumptions, would be different from the yield curve built with fixed
rate quotes that reflect, say, monthly settlements or quarterly settlements.
While intuition might lead us to expect these differences to be inconsequential,
in fact, these differences have started to become more substantial . . . The
real lesson here is that we need to understand the limitations of fair value
estimates. They are just that — estimates. And it may be worth pointing out that
value may just be in the eye of the beholder. Different analysts will likely
employ somewhat different methodologies. We should appreciate that different
valuation estimates do not necessarily mean that one result is wrong and the
other is right. They are just different.
Ira Kawaller, "Pricing Swaps: Once Upon a Time…," Bank Asset/Liability
Management, March 2009 ---
http://www.kawaller.com/pdf/BALM_Pricing_Swaps_Mar_09.pdf
Bob Jensen's threads on interest rate swap valuation are at
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
"New York CPAs Slam IFRS Roadmap: The international standards
are of dubious quality, the SEC is vague on how it will judge them, and the
benefits of adoption are contradictory, the accountants charge," by David
McCann, CFO.com, March 6, 2009 ---
http://www.cfo.com/article.cfm/13254066/c_13252677?f=home_todayinfinance
Pat Walters forwarded the above link.
A prominent accountants group filed a comment
letter with the Securities and Exchange Commission yesterday displaying deep
skepticism about the workability of the current roadmap for requiring U.S.
public companies to use International Financial Reporting Standards.
The New York State Society of Certified Public
Accountants registered a broad range of concerns, addressing the quality of
the international standards; conversion costs; an alleged contradiction
between the two main benefits of adopting IFRS put forth by the SEC;
eligibility criteria for early adopters; and a forthcoming version of the
standards for use by private companies.
The roadmap calls for the SEC to vote in 2011
whether to move forward with mandatory adoption, which under the existing
plan would be phased in from 2012 to 2014. It also allows a limited number
of large U.S. companies to adopt the international standards as early as
this year.
The quality issue is foremost to the New York
accountants. "The SEC Roadmap does not present, in sufficient detail, the
methodology and criteria expected to be applied ... in assessing the
adequacy of IFRS," they wrote in their comment letter.
Apples and Oranges?
In their letter, the New York accountants seemed to
question whether the SEC is doing enough to make sure financial reports that
use IFRS will be comparable with one another.
Any assessment of the international standards, the
NYSSCPA wrote, should consider whether they are consistent with the
Financial Accounting Standards Board's Concepts Statements. They singled out
Statement No. 1, which says that financial reports should provide
information investors and creditors can use to make informed decisions, and
Statement No. 2, which says comparability and consistency are important
characteristics of financial statements.
The New York accountants also questioned whether
the decision-making process of the International Accounting Standards Board,
which promulgates IFRS, "is conducive to setting future high-quality
standards."
They criticized the IASB for its move last fall to
let companies retroactively reclassify assets so they could "cherry pick"
ones with significant losses and remove them from net-income calculations.
In doing so, the international board gave in to pressure from the European
Commission, the accountants suggested, saying they are concerned about "the
influence of various national regulators, users, and others who promote the
interests of their specific constituencies, as opposed to the needs of the
worldwide community."
Further, the NYSSCPA said the supposed main
benefits of adopting IFRS — comparability with non-U.S. reporting entities
and allowing management greater judgment in preparing financial information
— may both be desirable but appear inherently contradictory.
"The comparability of financial statements prepared
in conformity with IFRS may be overstated," the comment letter said. "IFRS
does not seem to be consistently applied from country to country, as the
number of allowable options is conducive for the regulatory agencies in each
country to interpret IFRS pursuant to their respective needs and business
environments."
Comparability is further reduced, the letter added,
by the tendency of preparers and auditors, "because of their habits of
mind," to apply IFRS in a manner that is as similar to their current or
former national accounting standards as possible. "When using
principles-based standards, reasonable people arrive at materially different
results after applying their judgments to a given set of facts and
cirucmstances," the New York accountants wrote.
When and Who?
The letter also questioned the prudence of the
conversion to IFRS when the depth and duration of the financial crisis are
hard to predict. "It would be reasonable to conclude that the monetary and
human capital costs of the transition could be burdensome to entities with
limited resources and prohibitive for some smaller entities, even over a
period of many years."
An alternative, the NYSSCPA suggested, would be for
FASB and IASB to vigorously pursue efforts to converge the American and
international standards, which it said would produce the best-quality global
standards and help minimize conversion costs for U.S. companies when IFRS
adoption does finally become mandatory.
At the same time, though, the society said it fully
supports allowing early adoption of IFRS, and in fact the eligibility
criteria should be expanded.
The roadmap suggests that the proposal to limit
early use of IFRS to the 20 largest companies in so-called "IFRS industries"
is grounded in an assumption that larger companies will be more likely to
have sufficient expertise and resources to carry out the adoption.
"We disagree," the accounting society members
wrote. "In fact, IFRS adoption experience in Europe has shown that smaller
entities may need less time to complete the IFRS transition, while large
companies with numerous subsidiaries in different countries may take as long
as five years."
U.S. companies that are among the 20 largest
worldwide in "IFRS industries" — ones like oil and gas and some retail
sectors in which IFRS is the most-often-used financial reporting system —
are eligible to adopt the international standards as early as this year. The
SEC has estimated there are at least 110 such companies.
Continued in article
AICPA Supports SEC Proposed
Roadmap for Transitioning to IFRS for Public Companies ---
Click Here
However, no mention is made of any survey of the membership on this issue.
Bob Jensen's threads on standard setting controversies are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
New Teaching Cases in Corporate Responsibility and Compensation
Topic:
Corporate Responsibility |
|
|
The markets are down and the economy is in a recession. The causes are
complex and varied, but many people are focusing the blame on a
breakdown in corporate responsibility. How much corporate directors and
executives are to blame remains debatable, but most would agree that the
investing public has lost confidence in the corporate governance and
ethics of boards and executives.
The following articles present some of the reactions and consequences
resulting from the leadership lapses reported recently. Current and
future business professionals need to be aware of the consequences that
will impact all businesses and industries, regardless of whether those
businesses have acted improperly. Additionally, all in the business
world must deal with negative perceptions the investing public now has
of boards and corporate activity. On a positive note, with the
widespread lack of confidence in the markets, fiscally and
ethically-responsible companies can use that reputation to develop a
distinct advantage in the marketplace. This month's articles highlight
some of the recent ethical and leadership lapses, as well as the public
outcry and emerging rules and regulations resulting from those
decisions. Regardless of your position or industry, there are important
lessons to be learned and shared so that you and your organizations are
not punished, but instead thrive.
|
|
|
FOCUS ARTICLE>> Legislation, Shareholder Rights
Policy Makers Work to Give Shareholders More Boardroom Clout
by: Kara Scannell
Date: Mar 26, 2009
SUMMARY: Policy makers are advancing plans to give shareholders more
power in boardrooms at a time when decisions about executive pay have
ignited a public furor.
DISCUSSION:
- What measures are policy makers considering that would provide
shareholders with additional rights in corporate governance? What
authority and interests do each of these policy-making groups have
in the governance arena? Why are corporations regulated by many
different bodies?
- What are proxies and why are they a point of contention between
corporations and shareholders? What are the pros and cons of
shareholder access to proxies? Why are shareholder rights so
important? Up to this point, what parties have had most of the
control over a corporation? What are some reasons that these types
of rules were not enacted sooner?
- What could be some unintended negative consequences of these new
laws and rules? What are the costs involved? Would small and
medium-sized businesses impacted by these rules? How does this
information impact your attitudes and concerns regarding your
current and future investment decisions? What are some of the
cumulative effects of those concerns when held by millions of
shareholders?
|
|
|
FOCUS ARTICLE>> Government Oversight
The U.S.'s Fly on the Wall at AIG
by: Peter Lattman
Date: Mar 27, 2009
SUMMARY: Government-appointed lawyer James Cole has been on site and
inside AIG board-committee meetings for the past four years, but his
reports to regulators aren't public.
DISCUSSION:
- What is a deferred-prosecution agreement? Why would companies
agree to this? What are the costs involved versus the corresponding
benefits? Why would the government agree to one of these agreements?
Why do these agreements seem to be more common today than they have
been in the past?
- What AIG activities led to its deferred-prosecution agreement?
What have been the duties of the government-appointed attorney? How
were day-to-day operations affected by the agreement? Have these
activities corrected the problems that triggered the government
actions at AIG? Were they meant to prevent further problems as well?
- Are deferred-prosecution agreements effective tools for
punishing and preventing negative corporate activity? Should similar
plans be implemented for currently troubled companies? Please give
reasons for your answers.
|
|
|
FOCUS ARTICLE>> Corporate Governance, Director Responsibility
Corporate Directors' Group Gives Repair Plan to Boards
by: Joann S. Lublin
The Wall Street Journal
Date: Mar 24, 2009
SUMMARY: A directors' trade group in a new report urges boards to do
a better job of governing corporate America.
DISCUSSION:
- What is the NACD and what is its purpose? What is the reasoning
for its new report and why was the report issued? What specific
suggestions does it contain? What is your opinion of the ideas
presented in the report? Do you think that these ideas will restore
investor confidence? Why or why not?
- What is the purpose of a corporate board of directors? What are
its duties and responsibilities? Why is the board so important? Why
do business professionals serve on boards?
- Have any of these ideas been implemented at one of your past or
current employers? What other ideas could be implemented to increase
corporate governance at your current employer or other companies?
|
|
|
FOCUS ARTICLE>> Executive Compensation, Nonprofits
Pay at Nonprofits Gets a Closer Look
by: Mike Spector and Shelly Banjo
The Wall Street Journal
Date: Mar 27, 2009
SUMMARY: Furor over big AIG bonuses and other Wall Street firms is
prompting nonprofits to brace for more scrutiny of their executive pay
practices.
DISCUSSION:
- What nonprofit industries and organizations are being impacted
by the increase in scrutiny? What are some of the positive outcomes
that could result from this closer examination of nonprofits? What
would be some negative outcomes from these current pressures?
- Corporations are facing increased scrutiny as a result of the
market meltdown. Why are nonprofits also feeling pressure from
additional scrutiny for compensation and other expenses? How are
nonprofits different from profit-seeking entities? Should they be
held to the same standards? Why or why not?
- How might this additional scrutiny impact nonprofits? How might
your career, business, or industry be affected by increased scrutiny
of nonprofits? How will you be affected personally, either through
services you receive or donations that you make?
|
|
|
FOCUS ARTICLE>> Risk Management, Market Regulation
Geithner Calls for Tougher Standards on Risk
by: Damian Paletta, Maya Jackson Randall, and Michael Crittenden
The Wall Street Journal
Date: Mar 26, 2009
SUMMARY: Geithner will call for changes in how the government
oversees risk-taking in financial markets, pushing for tougher rules on
how big companies manage their finances.
DISCUSSION:
- What changes is Geithner proposing? What ideals would this new
regulation support? Do you think that the newly proposed rules would
achieve these goals? Are there other ways to achieve those same
goals?
- Why is Geithner calling for changes in the regulation of risk
management? What will be the costs to industry for this new
government oversight? Who will pay these costs, both directly and
ultimately?
- How will these rules change your current or future industry and
career? How could these rules impact you as an investor?
|
|
"Executives Took, but the Directors Gave," by Heather Landy, The
New York Times, April 4, 2009 ---
http://nytimes.com/2009/04/05/business/05board.html?8dpc
Little of the ire against outsize C.E.O.
paychecks has been aimed at the people who signed off on them: corporate
directors.
Instead, the anger has been concentrated
on the executives themselves, particularly those running companies at the
heart of the financial crisis. And boards — thrust into the limelight only
rarely, as when the directors of the New York Stock Exchange were in a legal
battle over the pay collected by Richard A. Grasso — have managed to stay in
the background.
The exchange’s board “really took a lot of
heat for that controversy,” says Sarah Anderson, an analyst on executive pay
at the Institute for Policy Studies in Washington. “But so far, with this
crisis, I don’t feel like boards have been getting as much attention as they
should be.”
Last spring, the House Committee on
Oversight and Government Reform examined pay practices at Countrywide
Financial, Merrill Lynch and Citigroup, but those issues eventually took a
back seat to broader concerns about the viability of the country’s financial
system. As investors frustrated by the continuing crisis start seeking ways
to avoid the next one, advocates of change in corporate governance expect
boards to come under renewed scrutiny that could yield big changes.
Emboldened shareholder activists are
pressing more companies to hold annual nonbinding votes on executive pay
packages. They’re also pursuing, and appear increasingly likely to win,
rules to make it easier for investors to nominate or replace board members.
And as more people start connecting the
dots between pay incentives that boards laid out for executives and the
risk-taking at the heart of the financial crisis, some lawmakers have been
eager to step in, and many directors themselves are re-examining their
approach to compensation.
“When you look at cases where compensation
of senior management was out of line, or where people arguably were
overpaid, it’s definitely the fault of the compensation committee of the
board,” says Thomas Cooley, dean of the Stern School of Business at New York
University and a director of Thornburg Mortgage. “Congress has gotten into
the business of dictating executive pay now, and they shouldn’t be in that
business. What they should be doing is turning the light on the committees.”
Activist shareholders have been
criticizing executive pay practices for well over a decade, accusing
directors of being too cozy with C.E.O.’s, too eager to lavish pay on them
and too ambiguous about the formulas they use for setting compensation.
Improved standards for determining
director independence and disclosing the procedures of board compensation
committees were supposed to help solve those problems. And activist
shareholders played a major role in spreading the notion of
pay-for-performance, by which executives would be compensated based on their
ability to meet board-devised financial targets.
But amid all the changes, a crucial piece
of the equation — the unintended risks that could arise from these
pay-for-performance incentives — went unnoticed, said James P. Hawley,
co-director of the Elfenworks Center for the Study of Fiduciary Capitalism
at St. Mary’s College of California.
“The problem isn’t just when people in a
particular firm are getting rewarded in ways that take away from the
shareholder. That’s been well recognized,” Mr. Hawley says. “What’s not been
recognized is that the misalignment of incentives has resulted in firm,
sector and systemic risks. None of the corporate governance activists ever
made the connection.”
It took the disastrous results of 2008 to
expose such links, and to make compensation a central issue for politicians
and corporate America.
TWO factors contributed to the pay scales
that now have C.E.O.’s earning more than 300 times the pay of the average
American worker.
First was the advent of giant stock option
grants, a form of compensation made all the more attractive by a 1993 change
to the tax law that maintained corporate tax deductions for executive pay
over $1 million, but only if the pay was tied to performance.
Second was the widespread practice of
linking pay to the levels at companies of similar size or scope. Every time
a board tries to keep an executive happy by offering above-average pay, the
net effect is to raise the average that everyone else will use as a
baseline.
In the absence of fraud or self-dealing,
it’s hard for shareholders to make a legal argument that boards have failed
at their job. State law in Delaware, where most big public entities are
incorporated, simply requires companies to have boards that direct or manage
their affairs, and it affords broad legal protection to board members so
long as they act in good faith and in a manner “believed to be in or not
opposed to the best interests of the corporation.”
That was the basis for the recent ruling
of a Delaware judge who threw out most of the claims in a shareholder
lawsuit seeking to hold Citigroup directors and officers liable for big
losses tied to subprime mortgages. But the judge did allow the plaintiffs to
pursue one of their claims, which alleged corporate waste stemming from a
multimillion-dollar parting pay package that Citigroup’s board awarded
Charles O. Prince III, the former C.E.O., in 2007.
Continued in article
Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance
Outrageous Executive and Director Compensation Schemes That Reward Failure
and Fraud ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
Corporate Governance is in a Crisis ---
http://www.trinity.edu/rjensen/Fraud001.htm#Governance
Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Humor Between February 1 and February 28, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor022809
Humor Between January 1 and January 31, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013109
Humor Between March 1 and March 31,
2009
Bumper Stickers
Honk if you're paying my mortgage
God will provide unless Obama gets there first
You voted for him, You pay!
America didn't vote for a rush to failure
Don't blame me, I voted for McCain
Diners Can 'Have a Ball' at Testicle Festival"--headline,
Associated Press, March 27 ,2009
Bailout Rap (link forwarded by David Albrecht) ---
http://www.youtube.com/watch?v=64g_g22iEe8
PJ O’Rourke’s Parliament of
Whores ---
http://snipurl.com/parliamentwhores
Forwarded by my good neighbors
The economy is so bad:
CEO's are now playing miniature golf.
Even people who have nothing to do with the Obama administration aren't
paying their taxes.
Hotwheels and Matchbox stocks are trading higher than GM.
Obama met with small businesses to discuss the Stimulus Package: GE, Pfeizer
and Citigroup.
PETA serves chicken wings at their meetings
McDonalds is selling the 1/4- ouncer.
People in Beverly Hills fired their nannies and learned their children's
names.
A truck of Americans got caught sneaking into Mexico ...
The most highly-paid job is now jury duty.
Dick Cheney took his stockbroker hunting.
People in Africa are donating money to Americans.
Mothers in Ethiopia are telling their kids, "finish your plate, do you know
how many kids are starving in the US ?"
Motel Six won't leave the light on.
The Mafia is laying off judges.
finally,
Congress says they are looking into this Bernard Madoff scandal. So, the guy
that made $64 billion disappear is being investigated by the people who made
$750 billion disappear.
Forwarded by Paula
St. Patrick's Day is getting
close--
*The Errand*
McQuillan walked into a
bar and ordered martini
after martini,
each time removing the
olives and placing them
in a jar.
When the jar was filled
with olives and all the
drinks consumed,
the Irishman started to
leave.
"S'cuse me", said a
customer,
who was puzzled over
what McQuillan had done,
"what was that all
about?"
"Nothin', said the
Irishman,
"me wife just sent me
out for a jar of
olives!"
***********************************************
*_The Lost Luggage_*
An Irishman arrived at
J.F.K. Airport and
wandered
around the terminal with
tears streaming down his
cheeks.
An airline employee
asked him if he was
already homesick.
"No," replied the
Irishman.
"I've lost all me
luggage!"
"How'd that happen?"
"The cork fell out!"
said the Irishman.
***********************************************
*_Water to wine_*
An Irish priest is
driving down to New York
and gets stopped for
speeding.
The state trooper smells
alcohol on the priest's
breath
and then sees an empty
wine bottle on the floor
of the car.
He says, "Sir, have you
been drinking?"
"Just water," says the
priest.
The trooper says, "Then
why do I smell wine?"
The priest looks at the
bottle and says,
"Good Lord! He's done it
again!"
***********************************************
*_The Brothel_*
Two Irishmen were
sitting in a pub having
beer
and watching the brothel
across the street.
They saw a Baptist
minister walk into the
brothel,
and one of them said,
"Aye, 'tis a shame to
see a man of the cloth
goin' bad."
Then they saw a Rabbi
enter the brothel,
and the other Irishman
said,
"Aye, 'tis a shame to
see that the Jews
are falling' victim to
temptation."
Then they saw a Catholic
priest enter the
brothel,
and one of the Irishmen
said,
"What a terrible pity...
one of the girls must be
quite ill."
**********************************************
*_Lost at Sea_*
Two Irishmen, Patrick &
Michael,
were adrift in a
lifeboat following a
dramatic escape
from a burning
freighter.
While rummaging through
the boat's provisions,
Patrick stumbled across
an old lamp.
Secretly hoping that a
genie would appear,
he rubbed the lamp
vigorously.
To the amazement of
Patrick, a genie came
forth.
This particular genie,
however,
stated that he could
only deliver one wish,
not the standard three.
Without giving much
thought to the matter,
Patrick blurted out,
"Make the entire ocean
into Guinness Beer!"
The genie clapped his
hands with a deafening
crash,
and immediately the
entire sea turned into
the finest brew ever
sampled by mortals.
Simultaneously, the
genie vanished.
Only the gentle lapping
of Guinness on the hull
broke the stillness as
the two men considered
their circumstances.
Michael looked
disgustedly at Patrick
whose wish had been
granted.
After a long,
tension-filled moment,
he spoke:
**"Nice going Patrick!**
**Now we're going to
have to pee in the
boat!**
***********************************************
*_The Fall_*
Murphy was staggering
home with a pint of
booze
in his back pocket when
he slipped and fell
heavily.
Struggling to his feet,
he felt something wet
running down his leg.
"Please Lord," he
implored,
"let it be blood!!"
*************************************
|
|
Darwin awards are given to dimwits ---
http://www.darwinawards.com/
I kick myself for not going to this site on a more frequent basis. On occasion
my wife threatens to nominate me for one of these for my resume.
Forwarded by my good neighbors
A young cowboy from Wyoming goes off to college. Half way through the
semester, he has foolishly squandered all his money. He calls home. "Dad," he
says, "You won't believe what modern education is developing! They actually have
a program here in Laramie that will teach our dog, Ol' Blue how to talk!"
"That's amazing," his Dad says. "How do I get Ol' Blue in that program?"
"Just send him down here with $1,000" the young cowboy says. "I'll get him in
the course."
So, his father sends the dog and $1,000. About two-thirds of the way through
the semester, the money again runs out. The boy calls home. "So how's Ol' Blue
doing son?" his father asks.
"Awesome, Dad, he's talking up a storm," he says, "but you just won't believe
this -- they've had such good results they have started to teach the animals how
to read!"
"Read!?" says his father, "No kidding! How do we get Blue in that program?"
"Just send $2,500, I'll get him in the class."
The money promptly arrives, but our hero has a problem. At the end of the
year, his father will find out the dog can neither talk, nor read. So he shoots
the dog. When he arrives home at the end of the year, his father is all excited.
"Where's Ol' Blue? I just can't wait to see him read something and talk!"
"Dad," the boy says, "I have some grim news. Yesterday morning, just before
we left to drive home, Ol' Blue was in the living room, kicked back in the
recliner, reading the Wall Street Journal, like he usually does. Then he turned
to me and asked, "So, is your daddy still messing' around with that little
redhead who lives in town?"
The father exclaimed, "I hope you shot that son of a bitch before he talks to
your Mother!"
"I sure did, Dad!"
"That's my boy!"
The kid went on to be a successful lawyer, and then he went on to become a
Congressman.
Possible Urban Legends forwarded by Paula
If you yelled for 8 years, 7 months and 6 days you would have produced enough
sound energy to heat one cup of coffee. (Hardly seems worth it.)
The human heart creates enough pressure when it pumps out to the body to
squirt blood 30 feet. (O..M.G..!)
A pig's orgasm lasts 30 minutes.. (In my next life, I want to be a pig.)
A cockroach will live nine days without its head before it starves to death.
(Creepy.) (I'm still not over the pig.)
Banging your head against a wall uses 150 calories a hour (Don't try this at
home, maybe at work)
The male praying mantis cannot copulate while its head is attached to its
body. The female initiates sex by ripping the male's head off. (Honey, I'm home.
What the...?!)
The flea can jump 350 times its body length. It's like a human jumping the
length of a football field . (30 minutes.. Lucky pig! Can you imagine?)
The catfish has over 27,000 taste buds . (What could be so tasty on the
bottom of a pond?)
Some lions mate over 50 times a day. (I still want to be a pig in my next
life....quality over quantity)
Butterflies taste with their feet. (Something I always wanted to know.)
The strongest muscle in the body is the tongue. (Hmmmmmm......)
Right-handed people live, on average, nine years longer than left-handed
people.
(If you're ambidextrous, do you split the difference?)
Elephants are the only animals that cannot jump. (Okay, so that would be a
good thing)
A cat's urine glows under a black light . (I wonder who was paid to figure
that out?)
An ostrich's eye is bigger than its brain. ( I know some people like that.)
Starfish have no brains (I know some people like that too..)
Polar bears are left-handed. (If they switch, they'll live a lot longer)
Humans and dolphins are the only species that have sex for pleasure. (What
about that pig??)
Forwarded by Debbie
Dear IRS,
I am sorry to inform you that I will not be able to pay taxes owed April 15, but
all is not lost.
I have paid these taxes: accounts receivable tax, building permit tax, CDL tax,
cigarette tax, corporate income tax, dog license tax, federal income tax,
unemployment tax, gasoline tax, hunting license tax, fishing license tax,
waterfowl stamp tax, inheritance tax, inventory tax, liquor tax, luxury tax,
Medicare tax, city, school and county property tax (up 33 percent last 4 years),
real estate tax, social security tax, road usage tax, toll road tax, state and
city sales tax, recreational vehicle tax, state franchise tax, state
unemployment tax, telephone federal excise tax, telephone federal state and
local surcharge tax, telephone minimum usage surcharge tax, telephone state and
local tax, utility tax, vehicle licence registration tax, capitol gains tax,
lease severance tax, oil and gas assessment tax, Colorado property tax, Texas,
Colorado, Wyoming, Oklahoma and New Mexico sales tax, and many more that I can't
recall but I have run out of space and money.
When you do not receive my check April 15, just know that it is an honest
mistake. Please treat me the same way you treated Congressmen Charles Rangle,
Chris Dodd, Barney Frank and ex-Congressman Tom Dashelle and, of course, your
boss Timothy Geithner. No penalties and no interest.
P.S. I will make at least a partial payment as soon as I get my stimulus check.
Ed Barnett
Wichita Falls
Forwarded by Linda
Subject:
Where to retire
WHERE TO
RETIRE
You can
retire to Phoenix , Arizona where.....
1. You are
willing to park 3 blocks away because you found shade.
2. You've
experienced condensation on your butt from the hot water in the toilet bowl.
3. You can drive for 4 hours in one direction and never leave town.
4. You
have over 100 recipes for Mexican food.
5. You
know that "dry heat" is comparable to what hits you in the face when you
open your oven door.
6. The 4
seasons are: tolerable, hot, really hot, and ARE YOU KIDDING ME??!!
You can
retire to California where...
1. You
make over $250,000 and you still can't afford to buy a house.
2. The
fastest part of your commute is going down your driveway.
3. You
know how to eat an artichoke.
4. You
drive your rented Mercedes to your neighborhood block party.
5. When
someone asks you how far something is, you tell them how long it will take
to get there rather than how many miles away it is.
6. The 4
seasons are: Fire, Flood, Mud, and Drought.
You can
retire to New York City where...
1. You say
"the city" and expect everyone to know you mean Manhattan ..
2. You can
get into a four-hour argument about how to get from Columbus Circle to
Battery Park, but can't find Wisconsin on a map.
3. You
think Central Park is "nature."
4. You
believe that being able to swear at people in their own language makes you
multi-lingual.
5. You've
worn out a car horn. ( ed note: if you have a car)
6. You
think eye contact is an act of aggression..
You can
retire to Maine where...
1. You
only have four spices: salt, pepper, ketchup, and Tabasco ..
2.
Halloween costumes fit over parkas.
3. You
have more than one recipe for moose.
4. Sexy
lingerie is anything flannel with less than eight buttons.
5. The
four seasons are: winter, still winter, almost winter, and construction.
You can
retire to the Deep South where...
1. You can
rent a movie and buy bait in the same store.
2. "Y'all"
is singular and "all y'all" is plural.
3. "He
needed killin'" is a valid defense.
4.
Everyone has 2 first names: Billy Bob, Jimmy Bob, Mary Sue, Betty Jean, Mary
Beth, etc.
5.
Everything is either "in yonder," "over yonder" or "out yonder." It's
important to know the difference, too.
You can
retire to Colorado where...
1. You
carry your $3,000 mountain bike atop your $500 car
2. You
tell your husband to pick up Granola on his way home and so he stops at the
day care center.
3. A pass
does not involve a football or dating.
4. The top
of your head is bald, but you still have a pony tail.
You can
retire to the Midwest where...
1. You've
never met any celebrities, but the mayor knows your name.
2. Your
idea of a traffic jam is ten cars waiting to pass a tractor.
3. You
have had to switch from "heat" to "A/C" on the same day.
4. You end
sentences with a preposition: "Where's my coat at? "
5. When
asked how your trip was to any exotic place, you say, "It was different!"
AND You
can retire to Florida where..
1. You eat
dinner at 3:15 in the afternoon.
2. All
purchases include a coupon of some kind -- even houses and cars.
3.
Everyone can recommend an excellent dermatologist.
4. Road
construction never ends anywhere in the state.
5. Cars in
front of you often appear to be driven by headless people.
--
"A bad day of golf is better than a good day at work"
Forwarded by Team Carper
A sixteen year-old boy came home with a new Chevrolet Avalanche--his parents
began to yell and scream, 'Where did you get that truck???!!!'
He calmly told them, 'I bought it today.'
'With what money?' demanded his parents. They knew what a Chevrolet Avalanche
cost.
'Well,' said the boy, 'this one cost me just fifteen dollars.' So the parents
began to yell even louder. 'Who would sell a truck like that for fifteen
dollars?' they said.
'It was the lady up the street,' said the boy. I don't know her name--they
just moved in. She saw me ride past on my bike and asked me if I wanted to buy a
Chevrolet Avalanche for fifteen dollars.'
'Oh my Goodness!,' moaned the mother, 'she must be a child abuser. Who knows
what she will do next? John, you go right up there and see what's going on.' So
the boy's father walked up the street to the house where the lady lived and
found her out in the yard calmly planting petunias!
He introduced himself as the father of the boy to whom she had sold a new
Chevrolet Avalanche for fifteen dollars and demanded to know why she did it.
'Well,' she said, 'this morning I got a phone call from my husband. I thought
he was on a business trip but learned from a friend he had run off to Hawaii
with his mistress and really doesn't intend to come back.
He claimed he was stranded and needed cash and asked me to sell his new
Chevrolet Avalanche and send him the money. So I did.'
Forwarded by Paula
WHAT PETS WRITE IN THEIR DIARIES.......
Excerpts from a Dog's Diary
8:00 am - Dog food! My favorite thing!
9:30 am - A car ride! My favorite thing!
9:40 am - A walk in the park! My favorite thing!
10:30 am - Got rubbed and petted! My favorite thing!
12:00 pm - Lunch! My favorite thing!
1:00 pm - Played in the yard! My favorite thing!
3:00 pm - Wagged my tail! My favorite thing!
5:00 pm - Milk Bones! My favorite thing!
7:00 pm - Got to play ball! My favorite thing! 8:00 pm - Wow! Watched TV with
the people! My favorite thing!
11:00 pm - Sleeping on the bed! My favorite thing!
Excerpts from a Cat's Daily Diary
Day 983 of my captivity...
My captors continue to taunt me with bizarre little dangling objects. They
dine lavishly on fresh meat, while the other inmates and I are fed hash or some
sort of dry nugget.
Although I make my contempt for the rations perfectly clear, I nevertheless
must eat something in order to keep up my strength.
The only thing that keeps me going is my dream of escape. In an attempt to
disgust them, I once again vomit on the carpet.
Today I decapitated a mouse and dropped its headless body at their feet. I
had hoped this would strike fear into their hearts, since it clearly
demonstrates what I am capable of. However, they merely made condescending
comments about what a 'good little hunter' I am.
There was some sort of assembly of their accomplices tonight. I was placed in
solitary confinement for the duration of the event. However, I could hear the
noises and smell the food. I overheard that my confinement was due to the power
of 'allergies.' I must learn what this means and how to use it to my advantage.
Today I was almost successful in an attempt to assassinate one of my
tormentors by weaving around his feet as he was walking. I must try this again
tomorrow -- but at the top of the stairs.
I am convinced that the other prisoners here are flunkies and snitches. The
dog receives special privileges. He is regularly released - and seems to be more
than willing to return. He is obviously retarded.
The bird has got to be an informant. I observe him communicating with the
guards regularly. I am certain that he reports my every move. My captors have
arranged protective custody for him in an elevated cell, so he is safe. For
now................
Forwarded by Gene and Joan
24 Hours to Live
Morris returns from the doctor and tells his wife that the doctor has told
him that he has only 24 hours to live. Given the prognosis, Morris asks his wife
for sex.
Naturally, she agrees, so they make love.
About 6 hours later, the husband goes to his wife and says, 'Honey, you know
I now have only 18 hours to live. Could we please do it one more time?'
Of course, the wife agrees, and they do it again.
Later, as the man gets into bed, he looks at his watch and realizes that he
now has only 8 hours left. He touches his wife's shoulder and asks, 'Honey,
please... just one more time before I die.'
She says, 'Of course, Dear,' and they make love for the third time.
After this session, the wife rolls over and falls to sleep.
Morris, however, worried about his impending, tosses and turns, until he's
down to 4 more hours. He taps his wife, who rouses. 'Honey, I have only 4 more
hours. Do you think we could...'
At this point the wife sits up and says, 'Listen Morris, I have to get up in
the morning... you don't.'
Dolly Parton and Queen Elizabeth Outside the Pearly Gates
Both die on the same day and they both go before an St. Peter to find out if
they'll be admitted to Heaven.
Unfortunately, there's only one space left that day, so the angel must decide
which of them gets in. The Angel asks Dolly if there's some particular reason
why she should get into Heaven.
Dolly takes off her top and says, 'Look at these, they're the most perfect
breasts God ever created, and I'm sure the angels will be pleased to see them
every day, for eternity.'
The Angel thanks Dolly, and asks Her Majesty the same question.
The Queen takes a bottle of Perrier out of her purse, shakes it up, and
gargles. Then, she spits into a toilet and pulls the lever.
The angel chuckles and says, 'Okay, Your Majesty, you may go in.'
Dolly is outraged and asks, 'What was that all about? I show you two of God's
own perfect creations and you turn me down. She spits into a commode and gets
in! Would you explain that to me?'
'Sorry, Dolly,' says the angel, 'but, even in Heaven, a royal flush beats a
pair - no matter how big they are.'
And that's the way it was on March 31, 2009 with a little help from my friends.
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
International Accounting News (including the U.S.)
AccountingEducation.com and Double Entries ---
http://www.accountingeducation.com/
Upcoming international accounting conferences ---
http://www.accountingeducation.com/events/index.cfm
Thousands of journal abstracts ---
http://www.accountingeducation.com/journals/index.cfm
Deloitte's International Accounting News ---
http://www.iasplus.com/index.htm
Association of International Accountants ---
http://www.aia.org.uk/
Wikipedia has a
rather nice summary of accounting software at
http://en.wikipedia.org/wiki/Accounting_software
Bob Jensen’s accounting software bookmarks are at
http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware
Bob Jensen's
accounting history summary ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory
Bob Jensen's
accounting theory summary ---
http://www.trinity.edu/rjensen/Theory.htm
AccountingWeb ---
http://www.accountingweb.com/
AccountingWeb Student Zone ---
http://www.accountingweb.com/news/student_zone.html
Introducing the New journalofaccountancy.com (free) ---
http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm
SmartPros ---
http://www.smartpros.com/
I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free
newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure
University) ---
http://www.financeprofessor.com/
Financial Rounds (from the Unknown Professor) ---
http://financialrounds.blogspot.com/
Professor Robert E. Jensen (Bob)
http://www.trinity.edu/rjensen
190 Sunset Hill Road
Sugar Hill, NH 03586
Phone: 603-823-8482
Email:
rjensen@trinity.edu
February 28, 2009
Bob Jensen's New Bookmarks on
February 28, 2009
Bob Jensen at
Trinity University
For
earlier editions of Fraud Updates go to
http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at
http://www.searchedu.com/.
Bob Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Many useful accounting sites (scroll down) ---
http://www.iasplus.com/links/links.htm
Accounting program news items for colleges are posted at
http://www.accountingweb.com/news/college_news.html
Sometimes the news items provide links to teaching resources for accounting
educators.
Any college may post a news item.
Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of
appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm
Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting)
---
http://www.heritage.org/research/features/BudgetChartBook/index.html
Humor Between February 1 and February 28, 2009 ---
http://www.trinity.edu/rjensen/book09q1.htm#Humor022809
Humor Between January 1 and January 31, 2009 ---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013109
Happy Birthday to the AECM ---
http://pacioli.loyola.edu/aecm/
On the occasion of its 15th birthday, I replied as follows on February 28, 2009
to the birthday greetings of Barry Rice and Amy Haas.
Hi Amy Haas and Barry Rice,
Let me add to the thank you, thank you, thank you Barry that
Jagdish already stated. Over and over I thank you Barry for cranking up the
AECM 15 years ago.
My thank you to Barry still stands at
http://listserv.loyola.edu/archives/aecm.html
My views on open sharing are highlighted at
http://www.trinity.edu/rjensen/000aaa/AAAaward_files/AAAaward02.htm
The main thing to remember about sharing is that whatever is given generally
comes back tenfold in one way or another.
And as your will see below, I generally do not like networking
behind passwords. Passwords in general seem to me to be obstructions to open
sharing. Social network messaging hides behind passwords, whereas listserv
messaging and blogs often do not hide behind passwords.
My wife often shakes her head and says I’m lousy at keeping secrets.
To learn about social networking, Amy, the best place to begin
is at
http://en.wikipedia.org/wiki/Social_network_service
Then you can click on any of the many alternative networks to view their
advantages and disadvantages. The main disadvantage for me would be
information overload. Interactive communications on a listserv like the AECM
has a lot of value added for reasons that I spell out at
http://www.trinity.edu/rjensen/ListservRoles.htm
But I would be overwhelmed by social networking and LinkedIn type networking
as well.
I personally have no interest in using Facebook, MySpace, or any
of these social networks although out of the purported 175 million users of
Facebook there must be many that find some value added in having special
networks of friends, colleagues, etc. Unless I’m in a collaborative project,
I don’t have any interest in joining a hive on the AAA Commons even though I
like the AAA Commons for communications between members of the American
Accounting Association who use the Commons as a whole. But hiving in smaller
cohorts could overwhelm me.
I receive invitations all the time from former students, friends
I’ve not seen in years, and professors whom I admire and respect that ask me
to join their private networks, particularly the LinkedIn network. I don’t
join any of them because if I did the networking would become overwhelming.
I currently receive over 100 email messages a day as it stands now and
cannot possibly handle social networking as well as the other networking
messages that I receive. And generally if I went to a lot of trouble to
research a problem for a LinkedIn friend I would want to share may research
findings with the world in a file that can be found by Google.
One thing I like about the AECM is that Web crawlers like Google
can find messaging content in the AECM since there are no password barriers
at
http://listserv.loyola.edu/archives/aecm.html
For the AAA Commons there is a password barrier and for most practical
purposes users must first be dues-paying members of the AAA. Google cannot
crawl into the Commons messages like it can crawl into the AECM messages.
The same is true for most social networking messaging that hides behind
passwords. I’m a much more public kind of guy who likes Google crawling.
When I crawl I learn from others who are willing to share. When others find
what I’ve written it’s my way of not only paying them back but there’s a
chance that they will respond directly to me with added information that
teach me something new.
I’m especially active on the AECM, CPA-L, the TigerNet at
Trinity University, and to a lesser extent the AAA Commons. I restrain
myself when it comes to the Commons because there I don’t want to look like
a messaging hog any more than I already look like a messaging hog. Virtually
everything that I do share on the AAA Commons is something that I’ve already
shared in a more public space. Putting it on the Commons, however, does
reach some AAA members who I cannot otherwise reach if they are not
subscribed to the AECM.
I have two huge Websites (over 20,000 documents) such that when
people really want to find me it does not take much imagination to find my
email address using Google. There are about 25,000 visitors to these
Websites each month. But I only get twenty messages each day on average from
people who want help with something that I’ve written about, the most common
topic being derivative financial instruments accounting and valuation of
interest rate swaps for some reason. Sometimes the questions are from
students and professors in Africa and Asia. Sometimes the questions are from
employees of accounting firms, corporations, and government. The frequency
of questions could be overwhelming if it wasn’t that more often than not the
answer already lies somewhere in my Websites. I’m just better at navigating
my own Websites that most people who send me questions about a topic.
I hesitate to brag that I myself have written all the answers to
questions that people send me. Much of the time the answers were written by
people like yourself Amy who have written them on the AECM (a public medium)
so I could archive them somewhere in my Websites. Also there are a lot of
quotations from the media and from abstracts of journal articles that I’ve
archived on documents at my Website.
I’ve been refereeing a very interesting research paper about why
subscribers join and stay with the AECM even if they are lurkers who never
send out messages. I really cannot ethically reveal much about the findings
of that study at this point --- I sure wish it would get published soon. But
there is one finding I will share with you. Since I am the most active
broadcaster on AECM, I discovered that a lot of subscribers sort of hate me.
But at the same time they find so many messages, including my messages, to
be “too interesting” to miss out on.
What Jensen, Jagdish, Albrecht, Williams, Dunbar, Walters,
Scribner, Beresford, Bonacker, and the other broadcasters do on the AECM is
save other subscribers a lot of time and trouble in discovering new or old
(history) information that is “too interesting” to miss out on. I know I
find many, many interesting bits of information on the AECM that are value
added things in my life.
And I’m thrilled when previous lurkers decide to add to the AECM
conversations. They often add something that us old timers just never
thought of before.
I’m thrilled that subscribers to the AECM do not appear to take
criticism personally. I think a necessary condition to be a part of the
academic academy is to accept criticism professionally without making it
personal.
It is possible to abuse the AECM, but in the first 15 years I’ve
not seen much abuse. One abuse is to send out research surveys simply
because it is so easy to reach all of us. But this type of use is almost as
irritating as telemarketing. Another abuse is to advertise a commercial
product such as a new textbook. This type of advertising would get very
intrusive like television commercials are intrusive. Another abuse would be
for accounting firms and corporations to try to preach to accounting
professors on the AECM. To my knowledge this type of abuse has never taken
place on the AECM. The firms have been very restrained even though I know at
times they would like to wring Jensen’s neck.
Another abuse would be to keep broadcasting over and over about
one topic. Although Jensen broadcasts over and over each day, his message
topics are across the board in a concerted effort not to get too boring on
one theme. If I feel that I’m becoming too focused on any one theme, I
generally try to call attention to my Web documents rather than continually
harp on such matters in my AECM messaging.
In closing, I want to thank Barry for the medium since the
medium is so often the message. I would like to thank the active
broadcasters on the AECM since it is your messaging that corrected my
mistakes and gave me new insights that I would’ve never discovered on my
own. And I thank you for the knowledge that I so often pass along to others
in my Web pages. I hope you appreciate my Web pages since you contributed
millions of the words that appear on those pages.
I think all of us have benefitted greatly from the AECM, and many
of our students have benefitted because we took the time and trouble to join
into the AECM. Thanks for the learning times Barry.
And I really feel sorry for professors and students who have
unsubscribed to the AECM. I plan to stay subscribed after death.
Robert E. (Bob) Jensen
Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
Tel. 603-823-8482
www.trinity.edu/rjensen
March 2, 2009 reply from Linda A Kidwell, University of Wyoming
[lkidwell@UWYO.EDU]
First, congratulations and happy anniversary to
both Barry and Bob on 15 years of wonderful information sharing.
Wouldn't you say that AECM is, to some degree, a
social network? Like some have said, we get to know the frequent posters
pretty well, whether or not we see them at annual meetings to shake their
hands. But no one has touched on the direct evidence I've found of the
social networking component of AECM. When I was last on the job market, I'd
say a dozen interviews were either granted because someone knew my name from
my participation in the list or required no ice-breaking time because AECM
had already facilitated that. I am quite certain that one of the schools
would not have interviewed someone with my research interests at all had I
not been known to a search committee member. Another social networking
aspect has taken place off the list but because of the list. I have needed
advice and/or support at various points in my career over the last 15 years,
and I have felt quite comfortable going to acquaintences from AECM for that
advice. This has come in form of advice about dealing with an authoritarian
dean, letters of reference during a job search, and support for a tenure
application. Another great benefit has been seeking someone to review a
manuscript before I submitted it to a journal. I've also found one prominent
AECMer, and he knows who he is, to be quite forgiving of professional lapses
of courtesy. And I believe another frequent member got helpful support in
the face of an over-reacting employer in the case of information loss in the
last few years.
So have I joined facebook? Yes, because I have
teenage children and require them to accept me as friends, and my college's
125th anniversary of the Glee Club is being facilitated through facebook as
well. But I consider AECM to be my most important professional social
network!
Linda Kidwell
The AICPA's Economic Crisis Resource Center ---
http://economy.aicpa.org/
Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of
appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm
2009 AICPA Video on Career Opportunities for CPAs
---
http://link.brightcove.com/services/player/bcpid1716442239
Accounting firms dominate BusinessWeek's second annual ranking of the
"Best Places to Launch a Career."
From SmartPros, September 14, 2007 ---
http://accounting.smartpros.com/x59101.xml
Deloitte & Touche is No. 1, followed by
PricewaterhouseCoopers and Ernst & Young. The last of the Big Four, KPMG,
moved up four spots to No. 11.
Accountants used to be spoofed as bean counters
-- dutiful, middle-aged, gray-suited men with considerable analytical
expertise but little charisma. This year accountants became sexy,
BusinessWeek said in a statement.
Why did the accounting firms do so well?
Enormous demand. Across industries, there is a mad scramble to recruit the
best and brightest of a new generation, the much-maligned, heavily
scrutinized Gen Y. Nowhere is the pressure more intense than in the Big
Four. The Sarbanes-Oxley Act has so greatly increased the need for their
services that the firms are facing an epic talent shortage.
BusinessWeek's "Best Places to Launch a Career"
ranking is based on three extensive surveys: of career services directors at
U.S. colleges, the employers they identify as the best for new graduates,
and college students themselves.
Some great information about the organization of major accounting firms,
their finances (including average partner comp) and litigation ---
http://thecaq.org/publicpolicy/treasurydata.htm
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"Task Force Identifies 21 Practical Pointers for Public
Company Auditors," SmartPros, February 16, 2009 ---
http://accounting.smartpros.com/x65443.xml
Here are two professors who really works to reduce dropout rates.
Actually they really work period!
February 27, 2009 message from Mark Meuwissen
[MarkM@ALEXTECH.EDU]
In response to my previous post, two of you asked
how I accomplished good student retention this year.
Now you put me on the spot. It was more of an
observation from a contrarian than a claim to have the secret, but here are
some thoughts.
First, we are a small outstate tech school that
doesn't always recruit the cream of the crop. Our AAS 2 year accounting
degree typically start 30 students a year, and graduate less than 20. We
also have 4 to 6 AS transfer degree students.
There have been years when we lost 1/3 of the
students in the first year. Sometimes it is because they just aren't ready
or willing to get ready for college. Other times it is because life problems
drove them to pursue a college degree and those life problems didn't go
away. One year, I remember 2 of my 29 new students were diagnosed with an
incurable cancer and then later that year a spring start died unexpectedly
in her apartment. I suspect suicide, but never found out. So, we haven't
always had good luck with retention.
Here are few things my co-instructor, Carole, and I
do different from past years:
- We incorporate more team projects and working
together in class. We have daily exercises completed in pairs. We do a
lot of active learning techniques. This includes an occasional table
test where the whole table shares their answers and tries to outdo the
other table. The concept is to quickly build a support network with the
other students. We also find that working together gives better
retention.
- Both Carole and I take two days each semester
to advise meet with each student two on one. It takes two full days but
sometimes it provides that first opportunity to meet with a troubled
student. I find it very effective to ask them what they will do if they
don't finish school. Most are adamant that they won't live at home, but
when I ask them how they will pay for their own car and their own rent,
they get very nervous. For most however, we really pump them up and make
them feel good about their school.
- We are able to find some funding for second
year students to tutor the first year students. This helps maybe 1 or 2
per year.
- We aggressively pursue attendance contracts
and often send students to academic affairs for a good chewing out. When
I started school here, I thought this was ridiculous. I graduated from a
private college where attendance was completely your option. I thought
the students would be grown up enough to come to class, but they
weren't. I have been converted into taking attendance and acting like it
is still high school. Unfortunately, this seems to be important and we
have saved at least one student each year by getting them on an
attendance contract.
- We changed the sequence of courses around so
that any student in our program has to take Payroll in the Fall. Some
come in with Principles already from another school or from high school,
so we use to have students neither Carole or I had in class their first
semester. Now, we always make sure that a new student has either Carole
or I at least once in their first semester so we get to know them and
they get to know us. This was huge!
- In principle 1, I started doing a life plan
project where each student has to lay out their life listing every major
event that affects who they are. I am the only one that sees it other
than the student. I very clearly tell them that every event has to be on
their project no matter how painful. If their brother committed suicide,
it has to be on there. If they got into drugs, it has to be on there. I
explain that completion of this project will give them a much better
idea where they are and how they got there. Without this idea, they
can't do a good job making a plan for their future. I then make them do
5, 10 and 15 year plans. One other requirement is they have to use
pictures, real, hand drawn or something similar found on the internet.
It has to be visual. They usually do this either in PowerPoint or on an
oversized sheet of paper. Some use a scrap book approach. One other part
of this project that adds to the effect is that I tell them my life
story, which has some not so great events. I have made several cry in
class at how pitiful I was before turning my life around. This project
has been very effective at building relationships and opening the
students to change. It has also opened my eyes to the number of these
students who have been raped, or have tried to commit suicide. It opened
my eyes and my heart.
- Both Carole and I give many, many chances for
make-up, rework, independent studies, maybe even special treatment. We
probably violate almost every rule out there on assessment and fairness.
Our thought is that we need to get the weaker students through as many
semesters as we can even if they have no hope of graduating. Each
semester completed improves the student. You can see them grow. Some
have taken 4 years to graduate from a 2 year program, but we think these
are our biggest success. It is really only until the final semester that
we buckle down and hold them accountable. In the end, we know that our
reputation is stamped on their head when they leave, so we make the
final semester pretty dang hard. But by making the others much easier,
we get more of them to the final semester.
I wish I could tell you it was about using some
special educational methodology like "self-directed hybrid course work" but
it isn't. In just my 4th year here, I have already taught 14 different
courses. I rarely have the same course twice in a semester. For example,
this semester I have 5 preps and will spend 24 contact hours each week in
class or in lab. That doesn't count the time I spend administrating a VITA
tax service here at the college. I don't think the quality of our delivery
is that great, which is why I read this list serve so attentively. I want to
improve delivery methods.
I believe the key is the relationship we develop
with our students. I don't have any other answer.
Mark Meuwissen
Professor Schiller at Yale assets housing prices are still overvalued and
need to come down to reality
The median value of a U.S. home in 2000 was $119,600.
It peaked at $221,900 in 2006. Historically, home prices have risen annually in
line with CPI. If they had followed the long-term trend, they would have
increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan
Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of
loans by lowlife mortgage brokers, the greed and hubris of investment bankers
and the foolishness and stupidity of home buyers. It is now 2009 and the median
value should be $150,000 based on historical precedent. The median value at the
end of 2008 was $180,100. Therefore, home prices are still 20% overvalued.
Long-term averages are created by periods of overvaluation followed by periods
of undervaluation. Prices need to fall 20% and could fall 30%.....
Watch the video on Yahoo Finance ---
Click Here
See the chart at
http://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
Also see Jim Mahar's blog at
http://financeprofessorblog.blogspot.com/2009/02/shiller-house-prices-still-way-too-high.html
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost allocation
accounting, the above analysis by Professor Schiller is sobering. It suggests
how much policy and widespread fraud can generate misleading "fair values" in
deep markets with many buyers and sellers, although the housing market is a bit
more like the used car market than the stock market. Each house and each used
car are unique, non-fungible items that are many times more difficult to update
with fair value accounting relative to fungible market securities and new car
markets.
Note how Days Inns presented both traditional and real estate exit value
balance sheets when anticipating an IPO ---
http://www.trinity.edu/rjensen/theory01.htm#FairValue
"SEC ISSUES DETAILED STUDY ON MARK-TO-MARKET ACCOUNTING,"
by Gia Chevis, Accounting Education.com, February 19, 2009 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=148980
The report was issued on December 31, 2008
At the direction of the U.S.
Congress, the SEC prepared and released on 30 December 2008 a study on
mark-to-market accounting and its role in the recent financial crises.
Though it concluded that mark-to-market accounting was not responsible
for the crisis, it did make eight recommendations.
The 259-page document, a result of the Emergency Economic Stabilization
Act of 2008, details an in-depth study of six issues identified by the
Act: effects of fair value accounting standards on financial
institutions' balance sheets; impact of fair value accounting on bank
failures in 2008; impact of fair value accounting on the quality of
financial information available to investors; process used by the FASB
in developing accounting standards; alternatives to fair value
accounting standards; and advisability and feasibility of modifications
to fair value accounting standards. Its eight recommendations are:
1) SFAS No. 157 should be improved, but not suspended.
2) Existing fair value and mark-to-market requirements should not be
suspended.
3) While the Staff does not recommend a suspension of existing fair
value standards, additional measures should be taken to improve the
application and practice related to existing fair value requirements
(particularly as they relate to both Level 2 and Level 3 estimates).
4) The accounting for financial asset impairments should be readdressed.
5) Implement further guidance to foster the use of sound judgment.
6) Accounting standards should continue to be established to meet the
needs of investors.
7) Additional formal measures to address the operation of existing
accounting standards in practice should be established.
8) Address the need to simplify the accounting for investments in
financial assets.
On February 18, the FASB
announced the addition of two short-timetable projects to its agenda
concerning fair value measurement and disclosure. The first project aims
to improve application guidance for measurement of fair value, with
issuance projected for the second quarter. The second will address
issues related to input sensitivity analysis and changes in levels; the
FASB anticipates completing that project in time for calendar-year-end
filing deadlines. Both projects were undertaken in response to the SEC's
recent study on mark-to-market accounting and input from the FASB's
Valuation Resource Group.
The full report can be freely downloaded at
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf. (pdf)
SFAS No. 157’s fair value hierarchy prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels. The
fair value hierarchy gives the highest priority to unadjusted quoted prices in
active markets (Level 1) and the lowest priority to unobservable inputs (Level
3). With respect to IFRS, the report states the following on Page 33:
Currently, under IFRS,
“guidance on measuring fair value is dispersed throughout [IFRS] and is
not always consistent.”52 However, as discussed in Section VII.B, the
IASB is developing an exposure draft on fair value measurement guidance.
IFRS generally defines fair
value as “the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s
length transaction” (with some slight
variations in wording in different standards).53
While
this definition is generallyconsistent with SFAS No. 157, it is not
fully converged in the following respects:
•
The definition in
SFAS No. 157 is explicitly an exit price, whereas the definition in IFRS
is neither explicitly an exit price nor an entry price.
•
SFAS No. 157
explicitly refers to market participants, which is defined by the
standard, whereas IFRS simply refers to knowledgeable, willing parties
in an arm’s length transaction.
•
For liabilities, the
definition of fair value in SFAS No. 157 rests on the notion that the
liability is transferred (the liability to the counterparty continues),
whereas the definition in IFRS refers to the amount at which a liability
could be settled.
"SEC Advises No Break in 'Mark' (Fair Value
Accounting) Rules," by Michael R. Crittenden, The Wall Street Journal,
December 31, 2008 ---
http://online.wsj.com/article_email/SB123067591247143735-lMyQjAxMDI4MzMwMDYzNzA1Wj.html
The Securities and Exchange Commission recommended
against suspending fair-value accounting rules, instead suggesting
improvements to deal with illiquid markets and reducing the number of models
used to measure impaired assets.
In a 211-page report to U.S. lawmakers, as
expected, the agency's staff Tuesday definitely recommended that fair-value
and mark-to-market not be eliminated or suspended. "The abrupt elimination
of fair value and market-to-market requirements would erode investor
confidence," the report said.
The banking lobby has argued that financial
institutions have been forced to write off as losses still-valuable assets
because the market for them had dried up, creating a spiral of write-downs
and asset sales.
The report said that staff found no evidence to
suggest that the accounting rules had played a significant role in the
collapse of U.S. financial institutions. "While the application of fair
value varies among these banks...in each case studied it does not appear
that the application of fair value can be considered to have been a
proximate cause of the failure," the report said.
Additionally, the SEC suggests that the Financial
Accounting Standards Board narrow the number of accounting models firms can
use to assess the impairment for financial instruments.
"Robert H. Herz, Chairman of the Financial Accounting Standards Board, today
announced the addition of new FASB agenda projects intended to improve
(1) the application guidance used to determine fair values and
(2) disclosure of fair value estimates.
"FASB Initiates Projects to Improve Measurement and Disclosure of Fair Value
Estimates," SmartPros, February 18, 2009 ---
http://accounting.smartpros.com/x65563.xml
The projects were added in response to recommendations contained in the
Securities and Exchange Commission's (SEC) recent study on mark-to-market
accounting, as well as input provided by the FASB's Valuation Resource
Group, a group of valuation and accounting professionals who provide the
FASB staff and Board with information on implementation issues surrounding
fair value measurements used for financial statement reporting purposes.
"The SEC expressed continued support of fair value
accounting in its study, but recommended consideration of potential
improvements in the guidance surrounding the application of fair value
principles," stated Chairman Herz. "We agree with the SEC and with our
Valuation Resource Group that more application guidance to determine fair
values is needed in current market conditions. Additionally, investors have
asked for more information and disclosure about fair value estimates.
Therefore, the FASB is immediately embarking on projects that directly
address areas that constituents have told us are challenging in the current
environment, and which will improve disclosures in financial reports."
The fair value projects address both application
and disclosure guidance:
-- The projects on application guidance will
address determining when a market for an asset or a liability is active or
inactive; determining when a transaction is distressed; and applying fair
value to interests in alternative investments, such as hedge funds and
private equity funds.
-- The project on improving disclosures about fair
value measurements will consider requiring additional disclosures on such
matters as sensitivities of measurements to key inputs and transfers of
securities between categories.
The FASB anticipates completing projects on
application guidance by the end of the second quarter of 2009, and the
project on improving disclosures in time for year-end financial reporting.
The FASB has also recently proposed enhanced disclosures in interim reports
relating to the fair values of financial instruments. (Proposed FASB Staff
Position (FSP) FAS 107-b and APB 28-a is available at
http://www.fasb.org/fasb_staff_positions/prop_fsp_fas107-b&apb28-a.pdf
).
As previously announced, the FASB has also
commenced work with the International Accounting Standards Board (IASB) on a
more comprehensive project to improve, simplify, and converge the accounting
for financial instruments. The Boards are obtaining input on that project
from a number of sources, including the senior-level Financial Crisis
Advisory Group that has been formed to assist the FASB and the IASB in
evaluating financial reporting issues emanating from the global financial
crisis.
The SEC study, entitled Report and Recommendations
Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008:
Study on Mark-To-Market Accounting,, was issued to Congress by the SEC's
Office of the Chief Accountant and Division of Corporate Finance on December
30, 2008, as mandated by the Emergency Economic Stabilization Act of 2008.
The 211-page report recommended against suspension of fair value accounting
standards, and instead recommended specific improvements to existing
practice. The report reaffirms that investors generally believe fair value
accounting increases financial reporting transparency, and that the
information it provides helps result in better investment decision-making.
(The report is available at
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf .)
The FASB Valuation Resource Group met on February
5, 2009 to provide input on fair value issues to the Board. The group was
formed in June 2007, as a result of feedback received from constituents
calling for the Board to address issues relating to valuation for financial
reporting. More information about the VRG and its members is available at
http://www.fasb.org/project/valuation_resource_group.shtml#background.
Continued in article
Banking industry pressures to abandon fair value accounting are summarized
at
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
IASB = International Accounting Standards Board
"IASB's Responses to the Global Financial Crisis," IAS Plus,
February 25, 2009 ---
http://www.iasplus.com/index.htm
The SAC discussed the current global financial
crisis and the IASB's responses to it. The IASB Chairman and the IASB's
Director of Capital Markets outlined the activities of the IASB and the
staff since the Financial Stability Forum's action plan was issued in April
2008. Among others, the following matters were raised or discussed:
- Regulatory responses tended to mingle
(unhelpfully) issues related to financial stability (prudential
regulation) and 'dynamic provisioning'. These were separate issues that
needed to be addressed separately and not necessarily by accounting
standard-setters.
- The recent activities of the US Financial
Accounting Standards Board with respect to proposed FAS 133
Implementation Issue C22, Exception Related to Embedded Credit
Derivatives, were acknowledged as still under deliberation by the
FASB. The IASB staff and SAC members noted that, if issued in the same
form as it was exposed, C22 would narrow but not eliminate an IFRS/US
GAAP difference. In particular, the March 2009 joint meeting of the IASB
and FASB would examine issues related to impairment.
- The FASB/ IASB Financial Crisis Advisory Group
was of the view that 'financial stability' was the responsibility of
regulators, while the interests of investors (who do not have the
statutory access to information usually available to regulators) are
best served by transparent financial reporting that reflected the
economics of the entity.
- SAC members supported this conclusion, but
noted that transparent financial reporting was necessary for regulators
to achieve financial stability. While SAC members noted that accounting
has an important role to play in market regulation, it should not be
driven by the prudential needs of regulators. As one SAC member put it:
'Financial stability is important, but not at the price of playing with
the numbers'.
- It was suggested that the IASB had been 'slow
out of the blocks' at the beginning of the crisis, with poor
communications. Communications had improved but needed to acknowledge
that, while accounting did not cause the crisis, it was inextricably
involved with it.
- While the use of fair value still has lots of
support in principle, there needs to be greater discipline in how it is
applied in practice. One SAC member, representing a financial regulator,
said that it would be helpful, for example, if all banks applied the
same measurement principles to the same instruments.
- While focusing on fair value for all financial
instruments as a long term goal, the IASB (and the FASB) might be more
successful if they adopted an 'evolutionary' rather than 'revolutionary'
approach and allow the financial markets to regain credibility before
adopting radical changes to the accounting for financial instruments.
- The Experts Advisory Panel's guidance on
applying fair value in illiquid and inactive markets was seen as very
useful guidance and was commended.
- Sharing the results of a study of the use of
the Reclassification Amendment to IAS 39 approved in October 2008, the
SAC was told that about €7.5 billion worth of assets had been
reclassified, resulting in about €5.5 billion positive effect on profit
and loss. The reclassifications had been done primarily for regulatory
capital reasons. The survey had demonstrated a fundamental conflict
between investor and supervisory interests.
The IASB Chairman suggested that the IASB had three
real alternative approaches to accounting for financial instruments
generally:
- (A) Fair value for all financial instruments
- (B) All financial instruments that are
'traded' to be measured at fair value; all others would be measured at
amoritsed cost. ('Traded' was not defined but, in context, appeared to
mean fair value reliably measurable based on price quotations or
transactions in an active market.)
- (C) All financial instruments with contractual
terms and conditions that permit the determination of a basis of
amortisation would be measured at amortised cost; all others would be
measured at fair value.
(It was assumed that certain financial instruments,
such as all derivative financial instruments, would be measured at fair
value.)
Bob Jensen's threads on the global financial crisis are
at
http://www.trinity.edu/rjensen/2008Bailout.htm
Leading Academic Research Centers of Business
There are various competing rankings of business schools
most of which are published by media giants like US News, Business Week,
and The Wall Street Journal. These vary by criteria used and by who does
the rankings. For example, the WSJ rankings are done by recruiters of graduates
and hence are heavily influenced by quality of students admitted as well as
quality of student eventually graduated by the business schools. The US News
rankings are done by business school deans who are influenced by various
criteria, not the least of which is the halo reputation of the entire university
in which a business school is embedded, which in my viewpoint gives the Ivy
League along with Stanford and some leading universities a bias toward the
reputation of the entire university vis-a-vis its business school if it has a
business school. The rankings themselves can vary somewhat significantly between
US News, Business Week, and The Wall Street Journal. You can read
more about these popular and highly controversial rankings at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
In comparison there are also rankings of business schools
according to research journal publications of faculty. One such ranking can be
found in the University of Texas at Dallas (UTD) database at
http://somweb.utdallas.edu/top100Ranking/
It would seem that since UTD does not come out particularly well in the US
News, Business Week, and The Wall Street Journal that this UTD
ranking database is an attempt to inform prospective students and faculty that
UTD is one of the leading research centers in management. Indeed, using the
criteria chosen by UTD for this database, UTD shows up at Rank 18 among the
leading business schools Rank 18 (worldwide) among the world's leading schools
of business.
The criteria used for these rankings include publications
of faculty in 20 leading accounting, finance, marketing, management, and
management science research journals. The journals chosen are indeed leading
research journals in those disciplines, but since there are so many different
disciplines there are many research journals that are excluded. In accounting,
the only chosen journals are TAR, JAR, and JAE.
The criteria include an adjustment for joint authorship
such that if there are four authors on a paper, a given author only gets 0.25
credit rather than the 1.00 credit given to solo authors.
Advantages of the UTD Database
-
Although the criteria are subjectively selected, the
application of these criteria is not subjective. Unlike the US News,
Business Week, and The Wall Street Journal rankings, people are
not subjectively applying the criteria.
-
This database allows interaction to such a level as to
selectively choose journals and universities and individual authors.
-
Users can drill down to see the actual journal titles
and author listings going into any university's ranking.
-
The rankings have a surprise factor in that the top 25
business programs in this database differ substantially from the rankings in
all the popular media rankings of business schools.
Disadvantages of the UTD Database
-
The database has a self-selected total population of
only 20 research journals in business and leaves out some high quality
academic research journals such as Contemporary Accounting Research,
Accounting Organizations and Society, Abacus, The British Accounting
Review, and hundreds of others across all business disciplines that were
left out of the database.
-
The database provides worldwide rankings with limited
or no non-US journals in most disciplines. For example, the only three
accounting research journals included in the database are all in published
in the United States. Having worldwide rankings with only U.S. journals is a
severe limitation.
-
The database is skewed heavily toward quantitative
research methods and leaves out research journals that feature other
methodologies such as the philosophical and archival methods of AOS and the
case methods of the Harvard Business Review.
-
Related to the above methodology bias is the neglect of
emerging research areas. For example an emerging research area in the past
two decades as been accounting information systems. The leading AIS research
centers do have much of any chance to help lift their university in this UTD
database. Similarly, and emerging research area is in forensic accounting.
The TAR, JAR, and JAE fail to publish any of the leading AIS and forensic
accounting research over the period covered in the database (beginning in
1990).
-
The database counts a university's ghosts in the
context of giving credit to a university for a former faculty member who was
at that university at the time of the publication but departed years ago.
-
The database can give an undeserved high or low ranking
to a given discipline by "halo association." For example, a business school
may have professors in finance, marketing, and management who are prolific
publishers relative to the accounting faculty. This can lead readers to
think the business school is great in all disciplines when in fact it is
rated high only because of halo aggregation rather than by individual
disciplines. For example, the University of Maryland is in the top ten
worldwide research centers in this database. However, in the UTD database's
three accounting journals only 16 of its faculty are co-authors between 1990
and 2008 in the database. In comparison, SUNY Buffalo has 17 hits in these
top accounting journals and comes up at Rank 97 worldwide. Apparently the
non-accounting disciplines are driving the high ranking of Maryland relative
to Buffalo. This "halo phenomenon" is even more marked in the
worldwide rankings. Accounting is a difficult discipline for many research
centers since there is a marked shortage of accounting researchers relative
to researchers in the other disciplines of business ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
I do not want to imply that the UTD database should not be
studied and evaluated. Like any database or other ranking reference, it has its
advantages and disadvantages. Readers who view these rankings superficially are
apt to be misled without fully understanding the limitations caused by both the
criteria used and the possible subjectivity of the persons doing the ranking. As
pointed out earlier, the only subjectivity in the UTD database is the choice of
the 20 academic research journals used as inputs to the UTD ranking outcomes.
This eliminates some, but certainly not all, the subjectivity found in many
other ranking systems.
The obvious risk in using any ranking system is the risk
that it will become a huge factor in the choice of a program by a doctoral
student or a faculty prospect. For example, an accounting PhD prospect might be
terribly impressed that Duke University is the Rank 1 management research center
in North America and the Rank 2 business program in the entire world. Duke
certainly has a great business school, but its UTD high ranking for research
should not, in my viewpoint, become the major criterion for choosing Duke for
doctoral studies relative to such programs as Cornell (Rank 33), University of
Virginia (Rank 98), Notre Dame (Rank 49), and the University of Southern
California (Rank 13) in terms of worldwide rankings.
Similarly I doubt that most accounting faculty in Texas
would rate the University of Texas at Dallas (Rank 18 worldwide) higher than the
Texas A&M (Rank 37 worldwide) accounting researchers. But this is the outcome in
the UTD multi-discipline ranking outcomes.
The rankings of business research centers in the UTD
database is most certainly at odds with the rankings of accounting research
programs in the Coyne, Summers,
Williams, and Wood ranking of accounting research programs under varying
criteria. This controversial paper can be downloaded for free from SSRN and is worth your time to read. Note especially
that the study is not limited to accounting research centers in the United
States. Names like Melbourne, Manchester, and Waterloo appear in the rankings
---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755
Leading Academic Research Centers of Accountancy
Four accounting
researchers (Professors Coyne, Summers, Williams, and Wood) at Brigham Young
University have written a paper that ranks accounting research programs in the
academy according to varying criteria. This controversial paper can be
downloaded for free from SSRN and is worth your time to read. Note especially
that the study is not limited to accounting research centers in the United
States. Names like Melbourne, Manchester, and Waterloo appear in the rankings
---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755
To its credit,
this study’s findings are based on current affiliations of leading researchers
and attempts not to give ranking credits for an institution’s ghosts. This may,
in part, explain some of the unexpected rankings of some institutions. I think
in some cases a doctoral student might be a little misled by the outcomes. In
other instances, however, there is richness in these outcomes that can lead a
doctoral program applicant to ask the right questions. For example, why is
Bentley College so highly ranked in AIS? There is a reason! Why does Florida
International rank so very high in international accounting research?
The study
possibly should’ve noted which accounting research centers have no doctoral
programs. For example, BYU and Rice and Dartmouth have no doctoral programs in
accountancy. A doctoral program listing is available in the Hasselback
Directory, although Hasselback has some errors such as the failure to list
Yale’s doctoral program and the listing of Penn State as not having graduated
any doctoral students since 1998 (actually Penn State has graduated more than
five a year in recent years).
There are other
noteworthy innovations in this (Professors Coyne, Summers, Williams, and Wood)
study. However, I think the analysis falls short of what is possible from this
and related data. The analysis is weak on history and possible explanations of
trends. A table of trends in doctoral student graduation numbers would help
along with a table of faculty size of leading accounting programs. The analysis
also does not discuss how poorly academic accounting research is perceived in
academe relative to finance, marketing, and management research ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
My first
reaction is that size matters in these rankings, especially in terms of the
number of accounting researchers in a given area. This is probably why the University of
Chicago and Yale come out so poorly in this study relative to the huge
accounting programs of Texas, Texas A&M, OSU, Michigan State, Illinois, and USC.
The University of Rochester does not even get mentioned. This may also be due,
at least in part, by not counting ghosts who left for greener pastures. And
what happened to that former research powerhouse on the eastern side of the Bay
Bridge leading out of San Francisco?
Carnegie-Mellon,
Michigan, UC Berkeley, Rochester, and Chicago were at certain points in history the leading
centers of accounting research. They do not do well in this later study. Times
are changing. Even mighty Stanford slipped down a lot of notches in some
categories.
The non-mention
of the University of Rochester and Lancaster (England) might be due to small
numbers of accounting researchers, albeit influential researchers. The
relatively poor showings larger research centers at MIT and NYU are more
surprising. Harvard is also less than stellar in these outcomes to say the
least.
Some of the
larger doctoral programs in accountancy get a zero in this study. Examples
include the non-mention of Kent State University and the University of Nebraska.
An unexpected
outcome is that the huge accounting research center at the University of Florida
does not rank highly in comparison to lesser-known Florida International
University, the University of Southern Florida, and Florida State University
just to name a few of its closest rivals. The same can be said for the huge
research center at the University of Georgia vis-à-vis its geographical rivals
Georgia State, Georgia Tech, and Emory. The same can also be said for the
University of Arizona (except for its Number 2 ranking in tax research).
I think the
general conclusion is that the centers for academic research in accounting have
shifted in recent years. In many respects this reflects how graduates of former
leading research centers commenced to populate the larger accounting programs
that, until then, were not especially known for accounting research. Examples
include Arizona State University, the University of Washington, BYU, and Texas
A&M. The University of Iowa dropped in terms of its ranking in financial
accounting research but graduated some leading researchers that now are at other
universities. Similarly, Michigan State University graduated some of the leading
AIS researchers in the U.S. but only ranks Number 12 in the listing of AIS
research centers. Some of Bill McCarthy’s gifted alumni are at higher-ranked AIS
research centers.
The study also
indicates how some of the historically leading accounting research centers such
as the University of Illinois and the University of Texas did not change with
the times in emerging areas of research. For example, except for Missouri the
top ten AIS research centers were not particularly noted as accounting research
centers in the past before AIS emerged as a research discipline in accounting.
One criticism I
have of this study is the bibliography. It’s missing most of the previous
studies related to historical trends in accounting research people and
universities. Many of the missing references, for example, are cited and quoted
in the following paper:
“Evolution of Research Contributions by The
Accounting Review (TAR): 1926-2005,” by Jean L. Heck and Robert E. Jensen,
Accounting Historians Journal, Volume 34, No. 2, December 2007
Former studies
along these lines enable readers to reflect on trends in academic accounting
research centers.
One limitation
of the study is the failure to note how common it is for accounting researchers
to be more productive in the early years before becoming full professors. Jensen
and Heck note the fall off of leading-researcher publications after their
assistant professorships. Hence there may be an assistant-professor bias in some
of the rankings in this new Coyne, Summers, Williams, and Wood study. A few
institutions that have some of the leading doctoral program advisors may not
rank high because those leading advisors just do not publish much as senior
professors. Also it may be common of some of these institutions to have a
leading researcher and publisher who just does not have many colleagues that
help to raise the ranking in the CSWW study. I can name a few such universities
but will not do so since this is anecdotal on my part.
Remember that
there are Accounting Hall of Fame doctoral studies advisors not noted for any
publication records. Tom Burns at Ohio State and Carl Nelson at Minnesota
produced some of the best accounting researchers in history, but I don’t think
Tom and Carl were ever noted for their bibliographic listings of research
publications. My point here is that faculty advisors recommend doctoral programs
to prospective doctoral students for reasons other than the publication records
of faculty in doctoral programs.
Hence when an
aspiring accounting professor is trying to decide on where to get a doctoral
degree, I would sometimes advise looking more closely for the particular woman
or man at an institution relative to an institutional ranking. Some people go to
Florida just to study under Joel Demski. Others go to Duke just because of
Katherine Schipper or Southern California because of Zoe-Vonna Palmrose. Ken
Peasnell attracts doctoral students to Lancaster across the pond. Others want
UCONN now that Amy Dunbar heads up the doctoral program or Stanford because of
the IASB’s Mary Barth. Some people choose Yale just to be near Shyam Sunder.
Some people go to Chicago just to learn from Ray Ball for reasons other than his
knowledge of fine wines.
An aspiring doctoral program
applicant might’ve never heard the names above, but that applicant usually
relies heavily on the prejudices of his or her undergraduate and masters program
mentors who often love to drop names. Name dropping can be misleading in some
instances such as in the case for getting a doctoral degree from Bentley College
where the ranking in this SCWW study is very relevant relative to name dropping.
For this we owe Professors Coyne, Summers, Williams, and Wood a debt of
gratitude.Also see
---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
Bob Jensen's critique of accountancy doctoral programs
can be found at
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
I received the following message from a staff member of
the FASB. I altered it slightly to keep it anonymous.
Hi Bob,
As you know, after 16 years in the corporate world,
I spent over (XX) years teaching as a non-tenure track, non PhD in
accounting. Several times during my stay in academia, i investigated PhD
programs in accounting. Each time i found the mathematical requirements to
be distasteful. Precious few programs actually included courses in
accounting or current FASB/IASB practice issues and those who did still did
so sparingly. I could not see myself, at advanced age and experience,
subjecting myself to several year of extremely low pay and distasteful (to
me) study. What joy is there in producing "research" that includes heavy
statistical analysis that nobody outside a very small circle of researchers
looking for citations will ever read? There certainly would have been no
time or encouragement to pursue relevant topics like XBRL.
While I at the FASB, I see first hand the low
esteem members of academia held inside FASB. Not once did I hear a staff
member indicate that they would be calling a professor to ask an opinion on
an accounting issue. I'm sure some did, but they were quiet about it. I also
did not see any academic journals in the bookcases of FASB staff members.
The library held copies of the top level journals but it was as rare
occasion indeed when the library sent a notice to staff alerting them to a
new accounting journal article. In contrast, Accounting Today, CFO magazine,
Wall Street Journal, The Times, New York Times and the news services that
produced digests of current accounting issues were in daily their reads.
XXXXX
Questions
Why might you want to teach a modified IRR?
Is the reinvestment-at-the-same-rate assumption true?
It may not be, when interim cash inflows occur far in the future, or if
there is limited available capital to fund competing projects.
Is timing important?
Yes, it is vital. A change in the expected receipt of future cash inflows by
as little as 30 days has a significant impact on the computed IRR.
"Spreadsheets at Work: Rating Your Own IRR Some tips for doing these key
calculations; and introducing "modified" internal rate of return," by Richard
Block and Jan Bell, CFO.com, February 20, 2009 ---
http://www.cfo.com/article.cfm/13052407/c_2984312?f=FinanceProfessor/SBU
Link forwarded by Jim Mahar.
It is budgeting season again. Financial analysts
are completing their analyses of the R&D or capital spending projects being
proposed. And financial executives are either anxiously awaiting those
analyses, or already getting started on their reviews. No doubt the analyses
include investment costs, anticipated future savings, discounted cash flows,
computed internal rates of return, and a ranking of which projects make the
"cut," and which do not.
Almost certainly, a spreadsheet was used for each
project — to compute the discounted cash flows, the internal rates of
return, and the presentation of the overall rankings.
You will take comfort, of course, because these
analyses, and your decision on which projects to accept or fund, were based
on a sound financial principle: namely, the better the internal rate of
return, the better the project.
But is that comfort warranted? Or might you be
vulnerable to the weaknesses long pointed out — if too often ignored — by
researchers who have warned that IRR calculations often contain built-in
reinvestment assumptions that improperly improve the appearance of bad
projects, or make the good ones look too good .
IRR, of course, is the actual compounded annual
rate of return from an investment, often used as a key metric in evaluating
capital projects to determine whether an investment should be made. IRR also
is used in conjunction with the Net Present Value (NPV) function,
determining the current value of the sum of a future series of negative and
positive cash flows; namely investments and savings. The prescribed discount
factor to be used in computing NPV is the company's weighted average cost of
capital, or WACC. The internal rate of return is the annual rate of return,
also known as the discount factor, which makes the NPV zero.
The rub in justifying long-term project funding
decisions by using IRR is two-fold. First, IRR assumes that interim cash
inflows, or savings, will be "reinvested," and will produce a return — the
reinvestment rate — equal to the "finance rate" used to fund the cash
outflows (the investment.) Second, the anticipated investment cash outflows
required for the project, and for the anticipated cash inflows from savings
once the project is complete, are so far in the future that their timing is
difficult to determine with reasonable accuracy.
Is the reinvestment-at-the-same-rate assumption
true? It may not be, when interim cash inflows occur far in the future, or
if there is limited available capital to fund competing projects. Is timing
important? Yes, it is vital. A change in the expected receipt of future cash
inflows by as little as 30 days has a significant impact on the computed IRR.
But by knowing and using the subtleties of the
various IRR functions available in an electronic spreadsheet, we can
safeguard ourselves against miscalculations based on faulty assumptions, and
minimize the range of error by early detection of faulty assumptions.
In this article, part one of a two-part series, we
will study the reinvestment issue. The second article will address how to
reduce inaccuracies — minimizing the range of error — based on timing
concerns.
Continued in article
Finance Test Questions ---
http://financetestquestions.wikispaces.com/
Bob Jensen's threads on rate of return theory ---
http://www.trinity.edu/rjensen/roi.htm
The American Accounting Association holds the active
copyright to one of the most classic books in accounting history:
W.A. Paton and A.C. Littleton's 1940 monograph, An Introduction to
Corporate Accounting Standards
I don’t think
the AAA has ever paid royalties to authors based upon book sales. Both Paton and
Littleton are long dead.
I noticed that there is one used copy of this very short
book available from Amazon at $416.39 ---
http://www.amazon.com/Introduction-Corporate-Accounting-Standards/dp/0865390002
This makes me think that the American Accounting
Association should digitize this classic history book and sell it as an
electronic download at a much more reasonable price. Since most college
libraries have one copy at best it would be very difficult to make this book
available to all students in an accounting course. Also at used book prices like
that it seems to be a theft hazard for libraries.
If they can borrow a copy, students can scan this book for
free or photocopy two small pages per sheet for less than $8 since there are
only 156 pages to this book, including the bibliography. But I'm not sure this
is legal even though the AAA has a copyright policy that some of its
publications (e.g., journals) can be distributed free for educational purposes
to students in a course. Certainly it is not legal at this point in time to
digitize a copy and distribute to the public in general without written
permission from the AAA.
If I didn't prize my old copy so much I would sell it for
$400 on Amazon and top off my heating oil tank. Fortunately we're having a heat
wave at the moment with temperatures less than 30 degrees below freezing.
Earlier in the
week it roared up to above freezing for a couple of days --- hated it!
"The SEC Rules Historical Cost Accounting: 1934 to the
1970s," by Stephen A. Zeff, SSRN, January 2007 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956163
Abstract:
From its founding in 1934 until the early 1970s, the SEC and especially its
Chief Accountant disapproved of most upward revaluations in property, plant
and equipment as well as depreciation charges based on such revaluations.
This article is a historical study of the evolution of the SEC's policy on
such upward revaluations. It includes episodes when the private-sector body
that established accounting principles sought to gain a degree of acceptance
for them and was usually rebuffed. In the decade of the 1970s, the SEC
altered its policy. Throughout the article, the author endeavors to explain
the factors that influenced the positions taken by the parties.
Question
How close to the edge would an accounting firm be if it performed this
consulting service for an audit client?
I did not investigate whether E&Y refuses to perform such services for audit
clients.
Ernst & Young, a major accountancy
firm, markets its services with the statement that (see page 81 of this report)
"successfully managing business and tax issues related to transfer pricing
involves much more than documentation compliance. Transfer pricing affects
almost every aspect of an MNE and can significantly impact its worldwide tax
burden. Our ... professionals help MNEs address this burden ... with leading
solutions. Our multidisciplinary team helps MNEs develop transfer pricing
strategies, tax effective solutions, and controversy management approaches that
best fit their objectives."
Prem Sikka, "Shifting profits across borders'Transfer pricing' is the biggest
tax avoidance scheme of all. The government must insist on companies being more
transparent," The Guardian, February 12, 2009 ---
http://www.guardian.co.uk/commentisfree/2009/feb/11/taxavoidance-tax
Bob Jensen's threads on auditor professionalism and
independence ---
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism
Bob Jensen's threads on Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
Question
Who needs the accounting lesson here?
All the accounting professors, like me, I know are just shaking their heads or
are bent over in laughter at the Accounting 101 stupidity here.
To my knowledge there's no "Accumulated Retained Earnings Cash/Investment
Account" on the asset side of these troubled banks that is reserved for
dividends. Seems like some banks are robbing Peter (oops I meant to say TARP) to
pay Paul a bit like Madoff paid his wife 15 million dollars just before he
opened the door to guys holding out handcuffs. Without TARP funds some banks
couldn't meet the payroll let alone pay dividends and hefty executive bonuses.
The Madoff Fund is not the only Ponzi game on Wall Street.
And just having an accumulated balance in the Retained Earnings account from
prior years of happiness still leaves common shareholders at the bottom of the
priority list in terms of claims on bank assets. Current creditors and preferred
shareholders have higher order claims that must be paid before shareholders get
a penny if the bank indeed fails. Of course the bankruptcy lawyers have first
dibs on any assets of a failed bank before the creditors even get paid. If the
FDIC pays off depositors, it too is a priority claimant.
"Accounting for (Congressional Jerry Bower) Dummies,"
by Jerry Bowyer, Townhall, February 14, 2009 ---
http://townhall.com/columnists/JerryBowyer/2009/02/14/accounting_for_congressional_dummies
Kudlow was right, and Sherman needs a little
accounting refresher. Dividends are paid out of retained earnings, which is
the accumulated net income of the business. They are not paid out of direct
investment accounts such as preferred stock. The TARP money was in the form
purchase of preferred stock, which is a completely separate account than
retained earnings.
It’s actually even a little bit worse for his case:
companies pay dividends out of the retained earnings account, which means
even companies that don’t have any net earnings can pay dividends without
touching TARP money, because retained earnings are the accumulated wealth of
prior years of net income. If I lose money this year, but made money last
year, and I pay a dividend this year, the money is not coming from preferred
stock accounts, or common stock accounts, it’s coming from the net income of
prior profitable years. Bank of America, for example, is sitting on over $70
billion in retained earnings, all available to distribute to the
shareholders to whom it rightly belongs.
Continued in article
Jensen Comment
In truth the really ignorant people here, other than Jerry Bower, are members of
Congress who did not place restrictions on how TARP money could be spent. I
guess we can blame that one on their lousy teachers --- Barney Frank, Nancy
Pelosi, Harry Reid, Hank Paulsen and
Ben Bernanke
I suggest that they learn by
playing The Bailout Game (its fun and educational) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Revolution
Bob Jensen's threads on the
bailout mess ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Essay
NASBA Wants SEC to Withdraw IFRS Roadmap
NASBA said in a comment letter to the SEC that it
believes that moving to convergence with IFRS, rather than simply adopting the
international standards, is the right path for the SEC to follow. NASBA wrote a
letter to the SEC asking it to withdraw the proposed roadmap and instead support
the joint efforts of the Financial Accounting Standards Board and the IASB to
converge standards by 2011.
Michael Cohn, "NASBA Wants SEC to Withdraw IFRS Roadmap," WebCPA,
February 20, 2009 ---
http://www.webcpa.com/article.cfm?articleid=30786
The Securities and Exchange Commission of Pakistan (SECP) has granted a
'relaxation' of the requirements of IAS 39
IAS Plus, February 15, 2009 ---
http://www.iasplus.com/index.htm
The Securities and Exchange Commission of Pakistan
(SECP) has granted a 'relaxation' of the requirements of IAS 39 by allowing
impairment losses on available-for-sale (AFS) equity securities to be
charged against equity, rather than against profit or loss as IAS 39
requires. Click for
SECP
Announcement (PDF 79k). The 'relaxation' is valid
till 31 December 2009. The 'relaxation' was granted in response to requests
from various financial institutions in Pakistan, including mutual funds,
insurance companies, leasing companies, banks, and the corporate sector in
general. The SECP said it granted the relaxation because recognising
impairment losses on AFS equity securities through profit or loss 'will not
reflect the correct financial performance of the corporate entities'.
Nonetheless, the SECP's announcement said that 'those companies who are
willing to follow the full requirements of IAS 39 are encouraged to do so'.
The current and former presidents of the Institute of Chartered Accountants
of Pakistan (ICAP) expressed support for the 'relaxation'. Asad Ali Shah,
current ICAP President, said that 'such deviations from IFRSs have been
witnessed in extraordinary situations in the world'. The Competition
Commission of Pakistan, however, expressed concern that failure to recognise
losses could be viewed as deceptive marketing of securities.
Bob Jensen's theads on IAS 39 are at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
My Latest Fish Catch
"The Two Languages of Academic Freedom," by Stanley Fish, The New
York Times, February 8, 2009 ---
http://fish.blogs.nytimes.com/2009/02/08/the-two-languages-of-academic-freedom/
Last week we came to the section on
academic freedom in my course on the law of higher education and I posed
this hypothetical to the students: Suppose you were a member of a law firm
or a mid-level executive in a corporation and you skipped meetings or came
late, blew off assignments or altered them according to your whims, abused
your colleagues and were habitually rude to clients. What would happen to
you?
The chorus of answers cascaded
immediately: “I’d be fired.” Now, I continued, imagine the same scenario and
the same set of behaviors, but this time you’re a tenured professor in a
North American university. What then?
I answered this one myself: “You’d be
celebrated as a brave nonconformist, a tilter against orthodoxies, a
pedagogical visionary and an exemplar of academic freedom.”
My assessment of the way in which some
academics contrive to turn serial irresponsibility into a form of heroism
under the banner of academic freedom has now been at once confirmed and
challenged by events at the University of Ottawa, where the administration
announced on Feb. 6 that it has “recommended to the Board of Governors the
dismissal with cause of Professor Denis Rancourt from his faculty position.”
Earlier, Rancourt, a tenured professor of physics, had been suspended from
teaching and banned from campus. When he defied the ban he was taken away in
handcuffs and charged with trespassing.
What had Rancourt done to merit such
treatment? According to the Globe and Mail, Rancourt’s sin was to have
informed his students on the first day of class that “he had already decided
their marks : Everybody was getting an A+.”
But that, as the saying goes, is only the
tip of the iceberg. Underneath it is the mass of reasons Rancourt gives for
his grading policy and for many of the other actions that have infuriated
his dean, distressed his colleagues (a third of whom signed a petition
against him) and delighted his partisans.
Rancourt is a self-described anarchist and
an advocate of “critical pedagogy,” a style of teaching derived from the
assumption (these are Rancourt’s words) “that our societal structures . . .
represent the most formidable instrument of oppression and exploitation ever
to occupy the planet” (Activist Teacher.blogspot.com, April 13, 2007).
Among those structures is the university
in which Rancourt works and by which he is paid. But the fact of his
position and compensation does not insulate the institution from his
strictures and assaults; for, he insists, “schools and universities supply
the obedient workers and managers and professionals that adopt and apply
[the] system’s doctrine — knowingly or unknowingly.”
It is this belief that higher education as
we know it is simply a delivery system for a regime of oppressors and
exploiters that underlies Rancourt’s refusal to grade his students. Grading,
he says, “is a tool of coercion in order to make obedient people” (rabble.ca.,
Jan. 12, 2009).
It turns out that another tool of coercion
is the requirement that professors actually teach the course described in
the college catalogue, the course students think they are signing up for.
Rancourt battles against this form of coercion by employing a strategy he
calls “squatting” – “where one openly takes an existing course and does with
it something different.” That is, you take a currently unoccupied structure,
move in and make it the home for whatever activities you wish to engage in.
“Academic squatting is needed,” he says, “because universities are
dictatorships . . . run by self-appointed executives who serve capital
interests.”
Rancourt first practiced squatting when he
decided that he “had to do something more than give a ‘better’ physics
course.” Accordingly, he took the Physics and Environment course that had
been assigned to him and transformed it into a course on political activism,
not a course about political activism, but a course in which political
activism is urged — “an activism course about confronting authority and
hierarchical structures directly or through defiant or non-subordinate
assertion in order to democratize power in the workplace, at school, and in
society.”
Clearly squatting itself is just such a
“defiant or non-subordinate assertion.” Rancourt does not merely preach his
philosophy. He practices it.
This sounds vaguely admirable until you
remember what Rancourt is, in effect, saying to those who employ him: I
refuse to do what I have contracted to do, but I will do everything in my
power to subvert the enterprise you administer. Besides, you’re just
dictators, and it is my obligation to undermine you even as I demand that
you pay me and confer on me the honorific title of professor. And, by the
way, I am entitled to do so by the doctrine of academic freedom, which I
define as “the ideal under which professors and students are autonomous and
design their own development and interactions.”
Of course, as Rancourt recognizes, if this
is how academic freedom is defined, its scope is infinite and one can’t stop
with squatting: “The next step is academic hijacking, where students tell a
professor that she can stay or leave but that this is what they are going to
do and these are the speakers they are going to invite.” O, brave new world!
The record shows exchanges of letters
between Rancourt and Dean Andre E. Lalonde and letters from each of them to
Marc Jolicoeur, chairman of the Board of Governors. There is something
comical about some of these exchanges when the dean asks Rancourt to tell
him why he is not guilty of insubordination and Rancourt replies that
insubordination is his job, and that, rather than ceasing his insubordinate
activities, he plans to expand them. Lalonde complains that Rancourt “does
not acknowledge any impropriety regarding his conduct.” Rancourt tells
Jolicoeur that “Socrates did not give grades to students,” and boasts that
everything he has done was done “with the purpose of making the University
of Ottawa a better place,” a place “of greater democracy.” In other words, I
am the bearer of a saving message and those who need it most will not hear
it and respond by persecuting me. It is the cry of every would-be messiah.
Rancourt’s views are the opposite of those
announced by a court in an Arizona case where the issue was also whether a
teaching method could be the basis of dismissal. Noting that the university
had concluded that the plaintiff’s “methodology was not successful,” the
court declared “Academic freedom is not a doctrine to insulate a teacher
from evaluation by the institution that employs him” (Carley v. Arizona,
1987).
The Arizona court thinks of academic
freedom as a doctrine whose scope is defined by the purposes and protocols
of the institution and its limited purposes. Rancourt thinks of academic
freedom as a local instance of a global project whose goal is nothing less
than the freeing of revolutionary energies, not only in the schools but
everywhere.
It is the difference between being
concerned with the establishing and implementing of workplace-specific
procedures and being concerned with the wholesale transformation of society.
It is the difference between wanting to teach a better physics course and
wanting to save the world. Given such divergent views, not only is
reconciliation between the parties impossible; conversation itself is
impossible. The dispute can only be resolved by an essentially political
decision, and in this case the narrower concept of academic freedom has won.
But only till next time.
Stanley Fish is the Davidson-Kahn Distinguished
University Professor and a professor of law at Florida International
University, in Miami, and dean emeritus of the College of Liberal Arts and
Sciences at the University of Illinois at Chicago. He has also taught at the
University of California at Berkeley, Johns Hopkins and Duke University. He
is the author of 10 books. His new book on higher education, "Save the World
On Your Own Time," has just been published.
"An Authoritative Word on Academic Freedom," by Stanley
Fish, The New York Times, November 23, 2008 ---
http://fish.blogs.nytimes.com/2008/11/23/an-authoritative-word-on-academic-freedom/?ei=5070&emc=eta1
More than a few times in these
columns I have tried to deflate the balloon of academic freedom by
arguing that it was not an absolute right or a hallowed principle,
but a practical and limited response to the particular nature of
intellectual work.
Now, in a new book —
“For the Common Good: Principles of American Academic Freedom,”
to be published in 2009 — two
distinguished scholars of constitutional law, Matthew W. Finkin and
Robert C. Post, study the history and present shape of the concept
and come to conclusions that support and deepen what I have been
saying in these columns and elsewhere.
The authors’ most important
conclusion is presented early on in their introduction: “We argue
that the concept of Academic freedom . . . differs fundamentally
from the individual First Amendment rights that present themselves
so vividly to the contemporary mind.” The difference is that while
free speech rights are grounded in the constitution, academic
freedom rights are “grounded . . . in a substantive account of the
purposes of higher education and in the special conditions necessary
for faculty to fulfill those purposes.”
In short, academic freedom, rather
than being a philosophical or moral imperative, is a piece of policy
that makes practical sense in the context of the specific task
academics are charged to perform. It follows that the scope of
academic freedom is determined first by specifying what that task is
and then by figuring out what degree of latitude those who are
engaged in it require in order to do their jobs.
If the mission of the enterprise
is, as Finkin and Post say, “to promote new knowledge and model
independent thought,” the “special conditions” necessary to the
realization of that mission must include protection from the forces
and influences that would subvert newness and independence by either
anointing or demonizing avenues of inquiry in advance. Those forces
and influences would include trustees, parents, donors, legislatures
and the general run of “public opinion,” and the device that
provides the necessary protection is called academic freedom. (It
would be better if it had a name less resonant with large
significances, but I can’t think of one.)
It does not, however, protect
faculty members from the censure or discipline that might follow
upon the judgment of their peers that professional standards have
either been ignored or violated. There is, Finkin and Post insist,
“a fundamental distinction between holding faculty accountable to
professional norms and holding them accountable to public opinion.
The former exemplifies academic freedom: the latter undermines it.”
Holding faculty accountable to
public opinion undermines academic freedom because it restricts
teaching and research to what is already known or generally
accepted.
Holding faculty accountable to
professional norms exemplifies academic freedom because it
highlights the narrow scope of that freedom, which does not include
the right of faculty “to research and publish in any manner they
personally see fit.”
Indeed, to emphasize the
“personal” is to mistake the nature of academic freedom, which
belongs, Finkin and Post declare, to the enterprise, not to the
individual. If academic freedom were “reconceptualized as an
individual right,” it would make no sense — why should workers in
this enterprise have enlarged rights denied to others? — and support
for it “would vanish” because that support, insofar as it exists, is
for the project and its promise (the production of new knowledge)
and not for those who labor within it. Academics do not have a
general liberty, only “the liberty to practice the scholarly
profession” and that liberty is hedged about by professional norms
and responsibilities.
I find this all very congenial.
Were Finkin and Post’s analysis internalized by all faculty members,
the academic world would be a better place, if only because there
would be fewer instances of irresponsible or overreaching teachers
invoking academic freedom as a cover for their excesses.
I do, however, have a quarrel with
the authors when they turn to the question of what teachers are free
or not free to do in the classroom.
Finkin and Post are correct when
they reject the neo-conservative criticism of professors who bring
into a class materials from disciplines other than the ones they
were trained in. The standard, they say, should be “whether material
from a seemingly foreign field of study illuminates the subject
matter under scrutiny.”
Just so. If I’m teaching poetry
and feel that economic or mathematical models might provide a
helpful perspective on a poem or body of poems, there is no good
pedagogical reason for limiting me to models that belong properly to
literary criticism. (I could of course be criticized for not
understanding the models I imported, but that would be another
issue; a challenge to my competence, not to my morality.)
But of course what the
neo-conservative critics of the academy are worried about is not
professors who stray from their narrowly defined areas of expertise;
they are worried about professors who do so in order to sneak in
their partisan preferences under the cover of providing students
with supplementary materials. That, I think, is a genuine concern,
and one Finkin and Post do not take seriously enough.
Responding to an expressed concern
that liberal faculty too often go on about the Iraq War in a course
on an entirely unrelated subject, Finkin and Post maintain that
there is nothing wrong, for example, with an instructor in English
history “who seeks to interest students by suggesting parallels
between King George III’s conduct of the Revolutionary War and
Bush’s conduct of the war in Iraq.”
But we only have to imagine the
class discussion generated by this parallel to see what is in fact
wrong with introducing it. Bush, rather than King George, would
immediately become the primary reference point of the parallel, and
the effort to understand the monarch’s conduct of his war would
become subsidiary to the effort to find fault with Bush’s conduct of
his war. Indeed, that would be immediately seen by the students as
the whole point of the exercise. Why else introduce a contemporary
political figure known to be anathema to most academics if you were
not inviting students to pile it on, especially in the context of
the knowledge that this particular king was out of his mind?
Sure, getting students to be
interested in the past is a good thing, but there are plenty of ways
to do that without taking the risk (no doubt being courted) that
intellectual inquiry will give way to partisan venting. Finkin and
Post are right to say that “educational relevance is to be
determined . . . by the heuristic purposes and consequences of a
pedagogical intervention”; but this intervention has almost no
chance of remaining pedagogical; its consequences are predictable,
and its purposes are suspect
Still, this is the only part of
the book’s argument I am unable to buy. The rest of it is right on
target. And you just have to love a book — O.K., I just have to love
a book — that declares that while faculty must “respect students as
persons,” they are under no obligation to respect the “ideas held by
students.” Way to go!
Jensen Comment
The term "political correctness" and related phrases
have a long history ---
http://en.wikipedia.org/wiki/Political_correctness#In_the_United_States
However, probably no U.S. scholar is more associated with "political
correctness" since than Stanley Fish when he was at Duke University and
the phrase "political correctness" with feminist language constraints
and liberalism in campus politics ---
http://en.wikipedia.org/wiki/Stanley_Fish
Thomas Carlyle's (1896) Sartor Resartus ("Tailor
Retailored")
February 9, 2009 reply from Roger Collins
[Rcollins@TRU.CA]
Hmm...- wasn't it Yuji Ijiri who was reported as
claiming in a not-too-recent paper in Accounting Horizons that, as a
student, one of his most interesting courses (in Accounting Theory ? I can't
remember exactly) had been devoted entirely to a novel by Thomas Carlyle
entitled Sartor Resartus (The Tailor Retailored) ? And that of all the
courses he had taken, it was this course which he had found most stimulating
and thought-provoking? (The Accounting Horizons paper was a piece on the
thoughts of several high profile accounting academics of which Ijiri was
one).
I think that Denis Rancourt crosses the line
between academic freedom and idiosyncrasy for idiosyncracy's' sake. At the
same time, the case may remind us that academic freedom generally gives us a
fair amount of rope to play with if we so choose.
The Wikipedia reference is
http://en.wikipedia.org/wiki/Sartor_Resartus
The opening paragraph of the reference is.../
Thomas Carlyle's major work, Sartor Resartus
(meaning 'The tailor re-tailored'), first published as a serial in
1833-34, purported to be a commentary on the thought and early life of a
German philosopher called Diogenes Teufelsdröckh (which translates as
'god-born devil-dung'), author of a tome entitled "Clothes: their Origin
and Influence." Teufelsdröckh's Transcendentalist musings are mulled
over by a skeptical English editor who also provides fragmentary
biographical material on the philosopher. The work is, in part, a parody
of Hegel, and of German Idealism more generally.
Roger Collins
TRU School of Business
February 10, 2009 reply from Bob Jensen
Hi Roger,
Ijiri brings up Sartor
Resartus (free download) at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=305904
“I took a
philosophical "accounting seminar" as an undergraduate in Japan, in which we
spent the entire course on Thomas Carlyle's (1896)
Sartor Resartus
("Tailor Retailored"). Here, we went
over the philosophy of clothes and the indispensable role that clothes play in
society, treating accounting also as indispensable clothes people wear, change
and discard. Nearly a half-century later, it is still having impact on my
thinking.”
Professor Ijiri served on my doctoral
studies committee when we were both at Stanford years ago. He never mentioned
Sartor Resartus at the time.
Some Thoughts
on the Intellectual Foundations of Accounting
Joel S. Demski
University of Florida - Fisher School of Accounting
Shyam Sunder
Yale School of Management
John C. Fellingham
Ohio State University - Department of Accounting & Management Information
Systems
Yuji Ijiri
Carnegie Mellon University
Jonathan C. Glover
Carnegie Mellon University
Pierre Jinghong Liang
Carnegie Mellon University - Tepper School of Business
February
2002
Yale ICF Working Paper No.
Abstract:
We
report on a panel discussion at the 2001 CMU Accounting Mini-conference under
the title "Intellectual Foundations of Accounting." We provide a background and
the motivation for the discussion and present the remarks by the four panelists.
A number of perspectives are taken. Sunder emphasizes dualities in accounting.
Demski stresses the endogeneity of accounting measurement activities. Fellingham
examines the core and superstructure of accounting. Ijiri observes the
microcosmos in accounting and its philosophical connection. We also argue that
accounting's intellectual foundations are far from settled and an on-going
discussion is likely to help reinvigorate accounting scholarship
February 10, 2009 reply from Roger Collins
[Rcollins@TRU.CA]
Hello Bob,
Many thanks for this. The paper you've so kindly
attached was one that annoyed me somewhat when I first read it, as I thought
that the major contributors (Demski, Sunder, Fellingham and Ijiri) were
taking rather narrowly defined positions and perhaps rather resting on their
laurels. I took the attached paper to a couple of minor conferences but
never seriously thought of having it published. If you - or anyone else on
AECM - feels inclined either to critique it or comment on its suitability
for publication at this distance in time from the original paper, I'd
welcome any responses.
Roger
Roger Collins
TRU School of Business
February 11, 2009 reply from Bob Jensen
Hi Roger,
Your critique is great for openers. It just does not go
far enough with regard to the destructiveness of the search for
"intellectual foundations" in accountancy. Since the "Perfect Storm" of the
late 1950s and 1960s, academic accountants from Mattesich to Demski to
Zimmerman became
prophets
of destructive
positivism.
The leading academic accounting research centers literally ignored the
warnings of Bob Sterling, Steve Zeff, and others about the destructive
evolution of this so-called "intellectualism" of academic accounting
research. You can read more about this "Perfect Storm" at
---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
By "destructive" I mean that the leading academic
accounting research centers, journals, and doctoral programs virtually all
adopted a mathematical model building paradigm without caring that the world
of information, executive decision making, and portfolio investment behavior
within and external to a business organization is far too complex for most
models to have much utility to either decision makers or standard setting
bodies around the world. The result was to divert our best and brightest
accounting academic researchers into superficial worlds where they could get
their intellectual highs while financial and managerial accounting
professions themselves had to carry on without much of any contribution of
merit from the accounting academy. A good example is Ijiri's promising cash
flow equivalency model which on paper looked like it would revolutionize
accounting information systems and financial analysis. But implicit inside
the model is a hypersensitivity to parameter estimation error that washed
out all relevance of the model. This is why very few people on the AECM
listserv even heard about this model. Certainly it was never relevant to the
FASB or General Electric.
About the same time, the same thing commenced to take
place in the search for intellectual foundations of science intended to
raise the world of science to new heights in intellectualism. This so-called
"philosophy of science" intended to bring about intellectual sophistication
in scientific effort. Leading universities commenced to offer philosophy of
science courses and even majors in philosophy of science. Unlike in leading
academic accounting research centers, the science research centers learned
quickly that this intellectualization of science was not adding much if any
value to science. Instead it was sometimes getting in the way of science.
Quietly, these centers dropped most of their philosophy of science courses,
journals, and study itself. Scientists just got on with their work without
allowing themselves to be destroyed by
positivism.
This is not to say that there was not some basic values that evolved in the
philosophy of science. It's constraints on science just should not be taken
too far.
You might note the following quotation ---
http://en.wikipedia.org/wiki/Philosophy_of_Science#Critiques_of_scientific_method
Paul Feyerabend argued that no description of
scientific method could possibly be broad enough to encompass all the
approaches and methods used by scientists. Feyerabend objected to
prescriptive scientific method on the grounds that any such method would
stifle and cramp scientific progress. Feyerabend claimed, "the only
principle that does not inhibit progress is: anything goes."[28]
However there have been many opponents to his theory. Alan Sokal and
Jean Bricmont wrote the essay "Feyerabend:
Anything Goes" about his belief that science
is of little use to society.
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
Accordingly the University of Florida's doctoral
program puts up a wall blocking doctoral program applicants with research
skills other than mathematics. What Florida's biomedical research center put
up the same barriers requiring advanced mathematics to be allowed into any
of its doctoral programs?
Probably the major shortcoming of our model builders in
academic accounting research centers is their indifference to risk and risk
management. What leading accounting research center has experts on
derivative financial instruments and the complex contracting that evolved in
derivative instrument practice and frauds? I would really like to know since
I'm contacted almost weekly by business firms and news reporters seeking
accounting professors who are experts in FAS 133 and its amendments.
When coming to terms with this during the evolution of
FAS 133, what accounting professor in the world made a noteworthy
contribution to the FASB struggling to learn how to report these contracts?
Where are the papers on derivative financial instruments and their massive
frauds when you scour the literature of TAR, JAR, and JAE in the 1960s,
1970s, 1980s, and 1990s when all the derivative financial instruments frauds
were taking place. I provide a timeline of these frauds and the evolution of
FASB and IASB standards without citing a single noteworthy research paper
appearing in our leading academic accounting research journals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
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 research programs have immunized themselves against the
“vocational virus.” The resulting 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.
Demski’s (1973) article, ‘‘The
General Impossibility of Normative Accounting Standards,’’ reinforced
academic reluctance to weigh in on how practice ‘‘ought’’ to proceed. What
quantitative, management accountants read into Demski’s article was that the
accounting standard-setting process was hopelessly and inevitably pointless—
impossible, even—and that it did not deserve any further effort from them.
Academicians began backing off from involvement in standard setting, which
caused further separation of teaching from research, but also exacerbated
the separation of research from practice. In fact, polls revealed that the
most quantitative journals—thus, those least accessible to
practitioners—were perceived to have the highest status in the academy
(Benjamin and Brenner 1974).
Glenn Van Wyhe, "A History of U.S. Higher Education in Accounting, Part II:
Reforming Accounting within the Academy," Issues in Accounting Education,
Vol. 22, No. 3 August 2007, Page 481.
Bob Jensen
Some comparative nine-month academic year salaries recently released by
the AACSB
Note that major research university salaries considerably higher than
average while salaries in many private universities are much lower as are
salaries in state universities that are not flagship research universities. The
results for accounting and taxation new assistant professors primarily reflects
the downward trend of doctoral graduates in accounting, auditing, and taxation
in the past two decades ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
From the Financial Rounds Blog on February 16, 2009 ---
http://financialrounds.blogspot.com/
The Annual
AACSB salary
survey is the definitive source for business school faculty salaries. Here's
the most important table from the report - it shows the mean salaries for
new doctorates for the major business disciplines
The figures
above are
for 9-month salaries. At research schools, summer research support can add
another 10-20% to that, and there are also opportunities to pick up
additional $$ teaching over the summer. However, at teaching oriented
schools, there typically isn't summer
support,
and summer teaching money is also much lower.
For years, Finance professors got the highest salaries across all business
disciplines. That's changed in the last few years, with accounting salaries
pulling ahead. The increase in accounting new-hire salaries is likely due to
smaller numbers of accounting
PhD's being
graduated and a lot of retirements in their field. But still, $120K isn't
bad.
Click
here for the free executive summary (you can also
get the full report, but it'll cost you).
Bob Jensen's threads on salary compression, inversion, and controversy are
at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Salaries
February 19, 2009 reply from Jagdish Gangolly
[gangolly@CSC.ALBANY.EDU]
Patricia, Zane, Bob,...
My ex-President (a brilliant scholar of American
constitutional law, he died in a swimming accident a few years ago) Kermit
Hall once said that if you don't like teaching, you should be a banker or
something else. As our President, he taught an undergraduate course in
history each semester. He insisted that all the Deans teach a course every
semester; didn't make him popular.
We should not forget that, at the well-known
English universities such as Oxford and Cambridge, in the not too distant
past, faculty and dons were not to marry if they wished to retain their
position, lest they acquire acquisitive (or comparative?) instinct.
I would never encourage any student to take to
academics to get rich. In fact, I think business schools have been
thoroughly corrupted because of this constant talk of opportunity costs of
alternative employment. Fortunately this economic virus is not as rampant at
other units at most universities I know.
On the other hand, as a profession, I think one
should not be in teaching unless you also have practiced the profession. Any
day, I would have a mid-career or retired professional teaching me than a
PhD who has never seen real-world accounting and who has learnt the
profession from faculty who have themselves never seen real-world
accounting.
The shortage of accounting faculty is contrived by
us to protect our wages. If opportunity costs are high, why not ask faculty
to produce evidence of such opportunities if they demand higher wages? Or
still better, how about asking tenured faculty to produce evidence of such
alternative practice opportunities to retain their tenure? For most faculty
these days, such opportunities are ethereal more than real.
I gave up a lucrative career in industry when I
took the vow of poverty years ago, and have never regretted it. Early in my
academic career, lack of material possessions irritated me, but have learnt
not to compare me to any others, especially my good old friends in industry
rolling in riches.
Jagdish Gangolly
(gangolly@csc.albany.edu )
Department of Informatics,
College of Computing & Information
State University of New York at Albany
1400 Washington Avenue, Albany NY 12222 Phone: 518-442-4949
February 20, 2009 reply from Bob Jensen
Hi Jagdish,
You wrote:
"The shortage of accounting faculty is contrived by us
to protect our wages."
I agree with most of what you said above. However, I don’t think the
decline in accountancy doctoral graduates over the past two decades was
contrived in any kind of conspiracy to create barriers to entry for purposes
of higher salaries. The causes of accounting PhD shortages are many and
complicated, but none of them were intended to make accounting professors
the highest paid professors in the academy.
Part of the cause of a shortage was the increase in demand for accounting
professors. When the big firms commenced adding internships to senior
accounting majors, accounting became much more popular as an undergraduate
major. The professorial supply just did not increase with this demand.
One of the main causes of a shortage of accountancy PhDs is the
time-to-degree. A top economics undergraduate can get a PhD in economics in
seven years of college. The same is possible in finance, marketing, and
management. Law school typically takes three years after obtaining an
undergraduate degree.
In accounting we now require 150 credits to take the CPA examination, so
most of our graduates now get a masters degree with almost no courses in for
academic research. If a statistics course is required it generally has a
coloring book for a textbook.
In addition our doctoral programs prefer to admit candidates with work
experience in accountancy. So now we’re talking six or more years before
admitting a doctoral student. Then students week in mathematics, statistics,
econometrics, and psychometrics take about two years of such courses.
Students who manage to get admitted without much accounting, often foreign
students, take about two years of undergraduate accounting. Then there’s the
additional time for doctoral seminars in accounting research, financial
research, and behavioral research. All told a doctoral program in
accountancy takes at least five years and often six years. What is six years
plus five years? That is just a minimum. Most of our accounting professors
today probably did not complete their accountancy PhD degrees before they
were almost 30 years old except for the oldsters who did not have to earn
150 credits to sit for the CPA examination along the way.
BYU recognized this problem and created a masters degree program for
students who are pretty certain that they want to eventually be admitted to
a doctoral program. The BYU masters program won an AAA Innovation in
Accounting Education annual award. This masters program is intended to
provide students with the research course prerequisites for doctoral studies
such that the time in a doctoral program should, in theory, be reduced to
three years. You can read about BYU’s award winning PhD Prep Program at
http://phdprep.byu.edu/index.php?title=Main_Page
If students has a sufficient amount of accountancy as undergraduates, that
can also take the CPA examination with this masters degree.
Another barrier to entry in accountancy doctoral programs is that the
accountics research professors hijacked the prestigious doctoral programs
and all the other doctoral programs in North America thought that it was
necessary to clone the accountancy doctoral programs at Chicago, Stanford,
Rochester, Cornell, Northwestern, Illinois, Texas, USC, UCLA, and
Cal-Berkeley. Hence all accountancy programs became highly mathematical
social science programs in mathematics, econometrics, and psychometrics.
Practicing CPAs who contemplate returning to a university for an accountancy
PhD are frequently turned off by having to get a social science PhD in the
name of accountancy/accountics. I’ve already written much about this problem
at
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
The bottom line is that I don’t think that the decline in the number of
accountancy doctoral graduates in North America was contrived for purposes
of keeping accounting professor salaries high. The decline was caused by
lengthening the time to the CPA (150 credits), a desire for work experience
for doctoral program admission, and upping the requirements for mathematics,
statistics, econometrics, and psychometrics if virtually all North American
doctoral programs in accountancy.
There are of course other factors to be considered. Accounting careers in
CPA firms and corporations became increasingly attractive. For example, all
the Big Four accounting firms now place in the top ten organizations as
desirable places to work. CPA firms in particular strived to become more
accommodating to parents who seek more time to care for children. In the age
of networking, more and more clients can be served from work at home. Hence,
many accounting workers are less frustrated on the job and are less inclined
to give up five or more years of their lives in a doctoral program.
Business school graduates in non-accounting specialties often have more
trouble getting jobs. Even in the Wall Street boom times, most graduates in
finance could not get plumb jobs on Wall Street and had to settle for
less-than-exciting local bank jobs or become stock brokers living on
commission income. Those graduates were more inclined to come back to
college for doctorates in economics, finance, marketing, management, and
MIS. Some regretted later on that they had not been accounting majors.
It’s tough late in life to come back and take all those accounting
undergraduate courses to get back on track in accounting. But Finley Graves
did it after becoming a PhD in German Literature. He then took the time and
trouble to earn a second PhD in Accounting and is now a terrific accounting
professor.
Bob Jensen
Video of an Accounting Researcher
Accounting Professor
John Hughes
(Ernst & Young accounting professor at UCLA)
Four Minute Video: Does Information Asymmetry Affect the
Cost of Capital?
Video:
http://www.anderson.ucla.edu/documents/areas/adm/web/vid_JHughes.html
Paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=488203
Jensen Comment
With some rather innocent sounding assumptions, Modigliani and Miller, in a
famous ground breaking study, showed that the amount of leverage is
cost-of-capital neutral when making decisions to issue debt versus equity. I
think the current collapse of large and highly leveraged banks brings market
efficiency assumptions into question. In particular the moderating effect of
cash traders depends upon deep markets that often just do not exist when
insiders are either bailing out big time or jumping in deep based upon
information asymmetry in inefficient markets. As with all empirical model
findings, the assumptions should be severely analyzed. Also in the present
economic crisis cost-of-capital expectations are all messed up when and if Uncle
Sam interferes in the private markets. The Treasury Department will most
certainly demand less information asymmetry before deciding how much to help
troubled banks.
February 11, 2009 reply from Jagdish Gangolly
[gangolly@CSC.ALBANY.EDU]
I most certainly did not question Professor Hughes'
standing as an academic. I was just questioning if this sort of research is
really accounting or finance. I am not opposed to this sort of research at
all, and in fact do read it occasionally.
Neither am I saying this line of research should
not be pursued by accountants. As some one from a campus-wide
interdisciplinary PhD program, I view any such strictures as infringing on
academic freedom. Almost all of my own research the past few years has been
very much outside (yet extremely relevant to) accounting, but most
accounting departments in the US thoroughly discourage any sort of research
other than the likes of those in the video.
However, why is it that this sort of research is
glorified (and privileged) in academic accounting AT THE EXPENSE of many
other kinds of research (especially when the space in the so-called quality
journals in accounting is limited)?
Also, since this is really research in finance, do
the academics in finance read it? Does this sort of research in accounting
get any sort of peer review from academic researchers in finance?
Jagdish Gangolly (gangolly@csc.albany.edu)
Department of Informatics,
College of Computing & Information
State University of New York at Albany
1400 Washington Avenue, Albany NY 12222 Phone: 518-442-4949
February 12, 2009 reply from Bob Jensen
Hi Jagdish,
I hate to keep harping on this, but if our
“scientific” capital markets and behavioral studies published in leading
accounting research journals had any genuine relevance, readers would demand
replications. Readers don’t have any interest in replications and the
leading accounting research journals won’t even publish replications ---
http://www.trinity.edu/rjensen/theory01.htm#Replication
That’s the main difference between real science and accounting’s so-called
science (accountics).
If you read an article in TAR, JAR, JAE, CAR, etc.
you must make a leap of faith that the authors did not make a mistake in
data collection and data analysis. Our leading research studies are assumed
to be error free. It’s either that or the publications have so little
relevance that nobody cares. Imagine that!
You asked whether academics in finance (and
accordingly economics) find much value added in finance/economics studies
published in accounting research journals.
In her Presidential
Message at the AAA annual meeting in San Francisco in August, 2005, Judy
Rayburn addressed the low citation rate of accounting research when
compared to citation rates for research in other fields. Rayburn
concluded that the low citation rate for accounting research was due to
a lack of diversity in topics and research methods:
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 [2006, p. 4] ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
Rayburn drew from a citation study by Ed Swanson in
2002 (SSRN) ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=345340
Abstract:
Publication in top-tier journals is the primary
criterion for promotion at many business schools and a strong influence on
salary, teaching load, and research support. Business schools evaluate
publication records by comparing the quality and quantity of top-tier
research articles to those of peers within the same discipline (intradisciplinary)
and to those of academics from other business disciplines
(interdisciplinary). An analytical model of the research review process (the
q-r model) predicts that interdisciplinary differences exist in the
standards that top-tier journals use for accepting articles. If true,
decision makers should consider these differences. I examine the period from
1980 to 1999 and, consistent with the model's predictions, find that
significant differences exist in the number of articles and proportion of
faculty who published in the "major" journals in accounting, finance,
management, and marketing. Most notably, top-tier accounting journals
publish substantially fewer major articles than journals in the other three
business disciplines. In addition, I find the proportion of doctoral faculty
publishing a major article has declined in all four disciplines over the
1980 to 1999 period.
I think one key difference between accounting and
the related disciplines of finance, marketing, and management is that
practitioners in those professions (e.g., former investment bankers,
bankers, marketing executives, and some management executives) actually make
use of leading academic journals in their disciplines and cite them in their
own writings in professional non-academic journals. The Journal of
Finance became so esoteric that it was not serving the majority of
instructors of finance. This gave rise to the exceedingly popular Financial
Management Association (FMA) among finance faculty and the generally
readable journals called Financial Management and the Journal of
Applied Finance.
Probably the main difference, however, is that the
majority of instructors in accounting stopped even looking at the leading
accounting research journals like TAR, JAR, and JAE. Once the
practitioner-oriented and teaching-oriented articles were steered from TAR
to AH and IAE, readership in TAR plummeted. You can read the following at
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
Fleming et al. [2000, p. 48]
report that education articles in TAR declined from 21 percent in 1946-1965
to 8 percent in 1966-1985. Issues in Accounting Education began to
publish the education articles in 1983. Garcha, Harwood, and Hermanson
[1983] reported on the readership of TAR before any new specialty journals
commenced in the AAA. They found that among their AAA membership
respondents, only 41.7 percent would subscribe to TAR if it became unbundled
in terms of dollar savings from AAA membership dues. This suggests that TAR
was not meeting the AAA membership’s needs. Based heavily upon the written
comments of respondents, the authors’ conclusions were, in part, as follows
by Garcha, Harwood, and Hermanson [1983, p. 37]:
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.
We surmise that some
professionals in accounting who have no aptitude or interest in becoming
scientists refrain from enrolling in current accounting doctoral programs
due to the narrowness of most accounting doctoral programs and the lack of
other epistemological and ontological methods more to their liking. New
evidence suggests that this problem also extends to topical concentrations
of those who do enter doctoral programs. In a study of the critical shortage
of doctoral students in accountancy, 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. We might add that the authors of the article were all
appointed in 2004 by American Accounting Association President Bill Felix to
an ad hoc Committee to Assess the Supply and Demand for Accounting Ph.D.s.
Plumlee et al. [2006, p. 125] wrote as follows (emphasis added as we think
it relates to accountics):
The Committee believes the dire shortages in tax and audit areas
warrant particular focus. One possible solution to these specific
shortages is for PhD. Programs to create new tracks targeted toward
developing high-quality faculty specifically in these areas. These
tracks should be considered part of a well-rounded Ph.D. program in
which students develop specialized knowledge in one area of accounting,
but gain substantive exposure to other accounting research areas . . .
A possible explanation for the shortages in these areas is that PhD.
Students perceive that publishing audit and tax research in top
accounting journals is more difficult, which might have the unintended
consequence of reducing the supply of PhD.-qualified faculty to teach in
those specialties.
Given that promotion and
tenure requirements at major universities require publication in
top-tier journals, students are likely drawn to financial accounting in
hopes of getting the necessary publications for career success. While
the Committee has no evidence that bears directly on this point, it
believes that the possibility deserves further consideration.
A number of AAA presidents have asserted that empirical
research is not always well suited for “discovery research.” These AAA
presidents urged in their messages to the membership and elsewhere that
accounting research become more diverse in terms of topics and methods.
Examples include Bailey [1994], Langenderfer [1987], Rayburn [2006], and
Dyckman and Zeff [1984]. The following is a quote from the President’s
Message of Sundem [1993, p. 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.
In fairness, the new TAR Editor is listening to our
complaints and is inviting the accounting academy to submit more diverse
articles to TAR (including commentaries, survey-based studies, AIS-method
studies, and (gasp) case studies. Thus far, however, the professors in the
leading doctoral programs are not heeding the call. It’s pretty much same old,
same old in all of our leading academic research journals.
I received the following message from a staff member of
the FASB. I altered it slightly to keep it anonymous.
Hi Bob,
As you know, after 16 years in the corporate world,
I spent over (XX) years teaching as a non-tenure track, non PhD in
accounting. Several times during my stay in academia, i investigated PhD
programs in accounting. Each time i found the mathematical requirements to
be distasteful. Precious few programs actually included courses in
accounting or current FASB/IASB practice issues and those who did still did
so sparingly. I could not see myself, at advanced age and experience,
subjecting myself to several year of extremely low pay and distasteful (to
me) study. What joy is there in producing "research" that includes heavy
statistical analysis that nobody outside a very small circle of researchers
looking for citations will ever read? There certainly would have been no
time or encouragement to pursue relevant topics like XBRL.
While I at the FASB, I see first hand the low
esteem members of academia held inside FASB. Not once did I hear a staff
member indicate that they would be calling a professor to ask an opinion on
an accounting issue. I'm sure some did, but they were quiet about it. I also
did not see any academic journals in the bookcases of FASB staff members.
The library held copies of the top level journals but it was as rare
occasion indeed when the library sent a notice to staff alerting them to a
new accounting journal article. In contrast, Accounting Today, CFO magazine,
Wall Street Journal, The Times, New York Times and the news services that
produced digests of current accounting issues were in daily their reads.
XXXXX
February 12, 2009 reply from Jagdish Gangolly
[gangolly@CSC.ALBANY.EDU]
THE
NON-ECONOMETRICIAN'S LAMENT
By Sir Dennis H.
Robertson
As soon as I could
safely toddle
My parents handed me a
Model;
My brisk and energetic
pater
Provided the
accelerator.
My mother, with her
kindly gumption,
The function guiding my
consumption;
And every week I had
from her
A lovely new parameter,
With lots of little
leads and lags
In pretty parabolic
bags.
With optimistic
expectations
I started on my
explorations,
And swore to move
without a swerve
Along my sinusoidal
curve.
Alas! I knew how it
would end:
I've mixed the cycle
with the trend,
And fear that, growing
daily skinnier,
I have at length become
non-linear.
I wander glumly round
the house
As though I were
exogenous,
And hardly capable of
feeling
The difference 'tween
floor and ceiling.
I scarcely now, a
pallid ghost,
Can tell ex ante from
ex post:
My thoughts are sadly
inelastic,
My acts invariably
stochastic.
________________________________
Re-arranging the deck chairs on the USS SEC
We understand why Ms. Schapiro would want to show some
love to the staff after the blistering attack it received last Wednesday on the
Hill. Said liberal New York Congressman Gary Ackerman, "You have totally and
thoroughly failed in your mission." Then he went negative, referring to the
SEC's difficulty in finding a part of the human anatomy "with two hands with the
lights on." Mr. Markopolos added that his many interactions with the agency "led
me to conclude that the SEC securities' lawyers, if only through their
investigative ineptitude and financial illiteracy, colluded to maintain large
frauds such as the one to which Madoff later confessed." . . . If Ms. Schapiro
seeks to learn from the SEC's recent history, she might start by considering the
most basic lesson from the Madoff incident. Private market participants spotted
the fraud, while SEC lawyers couldn't seem to grasp it. Rather than giving her
staff lawyers still more autonomy, she should instead be supervising them more
closely, while trying to harness the intelligence of the marketplace. Meantime,
investors should remember that their own skepticism and diversified investing
remain their best defenses against fraudsters.
"Just Don't Mention Bernie: Unleashing the SEC enforcers
who were already unleashed," The Wall Street Journal, February 10, 2009
---
http://online.wsj.com/article/SB123423071487965895.html?mod=djemEditorialPage
Also see "High "Power Distance" at the SEC: Why Madoff Was Allowed to
Take Investors Down with Him," by Tom Selling, The Accounting Onion,
December 10, 2009 ---
http://accountingonion.typepad.com/theaccountingonion/2009/02/high-power-dist.html
I don't
think we in the U.S. are as low a power
distance society as we fashion
ourselves, and the redistribution of
wealth that has been occurring since the
1980s may be pushing us inexorably
towards Colombia. Also, it wasn't
difficult for me to think of a few
examples of where the SEC in particular
has been exhibiting symptoms
characteristic of a high power distance
country:
-
When asked why
he robbed banks, Willie Sutton
simply replied, "Because that's
where the money is." Lately, it
seems that the SEC staff (i.e., the
"co-pilots,") has shied away from
the big money, out of a mirror-image
version of the self-interest
(survival, in case of a staff
member) that motivated Mr. Sutton.
And that fear is not merely
paranoia, as tangibly illustrated
recently when a former SEC
investigator was
fired
after pursuing evidence that John
Mack, Morgan Stanley's CEO,
allegedly had tipped off another
investment company about a pending
merger.
-
The
Christopher Cox administration
instituted an unprecedented policy
that required the Enforcement staff
to obtain a special set of approvals
from the Commission in order to
assess monetary penalties as
punishment for securities fraud.
Mary Schapiro, the new SEC chair,
claims
that the policy, among other
deleterious effects, "discouraged
staff from arguing for a penalty in
a case that might deserve a
penalty…" In other words, the
co-pilots were "encouraged" to keep
a lid on embarrassing news that
reflected badly on members of the
pilot class.
-
And, lest you should not labor under
any illusion that enforcement of
accounting rules is a level playing
field, consider the case in 1992 (I
think) when the SEC effectively
handed out special permission to
AT&T to account for its acquisition
of NCR as a "pooling of interests."
Quite evidently, the SEC staff could
not bring the bad news to the
"pilots" that the merger with NCR
would not happen just because AT&T
did not technically qualify for the
accounting it so sorely "needed." To
put it in the stark terms of today,
the merger was simply "too big to
fail." (And perhaps not
coincidentally, acquiring NCR proved
to be one of the biggest wastes of
shareholder wealth in the history of
AT&T.)
February 10, 2009 reply from Tom Selling
[tom.selling@GROVESITE.COM]
As to why “Madoff went unchallenged for so
long,” I provide an ad hoc explanation based on Hofstede’s cultural
dimension, “power distance” at
www.accountingonion.com.
Linda
Thomsen should have resigned long ago, after investigators exposed her
role in the firing of attorney/investigator Gary Aguirre, who wanted to
obtain testimony from John Mack, the CEO of Morgan Stanley. Only the
autocratic Christopher Cox could have had the chutzpah to keep her on
after that.
As to why “Madoff went unchallenged
for so long,” I provide an ad hoc explanation based on Hofstede’s
cultural dimension, “power distance” at
www.accountingonion.com.
Linda Thomsen should have resigned long ago, after investigators
exposed her role in the firing of attorney/investigator Gary
Aguirre, who wanted to obtain testimony from John Mack, the CEO of
Morgan Stanley. Only the autocratic Christopher Cox could have had
the chutzpah to keep her on after that.
Best,
Tom
Bob Jensen's "Rotten to the Core" threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
From The Wall Street Journal Accounting Weekly Review
on February 12, 2009
Jensen Comment
What I don't understand is why the massive other losses of GM would not zonk
this gain come tax time?
Tax Bill Threatens GM's Overhaul
by John D.
Stoll
The Wall Street Journal
Feb 02, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123343353399236457.html?mod=djem_jiewr_AC
TOPICS: Accounting,
Tax Laws, Tax Planning, Taxation
SUMMARY: General
Motors Corp. may generate a taxable gain resulting in a $7
billion tax liability if it can persuade "...bondholders to
participate in a debt-for-equity swap and lure the United Auto
Workers into re-engineering how a massive health-care trust for
retirees will be funded."
CLASSROOM
APPLICATION: Questions focus on how the debt-for-equity swap
to retire the bonds can result in a taxable gain and on how GM
is assessing its cash needs--quoted at $11 billion to $14
billion in the article--to keep operating.
QUESTIONS:
1. (Introductory) What is a restructuring plan? When
and for what purpose must General Motors develop such a plan?
2. (Introductory) Why is a debt-for-equity swap part of
the General Motors restructuring plan?
3. (Advanced) How can a debt-for-equity swap lead to
taxable income for General Motors under U.S. tax law?
4. (Advanced) Given past net operating losses at
General Motors, their tax liability should be offset for many
years. Why does a change in ownership limit the carryforward of
net operating losses?
5. (Introductory) What level of cash does General
Motors need in order to maintain operations? How is this level
of cash determined? How does this determination differ from
assessing profitability over this time period?
Reviewed By: Judy Beckman, University of Rhode Island
|
"Tax Bill Threatens GM's Overhaul: Auto Maker
Lobbies Washington to Avoid a Looming $7 Billion Liability," by
John D. Stoll, The Wall
Street Journal, February ,, 2009 ---
http://online.wsj.com/article/SB123343353399236457.html?mod=djem_jiewr_AC
General
Motors Corp. is reaching out to the U.S. Treasury
Department and Congress in hopes of avoiding a
multibillion-dollar tax burden that could be attached to
a new restructuring plan the auto maker is working to
create by mid-February, according to people familiar
with the effort.
GM, racing
to submit a viability plan to the White House by Feb.
17, could face an income-tax bill of as much as $7
billion that would be associated with a plan to give
much of the company's outstanding stock to debtholders,
the United Auto Workers union and the federal
government.
Continued in article
Fighting the Spread of Corruption
A new KPMG Forensics survey suggests multinational
organizations in the United States continue to face challenges with key issues
related to the Foreign Corrupt Practices Act. The survey, completed in summer
2008, found that 85% of the respondents had an FCPA compliance program, but many
struggled with fundamental elements, including: performing effective due
diligence on foreign agents/third parties (82%); auditing third parties for
compliance (76%); and performing due diligence during merger or acquisition
activities (73%).
Journal of Accountancy, February 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Feb/FightingtheSpreadofCorruption.htm
Source: KPMG Forensic 2008 Anti-bribery and Anti-corruption Survey,
www.kpmg.com .
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/fraud.htm
After KPMG sold its consulting division, it promised
over and over that its auditors would be independent
February 11, 2009 message from Roger Collins
[rcollins@TRU.CA]
Two stories....
1. 'Independent' KPMG earned millions from HBOS
Patrick Hosking, Banking and Finance Editor
The "independent" experts hired by HBOS to
investigate allegations of serious failings at the bank in 2005 had been
receiving millions of pounds in fees from the company for years.
KPMG, which was hired by Lord Stevenson of
Coddenham, the HBOS chairman at the time, to investigate claims by the
whistle-blower Paul Moore, received fees for auditing, tax advice,
information technology work and compliance advice.
Last year it was paid £11.4 million in fees by HBOS
and the year before £11.2 million, and it had had a close relationship with
the bank since 2001, when it was appointed auditor.
HBOS is understood to be one of its biggest clients
in the UK.
....continued in article...
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5709285.ece
2.Top banker Sir James Crosby quits after
whistle-blower claims Philip Webster, Political Editor and David Byers
The deputy head of the country's financial watchdog
resigned today after Gordon Brown withdrew confidence in him over damaging
allegations from a bank whistle-blower.
Sir James Crosby, the former HBOS chief executive,
stepped down from his role at the Financial Services Authority (FSA) after
it was claimed that he personally dismissed his former head of risk who
raised fears that the bank was growing too fast.
Sir James resigned minutes after the No 10
spokesman made it clear that Mr Brown he did not have full confidence in the
banker.
"These are serious allegations but they are
contested allegations," the spokesman said.
...continued in article...
http://www.timesonline.co.uk/tol/news/politics/article5708234.ece
Roger Collins
TRU School of Business
Bob Jensen's threads on KPMG's professionalism and legal
woes are at
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
Bankruptcy and Other Educational Law Materials
February 10, 2009 message from Krzyzanowski, Jeanine (LNG-NPV)
[jeanine.krzyzanowski@lexisnexis.com]
Hello Bob.
We suggest adding our link on the following page:
http://www.trinity.edu/rjensen/FraudEnron.htm
Bob Jensen's threads on law tutorials and other
materials are at
http://www.trinity.edu/rjensen/Bookbob2.htm#Law
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/Fraud.htm
Bob Jensen's threads on how to find lawyers and
accountants are at
http://www.trinity.edu/rjensen/fees.htm
Question
Should You Stick With XP/Office 2003 or Upgrade To Vista/Office 2007?
Journal of Accountancy Answers, February 2009 ---
Click Here
Jensen Comment
Windows Vista is heavily flawed, and the forthcoming Windows 7 (now in beta) is
intended to overcome these flaws. If you've avoided upgrading to Vista, you may
want to do so before upgrading to Windows 7.
Repeated from
http://www.trinity.edu/rjensen/tidbits/2009/tidbits090203.htm
Computer Purchase Timing: 2009 is the Year of New Windows, Mac, and Palm
Operating Systems
Windows 7 may leave Vista in the dust, but Vista makes switch to Windows 7
much easier
It will be complicated to leap from XP to Windows 7
But there are some downsides to Windows 7.
First, you will only be able to directly upgrade Vista computers to the new
version. People still using Windows XP will need to perform a more cumbersome
multistep process. Microsoft is working on a method to help XP owners preserve
all their data during this process.
"Even in Test Form, Windows 7 Leaves Vista in the Dust," by Walter S.
Mossberg, The Wall Street Journal, January 29, 2009 ---
http://online.wsj.com/article/SB123258632983004629.html
This will be a big year for new operating
systems. Apple plans a new version of its Macintosh operating system, to be
called Snow Leopard. Palm plans an all-new smart phone operating system
called Palm WebOS. But the new release that will affect more users than any
other will be Windows 7, the latest major edition of Microsoft's dominant
platform.
Microsoft hasn't announced an official release
date for Windows 7, but I would be surprised if it wasn't available to
consumers by this fall. The company has just released the first public beta,
or test, version of the software, and I've been trying it out on two
laptops. One is a Lenovo ThinkPad lent me by Microsoft with Windows 7
already installed, and the other is my own Sony Vaio, which I upgraded to
Windows 7 from Windows Vista.
Personal Technology columnist Walt Mossberg
provides a preview of the coming Microsoft Windows 7 operating software,
which he says offers significant improvements over the unpopular Windows
Vista. I won't be doing a full, detailed review of Windows 7 until it is
released in final form, but here's a preview of some of the main features of
this new operating system and some of my initial impressions.
In general, I have found Windows 7 a pleasure to
use. There are a few drawbacks, but my preliminary verdict on Windows 7 is
positive.
Even in beta form, with some features incomplete
or imperfect, Windows 7 is, in my view, much better than Vista, whose
sluggishness, annoying nag screens, and incompatibilities have caused many
users to shun it. It's also a serious competitor, in features and ease of
use, for Apple's current Leopard operating system. (I can't say yet how it
will compare with Apple's planned new release, as I haven't tried the
latter.)
In many respects, Windows 7 isn't a radical
shift from Vista, but is more of an attempt to fix Vista's main flaws. It
shares the same underlying architecture, and retains graphical touches like
translucent Window borders. But it introduces some key new navigation and
ease-of-use features, plus scores of small usability and performance
improvements -- too many to list here.
The flashiest departure in Windows 7, and one
that may eventually redefine how people use computers, is its multitouch
screen navigation. Best known on Apple's iPhone, this system allows you to
use your fingers to directly reposition, resize, and flip through objects on
a screen, such as windows and photos. It is smart enough to distinguish
between various gestures and combinations of fingers. I haven't been able to
test this feature extensively yet, because it requires a new kind of
touch-sensitive screen that my laptops lack.
But even if your current or future PC lacks a
touch screen, Windows 7 will have plenty of other benefits. The most
important may be speed. In my tests, even the beta version of Windows 7 was
dramatically faster than Vista at such tasks as starting up the computer,
waking it from sleep and launching programs.
And this speed boost wasn't only apparent in the
preconfigured machine from Microsoft, but on my own Sony, which had been a
dog using Vista, even after I tried to streamline its software. Of course,
these speed gains may be compromised by the computer makers, if they add
lots of junky software to the machines. Windows 7 is also likely to run well
on much more modest hardware configurations than Vista needed.
The familiar Windows taskbar is more
customizable and useful in Windows 7. The program icons are larger, and can
be "pinned" anywhere along the taskbar for easy, repeated use. There are
also "jump lists" that pop out from the icons in the taskbar and start menu,
showing frequently used or recent actions.
View Full Image
Associated Press A screenshot shows several
application windows on the desktop of the Beta version of the Microsoft
Windows 7 software. Windows 7 also cuts down on annoying warnings and nag
screens. Microsoft notifications have been consolidated in a single icon at
the right of the taskbar, and you can now decide under what circumstances
Windows will warn you before taking certain actions.
Compatibility with hardware and software, which
was a problem in Vista, seems far better in Windows 7 -- even in the beta. I
tried a wide variety of hardware, including printers, Web cams, external
hard disks and cameras, and nearly all worked fine.
I also successfully installed and used popular
programs from Microsoft's rivals, such as Mozilla Firefox, Adobe Reader,
Apple's iTunes, and Google's Picasa. All worked properly, even though none
was designed for Windows 7.
But there are some downsides to Windows 7. First,
you will only be able to directly upgrade Vista computers to the new
version. People still using Windows XP will need to perform a more
cumbersome multistep process. Microsoft is working on a method to help XP
owners preserve all their data during this process.
Continued in article
Jensen Comment
I'm still hot under the collar about the vulnerability of Windows to malware.
Each year I get closer to buying a Mac out of dirty Windows frustrations.
OpenOffice 3.0.1 ---
http://www.openoffice.org/
Open Office is a fine choice for those looking for an
alternative to some of the other commercial word processing software packages.
This latest version of OpenOffice includes several new templates for
professional writers, weblog publishing, and a tool that will help users export
documents for functionality with Google Docs. This particular version is
compatible with all operating systems.
February 6, 2009 message from Bob Jensen to the AECM
It is interesting that earlier in the day we had an AECM exchange about
whether to upgrade from 2003 MS Office to the 2007 version.
My computer running 2003 MS Office will not run the [Policy assignment
2.docx] file that Denny Beresford attached to his AECM message. This is
because I’ve not upgraded to a newer version of MS Office. The Journal of
Accountancy in February 2009 discusses this problem.
"Why Can't They Read My Word 2007 Document?" by Stanley Zarowin, Journal
of Accountancy, February 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Feb/WhyCantTheyReadMyWord2007Document.htm
Stanley recommends saving a docx file as an rtf file and then sending it
to persons like me still running on 2003 MS Word.
An alternate solution that I’ve always used for transmitted doc files is
to open the file in MS Word and then save it as a htm file before attaching
them to email messages. This is easy to do in Word. Sometimes this is
problematic, but more often or not I found this to be a safe way to send MS
Word files to others on the Web. One drawback is that if the file has
embedded graphics, there may be added files to send. In that case, perhaps
the Stanley’s rtf approach is better.
An advantage of htm files is that they are read in your Web browser such
as Internet Explorer or Firefox or Safari. These are much safer when reading
transmitted Word files. Denny would not intentionally send an unsafe doc or
docx file to us. But if this is a student paper, he might innocently send a
dangerous file. Hence, I recommend that he first save it as a htm file and
attach it to his AECM message.
Bob Jensen
February 6, 2009 reply from Scott Bonacker [lister@BONACKERS.COM]
Bob -
Go here:
http://www.microsoft.com/downloads/details.aspx?FamilyId=941B3470-3AE9-4AEE-8F43-C6BB74CD1466&displaylang=en
And download the "Microsoft Office Compatibility
Pack for Word, Excel, and PowerPoint 2007 File Formats"
Overview Users of the Microsoft Office XP and 2003
programs Word, Excel, or PowerPoint-please install all High-Priority updates
from Microsoft Update before downloading the Compatibility Pack.
By installing the Compatibility Pack in addition to
Microsoft Office 2000, Office XP, or Office 2003, you will be able to open,
edit, and save files using the file formats new to Word, Excel, and
PowerPoint 2007. The Compatibility Pack can also be used in conjunction with
the Microsoft Office Word Viewer 2003, Excel Viewer 2003, and PowerPoint
Viewer 2003 to view files saved in these new formats. For more information
about the Compatibility Pack, see Knowledge Base article 924074.
Note: If you use Microsoft Word 2000 or Microsoft
Word 2002 to read or write documents containing complex scripts, please see
http://support.microsoft.com/kb/925451 for
information to enable Word 2007 documents to be displayed correctly in your
version of Word.
Administrators: The administrative template for the
Word, Excel, and PowerPoint converters contained within the Compatibility
Pack is available for download.
Scott Bonacker CPA
Springfield, MO
A Parmalat Ruling May
Broaden Auditing Firm Liability
From The Wall Street Journal Accounting Weekly Review
on February 6, 2009
A Parmalat Ruling May Broaden Liability
by Nathan
Koppel
The Wall Street Journal
Jan 29, 2009
Click here to view the full article on WSJ.com
http://online.wsj.com/article/SB123318828413626629.html?mod=djem_jiewr_AC
TOPICS: Audit
Firms, Auditing
SUMMARY: U.S.
District Judge Lewis Kaplan of New York ruled on Tuesday,
January 27, 2009, that "...Deloitte Touche Tohmatsu potentially
could be held liable for an allegedly defective Parmalat audit
by its Italian member firm, Deloitte & Touche SpA."
CLASSROOM
APPLICATION: Understanding the structure of audit firms and
the nature of business risk associated with worldwide operations
can be achieved with this article.
QUESTIONS:
1. (Introductory) What was the nature of the Parmalat
scandal in 2003? Cite your source for this information.
2. (Advanced) The judge in this case concluded that
Deloitte Touche Tohmatsu "...exercised substantial control over
the manner in which its member firms conducted their
professional activities." How is such control achieved? What are
the limits to the firm being able to achieve this control?
3. (Advanced) How might Deloitte Touche Tohmatsu,
located in the U.S. and other places, be held responsible for an
alleged audit failure in relation to the Parmalat engagement run
by the Italian arm of the audit firm? What does this
responsibility imply, in terms of choices of affiliated entities
when growing an audit firm's business?
4. (Advanced) Refer to the related article. How might
an alleged audit failure over Satyam Computer Services, Ltd.,
affect PriceWaterhouseCoopers' worldwide operations?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
Satyam to Hire New Auditor
by Eric Bellman and Jackie Range
Jan 13, 2009
Online Exclusive
|
"A Parmalat Ruling May Broaden
Liability," by Nathan Koppel,
The Wall Street Journal, January 29, 2009 ---
http://online.wsj.com/article/SB123318828413626629.html?mod=djem_jiewr_AC
A U.S. judge issued a ruling in the Parmalat
securities litigation that could worry large accounting firms with offices
in many countries.
Parmalat SpA, an Italian conglomerate, collapsed in
2003 following the discovery of a massive fraud in which the company
allegedly overstated its assets by $16 billion.
At issue in Tuesday's ruling, by U.S. District
Judge Lewis Kaplan of New York, was whether Deloitte Touche Tohmatsu
potentially could be held liable for an allegedly defective Parmalat audit
by its Italian member firm, Deloitte & Touche SpA. Judge Kaplan held that it
was possible, in denying Deloitte Touche Tohmatsu's motion for summary
judgment. A request for summary judgment asks that part or all of the case
be dismissed before trial.
"This is huge," says Stuart Grant, counsel for
people who bought Parmalat shares. "Judge Kaplan has finally made the law
reflect reality. These accounting firms sell themselves as world-wide,
seamless organizations. Now they are going to be held responsible in the
same fashion."
Deloitte Touche Tohmatsu "provided no services of
any kind to any Parmalat entity," the firm said in a statement. "We are
confident of victory at any trial of this matter."
Whether Deloitte Touche Tohmatsu can be held liable
for Deloitte & Touche SpA turns on whether it had a "principal-agent"
relationship with the Italian affiliate. Judge Kaplan concluded that "DTT
exercised substantial control over the manner in which its member firms
conducted their professional activities."
Bob Jensen's threads on the Parmalat/Deloitte
mess are at
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
Grant Thornton is Being Sued Separately
"Jury Finds Parmalat Defrauded Citigroup," by Eric Dash, The New
York Times, October 20, 2008 ---
Click Here
A New Jersey jury
found that Parmalat, the Italian food and dairy company, had defrauded
Citigroup and awarded the bank $364.2 million in damages.
The 6-to-1
verdict cleared Citigroup of any wrongdoing after a five-month civil
trial that delved into complex, off-balance-sheet accounting that
enabled Parmalat to artificially raise its earnings.
The verdict was
returned on Monday in New Jersey Superior Court in Hackensack.
For Citigroup,
the decision will most likely be the last in several accounting scandals
that entangled it earlier this decade. The bank previously reached
settlements over its roles in Enron and WorldCom. But more litigation is
coming.
The bank is
expected to face billions of dollars in legal claims over its role in
the subprime mortgage market and is engaged in another battle with Wells
Fargo over the takeover of the Wachovia Corporation.
Parmalat’s new
management, including its chief executive, Enrico Bondi, had sought up
to $2.2 billion in damages from Citigroup, contending its bankers
designed a series of complex transactions that helped Parmalat “mask
their systemic looting of the company” while collecting tens of millions
in fees. The Italian company collapsed in 2003 under billions of dollars
of debt.
Citigroup said it
was a victim of Parmalat’s fraud and countersued for damages. On Monday,
Citigroup said it was delighted that a jury had vindicated its position.
“We have said from the beginning that we have done nothing wrong,” the
bank said. “Citi was the largest victim of the Parmalat fraud and not
part of it.”
Officials from
Parmalat could not be reached, but the company is expected to appeal the
decision.
Citigroup was the
first financial services firm to go to trial in the United States over
Parmalat’s accusations. Parmalat is pursuing separate claims against the
Bank of America and Grant Thornton, the
accounting firm, in Manhattan federal
court. That case is expected to go to trial next year; both companies
have denied any wrongdoing.
Bob Jensen's threads on the Parmalat/GrantThornton mess
are at
http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton
From The Wall Street Journal Accounting Weekly Review
on February 6, 2009
Roche Cuts Price of Bid to Own Genentech
by Jeanne
Whalen, Dana Cimilluca and Ron Winslow
The Wall Street Journal
Jan 31, 2009
Click here to view the full article on WSJ.com
TOPICS: Advanced
Financial Accounting, Mergers and Acquisitions
SUMMARY: "Roche
Holding AG made a lower, hostile bid for Genentech Inc. after
failing to reach an agreement...to buy the 44% of Genentech it
doesn't already own." Genentech's board of directors rejected
and $89 a share bid from July 2008 as too low and "talks since
then have failed to reach an agreement on price."
CLASSROOM
APPLICATION: The article may be used in classes covering
business combinations to explain the difference between a merger
and a tender offer.
QUESTIONS:
1. (Introductory) Define a tender offer and contrast
this definition with that of a merger.
2. (Introductory) What is a hostile tender offer? What
are the business risks associated with such a takeover?
3. (Advanced) How much of Genentech does Roche Holding
AG currently own? Access the information about Genentech
available through The Journal by clicking on the live link in
the online article. Review the available information and
specifically quote numbers that confirm this percentage.
4. (Advanced) Access Genentech 10-Q filing for the
quarter ended September 30, 2008 at http://www.sec.gov/Archives/edgar/data/318771/000031877108000019/dna-10q_q308.htm
Alternatively, proceed from the web location used in answering
question 3 by clicking on the link to SEC filings on the left
hand side of the page. Choose the Form 10-Q filing made on
11/04/2008. What disclosures are made about Roche Holding AG in
this filing? Describe all that you find.
5. (Advanced) Refer to your answer to question 4. What
accounting standards require the disclosures that you found?
Cite the specific reference to U.S. authoritative accounting
literature.
6. (Advanced) Refer again to your answer to question 3
above. How does the ownership level held by Roche Holding impact
the accounting for its investment in Genentech?
7. (Advanced) Confirm your assessment of Roche
Holding's accounting for its investment in Genentech by
accessing the Roche Holding financial statements. Explain where
in the financial statements you find the confirmatory
information.
Reviewed By: Judy Beckman, University of Rhode Island
|
From The Wall Street Journal Accounting Weekly Review
on February 27, 2009
Medtronic to Acquire
Valve Makers
by Jon
Kamp
The Wall Street Journal
Feb 24, 2009
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB123540006048947881.html?mod=djem_jiewr_AC
TOPICS: Advanced
Financial Accounting, Goodwill, Mergers and Acquisitions
SUMMARY: Medtronic
is purchasing two closely-held entities, Ventor Technologies Ltd. and
CoreValve, Inc., to expand its product lines to devices which require
less-invasive surgical procedures than do implantable heart
defibrillators. Ventor's product is expected to be introduced in Europe
in 2012 and CoreValve's in the U.S in 2014; CoreValve had sales of $35
million in 2008.
CLASSROOM APPLICATION: Classes
covering business combination accounting can use this article to discuss
the nature of items resulting in R&D, patents, and goodwill accounts
after such transactions.
QUESTIONS:
1. (Introductory)
What are the strategic reasons for Medtronic, Inc. to make the
acquisitions described in this article?
2. (Advanced)
Given that the two products being acquired in these transactions are not
yet sold in the U.S., and one is not yet sold in Europe, how can
Medtronic decide what price to pay for these acquisitions?
3. (Advanced)
Given the nature of the acquisitions, what category of assets do you
expect will be recorded on Medtronic's books in entries to record these
business combinations?
4. (Advanced)
Focus on the nature of goodwill in general. Do you think that the
goodwill recorded in these business combinations will be relatively high
or relatively low in relation to the total $1.03 billion price Medtronic
will pay? Cite the factors in the article leading to your assessment.
Reviewed By: Judy Beckman, University of Rhode Island
"Medtronic to Acquire Valve Makersm" by Joe Kamp, The Wall
Street Journal, February 27, 2009 ---
http://online.wsj.com/article/SB123540006048947881.html?mod=djem_jiewr_AC
Medtronic Inc. agreed to pay at least $1.03 billion
to buy two closely held makers of replacement heart valves that don't
require major surgery, taking the medical-device maker into a nascent market
and fueling a rivalry with Edwards Lifesciences Corp.
The deals for CoreValve Inc. and Ventor
Technologies Ltd. could help Medtronic offset sluggish conditions in its
biggest business -- implantable heart defibrillators -- and competitive
pressure elsewhere.
The market for so-called transcatheter valves is
small and open only overseas thus far. But Medtronic sees potential for the
market to balloon to $2.7 billion to $3.5 billion over time.
The devices are replacements for the aortic valve,
which sends blood from the heart's main pumping chamber. The aortic valve
can become narrow to the point at which it impedes blood flow, in which case
patients may need a replacement.
Medtronic already competes in the market for
replacement valves that require major surgery. But some patients are too
frail to withstand such procedures, which opens the door for transcatheter
valves, the implantation of which is less invasive.
Medtronic agreed to pay $700 million for CoreValve,
plus two potential $75 million milestone payments. CoreValve, based in
Irvine, Calif., competes with Edwards in Europe in the market for valves
delivered through arteries.
Sometimes patients' arteries can't handle such
so-called transfemoral procedures, however. An alternate method, a
transapical procedure, involves passing the valve through an incision
between the ribs. Ventor, an Israeli company, designs valves that can be
delivered by that procedure. Medtronic agreed to pay $325 million for Ventor.
Medtronic expects the Ventor product to be
introduced in Europe in 2012 and for CoreValve's product to hit the U.S. in
2014.
Medtronic has an internal development program for
such valves, but "the acquisition of CoreValve and Ventor will accelerate
our market entry," Scott Ward, president of Medtronic's cardiovascular
business, said in an interview. CoreValve had sales of $35 million last
year, according to a Medtronic spokesman.
Edwards Lifesciences' valve, the Sapien, garnered
$53 million in sales last year. The company has projected sales of $75
million to $95 million for this year. The Sapien value can be installed
through either delivery method and is approved in Europe.
"With the success of transcatheter heart valve
technology, we are not surprised that competitors are looking to move into
the market; in fact, we are surprised it has not happened sooner," Edwards
said.
Humor Between February 1 and February 28,
2009
Bailout Rap (link forwarded by David Albrecht) ---
http://www.youtube.com/watch?v=64g_g22iEe8
PJ O’Rourke’s Parliament of
Whores ---
http://snipurl.com/parliamentwhores
Forwarded by Paula
F16 vs C-130: THERE IS A MORAL HERE!
A C-130 was lumbering along when a cocky F-16 flashed by. The jet jockey
decided to show off.
The fighter jock told the C-130 pilot, 'watch this!' and promptly Went into a
barrel roll followed by a steep climb. He then finished With a sonic boom as he
broke the sound barrier. The F-16 pilot Asked the C-130 pilot what he thought of
that?
The C-130 pilot said, 'That was impressive, but watch this!' The C-130 droned
along for about 5 minutes and then the C-130 Pilot came back on and said: 'What
did you think of that?' Puzzled, the F-16 pilot asked, 'What the heck did you
do?' The C-130 pilot chuckled. 'I stood up, stretched my legs, walked To the
back, went to the bathroom, then got a cup of coffee and a Cinnamon bun.'
When you are young & foolish - speed & flash may seem a good thing !!!
When you get older & smarter - comfort & dull is not such a bad thing !!!
Us old folks understand this one.
The last tool in the list is probably the only tool your little kids know
by name.
TOOLS EXPLAINED
DRILL PRESS: A tall upright machine useful for suddenly snatching flat metal
bar stock out of your hands so that it smacks you in the chest and flings your
beer across the room, denting the freshly-painted project which you had
carefully set in the corner where nothing could get to it.
WIRE WHEEL: Cleans paint off bolts and then throws them somewhere under the
workbench with the speed of light. Also removes fingerprints and hard-earned
calluses from fingers in about the time it takes you to say, 'Oh sh -- '
ELECTRIC HAND DRILL: Normally used for spinning pop rivets in their holes
until you die of old age.
SKILL SAW: A portable cutting tool used to make studs too short.
PLIERS: Used to round off bolt heads. Sometimes used in the creation of
blood-blisters.
BELT SANDER: An electric sanding tool commonly used to convert minor touch-up
jobs into major refinishing jobs.
HACKSAW: One of a family of cutting tools built on the Ouija board principle.
It transforms human energy into a crooked, unpredictable motion, and the more
you attempt to influence its course, the more dismal your future becomes.
VISE-GRIPS: Generally used after pliers to completely round off bolt heads.
If nothing else is available, they can also be used to transfer intense welding
heat to the palm of your hand.
OXYACETYLENE TORCH: Used almost entirely for lighting various flammable
objects in your shop on fire. Also handy for igniting the grease inside the
wheel hub out of which you want to remove a bearing race.
TABLE SAW: A large stationary power tool commonly used to launch Wood
projectiles for testing wall integrity.
HYDRAULIC FLOOR JACK: Used for lowering an automobile to the ground after you
have installed your new brake shoes, trapping the jack handle firmly under the
bumper.
BAND SAW: A large stationary power saw primarily used by most shops to cut
good aluminum sheet into smaller pieces that more easily fit into the trash can
after you cut on the inside of the line instead of the outside edge.
TWO-TON ENGINE HOIST: A tool for testing the maximum tensile strength of
everything you forgot to disconnect.
PHILLIPS SCREWDRIVER: Normally used to stab the vacuum seals under lids or
for opening old-style paper-and-tin oil cans and splashing oil on your shirt;
but can also be used, as the name implies, to strip out Phillips screw heads.
STRAIGHT SCREWDRIVER: A tool for opening paint cans. Sometimes used to
convert common slotted screws into non-removable screws and butchering your
palms.
PRY BAR: A tool used to crumple the metal surrounding that clip or bracket
you needed to remove in order to replace a 50 cent part.
HOSE CUTTER: A tool used to make hoses too short.
HAMMER: Originally employed as a weapon of war, the hammer nowadays is used
as a kind of divining rod to locate the most expensive parts adjacent the object
we are trying to hit.
UTILITY KNIFE: Used to open and slice through the contents of cardboard
cartons delivered to your front door; works particularly well on contents such
as seats, vinyl records, liquids in plastic bottles, collector magazines, refund
checks, and rubber or plastic parts. Especially useful for slicing work clothes,
but only while in use.
DAMN-IT TOOL: Any handy tool that you grab and throw across the garage while
yelling 'DAMN-IT' at the top of your lungs. It is also, most often, the next
tool that you will need.
Forwarded by Paula
Pay heed, free advice is worth every penny that you pay for it! .
The Importance of Walking
Walking can add minutes to your life. This enables you, at 85 years old, to
spend an additional 5 months in a nursing home at $7000 per month.
My grandpa started walking five miles a day when he was 60. Now he's 97 years
old and we don't know where he is.
I like long walks... especially when they are taken by people who annoy me.
The only reason I would take up walking is so that I could hear heavy
breathing again.
I have to walk early in the morning... before my brain figures out what I'm
doing.
I joined a health club last year, spent about 400 bucks. Haven't lost a
pound. Apparently you have to go there.
Every time I hear the dirty word 'exercise,' I wash my mouth out with
chocolate.
I do have flabby thighs but, fortunately, my stomach covers them.
The advantage of exercising every day is so, when you die, they'll say,
'Well, he looks good, doesn't he?'
If you are going to try cross-country skiing, start with a small country.
I know I got a lot of exercise the last few years,...... just getting over
the hill.
We all get heavier as we get older because there's a lot more information in
our heads. That's my story and I'm sticking to it.
New Financial Terms forwarded by my good neighbors
Subject: New Financial Terms
CEO- Chief Embezzlement Officer
CFO - Corporate Fraud Officer
BULL MARKET- A random market movement causing investors to mistake
themselves for financial geniuses.
BEAR MARKET- a 6-to-18-month period when the kids get no allowance, the
wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING- The art of buying low and selling lower.
P/E RATIO- The percentage of investors wetting their pants as the market
keeps crashing.
BROKER - What my financial planner has made me.
STANDARD & POOR- Your life in a nutshell.
STOCK ANALYST- Idiot who just downgraded your stock.
STOCK SPLIT- When your ex-wife and her lawyer split your assets equally
between themselves.
MARKET CORRECTION- The day after you buy stocks.
CASH FLOW- The movement your money makes as it disappears down the
toilet.
YAHOO! - What you yell after selling it to some poor sucker for $240 per
share.
WINDOWS- What you jump out of when you're the sucker who bought Yahoo at
$240 per share.
INSTITUTIONAL INVESTOR- Past year investor who's now locked up in a
nuthouse.
PROFIT - Archaic word no longer in use.
Forwarded by Niki
Think about this...
THOSE BORN 1920-1979
READ TO THE BOTTOM FOR QUOTE OF THE MONTH BY JAY LENO. IF YOU DON'T READ
ANYTHING ELSE---VERY WELL STATED
TO ALL THE KIDS WHO SURVIVED the 1930's, 40's, 50's, 60's and 70's!!
First, we survived being born to mothers who smoked and/or drank while they
were pregnant.
They took aspirin, ate blue cheese dressing, tuna from a can, and didn't get
tested for diabetes.
Then after that trauma, we were put to sleep on our tummies in baby cribs
covered with bright colored lead-based paints.
We had no child proof lids on medicine bottles, doors or cabinets and when we
rode our bikes, we had no helmets, not to mention, the risks we took
hitchhiking.
As infants & children, we would ride in cars with no car seats, booster
seats, seat belts or air bags.
Riding in the back of a pick up on a warm day was always a special treat.
We drank water from the garden hose and NOT from a bottle.
We shared one soft dr ink with four friends, from one bottle and NO ONE
actually died from this.
We ate cupcakes, white bread and real butter and drank Kool-aid made with
sugar, but we weren't overweight because,
WE WERE ALWAYS OUTSIDE PLAYING!
We would leave home in the morning and play all day, as long as we were back
when the streetlights came on.
No one was able to reach us all day. And we were OK.
We would spend hours building our go-carts out of scraps and then ride down
the hill, only to find out we forgot the brakes. After running into the bushes a
few times, we learned to solve the problem.
We did not have Playstations, Nintendo's, X-boxes, no video games at all, no
150 channels on cable, no video movies or DVD's, no surround-sound or CD's, no
cell phones, no personal computers, no Internet or chatrooms.......
WE HAD FRIENDS and we went outside and found them!
We fell out of trees, got cut, broke bones and teeth and there were no
lawsuits from these accidents.
We ate worms and mud pies made from dirt, and the worms did not live in us
forever.
We were given BB guns for our 10th birthdays, made up games with sticks and
tennis balls and although we were told it would happen, we did not poke out very
many eyes.
We rode bikes or walked to a friend's house and knocked on the door or rang
the bell, or just walked in and talked to them!
Little League had tryouts and not everyone made the team. Those who didn't
had to learn to deal with disappointment. Imagine that!!
The idea of a parent bailing us out if we broke the law was unheard of. They
actually sided with the law!
These generations have produced some of the best risk-takers, problem solvers
and inventors ever!
The past 50 years have been an explosion of innovation and new ideas.
We had freedom, failure, success and responsibility, and we learned HOW TO
DEAL WITH IT ALL!
If YOU are one of them CONGRATULATIONS!
You might want to share this with others who have had the luck to grow up as
kids, before the lawyers and the government regulated so much of our lives for
our own good .
While you are at it, forward it to your kids so they will know how brave (and
lucky) their parents were.
Kind of makes you want to run through the house with scissors, doesn't it?!
The quote of the month is by Jay Leno:
'With hurricanes, tornados, fires out of control, mud slides, flooding,
severe thunderstorms tearing up the country from one end to another, and with
the threat of bird flu and terrorist attacks, are we sure this is a good time to
take God out of the Pledge of Allegiance?'
New Financial Terms forwarded by my good neighbors
Subject: New Financial Terms
CEO- Chief Embezzlement Officer
CFO - Corporate Fraud Officer
BULL MARKET- A random market movement causing investors to
mistake themselves for financial geniuses.
BEAR MARKET- a 6-to-18-month period when the kids get no
allowance, the wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING- The art of buying low and selling lower.
P/E RATIO- The percentage of investors wetting their pants
as the market keeps crashing.
BROKER - What my financial planner has made me.
STANDARD & POOR- Your life in a nutshell.
STOCK ANALYST- Idiot who just downgraded your stock.
STOCK SPLIT- When your ex-wife and her lawyer split your
assets equally between themselves.
MARKET CORRECTION- The day after you buy stocks.
CASH FLOW- The movement your money makes as it disappears
down the toilet.
YAHOO! - What you yell after selling it to some poor
sucker for $240 per share.
WINDOWS- What you jump out of when you're the sucker who
bought Yahoo at $240 per share.
INSTITUTIONAL INVESTOR- Past year investor who's now
locked up in a nuthouse.
PROFIT - Archaic word no longer in use.
To which David Albrecht added the following:
Here's another list, from:
http://247wallst.com/2008/11/26/new-bear-market/
Below is the long list:
- "201/K": What used to be your 401/K, but cut in at least
half.
- "I.R.A.": This is the paramilitary group you want to sick on
thepeople who created the over-the-counter instruments and
financialderivatives that are making this financial mess much worse than
itshould have been.
- "IPO": The acronym that one yells when they see their
brokerage accounts or discover the balance of the 201/K. "I’m Pissed
Off!"
- "Short Squeeze": This is what you think your chair is doing
to you when you try to calculate the new balance of your investments.
- "Foreclosure": The time that the stock market stops dropping
each day.
- "Stock Broker": The value of your shares each day.
- "Discount Broker": The value of your shares of the brokerage
firm you own.
- "Bond Broker": That guy who puts up court money to get you
out of jail.
- "Market Sell-off": Daily news reports.
- "Selling Short": The notion you get every time you decide to
not go with one of your winning stock picks.
- "Dollar Cost Averaging": Sticking with a strategy that isn’t
working.
- "Market Crash": The last sound of Alec Baldwin jumping out of
the window
at the end of this SNL commercial.
- "Market Rally": A church vigil for investors praying for this
stock market selling to end.
- "Bailout": What investors have been doing for weeks and
weeks.
- "Credit Default Swap": When you trade canceled credit cards
with your friends and family.
- "Treasury Bill": $700 billion to $3 trillion that your kids
will have to pay for this mess, plus interest.
- "Over The Counter Derivative": The same stuff meth is made
with.
- “CDO”: Community Debt Onus
- "Financial Adviser": Bookie.
- "Hedge Fund": The money, jewelry, and silver coins you buried
in your back yard or stuck in a safe.
- "Analyst": Your proctologist’s trainee.
- "Risk Manager": The guy who rubber-stamped AAA ratings as the
second coming.
- "Underwriter": That creepy guy that works for the funeral
home.
- "Margin Call": What your former financial adviser keeps
calling you about.
- "Options Expiration Date": When you decide to give up on the
stock market forever.
- "Recession-Proof": That really strong and cheap booze that
everyone is drinking now; formerly called rot gut.
- "Stock Split": What you think happened with your shares when
you see the share price each week. But it didn’t split.
- "Bottom Sniffing": When bottom fishing doesn’t work.
- "52-Week Low": How you feel each new day when you get home.
- "TARP": What you sleep under after you lost your job, car,
and house.
- "Going Private": Telling your friends you are out of the
stock market but aren’t really out.
- "Private Equity": What Eliot Spitzer got in trouble over.
- "Resistance": Almost every penny price increment above the
current price.
- "Support": Tomorrow’s new resistance.
- "Gap and Crap": When the market opens up and almost
immediately sells off. That’s actually a real term used.
- "Poison Pill": What investors want to take when they see
their 201/K balance.
- "Junk Bond": Government agency investments.
- "DJIA": Down Jones Industrial Average
- "Blue Chip": The color of your skin around that broken piece
of knuckle you got slamming your first into your desk or keyboard.
- "Penny Stock": Former DJIA and S&P 500 index components that
have been kicked out of the index.
- "Reiterated Guidance": The new absolute best case scenario
for future earnings.
- "Microsoft": A Man’s libido after talking about the current
stock market.
- "Socialism": The new-age definition of Free Market Capitalism
- "Recession": A mild downturn in the economy where some
friends and neighbors become jobless.
- "Depression": A mild downturn in the economy that has now
turned horrible, and now you are jobless along with friends and
neighbors.
Forwarded by David Albrecht
Some guy bought a new fridge for his house. To get rid of his old fridge, he
put it in his front yard and hung a sign on it saying: 'Free to good home. You
want it, you take it.' For three days the fridge sat there without even one
person looking twice at it. He eventually decided that people were too
un-trusting of this deal.
It looked too good to be true, so he changed the sign to read: 'Fridge for
sale $50.'
The next day someone stole it!
***They walk amongst us!***
-----------------------------------------------------------------------------
*One day I was walking down the beach with some friends when someone
shouted....'Look at that dead bird!' Someone looked up at the sky and
said...'where?'
***They walk among us!!***
-----------------------------------------------------------------------------
While looking at a house, my brother asked the real estate agent which
direction was north because, he explained, he didn't want the sun waking him up
every morning. She asked, 'Does the sun rise in the north?' When my brother
explained that the sun rises in the east, and has for sometime, she shook her
head and said, 'Oh, I don't keep up with that stuff'
***They Walk Among Us!!***
---------------------------------------------------------------------------------
My colleague and I were eating our lunch in our cafeteria, when we overheard
one of the administrative assistants talking about the sunburn she got on her
weekend drive to the beach. She drove down in a convertible, but 'didn't think
she'd get sunburned because the car was moving'.
***They Walk Among Us!!!!***
--------------------------------------------------------------------------------
My sister has a lifesaving tool in her car it's designed to cut through a
seat belt if she gets trapped She keeps it in the trunk.
***They Walk Among Us!!!!!***
----------------------------------------------------------------------------------
I was hanging out with a friend when we saw a woman with a nose ring attached
to an earring by a chain. My friend said, 'Wouldn't the chain rip out every time
she turned her head?' I had to explain that a person's nose and ear remain the
same distance apart no matter which way the head is turned...
***They Walk Among Us!!!!!!! ***
-------------------------------------------------------------------------------
I couldn't find my luggage at the airport baggage area. So I went to the lost
luggage office and told the woman there that my bags never showed up. She smiled
and told me not to worry because she was a trained professional and I was in
good hands. 'Now,' she asked me, 'Has your plane arrived yet?'...
(I work with professionals like this.)
***They Walk Among Us!!!!!!!!***
-------------------------------------------------------------------------------
While working at a pizza parlour I observed a man ordering a small pizza to
go. He appeared to be alone and the cook asked him if he would like it cut into
4 pieces or 6. He thought about it for some time before responding. 'Just cut it
into 4 pieces; I don't think I'm hungry enough to eat 6 pieces.
***Yep, They Walk Among Us, too.!!!!!!!!
Sadly, not only do they walk among us, they also reproduce !!!!
Forwarded by Paula
EVEN GOD ENJOYS A GOOD
LAUGH!
There were 3 good arguments that Jesus was Black:
1. He called everyone brother.
2. He liked Gospel.
3. He didn't get a fair trial.
But then there were 3
equally good arguments that Jesus was Jewish:
1. He went into His Father's business.
2. He lived at home until he was 33.
3. He was sure his Mother was a virgin and his Mother was sure He was God.
But then there were 3
equally good arguments that Jesus was Italian:
1. He talked with His hands.
2. He had wine with His meals.
3. He used olive oil.
But then there were 3
equally good arguments that Jesus was a Californian:
1. He never cut His hair.
2. He walked around barefoot all the time.
3. He started a new religion.
But then there were 3 equally good arguments
that Jesus was an American Indian:
1. He was at peace with nature.
2. He ate a lot of fish.
3. He talked about the Great Spirit.
But then there were 3 equally good arguments
that Jesus was Irish:
1. He never got married.
2. He was always telling stories.
3. He loved green pastures.
But the most compelling evidence of all - 3
proofs that Jesus was a woman:
1. He fed a crowd at a moment's notice
when there was virtually no food.
2. He kept trying to get a message across to a bunch of men who just didn't get
it.
3. And even when He
was dead, He had to get up because there was still work to
do!
Forwarded by Niki
SMART ASS ANSWER #5
A flight attendant was stationed at the departure gate to check tickets. As a
man approached, she extended her hand for the ticket and he opened his trench
coat and flashed her. Without missing a beat, she said, 'Sir, I need to see your
ticket, not your stub.'
SMART ASS ANSWER #4
A lady was picking through the frozen turkeys at the grocery store but she
couldn't find one big enough for her family. She asked a stock boy, ' Do these
turkeys get any bigger?' The stock boy replied, 'No ma'am, they're dead.'
SMART ASS ANSWER #3
The police officer got out of his car as the kid who was stopped for speeding
rolled down his window. 'I've been waiting for you all day,' the officer said.
The kid replied, Yeah, well I got here as fast as I could.' When the cop finally
stopped laughing, he sent the kid on his way without a ticket.
SMART ASS ANSWER # 2
A truck driver was driving along on the freeway and noticed a sign that read:
Low Bridge Ahead. Before he knows it, the bridge is right in front of him and
his truck gets wedged under it. Cars are backed up for miles. Finally a police
car comes up. The cop gets out of his car and walks to the truck driver, puts
his hands on his hips and says, 'Got stuck, huh?' The truck driver says, 'No, I
was delivering this bridge and I ran out of fuel!
THE SMART ASS ANSWER OF THE YEAR 2008 !!
A college teacher reminds her class of tomorrow's final exam. 'Now class, I
won't tolerate any excuses for you not being here tomorrow. I might consider a
nuclear attack or a serious personal injury, illness, or a death in your
immediate family, but that's it, no other excuses whatsoever!' A smart-ass
student in the back of the room raised his hand and asked, 'What would you say
if tomorrow I said I was suffering from complete and utter sexual exhaustion?'
The entire class is reduced to laughter and snickering When silence was
restored, the teacher smiled knowingly at the student, shook her head and
sweetly said, 'Well, I guess you'd have to write the exam with your other hand.'
A BONUS EXTRA
A woman is standing nude looking in the bedroom mirror. She is not happy with
what she sees and says to her husband, 'I feel horrible; I look old, fat and
ugly. I really need you to pay me a compliment.' The husband replied, 'Your
eyesight's good.'
Forwarded by Dr. Wolff
They keep trying to make it sound complicated but it's really
very simple!
Bank Crisis in Terms Understood
Heidi is the proprietor of a bar in Washington, DC. In order to
increase sales and comply with CRAP (Community Reinvestment Act Program
reinforced by Socialist Congressmen), she decides to allow her loyal customers -
most of whom are unemployed alcoholics - to drink now but pay later. She keeps
track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around and as a result increasing numbers of customers flood into
Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints,
Heidi increases her prices for wine and beer, the most-consumed beverages. Her
sales volume increases massively.
A young and dynamic customer service consultant at the local bank recognizes
these customer debts as valuable future assets and increases Heidi's borrowing
limit.
He sees no reason for undue concern since he has the debts of the alcoholics as
collateral.
At the bank's corporate headquarters, expert bankers transform these customer
assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded
on markets worldwide. No one really understands what these abbreviations mean
and how the securities are guaranteed. Nevertheless, as their prices
continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager (subsequently of
course fired due his negativity) of the bank decides that slowly the time has
come to demand payment of the debts incurred by the drinkers at Heidi's bar.
However they cannot pay back the debts.
Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better,
stabilizing in price after dropping by 90 %.
The suppliers of Heidi's bar, having granted her generous payment due dates and
having invested in the securities are faced with a new situation. Her wine
supplier claims bankruptcy, her beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock
consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the
non-drinkers.
Finally an explanation I understand...
Forwarded by Paula
The Washington Post has published
the winning submissions to its yearly neologism contest, in which readers
are asked to supply alternate meanings for common words.
The winners:
1. Coffee (n.), the person upon whom one coughs.
2. Flabbergasted (adj.), appalled over how much weight you have gained.
3. Abdicate (v.), to give up all hope of ever having a flat stomach.
4. Esplanade (v.), to attempt an explanation while drunk.
5. Willy-nilly (adj.), impotent.
6. Negligent (adj.), describes a condition in which you absentmindedly
answer the door in your nightgown.
7. Lymph (v.), to walk with a lisp.
8. Gargoyle (n.), olive-flavored mouthwash.
9. Flatulence (n.) emergency vehicle that picks you up after you are run
over by a steamroller.
10. Balderdash (n.), a rapidly receding hairline.
11. Testicle (n.), a humorous question on an exam.
12. Rectitude (n.), the formal, dignified bearing adopted by Proctologists.
13. Pokemon (n.), a Rastafarian proctologist.
14. Oyster (n.), a person who sprinkles his conversation with Yiddishisms.
15. Frisbeetarianism (n.), The belief that, when you die, your Soul flies up
onto the roof and gets stuck there.
16. Circumvent (n.), an opening in the front of boxer shorts worn by Jewish
men.
The Washington Post's Style
Invitational also asked readers to take any word from the dictionary, alter
it by
adding, subtracting, or changing one letter, and supply a new definition.
Here are the winners:
1. Bozone (n.): The substance surrounding stupid people that stops bright
ideas from penetrating. The bozone layer, unfortunately, shows little sign
of breaking down in the near future.
2. Foreploy (v.): Any misrepresentation about yourself for the purpose of
getting laid.
3. Cashtration (n.): The act of buying a house, which renders the subject
financially impotent for an indefinite
period.
4. Giraffiti (n.): Vandalism spray-painted very, very high.
5. Sarchasm (n.): The gulf between the author of sarcastic wit and the
person who doesn't get it.
6. Inoculatte (v.): To take coffee intravenously when you are running late.
7. Hipatitis (n.): Terminal coolness.
8. Osteopornosis (n.): A degenerate disease.
9. Karmageddon (n.): It's like, when everybody is sending off all these
really bad vibes, right? And then,
like, the Earth explodes and it's like, a serious bummer.
10 Decafalon (n.): The grueling event of getting through the day consuming
only things that are good for you.
11. Glibido (v): All talk and no action.
12. Dopeler effect (n.): The tendency of stupid ideas to seem smarter when
they come at you rapidly.
13. Arachnoleptic fit (n.): The fra ntic dance performed just after you've
accidentally walked through a spider
web.
14. Beelzebug (n.): Satan in the form of a mosquito that gets into your
bedroom at three in the morning and cannot be cast out.
15. Caterpallor (n.): The color you turn after finding half a grub in the
fruit you're eating.
And the pick of the literature:
16. Ignoranus (n.): A person who's both stupid and an asshole.
Forwarded by Professor Edwards
Another oldie worth a second laugh...
These are from a book
called 'Disorder in the
American Courts' and
are
things people actually
said in court, word for
word, taken down and
now
published by court
reporters that had the
torment of staying calm
while
these exchanges were
actually taking place.
____________________________________________
ATTORNEY: This
myasthenia gravis, does
it affect your memory at
all?
WITNESS: Yes.
ATTORNEY: And in what
ways does it affect your
memory?
WITNESS: I forget.
ATTORNEY: You forget?
Can you give us an
example of something you
forgot?
___________________________________________
ATTORNEY: Now doctor
isn't it true that when
a person dies in his
sleep, he
doesn't know about it
until the next morning?
WITNESS: Did you
actually pass the bar
exam?
_________________________
___________
ATTORNEY: The youngest
son, the
twenty-year-old, how old
is he?
WITNESS: He's twenty,
much like your IQ.
___________________________________________
ATTORNEY: Were you
present when your
picture was taken?
WITNESS: Are you
shitting me?
_________________________________________
ATTORNEY: So the date of
conception (of the baby)
was August 8th?
WITNESS: Yes.
ATTORNEY: And what were
you doing at that time?
WITNESS: getting laid
____________________________________________
ATTORNEY: She had three
children, right?
WITNESS: Yes.
ATTORNEY: How many were
boys?
WITNESS: None.
ATTORNEY: Were there any
girls?
WITNESS: Your Honor, I
think I need a different
attorney. Can I get a
new attorney?
____________________________________________
ATTORNEY: How was your
first marriage
terminated?
WITNESS: By death.
ATTORNEY: And by whose
death was it
terminated?
WITNESS: Take a guess.
____________________________________________
ATTORNEY: Can you
describe the
individual?
WITNESS: He was about
medium height and had a
beard.
ATTORNEY: Was this a
male or a female?
WITNESS: Unless the
Circus was in town I'm
going with male.
_____________________________________
ATTORNEY: Is your
appearance here this
morning pursuant to a
deposition
notice which I
sent to your attorney?
WITNESS: No, this is how
I dress when I go to
work.
______________________________________
ATTORNEY: Doctor, how
many of your autopsies
have you performed on
dead people?
WITNESS: All of them.
The live ones put up too
much of a fight.
_________________________________________
ATTORNEY: ALL your
responses MUST be oral,
OK? What school did
you go to?
WITNESS: Oral.
_________________________________________
ATTORNEY: Do you recall
the time that you
examined the body?
WITNESS: The autopsy
started around 8:30 p.m.
ATTORNEY:
And Mr. Denton was dead
at the time?
WITNESS: If not, he was
by the time I finished.
____________________________________________
ATTORNEY: Are you
qualified to give a
urine sample?
WITNESS: Are you
qualified to ask that
question?
______________________________________
And, the
best for last:
ATTORNEY: Doctor, before
you performed the
autopsy, did you check
for a pulse?
WITNESS: No.
ATTORNEY: Did you check
for blood pressure?
WITNESS: No.
ATTORNEY: Did you check
for breathing?
WITNESS: No.
ATTORNEY: So, then it is
possible that the
patient was alive when
you began the autopsy?
WITNESS: No.
ATTORNEY: How can you be
so sure, Doctor?
WITNESS: Because his
brain was sitting on my
desk in a jar.
ATTORNEY: I see, but
could the patient have
still been alive,
nevertheless?
WITNESS: Yes, it is
possible that he could
have been alive and
practicing law.
Forwarded by Auntie Bev
And you also find out interesting things when you have sons, like...
1.) A king size waterbed holds enough water to fill a 2000 sq. ft. house 4
inches deep.
2.) If you spray hair spray on dust bunnies and run over them with roller
blades, they can ignite.
3.) A 3-year old Boy's voice is louder than 200 adults in a crowded
restaurant.
4.) If you hook a dog leash over a ceiling fan, the motor is not st rong
enough to rotate a 42 pound Boy wearing Batman underwear and a Superman cape. It
is strong enough, however, if tied to a paint can, to spread paint on all four
walls of a 20x20 ft. room.
5.) You should not throw baseballs up when the ceiling fan is on. When using
a ceiling fan as a bat, you have to throw the ball up a few times before you get
a hit. A ceiling fan can hit a baseball a long way.
6.) The glass in windows (even double-pane) doesn't stop a baseball hit by a
ceiling fan.
7.) When you hear the toilet flush and the words 'uh oh', it's already too
late.
8.) Brake fluid mixed with Clorox makes smoke, and lots of it.
9.) A six-year old Boy can start a fire with a flint rock even though a 36-
year old Man says they can only do it in the movies.
10.) Certain Lego's will pass through the digestive tract of a 4-year old
Boy.
11.) Play dough and microwave should not be used in the same sentence.
12.) Super glue is forever.
13.) No matter how much Jell-O you put in a swimming pool you still can't
walk on water.
14.) Pool filters do not like Jell-O.
15.) VCR's do not eject 'PB & J' sandwiches even though TV commercials show
they do.
16.) Garbage bags do not make good parachutes.
17.) Marbles in gas tanks make lots of noise when driving.
18.) You probably DO NOT want to know what that odor is.
19.) Always look in the oven before you turn it on; plastic toys do not like
ovens.
20.) The fire department in�Austin�,�TX�has a 5-minute response time.
21.) The spin cycle on the washing machine does not make earthworms dizzy.
22.) It will, however, make cats dizzy.
23.) Cats throw up twice their body weight when dizzy.
24.) 80% of Women will pass this on to almost all of their friends, with or
without kids.
25.) 80% of Men who read this will try mixing the Clorox and brake fluid.
Forwarded by Dick Haar
Understanding why they voted democrat
I voted Democrat because I love the fact that I can now marry whatever I
want. I've decided to marry my horse.
I voted Democrat because I believe oil companies' profits of 4% on a gallon
of gas are obscene but the government taxing the same gallon of gas at 15%
isn't.
I voted Democrat because I believe the government will do a better job of
spending the money I earn than I would.
I voted Democrat because freedom of speech is fine as long as nobody is
offended by it.
I voted Democrat because when we pull out of Iraq I trust that the bad guys
will stop what they're doing because they now think we're good people.
I voted Democrat because I'm way too irresponsible to own a gun, and I know
that my local police are all I need to protect me from murderers and thieves.
I voted Democrat because I believe that people who can't tell us if it will
rain on Friday can tell us that the polar ice caps will melt away I n ten years
if I don't start driving a Prius.
I voted Democrat because I'm not concerned about the slaughter of millions of
babies so long as we keep all death row inmates alive.
I voted Democrat because I believe that business should not be allowed to
make profits for themselves. They need to break even and give the rest away to
the government for redistribution as THEY see fit.
I voted Democrat because I believe liberal judges need to rewrite The
Constitution every few days to suit some fringe kooks who would never get their
agendas past the voters.
I voted Democrat because my head is so firmly planted up my ass that it is
unlikely that I'll ever have another point of view.
"A Liberal is a person who will give away everything they don't own."
"W.'s Greatest Hits
The top 25 Bushisms of all time," by Jacob Weisberg,
Slate, January 12, 2009 ---
http://www.slate.com/id/2208132/
Being able to laugh at yourself is a rare quality in a leader. It's one thing
George W. Bush can do that Bill Clinton couldn't. Unfortunately, as we bid
farewell to Bushisms, we must conclude that the joke was mainly on us.
1. "Our enemies are innovative and resourceful, and so are we. They never
stop thinking about new ways to harm our country and our people, and neither do
we."—Washington, D.C., Aug. 5, 2004
2. "I know how hard it is for you to put food on your family."—Greater
Nashua, N.H., Chamber of Commerce, Jan. 27, 2000
3. "Rarely is the question asked: Is our children learning?"—Florence, S.C.,
Jan. 11, 2000
4. "Too many good docs are getting out of the business. Too many OB/GYNs
aren't able to practice their love with women all across the country."—Poplar
Bluff, Mo., Sept. 6, 2004
5. "Neither in French nor in English nor in Mexican."—declining to answer
reporters' questions at the Summit of the Americas, Quebec City, Canada, April
21, 2001
6. "You teach a child to read, and he or her will be able to pass a literacy
test.''—Townsend, Tenn., Feb. 21, 2001
7. "I'm the decider, and I decide what is best. And what's best is for Don
Rumsfeld to remain as the secretary of defense."—Washington, D.C., April 18,
2006
8. "See, in my line of work you got to keep repeating things over and over
and over again for the truth to sink in, to kind of catapult the
propaganda."—Greece, N.Y., May 24, 2005
9. "I've heard he's been called Bush's poodle. He's bigger than
that."—discussing former British Prime Minister Tony Blair, as quoted by the Sun
newspaper, June 27, 2007
10. "And so, General, I want to thank you for your service. And I appreciate
the fact that you really snatched defeat out of the jaws of those who are trying
to defeat us in Iraq."—meeting with Army Gen. Ray Odierno, Washington, D.C.,
March 3, 2008
11. "We ought to make the pie higher."—South Carolina Republican debate, Feb.
15, 2000
12. "There's an old saying in Tennessee—I know it's in Texas, probably in
Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can't get
fooled again."—Nashville, Tenn., Sept. 17, 2002
13. "And there is distrust in Washington. I am surprised, frankly, at the
amount of distrust that exists in this town. And I'm sorry it's the case, and
I'll work hard to try to elevate it."—speaking on National Public Radio, Jan.
29, 2007
14. "We'll let our friends be the peacekeepers and the great country called
America will be the pacemakers."—Houston, Sept. 6, 2000
15. "It's important for us to explain to our nation that life is important.
It's not only life of babies, but it's life of children living in, you know, the
dark dungeons of the Internet."—Arlington Heights, Ill., Oct. 24, 2000
16. "One of the great things about books is sometimes there are some
fantastic pictures."—U.S. News & World Report, Jan. 3, 2000
17. "People say, 'How can I help on this war against terror? How can I fight
evil?' You can do so by mentoring a child; by going into a shut-in's house and
say I love you."—Washington, D.C., Sept. 19, 2002
18. "Well, I think if you say you're going to do something and don't do it,
that's trustworthiness."—CNN online chat, Aug. 30, 2000
19. "I'm looking forward to a good night's sleep on the soil of a friend."—on
the prospect of visiting Denmark, Washington, D.C., June 29, 2005
20. "I think it's really important for this great state of baseball to reach
out to people of all walks of life to make sure that the sport is inclusive. The
best way to do it is to convince little kids how to—the beauty of playing
baseball."—Washington, D.C., Feb. 13, 2006
21. "Families is where our nation finds hope, where wings take dream."—LaCrosse,
Wis., Oct. 18, 2000
22. "You know, when I campaigned here in 2000, I said, I want to be a war
president. No president wants to be a war president, but I am one."—Des Moines,
Iowa, Oct. 26, 2006
23. "There's a huge trust. I see it all the time when people come up to me
and say, 'I don't want you to let me down again.' "—Boston, Oct. 3, 2000
24. "They misunderestimated me."—Bentonville, Ark., Nov. 6, 2000
25. "I'll be long gone before some smart person ever figures out what
happened inside this Oval Office."—Washington, D.C., May 12, 2008
Forwarded by Maureen
(Passing requires 4 correct
answers)
1) How long did the Hundred Years' War last?
2) Which country makes Panama hats?
3) From which animal do we get cat gut?
4) In which month do Russians celebrate the October Revolution?
5) What is a camel's hair brush made of?
6) The Canary Islands in the Pacific are named after what animal?
7) What was King George VI's first name?
8) What colour is a purple finch?
9) Where are Chinese gooseberries from?
10) What is the colour of the black box in a commercial airplane?
Remember, you need 4 correct answers to pass.
Check your answers below.
ANSWERS TO THE QUIZ
1) How long did the Hundred Years War last? 116
years
2) Which country makes Panama hats? Ecuador
3) >>From which animal do we get cat gut? Sheep
and Horses
4) In which month do Russians celebrate the October Revolution? November
5) What is a camel's hair brush made of? Squirrel
fur
6) The Canary Islands in the Pacific are named after what animal? Dogs
7) What was King George VI's first name? Albert
8) What colour is a purple finch? Crimson
9) Where are Chinese gooseberries from? New
Zealand
10) What is the colour of the black box in a commercial airplane? Orange
(of course)
What do you mean, you failed? Me, too.
(And if you try to tell me you passed, you lie!)
Forwarded by Gene and Joan
Subject: Doctors' opinions on the stimulus package
The Allergists voted to scratch it, and the
Dermatologists advised not to make any rash moves.
The Gastroenterologists had sort of a gut feeling about it, but the
Neurologists thought the Administration had a lot of nerve, and the
Obstetricians felt they were all laboring under a misconception. The
Ophthalmologists considered the idea shortsighted. The
Pathologists yelled, 'Over my dead body!' while the
Pediatricians said, 'Oh, grow up!' The
Psychiatrists thought the whole idea was madness, the
Radiologists could see right through it, and the
Surgeons decided to wash their hands of the whole thing. The
Internists thought it was a bitter pill to swallow, and the
Plastic Surgeons said, 'This puts a whole new face on the matter.'
The Podiatrists thought it was a step forward, but the
Urologists felt the scheme wouldn't hold water. The
Anesthesiologists thought the whole idea was a gas, and the
Cardiologists didn't have the heart to say no. In the end, the
Proctologists left the decision up to the assholes in Washington
Forwarded by Team Carper
London Times Obituary of the late Mr. Common Sense
'Today we mourn the passing of a beloved old friend, Common Sense, who has
been with us for many years. No one knows for sure how old he was, since his
birth records were long ago lost in bureaucratic red tape. He will be remembered
as having cultivated such valuable lessons as: Knowing when to come in out of
the rain; why the early bird gets the worm; Life isn't always fair; and maybe it
was my fault.
Common Sense lived by simple, sound financial policies (don't spend more than
you can earn) and reliable strategies (adults, not children, are in charge).
His health began to deteriorate rapidly when well-intentioned but overbearing
regulations were set in place. Reports of a 6-year-old boy charged with sexual
harassment for kissing a classmate; teens suspended from school for using
mouthwash after lunch; and a teacher fired for reprimanding an unruly student,
only worsened his condition.
Common Sense lost ground when parents attacked teachers for doing the job
that they themselves had failed to do in disciplining their unruly children.
It declined even further when schools were required to get parental consent
to administer sun lotion or an aspirin to a student; but could not inform
parents when a student became pregnant and wanted to have an abortion.
Common Sense lost the will to live as the churches became businesses; and
criminals received better treatment than their victims. Common Sense took a
beating when you couldn't defend yourself from a burglar in your own home and
the burglar could sue you for assault.
Common Sense finally gave up the will to live, after a woman failed to
realize that a steaming cup of coffee was hot. She spilled a little in her lap,
and was promptly awarded a huge settlement.
Common Sense was preceded in death by his parents, Truth and Trust; his wife,
Discretion; his daughter, Responsibility; and his son, Reason. He is survived by
his 4 stepbrothers; I Know My Rights, I Want It Now, Someone Else Is To Blame,
and I'm A Victim.
Not many attended his funeral because so few realized he was gone. If you
still remember him, pass this on. If not, join the majority and do nothing.
And that's the way it was on February 28, 2009 with a little help from my friends.
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
International Accounting News (including the U.S.)
AccountingEducation.com and Double Entries ---
http://www.accountingeducation.com/
Upcoming international accounting conferences ---
http://www.accountingeducation.com/events/index.cfm
Thousands of journal abstracts ---
http://www.accountingeducation.com/journals/index.cfm
Deloitte's International Accounting News ---
http://www.iasplus.com/index.htm
Association of International Accountants ---
http://www.aia.org.uk/
Wikipedia has a
rather nice summary of accounting software at
http://en.wikipedia.org/wiki/Accounting_software
Bob Jensen’s accounting software bookmarks are at
http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware
Bob Jensen's
accounting history summary ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory
Bob Jensen's
accounting theory summary ---
http://www.trinity.edu/rjensen/Theory.htm
AccountingWeb ---
http://www.accountingweb.com/
AccountingWeb Student Zone ---
http://www.accountingweb.com/news/student_zone.html
Introducing the New journalofaccountancy.com (free) ---
http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm
SmartPros ---
http://www.smartpros.com/
I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free
newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure
University) ---
http://www.financeprofessor.com/
Financial Rounds (from the Unknown Professor) ---
http://financialrounds.blogspot.com/
Professor Robert E. Jensen (Bob)
http://www.trinity.edu/rjensen
190 Sunset Hill Road
Sugar Hill, NH 03586
Phone: 603-823-8482
Email:
rjensen@trinity.edu
January 31, 2009
Bob Jensen's New Bookmarks on
January 31, 2009
Bob Jensen at
Trinity University
For
earlier editions of Fraud Updates go to
http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at
http://www.searchedu.com/.
Bob Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Many useful accounting sites (scroll down) ---
http://www.iasplus.com/links/links.htm
Accounting program news items for colleges are posted at
http://www.accountingweb.com/news/college_news.html
Sometimes the news items provide links to teaching resources for accounting
educators.
Any college may post a news item.
Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of
appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm
Essay
-
Introductory Quotations
-
The Bailout's Hidden, Albeit Noble, Agenda
(for added details see Appendix Y)
-
A Step Back in History
-
Barney's Rubble
-
2009 Update on the Socialist Revolution
Without Increased Taxes, Debt, or Civil War
Appendix A: Impending Disaster in the U.S.
Appendix B: The Trillion Dollar Bet in 1993
Appendix C: Don't Blame Fair Value Accounting
Standards This includes a bull crap case based on an article by the former
head of the FDIC
Appendix D: The End of Investment Banking as We
Know It
Appendix E: Your Money at Work, Fixing Others’
Mistakes (includes a great NPR public radio audio module)
Appendix F: Christopher Cox Waits Until Now to
Tell Us His Horse Was Lame All Along S.E.C. Concedes Oversight Flaws Fueled
Collapse And This is the Man Who Wants Accounting Standards to Have Fewer
Rules
Appendix G: Why the $700 Billion Bailout
Proposed by Paulson, Bush, and the Guilty-Feeling Leaders in Congress Won't
Work
Appendix H: Where were the auditors? The
aftermath will leave the large auditing firms in a precarious state?
Appendix I: 1999 Quote from The New York Times
''If they fail, the government will have to step up and bail them out the
way it stepped up and bailed out the thrift industry.''
Appendix J: Will the large auditing firms
survive the 2008 banking meltdown?
Appendix K: Why not bail out everybody and
everything?
Appendix L: The trouble with crony capitalism
isn't capitalism. It's the cronies.
Appendix M: Reinventing the American Dream
Appendix N: Accounting Fraud at Fannie Mae
Appendix O: If Greenspan Caused the Subprime
Real Estate Bubble, Who Caused the Second Bubble That's About to Burst?
Appendix P: Meanwhile in the U.K., the
Government Protects Reckless Bankers
Appendix Q: Bob Jensen's Primer on Derivatives
(with great videos from CBS)
Appendix R: Accounting Standard Setters
Bending to Industry and Government Pressure to Hide the Value of Dogs
Appendix S: Fooling Some People All the Time
Appendix T: Regulations Recommendations
Appendix U: Subprime: Borne of Sleaze, Bribery,
and Lies
Appendix V: Implications for Educators,
Colleges, and Students
Appendix W: The End
Appendix: X: How Scientists Help Cause Our
Financial Crisis
Appendix Y: The Bailout's Hidden Agenda
Details
Appendix Z: What's the rush to re-inflate
the stock market?
Personal Note from Bob Jensen
Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting)
---
http://www.heritage.org/research/features/BudgetChartBook/index.html
Humor Between January 1 and January 31, 2009 ---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013109
Jim Mahar pointed out the following behavioral accounting article.
"Executive Overconfidence and the Slippery Slope to Fraud," by Catherine
M. Schrand amd Sarah L. C. Zechman, SSRN, December 30, 2008 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1265631
We propose that executive overconfidence increases
the likelihood that a firm commits financial reporting fraud. A manager that
faces an earnings shortfall is more likely to manage earnings to overcome it
if he believes the shortfall is temporary and, hence, the earnings
management will be a one-off event that likely will go undetected. If
performance does not improve, however, the manager, faced with reversals of
prior-period earnings management and continuing poor performance, may choose
to engage in the type of egregious financial reporting that the SEC
prosecutes. Overconfident managers with unrealistic beliefs about future
performance are more likely to find themselves in this situation. Using
industry-level proxies for executive overconfidence, we find industries that
attract overconfident executives have a greater proportion of frauds. Our
analysis that uses firm-level proxies for overconfidence suggests that there
are two types of frauds: Those associated with moderate levels of
overconfidence, perpetrated by executives who ex post fall down the slippery
slope, and those perpetrated by executives with extreme overconfidence that
commit fraud for opportunistic reasons ex ante. Analysis of individual
executives supports the notion that there are two types of overconfident
executives that engage in fraud. Those with opportunistic motives are more
likely to be from a founding family, have greater commitment to the firm,
earn more total and have a higher percent of variable cash compensation, and
are less likely to have accounting experience. Finally, we document that a
matched sample of non-fraud firms do not have stronger governance mechanisms
that prevent fraud. This result mitigates the possibility that it is weak
governance rather than executive overconfidence that is a significant
determinant of fraud.
Jensen Comment
In spite of the case they make for "executive overconfidence," I still think the
main causes are motive and opportunity. Executive compensation contracts that
provide huge bonuses and stock option gains are the main cause, in my viewpoint,
for earnings management with Frank Raines at Fannie Mae being Exhibit A ---
http://www.trinity.edu/rjensen/Theory01.htm#Manipulation
White collar crime generally pays even if chances are high of being caught
---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
Congratulations to Marc Massaud
Alumni, friends, parents, and staff of Claremont McKenna College have honored
emeritus accounting professor Marc Massaud with funding for the new Marcos F.
Massoud Endowed Chair in Accounting. Marc was one of the most respected and
admired professors in history at the Robert Day School of Business at Claremont
McKenna. He’s a very caring and humble scholar and a good friend.
Note the name "Robert Day" below.
The following is a Tidbit from New Bookmarks for September 2007 ---
http://www.trinity.edu/~rjensen/book08q2.htm
What would your college do with an added $200 million?
First I want to congratulate Claremont McKenna College for receiving such a
huge gift.
Second I want to congratulate them on how they intend to spend it in this era
where so many students opt for professional program majors rather than liberal
arts.
Claremont McKenna College on Thursday
announced a $200 million gift, from a trustee and alumnus, Robert Day. One
purpose of the funds will be to create new academic programs in which students
can combine liberal arts education with an education in business and finance —
either during their undergraduate program or through a one-year master of
finance program immediately after an undergraduate program is completed. The new
options are meant to be an alternative to a traditional M.B.A.
Inside Higher Ed, September 28, 2007 ---
http://www.insidehighered.com/news/2007/09/28/qt
Congratulations to Mary Barth
For her services to the profession, Mary Barth, a
professor of accounting at the Stanford University Graduate School of Business,
received a Doctor of Science degree from Lancaster University Management School
(LUMS) on December 10. It is the first time that Professor Barth, once described
by a PhD student as “the Michael Jordan of accounting,” has been awarded an
honorary degree on either side of the Atlantic.
"UK's Lancaster University Honors Barth for Accounting Contributions,"
Stanford GSB News, December 2008 ---
http://www.gsb.stanford.edu/news/headlines/barthaward.html
Marvene is a poor and unemployed elderly woman who lost her shack to
foreclosure in 2008.
That's after Marvene stole over $100,000 when she refinanced her shack with a
subprime mortgage in 2007.
Marvene wants to steal some more or at least get her shack back for free.
Both the Executive and Congressional branches of the U.S. Government want to
give more to poor Marvene.
Why don't I feel the least bit sorry for poor Marvene?
Somehow I don't think she was the victim of unscrupulous mortgage brokers and
property value appraisers.
More than likely she was a co-conspirator in need of $75,000 just to pay
creditors bearing down in 2007.
She purchased the shack for $3,500 about 40 years ago ---
http://online.wsj.com/article/SB123093614987850083.html
Marvene Halterman, an unemployed Arizona woman with a
long history of creditors, took out a $103,000 mortgage on her 576
square-foot-house in 2007. Within a year she stopped making payments. Now the
investors with an interest in the house will likely recoup only $15,000.
The Wall Street Journal slide show
of indoor and outdoor pictures ---
http://online.wsj.com/article/SB123093614987850083.html#articleTabs%3Dslideshow
Jensen Comment
The $15,000 is mostly the value of the lot since at the time the mortgage was
granted the shack was virtually worthless even though corrupt mortgage brokers
and appraisers put a fraudulent value on the shack. Bob Jensen's threads on
these subprime mortgage frauds are at
http://www.trinity.edu/rjensen/2008Bailout.htm
Probably the most common type of fraud in the Savings and Loan debacle of the
1980s was real estate investment fraud. The same can be said of the 21st Century
subprime mortgage fraud. Welcome to fair value accounting that will soon have us
relying upon real estate appraisers to revalue business real estate on business
balance sheets ---
http://www.trinity.edu/rjensen/Theory01.htm#FairValue
The Rest of Marvene's Story ---
http://www.trinity.edu/rjensen/FraudMarvene.htm
Accounting Implications
CEO to his accountant: "What is our net earnings
this year?"
Accountant to CEO: "What net earnings figure do you want to report?"
The sad thing is that Lehman, AIG, CitiBank, Bear
Stearns, the Country Wide subsidiary of Bank America, Fannie Mae, Freddie
Mac, etc. bought these
subprime mortgages at face value and their Big 4 auditors supposedly
remained unaware of the millions upon millions of valuation frauds in the
investments. Does professionalism in auditing have a stronger stench since
Enron?
Where were the big-time auditors? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
September 30, 1999
Fannie Mae Eases
Credit To Aid Mortgage
Lending
By STEVEN A. HOLMES
In a move that could help increase home
ownership rates among minorities and low-income consumers, the Fannie
Mae Corporation is easing the credit requirements on loans that
it will purchase from banks and other lenders.
The action, which will begin as a pilot
program involving 24 banks in 15 markets -- including the New York
metropolitan region -- will encourage those banks to extend home
mortgages to individuals whose credit
is generally not good enough to qualify for conventional loans. Fannie
Mae officials say they hope to make it a nationwide program by next
spring.
Fannie Mae, the nation's biggest underwriter
of home mortgages, has been under
increasing pressure from the Clinton
Administration to
expand mortgage loans among low and moderate income people and felt
pressure from stock holders to maintain its phenomenal growth in
profits.
In addition, banks, thrift institutions and
mortgage companies have been pressing Fannie Mae to help them make more
loans to so-called subprime borrowers. These borrowers whose incomes,
credit ratings and savings are not good enough to qualify for
conventional loans, can only get loans from finance companies that
charge much higher interest rates -- anywhere from three to four
percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for
millions of families in the 1990's by reducing down payment
requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief
executive officer. ''Yet there remain too many borrowers whose credit is
just a notch below what our underwriting has required who have been
relegated to paying significantly higher mortgage rates in the so-called
subprime market.''
Demographic information on these borrowers is sketchy. But at least one
study indicates that 18 percent of the loans in the subprime market went
to black borrowers, compared to 5 per cent of loans in the conventional
loan market.
In moving, even tentatively, into this new
area of lending, Fannie Mae is taking on significantly more risk, which
may not pose any difficulties during flush economic times. But the
government-subsidized corporation may run into trouble in an economic
downturn, prompting a government rescue similar to that of the savings
and loan industry in the 1980's.
''From the perspective of many people, including me, this is another
thrift industry growing up around us,'' said Peter Wallison a resident
fellow at the Americ an Enterprise Institute. ''If
they fail, the government will have to step up and bail them out the way
it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers
who qualify can secure a mortgage with an interest rate one percentage
point above that of a conventional, 30-year fixed rate mortgage of less
than $240,000 -- a rate that currently averages about 7.76 per cent. If
the borrower makes his or her monthly payments on time for two years,
the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter
of home mortgages, does not lend money directly to consumers. Instead,
it purchases loans that banks make on what is called the secondary mark
et. By expanding the type of loans that it will buy, Fannie
Mae is hoping to spur banks to make more loans to people with
less-than-stellar credit ratings.
Robert Shiller visits Google’s Mountain View, CA
headquarters to discuss his book “The Subprime Solution: How Today’s Global
Financial Crisis Happened, and What to Do About It.” This event took place on
October 30, 2008, as part of the Authors@Google series. The subprime mortgage
crisis has already wreaked havoc on the lives of millions of people and now it
threatens to derail the U.S. economy and economies around the world. In The
Subprime Solution, best-selling economist Robert Shiller reveals the origins of
this crisis and puts forward bold measures to solve it. He calls for an
aggressive response–a restructuring of the institutional foundations of the
financial system that will not only allow people once again to buy and sell
homes with confidence, but will create the conditions for greater prosperity in
America and throughout the deeply interconnected world economy. Robert J.
Shiller is the best-selling author of “Irrational Exuberance” and “Subprime
Solution” (both Princeton), among other books. He is the Arthur M. Okun
Professor of Economics at Yale University.
"Authors@Google: Robert Shiller," January 8, 2009 ---
http://www.ritholtz.com/blog/2009/01/authorsgoogle-robert-shiller/
Deloitte's Free IFRS Course Materials
"Deloitte IFRS curriculum materials are now available ," IAS Plus, January 7,
2008 ---
http://www.iasplus.com/index.htm
Deloitte IFRS curriculum materials are now available Deloitte (United
States) is making available a complete set of IFRS course materials through
Deloitte's IFRS University Consortium. Featuring on-campus lectures and
transcripts from Deloitte subject matter leaders, actual case studies and
case solutions, and other materials, the course is available free to all
colleges and universities. Course materials are divided into eight sessions,
with each session containing a unique set of presentations, case studies,
and lecture notes. The materials include a detailed introduction to IFRS and
provide an overview of the differences between IFRS and US generally
accepted accounting principles. Specific topics covered in the Deloitte IFRS
curriculum materials include:
* financial statement presentation;
* revenue, inventory and income tax;
* business combinations, discontinued operations and foreign currency;
* intangibles and leases;
* property and asset impairment;
* provisions, pensions and share-based payments;
* financial instruments; and
* consolidation policy, joint ventures and associates.
For more information about Deloitte's IFRS University Consortium
please go to the web site:
www.deloitte.com/us/ifrs/consortium .
From Ellen at Ernst & Young:
We
are pleased to announce the release of phase I of our free IFRS curriculum
materials produced by our Ernst & Young Academic Resource Center (EYARC).
Please click
here regarding the details of the material and how
you can access them.
If
you are unable to click the link above, please copy and paste the URL into
your internet browser:
https://eyaprimo.ey.com/natlmktgaprimoey/attachments/ARC_faculty_email_January09.pdf
We'd like to give a special thanks to the distinguished members of our EYARC.
These include the following faculty and retired Ernst & Young partners: Jana
Smith-Raedy, University of North Carolina at Chapel Hill, Tim Eaton, Miami
University at Ohio and Irene Wiecek, University of Toronto, John Kiss, Peter
Nurczynski, Nick Kissel and Bob Riley.
Regards,
Ellen
Ellen J. Glazerman
Executive Director, Ernst & Young Foundation
Americas Director, University Relations
Ernst & Young LLP
5 Times Square, 6th Floor
New York, NY 10036
212-773-5686 (tel)
866-855-4960 (fax)
ellen.glazerman@ey.com
January 22, 2009 message from Patricia Walters
[patricia@DISCLOSUREANALYTICS.COM]
IFRS standards (usually referred to as the "bound
volume") are only available for a fee because sales of publications is one
of the IASB's primary revenue streams.
That said, academics can get an on-line
subscription to the IASB (ability to download the standards, etc) for
(the dues fee of ) $25 if you join the IAAER and your
students can get a subscription for their dues fee of only $20.
http://www.iaaer.org/join/index.htm
This is a great deal.
Regards
Pat
Bob Jensen's threads on the messy transition to IFRS are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
There must be a mistake: Free IASB Standards and
Interpretations?
January 21, 2009 inquiry from Tom Oxner <TOxner@uca.edu>
I am trying to get up to speed on IFRS. I am
reading 2008 International GAAP by Ernst & Young, published by Wiley. It
does a good job of describing many of the requirements. Are the actual IFRS
pronouncements available other than for a fee? The IFRS website has
summaries, but I could not find the text of the pronouncements.
Thanks for your help.
Dr. Thomas H. Oxner
Professor of Accounting
University of Central Arkansas
Conway, AR 72035
January 21, 2009 reply from Bob Jensen
Hi Tom,
Like me, I think most students
learn best from illustrations.
Even if the IASB standards were
free I doubt that they would be of great use in the classroom except as
references. And I don’t think it is possible to get these standards into
the hands of students without paying a relatively large fee per student.
Relative to FASB statements,
interpretations, and implementation guides, the IASB provides a dearth
of good illustrations for classroom use. Those of us that like to teach
from illustrations will probably find ourselves using FASB illustrations
that we modify for IFRS differences. For example, the FASB spent a lot
of money outsourcing the writing of illustrations, whereas the IASB is
just not as well funded as the IASB. An example of expensive outsourced
illustrations from the FASB can be found at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/
I recommend that instructors
seriously look at an index of the key differences between IFRS and U.S.
GAAP. Beware that such an index probably overlooks the various U.S. GAAP
rules (e.g. FIN 46) that IFRS has not taken a position on one way or
another. You can find great
comparisons of IFRS vs. national GAAPs at
http://www.iasplus.com/country/compare.htm
Most of these are free.
I have some examples highlighted
in green at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
One problem is that the IASB has
not taken a position of various issues such as synthetic instruments and
variable interest entities. But there are many other FASB illustrations
that are relatively easy to modify. In a way these modified FASB
illustrations are useful because they encourage students to think about
why the FASB went one way and the IASB went another on certain issues.
Examples from FAS 133 versus IAS 39 include the following:
Definitions of
derivatives
-
IAS 39:
Does not define “net settlement” as being required to be scoped into
IAS 39 as a derivative such as when interest rate swap payments and
receipts are not net settled into a single payment.
-
FAS 133:
Net settlement is an explicit requirement to be scoped into FAS 133
as a derivative financial instrument.
-
Implications:
This is not a major difference since IAS 39 scoped out most of what
is not net settled such as Normal Purchases and Normal Sales (NPNS)
and other instances where physical delivery transpires in
commodities rather than cash settlements. Also IAS 39 applies net
settlement as a criterion in scoping a loan commitment into IAS 39.
IAS 39 makes other concessions to net settlement such as in deciding
whether a "loan obligation" is a derivative.
Offsetting amounts due
from and owed to two different parties
-
IAS 39:
Required if legal right of set-off and intent to settle net.
-
FAS 133:
Prohibited.
Multiple embedded
derivatives in a single hybrid instrument
-
IAS 39:
Sometimes accounted for as separate derivative contracts.
-
FAS 133:
Always combined into a single hybrid instrument.
-
Implications:
FAS 133 does not allow hybrid instruments to be
hedged items. This restriction can be overcome in some instances by
disaggregating for implementation of IAS 39.
Subsequent reversal of
an impairment loss
-
IAS 39:
Previous impairment losses may be reversed under some circumstances.
-
FAS 133:
Reversal is not allowed for HTM and AFS securities.
-
Implications:
The is a less serious difference since Fair Value Options (FVOs)
were adopted by both the IASB and FASB. Companies can now avoid HTM
and AFS implications by adopting fair values under the FVO hedged
instrument.
Derecognition of
financial assets
-
IAS 39:
It is possible, under restrictive guidelines, to derecognise part of
an a financial instrument and no "isolation in bankruptcy" test is
required.
-
FAS 133:
Derecognise financial instruments when transferor has surrendered
control in part or in whole. An isolation bankruptcy test is
required.
-
Status:
This inconsistency in the two standards will probably be resolved in
future amendments.
Hedging foreign
currency risk in a held-to-maturity investment
-
IAS 39: Can qualify for hedge
accounting for FX risk but not cash flow or fair value risk.
-
FAS 133: Cannot qualify for hedge
accounting.
IAS 39 Hedging foreign
currency risk in a firm commitment to acquire a business in a business
combination
-
IAS 39: Can qualify for hedge
accounting.
-
FAS 133: Cannot qualify for hedge
accounting.
Assuming perfect
effectiveness of a hedge if critical terms match
-
IAS 39:
Hedge effectiveness must always be tested in order to qualify for
hedge accounting.
-
FAS 133:
The “Shortcut Method” is allowed for interest rate swaps.
-
Implications:
This is an important difference that will probably become more
political due to pressures from international bankers.
Use of "basis
adjustment"
-
IAS 39:
Fair value hedge: Basis is adjusted when the hedge expires or
is dedesignated.
Cash flow hedge: Basis is adjusted when the hedge expires or
is dedesignated.
-
FAS 133:
Fair value hedge: Basis is adjusted when the hedged item is
sold or otherwise utilized in operations such as using raw material
in production.
Cash flow hedge of a transaction resulting in an asset or
liability: OCI or other hedge accounting equity amount remains
in equity and is reclassified into earnings when the earnings cycle
is completed such as when inventory is sold rather than purchased or
when inventory is used in the production process.
-
Implication:
This is am important difference that needs to be resolved. The FAS
133 approach, in our viewpoint, is unnecessarily complicated.
IAS 39 Macro hedging
-
IAS 39:
Allows hedge accounting for portfolios having assets and/or
liabilities with different maturity dates.
-
FAS 133:
Hedge accounting treatment is prohibited for portfolios that are not
homogeneous in virtually all major respects.
Implications: This is
pure theory pitched against practicality, politics, and how industry
hedges portfolios. It is a very sore point for companies having lots and
lots of items in portfolios that make it impractical to hedge each item
separately.
Bob Jensen
January 21, 2009 reply from Neal Hannon
[nhannon@GMAIL.COM]
Hi Tom,
You might want to
check out my wiki on IFRS, located at
http://ficpa-ifrs.wikispaces.com/ i hope
that you and all AECM interested parties will join the website and
contribute to our joint learning.
Additionally, the
2008 IFRS XBRL taxonomy is available for free download from
www.iasb.org A handy viewer is located here:
http://xbrl.iasb.org/xbev/viewer/presentation/index.html
Since the IFRS taxonomy follows the bound volumn
regualtions paragraph by paragraph, the viewer is an excellent way for
discovering by topic treatment of accounting issues in IFRS. The viewer
exposes a presentation view, a calculation view and a item view. Also
included is a handy look-up tool that students could easily use.
I think these online tools
and the ones already mentioned create a wealth of material for bringing
IFRS into ANY level accounting course. Anyone want to help documenting
this idea?
Neal
January 21, 2009 reply from Bob Jensen
Hi Neal,
Since Paul Pacter resides in Hong Kong but
is still a key player in the IASB, perhaps he will enlighten us about
whether we can count on this Hong Kong freebie to continue.
Thank you for pointing out this Hong Kong
Website that has IFRS content available for free.
I’m inclined to think that the free public
access to Hong Kong Volume II
(
http://www.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeII/contentpage.pdf
) is a Website oversight since the Master Volume is only available to
members of the Hong Kong CPA Institute. Now that information is leaking out
about this Volume II freebie to the world it’s a question of how long this
can remain free to the world.
What we are testing here is an efficient
markets hypothesis. If the IASB is dependent upon revenue from sales of its
standards and interpretations it can hardly allow any Web server to offer up
free content that is identically verbatim with content that is not free from
the IASB (aside from slight and obvious changes in numbering). I guess the
same can be said for the currently free 2008 IFRS XBRL available from the
IASB itself.
It would be great for academe if Hong Kong
and the IASB continue these backdoor freebie alternatives, but I would not
count on it for your students. Many college libraries either do or will soon
subscribe to Comperio from PwC. This is allows faculty and students to have
free online access to FASB Standards, IASB Standards, and a wealth of other
database information with the powerful Comperio search engine ---
http://www.pwc.com/Extweb/aboutus.nsf/docid/58B3A4A2F1C2053680256E2800357A82
But Comperio is not cheap. Perhaps an argument can be made with campus
librarians that Comperio has become more essential in the period of
transition from U.S. GAAP to IFRS since students must worry about both sets
of standards during the transition period and Comperio is very helpful in
this regard.
But who can argue with a Hong Kong freebie
as long as the IASB allows this leakage to the world?
Bob Jensen
January 22, 2009 message from Patricia Walters
[patricia@DISCLOSUREANALYTICS.COM]
IFRS standards (usually referred to as the "bound
volume") are only available for a fee because sales of publications is one
of the IASB's primary revenue streams.
That said, academics can get an on-line
subscription to the IASB (ability to download the standards, etc) for
(the dues fee of ) $25 if you join the IAAER and your
students can get a subscription for their dues fee of only $20.
http://www.iaaer.org/join/index.htm
This is a great deal.
Regards
Pat
January 22, 2009 reply from Dick van Offeren
[dvanofferen@GMAIL.COM]
The IAAER-fee is worth every single penny.
In the Netherlands we teach local and IASB-rules.
IFRS is obligatory only for consolidated annual reports of listed companies.
Besides IFRS we have the commercial code and local Standards for non-listed
companies and parent companies statements only. This hodgepodge of sometimes
conflicting standards makes teaching financial accounting and reporting a
great challenge. However, it makes clear that financial accounting is a
professional activity where professional judgements are to be made. There is
no single mechanical rule that can be applied in all cases.
In my view the accounting profession can only reach
a higher level when prominent accounting scholars lead the way.
I really like this discussion and this (AECM)
listserv.
Regards,
Dick van Offeren
Leiden University the Netherlands
January 21, 2009 reply from David A E Raggay
[david.raggay@IFRS-CONSULTANTS.COM]
I am
obviously not European, but I know a little bit about what has been
happening around the world.
The
ACCA, a body that qualifies accountants, primarily in Europe, Asia and
the Caribbean has for some years now, allowed candidates to focus in
their exams, on the IFRSs. The texts produced for the exams are
therefore, IFRS-friendly. Following is a link to the site of one
learning material provider:
http://www.bpp.com/page.asp?w=15&ref=2&usertyperef=2&exambodyref=40&pagetyperef=10249&parentref=2&locpagetyperef=-1&locationref=-1&easyread=-1
The
following should also be useful.
From
Paul Pacter’s website: IAS Plus
“Applying International Financial Reporting Standards,
published in December 2006 by John Wiley and Sons (Australia). The focus
of this 1,236-page text is
on the interpretation, analysis, illustration, and application of IFRSs.
The textbook has been written for intermediate and advanced financial
reporting courses, at both undergraduate and postgraduate level, and
aligns with the knowledge expectations of the accounting profession.
Paul's co-authors are Keith Alfredson,
former chairman of the Australian Accounting Standards Board (AASB);
Ruth Picker, IFRIC member and a technical partner of Ernst & Young; Ken
Leo and Jeannie Radford, both of Curtin University of Technology; and
Victoria Wise of Victoria University. Here is the
Book's Home Page, for
more information and
on-line purchasing. Or, for international orders, email custservice@johnwiley.com.au”
From
David Cairns website,
www.cairns.co.uk
“UNDERSTANDING
INTERNATIONAL FINANCIAL REPORTING STANDARDS IS THE FIRST BOOK TO MAKE
IFRS ACCESSIBLE TO STUDENTS. IT COVERS THE PRINCIPLES AND APPLICATION OF
ALL IFRS AND INCLUDES:
-
SUMMARIES (INCLUDING FLOWCHARTS) OF THE KEY POINTS OF EACH IFRS
-
EXAMPLES SHOWING THE APPLICATION OF THE PRINCIPLES IN EACH IFRS
-
EXTRACTS FROM THE PUBLISHED FINANCIAL STATEMENTS OF COMPANIES THAT
USE IFRS
-
BRIEF EXPLANATIONS OF HOW IFRS PRINCIPLES DIFFER FROM NATIONAL
PRINCIPLES
-
DISCUSSION AND EXAMINATION QUESTIONS
YOU CAN PURCHASE UNDERSTANDING IFRS FROM THE PEARSON
WEBSITE”
(ISBN 0273679007)
Full
disclosure: I know and speak to both Paul Pacter and David Cairns but am
in no way associated with them or their publications. I do, however,
recommend these publications.
With Kind Regards,
David Raggay
Managing Principal
IFRS Consultants
Offices: 625 Link Road, Lange Park Chaguanas, Trinidad, W.I.
& 67 Tragarete Road, Port of Spain Trinidad, W.I.
Phones: (868)-622-2217; (868)-672-7338
Fax: (868)-672-7338
Mobile:
(868)-739-9500
Email:
david.raggay@ifrs-consultants.com
Website:
http://www.ifrs-consultants.com
Bob Jensen's threads on IFRS are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Questions
What costs do accounting professors fail to factor in when teaching lease versus
buy decisions?
Jensen Comment
To the extent that lessees are likely to underspend on maintenance and, thereby,
lower ultimate resale value, the lessors probably factor this in when
contracting the amount of lease payments. Hence there is implied accounting for
this when teaching lease versus buy analysis for decision makers. However, I've
not heard that accounting professors factor in the costs of lessees having
higher accident rates and other problems.
Link forwarded by Jim Mahar
"Moral Hazard in Leasing Contracts: Evidence from the New York City Taxi
Industry," by Henry S. Schneider, SSRN, November 2008 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1146648#
In this study, I investigate
the effects of moral hazard in leasing contracts by examining the driving
outcomes of all long-term lessees and owner-operators of New York City
taxis. I find that moral hazard explains a sizable fraction of lessees'
accidents, driving violations, and vehicle inspection failures, and erodes a
moderate fraction of industry income. To address the possibility of
endogenous contract choice, I conduct an instrumental variables analysis on
the cross-section of all drivers, and a panel-data analysis on a subset of
drivers who switched from leasing to owning.
...evidence about the
leasing moral hazard by examining the New York City taxi industry, which is
split between taxis operated exclusively by lessees and taxis with
owner-drivers. Lessees have significantly worse driving outcomes than owner
drivers:
In 2005, long-term lessees
experienced 62 per cent more accidents and 64 percent more driving
violations per mile than owner-drivers, and operated taxis that failed
vehicle emissions and safety inspections at a 67 percent higher rate. Moral
hazard is an obvious candidate to explain these differences...contracting
over driving outcomes instead of actions also faces obstacles since taxis
are typically operated by multiple drivers, which prevents some driving
outcomes (e.g., vehicle mechanical failures) from being matched to
individual drivers....
Continued in article
Question
Has Chrysler committed fraud with channel stuffing revenue recognition or is
this merely a happenstance of the economic crisis?
From The Wall Street Journal Accounting Weekly Review on January 23,
2009
Inventory Traffic Jam Hits Chrysler
by Kate
Linebaugh
The Wall Street Journal
Jan 12, 2009
Click here to view the full article on WSJ.com
TOPICS: Channel
Stuffing, Financial Accounting, Managerial Accounting
SUMMARY: Chrysler
LLC's "...dealers are loaded with inventory and aren't ordering
new vehicles....Chrysler's situation is the most extreme example
of an inventory glut plaguing all auto makers as a result of the
slide in auto sales at the end of 2008...their lowest level in
25 years."
CLASSROOM
APPLICATION: The article notes that Chrysler recognizes
revenue upon order of vehicles by a dealer allowing it to be
used to discuss issues in revenue recognition and channel
stuffing. The article also uses several inventory level ratios.
QUESTIONS:
1. (Introductory) Describe the "inventory traffic jam"
now faced by Chrysler. In your answer, define the term "channel
stuffing" and comment on whether it is a concern in the scenario
facing Chrysler.
2. (Advanced) "An auto maker books sales when vehicles
are shipped from its plants to its dealers...." Are you
surprised at this timing for revenue recognition by Chrysler and
other auto makers? What are the possible concerns with this
practice?
3. (Introductory) AutoNation Inc."...estimates that 3.2
million vehicles are now sitting on dealer lots across the
country." Is this number large or small? It is relative to what
comparisons?
4. (Advanced) Define the average sales period ratio.
How is this ratio used in analysis for the article? Be sure to
describe all the comparisons made with the ratio.
5. (Introductory) Why does Chrysler have a limited time
period for working through these inventory levels? How does that
situation compare to other auto makers?
Reviewed By: Judy Beckman, University of Rhode Island
|
"Inventory Traffic Jam Hits Chrysler: With Sales Down Sharply, Dealers Aren't
Ordering New Cars Despite the Frail Auto Maker's Requests," by Kate Linebaugh,
The Wall Street Journal, January 12, 2009 ---
http://online.wsj.com/article/SB123172160917772419.html?mod=djem_jiewr_AC
After a deep slide in sales in the fourth quarter,
Chrysler LLC now faces a new obstacle in its battle to survive: Many dealers
are loaded with inventory and aren't ordering new vehicles.
Associated Press Unsold 2008 cars at a
Chrysler/Jeep lot in Golden, Colo., last month. Take Bill Rosado, owner of a
Chrysler-Dodge-Jeep dealership in Milford, Pa. He says he is resisting the
company's requests to add more stock to his already-crowded lot.
"We're not ordering any cars in spite of the
pressure they give us. We are going to sit tight with what we have," Mr.
Rosado said. "We don't see any peak coming up where all of a sudden
Chryslers are going to be desired."
Chrysler's financial troubles compound his
concerns. Four months ago, Mr. Rosado had to close a Dodge store in
Wilkes-Barre, Pa., after sales slowed, and he is still waiting for payment
from Chrysler for parts that he returned.
Detroit Auto Show Follow the latest news and see
photos of the concept cars and new models unveiled at the Detroit show at
the Auto Industry Tracker.
Journal Community Subscribers can join the All
Things Autos group in Journal Community and discuss the 2009 Detroit Auto
Show.
Auto Industry News"They are so behind paying us,"
he said. "We're all very cash-strapped at this point. So to build up
additional receivables is certainly not attractive to us."
An auto maker books sales when vehicles are shipped
from its plants to its dealers, so a slowdown in orders reduces a car
company's revenue.
Chrysler was nearly out of money last month before
it got $4 billion in emergency loans from Washington. During the next few
months, the company needs to find a way to keep revenue coming in as it
scrambles to slash costs. By March, Chrysler has to show the U.S. Treasury
Department it is viable as an independent company, or it could be required
to pay back the money or be denied further loans.
At the North American International Auto Show in
Detroit, Chrysler Chief Executive Robert Nardelli acknowledged the company's
cash reserves are dwindling. Chrysler ended 2008 with $2 billion in cash, he
told reporters, compared with $11.7 billion in June. The company's cash
holdings will hit a low point this month, he added.
He added that Chrysler is expecting to get an
additional $3 billion in government loans, and said Chrysler doesn't expect
a rebound in the market during the first quarter. Chrysler, a private
company controlled by private-equity group Cerberus Capital Management LP,
expects an annualized selling rate of 10.6 million vehicles in the quarter,
in line with the depressed levels of the past few months.
Chrysler's situation is the most extreme example of
an inventory glut plaguing all auto makers as a result of the slide in auto
sales at the end of 2008.
Continued in article
January 23, 2009 reply from Saeed Roohani
[sroohani@COX.NET]
If dealers actually purchase and own those cars as
they arrive at the dealership, is there still revenue recognition issue for
Chrysler? Does anyone know terms/agreements between auto makers and their
dealers? I am due for a new car and looking for a good deal.
Saeed R.
January 23, 2009 reply from Bob Jensen
Most automobile dealers buy and finance their own inventories ---
http://money.cnn.com/2008/09/30/autos/car_dealer_pain/index.htm
The actual “dealer cost” is a very elusive number.
In channel stuffing, the “customers” buy the merchandise and title is
passed to the customer with some type of understanding (possibly under the
table) that sales can be reversed under certain conditions. In the tobacco
industry where channel stuffing was once rampant, tobacco products were sold
back when the unsold retail tobacco inventory commenced to get ”stale”
(which mostly happened about two months after the tobacco company closed its
books) ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
In the genuine channel stuffing frauds, at the
end-of-the-accounting-year, suppliers load retailers up with more product
than the retailers even want. Sometimes the merchandise is never even sent
to the retailers who have title to the unshipped inventory and have not yet
paid for their “purchases.” In the case of Chrysler, I think the vehicles
are now sitting in dealer lots. But shipment in and of itself does not
preclude channel stuffing revenue recognition fraud.
PS I looked into buying a new car and found out that the deals are not as
good as they are hyped by dealers, except maybe in Belgium ---
http://www.portfolio.com/views/blogs/daily-brief/2008/12/05/auto-dealer-buy-one-get-one-free
I’ve seen similar two-for-one used car dealer advertisements in the U.S.,
but so far I don’t see any such deals in the U.S. for new cars.
Dealers have always tried to lure buyers with phony discounts from the
supposed Blue Book prices, e.g. claims that you’ve buying the vehicle at the
dealer’s cost --- yeah right! One thing that’s killing American-car dealers
at the moment is that foreign-car dealers, unlike American-car dealers at
the moment, can still offer pretty good lease deals for buyers who don’t put
a large number of miles on a car each year. My son got a heck of a good
lease deal near the end of the model year (on a Nissan). But I decided to
spend a couple of thousand on my aging Jeep.
I’ve always considered new cars a waste of money, but then I don’t put a
whole lot of miles on my cars. One is a 1989 Cad for summer and the other is
a 1999 Jeep for winter. In New Hampshire we have two seasons --- August and
Winter.
Bob Jensen
Bob Jensen's threads on channel stuffing revenue recognition fraud are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Closely
related to channel stuffing auditing concerns are those so-called bill and hold
frauds ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#BillAndHold
How should revenues known to be fraudulent (e.g., click frauds) be
reported and audited?
Click
Fraud ---
http://en.wikipedia.org/wiki/Click fraud
"Report: Click Fraud At Record High," by Jason Kincaid,
ClickCrunch.com via The Washington Post, January 27, 2009 ---
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/28/AR2009012800046.html?wpisrc=newsletter
17.1% of all clickthroughs on
web advertising are the result of
click
fraud - the act of
clicking on a web ad to artificially increase its
click-through rate - according to the latest report
from
Click Forensics, a company
that specializes in monitoring and preventing
internet crime. The level of clickfraud is the
highest the company has seen since it started
monitoring for it in 2006, dashing our hopes that it
might
hold steady in 2008. The
company recorded a rate of
16.3% in Q1 2008.
Also alarming is the fact that over 30% of click
fraud is now coming from automated bots - a 14%
increase from last quarter and the highest rate
Click Forensics has seen since it started
collecting data. Click fraud for ads on content
networks like Google AdSense and Yahoo Publisher
Network was up to 28.2% from 27.1% last quarter,
though that figure has decreased since Q4 2007,
when it was at 28.3%. Outside of the US, Click
Forensics reports that the most click fraud came
from Canada (which contributed 7.4%), Germany
(3%), and China (2.3%).
Click Forensics also notes that it has seen a
reemergence with some old-hat tricks, like link
farms. The company speculates that the increase
may be tied to the poor economy, which has
spurred a rise in activity like phishing and
other cybercrime.
January 29, 2009 reply from Jagdish Gangolly
[gangolly@CSC.ALBANY.EDU]
Bob,
In a click fraud situation
there are three parties:
1. The search engine
company
2. The advertiser
3. The hacker (fraudster)
There are two situations:
a. Collusion between 2 and
3
b. There is no collusion
between 2 and 3. Here there are two possibilities:
(a) the hack is a prank,
(b) hacker is a competitor
who wants to clobber the advertiser's budget
In either case a or b, a
crime may have been committed, since click fraud is a felony in many
states.
When there is click fraud,
the revenue of the search company is overstated,
and expenses of advertiser
is also overstated. In addition, there might be a
contingent liability due to
the fraud for the advertiser (and/or the hacker).
Overstatements make sense
only if the contingency materialises.
That being the case, as I
see it, there is no revenue recognition issue
here. The revenue that has
already been recognised here is a result
of an executed transaction.
The only issue is the
disclosure (or perhaps booking of it under GAAP)
if the contingency, and the
GAAP there is fairly well established.
Am I missing something?
Jagdish
Department of Informatics, College of
Computing & Information
State University of New York at Albany
1400 Washington Avenue, Albany NY 12222
Phone: 518-442-4949
Bob Jensen's threads on E-commerce are at
http://www.trinity.edu/rjensen/ecommerce.htm
Bob Jensen's threads on revenue accounting fraud are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Question
What recent 3-2 FASB vote riles the feathers of Tom Selling with innuendos that
the banking industry and large accounting firms had too much influence on a vote
that was not in the best interests of accounting transparency for investors?
A "Who Done It?"
"FSP EITF 99-20-1: Dissenting Board Members Hit the Nail on the Head," by Tom
Selling, The Accounting Onion, January 14, 2009 ---
http://accountingonion.typepad.com/theaccountingonion/2009/01/fsp-eitf-99-20.html
Jensen Comment
I perform the despicable deed of (almost) revealing the ending of his mystery to
those who've not yet read the mystery. What must our students think?
About Those Brave Dissenters
And, who were those masked men (or woman)? If I
give you a list of the current FASB members along with a brief description
of their backgrounds, I'm betting you can guess correctly, even without
knowing anything else about them:
* Robert Herz -- former ...
* Thomas Linsmeier -- former ...
* Leslie Seidman -- former ...
* Marc Siegel -- a recognized ...
* Lawrence Smith -- former ...
They are X and Y, of course -- the only two who did
not spend the bulk of their careers serving corporate clients. And
incidentally, they are the two most recent additions to the FASB.
The likes of X and Y give me some hope for the
future of standard setting following the second major financial reporting
crisis of the decade. If we could somehow get just one more on the board
like them, the SEC's recommendations to the FASB can become a reality long
before the IASB gets its act together.
January 17, 2009 reply from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
Like most accounting issues, reasonable people can
disagree on the best accounting for this situation. For example, I refer
readers to comment letter 7 on this FASB project written by yours truly. The
letter agrees with the majority FASB position and further explains why the
current "other than temporary impairment" model ought to be reconsidered by
the FASB. The SEC staff took a similar position in its recent report on fair
value accounting.
Not to disparage Tom's well considered views on
this matter, but I would also observe that those disagreeing with the output
of the process might have more influence on the process by expressing their
views directly to the FASB or other standard setting body.
Denny Beresford
January 18, 2009 reply from Bob Jensen
I do understand that the FASB is well intended, but I did hate to see it
reduce such power to three people no matter what the issue.
I think where I agree with Tom is the strong wording of the two that
dissented this time.
January 18, 2009 reply from Dennis Beresford
[dberesfo@TERRY.UGA.EDU]
Bob,
You've raised two separate issues:
1 - Whether new standards should require a larger
number of board members or a higher number of votes before becoming
effective.
2 - Whether the dissenters present more compelling
arguments (in your view) for their position than do the assenters for the
final position taken by the FASB.
As you know, the size of the FASB was reduced to
five members last year after having been comprised of seven members from the
beginning of the Board. The FAF Trustees made this change after due process
and there were arguments for and against. I was in favor of the change
primarily because it allows the Board to be more efficient and reach
conclusions more quickly rather than the past practice of working on some
issues "forever." I also note that, with only five members, the present
members from the user and academic community have more influence (2 of 5
votes) than they did under the old system (2 of 7 votes).
The voting requirement has changed several times -
majority vs. super majority. I served under both regimes and don't believe
that it made much difference. In almost all cases I can remember, the Board
would have acted on a final standard regardless of the voting requirement.
The bare majority rule just allowed one more member to get on his/her
soapbox and express a personal view that often didn't affect the overall
conclusion but rather one or more of the technical details.
So my question to you and others is should the
Trustees reconsider the composition of the Board to change the size again,
change the voting requirement again, or change the composition of the Board
by choosing members with different backgrounds? I know there has been a fair
amount of research on the effect of voting requirements but I'm not aware of
any such research that presents a compelling reason for one approach or the
other. The size of the Board is a new development and, again, I'm sure there
are research opportunities available. And, of course, individuals can always
weigh in with their personal opinions on these matters regardless of
supporting research.
On the second point above about whose opinions
should prevail, that seems to be the purpose of a standard setting process
that has been thoroughly considered and agreed to by those with interest in
the process. In other words, once interested parties have bought into the
idea that having standards is likely to improve the quality of financial
reporting and that the system for developing those standards is reasonable,
then those parties should be willing to accept the results of the system.
I'm a pragmatist and always felt that the financial markets were better
served by having some accounting standards even if those standards aren't
perfect (and who can judge that?). Thus, I only dissented a couple of times
during my time as Chairman. And even in those cases I thought it was better
that the Board issued a new standard than not, even if I would have
preferred a different approach. Since leaving the Board over 11 years ago I
have continued to write comment letters because I am passionate about
financial accounting and have personal views on most of the topics. Often
I've disagreed with the Board but I'm happy to have at least had the chance
to participate and I can cite at least a few cases where changes were made
as a result of my (and others') comments on a particular issue.
I've always been surprised that so few academics
participated in the FASB's process and I wrote about that at least a couple
of times while at the Board. And the situation is actually a bit better
these days as the AAA financial reporting committee and some individual
professors do contribute. But there is plenty of room for further
improvement.
Sorry for getting a little carried away on this. I
need to get back to my weekend reading.
Denny Beresford
January 19, 2009 reply from Tom Selling
[tom.selling@GROVESITE.COM]
Hi, Denny:
I hope I am not interrupting your reading with this
email. But, I really, really want to respond to some of your points.
Before I do that, however, and speaking of reading,
I did finally finish Alice Schroeder's 800-page authorized biography of
Warren Buffet. It was rather long, but quite enjoyable throughout – in large
part because it was so well-written. I hope to have more to say about it in
a blog post coming soon.
Coincidentally, I read Katharine Graham's
(“Personal History") memoirs about 10 years ago. Graham was the publisher of
the Washington Post (Ben Bradlee, Woodward, Bernstein, Pentagon papers,
etc.), and was a long time and close friend of Buffet. I would highly
recommend her autobiography as well for both enjoyable reading and her
perspective on the politics and "great personalities" of her time.
Also, more or less by coincidence, the book I read
after the Buffett biography was "Outliers: The Story of Success," by Malcolm
Gladwell. I read Gladwell's previous book, "Blink", and found it to be
interesting but not compelling. However, "Outliers" is an absolute must-read
for educators who want to understand more about what makes their students
tick. I think so highly of the book that, unusual for me, I plan to re-read
it. And just this weekend, I started Paul Krugman's book, "The Return of
Depression Economics and the Crisis of 2008." Already, it looks like it will
be an easy and informative read.
As to your comments pertaining to the size and
processes of the FASB, here are my reactions:
· So far, it does not appear that the Board has
become more efficient after having been pared down from seven to five
members. Perhaps the most egregious case is the financial statement
presentation project which I wrote about recently on my blog. The Board
could have resolved matters quickly but instead chose to combine forces
with a 14-member IASB with the result being, among other things, that we
still don't have a direct method statement of cash flows. We should also
be asking why the amendments to FAS 140 and FIN 46R are taking so long.
And, how come a five-member board has not fixed the blatantly bad
effects of pension and OPEB accounting on the income statement?
· While it may appear that the two members from
the user and academic communities have more influence, I don't believe
it to be the reality. Greater proportion representation does not mean
more influence. The chair now exclusively controls the agenda. FSP EITF
99-20-1 provides a strong indication that he or she who controls the
agenda now has a much greater influence on outcomes. I highly doubt that
Bob Herz would have put this project on the agenda, and indeed on a fast
track, unless he already had two other board members in his pocket.
Notwithstanding any arguments as to the quality and appropriateness of
the FSP, resistance from the other board members and dissenting
commenters was futile; the FSP was a done deal after that.
· Considering the views of "those with
interests in the process" is not an appropriate or necessary role of the
FASB. While there may be many stakeholders in the FASB’s decisions, the
only voices that should count in the FASB's deliberations are those
advocating the interests of investors. I believe the SEC has finally
acknowledged this unequivocally in its recent report to Congress. So,
why do we have former auditors and preparers on the FASB? It would seem
that some believe they are there to represent the interests of auditors
and preparers, but I believe they are there only to provide technical
and practical perspectives. OTTI accounting does not benefit investors,
and the changes made to OTTI accounting by the FSP also did not benefit
investors.
· As to why so few academics participate in the
FASB's process, I can provide three possible reasons pretty much off the
top of my head. First, as always, is incentives, or in this case, lack
thereof. Comment letters to the FASB or the SEC do not count as
"publications" by academic administrators. Second, academics prefer
models to politics; no matter how valid a point and academic may have to
make, unless you're a big name advocating the majority position, the
impact of your painstakingly written letter will amount to, at best,
just a tick mark in the "pro" or "con" column. (And, by the way, I KNOW,
that Board members read my blog; I doubt if the same would be true of my
comment letters.) Third, disincentives. The large accounting firms are
not appreciative of contentious comments; why should one go through all
the effort with the only certain outcome being a bite to a hand that
could feed you. Abe Briloff was ostracized, and I know of at least one
other case where a local partner of a Big Four firm complained to a
university about opinions publicly expressed by one of its faculty.
Best,
Tom
Spinning Debt Into Earnings With the Wave of a Fair Value Accounting Wand
"Euro banks' £169bn in accounting alchemy," by: Lindsey White, Financial
Times Advisor, January 19, 2009 --- Click Here
European banks conjured more than £169bn of debt
into profit on their balance sheets in the third quarter of 2008, a leaked
report shows.
Money Managementhas gained exclusive access to a
report from JP Morgan, surveying 43 western European banks.
It shows an exact breakdown of which banks
increased their asset values simply by reclassifying their holdings.
Germany is Europe's largest economy, and was the
first European nation to announce that it was in recession in 2008. Based on
an exchange rate of 1 Euro to £0.89, its two largest banks, Deutsche Bank
and Commerzbank, reclassified £22.2bn and £39bn respectively.
At the same exchange rate, several major UK banks
also made the switch. RBS reclassified £27.1bn of assets, HBOS reclassified
£13.7bn, HSBC reclassified £7.6bn and Lloyds TSB changed £3.2bn. A number of
Nordic and Italian banks also switched debts to become profits.
Banks are allowed to rearrange these staggering
debts thanks to an October 2008 amendment to an International Accounting
Standards law, IAS 39. Speaking to MM, IAS board member Philippe Danjou said
that the amendment was passed in "record time".
The board received special permission to bypass
traditional due process, ushering through the amendment in a matter of days,
in order to allow banks to apply the changes to their third quarter reports.
However, it is unclear how much choice the board
actually had in the matter.
IASB chairman Sir David Tweedie was outspoken in
his opposition to the change, publicly admitting that he nearly resigned as
a result of pressure from European politicians to change the rules.
Danjou also admitted that he had mixed views on the
change, telling MM, "This is not the best way to proceed. We had to do it.
It's a one off event. I'd prefer to go back to normal due process."
While he was reluctant to point fingers at specific
politicians, Danjou admitted that Europe's "largest economies" were the most
insistent on passing the change.
As at December 2008, no major French, Portuguese,
Spanish, Swiss or Irish banks had used the amendment.
BNP Paribas, Credit Agricole, Danske Bank, Natixis
and Societe Generale were expected to reclassify their assets in the fourth
quarter of 2008.
The amendment was passed to shore up bank balance
sheets and restore confidence in the midst of the current credit crunch. But
it remains to be seen whether reclassifying major debts is an effective
tactic.
"Because the market situation was unique, events
from the outside world forced us to react quickly," said Danjou. "We do not
wish to do it too often. It's risky, and things can get missed."
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
Question
Are many share repurchases motivated more out of executive greed than
shareholder benefits?
In accounting classes, it might be stressed that
increased executive compensation is one of the incentives of buying treasury
stock.
"Controlled by the corporations: Before we can deal with a financial
crisis manufactured in boardrooms, we must curb corporate power over our
legislators," by Prem Sikka, The Guardian, January 8, 2008 ---
http://www.guardian.co.uk/commentisfree/2009/jan/08/financial-crisis-regulation
Repurchase of shares has the potential to enable
company executives to make huge profits. A simple example would help to
illustrate the point. Suppose a company has earnings of £100 and 100 shares.
Now the earnings per share are £1. Suppose the company decides to use its
surplus cash to buy back 50 shares. After repurchase, it has only 50 shares
in circulation. So the earnings per share (EPS) are now £2. The significance
of this is that many executive remuneration schemes link profits to EPS.
Without creating an iota of additional wealth, directors can increase
earnings per share, their bonuses and share options. The company pays out
real cash to buy back its shares. Such cash could have been used to bolster
capital, liquidity or research and development, or could even have been put
away for a rainy day. In some cases, companies have taken on extra debts to
buy back their own shares, which opens them up to higher interest charges
and vulnerability. Of course, there is the forlorn hope that the reduction
in the number of shares might make the remaining shares somehow more
marketable, or that the repurchase of shares might assure markets and push
up the share price.
One US
study estimated that
about 100 companies a month were buying back their shares. Nearer home,
Alliance & Leicester
announced a £300m share
buyback at nearly £12
a share. Soon afterwards it was rescued by
Banco Santander at just £3.17 a share.
HBOS
had a £750m share
buyback programme and has now been bailed out by
the UK taxpayer.
Barclays
bought back 2m shares at 451p. In recent weeks,
its share price has been about a third of that and the bank had to
raise additional
money from Middle East investors.
Northern Rock
also has a history of
buying back its shares and had to be bailed out by
the taxpayer as well.
Continued in article
Bob Jensen "Rotten to the Core" threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Stewart Enterprises
Consents to Order Regarding Revenue Recognition Policies,"
Securities Law Prof Blog, December 30, 2008 ---
http://lawprofessors.typepad.com/securities/
On December 29, the SEC issued an Order Instituting
Administrative Proceedings Pursuant to Section 21C of the Securities
Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order
(Order) against Stewart Enterprises, Inc. (Stewart), Kenneth C. Budde, CPA (Budde)
and Michael G. Hymel, CPA (Hymel). The Order finds that, from 2001 through
2005, Stewart, the second largest publicly traded provider of death care
services in the United States, and Budde, Stewart's former chief financial
officer and chief executive officer, and Hymel, Stewart's former chief
accounting officer, made repeated public filings with the Commission that
materially misrepresented Stewart's revenue recognition policies and
methodologies with respect to the sale of cemetery merchandise made prior to
the need for a funeral (pre-need cemetery merchandise). Stewart misleadingly
represented that it utilized a straightforward delivery method to recognize
revenue for the sale of pre-need cemetery merchandise, by which, upon
delivery, Stewart would recognize as revenue the full contract amount paid
by the customer. However, Stewart could not actually identify the pre-need
contract amount and instead created an estimate of the amount of revenue to
be recognized. Stewart's failure to disclose this methodology of estimating
revenues in its public filings with the Commission rendered its financial
statements not in conformity with Generally Accepted Accounting Principles.
Only when required to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and informed by its outside auditor that it would no longer issue
unqualified audit opinions if this estimated methodology continued to be
used did Stewart finally shift to a revenue recognition system no longer
reliant on estimates. Errors arising from the assumptions underlying
Stewart's methodology for estimating revenues resulted in an overstatement
of net revenue from 2001 through 2005 by more than $72 million, overstated
annual net earnings before taxes during this period by amounts ranging from
10.76% to 38.76%, and were the primary basis for a subsequent material
restatement of earnings.
Based on the above, the Order ordered Stewart to
cease and desist from committing or causing any violations and any future
violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange
Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; ordered Budde to
cease and desist from committing or causing any violations and any future
violations of Exchange Act Rule 13a-14 and cease and desist from causing any
violations and any future violations of Section 13(a), 13(b)(2)(A), and
13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13
thereunder; and ordered Hymel to cease and desist from causing any
violations and any future violations of Sections 13(a), 13(b)(2)(A), and
13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13
thereunder. Stewart, Budde and Hymel consented to the issuance of the Order
without admitting or denying any of the findings contained therein.
In the Matter of Stewart Enterprises, Inc., Kenneth C. Budde, CPA, and
Michael G. Hymel, CPA.
In December 2008 the FASB and the IASB
announced a new joint project on cleaning up much of mess in revenue recognition
standards in IFRS ---
http://www.iasb.org/News/Press+Releases/IASB+and+FASB+propose+joint+approach+for+revenue+recognition.htm
Bob Jensen's threads on issues in revenue
recognition and timing ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Question
Is revenue recognition really as simple as the IASB is trying to make us
believe?
From IAS Plus on January 29, 2009
Deloitte's IFRS Global
Office has published an
IAS Plus Update Newsletter Discussion Paper
Proposes New Basis for Revenue Recognition
(PDF 117k). On 19 December 2008, the IASB and FASB
jointly published a discussion paper (DP) that
proposes a single, contract-based revenue
recognition model. The model would apply broadly to
contracts with customers, although contracts in the
areas of financial instruments, insurance, and
leasing may be excluded. Under the proposed model,
revenue would be recognised on the basis of
increases in an entity's net position in a contract
with a customer. |
With regard to recognition of revenue,
the DP states:
In the proposed model, revenue is recognised when a
contract asset increases or a contract liability
decreases (or some combination of the two). That
occurs when an entity performs by satisfying an
obligation in the contract.
With regard to measurement of revenue,
the DP states:
The boards propose that performance obligations
initially should be measured at the transaction
price – the customer's promised consideration. If a
contract comprises more than one performance
obligation, an entity would allocate the transaction
price to the performance obligations on the basis of
the relative stand-alone selling prices of the goods
and services underlying those performance
obligations.
Subsequent
measurement of the performance obligations should
depict the decrease in the entity's obligation to
transfer goods and services to the customer. When a
performance obligation is satisfied, the amount of
revenue recognised is the amount of the transaction
price that was allocated to the satisfied
performance obligation at contract inception.
Consequently, the total amount of revenue that an
entity recognises over the life of the contract is
equal to the transaction price. |
|
|
The
download link is
http://www.iasplus.com/iasplus/0901revenue.pdf
Jensen Comment
Revenue recognition is so complicated I don't think this relatively simple
standard will prevent many of the revenue recognition abuses and frauds detected
in the United States. For example, it still seems to me that we need drill down
rules like those in the FASB's EITF rules ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
I don't see most issues in the above document covered in the IASB's DP, You
be the judge!
I don't see the DP ending many of the abuses documented at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
"Credit Default Swamp: The Fed wants to give the blundering rating
agencies even more power – this time over derivatives.." The Wall Street
Journal, January 3, 2008 ---
http://online.wsj.com/article/SB123094475030650613.html?mod=djemEditorialPage
Could the political campaign to blame the financial
panic on unregulated derivatives be losing momentum? Let's hope so, because
this might save us from making new mistakes in the name of fixing the wrong
problems.
We now know that the predicted disaster for credit
default swaps (CDS) following the Lehman Brothers bankruptcy never happened.
The government also still hasn't explained how AIG's use of CDS to go long
on housing would have destroyed the planet. And now the New York Federal
Reserve's effort to regulate the CDS market is mired in a turf war. The
Securities and Exchange Commission and the Commodity Futures Trading
Commission have backed rival efforts in New York and Chicago.
But it is the New York Fed proposal that may pose
the most immediate threat to taxpayers, because it is designed to include
firms on at least one end of 90% of CDS contracts. After announcing its
intention to begin by the end of 2008, the New York branch of the central
bank is still awaiting approval from the Fed's Board of Governors to launch
a central clearinghouse for CDS trades. Credit default swaps are essentially
insurance against an organization defaulting on its debt, and they provide a
real-time gauge of credit risk. This has proven particularly valuable
because the Fed's method of judging risk -- relying on the ratings agencies
S&P, Moody's and Fitch -- has been disastrous for investors.
Under pressure from the New York Fed, nine large
CDS dealers -- giants like Goldman Sachs -- agreed to construct a central
counterparty, which would backstop and monitor CDS trades. Called The
Clearing Corp., it failed to catch on in the marketplace. So the big dealers
recently gave an ownership stake to IntercontinentalExchange (ICE). In
return, ICE agreed to make this government-created but privately owned
institution work.
ICE has given the venture, now called ICE Trust,
operational street cred, but the Fed-imposed architecture should still cause
taxpayer concern. That's because it takes the widely dispersed risk in the
CDS marketplace and attempts to centralize it in one institution. If not
structured correctly, it may reward the participating firms with the weakest
balance sheets. For this reason, some of the dealers who have resisted a
central counterparty because it threatens their profits may now embrace it
as a way to socialize their risks. What's more, if it allows these big Wall
Street dealers to build an electronic trading platform on top of the central
clearinghouse, the big banks could prevent pesky Internet start-ups from
threatening their market share.
Here's how the New York Fed's central counterparty
would change the market: Right now, CDS trades are conducted
over-the-counter as private contracts between two parties. They are reported
to the Trade Information Warehouse, so the market has some transparency, but
nobody is on the hook besides the two parties to the agreement. This
provides an incentive for each party to make an informed judgment on whether
the counterparty can be relied upon to pay debts. The buyer of credit
protection -- who is paying annual premiums for the right to be compensated
if a company defaults on its bonds -- has every reason to study the balance
sheet of the seller of a CDS contract.
In the New York Fed's judgment, the recent panic
showed there wasn't enough transparency in CDS trades. This claim would have
more credibility if the Fed would come clean about AIG. But in any case, the
Fed's solution is to force CDS contracts into its central counterparty.
There is a virtue here: A particular bank cannot throw out its collateral
standards to please one large favored client, because the same standards
apply to all participants. The nine large dealers plus perhaps four or five
more participating firms would each contribute roughly $100 million to the
central counterparty, and they'd have to cough up more money if failures
burn through this cash reserve.
However, this system also introduces new risks,
because all participants become liable for the potential failure of the
weakest members. How does one appropriately judge the credit risk of a
participant? ICE Trust and the Fed haven't released details. Sources tell us
that participants will need to have a net worth of at least $1 billion, and,
more ominously, that the Fed wants a high rating from a major credit-ratings
agency as a crucial test of financial health.
If regulators learn nothing else from the housing
debacle, they should recognize that their system of anointing certain firms
to judge credit risk is structurally flawed and immensely expensive for
investors. As Columbia's Charles Calomiris has explained on these pages, one
reason the Basel II standards for bank capital failed is because they
subcontracted risk assessments to the same ratings agencies that slapped AAA
on dodgy mortgage paper.
Unfortunately, the Fed stubbornly refuses to learn
this lesson. With its various lending facilities, the Fed continues to
demand collateral rated exclusively by S&P, Moody's or Fitch. A rival
ratings agency reports that the Fed recently rejected a request from a
clearing bank to consider a ratings firm other than the big three.
No doubt ICE Trust has a strong incentive to
monitor counterparty credit risk. Our concern is that the Fed's failed
policy on credit ratings will increase risks even further if it is allowed
to pollute the $30 trillion CDS market. The credit raters have shown they
are usually the last to know if a bank is in trouble, yet under a
credit-rating seal of approval such a bank could maintain the illusion that
all is well. If you have trouble conceiving of such a scenario, reflect on
the history of Enron, Bear Stearns, Lehman, Citigroup, the mortgage market,
collateralized-debt obligations, etc. Now try to imagine how long it will
take the Fed to commit taxpayer dollars if this central counterparty fails.
Any plan that seeks to minimize marketplace risks
by concentrating them in one institution deserves skepticism. Relying on
ratings from the big three to assess these risks would be an outrage.
"In Plato's cave: Mathematical models are a powerful way of
predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---
http://www.economist.com/specialreports/displaystory.cfm?story_id=12957753
ROBERT RUBIN was Bill Clinton’s treasury
secretary. He has worked at the top of Goldman Sachs and Citigroup. But he
made arguably the single most influential decision of his long career in
1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan
School of Management in Cambridge, Massachusetts, to hire an economist
called Fischer Black.
A decade earlier Myron Scholes, Robert
Merton and Black had explained how to use share prices to calculate the
value of derivatives. The Black-Scholes options-pricing model was more than
a piece of geeky mathematics. It was a manifesto, part of a revolution that
put an end to the anti-intellectualism of American finance and transformed
financial markets from bull rings into today’s quantitative powerhouses.
Yet, in a roundabout way, Black’s approach also led to some of the late
boom’s most disastrous lapses.
Derivatives markets are not new, nor are
they an exclusively Western phenomenon. Mr Merton has described how Osaka’s
Dojima rice market offered forward contracts in the 17th century and
organised futures trading by the 18th century. However, the growth of
derivatives in the 36 years since Black’s formula was published has taken
them from the periphery of financial services to the core.
In “The Partnership”, a history of Goldman
Sachs, Charles Ellis records how the derivatives markets took off. The
International Monetary Market opened in 1972; Congress allowed trade in
commodity options in 1976; S&P 500 futures launched in 1982, and options on
those futures a year later. The Chicago Board Options Exchange traded 911
contracts on April 26th 1973, its first day (and only one month before
Black-Scholes appeared in print). In 2007 the CBOE’s volume of contracts
reached almost 1 trillion.
Trading has exploded partly because
derivatives are useful. After America came off the gold standard in 1971,
businesses wanted a way of protecting themselves against the movements in
exchange rates, just as they sought protection against swings in interest
rates after Paul Volcker, Mr Greenspan’s predecessor as chairman of the Fed,
tackled inflation in the 1980s. Equity options enabled investors to lay off
general risk so that they could concentrate on the specific types of
corporate risk they wanted to trade.
The other force behind the explosion in
derivatives trading was the combination of mathematics and computing. Before
Black-Scholes, option prices had been little more than educated guesses. The
new model showed how to work out an option price from the known
price-behaviour of a share and a bond. It is as if you had a formula for
working out the price of a fruit salad from the prices of the apples and
oranges that went into it, explains Emanuel Derman, a physicist who later
took Black’s job at Goldman. Confidence in pricing gave buyers and sellers
the courage to pile into derivatives. The better that real prices correlate
with the unknown option price, the more confidently you can take on any
level of risk. “In a thirsty world filled with hydrogen and oxygen,” Mr
Derman has written, “someone had finally worked out how to synthesise H2O.”
Poetry in Brownian motion Black-Scholes is
just a model, not a complete description of the world. Every model makes
simplifications, but some of the simplifications in Black-Scholes looked as
if they would matter. For instance, the maths it uses to describe how share
prices move comes from the equations in physics that describe the diffusion
of heat. The idea is that share prices follow some gentle random walk away
from an equilibrium, rather like motes of dust jiggling around in Brownian
motion. In fact, share-price movements are more violent than that.
Over the years the “quants” have found
ways to cope with this—better ways to deal with, as it were, quirks in the
prices of fruit and fruit salad. For a start, you can concentrate on the
short-run volatility of prices, which in some ways tends to behave more like
the Brownian motion that Black imagined. The quants can introduce sudden
jumps or tweak their models to match actual share-price movements more
closely. Mr Derman, who is now a professor at New York’s Columbia University
and a partner at Prisma Capital Partners, a fund of hedge funds, did some of
his best-known work modelling what is called the “volatility smile”—an
anomaly in options markets that first appeared after the 1987 stockmarket
crash when investors would pay extra for protection against another imminent
fall in share prices.
The fixes can make models complex and
unwieldy, confusing traders or deterring them from taking up new ideas.
There is a constant danger that behaviour in the market changes, as it did
after the 1987 crash, or that liquidity suddenly dries up, as it has done in
this crisis. But the quants are usually pragmatic enough to cope. They are
not seeking truth or elegance, just a way of capturing the behaviour of a
market and of linking an unobservable or illiquid price to prices in traded
markets. The limit to the quants’ tinkering has been not mathematics but the
speed, power and cost of computers. Nobody has any use for a model which
takes so long to compute that the markets leave it behind.
The idea behind quantitative finance is to
manage risk. You make money by taking known risks and hedging the rest. And
in this crash foreign-exchange, interest-rate and equity derivatives models
have so far behaved roughly as they should.
A muddle of mortgages Yet the idea behind
modelling got garbled when pools of mortgages were bundled up into
collateralised-debt obligations (CDOs). The principle is simple enough.
Imagine a waterfall of mortgage payments: the AAA investors at the top catch
their share, the next in line take their share from what remains, and so on.
At the bottom are the “equity investors” who get nothing if people default
on their mortgage payments and the money runs out.
Despite the theory, CDOs were hopeless, at
least with hindsight (doesn’t that phrase come easily?). The cash flowing
from mortgage payments into a single CDO had to filter up through several
layers. Assets were bundled into a pool, securitised, stuffed into a CDO,
bits of that plugged into the next CDO and so on and on. Each source of a
CDO had interminable pages of its own documentation and conditions, and a
typical CDO might receive income from several hundred sources. It was a
lawyer’s paradise.
This baffling complexity could hardly be
more different from an equity or an interest rate. It made CDOs impossible
to model in anything but the most rudimentary way—all the more so because
each one contained a unique combination of underlying assets. Each CDO would
be sold on the basis of its own scenario, using central assumptions about
the future of interest rates and defaults to “demonstrate” the payouts over,
say, the next 30 years. This central scenario would then be “stress-tested”
to show that the CDO was robust—though oddly the tests did not include a 20%
fall in house prices.
This was modelling at its most feeble.
Derivatives model an unknown price from today’s known market prices. By
contrast, modelling from history is dangerous. There was no guarantee that
the future would be like the past, if only because the American housing
market had never before been buoyed up by a frenzy of CDOs. In any case,
there are not enough past housing data to form a rich statistical picture of
the market—especially if you decide not to include the 1930s nationwide fall
in house prices in your sample.
Neither could the models take account of
falling mortgage-underwriting standards. Mr Rajan of the University of
Chicago says academic research suggests mortgage originators, keen to
automate their procedures, stopped giving potential borrowers lengthy
interviews because they could not easily quantify the firmness of someone’s
handshake or the fixity of their gaze. Such things turned out to be better
predictors of default than credit scores or loan-to-value ratios, but the
investors at the end of a long chain of securities could not monitor lending
decisions.
The issuers of CDOs asked rating agencies
to assess their quality. Although the agencies insist that they did a
thorough job, a senior quant at a large bank says that the agencies’ models
were even less sophisticated than the issuers’. For instance, a BBB tranche
in a CDO might pay out in full if the defaults remained below 6%, and not at
all once they went above 6.5%. That is an all-or-nothing sort of return,
quite different from a BBB corporate bond, say. And yet, because both shared
the same BBB rating, they would be modelled in the same way.
Issuers like to have an edge over the
rating agencies. By paying one for rating the CDOs, some may have laid
themselves open to a conflict of interest. With help from companies like
Codefarm, an outfit from Brighton in Britain that knew the agencies’ models
for corporate CDOs, issuers could build securities with any risk profile
they chose, including those made up from lower-quality ingredients that
would nevertheless win AAA ratings. Codefarm has recently applied for
administration.
There is a saying on Wall Street that the
test of a product is whether clients will buy it. Would they have bought
into CDOs had it not been for the dazzling performance of the quants in
foreign-exchange, interest-rate and equity derivatives? There is every sign
that the issuing banks believed their own sales patter. The banks so liked
CDOs that they held on to a lot of their own issues, even when the idea
behind the business had been to sell them on. They also lent buyers much of
the money to bid for CDOs, certain that the securities were a sound
investment. With CDOs in deep trouble, the lenders are now suffering.
Modern finance is supposed to be all about
measuring risks, yet corporate and mortgage-backed CDOs were a leap in the
dark. According to Mr Derman, with Black-Scholes “you know what you are
assuming when you use the model, and you know exactly what has been swept
out of view, and hence you can think clearly about what you may have
overlooked.” By contrast, with CDOs “you don’t quite know what you are
ignoring, so you don’t know how to adjust for its inadequacies.”
Now that the world has moved far beyond
any of the scenarios that the CDO issuers modelled, investors’ quantitative
grasp of the payouts has fizzled into blank uncertainty. That makes it hard
to put any value on them, driving away possible buyers. The trillion-dollar
bet on mortgages has gone disastrously wrong. The hope is that the
trillion-dollar bet on companies does not end up that way too.
Continued in article
Denny Beresford forwarded the following link. I don't know how long it will
be a free download.
"The Crash: What Went Wrong? How did the most dynamic and sophisticated
financial markets in the world come to the brink of collapse? The Washington
Post examines how Wall Street innovation outpaced Washington regulation.,"
The Washington Post, January 2009 ---
http://www.washingtonpost.com/wp-srv/business/risk/index.html
Jensen Comment
The above site has three links to AIG and what went wrong with their credit
default swaps.
Part 1 "The Beautiful Machine" ---
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/28/AR2008122801916.html
Part 2 "A Crack in the System"---
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/29/AR2008122902670.html
Part 3 "Downgrades and Downfall"---
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/30/AR2008123003431.html
"Everything You Wanted to Know about Credit Default Swaps--but Were Never
Told," by Peter J. Wallison, RGE, January 25, 2009 ----
Click Here
Also see
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Bob Jensen's Primer on Derivatives ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Primer
Also see how AIG and some other Wall Street firms were bailed out of their
credit default swaps ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Madoff Chasers Dug for Years, to No Avail
by Kara
Scannell
Jan 05, 2009
Click here to view the full article on WSJ.com
TOPICS: Auditing,
Fraudulent Financial Reporting, SEC, Securities and Exchange
Commission
SUMMARY: "I
think the reality is the [SEC] enforcement program needs some
systematic review at this point, and it is not a review which
should start with judgments," said, Joel Seligman, president of
the University of Rochester, in the related article. "You want
to know what went wrong." The main article describes a series of
detailed investigations into Madoff investment management
practices that failed to uncover the biggest Ponzi scheme in
history.
CLASSROOM
APPLICATION: Auditing classes can use the article to discuss
fraud investigations versus overall financial statement audits,
evidential matter, and the importance of overall financial
statement analysis to assess reasonability of reported results.
QUESTIONS:
1. (Introductory) What auditing expertise is needed by
Securities and Exchange Commission staff members to properly
perform their functions related to the matter of Bernard L.
Madoff Securities Investment LLC?
2. (Introductory) Author of the lead article Kara
Scannell writes that "regulatory gaps abound in the paper trail
generated by the SEC's scrutiny of Bernard L. Madoff Investment
Securities." What were the regulatory gaps?
3. (Introductory) What reasonableness test was used by
Harry Markopolous to make the assessment that "Madoff Securities
is the world's largest Ponzi Scheme," as he wrote in a letter to
the SEC. Did the SEC follow up on this accusation?
4. (Advanced) One accusation by an outsider that the
SEC did specifically pursue, according to the article, was to
determine whether Mr. Madoff was "front-running" for favored
clients. Design an audit test to assess that question, including
in your answer a definition of the term.
5. (Advanced) Review the audit test drafted in answer
to question 4. Is it likely that your test would uncover the
type of fraud Madoff committed? Why or why not?
6. (Advanced) What audit steps did the SEC undertake in
its review of January 2005 customer accounts, according to the
article? What audit steps did they possibly overlook? How might
these steps have uncovered fraud?
7. (Introductory) In 1992, the SEC's enforcement
division sued two Florida accountants for selling unregistered
investment securities managed by Madoff. "With no investors
found to be harmed, the SEC concluded there was no fraud." Why
were the investors not shown to be harmed?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
SEC Nominee to Face Tough Questions at Confirmation Hearing
by Sarah N. Lynch
Jan 07, 2009
Online Exclusive
|
"Madoff Chasers Dug for Years, to No Avail: Regulators Probed at Least
8 Times Over 16 Years; Congress Starts Review of SEC Today," by Kara Scannell,
The Wall Street Journal, January 5, 2008 ---
http://online.wsj.com/article/SB123111743915052731.html?mod=djem_jiewr_AC
Bernard L. Madoff Investment Securities LLC was
examined at least eight times in 16 years by the Securities and Exchange
Commission and other regulators, who often came armed with suspicions.
SEC officials followed up on emails from a New York
hedge fund that described Bernard Madoff's business practices as "highly
unusual." The Financial Industry Regulatory Authority, the industry-run
watchdog for brokerage firms, reported in 2007 that parts of the firm
appeared to have no customers.
Mr. Madoff was interviewed at least twice by the
SEC. But regulators never came close to uncovering the alleged $50 billion
Ponzi scheme that investigators now believe began in the 1970s.
The serial regulatory failures will be on display
Monday when Congress holds a hearing to probe why the alleged fraud went
undetected. Among the key witnesses is SEC Inspector General David Kotz, who
was asked last month by the agency's chairman, Christopher Cox, to
investigate the mess.
The situation is even more awkward because SEC
examiners seemed to be looking in the right places, yet still were unable to
unmask the alleged scheme. For example, investigators were led astray by
concerns that Mr. Madoff, now under house arrest, was placing orders for
favored clients ahead of others to get a better price, a practice known as
"front running." Front running isn't thought to have played a role in the
firm's collapse.
Concern that the SEC lacks the expertise to keep up
with fraudsters is the latest criticism of the agency, which saw the Wall
Street investment banks it oversees get pummeled or vanish altogether in
2008. With Congress likely to take a hard look at how to structure oversight
of financial markets, the SEC is struggling to maintain its clout.
The failure to stop Mr. Madoff also is an
embarrassment for Mary Schapiro, the Finra chief who has been nominated by
President-elect Barack Obama as the next SEC chairman. Finra was involved in
several investigations of Mr. Madoff's firm, concluding in 2007 that it
violated technical rules and failed to report certain transactions in a
timely way.
Ms. Schapiro declined to comment. Mr. Cox has
previously acknowledged mistakes by the SEC. The agency declined to comment.
Regulatory gaps abound in the paper trail generated
by the SEC's scrutiny of Bernard L. Madoff Investment Securities, according
to a review of the documents. Many of the details haven't been reported
previously.
For years, Mr. Madoff told regulators he wasn't
running an investment-advisory business. By saying he instead managed
accounts for hedge funds, Mr. Madoff was able to avoid regular reviews of
his advisory business.
In 1992, Mr. Madoff had a brush with the SEC's
enforcement division, which had sued two Florida accountants for selling
unregistered securities that paid returns of 13.5% to 20%. The SEC believed
at the time it had uncovered a $440 million fraud.
"We went into this thinking it could be a major
catastrophe," Richard Walker, then-chief of the SEC's New York office, told
The Wall Street Journal at the time.
The SEC probe turned up money that had been managed
by Mr. Madoff. He said he didn't know the money had been raised illegally.
With no investors found to be harmed, the SEC
concluded there was no fraud. But the scheme indicated Mr. Madoff was
managing money on behalf of other people.
In 1999 and 2000, the SEC sent examiners into Mr.
Madoff's firm to review its trading practices. SEC officials worried the
firm wasn't properly displaying orders to others in the market, violating a
trading rule. In response, Mr. Madoff outlined new procedures to address the
findings.
Continued in article
A Tale of Four Investors
Forwarded by Dennis Beresford
Four investors made different
investment decisions 10 years ago. Investor one was extremely risk
averse so he put $1 million in a safe deposit box. Today he still
has $1 million. Investor two was a bit less risk averse so she
bought $1 million of 6% Fanny Mae Preferred. She put the $15,000
she received in dividends each quarter in a safe deposit box. After
receiving 40 dividends, she recently sold her investment for $20,000
so she now has $620,000 in her safe deposit box. Investor three was
less risk averse so he bought and held a $1 million well diversified
U.S. stock portfolio which he recently sold for $1 million, putting
the $1 million in his safe deposit box. Investor four had a friend
who knew someone who was able to invest her $1 million with Bernie
Madoff. Like clockwork, she received a $10,000 check each and every
month for 120 months. She cashed all the checks, putting the money
in her safe deposit box. She was outraged to learn that she will no
longer receive her monthly checks. Even worse, she lost all her
principal. She only has $1,200,000 in her safe deposit box. She
hopes the government will bail her out.
Lawrence D. Brown
J. Mack Robinson Distinguished Professor of Accounting
Georgia State University
December 18, 2008
"Madoff 'Victims' Do Math, Realize They Profited," SmartPros,
January 2009 ---
http://accounting.smartpros.com/x64396.xml
The many Bernard Madoff investors who withdrew
money from their accounts over the years are now wrestling with an ethical
and legal quandary. What they thought were profits was likely money stolen
from other clients in what prosecutors are calling the largest Ponzi scheme
in history. Now, they are confronting the possibility they may have to pay
some of it back.
The issue came to the forefront this week as about
8,000 former Madoff clients began to receive letters inviting them to apply
for up to $500,000 in aid from the Securities Investor Protection Corp.
Lawyers for investors have been warning clients to
do some tough math before they apply for any funds set aside for the
victims, and figure out whether they were a winner or loser in the scheme.
Hundreds and maybe thousands of investors in
Madoff's funds have been withdrawing money from their accounts for many
years. In many cases, those investors have withdrawn far more than their
principal investment.
"I had a call yesterday from a guy who said, 'I've
taken out more money then I originally put in, but I still had $1 million
left with Madoff. Should I file a $1 million claim?'" said Steven Caruso, a
New York attorney specializing in securities and investment fraud.
"I'm hard-pressed to give advice in that
situation," Caruso said.
Among the options: Get in line with other victims
looking for restitution. Keep quiet and hope nobody notices. Return the
money. Or hire a lawyer and fight to keep profits that were probably
fraudulent.
No one knows yet how many people will emerge as net
winners in the scandal, but the numbers appear to be substantial. Many of
Madoff's long-term investors have, over time, cashed out millions of dollars
of their supposed profits, which routinely amounted to 11 percent to 15
percent per year.
Jonathan Levitt, a New Jersey attorney who
represents several former Madoff clients, said more than half of the victims
who called his office looking for help have turned out to be people whose
long-term profits exceeded their principal investment.
"There are a lot of net winners," he said.
Asked for an example, Levitt said one caller, whom
he declined to name, invested $1.8 million with Madoff more than a decade
ago, then cashed out nearly $3 million worth of "profits" as the years went
by.
On paper, he still had $4 million invested with
Madoff when the scheme collapsed, but it now looks as if that figure was
almost entirely comprised of fictitious profits on investments that were
never actually made, leaving his claim to be owed anything unclear.
Other attorneys report getting similar calls.
Under federal law, the court-appointed trustee
trying to unravel Madoff's business can demand that people who profited from
the scheme return some or all of the money.
These so-called "clawbacks" are generally limited
to payouts over the last six years, but could still amount to big bucks for
some investors.
When a hedge fund run by the Bayou Group collapsed
and was revealed to be a Ponzi scheme in 2005, the trustee handling the case
sought court orders forcing investors to return false profits. Many experts
anticipate a similar process in the Madoff case.
Applying for the aid could give the trustee
evidence he needs to initiate a clawback claim. On the other hand, investors
who ignore the letter would most likely forfeit any chance of recovering
lost funds.
No matter how they respond, it may only be a matter
of time before investors wiped out in the scandal turn on those who
unknowingly enjoyed the fruits of the fraud.
"The sharks are all circling," Caruso said.
Some hedge funds that had billions of dollars
invested with Madoff are already going through years worth of records,
trying to figure out which of their investors withdrew more than they put
in.
That data could be used by the fund managers to
defend themselves against lawsuits, or go after clients deemed to have
profited from the scheme and get them to return the cash.
The future is equally cloudy for investors who
cashed out entirely before Madoff's arrest.
Continued in article
All Reported Trades in Madoff's Investment Fund Were Fakes for 28 Years:
How could the "auditors" not be complicit in the Ponzi fraud?
"BERNIE'S FAKE TRADES REGULATORS: NO TRACE OF MADOFF STOCK BUYS SINCE
1960s," by James Doran, The New York Post, January 16, 2009 ---
http://www.nypost.com/seven/01162009/business/bernies_fake_trades_150467.htm
The mystery surrounding Bernard Madoff's alleged
$50 billion Ponzi scheme deepened further yesterday after the securities
industry's watchdog said there was no evidence that the accused swindler
ever traded a single share on behalf of his clients, suggesting financial
irregularities going back to the 1960s.
Officials at the Financial Industry Regulatory
Authority, known as FINRA, told The Post that after examining more than 40
years' worth of financial records from Madoff's now-defunct broker dealer,
there are no signs that Bernard L. Madoff Investment Securities ever traded
shares on behalf of the investment-advisory business at the center of the
scandal.
The startling findings contradict statements that
Madoff's advisory clients received showing hundreds, if not thousands of
trades, completed by the broker dealer every year.
"Our investigations of Bernard Madoff's broker
dealership showed no evidence that any shares were ever traded on behalf of
his investment advisory business," a FINRA spokesman said, adding that the
regulator has looked at Madoff's books going back to 1960.
Ira Lee Sorkin, a Madoff lawyer, declined to
comment.
Madoff was arrested last month after his sons said
their father had confessed to them that his investment-advisory business was
a Ponzi scheme that had bilked $50 billion out of wealthy friends,
vulnerable charities and universities. Madoff remains free on $10 million
bail.
While his advisory business is at the center of the
scandal, all signs point to Madoff's broker dealer being a legitimate
business that traded shares wholesale on behalf of investment banks, mutual
funds and other institutions.
Madoff was previously vice chairman of FINRA's
predecessor NASD. He was also a member of the Nasdaq stock exchange, where
he served as chairman of its trading committee.
Richard Rampell, a Florida-based certified
accountant who counts as clients several of Madoff's victims, said his
review of dozens of statements supports FINRA's findings.
"Everything I saw on those statements told me that
Madoff was clearing his own trades," he said. "There was no third party
mentioned on any of those statements."
Steve Harbeck, CEO of Securities Industry
Protection Corp., the outfit overseeing the Madoff bankruptcy to ensure
clients get some sort of compensation, said his findings are similar to
FINRA's.
"I do not have any evidence to contradict that," he
said. "This is an amazing story that something like this could have gone on
undetected for so long."
Harbeck added that he believed Madoff has been
defrauding clients for at least 28 years. "I have seen evidence to that end
and I have nothing to contradict it," he said.
Question
If Madoff's stock trades were faked for 28 years, where did the cash come from
to pay some investors?
Answer
The definition of a Ponzi scheme depends upon new investors paying cash to pay
earlier investors ---
http://en.wikipedia.org/wiki/Ponzi
This almost eliminates the amount of $50 billion Madoff stole that can be
recovered for the latest investors in his investment fund.
Why Madoff's Hedge Fund Could Be Audited by Non-registered Auditors
We all know that Bernie Madoff's brokerage firm was
audited by an obscure 3-person accounting firm that is not registered with the
Public Company Accounting Oversight Board. This was permitted because the SEC
exempted privately owned brokerage firms from the SOX requirement that firms are
audited by registered accountants. Floyd Norris reports, in today's NY Times,
that the SEC has now quietly rescinded that exemption. As a result, firms that
audit broker-dealers for fiscal years that end December 2008 or later will have
to be registered. However, under another SOX provision, PCAOB is allowed to
inspect only audits of publicly held companies. NYTimes,
Oversight for Auditor of Madoff.
"Why an Obscure Accounting Firm Could Audit Madoff's Records," Securities Law
Professor Blog, January 9, 2008 ---
http://lawprofessors.typepad.com/securities/
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
"SEC Goes After Another
Ponzi Scheme," Securities Law Professor Blog,
January 8, 2009 ---
http://lawprofessors.typepad.com/securities/
Another Ponzi scheme -- is the SEC seeking
atonement for failure to uncover the Madoff fraud?
The SEC announced today that it has filed an
emergency civil enforcement action to
halt an ongoing affinity fraud and Ponzi scheme orchestrated by
Buffalo-based Gen-See Capital Corporation a/k/a
Gen Unlimited ("Gen-See") and its owner and president, Richard S. Piccoli.
According to the Commission's complaint, the defendants have raised millions
of dollars from investors by promising steady, "guaranteed" returns, ranging
from 7.1% to 8.3% per annum, and no fees or commissions. In November 2008
alone, the defendants raised over $500,000 from investors. The defendants
have relied heavily on advertisements in newsletters published by churches
and dioceses. The complaint further alleges that the defendants told
investors that their money was invested in "high quality" residential
mortgages that the defendants were able to purchase at a discount. The
defendants did not invest the funds as promised, but instead used new
investor funds to make payments to earlier investors. In addition, the
complaint alleges that Gen-See's offering and sale of securities to the
public was not registered with the Commission.
The Commission seeks, among other emergency relief,
a temporary restraining order (i) enjoining the defendants from future
violations of the federal securities laws; (ii) freezing the defendants'
assets; (iii) directing the defendants to provide verified accountings; and
(iv) prohibiting the destruction, concealment or alteration of documents. In
addition to this emergency relief, the Commission seeks preliminary and
permanent injunctive relief and civil money penalties against the defendants
as well as disgorgement by the defendants of their ill-gotten gains plus
prejudgment interest.
"SEC Takes Action to Halt
Ponzi Scheme,"
Securities Law Professor Blog, January 7, 2009 ---
http://lawprofessors.typepad.com/securities/
The SEC filed an emergency action to halt an
estimated $50 million Ponzi scheme conducted by Joseph S.
Forte (“Forte”) and Joseph Forte, L.P. (“Forte
LP”), of Broomall, Pennsylvania. According to the Commission’s complaint,
from at least February 1995 to the present, Forte has been operating a Ponzi
scheme in which he fraudulently obtained approximately $50 million from as
many as 80 investors through the sale of securities in the form of limited
partnership interests. The federal district court for the Eastern District
of Pennsylvania issued an order granting a preliminary injunction, freezing
assets, compelling an accounting, and imposing other emergency relief.
Without admitting or denying the allegations in the Commission’s complaint,
Forte and Forte LP consented to the entry of the order.
The Commission’s complaint alleges that in late
December 2008, Forte admitted to federal authorities that from at least 1995
through December 2008, he had been conducting a Ponzi scheme. Forte, who has
never been registered with the Commission in any capacity, told investors
that he would invest the limited partnership funds in a securities futures
trading account in the name of Forte LP that would trade in futures
contracts, including S&P 500 stock index futures (“trading program”). Forte
has admitted that he misrepresented and falsified Forte LP’s trading
performance from the very first quarter. From 1995 through September 30,
2008, the defendants reported to investors annual returns ranging from
18.52% to as high as 37.96%. However, from January 1998 through October
2008, the Forte LP trading account had net trading losses of approximately
$3.3 million.
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
More Headaches for PwC
Two Partners in India are Arrested
"Price Waterhouse Auditors Arrested in Satyam Inquiry," by Harichandan
Arakali and Saikat Chatterjee, Bloomberg News, January 24, 2009 ---
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5sa8Cqwaa_Q&refer=home#
PricewaterhouseCoopers LLP’s Indian affiliate, the
auditor of Satyam Computer Services Ltd., said two partners were arrested by
police as authorities extended the nation’s largest fraud inquiry.
Srinivas Talluri and S. Gopalakrishnan were
remanded to judicial custody on charges of “conspiracy and co-
participation,” A. Shivanarayana, a police spokesman in Andhra Pradesh
state, said from the province’s capital Hyderabad, where Satyam is based.
Price Waterhouse said in an e-mailed statement it didn’t know why two
partners were detained.
Seven years after the implosion of Enron Corp. led
to the dissolution of accounting firm Arthur Andersen LLP, the Satyam case
has put PricewaterhouseCoopers in the spotlight. Indian police, fraud squad,
markets regulator and accounting body have started investigations after
Satyam founder Ramalinga Raju said Jan. 7 that he had fabricated $1 billion
of assets.
“Over the last fortnight, the firm has fully
cooperated in all inquiries and has provided the documents called for by the
Indian authorities,” Price Waterhouse said today in a statement from New
Delhi. “We greatly regret that two Price Waterhouse partners have been
detained today for further questioning.”
PricewaterhouseCoopers LLP may also face scrutiny
in the U.S. after Satyam’s New York-listed equities lost 82 percent of their
market value in two weeks. The U.S. Securities and Exchange Commission is
investigating whether Satyam misled investors and officials from the SEC
plan to coordinate inquiries with counterparts in India.
Fudged Accounts
The auditing firm said Jan. 15 that its reports
could no longer be relied on after former chairman Raju said he’d fudged the
accounts. The Institute of Chartered Accountants of India, a statutory body
which oversees auditors, will report on its investigation into Price
Waterhouse on Feb. 11.
Prosecutors allege Satyam padded employee numbers
to siphon off cash and forged documents to support fake bank deposits.
Satyam had about 33 billion rupees ($674 million)
of “fictitious and non-existent” accounts, public prosecutor K. Ajay Kumar
told a hearing on Jan. 22. The company had about 40,000 employees, compared
with the 53,000 claimed by Satyam, he said.
India’s biggest corporate fraud investigation is
being led by teams from the Andhra Pradesh state police’s criminal
investigation department, the markets regulator, the independent accounting
body and the government’s serious fraud office.
Separate Entity
Satyam’s state-appointed board has almost arranged
funds to help tide over a cash crunch till the end of March, the company
said yesterday. The board has hired KPMG and Deloitte Touche Tohmatsu to
restate the accounts.
Satyam is struggling to raise cash to pay salaries
after Raju said he had falsified accounts for several years. It is also
battling to stop off customers from joining State Farm Mutual Automobile
Insurance Co. in canceling contracts.
Price Waterhouse has offices in nine Indian cities,
according to the firm’s Web site. The Indian operation is a separate legal
identity from PricewaterhouseCoopers International Ltd., according to the
Web site.
The auditor’s clients include Maruti Suzuki India
Ltd., maker of half the cars in the country, and the local units of
Colgate-Palmolive Co., the world’s largest toothpaste maker.
PricewaterhouseCoopers LLP has a “vigorous global
network” allowing member firms to “operate simultaneously as the most local
and the most global of businesses,” the firm says on its Web site. The site
also includes a disclaimer that each member firm “is a separate and
independent legal entity.”
Larsen & Toubro
Larsen & Toubro Ltd., India’s biggest engineering
company, yesterday tripled its stake in Satyam to give it greater say in the
rescue of the software exporter.
Continued in article
"Indian Prosecutors Allege Satyam Founder Siphoned Funds," by Eric Bellman
and Niraj Sheth, The Wall Street Journal, January 23, 2009 ---
http://online.wsj.com/article/SB123261715996005671.html?mod=todays_us_marketplace
The disgraced former chairman of Satyam Computer
Services Ltd., B. Ramalinga Raju, used salary payments to 13,000 fictitious
employees to siphon millions of dollars from the Indian outsourcer for land
purchases, prosecutors said Thursday.
Prosecutors in the southern Indian city of
Hyderabad, where the technology-outsourcing firm is based, told a criminal
court that Satyam has only about 40,000 employees instead of the 53,000 it
claims.
Prosecutors claimed the money, in the form of
salaries paid to ghost employees, came to around $4 million a month. The
money was diverted through front companies and through accounts belonging to
one of Mr. Raju's brothers and his mother to buy thousands of acres of land,
the prosecutors said.
Prosecutors said they are investigating but didn't
allege that Mr. Raju's mother or brother were involved. They didn't offer
further details on how the alleged diversion of funds took place.
Prosecutors made the claims in a hearing Thursday
where the state police for the state of Andhra Pradesh asked for more time
to interrogate Mr. Raju and Satyam's former chief financial officer,
Srinivas Vadlamani, who is also in custody.
"The funds of Satyam have been diverted to many
other companies," K. Ajay Kumar, assistant prosecutor, told a packed
courtroom. Investigators need more time with Mr. Raju and Mr. Vadlamani to
figure out where the money has gone, Mr. Kumar said.
Continued in article
PwC Auditors Apparently Let This Massive and Long-Term Accounting Fraud Go
Undetected
Price Waterhouse, auditor to Satyam Computer Services
Ltd. (500376.BY), Wednesday said it is examining the contents of Satyam Chairman
B. Ramalinga Raju's statement in which he said Satyam's accounts were falsified.
"We have learnt of the disclosure made by the chairman of Satyam Computer
Services and are currently examining the contents of the statement. We are not
commenting further on this subject due to issues of client confidentiality,"
Price Waterhouse said in an e-mailed statement.
"Price Waterhouse: Currently Examining Satyam Chmn's Statement," Lloyds, January
7, 2008 ---
http://www.lloyds.com/dj/DowJonesArticle.aspx?id=416525
Earlier in the day, Satyam Chairman Raju resigned, admitting to falsifying
company accounts and inflating revenue and profit figures over several years.
"Satyam Chief Admits Huge (multi-year accounting) Fraud," by Heather
Timmons, The New York Times, January 7, 2008 ---
http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html?_r=1&ref=business
Satyam Computer Services, a leading Indian
outsourcing company that serves more than a third of the Fortune 500
companies, significantly inflated its earnings and assets for years, the
chairman and co-founder said Wednesday, roiling Indian stock markets and
throwing the industry into turmoil.
The chairman, Ramalinga Raju, resigned after
revealing that he had systematically falsified accounts as the company
expanded from a handful of employees into a back-office giant with a work
force of 53,000 and operations in 66 countries.
Mr. Raju said Wednesday that 50.4 billion rupees,
or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the
company listed as assets for its second quarter, which ended in September,
were nonexistent.
Revenue for the quarter was 20 percent lower than
the 27 billion rupees reported, and the company’s operating margin was a
fraction of what it declared, he said Wednesday in a letter to directors
that was distributed by the Bombay Stock Exchange.
Satyam serves as the back office for some of the
largest banks, manufacturers, health care and media companies in the world,
handling everything from computer systems to customer service. Clients have
included General Electric, General Motors, Nestlé and the United States
government. In some cases, Satyam is even responsible for clients’ finances
and accounting.
The revelations could cause a major shake-up in
India’s enormous outsourcing industry, analysts said, and may force many
large companies to investigate and perhaps revamp their back offices.
“This development is going to have a major impact
on Satyam’s business with its clients,” said analysts with Religare Hichens
Harrison on Wednesday. In the short term “we will see lot of Satyam’s
clients migrating to competition like Infosys, TCS and Wipro,” they said.
Satyam is the fourth-largest outsourcing firm after the three named.
In the four-and-a-half page letter distributed by
the Bombay stock exchange, Mr. Raju described a small discrepancy that grew
beyond his control. “What started as a marginal gap between actual operating
profit and the one reflected in the books of accounts continued to grow over
the years. It has attained unmanageable proportions as the size of company
operations grew,” he wrote. “It was like riding a tiger, not knowing how to
get off without being eaten.”
Mr. Raju said he had tried and failed to bridge the
gap, including an effort in December to buy two construction firms in which
the company’s founders held stakes. Speaking of a “deep regret” and a
“tremendous burden,” Mr. Raju said that neither he nor the co-founder and
managing director, B. Rama Raju, had “taken one rupee/dollar from the
company.” He said the board had no knowledge of the situation, nor did his
or the managing director’s families.
The size and scope of the fraud raises questions
about regulatory oversight in India and beyond. In addition to India, Satyam
has been listed on the New York Stock Exchange since 2001, and on Euronext
since January of 2008. The company has been audited by
PricewaterhouseCoopers since its listing on the New York Stock exchange.
Satyam has been under close scrutiny in recent
months, after an October report that the company had been banned from World
Bank contracts for installing spy software on some World Bank computers.
Satyam denied the accusation but in December, the World Bank confirmed
without elaboration on the cause that Satyam had been banned. Also in
December, Satyam’s investors revolted after the company proposed buying two
firms with ties to Mr. Raju’s sons.
On Dec. 30, analysts with Forrester Research warned
that corporations that rely on Satyam might ultimately need to stop doing
business with the company. “Firms should take the initial steps of reviewing
the exit clauses in their current Satyam contracts,” in case management or
direction of the company changed, Forrester said.
The scandal raised questions over accounting
standards in India as a whole, as observers asked whether similar problems
might lie buried elsewhere. The risk premium for Indian companies will rise
in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.
R. K. Gupta, managing director at Taurus Asset
Management in New Delhi, told Reuters: “If a company’s chairman himself says
they built fictitious assets, who do you believe here?” The fraud has “put a
question mark on the entire corporate governance system in India,” he said.
Continued in article
Over 13,000 Well-Paid Ghosts (according to earlier news accounts)
The newspaper said the Serious Frauds Investigation
Office believes Satyam's headcount could have been inflated by 15-20 percent to
siphon off money as salary payments to non-existent employees. "Since a major
chunk of the costs were actually salaries, a minor distortion in the number of
employees could change the personnel expenses significantly," the paper quoted
the source as saying . . . The company's website says it had close to 53,000
staff, including those in subsidiaries and joint ventures as at end-September,
and it has since said that around 2,000 staff have left.
Rueters, January 20, 2009 ---
http://www.reuters.com/article/mergersNews/idUSBOM2182320090120
Where were the auditors?
We don't know where they were, but they're now in jail
"Price Waterhouse Auditors Arrested in Satyam Inquiry," by Harichandan
Arakali and Saikat Chatterjee, Bloomberg News, January 24, 2009 ---
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5sa8Cqwaa_Q&refer=home#
Bob Jensen's threads on PwC woes are at
http://www.trinity.edu/rjensen/Fraud001.htm#PwC
The huge accounting scandal at Satyam Computer
Services Ltd., one of India's biggest information-technology firms, could lead
to an overhaul of corporate-governance standards in the country and force
changes in how Indian companies do business. Although some leading Indian
companies have become international powerhouses in recent years, the general
standard of corporate ethics and accounting have traditionally been poor in
India.
Jackie Range and Joann S. Lublin, "Spotlight on India's Corporate Governance,"
The Wall Street Journal, January 8, 2008 ---
http://online.wsj.com/article_email/SB123134607361061165-lMyQjAxMDI5MzAxNzMwNDc2Wj.html
From The Wall Street Journal Accounting Weekly Review on January 16,
2009
Corporate Scandal Shakes India
by Niraj Sheth,
Jackie Range and Geeta Anand
The Wall Street Journal
Jan 08, 2009
Click here to view the full article on WSJ.com
TOPICS: Accounting,
Audit Committee, Audit Quality, Auditing, Corporate Governance
SUMMARY: The
found chairman of the Indian outsourcing company Satyam, B.
Ramalinga Raju, wrote a letter of resignation to his Board of
Directors in which he said that he "...overstated profits for
the past several years, overstated the amount of debt owed to
the company and understated its liabilities." Raju prepared the
portion of the financial statements that presented over $1
billion in cash when in fact the cash balances were about $66
million. He finally wrote the letter when "...the scheme reached
'simply unmanageable proportions' and he was left in a position
that was 'like riding a tiger, not knowing how to get off
without being eaten.'" The scandal has raised questions about
the role of the auditors, PricewaterhouseCoopers, and the
company's Board of Directors, particularly its audit committee.
It also has left Indian investors lacking confidence in other
Indian investments.
CLASSROOM
APPLICATION: Auditing and management classes may use this
article to discuss corporate governance issues, the role of the
audit committee, and the question of whether the Satyam Board
contained a financial expert as required by Sarbanes-Oxley and
supporting SEC regulations.
QUESTIONS:
1. (Introductory) Based on the description in the
article, what methods did Mr. Ramalinga Raju say that he had
used to improperly inflate Satyam's financial results for the
past several years?
2. (Introductory) What financial controls should
prevent fraud, particularly fraud of this magnitude?
3. (Advanced) What audit procedures should Satyam's
auditors, PricewaterhouseCoopers, have undertaken that may have
uncovered the fraud prior to the time of Mr. Raju's letter?
4. (Advanced) What is corporate governance? What role
does accounting and auditing play in upholding proper corporate
governance?
5. (Advanced) Refer to the first related article. What
impact does the Satyam scandal have on the regulatory
environment in India? What factors in India make it difficult,
more difficult than, say, in the U.S., to implement such changes
in corporate governance behaviors?
6. (Advanced) In general, what is the role of an audit
committee in a corporate Board of Trustees? What is the role of
this committee with respect to a fraud, such as this one
committed at Satyam?
7. (Introductory) Refer to the second related article
in which a corporate governance review firm notes that it
questioned Satyam's fulfillment of U.S. requirements for an
audit committee financial expert. What is an audit committee
financial expert under SEC guidelines developed to implement the
requirements of Sarbanes-Oxley?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
Spotlight on India's Corporate Governance
by Jackie Range and Joann S. Lublin
Jan 08, 2009
Page: A9
Satyam Probe Scrutinizes CFO, Audit Committee
by Eric Bellman and Jackie Range
Jan 14, 2009
Online Exclusive
|
"The Death of LIFO?: Changing inventory method requires managing
the accounting-tax differences," by Robert Bloom and William J. Cenker,
The Journal of Accountancy, January 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Jan/DeathOfLIFO.htm
Few differences between IFRS and U.S. GAAP loom
larger than accounting for inventories, particularly the disallowance of the
last-in, first-out (LIFO) method in IFRS. The proposed shift of U.S. public
companies to IFRS could affect many companies currently using LIFO for both
financial reporting and taxation. This is because the conformity rule of IRC
§ 472(c) requires taxpayers who apply LIFO for tax purposes to also apply it
for income measurement in financial reporting, and IFRS does not permit LIFO
for book accounting.
Therefore, CPAs may be called upon to help manage
inventory method changes. Companies using LIFO would have to switch to FIFO
or average cost. The change would place companies in violation of the
conformity requirement. Absent relief from the Treasury Department, it would
require them to change their tax method of inventory reporting.
This article highlights the impact of LIFO
accounting, widely used in the U.S. but scarcely used elsewhere. It could be
eliminated if U.S. GAAP were to fully conform to IFRS inventory accounting.
If LIFO were to disappear, many U.S. companies could face large income tax
liabilities from accelerated income recognition. In 2007, Exxon Mobil Corp.
reported its aggregate replacement cost of inventories at year-end exceeded
the inventories’ LIFO carrying value by $25.4 billion. The Sherwin-Williams
Co. reported that if it had used FIFO instead of LIFO, its net income for
2005 would have been $40.8 million higher (Exxon Mobil Corp., 2007 SEC Form
10-K; The Sherwin-Williams Co., 2007 SEC Form 10-K).
The proposed SEC road map released in November
contemplates some large U.S. companies voluntarily adopting IFRS, starting
with filings in 2010. Its application could be mandated for large public
companies starting in 2014.
Another major difference between IFRS and GAAP is
that IFRS requires entities to carry inventory at the lower of cost or net
realizable value. GAAP, on the other hand, values inventories at the lower
of cost or current replacement cost, which is subject to a ceiling of net
realizable value and a floor of net realizable value minus a normal profit
margin.
ACCOUNTING FOR CHANGES IN INVENTORY METHODS
Currently, the GAAP guidance under Statement no. 154, Accounting Changes and
Error Corrections, calls for changes in inventory costing methods to be
retrospectively applied to the prior financial statements presented in
annual reports (paragraph 7), unless it is impracticable to do so. In that
case, the new principles can be applied prospectively (paragraphs 8–9). An
entity makes retrospective application only for the direct effects of the
change (paragraph 10). However, indirect effects—for example, bonuses—are
reflected prospectively (paragraph 10).
Thus, a typical change in inventory method, such as
from average cost to FIFO, is treated retrospectively. The entity reflects a
change from LIFO to FIFO in the same manner. The result (assuming that the
accounting basis for inventory under the new method exceeds the
corresponding basis under the prior methods) is (1) an increase in
inventory, (2) an increase in current income taxes resulting from the
effective increase in income, and (3) an adjustment to retained earnings for
the effect of the increase in net income. The entity may need to show a
deferred tax liability for the temporary difference between the accounting
and tax bases for the inventory change if it were to remain, for example, on
average cost for tax purposes yet switch from average cost to FIFO for book
purposes.
Over time, LIFO can have a significant cumulative
downward effect on the inventory’s value. The cost of goods sold for any
particular year equals the sum of beginning inventory, plus purchases, less
ending inventory. Thus, a lower ending inventory increases cost of goods
sold and reduces taxable income.
INCOME TAXATION OF INVENTORY METHOD CHANGES
For voluntary changes occurring in tax years ending on or after Dec. 31,
2001, IRC § 481(a) generally permits an entity to deduct the entire change
in the year of the change if the adjustment is favorable to the entity.
Alternatively, if the cumulative effect of the change increases the entity’s
liability, the change may be taken into account over four years beginning
with the year of the change—with some exceptions—see "Timing Issues," below
(Revenue Procedure 2008-52, section 5.04). Therefore, instead of crediting
Income Tax Payable for the total tax bill in the following journal entry,
only one-fourth of the tax would be treated as a current liability. The
remainder would go into a Deferred Tax Liability account:
Inventory (asset increase) Retained Earnings
(stockholders' equity increase) Income Tax Payable (liability increase)
Deferred Tax Liability (liability increase)
For income tax purposes, a change in the accounting
method includes a change in the overall plan for reporting gross income or
deductions, or a change in the treatment of any material item (Revenue
Procedure 2008-52 and Treas. Reg. § 1.446-1(e)(2)(ii)(a)).
An accounting change from LIFO to another method is
made on Form 3115, Application for Change in Accounting Method, and can
either be an "advance consent request" or "automatic change request" (see
instructions to Form 3115).
INCOME EFFECTS Companies adopt LIFO primarily to
lower their income tax liability and to postpone paying taxes, but it also
reduces income for financial reporting purposes. Nevertheless, companies are
not required to use the same LIFO method for taxation and accounting. For
example, a unit LIFO method could be used in accounting and a dollar-value
LIFO method in taxation.
A change from LIFO will normally have a significant
positive income effect because the accumulation of prior years’ costs in
beginning inventory will replace cost of goods sold valued at current costs.
Assuming that the inventory turns over, income for the year of change would
increase by the entire amount of the LIFO reserve.
Rolling-Average Method
Another inventory issue in flux has been use of the rolling-average method.
With Revenue Procedure 2008-43, the Service in June reversed its long-held
position against the method. The IRS formerly said the method did not
clearly and accurately reflect income, especially where inventory is held
for long periods or its costs fluctuate significantly. The revenue procedure
provides a safe harbor for using a rolling-average method of inventory
accounting and taxation. If the rolling-average method is not used in
accounting, this method may not accurately portray taxable income. An entity
can secure automatic consent to change its tax inventory method to the
rolling average by complying with all the provisions of this revenue
procedure under IRC § 446(e).
TIMING ISSUES
Fortunately, the accounting change adjustment of establishing the opening
LIFO reserve, as well as the initial section 263A capitalization amount,
prevent amounts from being duplicated or omitted from income. Should the
taxpayer be required to include the section 481(a) amounts in the year of
the change, the potential increase in tax liability can be significant.
Accordingly, such amounts are normally taken into income ratably over four
years. If the entity follows procedures properly, and if the LIFO reserve
was not created over a short period, a four-year adjustment period will
normally be permitted. But if the change occurred because the entity did not
apply LIFO properly, or did not file a timely application, the total amount
of the change may be required to be taken as income in the year of the
change. See Treas. Reg. § 1.481-4 and Revenue Procedure 2008-52. Thus, there
will be a deferred tax liability associated with the switch in the year of
the change and the three following years.
Example. To illustrate an inventory method change,
assume BC Co. is a retail business. BC switches from dollar-value LIFO to
FIFO as of Jan. 1, 20X0, for both financial accounting and income taxation.
The inventory at FIFO is $20 million, and the dollar- value LIFO reserve is
$4 million. BC secures IRS permission to spread the adjustment over four
years.
A change from LIFO to any other method will impact
the balance sheet as well as the income statement in the year of the change.
The LIFO reserve is a contra-asset or asset reduction account that companies
use to adjust downward the cost of inventory carried at FIFO to LIFO. Many
companies use dollarvalue LIFO, since this method applies inflation factors
to "inventory pools" rather than adjusting individual inventory items.
Companies that are on LIFO for taxation and financial reporting typically
use FIFO internally for pricing, purchasing and other inventory management
functions.
Continued in article
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm
Neutrality Dreams versus Reality
Dell said Wednesday that it is accelerating the vesting
of options that are priced at an average $22.03 a share, far above the current
price, resulting in the quarterly charge . . . Bill Kreher, a stock analyst at
Edward Jones who follows Dell, said the manufacturing-related expenses aren't
surprising given the recent changes Dell has made. He added that by recording
the compensation expenses now, Dell is in a better position to give employees
future stock or options grants. With Dell's share price far below the options'
exercise price, he said, "it's probably unrealistic to think those are going to
motivate important employees." The Dell
spokesman said the company isn't planning to award large numbers of new options
and that most of its equity-based compensation now comes in the form of
restricted stock.
"Dell's Costs for Stock Options, Restructuring Will Cut Earnings,"
The Wall Street Journal, January 29, 2009 ---
http://online.wsj.com/article/SB123319391103527179.html?mod=todays_us_marketplace
Jensen Comment
I only highlighted this tidbit to emphasize how accounting standards are seldom
neutral. Although I've been a consistent advocate of FAS 123-R and feel the FASB
did the right think in requiring the expensing of stock options when they vest,
the revised standard did have a tremendous impact on how firms compensate
employees with restricted stock now instead of stock options that were
enormously popular before the revision of FAS 123 (when expensing was optional
and was most certainly the road not taken).
Neutrality may exist in terms of the frame of mind of an accounting standard
setter, but it flies in the face of reality.
Federal securities class action lawsuits increased 19 percent
in 2008, with almost half involving firms in the financial services sector
according to the annual report prepared by the Stanford Law School Securities
Class Action Clearinghouse in cooperation with Cornerstone Research ---
http://securities.stanford.edu/scac_press/20080106_YIR08_Press_Release.pdf
Especially note the 2008 Year in Review link at
http://securities.stanford.edu/clearinghouse_research/2008_YIR/20080106.pdf
"Director Capture,"
The Icahn Report, January 20, 2009 ---
http://www.icahnreport.com/
Jonathan Macey is Deputy Dean and Sam Harris Professor of Corporate
Law, Corporate Finance, and Securities Law at Yale Law School. He is the
author most recently of Corporate Governance: Promises Made, Promises Broken
(Princeton University Press, 2008) available at
http://www.amazon.com
The Icahn Report has exposed: (1) abuses in the use
of golden parachute agreements; (2) many of the false premises behind the
faulty assumption that corporate elections are "democratic" event that
legitimize corporate boards; (3) the entrenchment effects of staggered
boards of directors and, most importantly perhaps; (4) the sheer corruption
of law and morality that is represented by the continued legality and
adoption of poison pill defensive devices.
In my next two blog postings I would like to bring
my own, admittedly academic perspective to two topics that are, I believe,
highly relevant to the agenda of this blog. The first topic is the problem
of "board capture" among boards of directors of public companies. The second
is the general problem with shareholder democracy caused by defects in the
shareholder voting process.
Director Capture
In the academic world, particularly among political
scientists and economists, "capture" occurs when decision-makers such as
corporate directors favor certain vested interests such as incumbent
management, despite the fact that they purport to be acting in the best
interests of some other group, i.e. the shareholders. The problem of capture
and the theories associated with the idea of capture are most closely
associated with George Stigler, and the free-market Chicago School of
Economic thought. Among the more interesting and important theories of
Stigler and other proponents of capture theory is the idea that capture is
not only possible, in many contexts it is inevitable.
In my recent Princeton University Press book
"Corporate Governance: Promises Made: Promises Broken" I apply capture
theory, which is usually used to describe and model the behavior of
bureaucrats in the public sector, to the directors of publicly traded
companies who come to their positions through the board nominating
committee.
In my view, such directors are highly susceptible
to capture… even more susceptible than bureaucrats and politicians. Capture
is inevitable because management controls the machinery of the corporate
election process. Management's narrow interest in having passive and
supportive boards manifests itself in the appointment of docile directors
who are likely to support management's initiatives and unlikely to challenge
management or to demand that managers earn their compensation by maximizing
value for shareholders.
The extension of capture theory to corporate boards
of directors is supported not only by foundational work in political science
and economics but also by important work in social psychology. Directors
participate in corporate decision-making. In doing so, these directors, as a
psychological matter, come to view themselves in a very real way as the
owners of the strategies and plans that the corporation pursues. And of
course, these plans and strategies inevitably are proposed by incumbent
management. Thus, directors inevitably risk simply becoming part of the
management "team" instead of the vigorous outside monitors and evaluators
that they are supposed to be. Management’s persistent support of and
acquiescence in the proposals of management consistently renders directors
incapable of objectively evaluating these strategies and plans later on. Of
course this is not the case when the directors represent hedge funds or
other large investors who have a large financial stake in making sure that
the company prospers.
Another factor leading to board capture is the fact
that boards of directors have conflicting jobs. They are supposed not only
to monitor management, but also to select and evaluate the performance of
top management. After top managers have been selected, the boards of
directors making the selection decisions are highly likely to become
committed to these managers. For this reason, as board tenure lengthens, it
becomes increasingly less likely that boards will remain independent.
The theory of "escalating commitments" predicts
that decision-makers such as corporate directors will come to identify
strongly with management once they have endorsed the strategies and
decisions made by management. Earlier board decisions supporting management,
once made and defended, will affect future board decisions such that later
decisions comport with earlier decisions. As the well-respected Cornell
psychologist Thomas Gilovich has shown, "beliefs are like possessions" and
"[w]hen someone challenges our beliefs, (for example the belief of directors
that management is highly competent) it is as if someone [has] criticized
our possessions."
The cognitive bias that threatens boards of
directors and other proximate monitors is a manifestation of what Daniel
Kahneman and Dan Lovallo have described as the "inside view." Like parents
unable to view their children objectively or in a detached manner, directors
tend to reject statistical reality (such as earnings performance or stock
prices) and view their firms as above average even when they are not. The
first step in dealing with the problem of board capture is to recognize that
the problem exists.
Boards should be free to choose whether they wish
to be trusted advisors of management or whether they want to be credible
monitors of management. They can’t be both. We should stop pretending that
they can.
One policy proposal would be for companies to have
two boards of directors (as they do in Germany and the Netherlands), one for
monitoring and one for assisting in the management of the company. Firms
that decide to retain the single board format should be required to choose
whether their board should devote itself to "monitoring" (or supervising)
management or to advising (or managing along with) the company’s CEO and the
rest of the management team. The farce that board can do both should end.
Boards that purport to monitor or supervise
management should be held to an extremely high standard of independence.
Management should not be involved in any way in the recruitment or retention
of these board members. Socializing and gift-giving should be prohibited.
And, of course, managers themselves should not be allowed to sit on
monitoring boards. Managers should not be allowed to serve as the chairmen
of monitoring boards.
Independence standards should be relaxed for the
boards of companies that elect to participate in management. Decisions that
involve a conflict between the interests of shareholders and the interests
of management should be subjected to close scrutiny. Such decisions include
decisions about executive compensation of all kinds, particularly bonus and
severance payments, as well as decisions about such things as the adoption
of staggered terms for the board or the adoption of a poison pill rights
plan.
Continued in article
Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance
Bob Jensen's threads on great minds in management are at
http://www.trinity.edu/rjensen/theory/00overview/GreatMinds.htm
"Faculty Members Given Laptops May Incur Taxes, by David Shieh,
Chronicle of Higher Education, January 7, 2008 ---
http://chronicle.com/wiredcampus/article/3541/faculty-members-given-laptops-may-incur-taxes?utm_source=at&utm_medium=en
Professors lucky enough to get laptops from their
institutions may want to watch out — the taxman could come knocking.
Manchester College has announced that employees
with university-owned laptops will now have to add those laptops to their
tax forms as taxable items. This means a $1,600 laptop with a four-year life
expectancy would add $400 per year to an employee’s taxable income,
Manchester’s information-technology director, Michael Case, wrote in a
message sent to an e-mail list for campus technology officials hosted by
Educause.
At Manchester, the news has caused “significant
push back from employees” who want to avoid paying additional taxes, Mr.
Case wrote.
“Many want to exchange their laptop for a desktop
to avoid the tax liability in the future,” he wrote. “I can’t blame them
because I’m thinking the same thing.”
Because university laptops are often used for
personal purposes, the Internal Revenue Service counts them as taxable
“fringe benefits,” said Bertrand Harding, a tax lawyer specializing in
nonprofit institutions, in an interview with The Chronicle. If a college is
able to provide documentation showing such laptops were used for business
purposes every time they were turned on, it would not have to pay tax on the
machines. But few institutions could offer any such proof, Mr. Harding said.
In recent years, the IRS has started to crack down
on fringe benefits like laptops and cellphones, and it has asked
institutions to pay taxes that were not withheld from employees, Mr. Harding
said.
This has resulted in an increasing number of
colleges — like Manchester — listing laptops as taxable items, Mr. Harding
said.
“Some colleges just put their heads in the sand and
say we’re just going to wait for the IRS to come,” Mr. Harding said. “Others
are changing their policies so they don’t get hammered when the IRS comes
in.”
Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
"IASB proposes amendments to clarify the accounting for embedded
derivatives," IASB, December 22, 2008 ---
http://www.iasb.org/Current+Projects/IASB+Projects/Financial+Instruments/Financial+instruments.htm
The International Accounting Standards Board (IASB)
today published for public comment proposals to clarify the accounting
treatment for embedded derivatives.
The proposals respond to requests received from
those taking part in the recent round-table discussions organised by the
IASB and the US Financial Accounting Standards Board (FASB) to clarify the
requirements in IAS 39 Financial Instruments: Recognition and Measurement
and IFRIC 9 Reassessment of Embedded Derivatives.
Participants asked the IASB to act in order to
prevent any diversity in practice developing as a result of the amendments
made to IAS 39 in October 2008 to permit the reclassification of particular
financial assets. The proposals published today would require all embedded
derivatives to be assessed and, if necessary, separately accounted for in
financial statements.
Commenting on the proposals, Sir David Tweedie,
IASB Chairman, said:
* In October 2008, in response to exceptional
circumstances, the IASB amended accounting standards relating to the
reclassification of financial instruments. Issuing that amendment
without normal due process always carried the risk of unintended
consequences, and these proposals seek to clarify the application of
that amendment to embedded derivatives.
The proposals are set out in an exposure draft
Embedded Derivatives, on which the IASB invites comments by 21 January 2009.
The exposure draft is available on the Website from the 'open for comment'
at
www.iasb.org .
The Exposure Draft may be temporarily downloaded
from
http://www.iasb.org/NR/rdonlyres/7421736D-6390-4F7B-9F0A-BE4B21CBCABD/0/ED_IFRIC9andIAS391208.pdf
IASB Financial Instruments Projects Page ---
http://www.iasb.org/Current+Projects/IASB+Projects/Financial+Instruments/Financial+instruments.htm
Bob Jensen's threads on embedded derivatives are
under the E-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#E-Terms
Among those mounting a grassroots movement to slow
the rush to IFRS are Analyst's Accounting Observer newsletter editor
Jack Ciesielski, former FASB member Ed Trott, and Bowling
Green State University professor David Albrecht (who has compiled the arguments
of seven IFRS critics, including Niemeier and himself, on his blog
The Summa).
Among their arguments: preliminary research from Europe shows that the
international "standards" in fact afford investors little comparability among
financial statements, one of the key reasons given for U.S. convergence.
Niemeier is also leery of letting the International Accounting Standards Board (IASB)
be the standards-setter for the world, given its recent capitulation to pressure
from European Union authorities to loosen fair-value accounting for banks.
Alix Stuart, "Which One When? A roundup of key accounting deadlines,
developments, and detours to watch for in 2009," CFO Magazine, January 1,
2009 ---
http://www.cfo.com/article.cfm/12834698?f=search
From The Wall Street Journal Accounting Weekly Review on January 16,
2009
Time Warner Takes $25 Billion Hit
by Merissa
Marr and Nat Worden
The Wall Street Journal
Jan 08, 2009
Click here to view the full article on WSJ.com
TOPICS: Accounting,
Advanced Financial Accounting, Asset Disposal, Goodwill,
Impairment
SUMMARY: "Time
Warner has made a slew of acquisitions since the company's
last major write-down in 2002 for the value of AOL and its
cable systems...Investors chided AOL last year for the steep
$850 million price tag of its Bebo acquisition." Time Warner
has announced a $25 billion write down of its assets "to
account for the tumbling value of its cable, publishing and
AOL businesses." The write down includes goodwill; an
investment in Clearwire; a lease restructuring for floors in
Manhattan held by Lehman Brothers; an increase in credit
loss reserves for bankruptcy filings by retail customers;
and charges for a court judgment against Turner
Broadcasting.
CLASSROOM
APPLICATION: Accounting for goodwill and other asset
impairments, as well as loss accruals, is covered with this
article, including addressing implications for future
financial reporting.
QUESTIONS:
1. (Introductory) In general, what are the
accounting requirements for writing down goodwill and other
intangible assets?
2. (Advanced) Refer to the related article. How do
companies have "discretion in implementing accounting rules
on impairment"?
3. (Introductory) Refer again to the related
article. Time Warner says that the impairment charge was
prompted by "...the dip in its stock price last year. 'If
our stock price was higher we would not have to take this
charge..." How is this possible?
4. (Introductory) What assets besides goodwill has
Time Warner also written down? What other charges have been
recorded? Identify each as listed in the article and state
the authoritative accounting literature establishing
requirements in these areas.
5. (Advanced) How do all of these writedowns "reset
the level of shareholders' equity" as stated in the related
article? What are the future implications of these
writedowns today? Be sure to explain your answer.
6. (Introductory) How do these write downs impact
other companies in the cable industry?
7. (Advanced) "Time Warner still expects cash flows
for 2008 to total $5.5 billion, matching its outlook
provided in November...." After this announcement of a
downturn to a loss, why hasn't this projection changed?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED
ARTICLES:
Timely Warning on Cable Values
by Martin Peers
Jan 08, 2009
Page: C12
|
"Time Warner Takes $25 Billion Hit," by Merissa Marr
and Nat Worden, The
Wall Street Journal, January 8, 2009 ---
http://online.wsj.com/article/SB123133534152760741.html?mod=djem_jiewr_AC
Responding to past problems and the future perils
of the economic downturn,
Time Warner Inc.
attempted to clear its slate by writing down $25 billion of assets to
account for the tumbling value of its cable, publishing and AOL businesses.
The move, coming as the advertising outlook sours,
could signal more write-downs for media and cable companies. After a rash of
acquisitions at peak prices, companies in those industries are having to
scale back accounting values in the now-sullen climate. The media industry
also faces secular declines in areas such as newspapers, broadcast
television and radio, which are being ravaged by ad declines.
Coupled with weaker-than-expected advertising
revenue,Time Warner's fourth-quarter write-down is expected to swing the
company to an annual loss for 2008 -- its first in six years.
Time Warner Cable Inc., whose shares have fallen
50% in the past couple of years, represented the bulk of the non-cash
write-down, at nearly $15 billion. The news also highlights the lingering
effects of Time Warner's disastrous 2001 merger with AOL and a gloomy
outlook for the magazine-publishing business.
Time Warner has made a slew of acquisitions since
the company's last major write-down in 2002 for the value of AOL and its
cable systems. Time Warner Cable spent about $9 billion of cash and 16% of
its equity acquiring assets from rival Adelphia in 2005. AOL also has been
on a buying spree in its bid to revamp itself as an ad-based company.
Investors chided AOL last year for the steep $850 million price tag of its
Bebo acquisition.
Cable-TV company Comcast Corp. similarly plans to
write down its stake in wireless broadband company Clearwire Corp., whose
shares have fallen about 60% in the past 12 months, said people familiar
with the situation. Last October, CBS Corp. recorded a $14.1 billion charge,
largely for the shrinking value of its local television and radio stations.
"We believe that similar announcements from other media companies could be
forthcoming," said UBS analyst Michael Morris.
Time Warner's write-down says a lot about the
challenges that face Chief Executive Jeff Bewkes. Mr. Bewkes has signaled a
shift to focus more on the TV and movie businesses and less on non-content
assets such as Time Warner Cable, which he expects to spin off by the end of
the current quarter.
But he still needs to find long-term solutions for
AOL and publishing. Time Warner CFO John Martin, speaking at an investor
conference, said the company is still interested in finding AOL a partner,
after on-off talks with potential candidates, but noted the current climate
"is not conducive to" quick action.
Time Warner rang more alarm bells about the
advertising climate, saying "the economic environment has proved somewhat
more challenging" than previously expected, particularly at its AOL and
publishing units. The company scaled back its operating projection for 2008,
saying it now expects adjusted operating income before depreciation and
amortization to be $13 billion, up 1%, a drop from its previous forecast of
a 5% increase.
Time Warner shares were down 6.3% at $10.29 in 4
p.m. composite trading on the New York Stock Exchange, while Time Warner
Cable stock was down 4.8% at $21.56.
In addition to the write-down, Time Warner will
record charges of as much as $380 million in the fourth quarter, including
as much as $60 million from the restructuring of a lease for floors in its
Time & Life Building in Manhattan held by Lehman Brothers Holdings Inc.; a
$40 million increase in its credit-loss reserves for bankruptcy filings by
retail customers; and $280 million for a court judgment against its Turner
Broadcasting System Inc.
Time Warner still expects cash flows for 2008 to
total $5.5 billion, matching its outlook provided in November, because of
strong performances from its film division and its cable-television
networks.
Time Warner was expected to come under pressure to
write down assets as it carried over $42.5 billion in goodwill on the books
for 2008. Mr. Martin said he expects no "adverse impacts" from the
write-down, noting there are no debt covenants or tax implications that will
lead to more financial pain.
The Time Warner Cable write-down reflects the
decline in the market value of the company, a drop in the value of its
franchise rights and lowered expectations for cash flow amid increased
competition and higher borrowing costs. Time Warner Cable said it also plans
to take a charge of about $350 million related to its investment in
Clearwire.
Time Warner is to report fourth-quarter earnings Feb. 4.
Bob Jensen's threads on goodwill impairment issues are at
http://www.trinity.edu/rjensen/theory01.htm#Impairment
"New Prerequisites for CPAs," by David
Motz, Inside Higher Ed, December 17, 2008 ---
http://www.insidehighered.com/news/2008/12/17/cpa
Business schools in New York and Pennsylvania are
getting ready for a boom in accounting enrollments, following changes in
state policy on the education they need.
Looking for a job? See all 122 new postings Browse
all job listings: Faculty: 3,578 Administrative: 1,607 Executive: 189
FEATURED EMPLOYERS
Related stories Making Engagement Data Meaningful,
Dec. 12 So Goes the Nation, Nov. 13 General Education in the City, Sept. 5 A
Case Study in Case Studies, March 22, 2007 Walking on Eggshells, Aug. 15,
2006 E-mail Print
Currently, New York and Pennsylvania require that
C.P.A. candidates complete a minimum of 120 credit hours — of which at least
24 must be in accounting-related subjects — and have two years’ work
experience in public accounting or auditing before they can earn a license.
As of August 1, 2009 in New York and January 1,
2012 in Pennsylvania, C.P.A. candidates must have completed a minimum of 150
credits hours — of which at least 36 must be in accounting-related subjects
— and one year of work experience before they can earn a license. Though
these changes do not require an advanced degree beyond the existing
prerequisite of a bachelors’ degree, many students seeking a C.P.A. will
have to enroll in graduate studies to meet the new minimum requirement for
college credit hours. As a result, many students will earn master’s degrees.
Advocates of the change argue that this will boost the credibility of their
C.P.A.’s and give them an increased ability to practice in other states.
Most states already have made the shift; New York
and Pennsylvania are particularly significant as big states with many
business programs.
To account for these forthcoming changes, colleges
and universities in New York and Pennsylvania have to either expand
accounting programs or identify other educational pathways for students
seeking a C.P.A. license.
Baruch College of the City University of New York
has a large business school, which accounts for about 80 percent of its
16,000 students. Masako Darrough, chair of the department of accountancy,
said she expects more students to apply for a master’s program in order to
meet the 150-credit-hour threshold. In a fifth year, qualified students at
the institution can earn either a master’s degree in accounting or taxation
with more than enough credits to meet the new requirement.
Still, as a third of the business school’s
undergraduates major in accounting, Darrough said she is concerned that the
institution will not have enough space to serve the potentially growing
number of students seeking more credits.
“We will have to be more selective,” she said of
the institution’s master’s programs. “We cannot expand too much because we
have a hiring freeze and our classrooms are already quite full as it is.
This is a big change for students as well as for us, but we’re trying to
help students plan well for the future.”
The already crowded business school has had to turn
away a number of students with degrees from other institutions who were
seeking to take additional credits without the goal of an advanced degree,
Darrough noted.
Robert Morris University, in suburban Pittsburgh,
is also prepping for the change, encouraging accounting undergraduates to
enroll in a program that awards an M.B.A. for an additional year of study.
Frank Flanegin, head of the department of accounting and finance, said the
university introduced the program as a way to help students meet the
upcoming requirement change.
“There’s no mandate with this change to get another
degree – an M.S. in accounting or an MBA,” Flanegin said, noting that about
half of the university’s accounting majors go onto seek a C.P.A. “But why
would you want to have students take additional credits without earning an
additional degree? This provides our accounting majors who know what they
want to do with an opportunity to fulfill the requirement.”
The first class of Pennsylvania students to be
affected by the change in requirements — the class of 2012 — will begin at
the institution next fall, giving the institution more time to prepare for
the change.
There is, however, a certain amount of skepticism
regarding the change’s benefits to the field.
“It’s going to hurt,” Flanegin said of the
additional educational requirements on new accountants. “There’s already a
shortage of Ph.D.’s in accounting. Part of me understands why they’re doing
this. They’re trying to raise the education level. Accounting has become
much more complicated. Just look at the auditors and the mess we have on
Wall Street. A lot of that came from accountants. There are a lot of reasons
to require more education of C.P.A.’s.”
Darrough echoed the ambivalent sentiment.
“Some people think this is an undue burden on
students,” she said of the 150-credit-hour requirement. “It’s a costly
process [to require additional education of CPA candidates] and some wonder
if the benefits outweigh the cost.”
The Value at Risk (VaR) Model of Investment Risk ---
http://en.wikipedia.org/wiki/VaR
"In Defense Of Value At Risk (VaR) And Other Risk Management Methods,"
by Suna Reyent, Seeking Alpha, January 19, 2009 ---
http://seekingalpha.com/article/115339-defending-var-but-you-still-need-common-sense
In the beginning of the month, New York
Times Magazine published an article by Joe Nocera called “Risk
Mismanagement” that created quite a stir in the blogosphere and beyond.
Despite the watering-down of certain aspects related to risk management
tools, as well as the diversity with which these tools are applied practice,
the article was a success because of the buzz it created as well as the
ensuing debate.
The article portrays a debate over value
at risk methodology between well-known practitioners of VAR and the critics
of the methodology led by Nassim Taleb. It is hard not to get carried away
with Mr. Taleb’s tabloid-like descriptions of VAR as a “fraud” and its
practitioners as “intellectual charlatans.”
I love how the debate is construed. The
premise is that value at risk and other valuation models (such as Black-Scholes)
assume normal distribution of asset returns. Okay, they do that in their
most primitive forms, but let’s just accept the oversimplification as a fact
for a moment because the debate would hardly exist in this simplistic form
if we didn’t go along with the show here.
This is where our hero Mr. Taleb, an
experienced options trader no less, emerges to the public mainstream to
inform all of us ignorant folks that asset returns do not follow a normal
distribution! The horror! The painful realization that this stuff continues
to be taught in business schools! All that wasted class time learning
statistics!
It is fair to say that this assumption
will mislead naïve market participants about the nature of their risk
exposures as “Black Swan” events happen a lot more frequently than suggested
by Gaussian distributions. The problem is, almost anyone in finance already
knows that asset prices are not normally distributed, and many practitioners
build models or apply extensions to existing ones in order to take this into
consideration.
I decided to give a little background on
value at risk in order to get the points across that I feel strongly about.
Since I teach VAR in the classroom as part of a risk management curriculum,
I feel it is best to give some preliminary information.
A Primer On Value At Risk
Depending on the confidence interval
chosen, value at risk, in its simplest form, exists of applying a one-sided
test to figure out the loss that a portfolio may weather in a given time
period. For instance, a 95% daily VAR of ten million dollars indicates that
a portfolio is likely to lose at most that amount of money 95% of the time,
or once a month assuming 20 trading days in a given month. At the same time,
it displays the LEAST amount of money that the portfolio can lose 5% of the
time. I appreciated it when Mr. Nocera mentioned this in his article
prepared for general readership. As VAR is unable to tell us about what kind
of a loss we should expect in that tail of 5%, the limitation of this metric
if taken as gospel becomes apparent even to the untrained eye.
More on the tail risk later. But first, I
would like to talk about three established ways of calculating value at risk
for one asset and analyze the current risk management crisis within this
framework:
Analytical VAR – “Misunderestimating”
Risks
Otherwise known as variance-covariance
method of calculating the value at risk, this is the well-known method of
calculating VAR and the easiest one to apply. It assumes a normal
distribution of returns. All it takes to calculate VAR is a standard
deviation, which represents the “volatility” of the asset as well as a mean,
which is the expected return on the same asset.
This is the VAR that Mr. Taleb seems to
conveniently focus on, because it will indeed underestimate the risk at the
tails of a negatively skewed or a leptokurtic distribution.
Stock markets in general exhibit negative
skewness, which means that the distribution of returns will exhibit a long
tail (a few extreme losses) to the left side. They also exhibit
leptokurtosis, which means that both tails of the distribution are fatter
than implied by normal distribution.
So we could go nuts over how wrong the
normal distribution assumption is, and apparently people do. But we should
also be very concerned over how sensitive this measure is to the standard
deviation as well the mean, both of which are subject to change as markets
change especially in the light of the current crisis.
Historical VAR – Good As Long As Future
Resembles Past
This method does not need any assumptions
about the distribution of returns and is certainly superior to analytical
VAR because it is not parametric. The more data there is, the better the
measurement. Historical data will exhibit characteristics such as skewness
or kurtosis as long as the asset itself exhibits these qualities as well.
Assuming 250 trading days in a given year,
in order to measure the 95% daily VAR you need to rank the returns from
worst to best and pick the greatest return among those that correspond to
the bottom 5% of returns. So the worst 12th return (or you could interpolate
between the 12th and13th worst return, since 250 divided by 20 is 12.5, but
since VAR itself is an approximation, why bother?) will tell you the maximum
percentage loss 95% percent of the time, or the minimum percentage loss 5%
of the time. Multiply the loss by your portfolio value and you get the neat
VAR value in terms of dollars.
Moreover, the majority of investment
houses use historical VAR as the basis for measurement as it is a clear
improvement over the analytical VAR. You do not need return assumptions or
standard deviation values to come up with this value.
Historical VAR calculations replace
parametric assumptions with historical data. This means that if you had
positions in mortgage derivative securities and started the year 2007 with
models that were built around data of the previous two years encompassing
the “peaceful” periods of 2005 and 2006, you would soon be awakened to a
world where your VAR measures no longer reflected the reality of the
marketplace. Note that such limitations of VAR as an all-encompassing risk
measure were visible to any professional who understood risk management
models as well as the limitations of historical data that went into them.
As Mr. Nocera’s article conveys, this is
precisely what Goldman Sachs (GS) did. When it became obvious that the
mortgage markets had changed in fundamental ways and aggressive positions in
these securities started bringing in gigantic losses (as opposed to reaping
the usual gigantic profits on the back of the ever-rising housing market),
the team decided to limit its risk exposure by “getting closer to home.”
I don’t think the article conveys what
“getting closer to home” really means. Let me use day trading as an example
here. In day trading terms, this means that when your positions start
showing huge losses at the end of the day, you accept “defeat” and take your
losses as opposed to trying to ride them in the hope that the market will
come around. So instead of wishing for market to make a comeback to recoup
losses, you close out your open positions, take your losses and go home.
Then you go back to the drawing board to strategize for the next day given
the new reality of the marketplace.
Of course, looking retrospectively, the
decision to limit exposure and take losses as opposed to trying to ride them
in the expectation of a housing market turnaround has been the right
decision to make. However, as we have seen with many other bubbles, managers
do not have the incentive to make the sound trading decisions, nor do they
have the incentive to listen to their risk managers as long as they get a
huge piece of profits made during the ride and the taxpayer ends up holding
the bag when the market finally blows up.
We have seen this movie over and over
again. What surprises me is the heavy blame put on models for not reflecting
“reality,” whereas those in charge knew that the mortgage bubble was
collapsing, they had many opportunities to get rid of their huge exposures
to the derivatives securities, but they chose not to do it most likely
because of expectations of a market turn around. This is trading 101. If you
try to ride your losses, you may make comebacks, but you will eventually
blow up.
Now the next episode features critics who
tell us that the “models” have been faulty and wrong. Hence the conclusion
that value at risk is an erroneous and misleading measure, not to mention a
“fraud.”
Ladies and gentleman, we found the “fraud”
haunting the trading floor on the street, and it is not a human being: Shame
on you, VAR and other risk management tools! Of course, we can blame the car
manufacturers for the accident: the car’s faulty speedometer, or its lack of
an apparatus to show us the bumps on the road ahead. But why is the culture
that is reticent to blame the drunk driver who was clearly intoxicated with
the thrill of making green?
These “models” are as guilty as the
“accounting” that was used with a sleight of hand to conceal what was really
going on behind the curtains during the Enron debacle and others. Of course,
given the mathematical complexities of models, the quantitative brainpower
needed to understand some of them, and the assumptions required in creating
a map of your territory, there is more of an opportunity to either blame the
models or to pretend that you didn’t understand them when things turned
sour.
As I ventured with this essay, hoping to
make my points within the value at risk framework featured in textbooks, I
will move on to the third methodology used in calculating the measure.
Monte Carlo Simulation – Anything Goes,
But More Of An Art Than Science
Monte Carlo Simulation is especially
useful in calculating risk exposures of assets that have either little
historical data or whose historical data is rendered irrelevant due to
changing economic conditions that affect both the price of securities and
the way these securities interact with each other in a portfolio. Also,
historical returns of assets with asymmetric payoffs or returns of
derivative securities that interact with variables such as interest rates,
housing prices, and the like will not reflect the future when factors that
influence the return of the security change as the economic climate shifts.
Continued in article
Bob Jensen's threads on VaR are at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#VaR
Humor Between January 1 and January 31, 2009 ---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013109
Tidbits Directory for Earlier Months and
Years ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Humor Between January 1 and January 31, 2009
Forwarded by Auntie Bev
A Birth Certificate shows
that we were born
A
Death Certificate
shows that we died
Pictures show that we lived!
Have a seat . Relax . . .
And read this slowly..
I Believe...
Just because
two people
argue,
it doesn't mean they don't
love each other.
And just because they don't
argue,
it doesn't mean they do love
each other.
I Believe...
We don't have to change
friends if
we understand that friends
change.
I Believe..
No matter how good a friend
is,
they're going to hurt you
every once in a while and
you must forgive them for
that.
I Believe...
True friendship continues to
grow, even over
the longest distance..
The same goes for
true love.
I Believe..
You can do something in an
instant
that will give you heartache
for life.
I Believe...
That it's taking me a long
time
to become the person I want
to be.
I Believe...
You should always leave
loved ones with
loving words.
It may be the last time you
see them.
I Believe...
You can keep going long
after you think you can't.
I Believe...
We are responsible for what
we do, no matter how we
feel.
I Believe...
Either you control your
attitude or it controls you.
I Believe...
Money is a lousy way of
keeping score.
I Believe...
My
best friend
and I, can do anything, or
nothing and have the best
time.
I Believe...
Sometimes the people you
expect to kick you when
you're down,
will be the ones to help
youget back up.
I Believe...
Maturity has more to do with
what types of experiences
you've had
and what you've learned from
them and
less to do with how many
birthdays you've celebrated.
I Believe..
It isn't always enough, to
be forgiven by others.
sometimes, you have to learn
to forgive yourself.
I Believe...
No matter how bad your heart
is broken
the world doesn't stop for
your grief.
I Believe...
Our background and
circumstances may have
influenced who we are, but.
we are responsible for who
we become.
I Believe...
Two people can look at the
same
thing and see something
totally different.
I Believe...
Your life can be changed in
a matter of
hours by people who don't
even know you.
I Believe...
Even when you think you have
no more to give,
when a friend cries out to
you -
you will find the strength
to help.
I Believe...
Credentials on the wall do
not make you a
decent human being.
I Believe...
You should send this to all
the people
you believe in, I just did.
'The happiest of people
don't necessarily have the
best of everything;
they just make the most of
everything.'
|
|
Humor Between January 1 and January 31,
2009
PJ O’Rourke’s Parliament of
Whores ---
http://snipurl.com/parliamentwhores
"W.'s Greatest Hits
The top 25 Bushisms of all time," by Jacob Weisberg,
Slate, January 12, 2009 ---
http://www.slate.com/id/2208132/
Being able to laugh at yourself is a rare quality in a leader. It's one thing
George W. Bush can do that Bill Clinton couldn't. Unfortunately, as we bid
farewell to Bushisms, we must conclude that the joke was mainly on us.
1. "Our enemies are innovative and resourceful, and so are we. They never
stop thinking about new ways to harm our country and our people, and neither do
we."—Washington, D.C., Aug. 5, 2004
2. "I know how hard it is for you to put food on your family."—Greater
Nashua, N.H., Chamber of Commerce, Jan. 27, 2000
3. "Rarely is the question asked: Is our children learning?"—Florence, S.C.,
Jan. 11, 2000
4. "Too many good docs are getting out of the business. Too many OB/GYNs
aren't able to practice their love with women all across the country."—Poplar
Bluff, Mo., Sept. 6, 2004
5. "Neither in French nor in English nor in Mexican."—declining to answer
reporters' questions at the Summit of the Americas, Quebec City, Canada, April
21, 2001
6. "You teach a child to read, and he or her will be able to pass a literacy
test.''—Townsend, Tenn., Feb. 21, 2001
7. "I'm the decider, and I decide what is best. And what's best is for Don
Rumsfeld to remain as the secretary of defense."—Washington, D.C., April 18,
2006
8. "See, in my line of work you got to keep repeating things over and over
and over again for the truth to sink in, to kind of catapult the
propaganda."—Greece, N.Y., May 24, 2005
9. "I've heard he's been called Bush's poodle. He's bigger than
that."—discussing former British Prime Minister Tony Blair, as quoted by the Sun
newspaper, June 27, 2007
10. "And so, General, I want to thank you for your service. And I appreciate
the fact that you really snatched defeat out of the jaws of those who are trying
to defeat us in Iraq."—meeting with Army Gen. Ray Odierno, Washington, D.C.,
March 3, 2008
11. "We ought to make the pie higher."—South Carolina Republican debate, Feb.
15, 2000
12. "There's an old saying in Tennessee—I know it's in Texas, probably in
Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can't get
fooled again."—Nashville, Tenn., Sept. 17, 2002
13. "And there is distrust in Washington. I am surprised, frankly, at the
amount of distrust that exists in this town. And I'm sorry it's the case, and
I'll work hard to try to elevate it."—speaking on National Public Radio, Jan.
29, 2007
14. "We'll let our friends be the peacekeepers and the great country called
America will be the pacemakers."—Houston, Sept. 6, 2000
15. "It's important for us to explain to our nation that life is important.
It's not only life of babies, but it's life of children living in, you know, the
dark dungeons of the Internet."—Arlington Heights, Ill., Oct. 24, 2000
16. "One of the great things about books is sometimes there are some
fantastic pictures."—U.S. News & World Report, Jan. 3, 2000
17. "People say, 'How can I help on this war against terror? How can I fight
evil?' You can do so by mentoring a child; by going into a shut-in's house and
say I love you."—Washington, D.C., Sept. 19, 2002
18. "Well, I think if you say you're going to do something and don't do it,
that's trustworthiness."—CNN online chat, Aug. 30, 2000
19. "I'm looking forward to a good night's sleep on the soil of a friend."—on
the prospect of visiting Denmark, Washington, D.C., June 29, 2005
20. "I think it's really important for this great state of baseball to reach
out to people of all walks of life to make sure that the sport is inclusive. The
best way to do it is to convince little kids how to—the beauty of playing
baseball."—Washington, D.C., Feb. 13, 2006
21. "Families is where our nation finds hope, where wings take dream."—LaCrosse,
Wis., Oct. 18, 2000
22. "You know, when I campaigned here in 2000, I said, I want to be a war
president. No president wants to be a war president, but I am one."—Des Moines,
Iowa, Oct. 26, 2006
23. "There's a huge trust. I see it all the time when people come up to me
and say, 'I don't want you to let me down again.' "—Boston, Oct. 3, 2000
24. "They misunderestimated me."—Bentonville, Ark., Nov. 6, 2000
25. "I'll be long gone before some smart person ever figures out what
happened inside this Oval Office."—Washington, D.C., May 12, 2008
Gas Right Strips (video) ---
http://www.metacafe.com/watch/2238347/gas_right/
Forwarded by Maureen
What Is Butt Dust???
What, you ask, is 'Butt dust'? Read on and you'll discover the joy in it!
These have to be original and genuine. No adult is this creative!!
JACK (age 3) was watching his Mum breast-feeding his new baby sister. After a
while he asked: 'Mum why have you got two? Is one for hot and one for cold
milk?'
MELANIE (age 5) asked her Granny how old she was. Granny replied she was so
old she didn't remember any more. Melanie said, 'If you don't remember you must
look in the back of your pants. Mine say five to six.'
STEVEN (age 3) hugged and kissed his Mum good night. 'I love you so much that
when you die I'm going to bury you outside my bedroom window.'
BRITTANY (age 4) had an ear ache and wanted a pain killer. She tried in vain
to take the lid off the bottle. Seeing her frustration, her Mom explained it was
a child-proof cap and she'd have to open it for her. Eyes wide with wonder, the
little girl asked: 'How does it know it's me?'
SUSAN (age 4) was drinking juice when she got the hiccups. 'Please don't give
me this juice again,' she said, 'It makes my teeth cough.'
DJ (age 4) stepped onto the bathroom scale and asked: 'How much do I cost?'
MARC (age 4) was engrossed in a young couple that were hugging and kissing in
a restaurant. Without taking his eyes off them, he asked his dad: 'Why is he
whispering in her mouth?'
CLINTON (age 5) was in his bedroom looking worried When his Mum asked what
was troubling him, he replied, 'I don't know what'll happen with this bed when I
get married. How will my wife fit in it?'
JAMES (age 4) was listening to a Bible story. His dad read : 'The man named
Lot was warned to take his wife and flee out of the city but his wife looked
back and was turned to salt.' Concerned, James asked: 'What happened to his
flea?'
TAMMY (age 4) was with her mother when they met an elderly, rather wrinkled
woman her Mum knew. Tammy looked at her for a while and then asked, 'Why doesn't
your skin fit your face?'
The Sermon I think this Mum will never forget...this particular Sunday
sermon...'Dear Lord,' the minister began, with arms extended toward heaven and a
rapturous look on his upturned face. 'Without you, we are but dust...' He would
have continued but at that moment my very obedient daughter who was listening
leaned over to me and asked quite audibly in her shrill little four year old
girl voice, 'Mum, what is butt dust?'
Forwarded by Paula
As I was registering at this 2-star motel, I said to the blonde receptionist,
"I hope that the porn channel in my room is disabled."
"No," she replied with a real attitude, "It's just regular porn, you sick
bastard."
Forwarded by Auntie Bev
_And in the beginning. . ._
In ancient Israel, it came to pass that a trader
by the name of
Abraham Com did take unto himself a young
wife by the name of
Dot.
And Dot Com was a comely woman, broad of
shoulder and long of
leg. Indeed, she had been called Amazon Dot
Com.
She said unto Abraham, her husband, "Why doth
thou travel far
from town to town with thy goods when thou
can trade without ever
leaving thy tent?"
And Abraham did look at her as though she
were several saddle
bags short of a camel load, but simply said,
"How, Dear?"
And Dot replied, "I will place drums in all
the towns and drums
in between to send messages saying what you
have for sale and
they will reply telling you which hath the
best price. And the
sale can be made on the drums and delivery
made by Uriah's Pony
Stable (UPS)."
Abraham thought long and decided he would let
Dot have her way
with the drums. The drums rang out and were
an immediate success.
Abraham sold all the goods he had at the top
price, without ever
moving from his tent.
But this success did arouse envy. A man named
Maccabia did
secrete himself inside Abraham's drum and was
accused of insider
trading.
And the young men did take to Dot Com's
trading as doth the
greedy horsefly take to camel dung. They were
called Nomadic
Ecclesiastical Rich Dominican Siderites, or
NERDS for short.
And lo, the land was so feverish with joy at
the new riches and
the deafening sound of drums that no one
noticed that the real
riches were going to the drum maker, one
Brother William of
Gates, who bought up every drum company in
the land. And indeed
did insist on making drums that would work
only with Brother
Gates' drumheads and drumsticks.
Dot did say, "Oh, Abraham, what we have
started is being taken
over by others." And as Abraham looked out
over the Bay of
Ezekiel, or as it came to be known as "E-Bay"
he said,
"We need a name that reflects what we are."
And Dot replied, "Young Ambitious Hebrew
Owner Operators."
"YAHOO," said Abraham.
And that is how it all began. It wasn't Al
Gore after all.
Forwarded by Auntie Bev
For all my dog-loving friends.
How many dogs does it take to change a light bulb?
1. Golden Retriever: The sun is shining, the day is young, we've got our
whole lives ahead of us, and you're inside worrying about a stupid burned out
bulb?
2. Border Collie: Just one. And then I'll replace any wiring that's not up to
code.
3. Dachshund: You know I can't reach that stupid lamp!
4. Rottweiler: Make me.
5. Boxer: Who cares? I can still play with my squeaky toys in the dark.
6. Lab: Oh, me, me!!!!! Pleeeeeeeeeze let me change the light bulb! Can I?
Can I? Huh? Huh? Huh? Can I? Pleeeeeeeeeze, please, please, please!
7. German Shepherd: I'll change it as soon as I've led these people from the
dark, check to make sure I haven't missed any, and make just one more perimeter
patrol to see that no one has tried to take advantage of the situation.
8. Jack Russell Terrier: I'll just pop it in while I'm bouncing off the walls
and furniture.
9. Old English Sheep Dog: Light bulb? I'm sorry, but I don't see a light
bulb!
10. Cocker Spaniel: Why change it? I can still pee on the carpet in the dark.
11. Chihuahua : Yo quiero Taco Bulb. Or "We don't need no stinking light
bulb."
12. Greyhound: It isn't moving. Who cares?
13. Australian Shepherd: First, I'll put all the light bulbs in a little
circle...
14. Poodle: I'll just blow in the Border Collie's ear and he'll do it. By the
time he finishes rewiring the house, my nails will be dry..
How many cats does it take to change a light bulb?
Cats do not change light bulbs. People change light bulbs. So, the real
question is:
"How long will it be before I can expect some light, some dinner, and a
massage?"
ALL OF WHICH PROVES, ONCE AGAIN, THAT WHILE DOGS HAVE MASTERS, CATS HAVE
STAFF!
Forwarded by my good neighbors
HOSPITAL CHART BLOOPERS
Actual writings from hospital charts:
1. The patient refused autopsy.
2. The patient has no previous history of suicides.
3. Patient has left white blood cells at another hospital.
4. She has no rigours or shaking chills, but her husband states she was very
hot in bed last night.
5. Patient has chest pain if she lies on her left side for over a year.
6. On the second day the knee was better, and on the third day it
disappeared.
7. The patient is tearful and crying constantly. She also appears to be
depressed.
8. The patient has been depressed since she began seeing me in 1993.
9. Discharge status: Alive but without permission.
10. Healthy appearing decrepit 69-year old male, mentally alert but forgetful
11. Patient had waffles for breakfast and anorexia for lunch.
12. She is numb from her toes down.
13. While in ER , she was examined, x-rated and sent home.
14. The skin was moist and dry.
15. Occasional, constant infrequent headaches.
16. Patient was alert and unresponsive.
17. Rectal examination revealed a normal size thyroid.
18. She stated that she had been constipated for most of her life, until she
got a divorce.
19. I saw your patient today, who is still under our car for physical
therapy.
20. Both breasts are equal and reactive to light and accommodation.
21. Examination of genitalia reveals that he is circus sized.
22. The lab test indicated abnormal lover function.
23. Skin: somewhat pale but present.
24. The pelvic exam will be done later on the floor.
25. Patient has two teenage children, but no other abnormalities.
Forwarded by Paula
No one believes seniors .. . . everyone thinks they are senile.
An elderly couple was celebrating their sixtieth anniversary. The couple had
married as childhood sweethearts and had moved back to their old neighbourhood
after they retired. Holding hands, they walked back to their old school. It was
not locked, so they entered, and found the old desk they'd shared, where Andy
had carved 'I love you, Sally.'
On their way back home, a bag of money fell out of an armoured car,
practically landing at their feet. Sally quickly picked it up and, not sure what
to do with it, they took it home. There, she counted the money-fifty thousand
dollars! Andy said, 'We've got to give it back.'
Sally said, 'Finders keepers.' She put the money back in the bag and hid it
in their attic.
The next day, detectives were canvassing the neighbourhood looking for the
money, and knocked on their door. 'Pardon me, did either of you find a bag that
fell out of an armoured car yesterday?'
Sally said, 'No'.
Andy:’ She’s lying.. She hid it in the attic. '
Sally : 'Don't believe him, he's senile'
The cops turned to Andy and began to question him. One said: 'Tell us the
story from the beginning.'
Andy said, 'Well, when Sally and I were walking home from school yesterday
...... '
The first cop turned to his partner and said, 'We're outta here!'
Forwarded by Paula
A koala was sitting in a gum tree... smoking a joint...
when a little lizard walked past, looked up and said, 'Hey Koala! What are
you doing?'
The koala said, 'Smoking a joint, come up and have some.'
So the little lizard climbed up and sat next to the koala where they enjoyed
a few joints.
After a while the little lizard said that his mouth was 'dry' and that he was
going to get a drink from the river.
The little lizard was so stoned that he leaned over too far and fell into the
river.
A crocodile saw this and swam over to the little lizard and helped him to the
side. Then he asked the little lizard, 'What's the matter with you?'
The little lizard explained to the crocodile that he had been sitting with
the koala in the tree, smoking a joint, but got too stoned and fell into the
river while taking a drink.
The crocodile said that he had to check this out and walked into the rain
forest, found the tree where the koala was sitting finishing a joint. The
crocodile looked up and said,
'Hey you!'
So the koala looked down at him and said,
'Shiiiiiiiiiiit dude... How much water did you drink?'
Forwarded by Auntie Bev
Ramblings of a Retired Mind
I was thinking about how a status symbol of today is those cell phones that
everyone has clipped onto their belt or purse. I can't afford one. So, I'm
wearing my garage door opener. I also made a cover for my hearing aid and now I
have what they call blue teeth, I think.
You know, I spent a fortune on deodorant before I realized that people didn't
like me anyway.
I was thinking that women should put pictures of missing husbands on beer
cans!
I was thinking about old age and decided that old age is 'when you still have
something on the ball, but you are just too tired to bounce it.'
I thought about making a fitness movie for folks my age, and call it 'Pumping
Rust'.
I've gotten that dreaded furniture disease. That's when your chest is falling
into your drawers!
When people see a cat's litter box, they always say, 'Oh, have you got a
cat?' Just once I want to say, 'No, it's for company!'
Employment application blanks always ask who is to be notified in case of an
emergency. I think you should write, 'A Good Doctor'!
Why do they put pictures of criminals up in the Post Office? What are we
supposed to do...write to these men? Why don't they just put their pictures on
the postage stamps so the mailmen could look for them while they deliver the
mail? Or better yet, arrest them while they are taking their pictures!
I was thinking about how people seem to read the Bible a whole lot more as
they get older. Then, it dawned on me, they were cramming for their finals.
As for me, I'm just hoping God grades on the curve.
Forwarded by Col. Bob Booth
THE YEAR 1908
This will boggle your mind, I know it did mine! The year is 1908. One hundred
years ago. What a difference a century makes! Here are some statistics for the
Year 1908 :
************ ********* ********* ******
The average life expectancy was 47 years.
Only 14 percent of the homes had a bathtub.
Only 8 percent of the homes had a telephone.
There were only 8,000 cars and only 144 miles
Of paved roads.
The maximum speed limit in most cities was 10 mph.
The tallest structure in the world was the Eiffel Tower!
The average wage in 1908 was 22 cents per hour.
The average worker made between $200 and $400 per year .
A competent accountant could expect to earn $2000 per year, A dentist $2,500
per year, a veterinarian between $1,500 and $4,000 per year, and a mechanical
engineer about $5,000 per year.
More than 95 percent of all births took place at HOME .
Ninety percent of all doctors had NO COLLEGE EDUCATION!
Instead, they attended so-called medical schools, many of which
Were condemned in the press AND the government as 'substandard. '
Sugar cost four cents a pound.
Eggs were fourteen cents a dozen.
Coffee was fifteen cents a pound.
Most women only washed their hair once a month, and used
Borax or egg yolks for shampoo.
Canada passed a law that prohibited poor people from
Entering into their country for any reason.
Five leading causes of death were:
1. Pneumonia and influenza 2. Tuberculosis 3. Diarrhea 4. Heart disease 5.
Stroke
The American flag had 45 stars.
The population of Las Vegas , Nevada, was only 30!!!!
Crossword puzzles, canned beer, and ice tea
Hadn't been invented yet.
There was no Mother's Day or Father's Day.
Two out of every 10 adults couldn't read or write.
Only 6 percent of all Americans had graduated from high school.
Marijuana, heroin, and morphine were all available over the counter at the
local corner drugstores. Back then pharmacists said, 'Heroin clears the
complexion, gives buoyancy to the mind,regulates the stomach and bowels, and is,
in fact, a perfect guardian of health'
( Shocking? DUH! )
Eighteen percent of households had at least
One full-time servant or domestic help..
There were about 230 reported murders in the ENTIRE ! U.S.A. !
Now I forwarded this from someone else without typing
It myself, and sent it to you and others all over Canada & U.S.A
Possibly the world, in a matter of seconds!
Try to imagine what it may be like in another 100 years.
IT STAGGERS THE MIND
Humor Between March 1 and March 31, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor033109
Humor Between February 1 and February 28, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor022809
Humor Between January 1 and January 31, 2009
---
http://www.trinity.edu/rjensen/book09q1.htm#Humor013109
Tidbits Directory for Earlier Months and Years
---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
And that's the way it was on January 31, 2009 with a little help from my friends.
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
International Accounting News (including the U.S.)
AccountingEducation.com and Double Entries ---
http://www.accountingeducation.com/
Upcoming international accounting conferences ---
http://www.accountingeducation.com/events/index.cfm
Thousands of journal abstracts ---
http://www.accountingeducation.com/journals/index.cfm
Deloitte's International Accounting News ---
http://www.iasplus.com/index.htm
Association of International Accountants ---
http://www.aia.org.uk/
Wikipedia has a
rather nice summary of accounting software at
http://en.wikipedia.org/wiki/Accounting_software
Bob Jensen’s accounting software bookmarks are at
http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware
Bob Jensen's
accounting history summary ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory
Bob Jensen's
accounting theory summary ---
http://www.trinity.edu/rjensen/Theory.htm
AccountingWeb ---
http://www.accountingweb.com/
AccountingWeb Student Zone ---
http://www.accountingweb.com/news/student_zone.html
Introducing the New journalofaccountancy.com (free) ---
http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm
SmartPros ---
http://www.smartpros.com/
I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free
newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure
University) ---
http://www.financeprofessor.com/
Financial Rounds (from the Unknown Professor) ---
http://financialrounds.blogspot.com/
Professor Robert E. Jensen (Bob)
http://www.trinity.edu/rjensen
190 Sunset Hill Road
Sugar Hill, NH 03586
Phone: 603-823-8482
Email:
rjensen@trinity.edu