New Bookmarks
Year 2010 Quarter 3:  July 1 - September 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to 
Tidbits Directory --- 

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

Choose a Date Below for Additions to the Bookmarks File

July 31

 September 30


September 30, 2010


Bob Jensen's New Bookmarks on  September 30, 2010
Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to
For earlier editions of Tidbits go to
For earlier editions of New Bookmarks go to 

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

Bob Jensen's Blogs ---
Current and past editions of my newsletter called New Bookmarks ---
Current and past editions of my newsletter called Tidbits ---
Current and past editions of my newsletter called Fraud Updates ---

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  ---

Accounting Professors Who Blog ---

Cool Search Engines That Are Not Google ---

Accounting program news items for colleges are posted at
Sometimes the news items provide links to teaching resources for accounting educators.
Any college may post a news item.

How to author books and other materials for online delivery
How Web Pages Work ---

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at

Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---

The Master List of Free Online College Courses ---

Free Online Textbooks, Videos, and Tutorials ---
Free Tutorials in Various Disciplines ---
Edutainment and Learning Games ---
Open Sharing Courses ---
The Master List of Free Online College Courses ---

Bob Jensen's threads for online worldwide education and training alternatives ---

"U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---

Social Networking for Education:  The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses of Twitter)
Updates will be at

Pete Wilson provides some great videos on how to make accounting judgments ---

FEI Second Life Video (thank you Edith) ---
If I Were an Auditor ---

Teaching History With Technology ---
Some these ideas apply to accounting history and accounting education in general

"U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---

Bob Jensen's threads on accounting novels, plays, and movies ---

Bob Jensen's threads on tricks and tools of the trade ---

Bob Jensen's threads on education technology ---

The Two Faces of Accountics Scientists
Accountics scientists have almost a knee jerk, broken record reaction when confronted with case method/small sample research as evidenced by SHAHID ANSARI's review of the following book --- Click Here

ROBERT S. KAPLAN and DAVID P. NORTON , The Execution Premium: Linking Strategy to Operations for Competitive Advantage Boston, MA: Harvard Business Press, 2008,ISBN 13: 978-1-4221-2116-0, pp. xiii, 320.

If you are an academician who believes in empirical data and rigorous statistical analysis, you will find very little of it in this book. Most of the data in this book comes from Harvard Business School teaching cases or from the consulting practice of Kaplan and Norton. From an empirical perspective, the flaws in the data are obvious. The sample is nonscientific; it comes mostly from opportunistic interventions. It is a bit paradoxical that a book which is selling a rational-scientific methodology for strategy development and execution uses cases as opposed to a matched or paired sample methodology to show that the group with tight linkage between strategy execution and operational improvement has better results than one that does not. Even the data for firms that have performed well with a balanced scorecard and other mechanisms for sound strategy execution must be taken with a grain of salt.

Bob Jensen has a knee jerk, broken record reaction to accountics scientists who praise their own "empirical data and rigorous statistical analysis." My reaction to them is to show me the validation/replication of their  "empirical data and rigorous statistical analysis." that is replete with missing variables and assumptions of stationarity and equilibrium conditions that are often dubious at best. Most of their work is so uninteresting that even they don't bother to validate/replicate each others' research ---

Some Things You Might Want to Know About the Wolfram Alpha (WA) Search Engine:  The Good and The Evil
as Applied to Learning Curves (Cumulative Average vs. Incremental Unit)

Peter G. Peterson Website on Deficit/Debt Solutions ---

On September 13, 2010 The Wall Street Journal issued rankings of the “25 Best” college accounting education programs.

In May 2010 Bloomberg/Business Week issued its rankings of the “111 Best” college accounting education programs.

In an IAE paper, Woods et al. issues its rankings of the best college accounting research programs.

My tidbit comparing the rankings of these great accounting education programs is at

Test your understanding of the AICPA’s Code of Professional Conduct with this ethics quiz.---

Cloud Computing: What Accountants Need to Know ---

Free Templates ---
Templates Categories


"The Quickest 2011 CPA Exam Breakdown You’ll Ever Read," by Adrienne Gonzalez, Going Concern, September 24, 2011 ---

Because we know all of you are very busy tearing up your last exams before CBT-e hits in January of 2011, we won’t waste your time and get right to the point. 2011 is coming, the exam is changing and though we’ve been over it plenty in the last several months, let’s go over it one more time.

Simulations – This year’s simulations are next year’s simlets. Simulation problems will be shorter, task-based problems that should take you about 10 – 15 minutes to complete as opposed to the 45 minutes they take now. AUD and FAR will have 7 smaller simulation problems while REG will have 6. As usual, not all of these are graded.

Multiple choice – BEC and REG will contain 24 MCQ per testlet while FAR and AUD will still contain 30. MCQ will make up 60% of the FAR, AUD and REG exams and 85% of BEC.

Research – if you’re taking the exam this year, research is buried in simulations and doesn’t carry much weight point wise. Next year, however, research will be its own tab worth as many points as any of the other simlet problems. FAR research will be easy as it is limited to the ASCs (Accounting Standard Codification) and REG will mostly draw from the Internal Revenue Code but AUD will come with a dropdown menu that includes PCAOB ASs, the Code of Professional Conduct and SSARS just to name a few. You’ve been warned.

Written communication – WC is out of FAR, REG and AUD and slapped into BEC. You’ll have to write three written communications, of which two will be graded.

International standards IFRS and international auditing standards will be added to current FAR and AUD content (respectively) while REG is mostly unchanged by this as you can’t really test international standards of federal taxation. Keep in mind that this additional content will most likely be gently mixed in with what is already being tested and does not make GAAP completely irrelevant so don’t use 2011 as an excuse to procrastinate all the way through the holidays.

Now stop wasting your time with inflammatory nonsense blogs and GET BACK TO STUDYING!

(btw: if you have a CPA exam question for us – anything from applying to qualifying to passing – do get in touch)

Bob Jensen's threads on the CPA Examination are at

Joe Hoyle and his former partners elected to make their commercial CPA Examination Review materials free online. I am contacting Joe to see if they intend to keep those materials up to date for future CPA examinations. A link to the Hoyle et al. free materials is provided at 

September 25, 2010 reply from Joe Hoyle

-----Original Message-----
From: Hoyle, Joe []
Sent: Saturday, September 25, 2010 8:42 AM
To: Jensen, Robert
Subject: RE: Question for Joe Hoyle: The Quickest 2011 CPA Exam Breakdown You'll Ever Read

Hi Bob,

Hope this finds you well.   I just got through giving a bunch of tests last week (Intermediate Accounting II and Introduction to Financial Accounting) and, as always, some learned it all and some learned a lot less.   I am using my own new Financial Accounting textbook this semester.   As you may know, the book is written in an entirely Socratic Method (question and answer style).  I find that approach stimulates student curiosity much better than the traditional textbook which uses what I call a sermon or monologue style.   The Socratic Method has been around for 2,500 years -- isn't it strange that it has been ignored as a possible textbook model?  

I'm not a big fan of college education presently (that is college education and not just accounting education).   There are three major components to education:  professors, students, and the textbook (or other course material).  It is hard to change the professors and the students.   I think if we want to create a true evolution in college education in a hurry (my goal), the way to do that is produce truly better college textbooks.   I wish more college accounting professors would think seriously about how textbooks could be improved.  At the AAA meeting in San Francisco in August, I compared a 1925 intermediate accounting textbook to a 2010 intermediate accounting textbook and there was a lot less difference than you might have expected.   Textbooks have simply failed to evolve very much (okay, they are now in color).   It is my belief that textbooks were created under a "conveyance of information" model.   An educated person writes a textbook to convey tons of information to an uneducated person.   In the age of Google, Yahoo, Facebook, YouTube, and Wikipedia, I think the need to convey information is no longer so urgent.  I think we need to switch to a "thinking about information" model.  And, if that is the goal, the Socratic Method is perfect.   You can start off with a question like "Company X reports inventory at $500,000.  What does that mean?   Is it the cost or is the retail value?  And, if it is one, why is not the other?"  Accounting offers thousands of such delightful questions.

But, I digress -- you asked about CPAreviewforFREE.   We just finished our 117th week and it has been so much fun.   We had a person write in this week (on our Facebook page) to tell us that she had made three 99s and an 89.   Over the summer, we averaged about 300,000 page views per week.   That is page views and not hits but that is still a lot of people answering a lot of questions.

We are currently writing new questions for the new exam starting in 2011 including task-based simulations, IFRS, and written communications questions for BEC.   I personally think the exam will change less than people expect.   Currently, roughly 50 percent of the people who take a part pass that part.  I would expect that in January under the new CPA exam format, roughly 50 percent of the people who take a part will pass that part.   And, I would guess it will be almost exactly the same 50 percent.

However, to be honest with you, we are in the process of adding a subscription service.  I don't know if you ever go to but they give a lot of free information (Red Sox beat the Yankees last night 10-8) but they also have a subscription service where you can learn about things in more depth for a monthly fee (almost like a newspaper).   Our 2,100 free questions and answers will ALWAYS stay free.   But we found that people really wanted to have some content.   If they missed a question on earnings per share, for example, they wanted to know more about how convertible bonds are handled in that computation.   They didn't feel the need to pay $2,500 (don't get me started on what I think about that) but they wanted a bit more information.

To date, we have subscription content for FAR and Regulation.  Each is available for $15 per month which I think is a reasonable price (especially in a recession).   (As an aside, I have long felt that the high cost of CPA review programs keeps poor people out of the profession which I think is extremely unfair and even unAmerican.)    In our FAR content, for example, we have 621 slides that cover everything I could think of that FAR will probably ask about.   There are probably more slides in Regulation but I haven't counted them yet.   BEC and Auditing will be ready as quickly as possible.   When you have no paid employees, things only get done as fast as you can get them done.

Bob, I was delighted to see your name on my email this morning.   I'm actually in Virginia Beach on a 2 day vacation but decided I'd rather write you than go walk on the beach :).    If I can ever address more questions about textbooks, CPAreviewforFREE, or the Red Sox and the Yankees, please let me know.   As my buddy Paul Clikeman (who is on the AECM list) will tell you, I am a person of opinion.


Bob Jensen's threads on the CPA Examination are at

Humor Between December 1-31, 2010 ---
Humor Between November 1-30, 2010 --- 
Humor Between October 1-31, 2010 ---  

Humor Between August 1 and Sept. 30, 2010 --- 

Humor Between June 1 and July 31, 2010 ---

Humor Between June 1 and June 30, 2010 ---

Humor Between May 1 and May 31, 2010 ---

Humor Between April 1 and April 30, 2010 ---  

Humor Between March 1 and March 31, 2010 ---  

Humor Between February 1 and February 28, 2010 --- 

Humor Between January 1 and January 31, 2010 ---


The Game Changer in Bob Jensen's Professional Life
On August 2, 2010 in San Francisco I was invited to make a short speech at the Teaching, Learning, and Curriculum Section Breakfast. Afterwards a couple of you questioned some of the dates I gave to events in my life. The events I mentioned were true, but the dates were way off --- something I can only attribute to old age and extemporaneous speaking.

For some unknown reason I decided to divert from my prepared remarks while approaching the podium on August 2. I had not planned to talk about the "game changer" in my professional life, but suddenly I was talking about the big game changer in my life. Between 1966 and 1990 I was a lousy teacher focused only on three performance scores for my work --- the number of accountics research working papers (over 200 by 1990), the number of invited out-of-town research presentations, and the number of refereed publications (about 50 by 1990) ---

My research rather than my teaching paid off handsomely when I became the Nicolas M. Salgo Professor of Accounting at the University of Maine in 1968, received a Guggenheim Fellowship for two think tank years (1971/72 and 1973/74) at the Center for Advanced Study in the Behavioral Sciences (Stanford University), became the the KPMG Professor of Accounting at Florida State University in 1978, and ultimately became the Jesse H. Jones Professor of Business at Trinity University in 1982. My purpose here is not to brag. My purpose is to point out that research and publication outweighed every other criterion to my "success" prior to 1990 and made me what I think was overpaid between 1966 and 1990.

It was in the April 1990 (corrected date) when the game changer took place in my life. I was invited, along with about 40 other accounting professors in the State of Texas, by Prentice-Hall to attend an expense-paid seminar in Dallas on "How to Improve Your Teaching." The presentations on how to improve my teaching were uninspiring for nearly a day and a half until the very last presentation of the seminar --- the game changer in my life that instantly changed my entire focus from accountics research game playing to teaching, learning, and technology.

The game changer in my life was a presentation by Darrell Ward.--- 
Darrell resigned from the Computer Science Department at the University of North Texas  in the late 1980s to form HyperGraphics Corporation, HyperGraphics first built upon the old HyperCard seminal slide presentation software for the Apple II computers and added an entire non-linear navigation system and course management system for learning and assessment of learning. I don't think the Apple II version was all that successful, but when Darrill developed Hypergraphics for the DOS-based PC, HyperGraphics had considerable success.

I think my mouth was open during Darrell's entire presentation. Afterwards I went down and asked how I could buy the DOS-based HyperGraphics software. Darrill said that I could buy the stack of floppy disks and an instruction manual for $850 on the spot. I took out a check (my wife only allows me to carry one check) from my bill fold and wrote out a check for $850.

During the flight home from Dallas it then dawned on me that I did not own a PC. So instead of taking a taxi home from the San Antonio Airport, I took cab to a store called CompuAdd. There I paid over $2,000 for my first PC and projection panel. Until then I was always a snobby main frame guy (having taught FORTRAN, COBAL, and SPSS for the main frame) who, like IBM, thought that the the PC was simply a child's toy. After arriving home from the CompuAdd store I had to explain to my wife how I spent $3,000 on my way home from Dallas. Since I used my only check to buy the HyperGraphics software, I had to use a Visa card to buy the PC and an overhead panel.

In the summer of 1990 (corrected date) I worked about 15 hours a day programming my first course (a managerial accounting course) in HyperGraphics. In September of 1990 I unveiled my course to some of my Trinity University colleagues in a totally dark room using one of those terrible projection panels sitting on top of an overhead projector. The early panels converted all the color pictures to gray scale and were dim to read. But I could still demo what I thought was really cool --- nonlinear navigation for asynchronous learning and graphics/equation building in stages for student learning of complex details asynchronously. My colleagues departed shaking their heads and whispering that Jensen must be nuts.

It was October 4-5, 1990 (corrected date) when I made my first away-from-home dog and pony show on featuring HyperGraphics technology --- at the University of Wisconsin. HyperGraphics software pretty much died after Windows replaced the DOS operating system in PCs. I then shifted my managerial accounting and accounting theory courses to ToolBooks for the PC. My out-of-town dog and pony shows really commenced to roll when my university hosts invested in those old three-barrel color projectors that predated LCD projectors. I eventually made hundreds of presentations of HyperGraphics and then ToolBooks on college campuses in the United States, Canada, Mexico, Finland, Sweden, Germany, Holland, and the United Kingdom (where I lugged my full PC and LCD projector between five campuses as the European Accounting Association Visiting Professor). Many of my campus visits and topics are listed at

Today I would probably rely more on video for asynchronous learning ---

You can read about the history of HyperGraphics, ToolBook, Authorware, and the many other course authoring and management software systems (most of which died either early or prolonged deaths) at

The important game changer for me in April 1990 is that I belatedly commenced to think about how students learn and more importantly how I could become a better teacher (or rather learning manager)  by helping students study complicated material on their own asynchronously with the ability to keep replaying at their own learning paces. I even wrote an early 1994 book on learning technology with the aid of Petrea Sandlin as my editor ---

My thoughts about how students learn are summarized in two evolving papers at:

Evolving Papers on Learning

My evolving education technology threads are at

My life seems to have taken on more meaning since I focused more on my students and how they learn.

An Absolute Must Read for Educators:  Expanding Your Classroom with Video Technology and Social Media
One of the most exciting things I took away from the 2010 AAA Annual Meetings in San Francisco is a hard copy handout entitled "Expanding Your Classroom with Video Technology and Social Media," by Mark Holtzblatt and Norbert Tschakert. Mark later sent me a copy of this handout and permission to serve it up to you at

This is an exciting listing to over 100 video clips and full-feature videos that might be excellent resources for your courses, for your research, and for your scholarship in general. Included are videos on resources and useful tips for video projects as well as free online communication tools.

My thanks to Professors Holtzblatt and Tschakert for this tremendous body of work that they are now sharing with us.

Bob Jensen's threads on Tricks and Tools of the Trade are at

What do financial analysts do on the backs of envelopes and does it really matter to them whether we have IFRS-FASB convergence or fair value accounting?

Hulu (streaming video) ---

"Hulu Wants To IPO At A $2 Billion Valuation," by Jay Yarow, Business Insider, August  16, 2010 ---
Read more:

Bob Jensen's threads on valuation are at

Accounting valuation models for securities do not, to my knowledge, allow for the "value added" by the middle men/women hawking/touting those securities. For example, it is common to value derivatives based upon yield curves generated in a Bloomberg or Reuters terminal or turn to Steve Penman's textbook recommendations for valuing a potential investment.

It turns out that those middle men/women make a huge difference in sales volume and prices of securities. This is something that I certainly neglected to teach back when I was teaching valuation, and I suspect many other accounting and finance teachers and researchers have been just as negligent.

The success of hawking/touting may have some really undesirable implications for fair value accounting.
Has this ever been taken up in the literature of fair value accounting or in standard setting commentaries?

I missed this one until Simoleon Sense and Jim Mahar picked up on this in recent blog postings.

"Spam Works: Evidence from Stock Touts and Corresponding Market Activity," by Laura Frieder and Jonathan Zittrain, SSRN, March 14, 2007 ---

|We assess the impact of spam that touts stocks upon the trading activity of those stocks and sketch how profitable such spamming might be for spammers and how harmful it is to those who heed advice in stock-touting e-mails. We find convincing evidence that stock prices are being manipulated through spam. We suggest that the effectiveness of spammed stock touting calls into question prevailing models of securities regulation that rely principally on the proper labeling of information and disclosure of conflicts of interest as means of protecting consumers, and we propose several regulatory and industry interventions.

Based on a large sample of touted stocks listed on the Pink Sheets quotation system and a large sample of spam emails touting stocks, we find that stocks experience a significantly positive return on days prior to heavy touting via spam. Volume of trading responds positively and significantly to heavy touting. For a stock that is touted at some point during our sample period, the probability of it being the most actively traded stock in our sample jumps from 4% on a day when there is no touting activity to 70% on a day when there is touting activity. Returns in the days following touting are significantly negative. The evidence accords with a hypothesis that spammers "buy low and spam high," purchasing penny stocks with comparatively low liquidity, then touting them - perhaps immediately after an independently occurring upward tick in price, or after having caused the uptick themselves by engaging in preparatory purchasing - in order to increase or maintain trading activity and price enough to unload their positions at a profit. We find that prolific spamming greatly affects the trading volume of a targeted stock, drumming up buyers to prevent the spammer's initial selling from depressing the stock's price. Subsequent selling by the spammer (or others) while this buying pressure subsides results in negative returns following touting. Before brokerage fees, the average investor who buys a stock on the day it is most heavily touted and sells it 2 days after the touting ends will lose close to 5.5%. For those touted stocks with above-average levels of touting, a spammer who buys on the day before unleashing touts and sells on the day his or her touting is the heaviest, on average, will earn 4.29% before transaction costs. The underlying data and interactive charts showing price and volume changes are also made available.

Bob Jensen's threads on valuation are at

Bob Jensen's threads on fair value accounting are at

"Deloitte Touche plans hiring spree," by Alan Rappeport, Financial Times, September 13, 2010 --- 

Deloitte Touche Tohmatsu, the global accounting firm, said on Monday that it would hire an average of 50,000 workers a year during the next five years as it revealed strong revenues.

Revenues at Deloitte rose by 1.8 per cent to $26.6bn in the fiscal year ending May 31 on the strength of its consulting business and growing demand for its services in Asia.

Deloitte, which is one of the “big four” accounting firms, has been helped by the greater regulatory scrutiny that companies are facing along with the need to streamline their businesses in the wake of the downturn.

Consulting revenues at Deloitte rose by 14.9 per cent to $7.5bn last year. That helped the company absorb weaker revenue in its financial services advisory unit and its audit business, which Deloitte attributed to reductions in its hourly rates.

Deloitte’s consulting business was lifted by the acquisition of BearingPoint’s US public sector consulting practice and greater demand from businesses that needed help integrating new technology.

“I am proud of our people and their continued commitment to client service excellence during the most difficult economic climate in decades,” Jim Quigley, Deloitte’s chief executive, said in a statement.

Audit revenues declined by 1 per cent and financial advisory revenues were off by 2 per cent.

Deloitte employs 170,000 people worldwide and said on Monday that it expects to add 250,000 new workers during the next five years as it looks to expand its services and geographic reach.

Regionally, Deloitte had the strongest growth in Asia, where revenues were up by 8.5 per cent to $3.6bn. Revenues were up by nearly 4 per cent to $13bn in the Americas, thanks to increased demand in Brazil, but dipped in Europe, the Middle East and Africa.

In the US, accounting and audit firms have been under scrutiny in the aftermath of Bernard Madoff’s “Ponzi” scheme for failing to catch irregularities related to his investments. In the UK, the Financial Reporting Council is investigating conflicts of interest between firms that provide both accounting and audit services to clients.

Bob Jensen's threads on accountancy career are at

"DataLine 2010-34: Changes to Financial Instruments Accounting -- Impacts for Nonfinancial Services Companies," PwC Direct, August 26, 2010 ---

The FASB's proposal to change the accounting for financial instruments and hedge accounting could have broad implications to companies across all industries, including those in commercial and industrial industries. The proposed changes could result in a significant expansion of the use of fair value. Such changes would require greater valuation expertise and result in increased earnings volatility in many cases. Common instruments including investments in equity and debt instruments, accounts receivable and issuances of convertible debt, among others, would be affected. Companies should consider evaluating the impacts of the proposed changes now and consider providing feedback to the FASB on this very important proposal, which is open for comment through September 30, 2010. This DataLine discusses a few of the more common instruments and transactions that could be affected if proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, is adopted in its current form.

Jensen Comment
I still have to give more thought on how fair value accounting will increase earnings volatility. It will certainly increase volatility if commodities (other than precious metals and gemstones) like corn inventories are one day in the future required to be carried at fair value. But thus far the new FASB and IASB standards only are expanding  fair value accounting to more types of financial instruments.

Fair value accounting will certainly increase earnings volatility for unhedged booked financial instruments that were previously carried in AFS or HTM classifications under FAS 115. That one is a no brainer.

For fair value hedges of booked financial hedge items FAS 133 requires that the hedged items be carried at fair value during the hedging period so not much of substance changes here during the hedging period. Outside the hedging period, however, fair value accounting will create more earnings volatility for securities previously classified as AFS or HTM. For unbooked hedged items we still use that the account called "Firm Commitment" invented by FAS 133. It would be absurd for "Firm Commitment" account balances to be charged to current earnings, because then firms hedging for fair value would be unfairly hammered asymmetrically in terms of earnings volatility for unbooked hedged items.

For cash flow hedges, there was no fair value risk before hedging.  Unless fair value is driven by something other than changes in interest rates the booked value of the bond should remain constant. When value changes by factors other than interest rate risk, I do see how the new fair value accounting might increase earnings volatility. If the hedged item was previously carried at amortized cost rather than fair value, the change to fair value accounting will impact current earnings if those fair value changes are not booked to AOCI. In the past, under the old FAS 115, changes in value of AFS securities could be posted to AOCI even when those changes in value were do to things other than changes in interest rates. This will change under the new rules for financial instruments accounting since there are no longer any AFS safe harbors.

What is not clear to me is whether the supposed IFRS principles based standards will allow auditors to have more flexibility in offsetting fair value changes in financial instruments to AOCI. Perhaps this will be one of those areas in the revised IFRS 9 that adds bright lines requiring that offsets go to current earnings. I don't think IFRS 9 will give auditors flexibility about using AOCI with discretion.

"Fiscal Policy Report Card on America's Governors: 2010," Cato Institute, September 30, 2010
Download the PDF of Policy Analysis no. 668 (493 KB) ---
View this Policy Analysis in HTML ---

"A New Alternative for Taking and Sharing Notes: 3Banana Notes," by Mark Sample, Chronicle of Higher Education, September 9, 2010 ---

In my recent ProfHacker guide to 5 Android Apps I Can't Live Without, there was one seemingly obvious mobile application missing from my list: Evernote, which has gotten a lot of attention on ProfHacker. That wasn't an oversight on my part. I rarely use Evernote, for many reasons: I don't like the way it locks up my data, the desktop client is distractingly cluttered, and both the Apple and Android app interfaces are forgettable and unintuitive. And then there's Evernote's firepower. It's too much application for my purposes. I don't know about you, but I don't need my grocery shopping list tagged with keywords and filed away in notebooks. Bloated with features, Evernote is simply not useful for quick and dirty notes.

What I use instead is 3Banana Notes, an application available for iPhone and Android devices, powered in the cloud by Besides being oddly named, 3Banana is free, ad-free, incredibly lightweight, but powerful enough to corral the bits and pieces of my information stream—and then share them when needed.

Here's what you see when you open the application (I'm demonstrating the Android version, but its iPhone counterpart is nearly identical.

Continued in article

Jensen Comment
Since some faculty attend conferences and Webcasts that most faculty cannot attend, it would be helpful if sharing professors shared their conference notes, audio recordings, and video clips with the rest of us.

WebFilings for SEC and XBRL Reporting (Object Oriented Database) ---

For SEC reporting professionals, WebFilings is a revolution in collaboration software for regulatory compliance, delivering the only complete, integrated solution to meet SEC reporting requirements.

Jensen Comment
Note the XBRL tab ---

Bob Jensen's threads on accounting software ---

US Senate 'Small-Business' Bill Holds Plenty For Large Firms

Small businesses are less likely to benefit from bonus depreciation, because they can already write off 100% of equipment costs up to $250,000, under so-called Section 179 expensing. The Senate bill also proposes to increase that limit to $500,000. "A really large firm or medium-sized firm will be more interested in bonus depreciation, because Section 179 expensing is not on the table," said Alan Viard, an economist at the American Enterprise Institute.
Martin Vaughan, "US Senate 'Small-Business' Bill Holds Plenty For Large Firms," Automated Trader ---

The added feature will help make annuities marketed by life insurers more attractive. "We support partial annuitization. It will make it easier for a lot of annuity owners to access lifetime income while continuing to build their nest eggs," said Frank Keating, president and chief executive of the American Council of Life Insurers, in a statement.

The annuities provision is even more attractive to lawmakers because it actually raises revenue in the short term, providing nearly $1 billion to help offset the cost of other items in the small-business bill.

Cellphone service providers would win a change they have sought to remove cellphones as property that the Internal Revenue Service considers a fringe benefit, and thus taxes for personal use.

That would also benefit small business, by removing a requirement that they keep detailed phone use records to support their claim for deductions of cellphones provided to employees.

Beyond those provisions, the broader Senate bill includes more than a dozen tax breaks that are tailored specifically to small firms.

"There is a lot in the bill that will be helpful," said Bill Rys, tax counsel for the National Federation of Independent Business. He mentioned specifically the increase in Section 179 expensing limits and a proposal that would give the self-employed the same tax breaks for health insurance that employees now receive.

As proposed by Obama, the bill would eliminate capital gains taxes on certain small-business stock. It would increase Small Business Administration loan limits and provide $30 billion in loans to community banks to be used for small-business lending.

Even the bonus depreciation tax break may be useful to small businesses in certain situations, Rys said. Purchase of heavy equipment, such as what might be used by a farm or a tool and die shop, could exceed the limits of the small-business expensing provisions.

Continued in article

Bob Jensen's small business helpers are at

A Ghost From 1991:  Bob Jensen's Forgotten Learning Curve Paper is Challenges Memory of Times Past

Chris Deeley in Australia and I have been corresponding regarding an antique learning curve paper that I published nearly 20 years ago. You can read some of our correspondence at
In that correspondence I discuss the good and evil of the Wolfram Alpha computational search engine.

Chris also sent me his latest working paper on an entirely different topic (which I've not yet found time to delve into). I asked if I could serve up the paper to my AECM friends and others. When I find time I would like to test some of his formulas in Wolfram Alpha. Chris is skeptical.

September 23, 2010 message from

Yes, by all means post my working paper on general annuities on the AECM website. I suspect that Wolfram Alpha may not be able to handle this sort of thing. In fact, I wouldn’t be surprised if the application of standard maths has created and entrenched the error. Chris

Chris Deeley
Senior Lecturer in Accounting & Finance
School of Accounting,
Faculty of Business
Charles Sturt University,
Locked Mail Bag 588
Wagga Wagga, NSW 2678
Ph: +612 69332694 Fax: +612 69332790
Email: u

I put his paper on one of my Web servers. I'm sure that Chris will appreciate any comments that you have regarding this technical topic. It may be a good exercise for accounting and finance students to study this paper.

"IDENTIFICATION AND CORRECTION OF A COMMON ERROR IN GENERAL ANNUITY CALCULATIONS," by Chris Deeley, Charles Sturt University, Australia., September 23, 2010 Working Draft ---

"FASB Expands Discussion on Insurance Contracts," Journal of Accountancy, September 20, 2010 ---
A joint project with the IASB.

The reawakening of the Unknown Finance Professor who runs the Financial Rounds blog. He revealed his real name and affiliation to me years ago. What I like most about him, aside from his competency in finance, is his sense of humor.

The Unknown Finance Professor, who has actually been silent for months due to a personal tragedy (loss of a young son to cancer) and some other problems, made a posting on August 23, 2010 that raises the following question ---

 Hemorrhoid surgery 0r all-day faculty planning meeting? Let me think . . .
Continued in tidbit

On July 29. 2010 he wrote the following:

I'm Still Alive (but things might make me laugh myself to death)
Because of the end of the semester, some heath issues (since resolved), working on research, and being a bit burned, I haven't posted anything for several months.

like one of the best business tacticians of our times says, "Just when I thought I was out... they pull me back in". So I guess this is my "welcome back" post.

I just received a referee's report that made me laugh at its awesomeness. First a bit of background: I sent a paper to a lower-tier journal back in June of 2008. There was no response for over a year, so I sent several emails (and voice mails) to the editor with no response. Finally, getting fed up, back in November, I sent him an email (and follow-up voicemail) asking the editor to withdraw the paper. We subsequently got a revise and resubmit another journal.

Then today I get this from the original journal (i.e. the where I'd withdrawn the paper long ago):

RE: XXXXX and the use of XXX

I have now received a report on your paper in which the referee makes a number of recommendations for improvement. Unfortunately I am unable to accept the paper for publication in its current form. However I would be happy to reconsider the paper if you were to revise it along the lines suggested by the referee. I look forward to your resubmission.

The reviewer's comments are given below.

Referee: 1
Comments to the Author

This paper examines the relationship between XXX and XXX. However, Pearson correlation coefficient that this paper uses is very ordinary. And this often does not measure the non-linear relationship for variables. In addition, the paper does not make the necessary statistical test and analysis to the studying results.
Note: emphasis is mine, and I only changed the relatively few words necessary to protect the guilty.

Yes, that is the sum total of the referee's report. I'd always heard that the main difference between "good" journals and "weak" ones wasn't so much the mean quality of reviewer but the variance. Now I have my own data point.

Next time I will make sure to use "extraordinary" Pearson correlation coefficients and "make the necessary statistical test and analysis to the studying result".

update: I told a friend and former classmate of mine about this, and he suggested that "Outstandingly Bad Referee Reports" would make for a fun session topic at a conference- particularly if we had a journal editor select the panel members. However, he suggested that the entertainment value would be much better if you could somehow ensure that (unbeknownst to each other) both the recipients of the reports and the originators were both on the panel).

But that would be wrong. Funny, but wrong

"Mathematicians Create Objective Quality of Life Index," MIT's Technology Review, August 31, 2010 ---

I mention the tidbit above mainly to suggest that it may have some application to vegetable comparison, financial statement analysis, and accounting. My summary of the vegetable problem is given at

When it comes to financial statement analysis I am visualizing more complex financial statements that have multiple dimensions based upon historical cost, historical cost price-level-adjusted, exit value, and entry value dimensions (hence four dimensions as in the Quality of Life Index application noted above).

It would seem that there are many other types of applications such as expanding the Balanced Score Card concept to something like a Quality of Corporate Performance index.

At this point these are simply wild ideas off the top of my head.

Hedge Accounting
Ira has a new posting for those of you into hedge scholarship, research, and hedge accounting ---

Bob Jensen's 06Effectiveness.ppt PowerPoint file on effectiveness accounting for hedging instruments is included in the dog and pony show listing at
It saddens me that the IASB appears to be watering down effectiveness testing as IAS 39 is folded into IAS 9. It's just more and more principled-based mush.

Ketz Me If You Can
"Chairman Robert Herz Resigns," by J. Edward Ketz, SmartPros, September 2010 ---

In April 2009 I wrote a column that suggested that Robert Herz should resign as chairman of the FASB. Now, sixteen months later, he does in fact resign. I am not vain enough to attribute a cause-and-effect relationship, but I want to review my criticisms of Herz and suggest to the FAF who they should appoint to the board. In my column “Herz Should Resign,”  I stated that Mr. Herz is very knowledgeable about accounting and finance.  Indeed, if technical knowledge of accounting were all that is required, he would be a great chair, as demonstrated in his speeches and writings.  During his tenure, beginning July 1, 2002, the FASB has dealt with a variety of complex issues, including stock options, business combinations, pensions, special purpose entities, and of course the ever-present issue of derivatives.  In all of these areas, Bob Herz is a master.

However, the board has faced a series of serious threats and challenges during the last decade, and these did not call for technical solutions.  Indeed, they were outside the realm of the accountant’s black box, for they involved primarily political threats and challenges.  A good chairman would embrace these battles and not give up without a struggle.  He would not play defense, but go on the attack and win some battles against the bad guys.  FASB members have been too genteel—too quick to compromise instead of engaging the enemies in combat.

And who are the bad guys?  First and most obvious are the bankers.  In the previous essay I called April 2, 2009 a day of accounting infamy because that is when the FASB gave into the pressures of the banking industry and issued a couple of FSPs that supplied bankers with considerable wiggle room for their income statement machinations.  The banking industry has fought against fair value measurements with grim determination because they believe that the financial crisis beginning in 2008 could have been deferred, at least for awhile, if only they could have kept the investment community in the dark.  Fair value measurements provided the truth—and the truth was ugly.  Regardless of the consequences, the FASB should have defended accounting truth instead of allowing bankers additional methods to hide the truth.

What should the FASB have done?  While the public was still feeling the sting caused by the excesses and the failures of AIG and Lehman Brothers and the mortgage-based government-sponsored enterprises, the FASB should have written op-ed pieces for leading newspapers and online news agencies, it should have sought out guest spots on national radio shows, and it should have presented its case on national television shows.  The board should have taken the case to the American people and informed the world that AIG executives and bankers and managers at Freddie and Fannie were lying in their financial reports and wanted permission to lie some more.  The argument would have resonated with the public.

But wait—there’s more!  The biggest challenge against the FASB has been the expansion of financial engineering by investment bankers.  Every time the FASB issues a standard, bankers create ways of getting around the rules.  They may be unethical and some illegal, but if the financial engineers can find ways to subvert good accounting practices, then managers are willing to pay handsome fees.

Recall how Merrill Lynch enabled some of Enron’s frauds.  Managers at Enron needed to prop up the firm’s net income and cash flows in 1999, so in December 1999 Jeffrey McMahon, then Treasurer of Enron, negotiated with managers at Merrill Lynch to purchase an interest in Enron’s Nigerian barges, promising to repurchase the investment in six months; moreover, Enron guaranteed Merrill Lynch an annualized return of 22 percent.  The transaction was consummated in mid-December 1999 and was reversed in late June 2000 when Merrill Lynch sold its investment in the Nigerian barges to LJM2, one of the infamous special purpose entities of Enron.

The FASB needs to fight back.  When a bank creates such financial engineering, it needs to call them on it.  Another example is the creation of accelerated share repurchase programs by Wall Street.  These accelerated share repurchase programs purportedly allow firms to increase their earnings per share without actually buying back their own shares.  The FASB should denounce such antics in the press and on television.  The FASB has to attack the bad guys and put them on the defense.

The second set of bad buys is members of Congress.  Every time the FASB attempts to do something good, some misanthrope dressed in Washington garb writes a piece of legislation or holds hearings and castigates the accounting profession.  For example, consider Senator Enzi’s hearings on stock option accounting.  As an accountant, Enzi knew or should have known that stock options transfer resources to managers and involve very real costs.  But he wasn’t interested in supplying truth to investors and creditors; instead, he wanted to thwart the efforts of the FASB to better financial reporting in this country and help those who had helped him and hopefully would help him in the future.  The FASB needs to take the offense and point out the hypocrisy of members of Congress.

Continued in article

Question and Case
Who's the odd-on favorite for replacing Bob Herz as Chairman of the FASB?

Hint:  It's most likely an inside job. "Resistance is futile."

From The Wall Street Journal Accounting Weekly Review on September 10, 2010

Numbers Cop: FASB Staffer a Leading Candidate for Board
by: David Reilly
Sep 03, 2010
Click here to view the full article on

TOPICS: FASB, Financial Accounting Standards Board

SUMMARY: The current Director of Technical Activities at the Financial Accounting Standards Board (FASB), Russell Golden, is being considered for the open FASB post available due to the early exit of current Board Chairman Robert Herz. The need to fill the post quickly is influencing the choice of a new Board member. Current Board member Leslie Seidman will serve as Interim Chairwoman until the Financial Accounting Foundation (FAF) fills that role. The FAF plans to expand the Board back to seven members in this process as well. This review follows one last week covering the surprise announcement by Robert Herz of his early retirement from his post. The related article further speaks to the political process in accounting standards setting and implications for the skills necessary to handle the Board members' and chairman's jobs.

CLASSROOM APPLICATION: Questions focus on helping students understand the role of the FAF and the skills needed by individuals applying for Board positions as the FASB. It may be used in any accounting class, most likely those oriented towards financial reporting.

1. (Introductory) What is the background of the current Director of Technical Activities who is being considered to fill the 5th open position on the FASB? What other factors are influencing this opportunity for this individual? Base your answers on the information in the article, but you may access the FASB's web site at and navigate to About FASB>Our People to assist you in gathering information to answer this question.

2. (Advanced) What are the skills needed by the chairman/chairwoman of the FASB? In your answer, comment on your understanding of why these particular skills are necessary in this position.

3. (Advanced) Who will fill role of interim chairperson of the FASB until a permanent replacement for What is the role of the Financial Accounting Foundation, both overall and in this process of filling the chairman's seat being vacated by Chairman Robert Herz? Again, you may access the FASB main web page, then navigate to the Financial Accounting Foundation (FAF) through the links at About FASB>Facts About FASB>Our Independent Structure.

Reviewed By: Judy Beckman, University of Rhode Island

Herz Leaving Marks Boon for Banks
by David Reilly
Aug 25, 2010
Online Exclusive

"Numbers Cop: FASB Staffer a Leading Candidate for Board," by: David Reilly, The Wall Street Journal, September 3, 2010 ---

A staffer at the group that sets U.S. accounting rules is a leading candidate to fill the board opening created by last month's surprise retirement announcement of Chairman Robert Herz, according to people familiar with the matter.

The foundation that oversees the Financial Accounting Standards Board is considering Russell Golden, the board's technical director, for the board post, these people said, although they cautioned that no final decision has been made. The chairman's position would remain unfilled, they said, noting that the search process for a new chairman is at an early stage.

A spokesman for FASB declined to comment. Mr. Golden couldn't be reached to comment.

The foundation has leaned toward an internal candidate because it would allow FASB to largely continue its work uninterrupted once Mr. Herz departs at the end of the month. Mr. Golden already is involved with the board's many projects.

Speed is of the essence at FASB. The board is trying by next year to complete several projects that will allow the Securities and Exchange Commission to decide whether it is possible, and desirable, to switch from U.S. generally accepted accounting principles to international accounting standards.

A quick appointment of a fifth board member also would give the foundation more time to search for a new chairman and an additional board member. The foundation plans to expand the board to seven members from the current five. Until a new chairman is named, FASB member Leslie Seidman will serve as acting chairman, starting Oct. 1.

The search for a new chairman may prove lengthy given that a candidate needs both technical accounting as well as political skills. FASB is an independent body, but its activities are overseen by the Securities and Exchange Commission and it is subject to congressional oversight hearings.

Mr. Golden is a former partner in the national office of accounting firm Deloitte & Touche LLP, and joined FASB in 2004 as a senior technical adviser. One other FASB member, Lawrence Smith, had worked as a staffer before being appointed to the board.

Bob Jensen's threads on accounting standard setting controversies ---


"Proposed ASU No. EITF100F: : Health Care Entities Can Choose Their Poison," by Tom Selling, Accounting Onion, September 7, 2010 --- Click Here 

If you are teaching an accounting class, here's a simple and timely (I'll explain why, later) assignment for your students:

Facts: Company XYZ is a manufacturer that is being sued by a person claiming that she was injured from using one of XYZ's products. XYZ has retained outside counsel for the purpose of mounting a legal defense, which is expected to take at least two years.

Question: How should the legal defense costs be accounted for by XYZ: (A) record the legal costs as an expense when they are incurred; or (B) accrue the total legal costs expected to be incurred over the duration of the litigation as of the date the claim has been incurred?

See article for Tom's answers!

Will Deloitte become the largest international accounting firm?
“According to Mr Connolly, when Deloitte publishes its global results in October the firm is set to reveal it has overtaken PriceWaterhouseCoopers to become the biggest of the “Big Four” accountancy houses globally
London Telegraph --- Click Here

Jensen Comment
At the beginning of the 21st Century with the Big Five had shed themselves of the largest part of their consulting divisions, Deloitte was unable to find a buyer for its consulting division. Too say it is the largest "accounting" firm may be somewhat misleading. Andersen of course imploded, leaving only Deloitte and the other Big Three. And the other Big Three have rebuilt consulting divisions since divesting themselves of consulting divisions before the turn of the century. If that sounds confusing it's because it is confusing to those of us concerned with auditor independence.

How did egos get in the way of "real business?"
Francine's Chicago connection probably helped her write this one.
"PricewaterhouseCoopers Trying To Buy Consulting Revenue Again With Diamond Deal," by Francine McKenna, reTheAuditors, August 26, 2010 ---

When Mark O’Conner of Monadnock Research asked for my initial reaction to the deal I had to admit I hadn’t thought much about it. Diamond Technology, a true-blue Chicago born and bred company, is small potatoes. They never achieved the billion dollar revenue goals the founder had envisioned. PwC has potentially bought a pig in a poke.

Continued in article

Bob Jensen's threads on PwC are at

"Apparently, Sport Coats Can Go a Long Way for Big 4 Auditors," by Caleb Newquist. Going Concern, August 27, 2010 ---

Jensen Comment
I vividly recall being sent home by Ernst & Ernst years ago in order to change into a suit because I'd warn a blue blazer on an audit. Suits had to be dark with very, very conservative ties and long sleeve white shirts. Long socks had to be held up by those tiny garters so not the least bit of bare leg would show when men crossed their legs. Auditors also had to wear black or dark gray fedoras or equivalents to and from the office.

Women weren't allowed, at least in the Denver Office, to go out on audits those days so I don't know what the dress code was for women. Our office only had one woman and, even though she was brilliant, she was confined to the back room where she mostly did tax returns.

"There Are More Than a Few Texans Who Aren’t Impressed with Ernst & Young’s Auditing Abilities," by Caleb Newquist, Going Concern, August 26, 2010 --- 

Attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos are representing a group of investors in a lawsuit filed against hedge fund auditors Ernst & Young after the group lost more than $17 million following the collapse of a Plano, Texas-based hedge fund that promised low-risk investments.

The lawsuit focuses on two funds sold by Plano’s Parkcentral Global and was filed on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas R. Brown Family Private Foundation. The now-defunct Parkcentral Global was operated by affiliates of billionaire and former presidential candidate H. Ross Perot before closing its doors after losing a total of more than $2.6 billion.

“Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom,” says attorney Demetrios Anaipakos, who will try the case with Amir H. Alavi.

Continued on article

Bob Jensen's threads on Ernst & Young are at

"2010 Tax Software Survey," Journal of Accountancy, September 2010 ---

Bob Jensen's threads on accounting software ---

How States Hide Their Budget Deficits:  The SEC's charges against New Jersey for misleading investors should warn other states against sweeping the truth under the rug


Rotten Fraud in General ---
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) ---

We hang the petty thieves and appoint the great ones to public office.


Congress is our only native criminal class.
Mark Twain ---


Why should members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides," The Wall Street Journal, March 28, 2006; Page A1 ---

The Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties:  Few if any are uncorrupted
Committee members have shown no appetite for taking up all those cases and are considering an amnesty for reporting violations, although not for serious matters such as accepting a trip from a lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates that members of Congress have received more than $18 million in travel from private organizations in the past five years, with Democrats taking 3,458 trips and Republicans taking 2,666. . . But of course, there are those who deem the American People dumb as stones and will approach this bi-partisan scandal accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points for her minion, that are sure to come back and bite her .... “House Minority Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips she accepted from outside sponsors that were worth $8,580 and occurred as long as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National Ledger, January 6, 2006 --- 

And when they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol Hill, which created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page A20  --- Click Here

Once again, the power of pork to sustain incumbents gets its best demonstration in the person of John Murtha (D-PA). The acknowledged king of earmarks in the House gains the attention of the New York Times editorial board today, which notes the cozy and lucrative relationship between more than two dozen contractors in Murtha's district and the hundreds of millions of dollars in pork he provided them. It also highlights what roughly amounts to a commission on the sale of Murtha's power as an appropriator: Mr. Murtha led all House members this year, securing $162 million in district favors, according to the watchdog group Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to create the National Defense Center for Environmental Excellence in Johnstown to develop anti-pollution technology for the military. Since then, it has garnered more than $670 million in contracts and earmarks. Meanwhile it is managed by another contractor Mr. Murtha helped create, Concurrent Technologies, a research operation that somehow was allowed to be set up as a tax-exempt charity, according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed; the annual salary for its top three executives averages $462,000.
Edward Morrissey, Captain's Quarters, January 14, 2008 ---

The Sad State of Government (Governmental) Accounting and Accountability ---

"How States Hide Their Budget Deficits:  The SEC's charges against New Jersey for misleading investors should warn other states against sweeping the truth under the rug," by Steve Malanga, The Wall Street Journal, August 23, 2010 ---

In April, the New York State Comptroller, Thomas DiNapoli, issued a damning report on the Empire State's financial practices. Albany's budgets, he observed, increasingly employ "fiscal manipulations" to present a "distorted view of the State's finances." Money shuffled among accounts to hide deficits, loans made by the state to itself, and other maneuvers Mr. DiNapoli called a "fiscal shell game" are meant to "mask the true magnitude of the State's structural budget deficit."

The comptroller's report produced yawns. Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice.

The Citizens Budget Commission of New York recently measured states' obligations against their economic resources. New Jersey was rated in the worst fiscal shape, but it judged other states that employ questionable budget practices, including New York, California, Illinois and Rhode Island, to be only marginally better. Closer SEC scrutiny of these states' muni offerings should be welcomed by investors, and also by taxpayers from whom legislators often try to hide the true depth of fiscal problems until they grow unmanageable.

New Jersey is an object case in how such manipulations eventually backfire. The problems go back nearly 15 years, to when the then-relatively healthy state decided to borrow $2.8 billion and stick it in its pension funds in lieu of making contributions from tax revenues. To make the gambit seem reasonable, Trenton projected unrealistic annual investment returns—between 8% and 12% per year—on the borrowed money. The maneuver temporarily made the funds seem well-off.

In 2001, when legislators wanted to further enhance rich pension benefits, they valued the state's plan at its richest point: 1999, when the system was flush with borrowing and the tech bubble hadn't yet burst. The scheme proved disastrous, of course, because the stock market has since gone sideways, and New Jersey has achieved nowhere near the returns it needed on that borrowed money.

Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state broke the cardinal rule of municipal budgeting when it borrowed nearly $2 billion to close a budget deficit, which is like borrowing on your credit card to pay off your mortgage. (The state supreme court ruled this move unconstitutional but allowed it to go forward anyway because it didn't want to "disrupt" government operations.) Over time, New Jersey's combination of overspending in its budget and underfunding of its pensions resulted in a tidal wave of tax increases and spending cuts.

Now, even if Gov. Chris Christie can solve the state's long-term, structural budget problems, New Jersey will have to find some $3 billion a year in new revenues to begin contributing again to its pensions.

Municipal bondholders seem complacent in the face of such problems. They like to assert that they have first dibs on any tax revenues. But New Jersey has written so many "guarantees" into its constitution—whether regarding pensions or citizens' right to a "quality" education—that sorting out the competing interests in a fiscal crisis could keep the courts busy for years.

As alarming is how Jersey-style fiscal practices have proliferated in other states.

The manipulations date back to the late 1970s, when taxpayer revolts produced spending caps and constitutional limits on tax increases in states. Rather than hew to these restrictions, politicians found increasingly inventive ways around them.

State officials have acknowledged such practices are growing common. During the 2002 recession, a report by the National Association of State Budget Officers admitted that states were employing "creative, innovative . . . adjustments" to budgets. They include financing current operations with debt, moving money from trust funds dedicated to specific tasks (like highway maintenance) into general funds, and pushing payments to vendors into future fiscal years.

"The long-running use of gimmicks is part of the reason most state budgets are in crisis today," noted Eileen Norcross of the Mercatus Center at George Mason University in a recent study.

The federal government has served as enabler. Although the special tax-free status it bestows on municipal bonds amounts to a subsidy, Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana.

California granted its workers big pension and benefit enhancements in 1999. As in New Jersey, those benefits were based on unrealistic projections of stock-market returns over the long term. Now the costs of those pension enhancements—which have added some $4 billion annually to the state budget and hundreds of millions more to municipal costs—have deepened Sacramento's fiscal woes, which it is solving with more ploys, like pushing tax refunds and payments to vendors into future years.

These maneuvers often don't make it into bond presentations. Like New Jersey, Illinois used extensive borrowing—including a whopping $10 billion offering in 2003—to make its pensions appear well-funded. The state then skipped contributions into the system for several years, creating additional funding problems. A recent study by Joshua Rauh of Northwestern University projects that Illinois's pension system is among a handful that, like New Jersey's, could run out of money in the next decade.

Yet a presentation made by Illinois officials to potential investors in June mentioned the pension borrowings only briefly, then painted a rosy picture of the state's fiscal practices. "Does the state have the Will To Govern needed to address its challenges?" the presentation asked. "YES" it answered in big, bold letters. The presentation then touted modest pension reforms that the state had enacted, even though legislators are doing little to ensure the system's long-term viability.

The SEC should demand, at the very least, that states acknowledge the unease of their own in-house experts. There is nothing in the nearly 200 pages of New York's current disclosure document for investors, for instance, that hints at the state comptroller's concerns over the direction of the state budget. In refreshingly candid language, Mr. Napoli describes in his report a growing lack of transparency, which hides the state's true fiscal condition, as a "deficit shuffle."

If that's a new dance step, it's one that investors and taxpayers everywhere need to work harder to ban. The SEC should help.

"SEC charges State of New Jersey for fraudulent municipal bond filings," AccountingWeb, August 19, 2010 ---

This Week (August 20, 2010) in Securities Litigation
Fraud in offering: In the Matter of State of New Jersey, Adm. Proc. File No. 3-14009 (Aug. 18, 2010) is the SEC’s first fraud action against a state. The Order for Proceedings alleges fraud in violation of Securities Act Section 17(a)(2) & (3) in connection with 79 municipal bond offerings from August 2001 through April 2007 for $26 billion. The cases center on the failure of the state to make certain disclosures regarding the financial condition of two large pension funds, the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System. Specifically, the state created the fiscal illusion, according to the SEC, that the two pension funds were being adequately funded when in fact they were severely under funded. New Jersey was aware of the underfunding, according to the Order, but took no steps to correct the misleading documents used in connection with the bond offerings. During this period, the state did not have any written policies and procedures regarding the review or update of the bond offering documents and no training was given to its employees regarding disclosure obligations. To resolve the proceeding the state consented to the entry of a cease and desist order from commencing or committing or causing any violations and any future violations of the Sections on which the Order is based

Bob Jensen's fraud updates are at

The Sad State of Government (Governmental) Accounting and Accountability ---


Teaching Case on Unfunded Pension "Liabilities"

From The Wall Street Journal Accounting Weekly Review on September 24, 2010

Pension Gaps Loom Larger
by: David Reilly
Sep 18, 2010
Click here to view the full article on

TOPICS: Pension Accounting

SUMMARY: "Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions."

CLASSROOM APPLICATION: The article clearly describes and assesses the expected rate of return and the discount rate used in pension calculations.

1. (Introductory) What does it mean to say that a pension fund is facing a "funding gap"? Describe exactly how this gap is calculated. Also state whether this concept applies to defined benefit or defined contribution pension plans, including definitions of these two types of plans.

2. (Advanced) As used in accounting for pension plans, define the terms "expected rate of return on plan assets" and "discount rate".

3. (Introductory) As described in the article, how are these two rates used? How are they estimated differently by governmental pension funds, such the California and the Oregon Public Employees Retirement Systems, versus corporate pension plans?

4. (Advanced) Why can pension plans' assumptions about returns "affect the size of so-called funding gaps"?

5. (Introductory) What is the estimated total amount funding gap for corporate pension plans and for public plans?

6. (Advanced) What is the average expected rate of return on plan assets for corporate and for public pension plans? Where can this information be found for individual corporate plans?

Reviewed By: Judy Beckman, University of Rhode Island

"Pension Gaps Loom Larger," by: David Reilly, The Wall Street Journal, September 18, 2010 ---

Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions.

The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001, the association says.

The country's 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions, according to a survey of those funds by The Wall Street Journal.

Corporate pension plans in many cases have been cutting expectations more quickly than public plans, but often they were starting from more-optimistic assumptions. Pension plans at companies in the Standard & Poor's 500 stock index have trimmed expected returns by one-half of a percentage point over the past five years, but their average return assumption is also 8%, according to the Analyst's Accounting Observer, a research firm.

The rosy expectations persist despite the fact that the Dow Jones Industrial Average is back near the 10000 level it first breached in 1999. The 10-year Treasury note is yielding less than 3%, and inflation is running at only about 1%, making it tougher for plans to hit their return targets.

Return assumptions can affect the size of so-called funding gaps—the amounts by which future liabilities to retirees exceed current pension assets. That's because government plans use the return rates to calculate how much money they need to meet their future obligations to retirees. When there are funding gaps, plans have to get more contributions from either employers or employees.

The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America's government and corporate pension plans.

"It's unrealistic," John Bogle, founder of mutual fund giant Vanguard, says of the return assumptions in place at most pension plans.

Pension funds at companies in the S&P 500 faced a $260 billion shortfall at the end of 2009, according to Standard & Poor's. Estimates of the fund deficits faced by state and local governments range from $500 billion to $1 trillion.

Some plans are beginning to trim their return forecasts.

Earlier this month, New York State Comptroller Thomas DiNapoli said he would reduce the expected rate of investment return for his state's pension system, the third-largest in the nation, to 7.5%, from 8%.

The country's two biggest plans—the California Public Employees Retirement System, or Calpers, and the California State Teachers' Retirement System, or CalSTRS—both are undergoing reviews of projected investment returns that could lead to reductions later this year.

Many plans have held onto an 8% return expectation though thick and thin. Such return assumptions partly reflect the heady years of the 1990s bull market. Public pension plans posted a median, annualized return of 9.3% over the past 25 years, but just 3.9% over the past 10, according to consulting firm Callan Associates.

The Oregon Public Employees Retirement System has had an 8% assumption since 1989. Its actual return averaged 10.7% annually from 1970 through 2009. The Teachers Retirement System of Texas has had a similar expectation since 1986, with an annual return of 9% return since then.

A spokeswoman for the Texas system said it doesn't change assumptions "in response to short-term situations," and currently "sees no reason to change our investment-return assumption." A spokesman for the Oregon system said there are no special plans to review its return expectation.

The challenge for many plans, given investment horizons that can stretch out 50 years, is gauging which time period to look at when charting a future course.

George Diehr, vice president of the Calpers board, said in May that the question is whether the credit crisis has "dramatically altered long-held assumptions about investing in the world's financial markets. Are investors in for a sustained period of meager or below-market growth? Or will the traditional business and economic cycles, the ones investors have grown accustomed to over the past couple of decades, return?"

The outcome of Calpers's ongoing review "hangs on how we answer that question," a spokesman says.

Depressed stock prices aren't the only thing putting pressure on potential returns. Plummeting bond yields mean that plans' fixed-income portfolios will likely earn less in the future. A lower inflation outlook means that funds will have to generate greater real returns to meet their return targets.

Funds use a so-called discount rate to estimate the size of future obligations to retirees, and thus the contributions needed to fund them. Corporate plans use a discount rate based on corporate bond yields. But government plans use their expected return rate on all investments as their discount rate.

The higher the discount rate, the smaller a fund's pension obligation. That gives public plans another big reason to hesitate before cutting their expected return rates.

The Colorado Public Employees Retirement Association showed in its 2009 financial report the impact of reducing the rate. Using a 8% expected return rate, the plan faced a $23.4 billion deficit, based on market values, at the end of 2009. If the rate was cut to 6.5%, the shortfall would jump to $34 billion.

Meredith Williams, the Colorado plan's chief executive, says cutting the rate "creates pain." Nevertheless, Colorado at year-end of 2009 cut its return assumption to 8%, from 8.5%. Mr. Williams says the rate may be lowered again later this year.

Others have been more hesitant. In 2009, Matt Smith, state actuary for Washington state, recommended that its retirement system cut its return expectation to 7.5%, from 8%. That advice was rejected by the state's pension-funding council.

Continued in article

"How States Hide Their Budget Deficits:  The SEC's charges against New Jersey for misleading investors should warn other states against sweeping the truth under the rug," by Steve Malanga, The Wall Street Journal, August 23, 2010 ---
See above

Bob Jensen's threads on pension accounting are at

The Sad State of Government Accounting and Accountability ---

A Bedtime Story:  Teaching Case on Cash Flow and Cash Management

From The Wall Street Journal Accounting Weekly Review on September 24, 2010

Companies Like Bed Bath Need Capital Ideas
by: Kelly Evans
Sep 22, 2010
Click here to view the full article on

TOPICS: Cash Flow, Cash Management

SUMMARY: "U.S. companies are grappling with what might seem like an enviable problem: what to do with all their cash." Options for what to do with available cash are listed in the article: invest in new activities expected to grow and provide returns, pay off debt, or pay dividends. A final option is one that many have taken: U.S. companies have authorized a total of $257 billion of share repurchase programs so far in 2010.

CLASSROOM APPLICATION: The article is useful at any level from introductory accounting and up when introducing topics related to cash and balance sheet analysis.

1. (Advanced) Why should shareholders be concerned about companies having too much cash?

2. (Advanced) Consider the case of Bed Bath & Beyond; not only does it hold a record amount of cash but "it's expected to generate an additional $600 million to $650 million in free cash flow by the end of its fiscal year next February...." What does this statement mean? Include in your answer a definition of free cash flow.

3. (Introductory) What options are available to companies with high cash balances?

4. (Introductory) What have many chosen to do with their available cash? Comment on the meaning of the graphic shown in the online article.

5. (Advanced) Compare the impact on the balance sheet equation of paying dividends to shareholders versus repurchasing one's own shares of common stock. Why would a company choose one versus the other?

Reviewed By: Judy Beckman, University of Rhode Island

"Companies Like Bed Bath Need Capital Ideas," by: Kelly Evans, The Wall Street Journal, September 22, 2010 ---

U.S. companies are grappling with what might seem like an enviable problem: what to do with all their cash.

Take retailer Bed Bath & Beyond Inc., which releases fiscal second-quarter earnings Wednesday. The company had $1.64 billion in cash and short-term Treasurys as of May—a record high. And it's expected to generate an additional $600 million to $650 million in free cash flow by the end of its fiscal year next February, according to UBS Securities.

Yet investors aren't exactly jumping for joy. A key issue Wednesday will not just be earnings and revenue growth but also whether Bed Bath is putting its cash to good use.

It's a nationwide dilemma, particularly at tech companies. U.S. non-financial businesses had about $1.85 trillion in liquid assets as of June, according to the Federal Reserve, just shy of the first quarter's record high.

With interest rates near zero, there is little use in so much cash lying fallow on corporate balance sheets. Some companies, like Darden Restaurants Inc., have used cash to pay off debt. Yet Bed Bath is already debt-free. Others are ramping up spending, but expected returns are low amid a sluggish outlook for revenue growth, notes Gluskin Sheff Chief Economist David Rosenberg.

A third option is to use the cash for mergers and acquisitions, as some of the cash-heavy tech companies have been doing in recent months. Yet Bed Bath already owns several smaller chains, including Christmas Tree Shops and buybuy BABY. And deals for deals' sake is never a good idea.

While dividends would help satisfy investors' thirst for income, such payouts are rarely used by retailers that want investors to think they are still in growth mode. Hence the trend toward buying back shares.

Companies have authorized $257 billion of such buybacks so far this year, according to Birinyi Associates—more than double all of last year. Bed Bath repurchased about $85 million of its shares during its fiscal first quarter, ended May. Bed Bath is authorized for roughly $700 million more. The danger always exists, though, that companies will buy back at the wrong time.

None of the options is perfect. But companies like Bed Bath need to give shareholders a clear cash strategy. They can't hunker down forever.

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

In re New Century, Case No. CV 07-00931 (C.D. CA.) is a securities class action arising out of the collapse of sub-prime lender New Century. The defendants include a group of the former officers and directors of the company, its outside auditors KPMG LLP and underwriters J.P. Morgan Securities, Inc., Deutsche Bank Securities, Inc. and Morgan Stanley & Co. This week the court gave preliminary approval to a $125 million settlement. The officers and directors will pay $65 million, KPMG $44.75 million and the underwriters $15 million.

Insider trading: SEC v. Gansman, Civil Action No. 08-CV-4918 (S.D.N.Y. Filed May 29, 2008) is an insider trading case against a former attorney at the Transaction Advisory Services group of Ernst & Young, James Gansman, and his former stock broker and close friend, Donna Murdoch. The Commission alleged, as discussed here, that Mr. Gansman tipped Ms. Murdoch concerning at least seven different acquisition targets of E&Y clients. Ms. Murdoch traded in the securities of each and also tipped her father and recommended trading in two stocks to others, all of who traded. Previously, Mr. Gansman was convicted on parallel criminal charges and sentenced to serve a year and a day in prison. Ms. Murdoch pleaded guilty to a seventeen-count superseding information in December 2008 and is awaiting sentencing. To settle with the SEC, each defendant consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Gansman also agreed to pay disgorgement of $233,385 along with prejudgment interest while Ms. Murdoch will disgorge $339,110 along with prejudgment interest. Mr. Gansman consented to the entry of an order barring him from appearing or practicing as an attorney before the Commission in a related administrative proceeding. Ms. Murdoch agreed to the entry of an order barring her from association with any broker or dealer in a related administrative proceeding.

Bob Jensen's fraud updates are at

Bob Jensen's threads on accounting firm litigation are at

Francine says "The report nailed the KPMG auditors"

"Settling For Silence: KPMG Closes The Books On New Century And Countrywide," by Francine McKenna, re:TheAuditors, August 18, 2010 ---

And in the naked light I saw
Ten thousand people maybe more
People talking without speaking
People hearing without listening
People writing songs that voices never shared
No one dared
Disturb the sound of silence

It’s no coincidence that settlements were announced less than a week apart for both New Century and Countrywide.  As two of the earliest subprime failures, all parties were probably anxious to clear some clutter and make room for other matters.

Fortune, August 3, 2010: A federal judge signed off Monday on a settlement under which former shareholders of the troubled mortgage [originator] will get $624 million, the Los Angeles Times reported. The plaintiff lawyers called the sum the largest shareholder settlement since the mortgage meltdown started in 2007.

Bank of America (BAC), which acquired the mortgage lender two years ago and has since stopped using the Countrywide name, will pay $600 million and accounting firm KPMG will pay $24 million.

The Countrywide settlement comes just days after officers and directors in another big subprime class action agreed to pay $90 million to settle claims in that case. New Century co-founder Brad Morrice said then that he hoped the settlement “would make up for some of the losses suffered and provide closure to me and the shareholders.”

Closure isn’t coming any time soon for Countrywide. Bank of America’s annual report provides a list of legal cases tied to Countrywide that covers parts of three pages.

Nor is [Angelo] Mozilo [Countrywide former CEO] out of the woods. He and two other former Countrywide execs still face a Securities and Exchange Commission fraud suit that centers on familiar allegations, that the company duped shareholders by failing to disclose the growing risk of its subprime lending business.

Countrywide was not, strictly speaking, a failure.  Bank of America agreed to buy them in January of 2008, before the bigger “failures” of Lehman, AIG, and Bear Stearns changed the language describing our economic challenges from subprime crisis to full-blown, “is-it-a-second-coming-of-the-depression-well-at-least-it’s-a-serious-recession” financial crisis.


Reuters, January 11, 2008:Regulators and politicians in Washington are very keen to see troubled lenders find solutions to their problems, experts said. Egan said the Federal Deposit Insurance Corp did not want to deal with the potential failure of Countrywide. And Bove said: “The people in Washington must be having fits about what would happen if a bank or a thrift with $55 billion in assets went under, so I think they pushed Countrywide hard in this direction.”


I started writing about the subprime crisis in early 2007.  Countrywide was already spinning out of control.


“Countrywide, the nation’s biggest mortgage lender in terms of loan volume, said it faces “unprecedented disruptions” in debt and mortgage-finance markets that could hurt earnings and the company’s financial condition. In its quarterly filing with the SEC, the bank said “the situation is rapidly evolving and the impact on the company is unknown.”

KPMG is their auditor and gave them a squeaky clean opinion in 2006.

By mid-2007, New Century was giving KPMG a migraine and Deloitte had its hands full with American Home. By November, Deloitte was also worried about Bear Stearns and Merrill Lynch.

Countrywide became a black hole for Bank of America.  The bank was still gushing red ink in March, while due diligence continued, before the deal closed.

This was unexpected, they said.

Countrywide’s Mortgage Woes Deepen

Countrywide Financial Corp.’s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall, a securities filing shows…The lender also said it took a big loss in the fourth quarter on home-equity lines of credit. 

Further losses may lie ahead…Countrywide was blindsided during the quarter by obligations on home-equity lines of credit that it had sold to investors in the form of securities…Countrywide said the likelihood of such a situation was “deemed remote” until late 2007. It blamed a “sudden deterioration” in the housing market. As a result, it recorded a $704 million loss to cover the estimated costs of its obligations on the lines of credit…A Countrywide computer model used to gauge risks on these securities didn’t take into account the possible effects of exceeding the loss levels that cut off reimbursements…


Much has been written about Countrywide and its failings. There was enough evidence, I suppose, in re Countrywide Financial Corp. Securities Litigation, 07-05295 that “former Countrywide Chief Executive Officer Angelo Mozilo and other executives hid the fact that the company was fueling its growth by letting underwriting standards deteriorate” to scare the defendants away from a trial.  Mozilo is still subject to SEC civil suits and potential criminal indictments for fraud. But Countrywide, its executives and its auditors, KPMG, were not subjected to a bankruptcy filing and a bankruptcy examiner’s report like New Century was.

The judge in the Countrywide case has agreed to accept KPMG’s acknowledgment of $24 million of the $624 million liability or about 4% culpability. Without a bankruptcy examiner’s report such as the New Century report or a trial, we will never know the full extent, if any, of KPMG’s knowledge, negligence, aiding or abetting of the alleged Countrywide fraud.

Michael Missal’s New Century bankruptcy examiner report was a tour de force, the complete anatomy of a pre-financial crisis fraud, including several smoking guns pointed at auditors KPMG. Let me remind you that pros like Mr. Missal, who cut his teeth on the World Com bankruptcy and Arthur Andersen, drew the map used by Anton Valukas and the Lehman bankruptcy examiner’s report. Missal set the standard for Valukas’ colorable claims against Ernst and Young for professional impotence and complacency when faced with Lehman’s Repo 105 activities.

Paul Barrett of Business Week reminded us, too, of the important role of the virtuoso bankruptcy examination when setting up Trustees’ litigation and criminal indictments:

“The unavoidable question is whether the SEC will hold someone responsible for what happened at Lehman,” says Michael J. Missal, a partner in Washington with the law firm K&L Gates. Missal, who makes a living defending companies faced with government investigations, is another of those attorneys capable, when asked by a court, of transforming himself into a public-spirited, if generously compensated, pit bull. He published an impressive bankruptcy examiner’s report of his own in 2008 in the case of New Century Financial, one of the subprime mortgage giants that, with Wall Street’s assistance, recklessly inflated the housing bubble.

I spoke to Michael Missal recently.  He told me that to have a successful bankruptcy examiner’s engagement, the examiner must be:

1) Thorough

2) Accurate

3) Fair

4) Objective

5) Timely

I think his New Century report, clocking in at 551 pages plus appendices, did a great job of explaining, for the first time, difficult issues we would see so many times in later subprime and financial crisis litigation.

The report also really nailed the auditors, KPMG.

Bloomberg, April 2, 2009: KPMG’s audits of New Century violated both professional standards promoted by its international body and regulatory requirements, according to the complaint. Dissenters within the auditing firm were silenced by senior partners to protect the firm’s business relationship with New Century and KPMG LLP’s fees from the company.

One KPMG specialist who complained about an incorrect accounting practice on the eve of the company’s 2005 annual report filing was told by a lead KPMG audit partner “as far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off,” the complaint said.

KPMG’s regulator, the PCAOB, has told us over and over that KPMG will fudge on behalf of their clients when it comes to auditing estimates of loan loss reserves. That claim was the smoking gun in the New Century litigation.

Attorney for the New Century Trustee, Steven Thomas, thought so much of this smoking gun he put a $1 billion price tag on the litigation by the Trustee against KPMG

Continued in article

Will the large international auditing firms survive the multi-billion dollar lawsuits resulting from the lousy audits of the failed banks?

Late in the afternoon I'm tired of reporting bad news --- read it for yourself and weep!
"Westpoint Now Embroils KPMG, Deloitte And Australian Securities and Investments Commission," Big Four Blog, August 19, 2010 ---

KPMG's litigation woes ---

Need Some Inspiration to be a better Teacher?
Joe Hoyle recommends that you watch a particular film

I recommend that you watch the video of Joe Hoyle's "Last Lecture"
Last Lecture Series: Joe Hoyle

Call it like it is
"What do you tell your students?" by Joe Hoyle, Teaching Financial Accounting Blog, August 19, 2010 --- 

Tell Students That This is the Real World
Okay -- here might be the important part of this post: In the minds of many students, there is school and there is the real world and it is that divide that makes school seem unimportant. With my very first question on the very first day of the semester, I wanted the students to see that we were going to be studying something that really could be important to their lives beyond school. And, if you cannot establish that, right from the beginning, is there any reason to have the class?
Joe Hoyle, "Opening," Teaching Financial Accounting Blog, August 24, 2010 ---

The Crucial Role of Passion in Teaching and Learning ---

August 15, 2010 message from Bob Jensen

Hi Rick,

 In my reply I should’ve added some things about technology-experimenting accounting professors who pull off their experiments with an exceptional degree of passion. In addition to Amy Dunbar and Rick Lillie, I should’ve mentioned Steve Hornik ---
I can’t imagine how Steve pulls these innovations off with class sizes in the hundreds.

I’m certain there are others that are passionate in their own ways, and some of these passionate and innovative accounting educators are identified in the TLC Section Page at

I also should’ve elaborated a bit about the passions of Amy Dunbar and Rick Lillie:
May 31, 2010 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

I just finished the first week of a 12-week MSA online tax course at UConn. I put students in groups and I ask them to work fairly lengthy quizzes (homework) independently, putting their answers in an Excel spreadsheet, and then they meet in chats to discuss their differences. When they can’t resolve a question, they invite me into chat. This week a student introduced me to Google docs, and I was swept off my feet by the way this tool could be used in my class. I love it! I created a video on the fly on Thursday to illustrate how to create a spreadsheet and share it with other group members. I may be the last to the party on this tool, but in case some of you aren’t aware of it, I am posting the video. 

If anyone wants the “quiz” that the students worked, send me an email (not AECM), and I will send you the file.


Amy Dunbar
University of Connecticut School of Business
Department of Accounting
2100 Hillside Road Unit 1041 Storrs, CT 06269-1041  


This relates to Amy Dunbar's praise of Google Docs

"Simple, Powerful Uses for Google Books," by Amy Cavender, Chronicle of Higher Education,  August 13, 2010 ---


May 31, 2010 reply from Rick Lillie [rlillie@CSUSB.EDU]

Hi Amy,

I use Google Docs and Spreadsheets with all of my courses.  It's free, includes most of the Microsoft Office features, and makes it easy for students to collaborate on team projects.  It also makes it easy to submit the final document in various formats (e.g., .pdf format).

My students use two communication tools in conjunction with Google Docs and Spreadsheets (i.e., TokBox and Skype).  To use these tools, they need a headset/microphone and webcam.

TokBox ( is a free, hosted video messaging service.  You can record up to a 10 minute video clip that can be shared by URL link.  TokBox also includes a video chat feature that enables multiple people to video conference.  This feature works great with study teams.

Skype (  includes chat, audio and video-conferencing.  The chat feature works probably better than what you have been using.  With a headset/microphone, you can have up to 10+ people in a audio conference call.  Video-conferencing is 1:1 and includes a great  screen sharing feature.

You can really change the nature of team collaboration when you combine Google Docs and Spreadsheets with TokBox and/or Skype.  Following is an example of how to do this.


Students use Google Docs to create a shared workspace for writing a paper.  One student sets up the workspace and invites team members into the space through an email link.  Each team member is given editor rights.

Using a headset/microphone and webcam, students use TokBox to host a group video conference call.  This enables students to brainstorm and get a project running.

During the work process, each team member adds/changes the paper in the common workspace in Google Docs.

When it is time to pull the paper together and do final editing, students use the audio conference call feature to talk with each  other.  While all are online in Skype, each team member logs into the Google Docs paper and views it on his/her computer screen.  One or more students act as the editor.  All see changes as they are made.

When editing is finished, one student exports the final assignment document in .pdf format to his/her hard drive.  The student then submits the document for grading (e.g., student uploads the paper through the Digital Drop Box in Blackboard).


By combining the features of Google Docs and Spreadsheets with communication tools like TokBox and Skype, students learn how to use technology to get things done.  Major companies pay a fortune to do what your students can  do for free.  Purchasing a headset/microphone and webcam is relatively inexpensive.  The experience students get is priceless.

I use this approach and technology tools with face-2-face, blended, and online classes.  It works great.  The approach changes the nature of how students and instructor interact in the teaching-learning experience.

Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA.  92407-2397
Telephone:  (909) 537-5726Skype (Username):  ricklillie

On the last day of class, I would love to hear my students say:
“I never thought I could work so hard. I never thought I could learn so much. I never thought I could think so deeply. And, it was actually fun.”
(Joe Hoyle)

Jensen Comment
I’m certain that you will miss your beloved TokBox software now that it, like Google Wave, has been discarded on the trash pile of abandoned technology.

Bob Jensen's threads on Tricks and Tools of the Trade are at

How to author books and other materials for online delivery

How Scholars Search the Web ---

 Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Rick Lillie
Sent: Saturday, August 14, 2010 9:18 PM
Subject: Re: An Example of how I combine technologies to create a fully online teaching-learning experience

 Hi Bob,

Thank you for great feedback about the interactive Class Assignments Schedule (CAS) format that I developed for my third course in Intermediate Accounting.  I agree with your comments.  I am revising the CAS for my FQ 2010 course, so your comments and suggestions arrive at the right moment.  Below are comments for several issues that you raised.  Hopefully, I can explain why I did, what I did.

For AECM readers, below is the link to the interactive Class Assignments Schedule that you reviewed.


 When exploring linked features on the CAS, it works best to "right-click" on a link and then click the "open in a new window" option.  This makes it easier to navigate CAS features.


 Both CalState San Bernardino and UCLA Extension use Blackboard.  The LMS includes a discussion board feature that works well for certain information sharing activities.  However, this past year, I became dissatisfied with using the "finger tapping" discussion board for student discussions.

 What I tend to find is that the first few students who post discussion comments and responses post original thoughts.  After the first postings, things get repetitive.  Unfortunately, Blackboard (and most LMS systems) does not make it possible to keep postings private until after a deadline has passed.  The LMS structure almost by default encourages plagiarism.

 VoiceThread includes an option that allows postings to be kept private until I am ready to make them public for all class members to view.  This greatly reduces the chances of plagiarism occurring.

 VoiceThread allows three ways to post comments (i.e., text, audio, or video).  For the first VoiceThread assignment, students can use any of the three formats to post comments.  For subsequent VoiceThead assignments, students must post video comments.  This helps students improve their oral speaking/conversation presentation skills.  A student can see how he/she comes across to others.  A student can hear his(her) own explanation.

 I tell students to explain in terms a client will understand.  Save the "technical jargon" for colleagues who need to be impressed.  VoiceThread makes it possible for a student to see how well he(she) met this standard.

 Once the posting deadline passes, I make all postings public to all class members.  I use Zoomerang (online survey system) to allow students to anonymously rate each other's commentaries.  I use the overall ratings and a simple grading rubric as the basis for awarding individual grades.  Often a student wants to talk about his(her) presentation.  We use Skype for a 1:1 video conference call.


 I will add the "start-up" professionalization topics that you recommended.  I talk about these throughout the course, but have not specifically included them on the Class Assignments Schedule.  I set up other pages in Blackboard for these items.  I'll see I can add them to the Class Assignments Schedule.

 During FQ 2009, AAA allowed me to include Sir David Tweedie's speech from the 2009 AAA Annual Meeting.  I replaced Sir Tweedie's speech with the Paul Volker video.  I viewed the Partnoy video.  I agree this would be a far better opening video.  The "financial transparency" issue sets a good opening tone for the overall course.  The way the CAS is currently designed, I use Warren Buffett materials to focus on "financial transparency."  But, this is done through the closing topic.

 My syllabus (which is different from the CAS) includes discussion of academic ethics, integrity, plagiarism, and cheating.  However, my comments are not as dynamic as yours.  I will revise wording in my syllabus.

I agree with your comment about introducing XBRL.  I already decided to introduce XBRL throughout the course through short, web research exercises.  This should make the coverage relevant, practical, and less technical.


 I agree with your comments about demanding almost too much from students.  I am cutting back supplemental readings to no more than one or two per topic.  I refer to the readings as "Connect to Practice."  Readings will come from practitioner publications like the Journal of Accountancy or The CPA Journal.  I appreciate your references to Joe Hoyle's teaching advice.


Thank you for great advice and outstanding ideas.  Once I revise the interactive Class Assignments Schedule for FQ 2010, I will email you the hyperlink to the revised web page.  I think you will see significant improvements.

Again, thank you for your comments at the TLC Breakfast meeting.  I really appreciated you doing this.

Best wishes,

Rick Lillie
Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA.  92407-2397

Telephone:  (909) 537-5726
Skype (Username):  ricklilli

 On the last day of class, I would love to hear my students say:

“I never thought I could work so hard. I never thought I could learn so much. I never thought I could think so deeply. And, it was actually fun.”
(Joe Hoyle)


From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Saturday, August 14, 2010 3:17 PM
Subject: FW: An Example of how I combine technologies to create a fully online teaching-learning experience

Hi Rick,

I will expand well beyond your direct question to me in the interest of all AECM readers.

Probably the most unique aspect of your course is the use of student voice threads. I really don’t have much to say about these since I’ve never seen them used and have not read testimonials about how it well they work. Like most education technology, I suspect that this technology mostly depends on context and how it is used for grading purposes. Like Joe Hoyle, I think how you test is how students really learn. The voice thread idea might counter this somewhat, but much depends upon the role of voice threads in the grading formula.

I think all AECM readers should watch your tutorial on how to use the voice threading system.

You are a bit like Amy Dunbar in that when you try something new it will probably work for you because of your passion for making it a success. Less passionate accounting educators should be warned that what works fantastically for Rick Lillie and Amy Dunbar will not necessarily work for them without the accompanying passion.

My first reaction to your syllabus is that you demand almost too much from your students --- especially in terms of the volume of reading and video watching. For the readings assigned as “peruse readings” perhaps you need guidelines about what you expect from a “peruse” cruse. Some students will spend a great deal of time and take copious notes if they think any assigned material will be on an exam or quiz. Perhaps you should let students see “possible quiz questions” in advance for each “peruse” cruise. But then reserve the right to ask a general question not given in advance to scare students who may decentralize (among themselves) the answering of possible quiz questions.

Early in the course (read that the first or second class) display the tables and graphs that show the following:

2009 Best Places to Start/Intern According to Bloomberg/Business Week
Also see the Internship and Table links .
The Top five rankings contain all Big Four accountancy firms.
Somehow Proctor and Gamble slipped into Rank 4 above PwC
The accountancy firms of Grant Thornton and RMS McGladrey make the top 40 at ranks 32 and 33 respectively.

Best Places to Intern
I'm waiting for Francine to throw cold water on the "ever before" claim
Especially note the KPMG Experience Abroad module below
"Best Places to Intern:  Bloomberg BusinessWeek's 2009 list shows employers are hiring more interns to fill entry-level positions than ever before,"  by Lindsey Gerdes, Business Week, December 10, 2009 ---  

 Early on invite some of your most gifted graduate students in to talk about their intern experiences --- hopefully there will be Big Four interns and non-Big Four interns for these presentations.

In lieu of having live presentations, former intern videos might be displayed for the class.

Perhaps XBRL can be delayed a bit. That’s a bit technical and dull for openers.

You should explain why global work opportunities are opening up somewhat because of IFRS (avoid the convergence debate at this point).

I would also dwell on the growing opportunities for accounting majors --- including working for the FBI and working on your own or within a company as a forensic accountant. Explain the typical duties of both types of professionals. Explain how advantages arise for graduates fluent in more than one language. Also explain the difference between education and training so that your students try to stop hating humanities and science requirements.

Also explain why working for government (e.g., the IRS) can lead to great career opportunities later in life such that you’ve given hope to graduates who do not make it into or do not want to make it into the Big Four to start with at the time of graduation. Graduates who do not get Big Four offers are not doomed for life.

I would also devote some class time to the shortage of doctoral graduates in accounting and opportunities for accounting doctoral graduates (e.g., mention Texas A&M, USC, and Stanford starting salaries, research stipends, teaching loads, and research expense report. But be fair and also mention tenure track hurdles. A good reference is the following:

"So you want to get a Ph.D.?" by David Wood, BYU ---

Do You Want to Teach? ---

Then explain why it is probably best to obtain 1-5 years of experience as a practicing accountant before returning to a doctoral program.

Drop the VARK Stuff
I’m not into learning styles since I think top students adapt to whatever pedagogy is used by the instructor in every course taken at a university. I would instead explain why self-learning may be superior for nearly all students without going into details and conjectures at

And remember what Joe Hoyle alleges --- students learn what you test them on such that, good or bad, examinations and quizzes are the focal point of student attention. You need to spell you your testing and grading guidelines very clearly.

Early on, especially in the syllabus, I would explain the nuances of academic ethics, integrity, plagiarism, and cheating that you will not tolerate in the course. Explain the difference between learning collaboration/cooperating versus cheating and free riding.

Probably the most unique aspect of your course is the use of student voice threads. I really don’t have much to say about this since I’ve never seen this used and have not read testimonials about how it well it works. Like most education technology, I suspect that it mostly depends on context and how it is used for grading purposes. Like Joe Hoyle, I think how you test is how students really learn. The voice thread idea might counter this somewhat, but much depends upon the role of voice threads in the grading formula.

One thing the AECM can provide are alternate ideas to replace the financial system collapse as the first topic of voice threading. For example, it might be better to focus on the Partnoy video than the Volcker video:
Watch the video! (a bit slow loading)
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
Watch the video!

Abusive off-balance sheet accounting was a major cause of the financial crisis. These abuses triggered a daisy chain of dysfunctional decision-making by removing transparency from investors, markets, and regulators.  Off-balance sheet accounting facilitating the spread of the bad loans, securitizations, and derivative transactions that brought the financial system to the brink of collapse.

As in the 1920s, the balance sheets of major corporations recently failed to provide a clear picture of the financial health of those entities.  Banks in particular have become predisposed to narrow the size of their balance sheets, because investors and regulators use the balance sheet as an anchor in their assessment of risk.  Banks use financial engineering to make it appear that they are better capitalized and less risky than they really are.  Most people and businesses include all of their assets and liabilities on their balance sheets.  But large financial institutions do not.

Click here to read the full chapter.--- Sheet Transactions.pdf

Frank Partnoy is the George E. Barnett Professor of Law and Finance and is the director of the Center on Corporate and Securities Law at the University of San Diego.  He worked as a derivatives structurer at Morgan Stanley and CS First Boston during the mid-1990s and wrote F.I.A.S.C.O.: Blook in the Water on Wall Street, a best-selling book about his experiences there.  His other books include Infectious Greed: How Deceit and Risk Corrupted the Financial Markets and The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals.

Lynn Turner has the unique perspective of having been the Chief Accountant of the Securities and Exchange Commission, a member of boards of public companies, a trustee of a mutual fund and a public pension fund, a professor of accounting, a partner in one of the major international auditing firms, the managing director of a research firm and a chief financial officers and an executive in industry.  In 2007, Treasury Secretary Paulson appointed him to the Treasury Committee on the Auditing Profession.  He currently serves as a senior advisor to LECG, an international forensics and economic consulting firm.

The views expressed in this paper are those of the authors and do not necessarily reflect the positions of the Roosevelt Institute, its officers, or its directors. 

My point is that I think there are a lot of better accounting things to start this course with than the Volcker finance video.

As I mentioned in my TLC breakfast speech, I think Rick Lillie is one of the brightest resources in accounting education’s stable of accounting educators. He brings a passion for technology experimentation into learning and is willing to share his experiences with the education world. All accounting educators should track his main blog at
The postings are not frequent (i.e.., not daily) but they are highly informative about new advances in education technology.

Robert E. (Bob) Jensen

Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
Tel. 603-823-8482


From: Rick Lillie []
Sent: Friday, August 13, 2010 8:36 PM
To: Jensen, Robert
Subject: FW: An Example of how I combine technologies to create a fully online teaching-learning experience

 Hi Bob,

 I have deactivated several links on the example Class Assignments Schedule.  As I wrote to you earlier today, I deactivated some links in order to protect student privacy.  It is OK now to share my comments and example Class Assignments Schedule on your website and AECM.

I look forward to your comments and suggestions.

Have a great weekend,

Rick Lillie

From: Rick Lillie []
Sent: Friday, August 13, 2010 1:55 PM
To: Jensen, Robert
Subject: An Example of how I combine technologies to create a fully online teaching-learning experience

Dear Bob,

You blew me away at the TLC breakfast, when during your presentation, you mentioned me and my work. Thank you.  I am most grateful for the kind comments.

 I read your comments today about the game-changing experience that moved you toward teaching with technology.  I really enjoyed your presentation at the TLC breakfast.  I wish there had been more time, but that's how speeches go.

 Like your experience, several events happening since "2000," have done much the same thing for me.  I would like to share an example of how I use technology to create course materials and share them with my students.  I do not think I have shared this with you before.  I would appreciate your feedback comments.

The approaches I am developing may be used in face-2-face, blended, and fully online formats.  Click the link below to access what I call an interactive class assignments schedule.  I have taken the traditional assignments schedule included in a course syllabus and converted it into a Web 2.0 interactive teaching-learning experience.

I use the interactive class assignments schedule format with the third course in Intermediate Accounting that I teach for both CSUSB and UCLA Extension.  The CSUSB section is taught in a blended format.  The UCLA Extension class includes students from around the world and is fully online.

Link to Class Assignment Schedule:

The page design is simple.  It is a data table.  Each row presents a study week during the course.  The study process moves left-to-right across the row.  I treat the study week as beginning on Monday and ending the following Saturday evening at 11 PM (PST/PDT).

The second column of the table includes study content.  The third column includes practice.  The fourth column includes assessment.

Each week begins with an embedded video where I talk with students about the study week.  I create an interactive mind map to guide students through the chapter topic.  I use VoiceThread to create short lecture/discussion segments that are linked to subtopics of the mind map diagram.  Click on the "V" icon on the mind map to view a streaming video lecture segment.

Homework is completed through WileyPlus, an online homework system that supports the Kieso textbook.  I talked with Jerry Weygandt about how I select exercises for homework assignments.

Homework assignments are at the concept-technique level.  Weekly quiz questions are open-book, research-based and go deeper into concepts and critical thinking.  Each Sunday morning, I post links to suggested solutions and support explanations for quiz questions.

The interactive class assignments schedule is asynchronous and combines features of several Web 2.0 technology tools.  When a student needs "live" contact, we use Skype.  This works great.

Student feedback has been excellent.  During Spring Quarter 2010, UCLA Extension students rated the course 8.5 out of 9.0.  It was a great class.  Everyone enjoyed the give-and-take during the term.

 I would really appreciate your feedback comments about the interactive class assignments schedule.  This is one example of what I am doing.  I am working on a paper that describes how to use technology to create "teaching presence" in the teaching-learning experience.

If you would be interested, perhaps we could use Skype to talk about the class assignments schedule.

Best wishes,

Rick Lillie
Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA.  92407-2397

Telephone:  (909) 537-5726
Skype (Username):  ricklillie

 On the last day of class, I would love to hear my students say:
“I never thought I could work so hard. I never thought I could learn so much. I never thought I could think so deeply. And, it was actually fun.”
(Joe Hoyle)

Those of you teaching managerial and cost accounting may find some value in this video of the Model T production line ---

"Video: Entrepreneur Mark Cuban Unabashed!" Simoleon Sense, August 27, 2010 ---

Last Lecture Series: Joe Hoyle

A Teaching Case on How Regulators Are Targeting Financial Statement "Window Dressing"

From The Wall Street Accounting Weekly Review on September 24, 2010

Regulators to Target 'Window Dressing'
by: Michael Rapoport
Sep 16, 2010
Click here to view the full article on

TOPICS: Banking, Debt, Disclosure, Disclosure Requirements, SEC, Securities and Exchange Commission

SUMMARY: Federal regulators are poised to propose new disclosure rules targeting "window dressing...." The SEC " expected to issue proposal for public comment. The action follows a Wall Street Journal investigation...of financial data fro 18 large banks...[which] showed that, as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks."

CLASSROOM APPLICATION: The article can be used to discuss window dressing beyond the banking sector, to discuss current reactions to the financial crisis, and to discuss leverage and debt levels.

1. (Advanced) Define window dressing, going beyond what is offered in this article. Is this issue found in other industries beyond banking?

2. (Advanced) What has been the nature of the window dressing issue in the banking industry? Include in your answer an explanation of the chart "Masking Risk" associated with the article.

3. (Introductory) According to the article, what prompted banks to undertake these window dressing activities?

4. (Introductory) How have banks reacted to this WSJ report on window dressing?

5. (Introductory) What is the SEC proposing to do to improve financial reporting in order to address this issue?

6. (Advanced) Do you think the SEC's plan is adequate to address this issue? In your answer, comment on the nature of items included on the face of the balance sheet versus those disclosed in the financial statement footnotes.

7. (Advanced) Describe a transaction that will help "window dress" financial statements for quarter end or year end reporting.

Reviewed By: Judy Beckman, University of Rhode Island

"Regulators to Target 'Window Dressing'," by: Michael Rapoport. The Wall Street Journal, September 16, 2010 ---

Federal regulators are poised to propose new disclosure rules targeting "window dressing," a practice undertaken by some large banks to temporarily lower their debt levels before reporting finances to the public.

The Securities and Exchange Commission is scheduled to take up the matter at a meeting Friday and is expected to issue proposals for public comment. The action follows a Wall Street Journal investigation into the practice, which isn't illegal but masks banks' true levels of borrowing and risk-taking.

A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.

The practice suggests the banks are carrying more risk than is apparent to their investors or customers, who only see the levels recorded on the companies' quarterly balance sheets.

The SEC focus comes two years after the peak of the financial panic, which was exacerbated by high levels of borrowing by the nation's banks.

Since then, heightened scrutiny from regulators and investors has prompted banks to be more sensitive about showing high debt levels.

The SEC is expected to propose rules requiring greater disclosure from banks and other companies about their short-term borrowings.

The agency's staff has been considering whether banks should be required to provide more frequent disclosure of their average borrowings, which would give a better picture of their debt throughout a quarterly period than do period-end figures.

An SEC spokesman declined to comment.

Short-term borrowing pumps up risk-taking by banks, allowing them to make bigger trading bets.

Currently, banks are required to disclose their average borrowings only annually, and nonfinancial companies aren't required to disclose their average borrowings at all.

Last month, Sen. Robert Menendez, a New Jersey Democrat, and five other senators urged the agency to require more disclosure so the public could see if a company tried to dress up its quarterly borrowings.

"Rather than relying on carefully staged quarterly and annual snapshots, investors and creditors should have access to a complete real-life picture of a company's financial situation," the senators wrote to SEC Chairman Mary Schapiro, citing the Journal articles, among other things.

Ms. Schapiro, through a spokesman, declined to comment. Mr. Menendez's office didn't return a call.

Some large banks, including Bank of America Corp. and Citigroup Inc., frequently have lowered their levels of repurchase agreements, a key type of short-term borrowing, at the ends of fiscal quarters, then boosted those "repo" levels again after the next quarter began.

The banks have said they are doing nothing wrong, and that the fluctuations in their balance sheets reflect the needs of their clients and market conditions.

But the practices suggest the banks are more leveraged and carry more risk during periods when that information isn't disclosed to the public.

At Friday's meeting, the SEC also will consider additional guidance for companies about what they should disclose about borrowing practices in the "Management's Discussion and Analysis" sections of their securities filings.

In the wake of the financial crisis, the SEC's staff has been taking a fresh look at companies' disclosures in these "MD&A" sections about liquidity and capital resources.

In the SEC staff's view, balance-sheet fluctuations can happen for legitimate reasons, and the important thing is disclosing them to investors when they are material.

Concern about hidden risk-taking by banks was heightened after a March report about the collapse of Lehman Brothers Holdings Inc.

A bankruptcy-court examiner said Lehman had used a repo-accounting strategy dubbed "Repo 105" to take $50 billion in assets off its balance sheet and make its finances look healthier than they were.

The SEC later asked major banks for data about their repo accounting. SEC Chief Accountant James Kroeker said in May that the commission's effort hadn't uncovered widespread inappropriate practices.

Still, both Bank of America and Citigroup found errors in their repo accounting that amounted to billions of dollars, though these were relatively small in the context of their giant balance sheets.

An investigation by the SEC's enforcement division into Lehman's collapse is zeroing in on this Repo 105 accounting maneuver, according to people familiar with the situation.

In an April congressional hearing, Rep. Gregory W. Meeks, a New York Democrat, asked Ms. Schapiro about the Journal's findings regarding banks' end-of-quarter debt reductions.

"It appears investment banks are temporarily lowering risk when they have to report results, [then] they're leveraging up with additional risk right after," Mr. Meeks said. "So my question is: Is that still being tolerated today by regulators, especially in light of what took place with reference to Lehman?"

Ms. Schapiro said the commission is gathering detailed information from large banks, "so that we don't just have them dress up the balance sheet for quarter end and then have dramatic increases during the course of the quarter."

Jensen Comment
One of my heroes is former Coopers partner and SEC Chief Accountant Lynn Turner. My two heroes, Turner and Partnoy, write about how bank financial statements should be classified under "Fiction."

Frank Partnoy and Lynn Turner contend that bank accounting is an exercise in writing fiction:
 Watch the video! (a bit slow loading)
 Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets"
 "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
 Watch the great video!


Great Speech About the State of Accountancy
"20th Century Myths," by Lynn Turner when he was still Chief Accountant at the SEC in 1999 ---

Bob Jensen's threads on accounting theory ---

"Dick Bové: The KPMG Citi Team Is ‘An Acceptable (but not Exceptional) Group of Auditors’," by Caleb Newquist, Going Concern, August 30, 2010 --- 

Jensen Comment
This article above  is not going to change my thinking one way or the other.

The paper and video below changed my thinking.
I'm more inclined to judge Citi auditors by the the financial statements, including loan loss reserves, that they claimed were in conformance with GAAP ---
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---

"TIGTA: IRS Refuses to Stop Issuing $1 Billion in Erroneous Refund Checks," by Paul Caron, TaxProf Blog, September 21, 2010 ---

September 28, 2010 reply from rltodd [rltodd@IX.NETCOM.COM]

The original report, with all the redactions, is quite interesting on many levels.

Direct pointer: 

The Earned Income Tax Credit (EITC) has been a problem since its inception and the question is still open as to whether it is a question of technology or will to solve the problem.

"Immersed In Too Much Information, We Can Sometimes Miss The Big Picture," by Dave Pell, NPR, August 11, 2010 ---

Even in the era of Facebook, this was not a face I expected to see.

A few weeks ago, I might have argued that it’s almost impossible to shock members of Generation TMI. I would have been wrong. I was shocked by a recent Time cover that featured a photo of Aisha, an 18 year-old Afghan woman who had her nose and ears cut off by the Taliban.

My first reaction was to look away from the photo. My second was frustration toward the Time editors who decided to run the image. But after some reflection, I realized that in order to understand and form an opinion about the Taliban and the broader issues in Afghanistan, it was an image I needed to see. As a fellow human being — especially one living in an environment where my iPhone coverage is considered a critical issue — isn’t taking a long, hard look at this photo the very least I owe Aisha?

[Time Cover Picture of an Afghan woman with her nose chopped off]

Time Managing Editor Richard Stengel explained his decision to run the cover shot:

Bad things do happen to people, and it is part of our job to confront and explain them. In the end, I felt that the image is a window into the reality of what is happening — and what can happen — in a war that affects and involves all of us. I would rather confront readers with the Taliban’s treatment of women than ignore it.

While thinking about this issue and its relationship to social media, I reached out to the cadre of folks who often advise and assist me before I press the publish button.

None of them had seen the image.

This is in part a statement on the significance (or lack thereof) of magazine covers in today’s media.

I could imagine folks missing even an image this arresting in the past. But who would've thought we could collectively avert our eyes in an age when random videos can get millions of views and we all know about a Jet Blue flight attendant's creative slide to retirement within a few hours of it happening.

But that these folks — all of them heavily plugged-in —  missed this portrait of Aisha is also a statement on how we can collectively repress data that we don’t want to think about. Even though we are immersed in shared words and images, it’s still pretty easy to miss the big picture.

In his New Yorker piece, Letting Go, Atul Gawande laments the fact that doctors and patients have extremely poor communication when it comes to the difficult topic of end-of-life care.

Two-thirds of the terminal-cancer patients in the Coping with Cancer study reported having had no discussion with their doctors about their goals for end-of-life care, despite being, on average, just four months from death.

Although we find ourselves as travelers in the age of over sharing, it turns out we remain quite adept at avoiding the really tough topics.

Google’s Eric Schmidt recently stated that every two days we create as much information as we did from the beginning of civilization through 2003. Perhaps the sheer bulk of data makes it easier to suppress that information which we find overly unpleasant. Who’s got time for a victim in Afghanistan or end-of-life issues with all these Tweets coming in?

Between reality TV, 24-hour news, and the constant hammering of the stream, I am less likely to tackle seriously uncomfortable topics. I can bury myself in a mountain of incoming information. And if my stream is any indication, I’m not alone. For me, repression used to be a one man show. Now I am part of a broader movement — mass avoidance through social media.

Eric Schmidt followed up his comment about the piles of information being created with this: “I spend most of my time assuming the world is not ready for the technology revolution that will be happening to them soon.”

But in reality, we’re a lot more ready for the technology revolution than we are for Aisha.

Jensen Comment
With 500 million people using just one social network (Facebook) plus the millions of others on other social networks and addicted (like me) to blogs, there is most certainly information overload. In fact, one of the services I provide to accounting educators is to distill a vast amount of news to find accounting tidbits that I think will be on interest to accounting educators. But with so many social networks I cannot begin to cover the waterfront and don't even try on Facebook. I also only cover a microscopic part of Twitter where I have only a few selected sources that mostly are like me --- distilling the ocean of information for accounting tidbits.

What I discovered in the AAA Annual Meetings in San Francisco is that there are top-name accounting educators and researchers who are lurkers on the AECM. At least a dozen of them revealed to me for the first time that they've been lurking for years. We can't seem to motivate them to share their expertise with us on the AECM or the AAA Commons. I suspect that one of the main reasons is that they fear having to take too much time engaging in threads that they either commence or join on the AECM or AAA Commons. They are extremely paranoid about their time commitments.

Perhaps this is part of the overall information overload syndrome. It takes some time to lurk over tidbit nuggets, but it takes an even greater amount of time to engage in conversations about those nuggets.

When you think about it, information overload is probably a job saver for educators. Our students would be totally lost amongst the trees of the forests if educators were not handing out Google-type satellite maps of hidden mazes in each forest. The problem for us is that the forests are becoming so immense in size and so overlapping between disciplines that map construction is becoming more and more difficult.

Roles of ListServs, Blogs, and Social Networks ---

Bob Jensen's threads on data visualization (no chopped off noses) are at

"Video: Ted Talk–Navigating The Information Glut :The beauty of data visualization," Simoleon Sense, August 23, 2010 ---

Bob Jensen's threads on data visualization ---

Does time really fly when you're having great fun rather than thinking about accounting?

Jim Martin has a new MAAW section on Chinese Accounting and Management ---

IAS Plus has many searchable documents on Chinese accounting since its Webmaster, Paul Pacter, played a key role in the setting of Chinese accounting standards ---

August 19, 2010 reply from Jason Xiao []

Dear Bob, Thanks for the suggestion. There is an article titled Acceptance of China Research in Western Accounting Journals (1978-2007) by Dr Songlan Peng at York University, Canada, published in China Journal of Accounting Research 2009 Vol 2 Issue 1, pp. 21-70. As the title suggests, the paper lists publications from 1978 - 2007. Many of the publications it includes are not included in Jim's bibliography.

Please pass it onto Jim. Best wishes.



Academic Worlds (TAR) vs. Practitioner Worlds (AH)

Steve Zeff gave me permission to serve up his September 4 PowerPoint presentation in San Francisco ---

Steve compared the missions of the Accounting Horizons with performances since AH was inaugurated. Bob Mautz faced the daunting tasks of being the first Senior Editor of AH and of setting the missions of that journal for the future in the spirit dictated by the AAA Executive Committee at the time and of Jerry Searfoss (Deloitte) and others providing seed funding for starting up AH.

Steve Zeff first put up a list of the AH missions as laid out by Bob Mautz  in the first issues of AH:

Mautz, R. K. 1987. Editorial. Accounting Horizons (September): 109-111.

Mautz, R. K. 1987. Editorial: Expectations: Reasonable or ridiculous? Accounting Horizons (December): 117-120.

Steve Zeff then discussed the early successes of AH in meeting these missions followed by mostly years of failure in terms of meeting the original missions laid out by Bob Mautz ---

Steve’s conclusion was that AH became more like TAR rather than the practitioner-academy marriage journal that was originally intended. And yes, Steve did analyze the AH Commentaries as well as the mainline articles in reaching this conclusion.

Steve Kachelmeier (current Senior Editor of TAR) followed Steve Zeff and made what I also think was an excellent presentation making points that he’d mostly made earlier this summer on the AECM. One comment that stands out that Steve K will probably prefer that I do not repeat is that (paraphrased) “doing academic research to creatively impact accounting and business practice is harder than doing the kind of research published in TAR mostly for other academic researchers.”

That is a point that I’ve lamented repeatedly over the past two decades. One problem is that academic accountants generally do not have noteworthy comparative advantage over practitioners s in generating creative ideas for practitioners of accounting (excluding AIS where the academy ties to the profession seem to be closer). Most creative ideas impacting the profession (such as ABC costing, balanced score card, and dollar-value LIFO) were invented by practitioners rather than academics. And the investment analysis innovations (such as CAPM or lattice option pricing models) that did flow from academe to the profession tended to be created by finance and economics professors rather than accounting professors.

I suspect that Richard Sansing will quickly rebut my remarks with evidence that tax accounting researchers in academe did create some clever innovations for accounting practitioners and the IRS --- and I hope he does indeed provide us with some examples.


However, apart from AIS and tax, I don’t expect many replies to this thread that demonstrate how seminal creative research in the accounting academy impacted the practicing profession. It’s almost certain that practitioners cannot name the accounting professors (other than Bob Kaplan and his Harvard colleagues) that provided them with research that improved the profession itself. I readily admit that I’m one of the failed accountics researchers in this regard, including my original contributions to eigenvector scaling and other priority weighting schema for the Analytic Hierarchy Process (AHP) that pretty much failed in its real world experiments in helping decision makers choose between alternatives ---

One of the main missions of Accounting Horizons was to provide incentives for academic accounting researchers to focus more closely on the needs of practitioners. Steve Zeff concluded that AH is not doing a very good job in this mission.

On a somewhat related theme, Bob Kaplan alleged that noted fair value researchers like MacNeal, Canning, Chambers, Sterling, Edwards, and Bell failed to do what he (Bob Kaplan) has done with ABC costing and balanced scorecard. Simply putting out textbook theory and textbook examples of fair value accounting are bound for failure until researchers actually put the new ideas to work in real-world companies and auditing firms.

Bob Kaplan’s message to Tom Selling and Patricia Walters would be that it’s no longer of much value to preach the theoretical virtues of exit value accounting or entry value accounting for non-financial assets. Bob Kaplan would instead tell them to put their favored theories to work in the real world and attempt to demonstrate/measure the value added relative enormous costs and risks of real world implementations.

For example, in 1929 John Canning outlined the theoretical virtues of entry value accounting for all assets ---

But nobody has demonstrated, in the context of what Bob Kaplan did for ABC costing and balanced scorecard, that entry value accounting really provides substantial benefits relative to costs and risks in the real world. The FAS 33 effort was deemed a failure as applied by FAS 33 rules, but FAS 33 should not be the final word on why entry value accounting is doomed. FAS 33 implementation guidelines cut implementation costs to the bare bones such that analysts had virtually no faith in the accuracy of replacement costs generated in the financial statements.

Fair value accounting for financial assets is having more success largely because real world applications seem to be meeting the test of value added (although bankers still disagree with dubious arguments). Aside from the FAS 33 failure, the jury has not even convened for almost non-existent fair value implementations of exit value or entry value accounting  implementations on non-financial assets in going concerns.

Bob Jensen.

 August 145, 2010 reply from Dennis R Beresford [dberesfo@UGA.EDU]


I’m very sorry I didn’t attend the AAA annual meeting this year (first miss in about 15 years or so). I would have enjoyed listening to Steve Zeff’s presentation. In fact, I always enjoy listening to or reading Steve’s work.

I’m pleased to see that Steve pointed out the original mission of Accounting Horizons and that that mission seems to have been largely ignored over the past decade or more. When I received my latest issue I thought they had put the wrong cover on it as the first two or three articles had just as many formulas as The Accounting Review! Perhaps Accounting Horizons is now the overflow publication for TAR or maybe it should be labled TAR-Lite for articles that somehow are not quite as strong in methodology.

Of course, it’s hard to know whether the problem is that practitioners aren’t meeting their end of the bargain by submitting pieces for consideration or whether the editors are not seeking pieces from practitioners or discouraging them in other ways. As you know, I had enjoyed a nice record of several articles in AH over my time at the FASB but was rejected by the then editor for a similar paper based on a plenary presentation I made to the AAA annual meeting at the end of my term at the FASB. That effectively ended my interest in dealing with AH as a journal that supposedly had some interest in views from practitioners. I have no way of know whether other “practitioners” even try to submit articles to AH these days but seeing the current contents my guess would be not.

Frankly, some of the dialogue on AECM, properly edited, would make for great content in AH. It would certainly be a lot more practical and relevant than much (most) of what is published in the AAA’s official journals these days!

Denny Beresford

"Focusing the Balanced Scorecard (BSC) and Lean Accounting on Business Process Using a Gratis (free) ISO 9000 Simulation,"
August 6, 2008 ---

Tom Klammer, University of North Texas
Sandra Richtermeyer, Xavier University
James Sorensen, University of Denver

Jensen Comment
What caught my attention is the claim:  "Over eighty-five percent (85%) of Corporate America uses or tries to use the Balanced Scorecard (BSC) according to the Ernst & Young and IMA (2003) survey of tools used by practitioners."

Over eighty-five percent (85%) of Corporate America uses or tries to use the Balanced Scorecard (BSC) according to the Ernst & Young and IMA (2003) survey of tools used by practitioners. Using a gratis (free) ISO 9000:2000 simulation (Cimlite), you can focus your management accounting classroom on business process management--the most heavily weighted perspective in the Balanced Scorecard. Other accounting innovations such as Lean Accounting focus also on business process objectives of cost reduction and quality improvement (Huntzinger, IMA 88th (2007) Annual Conference & Exposition).

A stimulating and effective way to focus your classroom on the business process is through the use of ISO 9000:2000, one of the major frameworks available to businesses to reduce costs and improve quality ( ). Instructors or students can download copies of the simulation (Cimlite) free of charge from John A. Keane and Associates, Inc. .

In addition to the simulation at no cost, we provide original essential teaching support materials so you will be able to introduce this exciting material into your course with a minimum of start-up effort. This simulation has been demonstrated with success in classes.

Bob Jensen's threads on the questionable validity and relevance of academic accounting research are at

A Must Read Document
The Commission on Accounting Higher Education:
Pathways to a Profession
Charting a National Strategy for the Next Generation of Accountants
Established by the American Accounting Association (AAA) and the American Institute of CPAs (AICPA)

Draft: August 3, 2010

I hope some creative AECM and CPA-L threads emerge on this topic. In particular, I hope this document stimulates academic accounting research that is more focused on the needs of the business world and the profession (which was the main theme of Bob Kaplan’s outstanding plenary session on August 4 in San Francisco).

Also note the AAA’s new Issues and Resources page ---

The AICPA has a concise FAQ page on the lease EDs at
This might help students.

The August 2010 Exposure Draft and Comment Letters are at

It seems to me that the ED does not properly account for the key advantage of what was formerly an operating lease --- the “right” to get out of the lease in a short period of time such as a year or less. This is a legal “right” that is not properly addressed in the ED based upon my very hurried reading of the ED. Sure a capital lease can be broken, but the penalties for doing so are usually much more onerous.

The term “rights” is a very squishy term, much like the very squishy term “control” that is now a popular basis for proposed asset and revenue recognition accounting. The FASB and IASB need to present us with more precise definitions of what is a “right” and what is “control.” I’m not impressed with a standard that simply ignores the difference between a “right” to easily end an operating lease versus the not-so-hot right to terminate a capital lease with an onerous penalty payment.

There is also moral hazard here. A lessor or lessee might tip his/her hand by disclosing in the April 2011 release of the 2010 financial statements an increased probability of terminating operating leases in less than 12 months. Therefore, in an effort to not tip the hand, the lessor or lessee is highly tempted to lie by stating that  “optional renewal periods that are ‘more likely than not’ to be exercised’ when in fact it may almost be certain that the operating lease will be terminated.

For example, the lessor may not want to tip his or her hand that secret negotiations are underway to sell the 40-story building containing all those operating leases. The buyer may intend to implode the building and erect an 80-story skyscraper. Up to now, it was taken for granted that operating leases that were disclosed but not capitalized were subject to termination. Now the IASB and FASB are telling us to capitalize future lease payments based upon implied renewals when, in secret, such renewals are in jeopardy and the lessor/lessee really does not want to tip his or her hand in advance of completed negotiations.

For what we formerly called operating leases the ED is not properly accounting for the value of the “right to terminate” an operating lease at zero penalty cost. That right also has value, but it is a value that’s difficult to book in the general ledger.

PwC has an “In Brief” take on this ED --- Click Here

The Key Provisions

Lessee Accounting

The proposal effectively eliminates off-balance sheet accounting for most leases. All assets currently leased under operating leases would be brought onto the balance sheet, removing the distinction between capital and operating leases. Other significant impacts include:

The new asset — representing the right to use the leased item for the lease term — and liability — representing the obligation to pay rentals — would be recognized and carried at amortized cost, based on the present value of payments over the term of the lease.

The lease term would include optional renewal periods that are “more likely than not” to be exercised – a significant departure from current accounting which (absent a penalty) generally only included non-cancellable periods in the lease term.

Lease payments used to measure the initial value of the asset and liability would include ―contingen amounts, such as rents based on a percentage of sales or rent increases linked to variables such as the Consumer Price Index (CPI). Today, contingent rents are generally excluded from minimum lease payments and reflected in the period they arise.

Lease renewal and contingent rents would need to be continually reassessed, and the related estimates adjusted as facts and circumstances change. Under current accounting, absent a modification or binding exercise of an extension option, there is no reassessment of lease term and contingent rentals.

Income statement ―geograph and the recognition pattern for lease expenses would change. Straight-line rent expense would be replaced by amortization and interest expense. This would result in an acceleration of expense recognition, as interest on the obligation would be greater in the earlier years, similar to a mortgage.

Lessor Accounting

After much debate, the boards are proposing a dual model for lessor accounting. Depending on the economic characteristics of the lease, a lessor would apply either a performance obligation approach or a derecognition approach.

The performance obligation approach would be used for leases where the lessor retains exposure to significant risks or benefits associated with the leased asset either during the term of the contract or subsequent to the term of the contract.

Under this approach, the lessor would recognize a lease receivable, representing the right to receive rental payments from the lessee, with a corresponding performance obligation, representing the obligation to permit the lessee to use the leased asset.

Continued in article


Ketz Me If You Can
"Operating Lease Obligations to be Capitalized." by J. Edward Ketz, SmartPros, August 2010 ---

Wow! I have wondered for a few decades whether the accounting profession ever would account for operating leases correctly. Long-term operating leases, as opposed to rentals no longer than one year, clearly convey property rights and encumber the business entity with debt obligations. Not to require this accounting has served as a badge of hypocrisy long enough.

The FASB and the IASB issued exposure drafts August 17, which propose to make this change in the treatment of operating leases.  They also discuss some changes in the accounting for purchase options, conditionals, leases with service contracts, and the accounting for lessors, including the elimination of leveraged leases.  I shall address these topics at a later time; in this essay I wish to concentrate on the more fundamental issue of lessee accounting.

Let’s review the history of accounting for operating leases briefly.  The board issued Statement No. 13 on lease accounting in November 1976.  (The Accounting Principles Board also had pronouncements on lease accounting, but they were simply dreadful.)  For lessees, the statement created two categories, capital leases and operating leases.  The FASB concocted four criteria for the recognition of a lease as a capital lease.  If any one of the following criteria is met, then the business enterprise must account for the lease as a capital lease.  They are: (a) if legal title passes to the lessee; (b) if the lease contains a bargain purchase option; (c) if the lease term (the length of the lease) equals or exceeds 75 percent of the asset’s life; and (d) if the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.  If none of the four criteria is met, then the business enterprise treats the lease as an operating lease.

Accounting for these leases differs greatly.  In a capital lease, the firm capitalizes the asset at its present value (not to exceed its fair value), and it capitalizes the lease obligation at the present value of future cash flows.  On the income statement, the business enterprise shows the depreciation of the capitalized asset and displays the interest expense on the lease obligation.  In an operating lease, the entity ignores its property rights and it pretends that it has no debts, and on the income statement, the organization acknowledges a rent expense.  There is, however, no economic justification for this differential treatment.

I think it amazing—maybe even revolutionary—for the board finally to follow its own conceptual framework in the development of lessee accounting standards.  The FASB’s conceptual framework defines assets as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”  Further, it defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” 

It doesn’t take an accounting professor, much less Donald Trump, to figure out that leases confer to lessees probable future economic benefits and probable future sacrifices.  Present-day accounting for operating leases contradicts this rational approach of reporting the economics of these business transactions.  If the board only applies its own conceptual framework, as it appears ready to do, then it will achieve a much better accounting.

Let’s also remind ourselves of the significant consequences of these actions.  Billions, maybe trillions, of dollars of lease obligations have been off-balance sheet since time began.  Here is a small sample of firms, with my estimates (details on my estimation scheme inHidden Financial Risk”) of the present value of the cash flows of the operating leases (numbers are millions of dollars except for percentages).


Reported Debt

PV of Operating Lease Cash Flows

Percent Debt is Under-reported

















Home Depot








Clearly, the capitalization of essentially all leases is an important step to knowing realistically what corporations owe.  Notice that this sample of only six firms has off-balance sheet lease debts of almost $70 billion.  As this amount is material to everybody (except for members of Congress and the White House), business enterprises should supply this information to investors and creditors so they can better understand the firm’s financial leverage.

While this chapter of financial reporting is coming to a close, the most remarkable event in the history of lease accounting occurred in 1960.  That year Arthur Andersen published the booklet “The Postulate of Accounting” and averred that the only postulate of accounting is fairness.  “Financial statements cannot be so prepared as to favor the interests of any one segment without doing injustice to others.”  To add flesh to this argument, Arthur Andersen then gave the example of leases, contending that all leases should be capitalized.  Unfortunately, the AICPA’s Committee on Accounting Procedure and its Accounting Principles Board ignored these comments.

Fifty years ago this once great firm, under the leadership of Leonard Spacek, showed how a principled and courageous analysis of the facts could lead one to the proper accounting.  It shows that principles-based accounting can work—as long as we have principled leaders in the profession.  But it also shows the dangers of principles-based accounting when others are not blessed with logical thinking or courage—when they are not principled.

P.S.  The FASB really doesn’t have to apply an exception to short-term leases, those under twelve months in duration.  Every FASB statement is stamped with the caveat, “The provisions of this Statement need not be applied to immaterial items.”  As I expect most short-term rentals to provide income statement and balance sheet effects that are immaterially different from their capitalization, there is already a basis for firms not to worry about the accounting for such leases.

Jensen Comment
Something keeps nagging me that the "right to terminate" a lease in a year or less has economic value to be factored into the concocted scheme to forecast operating lease rentals ad infinitum. Until the IASB and FASB give us implementation guidelines on how to value the right to terminate, I'm not as solidly behind this revision to the standard as Professor Ketz.

Those professionals that are the most mobile and expectant of promotions and relocations, like gifted accounting staff, are recognizing the "right to terminate" values vis-a-vis having former houses in Phoenix and Las Vegas that they just cannot unload for as much as their equity in those houses. If they knew what they know now they would've rented throughout much of their careers --- at least until they've finally settled in.. The same can be businesses growing wildly or shrinking wildly that find facilities they own very hard to unload.

The lease versus buy cases that we've taught for years were probably incomplete --- I've never seen a case that values the "right to terminate" such that instead of capital lease versus buy we probably should've include a third alternative --- operating lease with an inherent right to terminate without penalty.

August 23, 2010 message from Tom Selling [tom.selling@GROVESITE.COM]

If you are looking for a principles-based approach to lease accounting, you may be interested in reading these blog posts (especially the first one listed)

Lease Accounting: Replacement Cost is the Only Hope for a Principles-Based Solution

Reason #2 to Dump on the IASB/FASB Leasing Proposal

The Lease Accounting Proposal: What Investors Say

Lease Accounting: Replacement Cost is the Only Hope for a Principles-Based Solution

Reason #2 to Dump on the IASB/FASB Leasing Proposal

The Lease Accounting Proposal: What Investors Say

Bob, if you are looking for information on cancellation options, I’ll bet you can find it in:

Copeland and Antikarov, Real Options, Revised Edition: A Practitioner’s Guide. There is a chapter on how Airbus used option valuation techniques for pricing and negotiating leases of airplanes.

I should also say that I don’t see how the presence of an option to cancel without penalty calls capital lease accounting into question. Isn’t it the mirror image of a renewal option? The only additional twist is that the option is “American style”, i.e., it may be exercised at any time, as opposed to only the expiration date (“European style”).

Finally, I plan on writing another leasing post – probably building on Ed’s (whom I had the pleasure of meeting for the first time at the AAA). I expect the message in my post will be that lease capitalization is fine as far as it goes, but the ED blithely continues the tradition of plugging in made up numbers since nobody can bring themselves to commit to some version of current value – and historic cost principles are to leasing as a pea shooter is to an elephant.

Best, Tom


August 24, 2010 reply from Bob Jensen

Bob Jensen's sadly neglected threads on real options and references to early applications are at

I like to think of actual examples. There was a big east-side mall in San Antonio that was a great mall suffering from a rapid decline in the surrounding neighborhood. It became a beautiful indoor congregating point for dope dealers and gangs and prostitutes. After a couple of murders in the mall, customer traffic declined dramatically and within a few years this great mall had to close. The three big department stores attached to the mall probably had long-term leases such that they were forced to try to operate on their own for a while even though the interior two-story mall with nearly 50 stores and theatres was blocked off and empty. I suspect the big department stores wanted out of their leases, but they could not do so nearly as easy as the stores inside the mall that only had operating leases with the right of termination in less than 12 months. 

Also consider the surrounding stores and restaurants that built up around the mall and depended upon the thousands of customers drawn weekly to the mall when it was thriving. For example right next to the mall parking Toys”R”Us built its own store financed with ownership or a capital lease.

Think of how much more valuable, in hindsight, it would have been for Toy”R”Us to have an operating lease inside the mall where the “right to terminate” became extremely valuable as the customers abandoned the mall in droves. In retrospect Toys”R”Us was stuck with long-term financing obligations that extended well beyond the profitability of the location. In short, the building quickly became a liability rather than an asset.

An operating lease is extremely valuable in situations where future needs for buildings and/or the equipment are extremely volatile and virtually unpredictable due to nonstationarities that make mathematical forecasting models virtually worthless. Mathematical valuation models like real options models require greater statationarities.

Real options analysis was invented by one of my fellow students, Stu Meyers (finance), in the doctoral program at Stanford. It's a brilliant financial model, but like so many finance models, it does not deal well in nonstatationarity environments. Stu did not invent the model until years later when he was a professor at MIT. I think it would be a great danger to an entrepreneur when assumed parameters are extremely tenuous.

Other more traditional capital budgeting models also fail in in nonstationarity situations. But the problem is greatly reduced when there is less fixed cost such as when an entrepreneur commits only to an operating lease rather than a long-term mortgage or capital lease.

Real Options Analysis ---

 ROA is often contrasted with more standard techniques of capital budgeting, such as net present value (NPV), where only the most likely or representative outcomes are modelled, and the "flexibility" available to management is thus "ignored"; see Valuing flexibility under Corporate finance. The NPV framework therefore (implicitly) assumes that management will be "passive" as regards their Capital Investment once committed, whereas ROA assumes that they will be "active" and may / can modify the project as necessary. The real options value of a project is thus always higher than the NPV - the difference is most marked in projects with major uncertainty (as for financial options higher volatility of the underlying leads to higher value).

More formally, the treatment of uncertainty inherent in investment projects differs as follows. Under ROA, uncertainty inherent is usually accounted for by risk-adjusting probabilities (a technique known as the equivalent martingale approach). Cash flows can then be discounted at the risk-free rate. Under DCF analysis, on the other hand, this uncertainty is accounted for by adjusting the discount rate, (using e.g. the cost of capital) or the cash flows (using certainty equivalents, or applying "haircuts" to the forecast numbers). These methods normally do not properly account for changes in risk over a project's lifecycle and fail to appropriately adapt the risk adjustment.

In general, since ROA attempts to predict the future, the quality of the output will only ever be as good as the quality of the inputs, which by their nature are sketchy. This comment also applies to net present value analysis, although NPV does not require volatility information (see below). Opinion is thus divided as to whether Real Options Analysis provides genuinely useful information to real-world practitioners. ROA is therefore increasingly used as a discussion framework, as opposed to as a valuation or modelling technique.


Bob Jensen's sadly neglected threads on real options and references to early applications are at

The above document quotes a great article by Wayne Upton when he was still at the FASB.
"Special Report: Business and Financial Reporting, Challenges from the New Economy," by Wayne Upton, Financial Accounting Standards Board, Document 219-A, April 2000 --- 
Incidentally Wayne was the FASB's technical guru on FAS 133 and its very technical revisions like FAS 138. Last I heard, Wayne changed to the IASB.

I’ve not lived in San Antonio for nearly five years, but I think the failed mall was eventually purchased by the School District for offices and maybe some classrooms. I could be wrong about whether that proposal for the mall's use came into being.. In any case, businesses lost a lot of money when the mall failed, but those businesses with operating leases had an easier time due to the value of the “Right to Terminate.”

Bob Jensen

 Second Message from Bob Jensen

I guess what I’m really saying is that if the standards are going to require capitalization of the present value of renewal lease payments that are not contractually required, then some adjustment should be made for the probability of non-renewal. The probability may be close to one in each case until there is a significant change in the revenue/profit outlook to a point where an entrepreneur is seriously considering non-renewal of an operating lease perhaps one, two, or three years into the future.

 Bob Jensen

August 24, 2010 message from Tom Selling [tom.selling@GROVESITE.COM]

I see.

I have not read the ED yet, but my recollection of the PV document (which I did read) is that non-substantive lease terms should be ignored. If the probability of renewal is essentially zero, then that should render any renewal option to be a non-substantive term. Even if the renewal were considered substantive, then the portion of the lease term to be taken into account at the inception of the lease will be only the initial term (or very close to it).

My problem is that substantive renewal options will be accounted for very differently for financial reporting purposes (i.e., using made-up numbers) than they were taken into account by the parties to the lease (e.g., Airbus and US Airways will measure their value using a real options framework, because that’s what they see as the state of the art) when they negotiated the terms of the lease. The lack of a relationship between the FASB’s made up numbers and the parties’ unbiased estimates of current value will lead to abuses that no standard setter will be able to anticipate.


Jensen Comment
Inconsistencies in Two Proposed IFRS Changes: The Ups and Downs of International Accounting Standard "trigger events"

In the context of FAS 39, a "trigger event" is an event that changes the likelihood of fully collecting or paying out a forecasted stream of future cash flows. The forecasted cash flows could be contractual such as the contracted stream of cash flows from a forward contract used as a speculation or a hedge. The fair value of the future stream is said to have become "impaired" by the "trigger event" that is material in nature. Auditors are required to test for impairments in cash flow streams. The net impact on the balance sheet may vary greatly when the contract is a speculation versus when the contract is a hedge and the amount of impairment loss/gain is offset by the amount of impairment gain/loss on a hedged item and vice versa.

For items carried at fair value, trigger events should be automatically recognized in changes in fair value unless the trigger event itself makes it impractical to measure fair value (such as a freezing or collapse in the market used to measure fair value). If a receivable is carried at amortized cost, trigger events are especially important and may signal the need to anticipate a loss such as an estimated bad debt loss.

An example of a common trigger event is a hugely lowered credit score/rating of a debtor.

For later reference, I might define a "wipeout trigger event" as one that reduces the NPV of a future cash flow stream to zero or virtually zero. Although such a trigger event might be analogous to when Madoff's arrest was announced, a wipeout trigger event may also be perfectly legal such as when a lessee announces in advance that a short-term lease will not be renewed.

It seems to me that in two current proposed changes to IFRS standards, one proposal is reducing the role of explicitly defined trigger events whereas the other is increasing the role of implicitly defined wipeout trigger events. The two IASB proposed change documents are as follows:

Financial Instruments
IAS 39 to IFRS 9:  "IFRS 9: Financial Instruments (replacement of IAS 39)
--- Click Here

The objective of this project is to improve the decision usefulness for users of financial statements by simplifying the classification and measurement requirements for financial instruments. In November 2008 the IASB added this project to their active agenda. The FASB also added this project to their agenda in December 2008.

FASB-IASB Joint Proposal on Lease Accounting
--- Click Here

... the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) published for public comment joint proposals to improve the reporting of lease contracts. The proposals are one of the main projects included in the boards’ Memorandum of Understanding. The proposals, if adopted, will greatly improve the financial reporting information available to investors about the financial effects of lease contracts.

The accounting under existing requirements depends on the classification of a lease. Classification as an operating lease results in the lessee not recording any assets or liabilities in the statement of financial position under either International Financial Reporting Standards or US standards (generally accepted accounting principles). This results in many investors having to adjust the financial statements (using disclosures and other available information) to estimate the effects of lessees’ operating leases for the purpose of investment analysis. The proposals would result in a consistent approach to lease accounting for both lessees and lessors—a ‘right-of-use’ approach. This approach would result in all leases being included in the statement of financial position, thus providing more complete and useful information to investors and other users of financial statements.

Financial Instruments ED That Plays Down Trigger Events
IAS 39 to IFRS 9:  "IFRS 9: Financial Instruments (replacement of IAS 39)
--- Click Here

This Financial Instruments Exposure Draft (ED), among other things downplays, the role of trigger events in impairment tests. In IAS 39 an anticipated loss may be delayed until a trigger event transpires to require immediate write down of an asset such as a receivable. Presumably this will not be the case in the new IFRS 9.

When IAS 39 is replaced by IAS 9, the ED proposes to recognize losses (prior to trigger events) by earlier use of probability-weighted estimates of the amounts to be collected in a future cash flow stream. Presumably these probabilities must be subjective (Bayesian) since it is difficult to imagine circumstances where the probability distribution can be objectively estimated. Implicit in the ED is the estimation of probabilities of future states of the domestic and/or world economy.

Auditors are no objecting to the replacement of trigger events with probability-weighted estimates on the grounds that attesting to such probability-weighted estimates before trigger events will not operational in auditing.

"Deloitte comment letter on financial instruments," July 6, 2010 ---

We agree with the Board’s objective in this phase of the IASB project to replace IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) to address weaknesses of the incurred loss model in IAS 39 that were highlighted during the global financial crisis. An impairment loss model that focuses on an assessment of recoverable cash flows reflecting all current information about the borrower’s ability to repay would be an improvement on the current approach in IAS 39 which relies on identification of trigger events and often leads to a delay in loss recognition. However, we have concerns about the specific requirements proposed by the IASB, in particular those to determine, and allocate, the initial estimate of expected credit losses on a financial asset and to use a probability-weighted outcome approach. We believe that this approach will in many cases be unnecessarily complex. Further, the incorporation of potential future economic environments in estimating recoverable cash flows would be extremely complex, costly and burdensome to apply by preparers.
The requirement in the ED to forecast future economic environments and events without providing sufficient guidance with respect to the level of objectivity, verifiability, or support for the underpinnings of these inputs presents significant challenges to internal auditors, external auditors, and regulators. Overall, we believe that the measurement principle would not be operational if the Board were to adopt the ED in its current form.

Leases ED That Plays Up Wipeout Trigger Events
FASB-IASB Joint Proposal on Lease Accounting
--- Click Here

The most controversial and in most instances welcome proposed change is the required capitalization of operating leases that were previously and commonly used to hide debt in what was tantamount to off-balance sheet financing.

And the most controversial of the controversial proposed changes is that short term operating leases having renewal options are to assume (for accounting purposes) renewals will take place even though they are not contractually required. For example, a store in a mall may have a year-to-year lease that was not booked on the lessee or lessor balance sheets until the monthly rent is due. The ED requires assumption of renewals that are not contractually required. Hence, the NPV of a year-to-year store lease must be booked as an asset on the lessor's books and a liability on the lessee's balance sheet for a rent cash flow stream across many years in which it is estimated that the lease will be renewed.

However, the ED does allow for what are tantamount to wipeout trigger events (not called as such in the ED). If it becomes known that the lessee or lessor will not renew the year-to-year lease, then the lessor may no longer record the NPV of future rentals that will not be received and the lessee need not book the NPV of future rentals that will not be paid.

Jensen Comment

For these two exposure drafts to be consistent, it would seem that either the probability-weighted requirement in the new IFRS 9 should be deleted or that a probability-weighted requirement should be imposed on short-term lease accounting. In the case of leases, probability weights would be assigned to assumed lease renewals.

The probability-weighted short-term lease requirement would most likely be objected to by auditors for the same reasons that auditors object to the probability-weighted requirement proposed for the IFRS 9.

I can anticipate the Deloitte objection letter to be as follows if auditing of lease renewal probability weightings were to (hypothetically) be required::

We agree with the Board’s objective to book operating leases in a manner consistent with how capital leases are booked. An impairment loss model that focuses on an assessment of renewable lease cash flows reflecting all current information about the lessee's intent to exercise a renewal option  would be an improvement on the current approach of keeping operating leases entirely off the balance sheet. However, we have concerns about the specific requirements proposed by the IASB, in particular those to determine probability weightings of lease renewals. We believe that this approach will in many cases be unnecessarily complex. Further, the incorporation of potential future economic environments in estimating lease renewal cash flows would be extremely complex, costly and burdensome to apply by preparers.
The requirement in the ED to forecast future economic environments and events without providing sufficient guidance with respect to the level of objectivity, verifiability, or support for the underpinnings of these inputs presents significant challenges to internal auditors, external auditors, and regulators. Overall, we believe that the measurement principle would not be operational if the Board were to adopt the ED in its current form.

In general, use of probability-weighted impairment accounting before trigger events transpire is probably an auditing nightmare in general. Trigger event impairment tests are much more realistic for auditors. However, at present the lease accounting ED does not take up the issue of how to deal with trigger events that are not wipeout trigger events.

Increasingly we are adding subjectivity and hypothetical transactions to financial statements. The biggest example is the transitioning to fair value accounting where assets and liabilities are adjusted for transactions that did not and might not ever transpire such as the interim changing of the value of a forward contract used as a hedge when, at the maturity date, the net cash flows are absolutely certain irrespective of the "hypothetical" changes in fair value before the maturity date.

If we're going to be so subjective about hypothetical transactions, we might as well impose subjective probability weights to short-term lease renewals rather than assume they will always be renewed until a wipeout trigger event transpires.

Bob Jensen's threads on lease accounting are at

Re-Branding the CPA Profession

September 20, 2010 message from Bob Jensen

Hi Denny,

Yes, I could access the PwC re-branding video directly without having to log in:

I do have a PwC Direct password, but I really doubt that the Switzerland link is using a cookie.

In any case the home page of PwC does not require any login ---
The video is now on this home page.

This takes me back to the days when Bob Eliott, eventually as President of the AICPA, was proposing great changes in the profession, including SysTrust, WebTrust, Eldercare Assurance, etc. For years I used Bob’s AICPA/KPMG videos as starting points for discussion in my accounting theory course. Bob relied heavily on the analogy of why the railroads that did not adapt to innovations in transportation such as Interstate Highways and Jet Airliners went downhill and not uphill. The railroads simply gave up new opportunities to startup professions rather than adapt from railroading to transportation.

Bob’s underlying assumption was that CPA firms could extend assurance services to non-traditional areas (where they were not experts but could hire new kinds of experts) by leveraging the public image of accountants as having high integrity and professional responsibility. That public image was destroyed by the many auditing scandals, notably Enron and the implosion of Andersen, that surfaced in the late 1990s and beyond ---

This is a 1998 lecture given by Bob Eliott before his world (the lofty public perception of CPA firm integrity) collapsed ---

The AICPA commenced initiatives on such things as Systrust. To my knowledge most of these initiatives bit the dust, although some CPA firms might be making money by assuring Eldercare services.

The counter argument to Bob Elliot’s initiatives is that CPA firms had no comparative advantages in expertise in their new ventures just as railroads had few comparative advantages in trucking and airline transportation industries, although the concept of piggy backing of truck trailers eventually caught on.

I still have copies of Bob’s great VCR tapes, but I doubt that these have ever been digitized. Bob could sell refrigerators to Eskimos.

September 21, 2010 reply from Roger Debreceny [roger@DEBRECENY.COM]

Isn't interesting that the pwc video has nothing at all to say about protection of the investor or maintenance of the public interest. It is all about value for the client. The client gets mentioned at least a dozen times -- investors and the public, zero times.

If these are truly the internalized values of the firm, we're sure to have more audit failures in coming years.



September 22, 2010 reply from Bob Jensen

Hi Roger,

 In 1998, Bob Elliott argued that financial audits were destined in the 21st Century to be money losing assurance services ---
This is a great lecture that can be debated in various accounting courses, notably AIS, Ethics, and Auditing courses.

Sarbox (Sarbanes, SOX) revived the profitability of financial audits but possibly not for long as worldwide lawsuits commence to take their toll on the auditing firms.

A key point made by Bob Elliott is that expansion of assurance services (e.g., SysTrust and Eldercare) is levered on the public image of CPA firms’ high integrity and professional responsibility. After this shining public image of CPA firms’ integrity and professional responsibility was tarnished since the turn of the Century, the question becomes what comparative advantages do CPA firms have that gives them comparative advantage. If you believe Francine, there’s not much left for the largest auditing firms aside from an existing global network of offices, infrastructures, vast teams of lawyers, and whatever is left of a once-shining public image

Bob Jensen

September 22, 2010 reply from Francine McKenna re: The Auditors Blog [retheauditors@GMAIL.COM]

Bob, it's all about branding. If you look at what Deloitte now says on their new boilerplate legal language- they recently converted from Swiss Verein to UK private firm structure - you'll see that brand is king. "Deloitte is a brand..." It begins.

Deloitte has a consulting firm they never shed, PwC wants one bad and is counting on it to grow to pull the rest if the firm up. KPMG is trying to get back in. They were advertising their presence at Oracle Open World user conf. EY seems the only one laying low, but then again I predicted that. Time and money is being spent on lots of litigation and they have the whopper of the day-Lehman. Yes, we are back pre-2000 and no one is doing anything to stop it. In the UK the regulators and media are rattling sabers but in the US nada but me and a few others like Jim Peterson. The PCAOB has no powers to stop acquisitions like BearingPoint and Diamond by PwC that distract them and waste resources that should be spent on training and quality assurance.


Bob Jensen's threads on auditor independence and professional responsibility ---

My point here is that neither private sector auditors nor public sector auditors are going to be truly independent as long as their plumbs are ripening when they leave their auditing posts and still maintain their old “friends” and “contacts” in the auditing firms or the government auditing agencies.
This a topic that students might address in ethics and auditing classes.

Recently on the AECM there was a thread running on whether a government audit agency could be more effective than the private sector in auditing corporations selling securities to the public.

One topic this thread seemed to avoid is a problem that neither the public or the private sector deals well with in regard to auditing firm/agency plum trees. I define “plumb picking” as the tendency of the audit clients to hire away the top auditors at huge salaries that are like plumbs waiting to be picked

For example, the CFO at Lehman who engineered what I think was bad Ernst & Young auditing of Repo 105 and 108 contracts was a former auditor from E&Y in charge of auditing the Lehman account. This is not an exception. Rather it is more like the rule that the auditors in charge will eventually pick the plumbs by being offered executive level (CEO, CFO, or CAO) jobs with audit clients.

But having government agencies may compound this plumb picking problem.

See below were SEC Agent Barasch picked the plum offered by Ponzi crook R. Allen Stanford

Kotz also reported that Barasch, who left the SEC in 2005, later represented Stanford before the SEC despite ethics laws against doing so. An SEC spokesman confirmed that the agency's ethics office referred the matter to the State Bar of Texas to consider whether Barasch committed any professional misconduct.


Barasch may have gone over the edge, but it is extremely common for FDA agents to go to work for drug and agribusiness companies, Defense Department workers and generals to go to work for defense contractors, FPA agents to go to work for power companies, EPA workers to go to work for polluting industries, SEC and FBI and IRS agents to go to work for accounting firms and business corporations, and on and on and on and on.

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

My point here is that neither private sector auditors nor public sector auditors are going to be truly independent as long as their plumbs are ripening when they leave their auditing posts and still maintain their old “friends” and “contacts” in the auditing firms or the government auditing agencies.
This a topic that students might address in ethics and auditing classes.

The SEC’s failure to prevent the Madoff Ponzi fraud may have been a little different. In that instance the plum was a woman rather than a high salary --- Plum  = a Madoff family member who eventually became the wife of the SEC agent who repeatedly forestalled investigation of tips sent to the SEC that Madoff was running a Ponzi theft.

Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
The Great Ponzi Crooks (R. Allen Stanford and Bernie Madoff) Who Allegedly Manipulated the SEC

"Ex-SEC Official May Be Prosecuted for Role in Stanford Inquiries," SmartPros, September 23, 2010 ---

Sept. 23 (The Dallas Morning News) — WASHINGTON -- Federal authorities are considering whether to prosecute a former securities regulator in Fort Worth who repeatedly quashed investigations into whether R. Allen Stanford was running a Ponzi scheme.

Under questioning at a hearing of the Senate Banking Committee on Wednesday, the Securities and Exchange Commission's inspector general told lawmakers that he's "had discussions with criminal authorities about whether there would be any criminal action arising because of that."

In a report issued earlier this year, Inspector General David Kotz wrote that Spencer C. Barasch had "a significant role" in decisions over the years not to formally investigate Stanford, who is accused of bilking investors out of $8 billion. The Houston businessman has pleaded not guilty.

The report said that some SEC examiners thought as early as 1997 that Stanford's financial empire was built on a Ponzi scheme.

"If you don't get the Justice Department involved in this, shame on you as the inspector general," said Sen. Jim Bunning, R-Ky. "That, to me, is criminal negligence. And the sooner they get him before a U.S. court, the better I will like it."

Barasch remains a partner in the Dallas office of Andrews Kurth. Bob Jewell, the firm's managing partner, said Wednesday that Kotz's testimony was "disappointing" and that Barasch "served the SEC with honor, integrity and distinction."

"We disagree with the characterization of Mr. Barasch's involvement put forth by the inspector general," Jewell said in a prepared statement. "We believe he acted properly during his contacts with the Stanford Financial Group and the Securities and Exchange Commission. He did not violate conflicts of interest."

Kotz also reported that Barasch, who left the SEC in 2005, later represented Stanford before the SEC despite ethics laws against doing so. An SEC spokesman confirmed that the agency's ethics office referred the matter to the State Bar of Texas to consider whether Barasch committed any professional misconduct.

A spokeswoman for the State Bar said such grievances remain confidential unless a district court or grievance panel sanctions the lawyer.

Many senators at Wednesday's hearing appeared to be grappling with Kotz's report for the first time.

The SEC made the report public on the same day in April that it charged Goldman Sachs with fraud, a case that got far more attention in the media. Several senators questioned whether the timing was an attempt to reduce public attention to the inspector general's embarrassing report.

The report said that SEC examiners in Fort Worth thought as early as 1997 that Stanford might be operating a Ponzi scheme and referred the matter to the enforcement staff. A manager who was leaving the agency told her boss that year that Stanford's business "looks like a Ponzi scheme to me, and someday it's going to blow up," according to Kotz's report.

However, the enforcement staff opened and closed its case after Stanford refused to voluntarily produce any records. Led by Barasch, the enforcement staff didn't open investigations after three other examinations in 1998, 2002, and 2004 all concluded that Stanford's certificates of deposit were probably a Ponzi scheme or other type of fraud.

"Any way you look at it, this is a colossal failure of the SEC," said Sen. Richard Shelby, D-Ala.

The SEC charged Stanford and three of his firms with fraud and other securities violations in February 2009. Rose Romero, the regional director of the SEC in Fort Worth, told lawmakers Wednesday that the SEC has notified other former Stanford employees that it intends to seek fraud charges against them. The group includes "former high level executives and financial advisers," Romero said.

Kotz said that Barasch and other enforcement attorneys believed the Stanford case was too complex and would absorb too many resources. The group believed that Washington judged regional offices based on how many cases they brought, which led them to pursue easier cases, Kotz said.

SEC officials generally conceded that they'd missed opportunities to cut off Stanford's alleged fraud.

The officials said they were implementing several changes to their enforcement priorities, including placing more emphasis on cases that affect a substantial number of investors. The SEC also said it has increased coordination between its examiners -- who originally suspected the Stanford fraud -- and its enforcement staff.

Robert Khuzami, the SEC's director of enforcement, told the panel that his staff has focused on complex accounting and securities cases, particularly since the credit crisis of 2008.

"If you look at the course of cases that we have brought in the last 18 months, particularly across the credit crisis -- New Century, Countrywide, Goldman, Dell, State Street, Evergreen, ICP, Citigroup, Bank of America -- these are hugely complicated accounting fraud, structured product cases," Khuzami said.

"We're not getting quick stats on those cases, I assure you."


From The Wall Street Journal Accounting Weekly Review on September 10, 2009

Madoff Report Reveals Extent of Bungling
by Kara Scannell and Jenny Strasburg
Sep 05, 2009
Click here to view the full article on

TOPICS: Auditing, Ponzi Schemes

SUMMARY: "The SEC's inspector general released the full 477-page version of his report on how the SEC missed red flags on [Bernard Madoff]....and details just how many opportunities there were for examiners to find the fraud and how bungled their efforts were." For example, "one anonymous complaint directed the SEC to a 'scandal of major proportion' by the Madoff firm and said assets of a specific investor 'have been 'co-mingled' with funds controlled by the Madoff firm. The SEC called Mr. Madoff's lawyer and had him ask Mr. Madoff if he managed money for that investor. When the lawyer said Madoff didn't, the complaint wasn't pursued further. The IG report concludes that 'accepting the word of a registrant who is alleged to be engaged in a specific instance of fraud is an inadequate investigation'....SEC Chairman Mary Schapiro said, 'In the coming weeks, we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January.'"

CLASSROOM APPLICATION: The article makes clear the need for auditing roles at the SEC as well as in public accounting firms auditing general purpose financial statements.

1. (
Introductory) What is a "Ponzi Scheme"? When was Mr. Madoff convicted of running such a scheme? How did this scheme impact Madoff's investors?

2. (
Introductory) Who issued the report on the SEC's failure to uncover the Madoff scheme before it collapsed and he himself admitted to the crime?

3. (
Advanced) What did "an unnamed hedge-fund manager" say in an email to the SEC? Explain how each of the points listed in the email indicate the possibility of a Ponzi scheme in operation.

4. (
Introductory) What is "front-running" in trading? How did a senior examiner explain this trading activity as his choice of action to investigate in Mr. Madoff's operations?

5. (
Advanced) How do you think a choice of action in examination should be determined if the SEC receives a credible indication of possible fraud in operating an investment firm such as Mr. Madoff's? How should this choice drive the determination of expertise needed on an investigatory team?

6. (
Advanced) What audit step failure was evident in the SEC investigatory actions undertaken between December 2003 and March 2004, as described in the article?

7. (
Introductory) What expertise do you think was needed on the investigative teams handling the Madoff case, at least as described in this article?

Reviewed By: Judy Beckman, University of Rhode Island

Ex-SEC Lawyer: Madoff Report Misses Point
by Suzanne Barlyn
Sep 04, 2009
Online Exclusive

'Evil' Madoff Gets 150 Years in Epic Fraud
by Robert Frank and Amir Efrati
Jun 30, 2009
Online Exclusive


New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge Fund
After being repeatedly warned for six years that this was a criminal scam
It's beginning to look like a family "affair"

(The SEC's) Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported. Swanson, no longer with the agency, declined to comment, the Post said.
"SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 ---
The Washington Post account is at --- Click Here

A U.S. Securities and Exchange Commission lawyer warned about irregularities at Bernard Madoff's financial management firm as far back as 2004, The Washington Post reported on Thursday, citing agency documents and sources familiar with the investigation.

Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent emails to a supervisor saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, the report said.

Several of the questions directly challenged Madoff activities that turned out to be elements of his massive fraud, the newspaper said.

Madoff, 71, was sentenced to a prison term of 150 years on Monday after he pleaded guilty in March to a decades-long fraud that U.S. prosecutors said drew in as much as $65 billion.

The Washington Post reported that when Walker-Lightfoot reviewed the paper documents and electronic data supplied to the SEC by Madoff, she found it full of inconsistencies, according to documents, a former SEC official and another person knowledgeable about the 2004 investigation.

The newspaper said the SEC staffer raised concerns about Madoff but, at the time, the SEC was under pressure to look for wrongdoing in the mutual fund industry. Walker-Lightfoot was told to focus on a separate probe into mutual funds, the report said.

One of Walker-Lightfoot's supervisors on the case was Eric Swanson, an assistant director of her department, the Post reported, citing two people familiar with the investigation.

Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported.

Swanson, no longer with the agency, declined to comment, the Post said.

SEC spokesman John Nester also declined to comment, citing the ongoing investigation by the agency's inspector general, the newspaper said.

Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at;cbsCarousel
The title of the video is “The Man Who Would Be King.”
Also see

Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

As Far as Regulations Go

An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
 Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---

Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

Bob Jensen's fraud updates are at

Bob Jensen's threads on Ponzi crooks ---

"Where the Free Market Fails: Online Dating," by Dan Ariely, Harvard Business Review Blog, September 8, 2010 --- Click Here

In economics, there's a concept called bad equilibrium. It's a strategy that all the players in the game can adopt and converge on, but it won't produce a desirable outcome for anyone. We decided to research this problem in the context of online dating, a prototypically perfect lab full of bad equilibrium.

First dates are all about strategies that both parties can agree to but which won't help them learn if the date was effective. Think of a first date: We try to express ourselves and learn about the other person, but not express ourselves too much or offend by being intrusive. We default to friendly over controversial, even at the risk of sounding dull. "We have so much in common," says one character in the movie Best in Show, exemplifying what first-date strategies yield. "We both love soup and snow peas, we love the outdoors, and talking and not talking. We could not talk or talk forever and still find things to not talk about."

It's easy to talk about our views on the weather or food. But while that may guarantee that we don't fail on this date, it does nothing to get us closer to success, as it provides us little useful information on whether we are a long-term romantic match.

In our research, we picked apart what we were hoping would be the juicy details of first introductions between potential matches. But what we found was a whole lot of bad equilibrium. Text analysis supported the idea that people like to maintain boring equilibrium at all costs. Whatever interesting things they may have had to say, they didn't say them, and instead presented themselves as utterly insipid in their written conversations. The dialogue was boring, consisting mainly of questions like:

Where did you go to college? What are your hobbies? What is your line of work? We sensed a compulsion to avoid rocking the boat, and so we decided to push these hesitant daters overboard. So with a certain group of daters who agreed to the experiment, we limited the type of discussions that online daters could engage in. We literally stripped them of the right to ask anything they wanted to and assigned them a list from which they could select questions to ask.

The questions we chose had nothing to do with the how many siblings someone might have or if their favorite show was Mad Men. Instead, we made sure all of the questions were personally revealing, like:

How many romantic partners have you had? When was your last breakup? Do you have any STDs? Have you ever broken someone's heart? How do you feel about abortion?

How about those ice breakers!

What we did, essentially, is rig the market by imposing an artificial risk level that would help prevent a bad equilibrium. Daters had no choice but to ask questions generally considered "out of bounds" for a first date.

And their partners responded in kind, creating much livelier conversations than we had seen when daters came up with their own questions. Instead of talking about the World Cup or their favorite pie, they shared deeply felt fears or told the story of losing their virginity. Both senders and repliers reported that they were happier with the interaction.

We believe that restricting the market in such ways can get people to gravitate toward behaviors that are produce better results for everyone. (Remember, in dating, learning sooner that you're not compatible is a better result than wasting time being polite to each other.) More generally, this research suggests that some restricted marketplaces can yield more desirable outcomes. Maybe you can use this idea to energize your next meeting. Create questions that people must address, or topics that aren't allowed to help avoid bad equilibrium.

By forcing people to step out of their comfort zone, risk tipping the relationship equilibria, we might ultimately gain more than if we just fall back on those tropes that are safe for everyone, and useful to no one.


Jensen Comment
It has long been known that the free market fails when there are positive and negative externalities (nonconvexities). There are obviously enormous nonconvexities in dating, love, and other human relationships. That of course does not mean that the Central Planning Board should control these relationships if they are not illegal.

"Elite B-Schools Keep on Building:  They're constructing bigger and more-elaborate campuses to attract applicants and professors and climb higher in magazine rankings," by Oliver Staley, Business Week, September 2, 2010 --- 

Three-Year Wonders from Business Executive Doctoral Programs
Nearly all accounting doctoral programs in North America (other than what I think is a fraudulent online program) take five to six years to complete (beyond a masters degree) and are tantamount to social science accountics doctoral programs with very little in the way of accounting ---

Will the new quickie "business executive doctoral programs" in North America be game changers for the accountics doctoral programs as well?

Jensen Comment
Here's one way to play the game. Rather than spend 5-6 years full time in a traditional accounting doctoral program in North America, become the CEO of your own lemonade stand (read that software development lemonade) and then enroll in a quickie (three-year) executive doctoral program. However, I seriously doubt whether it's possible to concentrate in accounting in these new "business" doctoral programs and become an accounting professor unless you were a CPA before entering the program.

Also, it's unlikely that the accountics professors guarding the Pearly Gates of Tenure will let you pass through unless you've published two or three articles in TAR, JAR, or JAE during your short tenure probation period, and you've most likely not had sufficient mathematics, econometrics, psychometrics, and statistics education to publish in TAR, JAR, or JAE. ---

"PhD Programs for Executives Gain Traction New doctoral programs in business geared to working executives help many develop on-the-job research skills or a shift into teaching," by Allison Damast, Business Week, August 16, 2010 ---

Business schools are seeking to take executive education to the next level, with a growing number offering niche doctoral programs aimed at senior-level managers either looking to shift to academia or to bring high-level research skills into the workplace.

Georgia State University's Robinson College of Business in Atlanta introduced a new Executive Doctorate in Business program in 2009 aimed at chief executives and other high-ranking corporate managers, while neighboring Kennesaw State University's Coles College of Business in Kennesaw, Ga., created a Doctorate of Business Administration program in 2008. Oklahoma State University's Spears School of Business in Stillwater is planning to launch a management doctoral program in the next 12 months, the school said.

Less than a dozen accredited business schools offer these types of business professional doctorates in the U.S., according to the Association to Advance Collegiate Schools of Business (AACSB), one of the leading accreditation agencies for business schools, which tracks doctoral degrees programs. In the past few years, interest in programs like these has grown as high-level managers seek a more rigorous academic experience than the typical executive education classes or executive roundtables offered at business schools, says Andy Policano, chairman of AACSB's board and dean of the University of California-Irvine's Paul Merage School of Business.

"The main reason these programs are springing up in the U.S. is there seems to be a market," Policano says. "There are more and more executives willing to pay a fairly high tuition to take this kind of program on, so now it becomes a legitimate business model for schools to offer."

For Experienced Senior Execs Most of these professional doctoral programs differ from traditional PhD programs in that they are part-time, can usually be completed in three years, and are aimed at working senior executives with advanced degrees and at least 15 years of work experience, Policano says. Typically, he adds, they encourage research that executives can apply directly back to the business world.

At Georgia State, students in the school's new executive doctoral program, which costs about $100,000 for three years, are required to come to the school's Atlanta campus for a three-day residency at the school, says Maury Kalnitz, the program's director. He reports that so far the school has been able to attract executives from IBM (IBM), Google (GOOG), and Citigroup (C) who are, on average, 45 years old and have 16 years of management experience. The program has about 38 students enrolled so far, Kalnitz says.

Students take classes that teach them how to conduct formal academic research, and later the school pairs them with a faculty adviser who works with students on their 100-page dissertation, which they are expected to submit to an academic journal for publication. Unlike typical doctoral programs, where students look for jobs in academia after graduating, almost all of the participants in the Robinson program plan to go back into the business world, says Lars Mathiassen, the program's academic director.

"The primary purpose of the program is to develop better executives," Mathiassen says. "It hits the sweet spot between business schools and the business world."

As a Kind of "Personal Quest" The program has attracted such students as Jeanette Miller, 43, of Marietta, Ga., an executive with 17 years' experience who is a consultant with 360°td, an international consulting firm that works in emerging markets in Central Asia and Southeast Europe. She started the program last fall and now spends 30 to 40 hours a week reviewing academic papers, working on research projects with classmates, and planning her dissertation, which she says will examine sustainability and corporate social responsibility at multinational companies. She says she hopes eventually to translate her research findings to her job and implement change in her field.

People don't go into a program like this at 45 or 50 years old to make another $100,000 on their base salary. It seems like we're all doing this more for a personal quest and the desire to make a difference somehow in the world at large," says Miller, who is paying for the program herself. "I feel like the doctorate gives you entrée into a realm where you can actually do that."

Kennesaw State's business school is seeking to attract a different type of student than Georgia State, primarily executives who want to have a second career as a professor at the university level, says Joe Hair, executive director of the school's Doctorate of Business Administration program.

Kennesaw's program, which costs $83,475 for three years, has strict admission standards; to apply, students must first attend a research workshop and later complete and submit a research proposal. Students who are admitted attend weekend residencies on campus, learning about research methods and academic theory, and eventually they produce a dissertation. Forty-two students are currently enrolled, and the school is in the process of recruiting its third cohort of students, Hair says.

An Avenue into Teaching About one-third of the executives, who average around 50 years old, are already teaching at business schools, and many others plan to shift into academia after graduation or later in their careers, he said. Students are attracted to the program because it will allow them to become "academically qualified," a designation by the AACSB that will allow them to land better-paying and more secure jobs at universities when they graduate, says Hair.

"There is a huge demand for this program because it is a step beyond executive education," Hair explains, noting that more than 250 students have showed up at the program's information sessions in each of the past two years.

Jerry Kudlats, 59, joined Kennesaw as a student last fall. He was ready for a second career as a university professor but was unable to commit to a full-time PhD program, he says. He has been working for 35 years and has owned his own business, JK Consulting Services, for the past 16 years. The Kennesaw program was an ideal fit for him, Kudlats says, because it was close to his home and he could do it part-time. "The traditional PhD program just wasn't going to work, because I couldn't afford to stop working and go to school full-time," he says. "When the Kennesaw program came out, it was the perfect match for me."

Catching on Elsewhere Professional doctoral programs are more prevalent in Europe and Australia than in the U.S., says T. Grandon Gill, a professor at the University of South Florida's College of Business in Tampa. The U.K. has at least 16 doctorate of business administration programs, and at least 20 such programs were created in Australia from 1993 to 2005, says Gill, who co-wrote a journal article on the programs last year. The programs are also popular in Germany, where an estimated 58.5 percent of executives hold doctoral degrees, compared with just 5.6 percent of CEOs in the U.S., according to a study cited in Gill's article.

The programs have not caught on to the same extent in the U.S. because of widespread faculty resistance to starting these programs. Many worry that starting an alternative professional doctoral program would taint the reputation of their traditional PhD programs, Gill says. That could be starting to change, he adds, especially as financially strapped business schools look for additional sources of revenue in the next few years.

Says Gill: "Schools may find these to be very attractive types of programs because they can be real revenue generators."

More U.S. Schools Join the Trend Oklahoma State University's Spears School of Business plans on launching a professional doctorate of management program for executives, which should be up and running within the next 12 months, says Larry Crosby, the school's dean. The program would have two tracks, one for students interested in becoming professors and another for those who want to remain in the business world, he says.

"There is a very strong groundswell of interest in starting such a program at our school," says Crosby, who has formed a committee at his school to design the program. "I think this is one of those areas that is still in the early stages in management education. Schools that get on this bandwagon in the next two to three years will be the innovators in this field, and we intend to be on that trajectory."

Schools in the U.S. and abroad are trying to capitalize on the growing interest in executive doctorates by starting an association of business schools that offer these programs, says Georgia State's Mathiassen. Founding members include Georgia State, Case Western Reserve University's Weatherhead School of Management, Paris-Dauphine University in France, the Cranfield School of Management in Britain, and Hong Kong's Polytechnic University. The group plans to organize an annual conference for schools that run these programs, as well as serve as a resource for students, Mathiassen says.

"We see this as a growing trend," he says, "so we want to help develop the brand and increase the quality of the programs, as well as get more schools involved."

Jensen Comment
If you do graduate as a Three-Year Wonder from a Business Executive Doctoral Program and become an Assistant Professor of  Accounting you will definitely have to learn about
Gaming for Tenure as an Accounting Professor ---
You stand a chance if you judiciously choose your 43 coauthors on 43 working papers.

"PCAOB Is Still Overachieving: Issues Inspection Reports for BDO, Grant Thornton, PwC," by Caleb Newquist, Going Concern, August 13, 2010 --- 

Well team, despite the little setback for the PCAOB earlier this week, Team Peek is not discouraged. In fact, they were so motivated by the SEC’s little stunt that they thought they’d churn out three major inspection reports today, just to show everyone that they get to say what’s what with these accounting firms (even if it is in an indecipherable combination of vague and wonky prose).

BDO, Grant Thornton and PwC all got their papers issued today, which leaves just KPMG as the last major U.S. firm to not have their report issued. We’ll give you the quick and dirty on these three but if you want the gory details, you’ll have to read them in depth yourself (some of us have lives, you know). We’ll go in alphabetical order so no one gets bent out of shape.

BDO had eight issuers mentioned in its report. Issues included not testing the underlying data used by a specialist, failure to identify a departure from GAAP before issuing its audit report, loan losses and “[failure] to perform sufficient procedures to evaluate the reasonableness of a significant assumption management used to calculate the gain on the sale of a business,” among others.

GT only had five issuers listed in their report with problems including two instances of departures from GAAP that weren’t identified before the issue of the audit report, testwork related to fair value determination of illiquid assets and testwork around revenue recognition. Steve Chipman got away from the teleprompter long enough to sign the letter to the PCAOB himself, along with Trent Gazzaway, the National Managing Partner of Audit Services.

Nine issuers were noted by the inspectors for P. Dubs. Various issues ranging from inadequate testing of foreign locations, loan loss issues (that’s a given) and fair value (another surprise). PwC’s response made it sound like they actually enjoy the whole inspection process, “We continue to support the PCAOB and we wish to convey our sincere appreciation for the professional efforts of the PCAOB staff.” Wonder if the engagement teams that were inspected feel the same?

Bob Jensen's threads on the largest international accounting firmsa are at

Independence:  I'll Show You Mine if You Show Me Yours

"KPMG Piggybacks on Dodd-Frank, Hires ex-Fed Official," By Chris Nelson, The Big Four Blog, August 16, 2010 ---

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") is expected to help lawyers, lobbyists, lawmakers….now Big Four firms.

Yes, Big Four firms are looking at streams of consulting revenue as clients try to understand and make sense of this sprawling act with many procedures which are unclear now and are left to further study .

KPMG’s recent hiring of Jon D. Greenlee, 47, formerly with the Board of Governors of the Federal Reserve System's Division of Banking Supervision and Regulation, and bringing him into the Financial Services Regulatory practice is a classic outcome of the uncertainty associated with the Act and the need for knowledgeable professionals who can provide advice and direction to generally distraught clients.

Greenlee was most recently the associate director of risk management with the Board of Governors of the Federal Reserve Systems Division of Banking Supervision and Regulation, where he supervised credit, market and liquidity, operational, and compliance risks and ensured the Federal Reserve had appropriate guidance and policies in place to address them. Not only did he have this great background (in addition to tons of experience in other Fed positions), he was also part of creating new regulatory standards such as updated guidance on commercial real estate lending, revised liquidity standards, and interest rate risk.

According to KPMG, Greenlee will provide regulatory and compliance advisory services for financial services clients to meet their various regulatory requirements and guide institutions in becoming more proactive in identifying, measuring, monitoring, and managing regulatory risk.

There is sure to be a good match between clients clamoring for clarity and KPMG’s ability to deliver solid advice on this front (and of course, to make good money along the way).

We think this is going to be a trend (albeit a small one) as experienced policy makers are wooed to Big Four firms and using some of their valuable backgrounds in increasing the bottom lines of these partnerships.

Jensen Comment
Is this another one of those "I'll show you mine if your show me yours" gray zones of audit independence?
KPMG offers regulation consulting to audit clients of the other Big Three and vice versa.
This, for the millionth time, skates on the edge of independence and professionalism ---

"Do stock options improve employee performance?" PhysOrg, August 12, 2010 ---

It has become an article of faith in Silicon Valley that stock options create incentives for employees to work harder and smarter. But does that assumption stand up? It depends on who is receiving the options, according to a new study co-authored by Nicole Bastian Johnson, assistant professor of accounting --- Nicole Bastian Johnson, assistant professor of accounting , UC Berkeley ---

Stock options have rewarded many thousands of employees, particularly those working in the information technology industry, with income that far outstrips their normal salaries. It's become an article of faith in Silicon Valley that those rewards create incentives for employees to work harder and smarter, in turn rewarding the companies that lavish options on the workforce with better performance and greater shareholder value.

"Our findings provide evidence that options provide incentive effects at the executive level that are sufficiently large to be reflected in firm performance, but no evidence for similar incentive effects for non-executive employees," wrote Johnson and co-authors David Aboody of UCLA's Anderson School of Management and Ron Kasznik of Stanford's Graduate School of Business.

Their paper, "Employee Stock Options and Future Firm Performance: Evidence from Option Repricings," will be published in the Journal of Accounting and Economics later this year. Learning that granting options to a broad selection of employees may not be an effective tool is the paper's most important contribution to the literature, Johnson says.

Options and their effect on corporate performance have been frequently studied. However, nearly all of the research has focused on options for executive-level employees. Few researchers have looked at companies that granted options to rank-and-file employees, largely because obtaining data is so difficult, says Johnson.

Public companies generally disclose option grants on regularly scheduled proxy statements, but usually for only top-level managers. Digging through hundreds of corporate filings with the Securities and Exchange Commission to find who else may have received options is extremely time-consuming. But that's exactly what Johnson and her colleagues did.

The researchers identified 1,364 companies with employee stock options whose stock price declined by 30 percent or more annually in any of the years between 1990 and 1996. Of those companies, 300 repriced and formed a basis of comparison to a control group of the 1,064 that didn't.

The researchers theorized that when a company's stock price falls below the exercise price of an option, much of any incentive effect the options may have had disappears. Repricing those options should restore those incentives, the researchers assumed. A situation in which options have been repriced should be similar to that of a newly instituted option-grant program.

So the researchers first asked whether companies that repriced outperformed the companies that didn't, as measured by cash flow and operating income over one, three, and five years. Companies that repriced options did significantly outperform the control group, and the performance gap grew over time.

Johnson and her colleagues also found that companies that had repriced options for only executive-level employees significantly outperformed the companies that had not repriced at all. But firms that repriced options for only non-executive employees did not outperform the control group.

While Johnson is confident that the study's results are meaningful, there are, she says, a number of caveats.

The researchers chose to study performance before significant accounting changes were made to the treatment of options, particularly the rule instituted in 2005 requiring companies to expense the cost of options. However, while that rule may have prompted some firms to cut back on granting stock options, the researchers do not have any reason to assume it would have changed the effect that option grants have on employee behavior—the focus of their study.

Bob Jensen's threads on accounting for employee stock options are at

Enormous Alternatives for Free Education
Open Courseware's Free Online Lectures and Courses ---

An OpenCourseWare(OCW) is a free and open digital publication of high quality university‐level educational materials.  These materials are organized as courses, and often include course planning materials and evaluation tools as well as thematic content.

OCW Consortium members from all over the world are publishing OCW in a variety of formats, subjects, and languages.  Here are some ways to find OCW.

Search Courses

Using our specialized search engine, you can search for courses amongst all OCW Consortium members who are currently publishing a course feed.  You can begin by using the quick search form in the left side of the page, or go directly to the Advanced Course Search page.

Browse Courses by Language

We have also organized courses by the language in which they are published.  You can choose from available languages here.

Browse Courses by Source

You can also explore courses from each source, or publishing institution.  You can choose from a list of members here.

OpenCourseWare Websites

Not all OCW sites are publishing courses in a format compatible with our search index.  To see the entire list of OCW sites of members, visit this directory.

For example, search on the term "accounting" without the quote marks at
You will get some false positives, but most are right on!
Accounting educators are not noted for being the most open sharing members of the academy.

Hundreds of colleges have set up channels on YouTube ---
Many universities offer over 100 videos, whereas Stanford offers over 500
Also just go to YouTube itself and search on the such words as "Intermediate Accounting" or "XBRL" to find individual courses and tutorials.

Bob Jensen's threads on open sharing courses ---

Bob Jensen's threads on free textbooks and videos ---

"Reader Poll: Tech Tool You're Most Excited to Take into the Classroom," by Julie Meloni, Chronicle of Higher Education, August 10, 2010 ---

I'm not sure I've ever said this out loud, but ReadWriteWeb is my absolute favorite blog in all the blogosphere, and has been since they began covering all things technology-related in 2003 or so—it's the emphasis on critical thinking and analysis rather than knee-jerk "first!" responses to news and events that makes me respect them so.

Recently, my most favorite RWW author (Audrey Watters) asked educators for input via Twitter: what's the tech tool you're most excited to take into the classroom with you this fall?. Audrey is collecting responses for use in an upcoming RWW story, so between now and August 15th feel free to help her out.

However, I'm interested in your answers as well. No, I don't aim to write a similar story as Audrey, but I do wonder about the different answers based on the different audiences. Audrey's readership comes from the already highly-technologically-inclined, often found on Twitter. The ProfHacker audience in the CHE is not necessarily so. In fact, I think it is safe to say that the majority of the ProfHacker readership is not on Twitter and is more technology-curious than technology-embedded (or invested).

So, I'd like to hear from you as well. In the comments, please let us know what's the tech tool you're most excited to take into the classroom with you this fall? (anything hardware or software "counts," and I'll even accept analog technologies as valid answers)

Hopefully, given your responses and Audrey's own article from (predominantly) her own audience, there will be some interesting food for thought on the state of technology in higher ed.

Jensen Comment
“Taking into the classroom” is a rather ambiguous phrase that should probably read “taking into the course.” In the latter case, something Camtasia is still on my list of important priorities for things to add to virtually any course whether onsite or online ---

Camtasia ---
Camtasia can be used by students as well as instructors.

"The Emerging List of Top 100 Tools for Learning 2010 as at 11 August 2010 based on 362 contributions so far The list will be closed and finalised on 17 October 2010," C4LPT, August 11, 2010 ---
Thanks to Rick LIllie for the heads up.

Bob Jensen's threads on Tricks and Tools of the Trade ---

Why is the U.S. more reluctant than over 100 other nations that willingly switched to IFRS?

July 28, 2010 message from abu abdullah [aat1420@YAHOO.COM]

Now a days we are having a conference in Tokyo about IFRS and it was mentioned that 150 countries around the world have either implemented the IFRSs or in the process of implementing them, however the US is still may be far from adopting IFRS. Why? What is your view in this case?

July 28, 2010 reply from Bob Jensen

The concerns that some of us have are rooted in problems unique to the United States. Most of the nations that have adopted IFRS still rely only lightly on equity markets for raising capital relative to using large banks to raise capital. Large banks such as those in Germany and Japan can dictate what financial information they want from companies and in what level of detail and type of format. In many instances the banks are really insiders with as much power as management to request financial and other information. Especially in places like Japan the big banks are virtually “partners” in the companies.

The United States is much more heavily engaged in equity funding of business capital through enormous stock exchanges like the NYSE and NASDAQ. Equity markets disperse fund raising among millions of investors that are virtually powerless in demanding what financial information is provided for their equity investing. In my viewpoint this makes the United States much more dependent than most nations on accounting standards for both stewardship and investment decisions.

Huge equity markets in the U.S. provide corporations with enormous incentives to get around the accounting rules in efforts to lower their costs of capital by what we often call creative accounting, cooking the books, off-balance sheet financing, and earnings management ---

Also see

There are enormous scandals that bear witness that managers are more likely to try to deceptively sneak around accounting standards ---

The FASB and SEC are more actively engaged in frequent and constant revision of standards to counteract the efforts of corporations to circumvent standards --- efforts of corporations to keep debt off the balance sheet and to manage earnings.

When standard setting is in domestic FASB and SEC hands, the entire focus of standard setting can be centered on making urgent changes in the standards when corporations find ways to circumvent standards. It’s like having a leaking dike where standard setters are constantly having to plug new leaks. Particular areas of leakage are often in areas where IFRS is very weak, including creative financial structures, variable-interest entities, and all sorts of questionable ways to recognize revenue ---
For example, the FASB has an Emerging Issues Task Force (EITF) that can act very quickly to counter revenue recognition and other fraud.

Now I will finally attempt to answer your question
Many of us in the United States are worried that we will become only one of 150+ nations dependent upon a monopolist standard setter, the IASB, that is concerned with all 150+ nations and not just one nation, the United States, where 95% of the creative accounting, off-balance sheet financing, and earnings management will take place.

We worry that the IASB will not respond nearly as quickly as the FASB and SEC to plug leaks in our dikes.

We also worry that the IASB will not give sufficient time and attention to U.S. accounting problems that are unique to the United States capital markets and legal system.

And we worry about a lot of other things about surrendering accounting standard setters to a monopolist IASB ---

But those of us with such concerns have lost the battle to the lobbyists of the giant multinational corporations and their international CPA auditing firms.


"FASB Would Drop Fair Value for Pension Plan Loans," Journal of Accountancy, September 2010 ---

FASB this week issued a Proposed Accounting Standards Update (ASU) that is intended to clarify how defined contribution pension plans should classify and measure loans to participants. Under the Proposed ASU, Plan Accounting—Defined Contribution Pension Plans (Topic 962), Reporting Loans to Participants by Defined Contribution Pension Plans (a consensus of the FASB Emerging Issues Task Force), loans to participants would no longer be presented at fair value.


Participant loans are currently classified as an investment in accordance with the defined contribution pension plan guidance in Accounting Standards Codification (ASC) paragraph 962-325-45-10. ASC Subtopic 962-325 requires most investments held by a plan, including participant loans, to be presented at fair value. The amendments in the Proposed ASU would require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The proposed changes would affect any defined contribution pension plan that allows participant loans.


The proposal says that the classification of participant loans as receivables acknowledges that participant loans are unique from other investments in that a participant taking out such a loan essentially borrows against his or her own individual vested benefit balance. FASB said the task force concluded that it is more meaningful to measure participant loans at their unpaid principal balance plus any accrued but unpaid interest, rather than at fair value.


Amendments in the proposal would be applied retrospectively to all prior periods presented. The effective date will be determined after the EITF considers comments. Early adoption would be permitted. The proposal lists specific questions for respondents to consider when submitting comments, which are due Sept. 7.

Jensen Comment
By whatever name a rose is still a rose and a held-to-maturity security is still an amortized cost receivable/liability. Fair value adjustments add pure fiction to the balance sheet (other than general price level adjustments). I've never been in favor of fair value adjustments of any financial instrument that is truly HTM. Participant loans are not strictly HTM, but they are a unique type of financial instruments for which fair value accounting is pure fiction.

Bob Jensen's threads on fair value accounting are at

"Pro Forma Earnings:  What's Wrong With GAAP?" Stanford Graduate School of Business, August 20, 2010 ---

Jensen Comment
I think what went wrong with pro forma statements is that business firms abused the intent ---

September 16, 2010 reply from Tom Selling [tom.selling@GROVESITE.COM]

If anybody is looking for official literature, the SEC’s rules are to be found in Regulation G (“non-GAAP measures” used outside of SEC filings) and Item 10 of Regulation S-K (non-GAAP measures used in SEC filings). 

There is also additional interpretive guidance on use of non-GAAP measures in MD&A (can’t provide cites off the top of my head), and an interesting pre-SOX enforcement release that makes for pretty light and enjoyable (if you’re into Schadenfreude) reading – Trump Hotels (AAER No. 1499 – available at


  • I've not been a huge fan of the Harvard Business Review ever since, years ago, it refused to publish my technical corrections to an article dealing with discounted cash flow and real estate valuation. Coincidentally the author was a wealthy Harvard alumnus.

    Be that as it may I still scan the HBR and its blog regularly. Here's a blog item worth noting ---
    "HBR's 10 Must Reads: The Essentials" --- Click Here

    Your library might have hard copy versions in the stacks and/or electronic access via database passwords.

    Forced Savings in the Private Sector? The public sector is exempted in this legislation!
    In an effort to increase the number of Americans who are saving for retirement – roughly 50 percent of employees have no retirement savings at all – the Automatic IRA Act of 2010 has been introduced in the Senate by Sen. Jeff Bingaman (D-NM) and in the House by Rep. Richard Neal (D-MA). The bill establishes IRA accounts for all employees and sets up automatic payroll deductions.

    AccountingWeb, August 31, 2010 ---

    Clawback Teaching Case:  Earnings Management and Creative Accounting

    "Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes," by Miriam A. Cherry and Jarrod Wong, SSRN, August 23, 2009 ---

    In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, we distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, we advocate writing prospective clawback terms into contracts directly, or implying them through default rules where possible, including via potential amendments to the law of securities regulation. We believe that such prospective clawbacks will result in more accountability for executive compensation, reduce inequities among investors in certain frauds, and overall have a salutary effect upon corporate governance.

    Clawback in the Context of TARP ---

    On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury announced their intention to buy senior preferred stock and warrants in the nine largest American banks. The shares would qualify as Tier 1 capital and were non-voting shares. To qualify for this program, the Treasury required participating institutions to meet certain criteria, including: "(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive." The Treasury also bought preferred stock and warrants from hundreds of smaller banks, using the first $250 billion allotted to the program.

    The first allocation of the TARP money was primarily used to buy preferred stock, which is similar to debt in that it gets paid before common equity shareholders. This has led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently.[15][16]

    In the original plan presented by Secretary Paulson, the government would buy troubled (toxic) assets in insolvent banks and then sell them at auction to private investor and/or companies. This plan was scratched when Paulson met with United Kingdom's Prime Minister Gordon Brown who came to the White House for an international summit on the global credit crisis.[citation needed] Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, merely infused capital into banks via preferred stock in order to clean up their balance sheets and, in some economists' view, effectively nationalizing many banks. This plan seemed attractive to Secretary Paulson in that it was relatively easier and seemingly boosted lending more quickly. The first half of the asset purchases may not be effective in getting banks to lend again because they were reluctant to risk lending as before with low lending standards. To make matters worse, overnight lending to other banks came to a relative halt because banks did not trust each other to be prudent with their money.[citation needed]

    On November 12, 2008, Secretary of the Treasury Henry Paulson indicated that reviving the securitization market for consumer credit would be a new priority in the second allotment

    From The Wall Street Journal Accounting Weekly Review on August 13, 2010

    Clawbacks Divide SEC
    by: Kara Scannell
    Aug 07, 2010
    Click here to view the full article on

    TOPICS: Accounting, Auditing, Executive Compensation, Restatement, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission, Stock Options

    SUMMARY: During the settlement with Dell, Inc. in which founder Michael Dell agreed to pay a $4 million penalty without admitting or denying wrongdoing, Commissioner Luis Aguilar raised the issue of "clawing back" compensation to executives based on inflated earnings. "The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings....Under [Section 304 of the 2002 Sarbanes-Oxley law], the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated." The SEC has been working on a formal policy to guide them in cases in which an executive has not been accused of personal wrongdoing, "but hammering out a policy acceptable to the five-member Commission...may be difficult." The related article announced the clawback provision when it was enacted into law in July and compares it to the previous requirements related to executive compensation under Sarbanes-Oxley.

    CLASSROOM APPLICATION: The article covers topics in financial reporting related to restatement, executive compensation topics, the Sarbanes-Oxley law, and the SEC's recent enforcement efforts in general.

    1. (Introductory) Based on the main and related article, define and describe a "clawback" policy.

    2. (Introductory) Why will most publicly traded companies implement change as a result of the new law and resultant SEC requirements?

    3. (Advanced) When must a company restate previously reported financial results? Cite the authoritative accounting literature requiring this treatment.

    4. (Advanced) Describe one executive compensation plan impacted by reported financial results. How would such a plan be impacted by a restatement?

    5. (Introductory) What is the difficulty with applying the new clawback provisions to executive stock option plans? Based on the related article, how are companies solving this issue?

    6. (Advanced) Is it possible that executives who are innocent of any wrongdoing could be affected financially by these new clawback provisions? Do you think that such executives should have to repay to their companies compensation amounts received in previous years? Support your answer.

    7. (Advanced) Refer to the main article. Consider the specific case of Dell Inc. founder Michael Dell. Do you believe Mr. Dell should have to return compensation to the company? Support your answer.

    8. (Introductory) How do the new requirements under the financial reform law enacted in July exceed the requirements of Sarbanes-Oxley? In your answer, include one or two statements to define the Sarbanes-Oxley law.

    Reviewed By: Judy Beckman, University of Rhode Island

    Law Sharpens 'Clawback' Rules for Improper Pay
    by JoAnn S. Lublin
    Jul 25, 2010
    Online Exclusive

    "Clawbacks Divide SEC," by: Kara Scannell, The Wall Street Journal, August 7, 2010 ---

    A dispute over how to claw back pay from executives at companies accused of cooking the books is roiling the Securities and Exchange Commission.

    Commissioner Luis Aguilar, a Democrat, has threatened not to vote on cases where he thinks the agency is too lax, people familiar with the matter said. That prompted the SEC to review its policies for the intermittently used enforcement tool.

    "The SEC ought to use all the tools at its disposal to try to seek funds for deterrence," Mr. Aguilar said in an interview on Tuesday. "It's important for us to the extent possible to try to deter, and part of that means using tools Congress has given us."

    The issue of clawbacks came up during the SEC's recent settlement with Dell Inc. and founder Michael Dell, people familiar with the matter said.

    The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings. He agreed to pay a $4 million penalty to settle the case without admitting or denying wrongdoing, but didn't return any pay.

    Mr. Aguilar initially objected to the Dell settlement, according to people familiar with the matter. It is unclear whether the penalty—considered high by historical standards for an individual—swayed Mr. Aguilar's vote or whether he removed himself from the case.

    In the interview, Mr. Aguilar spoke generally about clawbacks and declined to discuss Dell or other specific cases.

    A spokesman for the SEC declined to comment.

    Section 304 of the 2002 Sarbanes-Oxley law gave the SEC the ability to seek reimbursement of compensation from the chief executive and chief financial officer of a company when it restates its financial statements because of misconduct.

    Under the law, the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated.

    Last year, the SEC used the tool for the first time against an executive who wasn't accused of personal wrongdoing.

    In that case the SEC sued Maynard Jenkins, the former chief executive of CSK Auto Corp., for $4 million in bonuses and stock sales. Mr. Jenkins is fighting the allegations.

    SEC attorneys have been working on a more formal policy to guide them in such cases, people familiar with the matter said. They were seeking to tie the amount of the clawback to the period of wrongdoing, these people said.

    Mr. Aguilar felt the emerging new policy wasn't stringent enough and told the SEC staff he would recuse himself from cases when he didn't agree with the enforcement staff's recommendations, the people said.

    Amid the standoff, SEC enforcement chief Robert Khuzami has halted the initial policy and set up a committee to take another look at the matter, the people said.

    Hammering out a policy acceptable to the five-member commission, which has split on recent high-profile cases, may be difficult.

    The divisions worry some within the SEC because the absence of an agreement could affect cases in the pipeline, especially on close calls where Mr. Aguilar's vote might be necessary to go forward.

    Mr. Aguilar's hard line on clawbacks was bolstered by the Dodd-Frank law, signed by President Obama on July 21. It says stock exchanges need to change listing standards to require companies to have clawback policies in place that go further than the Sarbanes-Oxley policy.

    Section 954 of the law says that pay clawbacks should apply to any current or former employee and instructs companies to seek pay earned during the three-year period before a restatement "in excess of what would have been paid to the executive under the accounting restatement."

    Since becoming a commissioner in late 2008, Mr. Aguilar has called for a tougher enforcement approach, including a rework of the agency's policy of seeking penalties against companies.

    In a speech in May, Mr. Aguilar took up the issue of executive pay in the context of the SEC's lawsuit against Bank of America Corp. for failing to disclose to shareholders the size of bonuses paid to Merrill Lynch executives. The bank agreed to pay $150 million to settle the matter.

    Mr. Aguilar said that penalty "pales" in comparison to the $5.8 billion in bonuses paid during the merger.

    "Perhaps what should happen is that, when a corporation pays a penalty, the money should be required to come out of the budget and bonuses for the people or group who were the most responsible," he said.

    Bob Jensen's threads on outrageous executive compensation are at

    Bob Jensen's Fraud Updates are at

    The Fed's New Theme Song:  Behind Closed Doors
    Was AIG viewed as really "Too Big to Fail?"

    "Rare Fed Tightening The central bank wants to keep its AIG bailout debates a secret," The Wall Street Journal, September 11, 2010 --- .

    Federal Reserve Chairman Ben Bernanke is justly famous for his loose-money policies. But when it comes to preventing disclosure to taxpayers, Mr. Bernanke continues to tighten. In central bank speak, you could say that Mr. Bernanke's operation is not "accommodative" when responding to Freedom of Information Act requests.

    This week we received a letter from the Fed regarding documents we requested in February. Specifically, we asked the central bank to release a 2008 staff memo entitled, "Issues Related to Possible IPC Lending to American International Group." Soon after the memo was drafted, the Federal Reserve Bank of New York began lending money to AIG. This might suggest that the Fed staff favored this federal intervention.

    But in a CNBC interview last winter, Senator Jim Bunning said that Mr. Bernanke's staff did not think AIG was too big to fail after all. "His staff didn't agree with him," said the Kentucky Republican. "I'm talking about an email that he sent his staff after his staff recommended that the Federal Reserve not touch AIG."

    Members of Congress have been able to see this memo, though not to take a copy with them. We think taxpayers should be able to see the staff memo, as well as Mr. Bernanke's response, since the taxpayer exposure at AIG eventually reached $182 billion and the decision may hold lessons for the future. But our request has been "denied in full," according to the Fed, because the documents contain "pre-deliberative intra-agency analyses and recommendations."

    This is exactly the type of information that the Financial Crisis Inquiry Commission should be studying and making available to the public. We urge the commission to shine a light on this central episode in the history of the financial panic, allowing taxpayers to learn the truth.

    Jensen Comment
    I think saving AIG was not the main thing on  Hank Paulson's mind. As former CEO of Goldman Sachs, he wanted to save Goldman and the only way was to save AIG and thereby channel $100 billion to Goldman and other lesser CDS counterparties through AIG. Or am I just being too cynical in my old age?

    Credit Default Swap (CDS)
    This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

    "Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 ---
    Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 ---

    What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

    You tube has a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" ---
    In particular note this video by Paddy Hirsch ---
    Paddy has some other YouTube videos about the financial crisis.

    Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at

    The Ballad of 'Large Loan' Verrone:  During the boom, Wachovia banker Robert Verrone made money by slicing and dicing billions of dollars in commercial real estate loans. After the crash, he made money by restructuring those loans before they blew up. What has he learned? by Devon Leonard, Business Week, September 9, 2010 ---

    Bob Jensen's Rotten to the Core Threads ---

    Bob Jensen's threads on the bailout mess are at

    Interesting Video (painfully slow loading) on How to Detect Accounting Gimmicks & Fraud in Financial Reports
    Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports: How to Detect Accounting Gimmicks & Fraud in Financial Reports … Dr. Howard Schilit pulls back the curtain on the current climate of accounting

    Jensen Comment
    I was disappointed in this video, but it might have some benefit for students in the last third of the video where a brief summary of the bombshell Lehman Bank Examiner's Report (2,200 pages) ---

    Bob Jensen's threads on the Lehman Bank Examiner's Report ---

    Equity Valuation
    TAR book reviews are free online. I found the September 2010 reviews quite interesting, especially Professor Zhang's review of
    PETER O. CHRISTENSEN and GERALD A. FELTHAM, Equity Valuation (Hanover, MA:Foundations and Trends® in Accounting, 2009
    ISBN 978-1-60198-272-8) --- Click Here

    This book is an advanced accountics research book and the reviewer leaves many doubts about the theory and practicality of adjusting for risk by adjusting the discount rate in equity valuation. The models are analytical mathematical models subject to the usual limitations of assumed equilibrium conditions that are often not applicable to the changing dynamics of the real world.

    The authors develop an equilibrium asset-pricing model with risk adjustments depending on the time-series properties of cash flows and the accounting policy. They show that operating characters such as the growth and persistence of earnings can affect the risk adjustment.

    What are the highlights of this book? The book contains five chapters and three appendices. Chapters 2 to 5 each contain separate yet closely related topics. Chapter 2 reviews and identifies problems with the implementation of the classical model. In Chapters 3 to 5, the authors develop an accounting-based, multi-period asset-pricing model with HARA utility. My preferences are Chapters 2 and 5. Chapter 2 contains a critical review of the classical valuation approach with a constant risk-adjusted discount rate. As noted above, the authors highlight several problems in estimating these models. Many of these issues are not properly acknowledged and/or dealt with in many of the textbooks. The authors provide a nice step-by-step analysis of the problems and possible solutions.

    Chapter 5 contains the punch line. The authors push ahead with the idea of adjusting risk in the numerator, and deal with the thorny issue of identifying and simplifying the so-called “pricing kernel.” Although the final model involves a rather simplifying assumption of a simple VAR model of the stochastic processes of residual income and for the consumption index, it provides striking and promising ideas of how to estimate and adjust for risk based on fundamentals, as opposed to stock return. It provides a nice illustration of how to incorporate time-change risk characteristics of firms with the change in firms’ operations captured by the change in residual income. This is very encouraging.

    There are some unsettling issues in this book. Not surprisingly, I find the authors’ review of the classical valuation approach to be somewhat tilted toward the negative side. For instance, many of the problems cited arise from the practice of estimating a single, constant risk-adjusted discount rate for all future periods. This seems to be based on the assumption that firms’ risk characteristics do not change materially over future periods. Of course, this is a grossly simplified approach in dealing with the issues of time-changing interest rates and inflation. To me, errors introduced by such an approach reflect more the shortcomings in the empirical or practical implementation, rather than the shortcomings in the valuation approach per se. As noted by the authors, using date-specific discount rates can avoid many of the problems. After all, under most circumstances in a neo-classical framework, putting the risk adjustment in the numerator or in the denominator may simply be an easy mathematical transformation. In some cases, of course, adjusting risk in the denominator does not lead to any solution to the problem. In that sense, adjusting in the numerator is more flexible.

    After finishing the book, I asked myself the following question: Am I convinced that the practice of adjusting risk in the discount rate should be abolished? The answer seems unclear, for a couple of reasons. First, despite the authors’ admirable effort in bringing context to it, the concept of “consumption index” still seems rather elusive. As a result, it lacks the appeal of the traditional CAPM, namely, a clear and intuitive idea of risk adjustment.

     Professor Zhang seems to favor CAPM risk adjustment without delving into the many controversies of using CAPM for risk adjustment in the real world ---
    It would be interesting to see how these sophisticated analytical models are really used by real-world equity valuation analysts.

    Can the 2008 investment banking failure be traced to a math error?
    Recipe for Disaster:  The Formula That Killed Wall Street ---
    Link forwarded by Jim Mahar --- 

    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 -- -  

    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 ---

    Wall Street’s Math Wizards Forgot a Few Variables
    What wasn’t recognized was the importance of a different species of risk — liquidity risk,” Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University, told The Times. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.
    DealBook, The New York Times, September 14, 2009 ---

    Bob Jensen's threads on valuation are at

    Also see controversies over validation of accountics research



    AECM active Richard Sansing has a new TAR hit in September 2010
    Note that TAR articles are not open shared for free on the Web
    A SSRN version of this paper can be downloaded free at

    "FIN 48 and Tax Compliance"
    The Accounting Review 85 (5), 1721 (2010); doi: 10.2308/accr.2010.85.5.1721
    Lillian F. Mills
    The University of Texas at Austin

    Leslie A. Robinson
    Dartmouth College

    Richard C. Sansing
    Dartmouth College and CentER, Tilburg University

    We develop a model to examine the effects of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on the strategic interaction between publicly traded corporate taxpayers and the government. Several of our findings contradict conjectures voiced by members of the business community regarding the economic effects of implementing FIN 48. Specifically, taxpayers with strong facts obtain higher expected payoffs from uncertain tax benefits and some disclosed liabilities understate the expected tax liability. Consistent with the common conjectures, however, some taxpayers are more likely to be audited or are deterred from entering into transactions that generate uncertain tax benefits because of FIN 48. ©2010 American Accounting Association

    Jensen Comment
    I think Amy Dunbar is revising her FIN 48 BNA book, but I'm not certain where she stands on that revision

    Teaching Case on Managerial Accounting:  Accounting Assessments of New Strategy Performance

    From The Wall Street Journal Accounting Review on August 13, 2010

    Macy's Tailored Merchandise Pays Off
    by: Veronica Dagher
    Aug 12, 2010
    Click here to view the full article on

    TOPICS: Earnings Per Share, Financial Accounting, Financial Analysis, Financial Reporting, Interim Financial Statements, Management Controls, Managerial Accounting, Product strategy, Revenue Forecast

    SUMMARY: Macy's Inc. is benefiting from a plan to tailor merchandise to local markets, an effort that helped push its fiscal second-quarter earnings higher. But the retailer Wednesday reiterated uncertainty about the economy even as it raised its yearly earnings forecast. The department-store operator is entering the fall-shopping season "with tremendous momentum," but the economy remains uncertain, Chairman and Chief Executive Terry Lundgren said in a statement.

    CLASSROOM APPLICATION: This article can be used in both managerial and financial reporting classes. The managerial topic of planning and control is addressed through the Macy's tailoring process for regional U.S. tastes. Resultant quarterly reporting of earnings, gross margin, and comparison to analysts' estimates is then discussed.

    1. (Introductory) Macy's is tailoring its offerings across the U.S. Summarize how this retailer is taking this approach.

    2. (Introductory) How has the company assessed whether its strategy is working?

    3. (Advanced) What accounting information do you think is necessary to do the planning and assessment that you described in answer to the first two questions above? In your answer, describe how you would code accounting data to provide the needed information.

    4. (Introductory) What was Macy's most recent quarter end? How did the company perform during that quarter? In your answer, include definitions of revenue, gross margin, and profit.

    5. (Introductory) How did Macy's results compare to forecasted earnings? In your answer, state who forecasts these earnings and define the earnings per share metric they use.

    6. (Advanced) What fiscal year end date corresponds to the quarter end reported in this article? Why do you think retailers typically have this fiscal year end date?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Macy's Tailored Merchandise Pays Off," by Veronica Dagher, The Wall Street Journal, August 12, 2010 ---

    Macy's Inc. is benefiting from a plan to tailor merchandise to local markets, an effort that helped push its fiscal second-quarter earnings higher. But the retailer Wednesday reiterated uncertainty about the economy even as it raised its yearly earnings forecast.

    The department-store operator is entering the fall-shopping season "with tremendous momentum," but the economy remains uncertain, Chairman and Chief Executive Terry Lundgren said in a statement.

    Macy's typically kicks off the earnings season for major retailers and is seen by many analysts as a barometer of consumer spending.

    The Cincinnati-based company raised its earnings forecast for the year by 10 cents to between $1.85 and $1.90 a share. The company also increased its estimate for same-store-sales growth to 4% to 4.2%, from 3% to 3.5%.

    The retailer's shares jumped after its earnings report, rising 4.5% to $20.25 in afternoon trading Wednesday on the New York Stock Exchange. Its shares were a bright spot as global economic worries weighed on the broader market and concerns about consumer spending helped pressure competing retailers such as J.C. Penney Co.

    The stock through Tuesday was up 25% in the past year.

    Macy's, along with its peers, continues to face challenges due, in part, to low levels of consumer confidence and anemic job growth. Some analysts worry retailers face rougher going during the second half as results are compared with the prior year when the economy seemed to be improving.

    The company on Wednesday reiterated that the effort to tailor merchandise to local tastes, dubbed My Macy's, is paying off, with major changes behind it and the opportunity ahead to push hard at driving sales. The company stocks items based on individual market needs as part of the initiative, pilot-tested in 20 markets in 2008 and rolled out nationally in mid-2009.

    During the company's earnings call, Chief Financial Officer Karen Hoguet said private-brand and exclusive products also are helping drive growth. She added that all regions of the country did "relatively well" in the quarter, with the only cluster of weakness occurring in some parts of California.

    Ms. Hoguet said that on a two-year basis, the strongest regions for the department store giant were the North and the Midwest, both of which were original My Macy's pilot regions.

    Macy's has also increased its efforts in targeting teens and their mothers. With teen unemployment at record levels, teens have less money for new back-to-school clothes, which may put purchasing decisions back in the hands of their parents.

    Some analysts say moms may have more confidence shopping at department stores compared with teen retailers, which may give names like Macy's a boost.

    To that end, Macy's recently rolled out the Material Girl line inspired by singer Madonna and her daughter to lure in teens, an effort Ms. Hoguet said is performing well.

    The Material Girl line adds to other private labels—now more than 40% of Macy's stock—that also include the American Rag brand for juniors and young men and the Martha Stewart home-furnishings line.

    For the period ended July 31, the company reported a profit of $147 million, or 35 cents a share, up from $7 million, or two cents a share, a year earlier, which included 18 cents a share in restructuring-related charges.

    Analysts polled by Thomson Reuters forecast earnings of 29 cents a share for the second quarter.

    Gross margin edged up to 41.9% from 41.5%.

    Macy's last week reported total sales rose 7.3% to $5.54 billion and same-store-sales growth of 4.9%, compared with prior-year declines of 9.7% and 9.5%, respectively.

    Ms. Hoguet said sales were strong in most categories, with the only notable weaknesses in women's traditional career apparel and young men's. The best sales results in the quarter included men's, fashion watches, updated women's apparel and seasonal categories like swimwear, luggage, furniture and mattresses, she said.

    Combined online sales for and were another highlight in the quarter, rising 28.1%. Macy's has been making strides in the digital area and has boosted its spending on various types of online media this year.

    Macy's operates about 850 department stores in the U.S. and its territories. The company is opening three department stores in the second half, including its Bloomingdale's in Santa Monica, which opened last week, and is also planning to open its first four Bloomingdale's Outlets.

    Bob Jensen's threads on financial performance assessment are at

    Update on Lanny Arvan:  From SCALE Experiments to Blogs

    Years ago economics professor Lanny Arvan directed the famous in a controlled SCALE experiments comparing resident full-time students at the University of Illinois taking onsite versus online courses from the same instructors using common grade assessment procedures. Thirty courses across multiple disciplines were examined across five years of experimentation ---
    In spite of some technology glitches in those olden days, many students tended to prefer taking the courses online. Typically, many more students moved from B grades to A grades in online courses. However, there tended to not be much difference for D and F students, indicating that lack of motivation and aptitude cuts across online and onsite pedagogies in mostly the same way.

    In one of my technology workshops Dan Stone (then from the University of Illinois) gave us an overview that I still serve up his PowerPoint and audio files ---

    "Teaching With Blogs, by Lanny Arvan, Inside Higher Ed, July 27, 2010 ---

    “It is my impression that no one really likes the new. We are afraid of it. It is not only as Dostoevsky put it that 'taking a new step, uttering a new word is what people fear most.' Even in slight things the experience of the new is rarely without some stirring of foreboding.”
    --Eric Hoffer, Between The Devil And The Dragon

    I tried the new in fall 2009, teaching with student blogs, (look in sidebar and scroll down) out in the open where anyone who wanted to could see what the students were producing. The blogging wasn’t new for me. I’d been doing that for almost five years. Having students blog was a different matter. I had no experience in getting them to overcome their anxieties, relaxing in writing online, learning to trust one another that way. Normally I believe what’s good for the goose is good for the gander. If I could blog comfortably and get something from that, so could they. On reflection, however, I was very gentle with myself when I started to blog. As an experiment to prove to myself whether I could do it, for three full weeks I made at least one post a day, 500 to 600 words, a couple of times 1,100 to 1,200 words. I didn’t tell a soul I was doing this. There was no pressure on me to keep it up. It was out in the open, yet nobody seemed to be watching. After those three weeks I felt ready. In the teaching, however, at best I could ask the students to blog once a week. I gave the students weekly prompts on the readings or to follow up on class discussion. (See the class calendar for fall 2009. The prompts are in the Friday afternoon entries.) If I let them blog quietly to get comfortable as I had done, the entire semester would expire before they were ready to go public. There seemed no alternative but to have them plunge in.

    The uncertainty about how best to assist the students once they had taken the plunge created an important symmetry between the students and me; we both were to learn about how to do this well, often by first doing it less well. Though it was an inadvertent consequence, of all my teaching over the past 30 years I believe this course came closest to emulating the Seven Principles for Good Practice in Undergraduate Education by Chickering and Gamson. I learned to comment on the student posts, not with some pre-thought-through response based on what I anticipated they’d write, but rather to react to where they appeared to be in their own thinking. (This post provides a typical example. The student introduced time management as a theme. My comment aimed to make her think more about time management.) As natural as that is to do in ordinary conversation, I had never done it before when evaluating student work. Indeed, I didn’t think of these comments as evaluation at all. I thought of them as response. In the normal course of my non-teaching work I respond to colleagues all the time and they respond to me. This form of online interaction in the class made it more like the rest of my interactions at work.

    Most of the students were quite awkward in their initial blogging. Good students all, the class was a seminar on "Designing for Effective Change" for the Honors Program, but lacking experience in this sort of approach to instruction, the students wrote to their conception of what I wanted to hear from them. I can’t imagine a more constipated mindset for producing interesting prose. For this class there was a need for them to unlearn much of their approach which had been finely tuned and was quite successful in their other classes. They needed to take more responsibility for their choices. While I gave them a prompt each week on which to write, I also gave them the freedom to choose their own topic so long as they could create a tie to the course themes. Upon reading much of the early writing, I admonished many of them to "please themselves" in the writing. I informed them that they could not possibly please other readers if they didn’t first please themselves. It was a message they were not used to hearing. So it took a while for them to believe it was true. In several instances they tried it out only after being frustrating with the results from their usual approach. This, as Ken Bain teaches us, is how students learn on a fundamental level.

    I'm crustier now than I was as a younger faculty member. Nonetheless, I find it difficult to deal with the emotion that underlies giving feedback to students when that feedback is less than entirely complimentary to them. Yet given their awkward early attempts at writing posts that’s exactly what honest response demanded. It’s here where having the postings and the comments out in the open so all can see is so important, before the class has become a community, before the students have made up their minds about what they think about this blogging stuff. Though both the writing and the response are highly subjective, of necessity, it is equally important for the process to be fair. How can a student who receives critical comments judge those comments to be fitting and appropriate, rather than an example of the insensitive instructor picking on the hapless student? Perhaps a very mature student can discern this even-handedly from the comments themselves and a self-critique of the original post. I believe most students benefit by reading the posts of their classmates, making their own judgments about those writings and then seeing the instructor’s comments, finally making a subsequent determination as to whether those comments seem appropriate and helpful for the student in reconsidering the writing.

    A positive feedback loop can be created by this process. The commenting, more than any other activity the instructor engages in, demonstrates the instructor’s commitment to the course and to the students. In turn the students, learning to appreciate the value of the comments, start to push themselves in the writing. Their learning is encouraged this way. Further, since the blogging is not a competition between the students and their classmates, those who like getting comments begin to comment on the posts of other students. The elements of the community that the class can become are found in this activity.

    Since on a daily basis I use blogs and blog readers in my regular work, one of the original reasons for me taking this approach rather than use the campus learning management system was simply that I thought it would be more convenient for me. Also, given my job as a learning technology administrator, I went into the course with some thought that I might showcase the work afterward. Openness is clearly better for that. However in retrospect neither of these is primary. The main reason to be open is to set a good tone for the class. We want ideas to emerge and not remain concealed.

    Yet there remains one troubling element: student privacy. Is open blogging this way consistent with FERPA? As best as I’ve been able to determine, it is as long as students “opt in.” (I did give students the alternatives of writing in the class LMS site or writing in the class wiki site. No student opted for those.) My experience suggests, however, that is not quite sufficient. If most students opt in, peer pressure may drive others to opt in as well. More importantly, however, students choose to opt in when they are largely ignorant of the consequences. Might they feel regret after they better understand what the blogging is all about?

    Continued in article

    Bob Jensen's threads on blogs are at

    "In Pictures: The 10 Highest State Income Tax Rates For 2010," Forbes ---

    Teaching Case on the General Motors Forthcoming IPO
    From The Wall Street Journal Accounting Weekly Review on August 27, 2010

    GM Files for Long-Awaited IPO
    by: Sharon Terlep and Dan Fitzpatrick
    Aug 19, 2010
    Click here to view the full article on

    TOPICS: Audit Report, Auditing, Disclosure, Financial Reporting, Internal Controls, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission

    SUMMARY: General Motors. Co. filed registration papers Wednesday for an initial public offering in a 734-page document the WSJ describes as "...the most detailed portrait yet of GM post-bankruptcy....GM outlines a business plan that intends to leverage its massive global scale, strength in fast-growing emerging markets such as China and a balance sheet cleaned up by Chapter 11. At the same time, the company warns it faces many risks, such as continuing losses in Europe and a significant underfunding of its pension obligations." The report also is tainted by a disclaimer due to material weakness in internal controls.

    CLASSROOM APPLICATION: Questions ask students to understanding the nature of an IPO, its required SEC filing, discussion of risk factors, and the impact of a weakness in internal control on the overall report. It can be used in any financial accounting classes to cover disclosure or stock issuances and in auditing classes to cover weaknesses in internal control and forms of attestation reports.

    1. (Introductory) What is an initial public offering (IPO)? What filing must be made in order to sell shares of stock to the public in the U.S.? What entity regulates these transactions?

    2. (Advanced) After having been founded in 1908, why is General Motors (GM) now undertaking an IPO?

    3. (Introductory) What types of stock will GM sell in this offering? Explain the difference between these two types of stock. Also explain the features that lead some shares to "behave more like bonds than stock in the financial markets and [possibly] attract different types of investors."

    4. (Advanced) Why do you think that GM must disclose myriad 'risk factors' it faces in the registration documents filed for this IPO?

    5. (Advanced) Access the General Motors preliminary prospectus via the live link in the online article or directly at Proceed to page F-228 by clicking on the last item in the table of contents, "Controls and Procedures." What is the general nature of the weakness in internal controls at GM? What impact does that weakness have on this financial report?

    6. (Advanced) Access the auditor's reports on the consolidated financial statements by returning to the Table of Contents, clicking on Index to Consolidated Financial Statements, then clicking on the first two items, reports of the independent registered public accounting firm. What types of reports did this public accounting firm issue? What unusual items are included in each of these reports?

    Reviewed By: Judy Beckman, University of Rhode Island

    "GM Files for Long-Awaited IPO,"  by: Sharon Terlep and Dan Fitzpatrick, The Wall Street Journal, August 19, 2010 ---

    General Motors Co. filed registration papers Wednesday for an initial public stock offering, laying the groundwork for the car maker to begin cutting its ties to the U.S. government, its majority owner.

    The 734-page document is the most detailed portrait yet of GM post-bankruptcy. In it, the company's management is alternately confident about GM's progress since its near-death experience last year, and cautious about its prospects.

    GM outlines a business plan that intends to leverage its massive global scale, strength in fast-growing emerging markets such as China and a balance sheet cleaned up by Chapter 11. At the same time, the company warns it faces many risks, such as continuing losses in Europe and a significant underfunding of its pension obligations.

    GM's plan to return to the public markets includes preferred stock, which the company will sell to raise funds, along with common shares, which will be sold exclusively by some of GM's current shareholders, including the U.S. government. The company said no dividend is currently planned to be paid on the common shares.

    Preferred shares, which have a fixed return, behave more like bonds than stock in the financial markets and may attract different types of investors.

    Journal Community The IPO will allow the U.S. Treasury to begin selling the 61% stake it holds in GM after last year's $50 billion U.S. government bailout of the company.

    Another holder of GM shares, the United Auto Workers, also is expected to sell some of its stock during the IPO, according to people familiar with the situation.

    A Tumultuous Time View Interactive

    See how GM's fortunes have changed since the company received a government bailout.

    More photos and interactive graphics The UAW shares are held in an independent trust to pay for health care for retired auto workers. The trust owns 17.5% of GM, a stake it received last year in exchange for agreeing to cost-cutting concessions.

    The size of the IPO wasn't offered in the filing. That decision rests with Treasury officials, who have said they will make the determination largely on the state of the financial markets and investor sentiment.

    People familiar with the matter said the IPO, expected later this year, is anticipated to raise $10 billion to $15 billion but possibly more. An expected price range for the shares will be determined closer to the sale.

    The U.S. and Canadian governments will give up their right to nominate directors to the GM board after the stock offering, GM said in the filing. The Canadian and Ontario governments became GM shareholders after giving the company aid. The governments have said they are considering whether to participate in the IPO.

    As part of the 16 pages of "risk factors" in the filing, GM warns that while the U.S. car industry has recovered this year, "there is no assurance that this recovery in vehicle sales will continue or spread across all our markets." GM also said its pension plan is underfunded by $27 billion, $10.3 billion of which is in the U.S.

    From the Archives Read The Wall Street Journal's coverage of GM's 1916 stock offering.

    General Motors Co. Recapitalization Plan (Sept. 27,1916) Gen. Motors Directors Recommend Financing Plan (Oct. 17, 1916) General Motors Extend Time (Dec. 27, 1916) General Motors to Earn Over 40% on New Common (Dec. 28, 1916) General Motors Reflects Dividend Disappointment (Jan. 11, 1917) In addition, GM said it is unable to assure the accuracy of financial details about its operations because of weaknesses in its internal financial controls. GM said it has put in place steps to correct the weaknesses, but won't be able to test them for effectiveness until next year, when it can compare year-over-year financial results.

    Other risks outlined by the company include problems that could stem from global overcapacity in the car industry and rising costs of raw materials.

    General Motors filed registration papers for an initial public offering Wednesday. GM said its market-share losses over the past three years can be attributed to perceptions of its brand among consumers. To address that, GM said it is moving to increase the fuel efficiency of its vehicles, which it said will be critical to long-term profitability.

    The Obama administration would like to quickly begin exiting the car maker's business, though GM executives feel the company may need until late this year to prepare for the stock offering, according to people familiar with the discussions.

    The Securities and Exchange Commission typically takes 30 to 90 days to review an IPO registration filing.

    For the government to recoup its full investment GM must achieve a stock-market value of $70 billion—10 times GM's market capitalization before the company headed into bankruptcy-court protection in June 2009, and at least $30 billion more than the market value of Ford Motor Co.‪

    Investors won't be surprised by the lack of a dividend on the new GM shares since Ford doesn't pay one, said Linda Killian, principal at Renaissance Capital LLC, which researches and invests in IPOs. Still, she said, the lack of a dividend could be a hurdle for some investors since "other cyclical companies have dividends."

    Ms. Killian noted that the preferred shares will likely add to overall demand for the deal, since she suspects GM will be able to attract buyers who will take some common shares with the expectation it helps their chances to get some of the more desirable preferred shares.

    The preferred stock would be a type called mandatory convertible preferred shares that will convert to common on a set date.

    David Dreman, a veteran mutual-fund investor and chairman of Dreman Value Management, which manages about $5 billion in assets, said he is "a little wary" of investing in GM. He said non-U.S. auto stocks are more attractive to him because of how investors fared in GM's and Chrysler's restructurings. But he is open-minded if the economy improves before the IPO takes place.

    To prepare for the stock sale, GM last week said that Daniel Akerson, a former telecommunications executive appointed to the GM board by the Obama administration, will become CEO on Sept. 1, replacing Edward E. Whitacre Jr., who didn't want to keep the CEO job longer than a year. The move is intended to give investors a clearer picture of GM's management team.

    Underwriters of the offering include Morgan Stanley and J.P. Morgan Co. along with Bank of America Corp. and its Merrill Lynch unit, Citigroup Inc., Goldman Sachs Group Inc., Barclays PLC, Credit Suisse Group, Deutsche Bank AG, Royal Bank of Canada and UBS AG.

    Corrections & Amplifications

    General MotorsCo. filed a prospectus with the Securities and Exchange Commission for a public-share offering. A headline with a previous version of this article incorrectly referred to the filing as a proxy.

    As Found in Going Concern
    GM filing warns on reporting [Detroit Free Press] This may come as a shock but General Motors, despite filing paperwork for its IPO, admits that they still don’t have effective internal controls ---

    "Study: Every GM Vehicle Sold Costs Taxpayers $12,200," National Taxpayers Union, November 18, 2009 ---

    "Pension time bomb: The shadow hanging over GM's turnaround," The Washington Post, August 27, 2010

    PRESIDENT OBAMA has a riposte for critics of his decision to rescue General Motors and Chrysler: You can't argue with success. And much good news has emanated from Detroit of late, especially from GM. Having wiped out almost all of its debt through an administration-orchestrated bankruptcy process, slashed excess plants and streamlined operations, GM is once again turning a profit: $2.2 billion so far in 2010. Sales are up; promising new models are coming to market. GM's aggressive new management is planning a public stock offering, which would let the Treasury Department start unloading the 61 percent stake it bought for nearly $50 billion. U.S. officials speak of escaping with modest losses -- a small price for averting industrial catastrophe.

    All true -- up to a point. But the company's stock prospectus points to several reasons for caution, including such obvious ones as the sluggish U.S. economy and overcapacity in global auto manufacturing. And then there's a threat that the Obama-supervised bankruptcy did not address: the precarious condition of GM's immense pension plans.

    With almost $100 billion in liabilities, GM's defined-benefit plans for U.S. employees (one covers a half-million United Auto Workers members, another, 200,000 white-collar personnel) are the largest of any company in America. Yet they were underfunded by $17.1 billion as of the end of 2009, and the underfunding had only slightly lessened, to $16.7 billion, as of June 30. (Chrysler has a similar problem, on a smaller scale.) Having been filled with borrowed money before Chrysler's bankruptcy, the funds can limp along for a couple of years. But, as GM's prospectus acknowledges, federal law will require it to start pumping in "significant" amounts by 2014 if not sooner. GM does not say exactly how much, but an April Government Accountability Office report suggested that a $5.9 billion injection might be required initially, with larger ones to follow. In other words, any investor who buys GM stock is buying stock in a firm whose revenue is already partially committed to retired workers.

    When companies go bankrupt, their underfunded pensions often are taken over by the Pension Benefit Guaranty Corp. (PBGC), a government-run, industry-funded insurance agency, which then pays retirees a fraction of what they were owed. But that didn't happen in the GM-Chrysler bankruptcy. The UAW resisted what would have been a huge reduction in the generous benefits of its members, especially the many who retire before age 65. And the Obama administration chose not to push back.

    The net effect is that the pension time bomb is still ticking. If GM earns robust profits, even more robust than it is making now, the bomb won't detonate. Otherwise -- well, in a worst-case scenario, GM winds up back in bankruptcy, with PBGC intervention both unavoidable and more expensive than it would have been last year. And that could necessitate a bailout from Congress, because of the PBGC's own deficits.

    We're not offering investment advice -- just a dash of realism about a still-troubled industry, and a warning that its dependence on taxpayers may not be ended so easily.

    Bob Jensen's threads on pension accounting are at

    Bob Jensen's threads on the bailout are at

    At this point, GM’s balance sheet remains loaded with fluff

    "How GM Made $30 Billion Appear Out of Thin Air," by Jonathan Weil, Bloomberg, September 8, 2010 ---

    It will be a long time before General Motors Co. can shake the stigma of being called Government Motors. Here’s another nickname for the bailed-out automaker: Goodwill Motors.

    Sometimes the wackiest accounting results are the ones driven by the accounting rules themselves. Consider this: How could it be that one of GM’s most valuable assets, listed at $30.2 billion, is the intangible asset known as goodwill, when it’s been only a little more than a year since the company emerged from Chapter 11 bankruptcy protection?

    That’s the amount GM said its goodwill was worth on the June 30 balance sheet it filed last month as part of the registration statement for its planned initial public offering. By comparison, GM said its total equity was $23.9 billion. So without the goodwill, which isn’t saleable, the company’s equity would be negative. This is hardly a sign of robust financial strength.

    GM listed its goodwill at zero a year earlier. It’s as if a $30.2 billion asset suddenly materialized out of thin air. In the upside-down world that is GM’s balance sheet, that’s exactly what happened.

    Indeed, the company’s goodwill supposedly is worth more than its property, plant and equipment, which GM listed at $18.1 billion. The amount is about eight times the $3.5 billion GM is paying to buy AmeriCredit Corp., the subprime auto lender. Another twist: GM said its goodwill would have been worth less had its creditworthiness been better. Talk about a head- scratcher. (More on this later.)

    Not Normal

    This isn’t the way goodwill normally works. Usually it comes about when one company buys another company. The acquirer records the other company’s net assets on its books at their fair market value. It then records the difference between the purchase price and the net assets it bought as goodwill.

    The origins of GM’s goodwill are more convoluted. Shortly after it filed for bankruptcy last year, GM applied what’s known as “fresh-start” financial reporting, used by companies in Chapter 11. Through its reorganization, GM initially slashed its liabilities by about $93.4 billion, or 44 percent. Under fresh- start reporting, though, GM’s assets rose by $34.6 billion, or 33 percent, mainly because of the increase to goodwill.

    GM’s explanation? The company said it wouldn’t have registered any goodwill under fresh-start reporting if it had booked all its identifiable assets and liabilities at their fair market values. However, GM recorded some of its liabilities at amounts that exceeded fair value, primarily related to employee benefits. The company said the decision was in accordance with U.S. accounting standards on the subject.

    Funky Numbers

    The difference between those liabilities’ carrying amounts and fair values gave rise to goodwill. The bigger the difference, the more goodwill GM booked. In other instances, GM said it recorded certain tax assets at less than their fair value, which also resulted in goodwill.

    On the liabilities side, for example, GM said the fair values were lower than the carrying amounts on its balance sheet because it used higher discount rates to calculate the fair value figures. The higher discount rates took GM’s own risk of default into account, which drove the fair values lower.

    Here’s where it gets really funky. If GM’s creditworthiness improves, this would reduce the difference between the liabilities’ fair values and carrying amounts. Put another way, GM said, the goodwill balance implied by that spread would decline. That could make GM’s goodwill vulnerable to writedowns in future periods, which would reduce earnings.

    Unexpected Outcome

    A similar effect would ensue on the asset side if GM’s long-term profit forecasts improved. Under that scenario, GM could recognize higher tax assets and bring their carrying amount closer to fair value, narrowing the spread between them.

    So, to sum up, the stronger and more creditworthy GM becomes, the less its goodwill assets may be worth in the future. An intuitive outcome, this is not.

    There’s a broader storyline here. Normally when companies go public, they’re supposed to be prepared from a business and financial-reporting standpoint to take on the responsibilities of public ownership. GM’s IPO, of course, is a much different animal. Taxpayers already own most of the company. Now the government is trying to unload its 61 percent stake back onto the investing public, though it may take years before the government can sell it completely.

    Fluffy Balance Sheet

    At this point, GM’s balance sheet remains loaded with fluff, as the goodwill illustrates. GM said its August deliveries were down 25 percent from a year earlier, so it’s not as if business is booming. Moreover, GM disclosed that it still has material weaknesses in its internal controls, which is a fancy way of saying it doesn’t have the necessary systems in place to ensure its financial reporting is accurate.

    This being the political season, the Obama administration has made clear that it wants GM to complete the IPO this year, so the president can claim a policy success. It’s bad enough GM needed a taxpayer bailout. What would be worse is taking the company public again prematurely.

    This much is certain: The next time GM wants to create $30 billion out of nothing, it won’t be so easy.

    Jensen Comment
    This reminds me of KPMG's unusual twist.

    KPMG’s “Unusual Twist”
    While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.

    Punch Line
    This "foresight of top management" led to a 25-year prison sentence for Worldcom's CEO, five years for the CFO (which in his case was much to lenient) and one year plus a day for the controller (who ended up having to be in prison for only ten months.) Yes all that reported goodwill in the balance sheet of Worldcom was an unusual twist.

    Bob Jensen's threads on goodwill are at

    Joe Cassano ---

    A PwC Partner’s Scribbled Notes Helped Save Joe Cassano’s Hide ---


    July 23, 2010 message from Francine McKenna [retheauditors@GMAIL.COM]

    Here's what I wrote about the issue.  In April. And again in June.’s-cassano-snitches-on-pricewaterhousecoopers/’s-cassano-says-he-told-pwc-everything/

    The stories in NYT and WSJ are coming out because the documents that contain the evidence of the PwC knowledge of Cassano's contentions in November, pre- the investors meeting in December, have just been made public by the Financial Crisis Inquiry Commission.  They make for interesting reading for anyone with the interest, aptitude and patience.


    "With Cassano Off The Hook, Where Does PwC Hide In The AIG Case?" by Francine McKenna, re:TheAuditors, July 27, 2010 ---

    Welcome to Episode 33 rpm of AIG and PwC and the Big Bad Wolf, Goldman Sachs. In this episode we attempt to slow things down and stop blaming our mother, I mean Goldman Sachs, for everything.


    Let’s consider for a moment the unnaturally close, preternatural relationship between AIG and PwC over the years. The dramas these two have been through together evoke the classic dysfunctional family, hell bent on destroying each other before they let anyone or anything destroy any of them…

    “For decades,” Gretchen Morgenson tells us last Saturday in the New York Times,  “Goldman and AIG had a long and fruitful relationship, with AIG insuring billions in mortgage-related securities that Goldman Sachs underwrote. When the mortgage market started to deteriorate in 2007, however, the relationship went sour…”

    Goldman bought insurance against an AIG failure from large foreign and domestic banks, including Credit Suisse ($310 million), Morgan Stanley ($243 million) and JPMorgan Chase ($216 million). Goldman also bought $223 million in insurance on AIG from a variety of funds overseen by Pimco, the money management firm.

    Back in 2005, during an earlier scandal, reporters and plaintiffs like the Ohio pension plans that recently settled with AIG and PwC for more than $800 million, questioned PwC’s independence from AIG:

    The Washington Post, May 2005: “The relationship between PWC and AIG stretches back decades to when the firm still was called Coopers & Lybrand, before its 1998 merger with Price Waterhouse. Former AIG finance chief Howard I. Smith, who left the company earlier this year under pressure for failing to cooperate with regulators, spent almost two decades as an auditor at Coopers before joining AIG in 1984. Steven Bensinger, AIG’s new chief financial officer, also started his career at Coopers & Lybrand.

    In the lawsuit filed earlier this spring in U.S. District Court in Manhattan, Petro, the Ohio attorney general, alleges that PWC’s independence was “impaired” by these long-standing ties and by nearly $137 million in audit and consulting fees it received from AIG between 2000 and 2003.

    They also didn’t buy the excuses AIG made for PwC at the time – that PwC had been kept in the dark – and claimed there were enough red flags to pin some of the liability on the auditor.

    “In a boost to PWC, AIG in its release this spring also explicitly told investors that auditors and board members had been kept in the dark by management about some AIG accounting maneuvers, including the company’s dealings with Capco Reinsurance Co. Ltd., a Barbados reinsurance firm, and Union Excess Reinsurance Co. Ltd.”

    In the latest scandal at AIG, we’ve seen PwC and AIG’s most senior executives such as former CEO Sullivan and CFO Bensinger attempt to divert attention from themselves. One example is the accusation against Joseph Cassano.  Mr. Cassano, albeit not the most likeable guy for numerous reasons, seems to have done everything he could to get it through the thick heads of PwC, Sullivan and Bensinger that there were wolves at AIG’s door, even though Cassano believes even now that enough time and a suitably stubborn attitude could have fought them off.

    Everyone pointed at Cassano as an obdurate, incorrigible, obfuscating guy at the root of all of AIG’s problems.

    The Wall Street Journal, July 22, 2010:

    Joseph Cassano was once portrayed as a villain of our times.

    Prosecutors… interviewed AIG senior management and the company’s external auditor, and came away thinking Mr. Cassano hadn’t properly disclosed multi-billion-dollar accounting changes that drastically cut the size of estimated losses, these people said…In interviews in 2008, Mr. Ryan told prosecutors he sometimes couldn’t get straight answers from Mr. Cassano when he asked him to justify how AIG accounted for the swaps, these people said…Senior executives at AIG’s parent company voiced similar misgivings to prosecutors a couple of years ago…However, Cassano was able to prove that he gave both PwC and Sullivan/Bensinger enough of a heads up to make their own decision what to tell investors in December.


    The defense team rebutted the prosecution’s allegations, presenting a version of events that portrayed Mr. Cassano as repeatedly disclosing bad news to his bosses, investors and PwC…its efforts helped focus prosecutors’ attention on an obscure set of handwritten notes in their files, found scrawled on the bottom of a printed spreadsheet…the annotations, which were made by a PwC partner at a meeting with Mr. Cassano and AIG management a week before the key December 2007 investor conference…Prosecutors realized the notes were disastrous to their case… Mr. Cassano had in fact disclosed the size of the accounting adjustments to both his bosses and external auditors.

    It wasn’t really news when the Wall Street Journal wrote about auditors’ “scribbled notes that scuttled the AIG probe” and the New York Times Deal Book followed with a “me too” blurb the next day.  We’ve known since late May that the Department of Justice no longer had a case against Cassano. He had apparently told the auditors and his bosses everything.

    I wrote about Cassano’s apparent transparency in early April and then again at the end of June.

    The investigations went south when, “prosecutors found evidence Mr. Cassano did make key disclosures. They obtained notes written by a PwC auditor suggesting Mr. Cassano informed the auditor and senior AIG executives about the adjustment…[and] told AIG shareholders in November 2007 that AIG would have “more mark downs,” meaning it would lower the value of its swaps.” So who’s telling the truth?

    Why are we seeing more stories now with more color commentary on the Cassano vindication story?  There have been a number of parallel investigations and inquiries occurring – criminal, civil and congressional – of the entire AIG/Goldman Sachs affair as well constant reminders of the financial crisis conundrums.  As Gretchen Morgenson so aptly put it this past weekend:

    “What did they know, and when did they know it?” Those are questions investigators invariably ask when trying to determine who’s responsible for an offense or a misdeed….a third, equally important question must be asked: “What did they do once they knew what they knew?

    All of these investigations are inevitably producing reams of information – lots of it in electronic form via emails and electronic records of conversations, meeting minutes, contracts and calculations.  But this information is being made available to journalists and the general public on an intermittent and inconsistent basis. As the information dribbles out in linkable, source-able, quotable form, the journalists write more stories.

    Emails documenting internal conversations at AIG from 2007 were available to some journalists at the Washington Post as early as December of last year but were only recently posted to the Financial Crisis Inquiry Commission’s (FCIC) website for review by the general public.

    The PwC documents proving Mr. Cassano’s contentions of good faith were probably available to the Department of Justice early this year. The substance of them was made available to some journalists in April when they started reporting Cassano would not face charges and then later in May when stories were written about charges being dropped. The actual documents show clearly that PwC knew everything in advance of the December 2007 AIG investor meeting. They were recently posted to the FCIC and House Oversight Committee sites.

    The stories have been out there for a while. The details are now well known. AIG was under pressure from all sides since late 2006 and PwC stood side by side with them throughout:

    Every time a scandal such as this occurs, earnest journalists believe the auditors will come under closer scrutiny.

    They don’t.

    American International Group Inc.’s admission this week that it engaged in improper accounting practices is putting the nation’s largest independent auditing firm in the spotlight: PricewaterhouseCoopers LLP…For now, the Securities and Exchange Commission, which in February subpoenaed documents from the firm about AIG, isn’t focusing on the accountants’ actions, people familiar with the matter said. Instead, SEC investigators, working with New York state officials, are trying to determine what AIG told its auditors about deals under scrutiny and whether that information was truthful, the people said. But at some point, investigators will press PricewaterhouseCoopers to explain the reasons it missed the improper accounting, the people added.”

    Instead, in this case, PwC was reappointed to their jobs with the help of enabler Arthur Levitt.

    PwC, as auditor also of Goldman Sachs, JP Morgan, Bank of America, Barclays, Freddie Mac, PIMCO funds,  and two of the Big 3 ratings agencies – Moody’s (until mid-2008) and Fitch – had a pretty good eye into both AIG’s and Goldman Sachs’ counterparty risk and the ratings roller coaster ride they all were on.

    From Cassano’s FCIC testimony in June 2010: “In light of the auditors’ heavy involvement in the fair-market-model evolution generally, and their prior knowledge of the existence and magnitude of the negative-basis adjustment in particular, I also found the material-weakness finding surprising, to say the least. I know AIG senior management argued strenuously against it.”

    PwC, with KPMG, continues to allow their clients to delay asset markdowns, thereby only delaying inevitable losses to shareholders.

    I asked Tucker Warren, spokesperson for the FCIC, when or if any of the audit firms – EY for Lehman, Deloitte for Bear Stearns, WaMu, American Home and Merrill Lynch, KPMG for Citigroup, Fannie Mae, Countrywide, Wachovia, and New Century or PwC for AIG, Freddie Mac, Goldman Sachs or Bank of America – would testify before the Commission on the causes of the financial crisis.

    Continued in article

    Bob Jensen's threads on PwC are at

    Shareholder auditor liability case against PwC

    September 10, 2010 message from Francine McKenna [retheauditors@GMAIL.COM]

    Two very interesting cases regarding auditor liability for fraud and the legal doctrine of "in pari delicto" will be argued in Albany in front of the New York Court of Appeals on Tuesday September 14th.  Coincidentally, this is the anniversary of the Lehman failure.

    I've written about these cases regarding AIG and Refco.

    The attorney in the AIG PwC case cited my blog and this article in this press release and, I'm told, will be mentioning it in their argument.


    Begin forwarded message:

    From: "Allan Ripp" <>

    Date: September 10, 2010 9:51:52 AM CDT


    Subject: Shareholder auditor liability case against PwC to be argued in NY Sept 14


    Grant & Eisenhofer to argue pivotal case on auditor liability in NY Court of Appeals on Sept. 14 – underlying suit against PricewaterhouseCoopers stems from failure to detect bid-rigging fraud at AIG

     Francine -

    We want to alert you to a hearing on Tuesday, Sept. 14 before the N.Y. Court of Appeals in a case with significant implications for auditor malpractice liability.

    The auditor in this case – PricewaterhouseCoopers – is accused of failing to detect large-scale fraud at AIG related to alleged accounting manipulations and sham transactions that go back to 1999.  PwC won dismissal of the suit in the trial court by arguing that because AIG employees committed the fraud that PwC failed to spot, AIG was “in pari delicto” with PwC (translation: at mutual fault) and therefore could not bring a claim.

    Auditors have used similar defenses to avoid malpractice liability in a number of other cases, including a suit against Grant Thornton LLP by the bankruptcy trustee of Refco, Inc., which will be addressed at the same September 14 hearing.  This will mark the New York high court’s first opportunity to decide whether New York law recognizes this defense as an outright bar to auditor malpractice liability.  PwC knows well how high the stakes are, and has engaged former U.S. Solicitor General Paul Clement (now with King & Spalding) to plead its case.

    Making the argument for investors is Stuart Grant of leading shareholder and corporate governance law firm Grant & Eisenhofer, who says the outcome of the hearing will have significant public policy ramifications.  “Corporations hire accounting firms and pay them huge fees to look for fraud by company employees.  If an auditor can overlook fraud but escape malpractice liability by blaming the company for committing the fraud in the first place, then where is the accountability for the auditor?  The company would have no recourse against the auditor, no matter how egregious the auditor’s conduct.”

    The lawsuit against PwC alleges professional malpractice and negligence over the accounting firm's audits of AIG during a period of extensive chicanery at the giant insurer that predated the financial collapse. Grant & Eisenhofer represents pension fund Teachers’ Retirement System of Louisiana in the shareholders’ derivative suit brought on behalf of AIG in the Delaware courts. In their underlying case against PwC, the shareholders allege that the Big Four accounting firm repeatedly failed to detect numerous red flags indicative of massive fraud, including a $500 million sham reinsurance transaction with Gen Re Corporation in 2000.

    The PwC suit is drawing intense interest from the accounting industry, with amicus curiae briefs having been submitted by the American Institute of Certified Public Accountants and the Center for Audit Quality in support of PwC. The widely-read accounting blog re: The Auditors recently posed the question raised by this case: “Are auditors equally at fault in the big fraud cases?”

    When the plaintiffs appealed from the Delaware Chancery Court’s dismissal of the claims against PwC, the Delaware Supreme Court in March 2010 passed the issue of auditor liability to the New York Court of Appeals for determination, holding that “a resolution of this appeal depends on significant and unsettled questions of New York law…”  The Delaware high court certified to the Court of Appeals the question of whether under New York law corporate shareholders’ derivative claims against an outside auditor for professional malpractice/negligence are barred under the doctrine of in pari delicto.  The in pari delicto defense prevents a plaintiff who is also at fault from recovering damages from a defendant.

    Mr. Grant noted that Tuesday’s hearing will provide the opportunity for the litigants to ask the high court to declare what New York law is on this issue, as there has never been a definitive ruling by the Court of Appeals.

    “This case has huge implications for the auditing industry as well as shareholder derivative litigation,” Mr. Grant said. “What auditors are asking for is a ‘get-out-of-jail-free’ card that they can play every time their corporate client sues them for failing to detect fraud by a corporate manager.  But detecting that kind of fraud is exactly what the client hired them to do.  There needs to be some accountability.  If they acted properly, let them have their day in court where they can prove it, but don’t foreclose the company from bringing the suit in the first place.”

    The case caption is: Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP, No. 119 (N.Y.).

    Let us know if you’d like to speak with Mr. Grant or need any additional details about the upcoming hearing. If you would like to view a copy of the Delaware Supreme Court opinion or the plaintiffs’ brief before the N.Y. Court of Appeals, please let us know.

    Allan Ripp 212-262-7477
    Ivan Alexander 212-262-7482

    Bob Jensen's threads on PwC litigation ---

    "Yukos Slicks Accuse PricewaterhouseCoopers Of Succumbing To Kremlin Pressure," by Francine McKenna, re:TheAuditors, September 10, 2010 ---

    “If only it were all so simple! If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?”
    Aleksandr I. Solzhenitsyn (The Gulag Archipelago: 1918-1956)

    There’s quite a bit of bad news coming out of Russia about PricewaterhouseCoopers and their client Yukos.  Former Yukos chief Mikhail Khodorkovsky and his business partner Platon Lebedev stand co-accused in a new trial brought by prosecutors intent on preventing their scheduled release from prison in 2011.  Khodorkovsky and Lebedev have decided to target PwC in their defense.

    From the official Khodorkovsky And Lebedev Communication Center:

    (Yes! Still wealthy by any measure jailed Russian oligarchs can afford dedicated global PR efforts!)

    “…as reported in major features published in today’s Wall Street Journal and The Financial Times following separate investigations conducted by both newspapers, PwC appears to have succumbed to a woefully illegal war of intimidation waged against them by Russian authorities who sought to cast doubt on the reliability of the Yukos audits. PwC was subject to police raids, partners were threatened with imprisonment for their work on Yukos, and legal proceedings unrelated to Yukos were lodged by prosecutors against the firm. These problems all disappeared after PwC withdrew its Yukos reporting. A persistent threat echoed by authorities as PwC adamantly defended its Yukos reporting – that the firm’s Russian license could be revoked – has not been raised again since PwC backed down, and Yukos-related investigations into PwC appear to have ceased. The allegedly “new” information received by PwC was not only supplied by the prosecution, but also never independently verified before PwC withdrew their audits.”

    The Wall Street Journal makes a double vodka, straight-up, no chaser assessment of PwC’s problem:

    PWC’s entanglement in the legal travails of Mr. Khodorkovsky highlights the ethical and legal dilemmas that can face auditors in emerging markets where corporate governance and judicial systems are weak, industry observers say.

    Yes, indeed.

    Just ask PwC about its India firm post-SatyamOr about their Japanese firm and the problems they had after some of their partners were indicted for fraud along with their client, Kanebo.

    The Financial Times wants to talk about truth, as if that’s still the currency global audit firms like PwC actually trade in.

    Regardless of where the truth lies, what is emerging is a situation where global audit firms operating in Russia may all be vulnerable to the double jeopardy of auditing the books of notoriously opaque companies, while being regulated by a government able to launch arbitrary attacks. This lose-lose situation could call into question the value of audits that have been hotly sought as a western seal of approval ever since Russian companies began to access international financial markets.

    Correspondence between PwC and Yukos, as well as PwC’s own internal memorandums and audit drafts, raises questions over what the audit firm knew and did not know about certain transactions stemming from the late 1990s…

    This story has been out there for a while.  I started writing about it in March of 2007.  That’s more than three years ago! Reports have been open and consistent in saying PwC was pressured.

    Moscow raids PwC over Yukos back tax
    “Russian investigators raided the Moscow office of PwC on Friday, stepping up pressure on the “big four” audit firm ahead of a crucial court case over allegations that it signed off on false accounts by Yukos, the bankrupt oil company.

    About 20 law enforcement officials from the prosecutors’ office and interior ministry combed PwC’s offices for documents relating to Yukos, and questioned senior managers including Mike Kubena, head of PwC in Moscow, the company said. Interior ministry officials also announced they were launching a criminal probe into alleged tax avoidance by PwC in Russia.

    The search came as PwC prepared for a court hearing on Monday in a lawsuit filed by Russia’s Federal Tax Service alleging PwC concealed tax evasion by Yukos in 2002-04. PwC denies all the accusations. The pressure against the audit group is seen as a key element in the state campaign against Yukos …Much is at stake for PwC. If found in violation of accounting procedures, it could lose its Russian licence and valuable clients including big state-controlled companies such as Gazprom, the natural gas giant, Sberbank, the savings bank, Russia’s central bank, and Unified Energy System, the electricity monopoly.

    Political contributions, the audit firms’ stock in trade, kept the dogs at bay for a little while.

    MOSCOW, April 4, 2007 (RIA Novosti)“The United States expects Russia to treat U.S. companies doing business in the country fairly, including embattled auditor PricewaterhouseCoopers (PwC), the U.S. Commerce Secretary said Wednesday.


    PwC, a respected international auditing firm, has been accused by Moscow city tax officials of helping the bankrupt Yukos oil company evade taxes, and it may as a result lose its operating license in Russia. Carlos Gutierrez, who arrived in Moscow Monday to discuss Russia’s bid to join the World Trade Organization (WTO) and bilateral investment, said after a meeting with Russia’s economics minister, German Gref, that Washington expects any investigation into alleged violations of Russian tax legislation by PwC to be even-handed.

    By June of 2007, PwC had caved to the pressure from the Kremlin.

    Looks like PwC is claiming the we were duped” defense. (Do any of my attorney readers know which firm that defends the Big 4 came up with this brilliant strategy – make your client, who makes their money by selling knowledge and expertise, look dumb?)

    Must have been the price they had to pay to placate the Russians and pay back their Congressional and Administration godfathers.

    PwC withdraws Yukos audits

    “PwC has withdrawn its entire set of audit reports over 10 years for the bankrupt Yukos oil group, in a move that marks a significant climbdown by the global audit firm following months of Russian government pressure.

    PwC said on Sunday it was withdrawing all its audit reports of Yukos from the years ending 1995 to 2004 becauseRussian prosecutors had unearthed new information that led it to believe statements provided by Yukos management in the past “may not have been accurate”. The sudden about-turn comes after a government pressure campaign that included police raids in March on PwC’s Moscow office and an ongoing criminal investigation into alleged underpayment of taxes by PwC…

    Continued in article

    Bob Jensen's threads on PwC litigation ---

    "HP, Hurd, Deloitte and Tone At The Top," by Francine McKenna, re:TheAuditors, August 8, 2010 ---

    What do HP, Boeing and Navistar have in common?  All three companies, over the years, have fought SEC investigations, internal investigations, and shareholder lawsuits.

    HP and Boeing saw their CEOs, Mark Hurd this week and Harry Stonecipher in 2005, resign in disgrace because of “lapses in personal judgment” of the female dalliance kind.

    Navistar’s CEO Dan Ustian has managed to hang on to his job through all kinds of SEC troubles including firing Deloitte after 99 years as their auditor and a delisting. But Ustian, and his former CFO Bob Lannert, were recently the targets of an up until now very rare type of SEC enforcement action – use of the Sarbanes-Oxley Section 304 clawback provision to force the return of millions of incentive compensation received as a result of accounting manipulation.

    Because, after all, “boardroom Puritanism covers sex, but not greed. Where, oh where are the corporate ethics policies prohibiting chummy boards from approving eye-popping pay packages for C.E.O.’s whether or not they are doing a good job? Where are the solemn mission statements promising a workplace free of executive pillaging? Whom would you prefer: a C.E.O. who writes the occasional indelicate e-mail message? Or someone like [Bob] Nardelli, who treats shareholders with callous indifference? And which of the two executives really has worse judgment?” New York Times June, 25, 2006

    Continued in article

    Bob Jensen's threads on Deloitte are at

    Is there any accounting professor in the Top 100?
    These might be better termed the Least Influential in the Academic Community
    "100 Most Influential Accountants (not ranked), Accounting Today, ---

    Notably Absent from the List
    David Albrecht
    Ray Ball
    Mary Barth (member of the IASB and Stanford Professor)
    Denny Beresford
    Richard Campbell
    Susan Crossan
    Amy Dunbar
    David Fordham
    Sid Gray
    Don Keiso
    Bill Kinney
    Tom Linsmeier (member of the FASB)
    Bob Jensen
    Bob Kaplan (Oh my goodness)
    Steve Kachelmeier (as Senior Editor of TAR no less)
    Francine McKenna
    Jim Peterson
    Gary Previtts
    Richard Sansing
    Ed Scribner
    Tom Selling
    Shyam Sunder
    Robert Bruce Walker
    Patricia Walters
    Jonathan Weil (Bloomberg)
    Paul Williams
    Fred Wu
    Jerry Zimmerman
    Every other accounting professor I can think of off the wall


    Let's face it, accounting professors, researchers, journalists/bloggers, and textbook authors just don't have much influence in accounting!
    I take more comfort by not being in this list of people least known in the accounting academy

    A Starr for the Stars Fell Into a Prison Yard

    "Financial Adviser to Stars Pleads Guilty to Fraud," by Julie Creswell and Colin Moynihan, The New York Times, September 10, 2010 ---

    Kenneth I. Starr, the New York investment adviser who once counted Hollywood celebrities like Al Pacino, Martin Scorsese and Sylvester Stallone as clients, pleaded guilty on Friday in Federal District Court in Manhattan to charges that he diverted tens of millions of dollars of his clients’ money to pay for his lavish lifestyle.

    A money manager to the stars who frequented charity events, high-profile parties and movie premieres in search of clients, Mr. Starr, 66, wore a dark blue prison smock and appeared stooped and drawn as he stood before Federal Magistrate Judge Theodore H. Katz and pleaded guilty to one count each of wire fraud, money laundering and investment adviser fraud.

    Mr. Starr, who is not related to the special prosecutor with the same name who investigated President Bill Clinton, admitted that he stole $20 million to $50 million from his clients to use for his own purposes.

    Some of the money paid a multimillion-dollar legal settlement with a former client while other money bought a sprawling $7.5 million Upper East Side condo complete with a lap pool and a 1,500 square-foot garden.

    A plea agreement between Mr. Starr and the government calls for a prison sentence of 10 to 12.5 years. But Federal District Judge Shira A. Scheindlin, who is scheduled to sentence Mr. Starr on Dec. 15, is not bound by that agreement and could impose a greater or lesser penalty.

    The government said it could also seek the forfeiture of as much as $50 million in assets owned or controlled by Mr. Starr and $50 million in restitution for his victims.

    After the courtroom proceedings, a lawyer for Mr. Starr, Flora Edwards, indicated that the forfeiture and restitution amounts were under discussion but that they were likely to be “significantly less” than $50 million.

    “He’s assumed full responsibility for his conduct,” Ms. Edwards said. “He made a colossal error in judgment that he recognizes. He’s paying a very, very heavy price.”

    In a statement, Preet Bharara, the United States attorney in Manhattan, said, “Kenneth Starr’s is a tale of fiction and fraud, in which he played the role of legitimate investment adviser to a cast of unsuspecting victims.”

    Mr. Starr was indicted in June on 23 counts, including wire fraud, securities fraud, fraud by an investment adviser and money laundering.

    Clients relied on him to provide investment advice, financial planning and even pay bills and help with tax filings, federal prosecutors said in the indictment.

    In federal court on Friday, Mr. Starr admitted that his clients had “entrusted him” with their money, but that “from 2009 to 2010, instead of using my clients’ money as I promised, I knowingly used a portion of the money for my own purposes,” he told the judge.

    Continued in article

    Bob Jensen's fraud updates are at

    Plagiarism Is Not a Big Moral Deal:  Yeah Right!
    Although I admire Professor Fish, I don't quite share his views on plagiarism. And even if you share his views, this may not protect you or your students from the thunderbolts of wrath that sometimes strike plagiarists --- such thunderbolts as loss of job, loss of a degree (yes your prized college degree can be withdrawn), your publications may be withdrawn, you can be sued for your life savings, and you may face a lifetime of disgrace.

    The scarlet letter "P" around your neck is serious business and becomes even worse with a record of addiction. Of course there are examples of plagiarists who are highly regarded in spite of their plagiarism, including Martin Luther King, Jr. and Vladimir Putin ---

    "Plagiarism Is Not a Big Moral Deal," by Stanley Fish, The New York Times, August 9, 2010 ---

    During my tenure as the dean of a college, I determined that an underperforming program should be closed. My wife asked me if I had ever set foot on the premises, and when I answered “no,” she said that I really should do that before wielding the axe.

    And so I did, in the company of my senior associate dean. We toured the offices and spoke to students and staff. In the course of a conversation, one of the program’s co-directors pressed on me his latest book. I opened it to the concluding chapter, read the first two pages, and remarked to my associate dean, “This is really good.”

    But on the way back to the administration building, I suddenly flashed on the pages I admired and began to suspect that the reason I liked them so much was that I had written them. And sure enough, when I got back to my office and pulled one of my books off the shelf, there the pages were, practically word for word. I telephoned the co-director, and told him that I had been looking at his book, and wanted to talk about it. He replied eagerly that he would come right over, but when he came in I pointed him to the two books — his and mine — set out next to each other with the relevant passages outlined by a marker.

    He turned white and said that he and his co-author had divided the responsibilities for the book’s chapters and that he had not written (perhaps “written” should be in quotes) this one. I contacted the co-author and he wrote back to me something about graduate student researchers who had given him material that was not properly identified. I made a few half-hearted efforts to contact the book’s publisher, but I didn’t persist and I pretty much forgot about it, although the memory returns whenever I read yet another piece (like one that appeared recently in The Times) about the ubiquity of plagiarism, the failure of students to understand what it is, the suspicion that they know what it is but don’t care, and the outdatedness of notions like originality and single authorship on which the intelligibility of plagiarism as a concept depends.

    Whenever it comes up plagiarism is a hot button topic and essays about it tend to be philosophically and morally inflated. But there are really only two points to make. (1) Plagiarism is a learned sin. (2) Plagiarism is not a philosophical issue.

    Of course every sin is learned. Very young children do not distinguish between themselves and the world; they assume that everything belongs to them; only in time and through the conditioning of experience do they learn the distinction between mine and thine and so come to acquire the concept of stealing. The concept of plagiarism, however, is learned in more specialized contexts of practice entered into only by a few; it’s hard to get from the notion that you shouldn’t appropriate your neighbor’s car to the notion that you should not repeat his words without citing him.

    The rule that you not use words that were first uttered or written by another without due attribution is less like the rule against stealing, which is at least culturally universal, than it is like the rules of golf. I choose golf because its rules are so much more severe and therefore so much odder than the rules of other sports. In baseball you can (and should) steal bases and hide the ball. In football you can (and should) fake a pass or throw your opponent to the ground. In basketball you will be praised for obstructing an opposing player’s view of the court by waving your hands in front of his face. In hockey … well let’s not go there. But in golf, if you so much as move the ball accidentally while breathing on it far away from anyone who might have seen what you did, you must immediately report yourself and incur the penalty. (Think of what would happen to the base-runner called safe at home-plate who said to the umpire, “Excuse me, sir, but although you missed it, I failed to touch third base.”)

    Golf’s rules have been called arcane and it is not unusual to see play stopped while a P.G.A. official arrives with rule book in hand and pronounces in the manner of an I.R.S. official. Both fans and players are aware of how peculiar and “in-house” the rules are; knowledge of them is what links the members of a small community, and those outside the community (most people in the world) can be excused if they just don’t see what the fuss is about.

    Plagiarism is like that; it’s an insider’s obsession. If you’re a professional journalist, or an academic historian, or a philosopher, or a social scientist or a scientist, the game you play for a living is underwritten by the assumed value of originality and failure properly to credit the work of others is a big and obvious no-no. But if you’re a musician or a novelist, the boundary lines are less clear (although there certainly are some) and if you’re a politician it may not occur to you, as it did not at one time to Joe Biden, that you’re doing anything wrong when you appropriate the speech of a revered statesman.

    And if you’re a student, plagiarism will seem to be an annoying guild imposition without a persuasive rationale (who cares?); for students, learning the rules of plagiarism is worse than learning the irregular conjugations of a foreign language. It takes years, and while a knowledge of irregular verbs might conceivably come in handy if you travel, knowledge of what is and is not plagiarism in this or that professional practice is not something that will be of very much use to you unless you end up becoming a member of the profession yourself. It follows that students who never quite get the concept right are by and large not committing a crime; they are just failing to become acclimated to the conventions of the little insular world they have, often through no choice of their own, wandered into. It’s no big moral deal; which doesn’t mean, I hasten to add, that plagiarism shouldn’t be punished — if you’re in our house, you’ve got to play by our rules — just that what you’re punishing is a breach of disciplinary decorum, not a breach of the moral universe.

    Now if plagiarism is an idea that makes sense only in the precincts of certain specialized practices and is not a normative philosophical notion, inquiries into its philosophical underpinnings are of no practical interest or import. In recent years there have been a number of assaults on the notion of originality, issuing from fields as diverse as literary theory, history, cultural studies, philosophy, anthropology, Internet studies. Single authorship, we have been told, is a recent invention of a bourgeois culture obsessed with individualism, individual rights and the myth of progress. All texts are palimpsests of earlier texts; there’s been nothing new under the sun since Plato and Aristotle and they weren’t new either; everything belongs to everybody. In earlier periods works of art were produced in workshops by teams; the master artisan may have signed them, but they were communal products. In some cultures, even contemporary ones, the imitation of standard models is valued more than work that sets out to be path-breaking. (This was one of the positions in the famous quarrel between the ancients and the moderns in England and France in the 17th and 18th centuries.)

    Arguments like these (which I am reporting, not endorsing) have been so successful in academic circles that the very word “originality” often appears in quotation marks, and it has seemed to many that there is a direct path from this line of reasoning to the conclusion that plagiarism is an incoherent, even impossible, concept and that a writer or artist accused of plagiarism is being faulted for doing something that cannot be avoided. R.M. Howard makes the point succinctly “If there is no originality and no literary property, there is no basis for the notion of plagiarism” (“College English,” 1995).

    That might be true or at least plausible if, in order to have a basis, plagiarism would have to stand on some philosophical ground. But the ground plagiarism stands on is more mundane and firm; it is the ground of disciplinary practices and of the histories that have conferred on those practices a strong, even undoubted (though revisable) sense of what kind of work can be appropriately done and what kind of behavior cannot be tolerated. If it is wrong to plagiarize in some context of practice, it is not because the idea of originality has been affirmed by deep philosophical reasoning, but because the ensemble of activities that take place in the practice would be unintelligible if the possibility of being original were not presupposed.

    And if there should emerge a powerful philosophical argument saying there’s no such thing as originality, its emergence needn’t alter or even bother for a second a practice that can only get started if originality is assumed as a baseline. It may be (to offer another example), as I have argued elsewhere, that there’s no such thing as free speech, but if you want to have a free speech regime because you believe that it is essential to the maintenance of democracy, just forget what Stanley Fish said — after all it’s just a theoretical argument — and get down to it as lawyers and judges in fact do all the time without the benefit or hindrance of any metaphysical rap. Everyday disciplinary practices do not rest on a foundation of philosophy or theory; they rest on a foundation of themselves; no theory or philosophy can either prop them up or topple them. As long as the practice is ongoing and flourishing its conventions will command respect and allegiance and flouting them will have negative consequences.

    This brings me back to the (true) story I began with. Whether there is something called originality or not, the two scholars who began their concluding chapter by reproducing two of my pages are professionally culpable. They took something from me without asking and without acknowledgment, and they profited — if only in the currency of academic reputation — from work that I had done and signed. That’s the bottom line and no fancy philosophical argument can erase it.

    Jensen Comment
    The really sad fact about professors who plagiarize or otherwise cheat is that their employers may be tougher on student plagiarists than on faculty plagiarists ---

    Bob Jensen's threads on cheating and plagiarism are at

    Can you believe a highly respected corporation would over-value an asset just to spruce up its financial statements?

    Gormbley said he was punished for challenging the valuation of silicon-maker Momentive Performance Materials, an investment asset. GE Capital overstated Momentive’s value in December 2008 to improve its own balance sheet, he said. Valuing the asset correctly would have reduced ‘GE Capital’s earnings 100 percent,’ in the fourth quarter that year, according to the complaint.”
    Andrew H. Harris, "Former GE Unit Executive Says He Was Pushed Out for Questioning Accounting," Bloomberg, September 8, 2010 ---
    GE Capital denies the allegation.

    NelNet ---

    "Nelnet to Pay $55-Million to Resolve Whistle-Blower Lawsuit," by Kelly Field, Chronicle of Higher Education, August 15, 2010 ---

    Nelnet will pay $55-million to settle its share of a whistle-blower lawsuit that accuses it and several other lenders of defrauding taxpayers of more than a billion dollars in student-loan subsidies.

    The settlement, which Nelnet announced late Friday, is the latest to result from a lawsuit brought by Jon H. Oberg, a former Education Department researcher, on behalf of the federal government. A federal judge ordered Nelnet and seven other student-loan companies to participate in a settlement conference last week after two of the other defendants in the case, Brazos Higher Education Service Corporation and Brazos Higher Education Authority, reached a tentative settlement agreement with Mr. Oberg.

    Among the other defendants in the case is Sallie Mae, the nation's largest student-loan company. A year ago, the Education Department's inspector general issued an audit concluding that Sallie Mae overbilled the Education Department for $22.3-million in student-loan subsidies and should be required to return the money to the department.

    Continued in article

    Bob Jensen's fraud updates are at

    "Checklist for an Open CourseWare Semester," by Ethan Watrall, Chronicle of Higher Education,  August 19, 2010 ---

    For many of us, another semester is right around the corner. For those of us who adhere to an Open CourseWare (OCW) philosophy, it's a good time to evaluate (or re-evaluate) our personal OCW strategy. For those who are thinking about getting onboard with OCW, now is a perfect time to think about how best to go about getting in on the game. In the spirit of this, I would like to present a few items that should be on anyone's start of the semester OCW checklist—things that are best decided at the beginning of developing (or revamping) an open course. As is customary, this list is hardly exhaustive or comprehensive. It is simply the things that I think are important to think about. For a more comprehensive look at developing a personal OCW strategy (as opposed to a brief pre-semester checklist) have a look at my Developing a Personal Open Courseware Strategy post. That having been said, let's get to the checklist!

    What to Put Up?

    Different courses have different types of course materials (obviously). Some of the content you use in your course might not be appropriate for an open course. So, you need to make some decisions about what you are going to put up on the open course and what to leave out. There are practical considerations in play. If you want to include lecture audio on your open course, you need to make sure you have the ability (and equipment) to record and edit. You also need to make sure you record every lecture (as opposed to just recording two or three). If you want to include lecture slides, you need to make sure that they are standardized (in terms of format) and the series is complete. The bottom line is that when it comes to an open course, just make a logical (and practical) plan as to what you want to put up.

    Beyond the practical considerations, there are also copyright issues in play. Many classes rely on copyrighted materials. Should you include these materials in your open course? For instance, many of my classes have videos or video clips. It's always been a challenge for me to decide whether I should digitize these and put them online. My logic is that because many of the videos are vital to the class , leaving them out of the open course website makes the class seem somewhat incomplete (and therefore less useful as an actual open course). Despite new DMCA Exemptions, putting an entire digitized video online definitely falls into the "this sure as heck isn't fair use" and "wow, I'm probably going to get in trouble for this" categories. Many (including myself) have thought that putting videos behind password protection (setting one passwords for the class or hooking in to your university's authentication system) is a perfectly logical solution to treading in the unhappy land of copyright violation. Makes sense, right? By password protecting materials, you limit their access to just your students (as opposed to broadcasting them to the world). Well, this might still not be enough. Recently, the Association for Information and Media Equipment (an educational media trade group) threatened to sue UCLA, arguing that the streaming video which was behind the university's authentication still infringed on copyright. Despite the fact that UCLA asserted that they weren't in the wrong, they suspended the practice and are seeking to settle the matter out of court. The result is that faculty who assume that putting copyrighted video material behind some sort of university authentication will protect them (and the university) from nasty takedown letters and maybe even lawsuits probably need to rethink their strategy.

    Student Work, Public or Private?

    One of the most challenging questions (especially if your course website is the primary platform for class assignments) is whether or not student work should be open and accessible as well. On one hand, having student work (blog posts, wiki assignments, etc.) open and accessible is a great way to add depth to the class. On the other hand, putting student material online without their express permission is a major violation of FERPA. So, what to do? My solution is to ask each student at the beginning of the class if they want their work accessible to the public. If they don't object, cool. However, if they they have an issue, I simply agree to password protect their posts. I also tell students that if there are specific assignments that they want password protect, while leaving the rest of their material open and accessible, that's cool as well. The funny thing is that after years of doing this, I've never had a student who had a problem with their written assignments (mainly blogs and wikis) being completely open and forward facing.

    What is your Platform?

    In all honesty, this is a bit of a no-brainer. You can't create an open course without choosing the platform that you are going to use to serve the course. However, I think it's worth saying that it is very much in your best interest to make an informed choice ahead of the game as to the platform that works best for your needs. It's far better to do some research beforehand than to find yourself in the middle of the semester with a platform that doesn't meet your open course needs. Granted, if you've already chosen what content you are going to publish on your open course (and planned ahead) switching platforms shouldn't be too much work.

    Don't Forget the Creative Commons Language

    One of the key aspects of an open course is that it is published with some sort of open source license—the most logical and popular being a Creative Commons license. This ensures that your content is used in the way you deem appropriate (by attribution, non-commercially, etc.). There are a bunch of ways you could do this: as a footer on every page, as a paragraph in the "About" section of the class site, or by using one of the handy-dandy Creative Commons license badges.

    The Bottom Line

    As I said at the opening, this checklist is hardly comprehensive. The one theme (if you can have a theme with a four item checklist) is that planning ahead is a good thing. It'll save you grief and extra work down the line, and will ultimately ensure that your open course is more valuable and useful to your audience.

    Bob Jensen's threads on open courseware alternatives are at

    Teaching Case on Cost-Profit-Volume (CPV) Analysis

    From The Wall Street Journal Accounting Weekly Review on August 20, 2010

    Piece by Piece: The Suppliers Behind the New BlackBerry Torch Smartphone
    by: Jennifer Velentino-Devries and Phred Dvorak
    Aug 17, 2010
    Click here to view the full article on
    Click here to view the video on WSJ Video

    TOPICS: Cost Accounting, Cost-Volume-Profit Analysis, Managerial Accounting

    SUMMARY: The article was written based on analysis and component price estimates by research firm iSuppli after dismantling Blackberry's new Torch smartphone. The product was assembled in Mexico from parts made by at least 7 companies headquartered in the U.S., South Korea, the U.K., Germany, Japan, and Switzerland. Questions ask students to identify manufacturing cost components, determine gross profit, and consider what manufacturing costs are not separately identified when a company buys completed components for assembly.

    CLASSROOM APPLICATION: The article is appropriate for an introductory level managerial accounting class.

    1. (Introductory) What are the three components of cost for any manufactured product?

    2. (Introductory) What is the total cost of the components of the new BlackBerry Torch as estimated by iSuppli?

    3. (Advanced) Assuming that the cost shown in the article comprises all of the cost identified in your answer above, what is the gross profit earned on each sale of the Torch? What is the gross profit rate on this product? In your answer, define the difference between each of these amounts.

    4. (Advanced) What other costs might be included in the cost of selling this product beyond the component costs shown in this article? What other costs will Research in Motion (RIM) incur in selling this product that are never included in product cost? In your answer, define the terms period cost and product cost.

    5. (Introductory) View the video that is affiliated with this article. How many Torch smartphones were sold on the opening weekend for this product? What is the possible result of this sales level?

    6. (Introductory) According to the related video, what is the lowest price at which this new phone is offered? Recalculate the answers you gave to question 4 above based on this selling price.

    Reviewed By: Judy Beckman, University of Rhode Island

    "Piece by Piece: The Suppliers Behind the New BlackBerry Torch Smartphone," by: Jennifer Velentino-Devries and Phred Dvorak, The Wall Street Journal, August 17, 2010 ---

    Research In Motion Ltd.'s latest iPhone challenger, the BlackBerry Torch 9800, hasn't yet made a killing where it matters the most: at the cash register.

    Analysts say retail spot checks show sales of the Torch, which began in the U.S. at AT&T Inc. stores Thursday, have been unimpressive—particularly in comparison with other recent smartphone debuts.

    Analysts at RBC Capital Markets and Stifel Nicolaus both put weekend sales at around 150,000 phones. In comparison, Apple Inc. said it sold 1.7 million iPhone 4 units in the first three days. To be sure, many Torch sales will likely go to RIM's core business clients, who can be slower to adopt the latest models.

    RIM declined comment; AT&T didn't respond to requests for comment.

    The plodding start isn't great news for RIM, which is losing market share in the important North American market to snazzier rivals like the iPhone. The Torch, RIM's first phone with a touchscreen and slide-out keyboard, comes with revamped software and a faster Web browser, which address some of the complaints against previous BlackBerry models.

    But so far it's had a limited rollout: The Torch is only available—at least for now—through AT&T for $199.99, with a two-year service contract. RIM hasn't yet said when it will go on sale internationally or through other carriers.

    BlackBerry users could also be waiting to upgrade current phones with the new operating system, rather buying an entirely new phone, analysts say. The new software is set to roll out to existing devices in the coming months and promises to make it easier for developers to offer third-party applications. The platform also makes improvements in the way BlackBerry users can tap into social networks like Facebook and media from iTunes and Windows Media Player.

    Like other high-profile smartphones, the Torch has been disassembled by research firms to identify key components to help spot trends in the electronics industry. Two research firms, iSuppli and UBM TechInsights, concluded the new phone relies heavily on parts used in earlier RIM products. ISuppli said it was assembled for RIM in Mexico, though it didn't identify what company carried out that work.

    Experience WSJ professionalEditors' Deep Dive: Smartphone Rivals Face OffPC MAGAZINE Android Boosts Smartphone SalesThe Toronto Star The Curse of SuccessDow Jones International News Nokia N8 to Boost High-End CompetitivenessAccess thousands of business sources not available on the free web. Learn MoreISuppli estimated the total cost of the Torch's components at $171, plus $12 for manufacturing. The most expensive single part of the Torch, iSuppli said, is the display and touchscreen assembly, at an estimated cost of $34.85. The screen supplier was unknown. Memory chips, supplied by South Korea's Samsung Electronics Co., accounted for $34.25 of the Torch's component costs, the firm said.

    The chip that serves as the electronic brains of the Torch--and also provides so-called "baseband" functions to manage communications--was supplied by Marvell Technology Group Ltd., a company in Santa Clara, Calif., that primarily uses manufacturing services in Taiwan to build chips it designs. ISuppli put the price of that chip at $15.

    UBM TechInsights pointed out that the Marvell chip operates at a speed of 624 megahertz, where some high-end phones have chips that operate at 1 gigahertz--providing a substantial performance advantage.

    Bob Jensen's threads on management accounting are at

    August 11, 2010 message from Gerald Trites [gtrites@ZORBA.CA]

    Noted University of Toronto Accounting professor, Dr Gordon Richardson, has filed an expert witness report in a pending class action suit against the Canadian Imperial Bank of commerce, saying that the bank substantially overstated its profits in 2007 and 2008 by basing its estimates of risk on indefensible assumptions. The lawsuit is expected to go to court in March, 2011. A write-up on the submission is at 
    Dr Richardson recommended that the bank restate its income.

    "Subprime suit challenges CIBC accounting, by Jim Middlemis, Financial Post, August 10 ,2010 ---

    Canadian Imperial Bank of Commerce breached Canadian accounting standards by failing to properly disclose its exposure to subprime mortgages, according to expert testimony filed in Canada’s biggest lawsuit to stem from the credit crisis.

    Gordon Richardson, the KPMG professor of accounting at the Rotman School of Management in Toronto and a PhD, writes in his 65-page review of the bank’s subprime disclosure that “CIBC failed to comply with GAAP disclosure requirements … and the information provided to pertaining credit risk was, prior to December 6, 2007, wholly misleading to the market in general and to class members who invested in CIBC.”

    The lawsuit covers the period of May 31, 2007 to Feb. 28, 2008, a tumultuous period in the capital markets when credit started freezing up and investment firms scrambled to understand their exposure to subprime investments.

    Mr. Richardson said, “CIBC substantially overstated its income for the last three quarters of fiscal 2007 and the first quarter of 2008 and income for these periods should be restated in order to comply with GAAP.” The overstatement resulted from “indefensible assumptions” related to its hedge fund exposure.

    A second expert witness report from a noted securities valuation firm in the United States pegs CIBC investor losses at a maximum of $6.6-billion. The filings are made in preparation for the mammoth class-action suit, which is expected to come before the Ontario Superior Court for certification in March 2011.

    CIBC spokesman Rob McLeod said, “CIBC denies these allegations and plans to vigorously defend this action. CIBC is confident that, at all times, its conduct was appropriate and that its disclosure met applicable requirements.” The bank is expected to file its response by the end of August.

    Joel Rochon, who is representing Thornhill, Ont., investor Howard Green in the lawsuit, which was filed on July 22, 2008, declined to comment on the expert testimony reports.

    The lawsuit claims CIBC misrepresented the bank’s exposure to subprime investments and failed to implement appropriate risk-management controls related to billions of dollars in investments in collateralized debt obligations and U.S. subprime mortgages.

    A similar investor lawsuit in the United States covering CIBC disclosures between May 2007 to May 2008 was dismissed in March. Judge William Pauley of the Manhattan Federal Court wrote, “CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy [the] plaintiff enjoys in hindsight.”

    However, the laws between the two countries differ and CIBC is being sued in Canada under a new section of the Ontario Securities Act, which makes it easier for investors to sue corporations for misrepresentations. An investor class action against Imax Corp. over disclosure about the status of theatre construction was certified by an Ontario judge in February.

    Mr. Richardson’s extensive report examined CIBC’s exposure to various tranches of subprime residential mortgage-backed securities and collateralized debt obligations tied to subprime mortgages, including its hedged and unhedged position.

    He makes some damning conclusions.

    “In a nutshell, investors needed to be told by no later than April 30, 2007 that CIBC’s maximum exposure to credit risk was $11.4-billion. Instead CIBC misled its shareholders by remaining silent and by misstating and minimizing its exposure.” He writes that it wasn’t until Dec. 6, 2007 that the bank “stunned the investment community” and revealed the $11.4-billion exposure.

    He said based on the TABX and ABX indices, which tracked the value of credit default swaps tied to subprime mortgage bonds, the bank should have realized that its main $3.5-billion hedge with counterparty ACA Financial was in trouble. “CIBC had to have known that its hedge of $3.5-billion with ACA had collapsed by April 30, 2007 and by no later than July 2007.”

    He said that should have resulted in fair value writedowns of $769-million, $2.38-billion and $3.82-billion for the second and third quarters of fiscal 2007 versus the $273-million and $747-million hit the bank declared.

    He examined two other hedges involving XL Capital and FGIC Corp. and concluded that “CIBC should have recorded cumulative U.S. subprime fair value write downs between $6.54-billion and $6.95-billion by the end of the first [fiscal] quarter of 2008, rather than the $4.14-billion cumulative U.S. subprime write own it did take…. ”

    While the CIBC suit is one of the few pieces of subprime litigation in Canada, in the United States there have been more than 400 lawsuits filed in federal courts related to the credit crisis, according to NERA Economic consulting, which tracks such suits.

    Elaine Buckberg, a senior vice-president at NERA in New York, said her firm has identified 74 cases relating to collateral debt obligations, 10 of which were filed in 2010 and the others filed between 2007 and 2009. Overall, U.S. credit crisis lawsuits have resulted in US$2.1-billion in settlements involving a number of parties. Mortgage lender Countrywide Financial Corp. agreed to pay US$600-million to shareholders who accused it of misleading investors about its lending practices. Mortgage loan originator New Century Financial settled with investors for $125-million. Merrill Lynch settled its subprime litigation for $475-million. Charles Schwab paid out $225-million over allegations of misrepresentation related to one of its mutual funds.

    It isn’t the first investor class action CIBC has been at the centre of. In 2005, it settled a claim by Enron Corp. shareholders for US$2.4-billion.

    Read more:

    Ernst & Young LLP, Chartered Accountants, Toronto, Ontario, is the external auditor who prepared the Independent Auditors’ Reports to Shareholders - Report on Financial Statements and Report on Internal Control over Financial Reporting. Ernst & Young LLP is independent with respect to CIBC within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario, United States federal securities laws - 13 - and the rules and regulations thereunder, including the independence rules adopted by the United States Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002; and applicable independence requirements of the Public Company Accounting Oversight Board (United States).
    Annual Information Form, Canadian Imperial Bank of Commerce, December 4, 2008 ---

    Where Were the Auditors ---

    Bob Jensen's threads on Ernst & Young are at

    Lying CEOs:  Language May Hold Key To Knowing What Chiefs Have Accounting to Hide

    A Teaching Case from the Stanford Rock Center for Corporate Governance

    From The Wall Street Journal Accounting Weekly Review on August 20, 2010

    For Lying CEOs, 'Team,' Not 'I'
    by: Kyle Stock
    Aug 12, 2010
    Click here to view the full article on

    TOPICS: Accounting Changes and Error Corrections, Earning Announcements, Restatement

    SUMMARY: David Larcker and Anastasia Zakolyukina of Stanford Graduate School of Business and the Stanford Rock Center for Corporate Governance examined the psychological and linguistics components of investor conference calls by CEOs and CFOs of companies that later had to revise earnings results. "They fed their filter almost 30,000 transcripts of earnings conference calls from 2003 to 2007 and found that..." they could accurately predict subsequent earnings restatements about 50% to 65% of the time. The research paper is entitled "Detecting Deceptive Discussions in Conference Calls" and is available as paper #1572705 on the Social Science Research Network (SSRN) at The paper was last updated on July 29, 2010. The authors note in the abstract that their model is significantly better at detecting subsequent earnings restatements than are models based on discretionary accruals and traditional controls, a point not noted in the WSJ article.

    CLASSROOM APPLICATION: The article is useful to introduce students to the nature of accounting research in any financial reporting class covering earnings release topics.

    1. (Advanced) What are earnings restatements? What authoritative accounting literature requires restatements? Under what circumstances are such restatements required?

    2. (Advanced) What are earnings releases? What conference calls are associated with earnings releases?

    3. (Introductory) Summarize the basic points of the accounting research reported on in this newspaper article. Who conducted this research? What did they examine?

    4. (Advanced) Why do you think it is useful to be able to predict likely earnings restatements? Why might this result in the authors of this research "hearing from some hedge funds" as the author of this WSJ article states?

    Reviewed By: Judy Beckman, University of Rhode Island

    "For Lying CEOs, 'Team,' Not 'I," by: Kyle Stock, The Wall Street Journal, August 12, 2010 ---

    Conference call Q&As can be a confusing and cryptic dance. Executives try to put the most attractive case before investors, without giving away too much, of course. And in many cases, they are trying to put a good spin on bad results.

    But what if an investor could read right through all of the posturing and careful prose to recognize if they were being strung along?

    A pair of accounting professors at the Stanford Graduate School of Business and the Stanford Rock Center for Corporate Governance recently tried to do just that. The team built a model that tries to flush out executive, well, lies, using psychological and linguistic studies and transcripts of conference calls from companies that later restated earnings.

    They fed their filter almost 30,000 transcripts of earnings conference calls from 2003 to 2007 and found that it worked quite nicely. Executives who later had to revise their books displayed some very consistent clues.

    For one, they seldom referred to themselves or their companies in the first person; "I" and "we" were replaced by terms like "the team" and "the company." Deceitful executives passed up humdrum adjectives such as "solid" and "respectable" in favor of gushing words like "fantastic," and (not surprisingly) they seldom mentioned shareholder value.

    They also tended to buttress their points with references to general knowledge with phrases like "you know" and to make short statements with little hesitation, presumably because they had carefully scripted the untruths in advance and had no interest in lingering on them.

    Though the study doesn't call out particular companies, chiefs across a wide-range of industries raised the censor's red light 14% of the time. Those in the finance business proved slightly more honest than average, tagged for lying only 10% of the time. The study didn't specify the industry with the most dissembling.

    Finance chiefs, it appears, hold their cards a little closer to their chests. They spoke about half as much as their bosses, and, unlike chief executives, they showed no "positive emotions" via "brilliant" and "astounding" adjectives. Maybe they were busy picturing themselves in brilliant orange coveralls.

    The professors' model isn't perfect. It proved accurate enough to make predictions 50% to 65% of the time, in part because individual executives have unique ways of speaking that don't fall neatly into a pattern of deception.

    Still, big money has to like those odds. We bet that the authors of the study, David Larcker and Anastasia Zakolyukina, will be hearing from some hedge funds soon, if they haven't already.

    Bob Jensen's threads on creative accounting are at

    Bob Jensen's threads on corporate governance are at

    Paul Ekman video on how to read faces and detect lying ---
    This video runs for nearly one hour

    Paul Ekman ---

    Ekman's work on facial expressions had its starting point in the work of psychologist Silvan Tomkins.[Ekman showed that contrary to the belief of some anthropologists including Margaret Mead, facial expressions of emotion are not culturally determined, but universal across human cultures and thus biological in origin. Expressions he found to be universal included those indicating anger, disgust, fear, joy, sadness, and surprise. Findings on contempt are less clear, though there is at least some preliminary evidence that this emotion and its expression are universally recognized.]

    In a research project along with Dr. Maureen O'Sullivan, called the Wizards Project (previously named the Diogenes Project), Ekman reported on facial "microexpressions" which could be used to assist in lie detection. After testing a total of 15,000 [EDIT: This value conflicts with the 20,000 figure given in the article on Microexpressions] people from all walks of life, he found only 50 people that had the ability to spot deception without any formal training. These naturals are also known as "Truth Wizards", or wizards of deception detection from demeanor.

    He developed the Facial Action Coding System (FACS) to taxonomize every conceivable human facial expression. Ekman conducted and published research on a wide variety of topics in the general area of non-verbal behavior. His work on lying, for example, was not limited to the face, but also to observation of the rest of the body.

    In his profession he also uses verbal signs of lying. When interviewed about the Monica Lewinsky scandal, he mentioned that he could detect that former President Bill Clinton was lying because he used distancing language.

    Ekman has contributed much to the study of social aspects of lying, why we lie, and why we are often unconcerned with detecting lies. He is currently on the Editorial Board of Greater Good magazine, published by the Greater Good Science Center of the University of California, Berkeley. His contributions include the interpretation of scientific research into the roots of compassion, altruism, and peaceful human relationships. Ekman is also working with Computer Vision researcher Dimitris Metaxas on designing a visual lie-detector.

    Research Papers Worth Reading On Deceit, Body Language, Influence etc.. (with links to pdfs)

    Sixteen Enjoyable Emotions.(2003) Emotion Researcher, 18, 6-7. by Ekman, P

    “Become Versed in Reading Faces”. Entrepreneur, 26 March 2009. Ekman, P. (2009)
    Intoduction: Expression Of Emotion - In RJ Davidson, KR Scherer, & H.H. Goldsmith (Eds.) Handbook of Afective Sciences. Pp. 411-414.Keltner, D. & Ekman, P (2003)

    Facial Expression Of Emotion. – In M.Lewis and J Haviland-Jones (eds) Handbook of emotions, 2nd edition. Pp. 236-249. New York: Guilford Publications, Inc. Keltner, D. & Ekman, P. (2000)

    Emotional And Conversational Nonverbal Signals. – In L.Messing & R. Campbell (eds.) Gesture, Speech and Sign. Pp. 45-55. London: Oxford University Press.

    A Few Can Catch A Liar. - Psychological Science, 10, 263-266. Ekman, P., O’Sullivan, M., Frank, M. (1999)
    Deception, Lying And Demeanor.- In States of Mind: American and Post-Soviet Perspectives on Contemporary Issues in Psychology . D.F. Halpern and A.E.Voiskounsky (Eds.) Pp. 93-105. New York: Oxford University Press.

    Lying And Deception. – In N.L. Stein, P.A. Ornstein, B. Tversky & C. Brainerd (Eds.) Memory for everyday and emotional events. Hillsdale, NJ: Lawrence Erlbaum Associates, 333-347.

    Lies That Fail.- In M. Lewis & C. Saarni (Eds.) Lying and deception in everyday life. Pp. 184-200. New York: Guilford Press.

    Who Can Catch A Liar. -American Psychologist, 1991, 46, 913-120.
    Hazards In Detecting Deceit. In D. Raskin, (Ed.) Psychological Methods for Investigation and Evidence. New York: Springer. 1989. (pp 297-332)

    Self-Deception And Detection Of Misinformation. In J.S. Lockhard & D. L. Paulhus (Eds.) Self-Deception: An Adaptive Mechanism?. Englewood Cliffs, NJ: Prentice-Hall, 1988. Pp. 229- 257.

    Smiles When Lying. – Journal of Personality and Social Psychology, 1988, 54, 414-420.
    Felt- False- And Miserable Smiles.Ekman, P. & Friesen, W.V.

    Mistakes When Deceiving. Annals of the New York Academy of Sciences. 1981, 364, 269-278.

    Nonverbal Leakage And Clues To Deception Psychiatry, 1969, 32, 88-105.

    "You Can't Hide Your Lying Brain (or Can You?", by Tom Bartlett, Chronicle of Higher Education, May 6, 2010 ---

    Earlier this week Wired reported that a Brooklyn lawyer wanted to use fMRI brain scans to prove that his client was telling the truth. The case itself is an average employer-employee dispute, but using brains scans to tell whether someone is lying—which a few, small studies have suggested might be useful—would set a precedent for neuroscience in the courtroom. Plus, I'm pretty sure they did something like this on Star Trek once.

    But why go to all the trouble of scanning someone's brain when you can just count how many times the person blinks? A study published this month in Psychology, Crime & Law found that when people were lying they blinked significantly less than when they were telling the truth. The authors suggest that lying requires more thinking and that this increased cognitive load could account for the reduction in blinking.

    For the study, 13 participants "stole" an exam paper while 13 others did not. All 26 were questioned and the ones who had committed the mock theft blinked less when questioned about it than when questioned about other, unrelated issues. The innocent 13 didn't blink any more or less. Incidentally, the blinking was measured by electrodes, not observation.

    But the authors aren't arguing that the blink method should be used in the courtroom. In fact, they think it might not work. Because the stakes in the study were low--no one was going to get into any trouble--it's unclear whether the results would translate to, say, a murder investigation. Maybe you blink less when being questioned about a murder even if you're innocent, just because you would naturally be nervous. Or maybe you're guilty but your contacts are bothering you. Who knows?

    By the way, the lawyer's request to introduce the brain scanning evidence in court was rejected, but lawyers in another case plan to give it a shot later this month.

    (The abstract of the study, conducted by Sharon Leal and Aldert Vrij, can be found here. The company that administers the lie-detection brain scans is called Cephos and their confident slogan is "The Science Behind the Truth.")

    "The New Face of Emoticons:  Warping photos could help text-based communications become more expressive," by Duncan Graham-Rowe,  MIT's Technology Review, March 27, 2007 ---

    Computer scientists at the University of Pittsburgh have developed a way to make e-mails, instant messaging, and texts just a bit more personalized. Their software will allow people to use images of their own faces instead of the more traditional emoticons to communicate their mood. By automatically warping their facial features, people can use a photo to depict any one of a range of different animated emotional expressions, such as happy, sad, angry, or surprised.

    All that is needed is a single photo of the person, preferably with a neutral expression, says Xin Li, who developed the system, called Face Alive Icons. "The user can upload the image from their camera phone," he says. Then, by keying in familiar text symbols, such as ":)" for a smile, the user automatically contorts the face to reflect his or her desired expression.

    "Already, people use avatars on message boards and in other settings," says Sheryl Brahnam, an assistant professor of computer information systems at MissouriStateUniversity, in Springfield. In many respects, she says, this system bridges the gap between emoticons and avatars.

    This is not the first time that someone has tried to use photos in this way, says Li, who now works for Google in New York City. "But the traditional approach is to just send the image itself," he says. "The problem is, the size will be too big, particularly for low-bandwidth applications like PDAs and cell phones." Other approaches involve having to capture a different photo of the person for each unique emoticon, which only further increases the demand for bandwidth.

    Li's solution is not to send the picture each time it is used, but to store a profile of the face on the recipient device. This profile consists of a decomposition of the original photo. Every time the user sends an emoticon, the face is reassembled on the recipient's device in such a way as to show the appropriate expression.

    To make this possible, Li first created generic computational models for each type of expression. Working with Shi-Kuo Chang, a professor of computer science at the University of Pittsburgh, and Chieh-Chih Chang, at the Industrial Technology Research Institute, in Taiwan, Li created the models using a learning program to analyze the expressions in a database of facial expressions and extract features unique to each expression. Each of the resulting models acts like a set of instructions telling the program how to warp, or animate, a neutral face into each particular expression.

    Once the photo has been captured, the user has to click on key areas to help the program identify key features of the face. The program can then decompose the image into sets of features that change and those that will remain unaffected by the warping process.

    Finally, these "pieces" make up a profile that, although it has to be sent to each of a user's contacts, must only be sent once. This approach means that an unlimited number of expressions can be added to the system without increasing the file size or requiring any additional pictures to be taken.

    Li says that preliminary evaluations carried out on eight subjects viewing hundreds of faces showed that the warped expressions are easily identifiable. The results of the evaluations are published in the current edition of the Journal of Visual Languages and Computing.

    Continued in article

    Bob Jensen's threads on visualization are at

    September 18, 2010 message from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

    I am about to give expert evidence in a civil matter in respect to the failure or otherwise of a company to maintain proper records. In this particular matter the accountant, or accountants to be more precise, cobbled together a final set of financial statements that were wholly self-serving for the directors of the company. This entailed significant convolution and, I would say, corruption of accounting. This has been done shamelessly and I think that applies literally. The accountant, I surmise, doesn’t know that accounting is not to be manipulated for self serving ends. The lawyer is searching the (English speaking) globe for precedent. This is proving difficult.

    Simultaneously I am involved in another matter, criminal in nature, about which I am legally constrained from giving detail. However I think I can say that the case has a disturbing element to it. Four insolvency practitioners and three government agencies have raked over the embers of this particular fiasco all the while bemoaning the lack of records. I became involved and asked if there were any general ledgers. There were. They had existed all the time and were set out in complete detail yet no-one bothered to look at them!

    In a third matter I am the liquidator of a company to which a bank had appointed a receiver months before. The receiver is a chartered accountant of good reputation. When I asked for the accounting records initially the receiver and his lawyer attempted to block me. After a good deal of battering with the legal powers that fall to me I was provided with the records and a confession that reconciliations had not been prepared nor a general ledger from the time of appointment. The receiver’s lawyer’s argument was that it was ‘convention’ to fail to maintain proper records. I did point out that it is impossible to control receivables, for instance, without a proper records including a GL but that is what they attempted to do. The burden of fixing the records falls to me and what a profound mess it is, involving bizarre goings on with respect to GST (the NZ name for value added tax).

    I am see many such instances as these.

    I said to the lawyer in the first matter, partially in jest, that I seemed to be the only person in insolvency that cared about accounting records. He replied, in all seriousness, that was probably true. I have thought about that since and I fear he is correct. I have begun to have a fear that I am truly alone, a voice crying into a void. Something, seen from my perspective, is very badly broken.

    Given that I am right I think about the causes. Leaving aside the general lawlessness that prevails amongst accountants due to their adversarial stance to the State’s tax collectors, I believe there are two causes: the manner in which accountants are trained and the fragmentation of accounting due to standard setting.

    NZ follows an American model in which people who are to become accountants are ‘educated’ in Universities. There is minimal emphasis on double entry. Most of the courses are dedicated to theory, bullshit sociology, complex management accounting, auditing and so on. None of this makes any sense to a student if they first do not know the basics of accounting and that can only be gained by actually practicing the discipline. Large numbers of accountants, to use the term loosely, are produced who do not understand that the centrality of accounting is double-entry and the prime record is the general ledger. In NZ accountants insist on calling themselves ‘chartered accountants and business advisers’ as they are ashamed on being accountants alone. This disease began about the same time as the Cogitor travesty was perpetrated.

    What has happened with standards, whilst well intentioned (the road to hell probably), has resulted in fragmentation of a discipline that should be approached holistically. As the complexity grows inexorably, practitioners are being left behind. Indeed the current chairman of the government body which approves standards has spent 20 years trying to ensure that standards only apply to big government and big business. He wants to exclude SMEs, being closely held companies, from the scope altogether. I understand why he wants to do this, but he suffers from an ahistorical perspective. When limited liability was developed in Britain, from where we get our basic law, the notion of ‘true & fair’ was developed to ensure creditors were protected. T&F has been found, in judicial precedent, to equate to standards. Yet 150 years later we seek to sever the connection.

    Standards are replete with vast tracts of turgid wording much of it petty in the extreme. It is unrelated to the basic mechanisms of accounting. It is a feat of learning and memory to cover the whole scope. Practitioners dealing with small companies have long since abandoned the attempt to acquire the knowledge. Even those operating large, publicly accountable entities do not attempt to master it. In consequence accounting has no fulcrum upon which it pivots. There is no centre. It has become fragmented.

    Words are no substitute for numbers. Having spent 20 years attempting to put standards at the centre I have had a Pauline style conversion. I now believe that all that is necessary is a set of principles – the conceptual framework will do for this purpose. It should then be left to the accountant to express these principles in the mechanics of accounting. Standard setters should be reduced to providing arithmetic examples, at a high level, detailing how this should be done. That is the reason why I prefer FASB to IASB. At least FASB works out how economic events operate arithmetically before it writes its turgid, prolix nonsense. But even then it does not show how its schemes work in double entry. I recall many years ago working with FAS 90 (I think) in regard to acquired mortgages. There are examples but not expressed in double entry. They are of limited use thereby.

    In America the problem is compounded due to the fact that the most important issue in accounting, solvency determination, is left entirely to lawyers and courts. The disintegration is complete. I truly believe I am staring at something too awful to contemplate. Accounting created, or helped to create, the modern economic world. Yet in its time of crisis it is hopelessly ill-equipped to respond because it has so profoundly lost its way.

    These may be the delusions of a solitary raving lunatic simply reflecting the psychology of the aging – being the prospect of doom. But then I might be right.

    Jensen Comment
    Some of what Walker asserts is also asserted in the following:
    "Open the Andersen archives to find way out of today's mess," by Michael H. Granof and Stephen A. Zeff,  Houston Chronicle, April 6, 2002 --- Click Here and interviews/HoustonChronicle--article with Zeff on Andersen.htm

    September 19, 2010 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    I also would suggest the following article in the CPA Journal:

    Principles-Based Accounting It’s Not New, It’s Not the Rule, It’s the Law By Ronald M. Mano, Matthew Mouritsen, and Ryan Pace 
    There are a bunch of court cases that have made this crystal clear, my favourite being Herzfeld v. Laventhol,....

    One tidbit is the fact that Leonard Spacek, one of my heroes, was the president of the Kellogg Foundation when it gave Northwestern (where Arthur Andersen had taught) $10 million of its $40 million for its Business School.

    His profound sense of fairness and ethics is shown by the fact that even in the absence of any requirement under the AA partnership agreement, he arranged to pay annuity of around $600,000 to the widow of Arthur Andersen. See:

    Leonard Spacek: Ahead of His Time, Relevant Today By Frank Grippo

    CPA Journal is a tremendous resource, and probably one of the few in accounting I will read even after my retirement.

    Jagdish Gangolly (
    Department of Informatics College of Computing & Information
    State University of New York at Albany
    7A, Harriman Campus Road, Suite 220 Albany, NY 12206
    Phone: (518) 956-8251, Fax: (518) 956-8247


    Bob Jensen's threads on Enron are at

    Bob Jensen's Enron Quiz is at

    Accounting Basics: A Guest Post From Robert B. Walker," by Francine McKenna, re:The Auditor, September 21, 2010 ---

    Robert B Walker, Chartered Accountant is a sole practitioner undertaking insolvency work, in Wellington and Auckland New Zealand.

    Robert advises NZ Customs and Inland Revenue on credit control and debt collection. He has provided expert witness services, particularly with regard to the application of section 194 of the Companies Act.  He has advised a variety of Governments and NZ Government departments and agencies on application of financial reporting law, including the Government of Botswana, the Lesotho Revenue Authority and the National Bank of Georgia (that country’s central bank).

    Mr. Walker trained in London in a small firm, worked for Peat Marwick Mitchell & Co at the time of the financial revolution in the City.  He then worked in shipping and, on returning back in New Zealand, worked at the Bank of New Zealand as group accountant until it collapsed in the last recession.  He then went into audit in a small firm that, he told me, “…was crushed by predatory pricing and the depredations of the Auditor-General who subsequently went to prison!”

    He also audited solicitors’ trust accounts. “What a mess!” is his characterization of that period.

    He then went out on his own to specialize in financial reporting, following the enactment of a statute in that regard.  He attracted no business, sustained himself by working in Government (at the time of the bold experiment in government accounting) and then into insolvency where he tried to create the risk in financial reporting that was not present in the minds of my potential clients.  That is where he is today. I recommend going to his site and reading through some of the cases documented there.  It’s an interesting financial history of New Zealand during the past thirty years.

    A guest post from Robert  B. Walker:

    I am about to give expert evidence in a civil matter in respect to the failure or otherwise of a company to maintain proper records.  In this particular matter the accountant, or accountants to be more precise, cobbled together a final set of financial statements that were wholly self-serving for the directors of the company.  This entailed significant convolution and, I would say, corruption of accounting.  This has been done shamelessly and I think that applies literally.  The accountant, I surmise, doesn’t know that accounting is not to be manipulated for self-serving ends.  The lawyer is searching the (English speaking) globe for precedent.  This is proving difficult.

    Continued in article

    Jensen Comment
    Other messages from Robert Bruce Walker can be found by searching for "Walker" at

    "Fibbing With Numbers," by Steven Strogatz, The New York Times, September 19, 2010 ---

    Charles Seife is steaming mad about all the ways that numbers are being twisted to erode our democracy. We’re used to being lied to with words (“I am not a crook”; “I did not have sexual relations with that woman”). But numbers? They’re supposed to be cold, hard and objective. Numbers don’t lie, and they brook no argument. They’re the best kind of facts we have.

    And that’s precisely why they can be so powerfully, persuasively misleading, as Seife argues in his passionate new book, “Proofiness.” Seife, a veteran science writer who teaches journalism at New York University, examines the many ways that people fudge with numbers, sometimes just to sell more moisturizer but also to ruin our economy, rig our elections, convict the innocent and undercount the needy. Many of his stories would be darkly funny if they weren’t so infuriating.

    Although Seife never says so explicitly, the book’s title alludes to “truthiness” — the Word of the Year in 2005, according to the American Dialect Society, which defined it as “the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts known to be true.” The term was popularized by Stephen Colbert in the first episode of “The Colbert Report.” The numerical cousin of truthiness is proofiness: “the art of using bogus mathematical arguments to prove something that you know in your heart is true — even when it’s not.”

    . . .

    Falsifying numbers is the crudest form of proofiness. Seife lays out a rogues’ gallery of more subtle deceptions. “Potemkin numbers” are phony statistics based on erroneous or nonexistent calculations. Justice Antonin Scalia’s assertion that only 0.027 percent of convicted felons are wrongly imprisoned was a Potemkin number derived from a prosecutor’s back-of-the-envelope estimate; more careful studies suggest the rate might be between 3 and 5 percent.

    “Disestimation” involves ascribing too much meaning to a measurement, relative to the uncertainties and errors inherent in it. In the most provocative and detailed part of the book, Seife analyzes the recounting process in the astonishingly close 2008 Minnesota Senate race between Norm Coleman and Al Franken. The winner, he claims, should have been decided by a coin flip; anything else is disestimation, considering that the observed errors in counting the votes were always much larger than the number of votes (roughly 200 to 300) separating the two candidates.

    “Comparing apples and oranges” is another perennial favorite. The conservative Blue Dog Democrats indulged in it when they accused the Bush administration of borrowing more money from foreign governments in four years than had all the previous administrations in our nation’s history, combined. True enough, but only if one conveniently forgets to correct for inflation.

    Seife is evenhanded about exposing the proofiness on both sides of the political aisle, though we all know who’s responsible for a vast majority of it: the other side.

    He calls Al Gore to task for “cherry-picking” data about global warming. Although Seife doesn’t dispute that the warming is real and that human activities are to blame for a sizable portion of it, he chastises Gore for showing terrifying simulations of what would happen to Florida and Louisiana if sea levels were to rise by 20 feet, as could occur if the ice sheets in Greenland or West Antarctica were to melt almost completely. That possibility, while not out of the question, is generally considered an unlikely “very-worst-case” scenario, Seife writes.

    Meanwhile, the Bush administration committed a more insidious form of proofiness when it crowed, in 2004, that its tax cuts would save the average family $1,586. This is technically correct, but deliberately misleading — a trick that Seife calls “apple polishing.” (Again with the fruit!) The average is the wrong measure to use when a set of numbers contains extreme outliers — in this case, the whopping refunds received by a very few, very wealthy families. In such situations, the average is far from typical. That’s why, paradoxical as it might seem, most families received less than $650.

    In one of the book’s lighter moments, Seife even looks askance at the wholesome folks at Quaker Oats, who in addition to selling a “bland and relatively unappetizing product” once presented a graph that gave the visual impression that their “barely digestible oat fiber” was a “medicinal vacuum cleaner” that would reduce your cholesterol far more than it actually does. For the most part, though, he is deadly serious. A few other recent books have explored how easily we can be deceived — or deceive ourselves — with numbers. But “Proofiness” reveals the truly corrosive effects on a society awash in numerical mendacity. This is more than a math book; it’s an eye-opening civics lesson.

    Steven Strogatz is a professor of applied mathematics at Cornell and a contributor to the Opinionator blog on He is the author, most recently, of “The Calculus of Friendship.”

    Bob Jensen's threads on creative accounting ---

    Bob Jensen's Rotten to the Core threads are at

    Bob Jensen's threads on theory are at

    "Convicted CPA Bill Murray draws 19-year sentence," Sacramento News10, May 10, 2010 ---

    The prominent accountant who stole at least $13 million from more than 50 clients apologized to them moments before receiving one of the harshest sentences for white collar crime in recent memory in Sacramento federal court.

    William R. Murray, 56, was ordered by U.S. District Court Senior Judge Edward Garcia to serve 19 1/2 years in federal prison followed by three years of supervised release.

    Murray pleaded guilty in March to two mail fraud and tax charges for a long-running Ponzi scheme in which he converted clients' tax payments to his personal use and stole money they trusted him to invest.

    News10 first reported the massive fraud last November before criminal charges were filed. Murray, a former IRS agent, frequently appeared on News10 to discuss tax and investment strategies.

    Prior to Friday's sentencing, nine of Murray's victims described their losses to Garcia and implored him to impose the maximum sentence. One of the victims, Joyce Clifford, broke down in tears as she spoke of losing her home and life savings to Murray.

    "It's difficult to realize there can be such rotten people in this world," said Clifford, 78. "He betrayed an innocent elderly person who trusted him."

    One of the two criminal charges involved in the plea bargain was filed specifically for Clifford, and Murray's sentence was enhanced because of her age.

    Murray stood alongside attorney Donald Heller during the entire proceeding, which lasted more than an hour. Murray wore an orange jumpsuit issued by the Butte County Jail where he had been housed under contract by the U.S. Marshal. Although he wore a shackle around his waist, his hands were not cuffed.

    Other victims described how Murray had the ability to keep their trust even as the IRS was asking about missing tax payments.

    "He was like my brother. We broke bread together," said William Ames, an El Dorado Hills electrician and inventor who lost as much as $1 million to Murray.

    When asked by Garcia if he had anything to say before being sentenced, Murray offered the following apology but was quickly challenged by the judge.

    "I deeply regret it, and it's something I will live with the rest of my life. I'm sorry for my actions," Murray told Garcia, with his back to his victims.

    "This case calls out for an explanation," Garcia responded. "Why?"

    Murray: "I started with the intention of paying back the money."

    Continued in article

    "FD faces the music at London:  Philharmonic Former employee stole £645,000," by Pat Sweet , Accountancy Age, September 2, 2010 --- Click Here

    A former finance director at the London Philharmonic Orchestra (LPO) is facing jail for stealing £645,000 from the company.

    Australian accountant Cameron Poole forged signatures on company cheques and credit cards to embezzle cash which he then spent on holidays, designer clothes, art and jewellery, according to the Daily Mail .

    The fraud took place between January 2007 and November 2009. Poole hid the payments he was making to himself by making false entries on the orchestra's computerised accounting system.

    Poole claimed that money had been paid to IMG Artists, which manages singers and musicians, when in fact he used the cash to pay a building contractor. He was also in charge of running annual audits, and manipulated the figures to show the orchestra’s expenditure as far less than its revenue. The false information had an impact on LPO’s funding and grant applications.

    Cameron is currently paying off a £2.3m High Court order arising from a civil action brought by the orchestra in February.

    In a hearing at Southwark crown court, Poole admitted fraud by abuse of position and acquiring and using criminal property. He is due to be sentenced on 28 September, but the judge in the case warned the 'most likely outcome' would be a custodial sentence.

    Poole, an active member of his south London church, worked for consulting firm Accenture and a child poverty charity in Africa before moving to the orchestra.

    Bob Jensen's Fraud Updates ---

    "Inside Chiquita's 'painful' finance system overhaul:  The inside story of a problem-plagued financial system overhaul that just might work," by Robert L. Mitchell, Computer World, August 9, 2010 ---
    Thank you Glen Gray for the heads up.

    From PwC
    A Closer Look at the Dodd-Frank Act's impact on insurance companies ---
    Click Here

    US News ranking formulas of universities are "rejiggered" (Yawn)
    Yield fails to make it back into the formula

    "The Rankings, Rejiggered," by Eric Hoover , Chronicle of Higher Education, August 17, 2010 ---

    Bob Jensen's threads on the controversial media rankings of colleges and universities ---

    The Top Party School is the University of ______________________? 

    The Most Sober School is ________________ University?

    Answers --- Click Here

    While the World Implodes, Let’s Bicker About Accounting Program Rankings," by Caleb Newquist, Going Concern, May 6, 2010 ---

    "Blackboard Earns Certification for Accessibility to Blind Students," Inside Higher Ed, August 13, 2010 ---

    The National Federation of the Blind Thursday gave Blackboard, the e-learning giant, its top accessibility certification. Blackboard is the first learning-management company to earn the certification, although federation spokesman Chris Danielsen says the group had not tested all of Blackboard's competitors. Given that learning-management systems are so critical to modern education, it started working with Blackboard; the company was able to make a number of accessibility improvements in its latest version, released in the spring. Since Blackboard is by far the biggest player in the learning-management market, the federation's stamp of approval represents a big step for the visually impaired in an age when such online tools have become crucial even to brick-and-mortar institutions, Danielsen says.

    Bob Jensen's threads on technology aids for handicapped learners ---

    Bob Jensen's threads on Blackboard ---

    From The Wall Street Journal Accounting Weekly Review on September 3, 2010

    The Decline of the P/E Ratio
    by: Ben Levisohn
    Aug 30, 2010
    Click here to view the full article on
    Click here to view the video on WSJ Video

    TOPICS: Analysts' Forecasts, Financial Statement Analysis, Forecasting

    SUMMARY: "While U.S. companies announced record profits during the second quarter, and beat forecasts by a comfortable 10% margin, on average, the stock market has dropped 5%. Based on trailing 12-month earnings, the average price earnings (P/E) ratio in the overall market is about 14.9 compared to 23.1 in September 2009; "based on profit expectations over the next 12 months, the P/E ratio has fallen to 12.2 from about 14.5 in May, 2010." The reason for this divergence is, of course, economic uncertainty that is not evident in the (average) point estimates of earnings nor in the relatively good earnings numbers of both the first and second calendar quarters of 2010. The related article is a WSJ graphic of earnings per share actual compared to average analyst estimates, by industry and by week.

    CLASSROOM APPLICATION: The article is useful to show the need for understanding context of ratios in undertaking financial statement analysis. It also demonstrates that ratios can be measured in more than one way, such as the use of past earnings or analysts' average forecasts. The related article can be used to introduce students to analysts' earnings forecasts.

    1. (Introductory) Define the price earnings ratio (P/E) and explain its meaning.

    2. (Introductory) What two methods of measuring P/E are described in the article? Why do you think both are used?

    3. (Introductory) Refer to the related article. How are analysts' estimates used in this WSJ graphic analysis? In your answer, also describe who are the analysts producing these estimates.

    4. (Advanced) How did companies perform relative to analysts' estimates in the second calendar quarter of 2010?

    5. (Advanced) What has happened to the P/E ratio? Why does the author say the P/E has fallen in relevance? Do you agree with that assessment?

    6. (Introductory) What other evidence in the article corroborates the issues in the recent fall in the average P/E ratio?

    Reviewed By: Judy Beckman, University of Rhode Island

    Now Reporting: Earnings
    Aug 01, 2010
    Online Exclusive

    "The Decline of the P/E Ratio," by: Ben Levisohn, The Wall Street Journal, August 30, 2010 ---

    As investors fixate on the global forces whipsawing the markets, one fundamental measure of stock-market value, the price/earnings ratio, is shrinking in size and importance.

    And the diminution might not stop for a while.

    The P/E ratio, thrust into prominence during the 1930s by value investors Benjamin Graham and David Dodd, measures the amount of money investors are paying for a company's earnings. Typically, companies that post strong earnings growth enjoy richer stock prices and fatter P/E ratios than those that don't.

    But while U.S. companies announced record profits during the second quarter, and beat forecasts by a comfortable 10% margin, on average, the stock market has dropped 5% this month.

    The stock market's average price/earnings ratio, meanwhile, is in free fall, having plunged about 36% during the past year, the largest 12-month decline since 2003. It now stands at about 14.9, compared with 23.1 last September, based on trailing 12-month earnings results. Based on profit expectations over the next 12 months, the P/E ratio has fallen to 12.2 from about 14.5 in May.

    So what explains the contraction? In short, economic uncertainty. A steady procession of bad news, from the European financial crisis to fears of deflation in the U.S., has prompted analysts to cut profit forecasts for 2011.

    "The market is worrying not just about a slowdown, but worse," said Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets in New York. "People want clarity before they make a decision with their money."

    Three months ago, analysts expected the companies in the Standard & Poor's 500-stock index to boost profits 18% in 2011. Now, they predict 15%. Mutual-fund, hedge-fund and other money managers put the increase at closer to 9%, according to a recent Citigroup survey, while Mr. Levkovich's estimate is for 7% growth.

    "The sustainability of earnings is in doubt," said Howard Silverblatt, an index analyst at S&P in New York. "Estimates are still optimistic."

    Equally troublesome, analysts' forecasts are becoming scattered. In May, the range between the highest and lowest analyst forecasts of S&P 500 earnings per share in 2011 was $12. Morgan Stanley predicted $85 per share, while UBS predicted $97 per share. Now, the spread is $15. Barclays said $80 per share; Deutsche Bank predicts $95.

    When profit forecasts are tightly clustered, it signals to investors that there is consensus among prognosticators; when they diverge wildly, it shows a lack of clarity. The P/E ratio tends to fall as uncertainty rises, and vice versa.

    "A stock is worth its future earnings, but that involves uncertainty," said Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School. "The more uncertainty there is, the lower the P/E will be."

    Not only is the P/E ratio dropping, it also is in danger of losing some of its prominence as a market gauge.

    That is because, with profit and economic forecasts becoming less reliable, investors are focusing more on global economic events as they make trading decisions, parsing everything from Japanese government-debt statistics to shipping patterns in the Baltic region.

    To some extent this is in keeping with historical patterns. P/E ratios often shrink in size and significance during periods of uncertainty as investors focus on broader economic themes.

    P/E ratios fell sharply during the Depression of the 1930s and again after World War II, bottoming at 5.90 in 1949. They plunged again during the 1970s, touching 6.97 in 1974 and 6.68 in 1980. During those periods, global events sometimes took precedence over company-specific valuation considerations in the minds of investors.

    There have been periods when the P/E ratio was much more in vogue. A century ago, the buying and selling of stocks was widely considered to be a form of gambling. P/E ratios came about as a way to quantify the true value of a company's shares. The creation of the Securities and Exchange Commission during the 1930s made financial information more available to investors, and P/E ratios gained widespread acceptance in the decades that followed.

    But thanks to the recent shift toward rapid-fire stock trading, the P/E ratio may be losing its relevance. The emergence of exchange-traded funds in the past 10 years has allowed investors to make broad bets on entire baskets of stocks. And the ascendance of computer-driven trading is making macroeconomic data and trading patterns more important drivers of market action than fundamental analysis of individual companies, even during periods of relative calm.

    So where is the P/E ratio headed in the short term? A few optimists think it could rise from here. If corporate borrowing costs remain at record lows and stock prices remain depressed, companies will start issuing debt to buy back shares, said David Bianco, chief U.S. equity strategist for Bank of America Merrill Lynch. As a result, earnings per share would increase, he said, even if profit growth remains sluggish, and P/E ratios could jump with them.

    But today's economic uncertainty argues against that scenario. Consider that while P/E ratios dropped during the inflationary 1970s, they also fell during the deflationary 1930s. The one common thread tying those two eras of falling P/E ratios: unpredictable economic performance.

    "We're looking at a more volatile U.S. economy than we experienced in the last 30 years," said Doug Cliggott, U.S. equity strategist at Credit Suisse in Boston. "The pressure on multiples may be with us for quite some time."

    September 8, 2010 reply from John Briggs, John  [briggsjw@JMU.EDU]

    I saw this article and didn't quite "get" it...the title at least.

    Of course the P/E ratio is still relevant.

    My favorite site for this is, where a guy provides a daily look at the Shiller ("Irrational Exuberance") 10-year P/E...10 years of data instead of 1.  It's currently 20.  It used to be 45.  Indeed, 45 was a bubble.

    Right now, you would think 16 would be appropriate, but extremely low interest rates argue for higher (in comparison to investing in bonds), but economic uncertainly argues for lower.

    So I'd make the case that this metric should be around 16 right now...20 indicates to me that stocks are slightly overvalued.

    The only time the P/E ratio really was ignored was in 2000, it seems to me.  I'm glad I had no money then.

    Bob Jensen's bookmarks for financial ratios ---
    Also see

    Bob Jensen's threads on valuation are at


    "Goldman's Settlement with the SEC, and the Fragile Future of the Fabulous Fab," by Jim Peterson, Re:Balance, August 11, 2010 --- Click Here

    Bob Jensen's threads on Goldman are at

    "How to Start Tweeting (and Why You Might Want To)," by Ryan Cordell, Chronicle of Higher Education, August 11, 2010 ---

    Bob Jensen's threads on Twitter and Social Networking ---


    You're a 19 year old kid.
     You're critically wounded and dying in the jungle somewhere in the Central Highlands of Viet Nam .

    It's November 11, 1967.
     LZ (landing zone) X-ray. Your unit is outnumbered 8-1 and the enemy fire is so intense, from 100 yards away, that your CO (commanding officer) has ordered the MedEvac helicopters to stop coming in.

    You're lying there, listening to the enemy machine guns and you
    know you're not getting out.  Your family is half way around the world, 12,000 miles away, and you'll never see them again.  As the world starts to fade in and out, you know this is the day.

    Then - over the machine gun noise - you faintly hear the sound of a
    helicopter.  You look up to see a Huey coming in. But ... It doesn't seem real because no MedEvac markings are on it.

    Captain Ed Freeman is coming in for you.

    He's not MedEvac so it's not his job, but he heard the radio call and
    decided he's flying his Huey down into the machine gun fire anyway.  Even after the MedEvacs were ordered not to come. He's coming anyway.

    And he drops it in and sits there in the machine gun fire, as they load
    3 of you at a time on board.  Then he flies you up and out through the gunfire to the doctors and nurses and safety.

    And, he kept coming back!! 13 more times!!
     Until all the wounded were out. No one knew until the mission was over that the Captain had been hit 4 times in the legs and left arm.   He took 29 of you and your buddies out that day. Some would not have made it without the Captain and his Huey.

    Medal of Honor Recipient, Captain Ed Freeman, United States Air Force, died last Wednesday at the age of 70, in Boise, Idaho .

    May God Bless and Rest His Soul.


    "Information Overload Is Nothing New From the Roman Empire to the BlackBerry jam," by Peggy Noonan, The Wall Street Journal, August 20, 2010 ---

    It's high summer and we're all out there seeing each other. We're not hidden away in our homes and offices as we are in winter's cold. We're part of a crowd—on the street, in the park, on the boardwalk, on the top deck of the ferry to Saltaire. And we can see in some new or clearer ways how technology is changing us.

    For one thing, it is changing our posture. People who used to walk along the avenues of New York staring alertly ahead, or looking up, now walk along with their heads down, shoulders slumped, checking their email and text messages. They're not watching where they're going, and frequently bump into each other. I'm told this is called a BlackBerry jam.

    A lot of people seem here but not here. They're pecking away on a piece of plastic; they've withdrawn from the immediate reality around them and set up temporary camp in a reality that exists in their heads. It involves their own music, their own conversation, whether written or oral. This contributes to the new obliviousness, to the young woman who steps off the curb unaware that the police car with blaring siren is barreling down the street.

    In the street café, as soon as they've ordered, people scroll down for their email. Everyone who constantly checks is looking for different things. They are looking for connection, information. They are attempting to alleviate anxiety: "If I know what's going on I can master it." They are making plans. But mostly, one way or another, I think they are looking for a love pellet. I thought of you. How are you? This will make you laugh. Don't break this chain. FYI, because you're part of the team, the endeavor, the group, my life. Meet your new nephew—here's the sonogram. You will like this YouTube clip. You will like this joke. You are alive.

    We are surrounded by screens. Much of their impact is benign, but not all. This summer I turned a number of times—every time I did, a chapter seemed to speak specifically to something on my mind—to the calm and profound "Hamlet's BlackBerry" by William Powers. It is a book whose subject is how to build a good life in the digital age.

    Mr. Powers is not against the screens around us. We use digital devices "to nurture relationships, to feed our emotional, social, and spiritual hungers, to think creatively and express ourselves." At their best they produce moments that make life worth living. "If you've written an e-mail straight from the heart, watched a video that you couldn't stop thinking about, or read an online essay that changed how you think about the world, you know this is true." But he has real reservations about what digital devices are at their worst—an addiction to distraction, a way not of connecting but disconnecting.

    In a chapter on Seneca, he finds timeless advice.

    Lucius Annaeus Seneca was born at the time of Christ in Cordoba, Spain, an outpost of the Roman Empire. His father was an official in the Roman government, and Seneca followed his footsteps, becoming a Roman senator and, later, adviser to Nero in the early (and more successful) days of his reign. Seneca was a gifted manager and bureaucrat, but he is remembered today because he was an inveterate letter writer, and his correspondence contained thoughts, insights and convictions that revealed him to be a serious philosopher.

    Seneca thought the great job of philosophy was to offer people practical advice on how to live more deeply and constructively. He came of age in a time of tumult; the Rome he lived in was being transformed by a new connectedness. An empire that stretched over millions of square miles was being connected by new roads, a civil service, an extensive postal system. And there was the rise of written communication. Writing, says Mr. Powers, was a huge part of the everyday lives of literate Romans: "Postal deliveries were important events, as urgently monitored as e-mail is today." Seneca himself wrote of his neighbors hurrying "from all directions" to meet the latest mail boats from Egypt.

    As written language began to drive things, Mr. Powers says, "the busy Roman was constantly navigating crowds—not just the physical ones that filled the streets and amphitheaters but the virtual crowd of the larger empire and the torrents of information it produced."

    Seneca, at the center of it all, struggled with the information glut, and with something else. He became acutely conscious of "the danger of allowing others—not just friends and colleagues, but the masses—to exert too much influence on one's thinking." The more connected a society becomes, the greater the chance an individual can become a creature, or even slave, of that connectedness.

    "You ask me what you should consider it particularly important to avoid," one of Seneca's letters begins. "My answer is this: a mass crowd. It is something to which you cannot entrust yourself without risk. . . . I never come back home with quite the same moral character I went out with; something or other becomes unsettled where I had achieved internal peace."

    Seneca's advice: Cultivate self-sufficiency and autonomy. Trust your own instincts and ideas. You can thrive in the crowd if you are not dependent on it.

    But this is not easy.

    Everyone Seneca knew was busy and important, rushing about with what he called "the restless energy of the hunted mind." Some traveled to flee their worries and burdens but found, as the old joke says, "No matter where I go, there I am." Stress is portable. Seneca: "The man who spends his time choosing one resort after another in a hunt for peace and quiet, will in every place he visits find something to prevent him from relaxing."

    Even in Seneca's time, Mr. Powers notes, "the busy, crowd-induced state of mind had gone mobile." "Today we ask, 'Does this hotel have Wi-Fi?'"

    And there was the way people consumed information. The empire was awash in texts. "Elite, literate Romans were discovering the great paradox of information: the more of it that's available, the harder it is to be truly knowledgeable. It was impossible to process it all in a thoughtful way." People, Seneca observed, grazed and skimmed, absorbing information "in the mere passing." But it is better to know one great thinker deeply than dozens superficially.

    Seneca, Mr. Powers observes, could have been writing in this century, "when it's hard to think of anything that isn't done in 'mere passing,' and much of life is beginning to resemble a plant that never puts down roots."

    There are two paths. One is to surrender, to allow the crowd to lead you around by the nose and your experience to become ever more shallow. The other is to step back and pare down. "Measure your life," advises Seneca, "it just does not have room for so much."

    Beware, in Mr. Powers's words, "self-created bustle." Stop checking your inbox 10 times a day, or an hour. Once will do. Concentrate on your higher, more serious purpose. Enrich your own experience. Don't be a slave to technology.

    Which is good mid-August wisdom for us all. Focus on central things, quiet the mind, unplug a little, or a lot. And watch out for those crowds, both the ones that cause BlackBerry jams and the ones that unsettle, that attempt to stampede you into going along, or following. Step back, or aside. Think what you think, not what they think. Everyone is trying to push. Don't be pushed.

    Bob Jensen's threads on the dark side of technology ---

    Getting Brassy With Clients
    "Re-Branding at PricewaterhouseCoopers -- OMG, It's Like Totally Awesome!," by Jim Peterson, re:Balance, September 16, 2010 ---


    Humor Between August 1 and September 30, 2010

    Humor is an important but sensitive issue in education and learning and politics and everyday life

    Psychology of Humor: I never thought the Three Stooges Were Funny (What does that say about me?)
    I'm not sending the following out as a political message. It does, however, discuss some serious research on the psychology of humor

    "Political Stooges:  A new study of humor could spell trouble for Rand Paul," by James Taranto, The Wall Street Journal, August 12, 2010 ---

    Two lonely "psychological scientists" have been hard at work trying to understand this peculiar human phenomenon called "humor," the Association for Psychological Science tells us in a press release.

    It turns out, for example, that the idea of the late Jimmy Dean hiring a rabbi as a spokesman for a new line of pork products is "more likely to make the reader laugh" than the idea of Dean hiring a farmer for the same job. That's because "having a rabbi promote pork" is a "moral violation," per Leviticus 11:7:

    And the pig, though it has a split hoof completely divided, does not chew the cud; it is unclean for you.

    Haha, get it?! The other characteristic that makes humor "funny" is benignity, which explains the Three Stooges. From the press release:

    "We laugh when Moe hits Larry because we know that Larry's not really being hurt," says [the University of Colorado's A. Peter] McGraw, referring to humorous slapstick. "It's a violation of social norms. You don't hit people, especially a friend. But it's okay because it's not real."

    One should not underestimate the importance of this scientific advance, which builds on earlier work by "a research team led by Dr. Allan L. Reiss of the Stanford University School of Medicine," which was reported by the Associated Press in 2005:

    They were surprised when their studies of how the male and female brains react to humor showed that women were more analytical in their response, and felt more pleasure when they decided something really was funny.
    "Women appeared to have less expectation of a reward, which in this case was the punch line of the cartoon," said Reiss. "So when they got to the joke's punch line, they were more pleased about it."
    Women were subjecting humor to more analysis with the aim of determining if it was indeed funny, Reiss said in a telephone interview.
    Men are using the same network in the brain, but less so, he said, men are less discriminating.
    "It doesn't take a lot of analytical machinery to think someone getting poked in the eye is funny," he commented when asked about humor like the Three Stooges.

    And of course it's a commonplace that women don't get the Stooges. But imagine a DVD release of their greatest hits, accompanied by analysis from A. Peter McGraw. The ladies would love it, and the gents would be grateful for the chance to find common ground with the opposite sex.

    Continued in article

    "People Think Immoral Behavior Is Funny -- But Only If It Also Seems Benign,"  ScienceDaily (Aug. 9, 2010) ---

    August 12, 2010 reply from Zane Swanson [ZSwanson@UCO.EDU]

    As I am preparing syllabi for the fall, I am reviewing the WSJ accounting subject cartoons that are placed on the projector before class starts. When the cartoon is removed, it is the signal that serious learning is to begin. Unless I missed them, there were no funny WSJ accounting cartoons during this summer or the year for that matter. If anyone has some recent accounting cartoons to share, I would appreciate it.

    Zane Swanson

    August 12, 2010 reply from Bob Jensen

    Hi Zane,

    I prefer cartoons from The New Yorker, but there are serious copyright issues with cartoons in general and especially The New Yorker’s cartoons. Some of them are really funny ---

    Enter the word “accounting” in the search box.

    Bob Jensen's threads on humor are added to the bottom of every edition of New Bookmarks

    Accounting Humor ---

    Forwarded by Col. Booth

    To the Guy Who Tried to Mug Me In Downtown Savannah night before last.
    Date: 2009-05-27, 1 :43 a.m. E.S.T.

    I was the guy wearing the black Burberry jacket that you demanded that I hand over, shortly after you pulled the knife on me and my girlfriend, threatening our lives. You also asked for my girlfriend's purse and earrings. I can only hope that you somehow come across this rather important message. First, I'd like to apologize for your embarrassment; I didn't expect you to actually crap in your pants when I drew my pistol after you took my jacket..

    The evening was not that cold, and I was wearing the jacket for a reason.. My girlfriend had just bought me that Kimber Model 1911 ...45 ACP pistol for my birthday, and we had picked up a shoulder holster for it that very evening. Obviously you agree that it is a very intimidating weapon when pointed at your head ... isn't it?!

    I know it probably wasn't fun walking back to wherever you'd come from with that brown sludge in your pants. I'm sure it was even worse walking bare-footed since I made you leave your shoes, cell phone, and wallet with me. [That prevented you from calling or running to your buddies to come help mug us again].

    After I called your mother or "Momma" as you had her listed in your cell, I explained the entire episode of what you'd done. Then I went and filled up my gas tank as well as those of four other people in the gas station, -- on your credit card. The guy with the big motor home took 150 gallons and was extremely grateful!

    I gave your shoes to a homeless guy outside Vinnie Van Go Go's, along with all the cash in your wallet. [That made his day!] I then threw your wallet into the big pink "pimp mobile" that was parked at the curb ... after I broke the windshield and side window and keyed the entire driver's side of the car.

    Later, I called a bunch of phone sex numbers from your cell phone. Ma Bell just now shut down the line, although I only used the phone for a little over a day now, so what 's going on with that? Earlier, I managed to get in two threatening phone calls to the DA's office and one to the FBI, while mentioning President Obama as my possible target. The FBI guy seemed really intense and we had a nice long chat (I guess while he traced your number etc.).

    In a way, perhaps I should apologize for not killing you . but I feel this type of retribution is a far more appropriate punishment for your threatened crime.. I wish you well as you try to sort through some of these rather immediate pressing issues, and can only hope that you have the opportunity to reflect upon, and perhaps reconsider, the career path you've chosen to pursue in life. Remember, next time you might not be so lucky.

    Have a good day!
     Thoughtfully yours,

    Forwarded by Maureen

     The teenage granddaughter comes downstairs for her date with this  see-through blouse on and no bra. Her grandmother just pitched a fit,  telling her not to dare go out like that!  

    The teenager tells her "Loosen up Grams. These are modern times. You  gotta let your rosebuds show!" and out she goes.  

    The next day the teenager comes downstairs, and the grandmother is  sitting there with no top on. The teenager wants to die. She explains to  her grandmother that she has friends coming over and that it is just not  appropriate...  

    The grandmother says, "Loosen up, Sweetie. If you can show off your  rosebuds, then I can display my hanging baskets."

    Forwarded by Paula






    Sort a brings a tear to your eye, don't it?

    Forwarded by Paula

    Old Sea Story

    There's an old sea story in the Navy about a ship's Captain who inspected his sailors, and afterward told the Chief Boatswain that his men smelled bad. The Captain suggested perhaps it would help if the sailors would change underwear occasionally. The Chief responded, "Aye, aye sir, I'll see to it immediately!" The Chief went straight to the sailors berth deck and announced, "The Captain thinks you guys smell bad and wants you to change your underwear." He continued, "Pittman, you change with Jones, McCarthy, you change with Witkowski, and Brown, you change with Schultz. Now, GET TO IT!"

    THE MORAL OF THE STORY IS: Someone may come along and promise "Change", but don't count on things smelling any better.

    Jensen Comment
    I first heard this story (in the context of gold miners) in the Malamute Saloon in Fairbanks, Alaska courtesy of our host Tom Robinson. In the Malamute Saloon the sawdust and peanut shells on the floor are almost ankle deep. The temperature outside the saloon can be as much as 20 degrees colder in winter than at the top of the cliff above the saloon.

    Forwarded by Paula

    I am passing  this on to you because it definitely worked for me and we all could use more calm in our lives. 
    By following the simple advice I heard on a Medical TV show, I have finally found inner peace. 
    A Doctor proclaimed the way to achieve inner peace

     is to finish all the things you have started. 
    So I looked around my house to see things I'd started

     and  hadn't finished,

    and, before leaving the house this morning,

    I finished off a bottle of Merlot,

    a bottle of shhhardonay,

    a bodle of Baileys,

    a  butle of vocka,

    a pockage of Prunglies,

    tha mainder of botal Prozic and  Valum scriptins,

    the res of the Chesescke an a box a choclits. 
    Yu haf no idr hou fkin gud I feal. 
    Peas sen dis orn to dem yu fee AR in ned ov inr  pis

    Forwarded by Dick Haar,

    In the dead of summer a fly was resting on a leaf beside a lake. A hot, dry fly who said to no one in particular, "Gosh, if I go down three inches, I will feel the mist from the water and I will be refreshed."

    There was a fish in the water thinking, "Gosh, if that fly goes down three inches I can eat him."

    There was a bear on the shore thinking, "Gosh, if that fly goes down three inches, that fish will jump for the fly, and I will eat him."

    It also happened that a hunter was farther up the bank of the lake preparing to eat a cheese sandwich. "Gosh," he thought, "if that fly goes down three inches, and that fish leaps for it, that bear will expose himself and grab for the fish. I'll shoot the bear and then have a proper trophy."

    You probably think this is enough activity for one bank of a lake, but I can tell you there was more.

    A wee mouse by the hunter's foot was thinking, "Gosh, if that fly goes down three inches, and that fish jumps for that fly, and that bear grabs for that fish, the dumb hunter will shoot the bear and drop his cheese sandwich."

    A cat lurking in the bushes took in this scene and thought, as was fashionable to do on the banks of this particular lake around lunch time, "Gosh, if that fly goes down three inches, and that fish jumps for that fly, and that bear grabs for that fish, and that hunter shoots that bear, and that mouse makes off with the cheese sandwich, then I can have mouse for lunch."

    The poor fly is finally so hot and so dry that he heads down for the cooling mist of the water, The fish swallows the fly, The bear grabs the fish, The hunter shoots the bear, The mouse grabs the cheese sandwich, The cat jumps for the mouse, The mouse ducks, and The cat falls into the water and drowns.

    This is a bit like when a researcher has a seminal discovery that pushes the knowledge bound three inches.


    Forwarded by Auntie Bev

    Ask Why 
    l Like Retirement !!!

      How many days in a week?  
      6 Saturdays, 1 Sunday.

      When is a retiree's bedtime?  
      Three hours after he falls asleep on the couch.  

      How many retirees to change a light bulb?  
      Only one, but it might take all day. 

      What's the biggest gripe of retirees?  
      There is not enough time to get everything done. 

      Why don't retirees mind being called Seniors?  
      The term comes with a 10% discount. 

      Among retirees what is considered formal attire?  
      Tied shoes. 

      Why do retirees count pennies?  
      They are the only ones who have the time.  

    Question:  What is the common term for someone who enjoys work and refuses to retire? 

    Question:  Why are retirees so slow to clean out the basement, attic or garage? 
      They know that as soon as they do, one of their adult kids will want to store stuff there. 

      What do retirees call a long lunch?  
        Normal . 

      What is the best way to describe retirement?  
      The never ending Coffee Break. 

      What's the biggest advantage of going back to school as a retiree? 
      If you cut classes, no one calls your parents.

      Why does a retiree often say he doesn't miss work, but misses the people he used to work with? 
      He is too polite to tell the whole truth.  

    And, my very favorite....

      What do you do all week?  
      Monday through Friday, NOTHING..... Saturday & Sunday, I rest. 



    Reporters interviewing a 104-year-old woman:
    'And what do you think is the best thing
    about being 104?' the reporter asked.  
    She simply replied, 'No peer pressure.'


    The nice thing about being senile is
    you can hide your own Easter eggs.


    I've sure gotten old! 
    I've had two bypass surgeries, a hip replacement,
    new knees, fought prostate cancer and diabetes.
    I'm half blind,
    can't hear anything quieter than a jet engine,
    take 40 different medications that 
    make me dizzy, winded, and subject to blackouts. 
    Have bouts with dementia. 
    Have poor circulation; 
    hardly feel my hands and feet anymore. 
    Can't remember if I'm 85 or 92. 
    Have lost all my friends. But, thank God, 
    I still have my driver's license.

    I feel like my body has gotten totally out of shape,
    so I got my doctor's permission to
    join a fitness club and start exercising.
    I decided to take an aerobics class for seniors.
    I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, 
    by the time I got my leotards on,
    the class was over.

    An elderly woman decided to prepare her will and
    told her preacher she had two final requests.
    First, she wanted to be cremated, and second,
    she wanted her ashes scattered over 
    'Wal-Mart?' the preacher exclaimed. 
    'Why Wal-Mart?'  
    'Then I'll be sure my daughters visit me twice a week'

    My memory's not as sharp as it used to be.
    Also, my memory's not as sharp as it used to be.

    Know how to prevent sagging?
    Just eat till the wrinkles fill out.

    It's scary when you start making the same noises
    as your coffee maker.

    These days about half the stuff
    in my shopping cart says,
    'For fast relief.'

    Grant me the senility to forget the people
    I never liked anyway,
    the good fortune to run into the ones I do, and
    the eyesight to tell the difference.

    Forwarded by Auntie Bev

    It's just pension sex

    Two men were talking. 'So, how's your sex life?' 'Oh, nothing special. I'm having Pension sex.' 'Pension sex?' 'Yeah, you know; I get a little each month, but not enough to live on!'


    LOUD SEX A wife went in to see a therapist and said, 'I've got a big problem, doctor. Every time we're in bed and my husband climaxes, He lets out this ear splitting yell.'

    'My dear,' the shrink said, 'that's completely natural. I don't see what the problem is.' 'The problem is,' she complained, 'it wakes me up!'


    QUIET SEX Tired of a listless sex life, the man came right out and asked his wife During a recent lovemaking session, 'How come you never tell me when you have an orgasm?' She glanced at him and replied, 'You're never home!'


    CONFOUNDED SEX A man was in a terrible accident, and his 'manhood' was mangled and torn from his body. His doctor assured him that modern medicine could give him back his manhood, but that his insurance wouldn't cover the surgery since it was considered cosmetic. The doctor said the cost would be $3,500 for 'small, $6,500 for 'medium, and $14,000 for 'large.'

    The man was sure he would want a medium or large, but the doctor urged him To talk it over with his wife before he made any decision. The man called his wife on the phone and explained their options. The doctor came back into the room, and found the man looking dejected.

    'Well, what have the two of you decided?' asked the doctor.

    'She'd rather remodel the kitchen.'



    A husband and his wife had a bitter quarrel on the day of their 40th wedding anniversary The husband yelled, 'When you die, I'm getting You a headstone that reads: 'Here Lies My Wife - Cold As Ever'.'

    'Yeah,' she replies, 'when you die, I'm getting you a headstone that reads: 'Here Lies My Husband - Stiff At Last.' '



    My husband came home with a tube of K Y jelly and said, 'This will make you happy tonight.' He was right. When he went out of the bedroom, I squirted it all over the doorknobs. He couldn't get back in.



    One night, an 87 year-old woman came home from Bingo and found Her 92 year-old husband in bed with another woman. She became violent and ended up pushing him off the balcony Of their 20th floor, assisted living apartment, killing him instantly.

    Brought before the court on the charge of murder, The judge asked her if she had anything to say in her defense. She began coolly, 'Yes, your honor. I figured that at 92, if he could have sex... He could also fly.'

    Forwarded by Paula

    Catholic Rituals

    To my Catholic friends and others:

    SHHHH...his information is for Catholics only.  It must not be divulged to non-Catholics.
    The less they know about our rituals and top secret code words, the better off they are.

    AMEN: The only part of a prayer that everyone knows.

    BULLETIN: Your receipt for attending Mass.

    CHOIR: A group of people whose singing allows the rest of the Parish to lip-sync.

    HOLY WATER: A liquid whose chemical formula is H2OLY.

    HYMN: A song of praise usually sung in a key three octaves higher than that of the congregation' s range.

    RECESSIONAL HYMN: The last song at Mass often sung a little more quietly, since most of the people have already left.

    INCENSE: Holy Smoke!

    JESUITS: An order of priests known for their ability to find colleges with good basketball teams.

    JONAH: The original 'Jaws' story.

    JUSTICE: When kids have kids of their own.


    KYRIE ELEISON: The only Greek words that most Catholics can recognize besides gyros and baklava. (for you non-Catholics it means Lord have mercy)

    MAGI: The most famous trio to attend a baby shower.

    MANGER: Where Mary gave birth to Jesus because Joseph wasn't covered by an HMO. (The Bible's way of showing us that holiday travel has always been rough.)

    PEW: A medieval torture device still found in Catholic churches.

    PROCESSION: The ceremonial formation at the beginning of Mass consisting of altar servers, the celebrant, and late parishioners looking for seats.

    RECESSIONAL: The ceremonial procession at the conclusion of Mass led by parishioners trying to beat the crowd to the parking lot.

    RELICS: People who have been going to Mass for so long, they actually know when to sit, kneel, and stand.

    USHERS: The only people in the parish who don't know the seating capacity of a pew.

    LITTLE KNOWN FACTS about the Catholic Church in Las Vegas  :

    There are more churches in LasVegas than casinos.  During Sunday services at the offertory, some worshippers contribute casino chips as opposed to cash.  Some are sharing their winnings - some are hoping to win.  Since they get chips from so many different casinos, and they are worth money, the Catholic churches are required to send all the chips into the diocese for sorting.  Once sorted into the respective casino chips, one junior priest takes the chips and makes the rounds to the casinos turning chips into cash.  And he, of course, is known as The Chip Monk.

    Forwarded by Maureen

    He Said To Me!

    He said to me
    Shall we try swapping positions tonight?
    I said .. That's a good idea - you stand by the stove & sink while I sit on the sofa and do nothing but fart

    He said to me
    What have you been doing with all the grocery money I gave you?
    I said to him . ..... Turn sideways and look in the mirror!

    He said to me. .
    Why is it difficult to find men who are sensitive, caring and Good- looking?
    I said to him . . . They already have boyfriends.

    He said...
    What do you call a woman who knows where her husband is every night?
    I said. . .. A widow.

    He said to me....
    Why are married women heavier than single women?
    I said to him .. . .. Single women come home, see what's in the fridge and go to bed. Married women come home, see what's in bed and go to the fridge.


    Forwarded by Col.. Booth

    A nice, calm and respectable lady went into the pharmacy, walked up to the pharmacist, looked straight into his eyes, and said, "I would like to buy some cyanide."

    The pharmacist asked, "Why in the world do you need cyanide?"

    The lady replied, "I need it to poison my husband."

    The pharmacist's eyes got big and he explained, "Lord have mercy! I can't give you cyanide to kill your husband, that's against the law? I'll lose my license! They'll throw both of us in jail! All kinds of bad things will happen. Absolutely not! You CANNOT have any cyanide! Why don't you just get a divorce?"

    The lady reached into her purse and pulled out a picture of her husband in bed with the pharmacist's wife.

    The pharmacist looked at the picture and replied, "You didn't tell me you had a prescription.".

    Forwarded by Paula (oldies but goodies)

    Comprehending Accountants - Take One

    Two accountancy students were  walking across campus when one said, "Where did you get such a great  bike?"
    The second student replied, "Well, I was walking along  yesterday minding my own business when a beautiful woman rode up on this  bike.
    She threw the bike to the ground, took off all her clothes and said, "Take what you want."
    The first student nodded approvingly,  "Good choice; the clothes probably wouldn't have  fit."

    Comprehending Accountants - Take Two

    An architect, an  artist and an accountant were discussing whether it was better to spend time  with the wife or a mistress.
    The architect said he enjoyed time with his  wife, building a solid foundation for an enduring relationship.
    The artist  said he enjoyed time with his mistress, because of the passion and mystery he  found there.
    The accountant said, "I like both."


    The accountant replied "Yeah. If you have a wife and a mistress, they  will each assume you are spending time with the other woman, and you can go  to the office and get some work done."

    Comprehending Accountants  - Take Three

    To the optimist, the glass is half full.
    To the  pessimist, the glass is half empty.
    To the accountant, the glass is twice as  big as it needs to be.

    Comprehending Accountants - Take Four

    "An Accountant and His Frog"
    An accountant was crossing a  road one day when a frog called out to him and said, "If you kiss me, I'll turn into a beautiful  princess".
    He bent over, picked up the  frog and put it in his pocket.
    The frog spoke up again and said, "If you  kiss me and turn me back into a beautiful  princess, I will stay with you for one week". The accountant took the  frog out of his pocket, smiled at it and returned it to the pocket.
    The  frog then cried out, "If you kiss me and turn me back into princess,
    I'll stay with you and do  ANYTHING you want." Again the accountant took the frog out, smiled at it and put it back into his pocket.
    Finally,  the frog asked, "What is the matter? I've told you I'm a beautiful princess, that I'll stay with you and do anything you want.
    Why won't you kiss me?"
    The accountant said,  "Look I'm an accountant. I don't have time for a girlfriend, but a  talking frog, now that's cool."

    Comprehending Accountants - Take  Five

    A businessman was interviewing applicants for the position  of Divisional Manager. He devised a simple  test to select the most suitable person for the job. He asked each applicant the question, "What is two and two"?
    The first interviewee was a journalist. His answer was  "twenty-two."

    The second applicant was an engineer. He pulled out a  calculator and showed the answer to be between 3.999999 and 4.000001.

    The  next person was a lawyer. He stated that in the case of Jenkins v. Commr of  Stamp Duties (Qld), two and two was proven to be four.

    The last applicant was  an accountant. The business man asked him, "How much is two and two?" The accountant got up from his chair, went  over to the door, closed it then came back  and sat down. He leaned across the desk and said in a low voice, "How much do you want it to be?" He got the job.
    What's the definition of an  accountant?
    Someone who solves a problem you didn't know you had in a way  you don't
    What's the definition of a good tax  accountant?
    Someone who has a loophole named after  him.
    When does a person decide to become an  accountant?
    When he realizes he doesn't have the charisma to succeed as  an undertaker.
    What does an accountant use for birth  control?
    His personality.
    What's an extroverted  accountant?
    One who looks at your shoes while he's talking to you instead of  his own.
    What's an auditor?
    Someone who arrives after  the battle and bayonets all the wounded.
    Why did the auditor  cross the road?
    Because he looked in the file and that's what they did last  year.
    There are three kinds of accountants in the  world.
    Those who can count, and those who can't.
    How do  you drive an accountant completely insane?
    Tie him to a chair, stand in front  of him and fold up a roadmap the wrong
    What's the most wicked thing a group of young  accountants can do?
    Go into town and gang-audit  someone.
    What do accountants suffer from that ordinary  people don't?
    An accountant is having a  hard time sleeping and goes to see his doctor.
    "Doctor, I just can't  get to sleep at night."
    "Have you tried counting  sheep?"
    "That's the problem - I make a mistake and then spend  three hours trying to find  it."

    From Maxine

    MY LIVING WILL Last night, my kids and I were sitting in the living room and I said to them, 'I never want to live in a vegetative state, dependent on some machine and fluids from a bottle. If that ever happens, just pull the plug.'

    They got up, unplugged the Computer, and threw out my wine.

    They are SO on my shit list ...

    1. My husband and I divorced over religious differences. He thought he was God and I didn't.

    2. I don't suffer from insanity; I enjoy every minute of it.

    3. Some people are alive only because it's illegal to kill them.

    4. I used to have a handle on life,but it broke .

    5. Don't take life too seriously; No one gets out alive.

    6. You're just jealous because the voices only talk to me

    7. Beauty is in the eye of the beer holder .

    8. Earth is the insane asylum for the universe .

    9. I'm not a complete idiot -- Some parts are just missing.

    10. Out of my mind. Back in five minutes .

    11. NyQuil, the stuffy, sneezy, why-the-heck-is-the-room-spinning medicine.

    12. God must love stupid people; He made so many.

    13. The gene pool could use a little chlorine.

    14. Consciousness: That annoying time between naps.

    15. Ever stop to think, and forget to start again?

    16. Being 'over the hill' is much better than being under it!

    17. Wrinkled Was Not One of the Things I Wanted to Be When I Grew up .

    18 . Procrastinate Now!

    19. I Have a Degree in Liberal Arts; Do You Want Fries With That?

    20. A hangover is the wrath of grapes.

    21. A journey of a thousand miles begins with a cash advance.

    22. Stupidity is not a handicap. Park elsewhere!

    23. They call it PMS because Mad Cow Disease was already taken .

    24 . He who dies with the most toys is nonetheless DEAD.

    25. A picture is worth a thousand words, but it uses up three thousand times the memory.

    26 . Ham and eggs... A day's work for a chicken, a lifetime commitment for a pig. (how true)

    27. The trouble with life is there's no background music .

    28. The original point and click interface was a Smith & Wesson.

    29. I smile because I don't know what the hell is going on .

    Appreciate every single thing you have, especially your friends! Life is too short and friends are too few !

    Forwarded by Paula

    Enjoy a good 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: Are you sexually active?
    WITNESS: No, I just lie there.
    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: Do you know if your daughter has ever been involved in voodoo?
    WITNESS: We both do.
    ATTORNEY: Voodoo?
    WITNESS: We do.
    ATTORNEY: You do?
    WITNESS: Yes, voodoo.
    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 sh--ting 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 20, 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: 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.  

    10 Ways to Know You Were Born to Be an Accountant ---
    Thanks to Scott Bonacker for the heads up.

    Some Yugo Humor Extended to Higher Ed ---  

    Forwarded by Auntie Bev

    George Bush, Queen Elizabeth, and Vladimir Putin all die and go to hell. While there, they spy a red phone and ask what the phone is for. The devil tells them it is for calling back to Earth.

    Putin asks to call Russia and talks for 5 minutes.

    When he is finished the devil informs him that the cost is a million dollars, so Putin writes him a check. Next Queen Elizabeth calls England and talks for 30 minutes. When she is finished the devil informs her that the cost is 6 million dollars, so she writes him a check.

    Finally George Bush gets his turn and talks for 4 hours. When he is finished the devil informs him that the cost is $5.00. When Putin hears this he goes ballistic and asks the devil why Bush got to call the USA so cheaply.

    The devil smiles and replies: "Since Obama took over, the country has gone to hell, so it's a local call."

    Forwarded by Col. Booth

    A blonde teenager, wanting to earn some extra money for the summer, decided to hire  herself out as a "handy-woman" and started canvassing a nearby well-to-do neighborhood. She  went to the front door of the first house, and asked the homeowner if he had any  odd jobs she could do.
     "Well, I guess I could use somebody to paint my porch," he said, "How much will you charge me?"
     Delighted, the girl quickly responded, "How about $50?"
     The man quickly agreed and told her that the paint brushes and everything she would need was in the garage. The man's wife, hearing the conversation said to her husband, "Does she realize that our porch goes ALL the way around the house?"

    He responded, "That's a bit cynical, isn't it?"
     The wife replied, "You're right. I guess I'm starting to believe all those  dumb blonde jokes we've been getting by email lately."
     Later that day, the blonde teenager came to the door to collect her money.
     "You finished already?" the startled husband asked.
     "Yes, she replied, and I even had paint left over, so I gave it two coats."
     Suitably impressed, the man reached into his pocket for the $50.00 and handed it to her along with a $10.00 tip.
     "And by the way, "the blonde teenager added, "it's not a Porch, it's a Lexus.

    Forwarded by Paula

    *Two prostitutes were riding around town with a sign on top of their car which said: Two Prostitutes - $50.00.

    A policeman, seeing the sign, stopped them and told them they'd either have to remove the sign or go to jail. Just at that time, another car passed with a sign saying: 'JESUS SAVES.' One of the girls asked the officer, 'How come you don't stop them?!' 'Well, that's a little different,' the officer smiled, 'Their sign pertains to religion.' The following day the same police officer noticed the same two hookers driving around with a large sign on their car. He figured he had an easy arrest until he read their new sign:

    "Two Fallen Angels Seeking Peter --$50"

    Forwarded by Paula

    A cowboy appeared before St. Peter at the Pearly Gates. 'Have you ever done anything of particular merit?' St. Peter asked.

    'Well, I can think of one thing,' the cowboy offered. ‘On a trip to the Black Hills out in South Dakota, I came upon a gang of bikers who were threatening a young woman. I directed them to leave her alone, but they wouldn't listen. So, I approached the largest and most tattooed biker and smacked him in the face, kicked his bike over, ripped out his nose ring, and threw it on the ground. I yelled, 'Now, back off or I'll kick the shit out of all of you!' St. Peter was impressed, 'When did this happen?'

    'Couple of minutes ago.'

    Forwarded by Maureen

    One day Gerry decided to retire...

    He booked himself on a Caribbean cruise and proceeded to have the time of his life, that is, until the ship sank.  He soon found himself on an island with no other people, no supplies, nothing, only bananas and coconuts.

    After about four months, he is lying on the beach one day when the most gorgeous woman he has ever seen rows up to the shore. In disbelief, he asks, "Where did you come from? How did you get here?"

    She replies, "I rowed over from the other side of the island where I landed when my cruise ship sank."

    "Amazing," he notes. "You were really lucky to have a row boat wash up with you."

    "Oh, this thing?" explains the woman. "I made the boat out of some raw material I found on the island. The oars were whittled from gum tree branches. I wove the bottom from palm tree branches, and the sides and stern came from a Eucalyptus tree."

    "But, where did you get the tools?"

    "Oh, that was no problem," replied the woman. "On the south side of

    the island, a very unusual stratum of alluvial rock is exposed. I found that if I fired it to a certain temperature in my kiln, it melted into ductile iron I used that to make tools and used the tools to make the hardware."

    The guy is stunned.

    "Let's row over to my place," she says. So, after a short time of rowing, she soon docks the boat at a small wharf. As the man looks to shore, he nearly falls off the boat. Before him is a long stone walk leading to an exquisite bungalow painted in blue and white. While the woman ties up the rowboat with an expertly woven hemp rope, the man can only stare ahead, dumb struck.  As they walk into the house, she says casually, "It's not much, but I call it home. Sit down, please."

    "Would you like a drink?"

    "No!  No thank you," the man blurts out, still dazed.  "I can't take another drop of coconut juice."

    "It's not coconut juice," winks the woman.. "I have a still.  How would you like a Pina Colada?"

    Trying to hide his continued amazement, the man accepts, and they sit down on her couch to talk. After they exchange their individual survival stories, the woman announces, "I'm going to slip into something more comfortable.  Would you like to take a shower and shave?  There's a razor in the bathroom cabinet upstairs."

    No longer questioning anything, the man goes upstairs into the bathroom.  There, in the cabinet is a razor made from a piece of tortoise bone.  Two shells honed to a hollow ground edge are fastened on to its end inside a swivel mechanism.

    "This woman is amazing," he muses.  "What's next?"  When he returns, she greets him wearing nothing but some small flowers on tiny vines, each strategically positioned, she smelled faintly of gardenias.  She then beckons for him to sit down next to her.

    "Tell me," she begins suggestively, slithering closer to him, "We've both been out here for many months.  You must have been lonely. There's something I'm certain you feel like doing right now, something you've been longing for, right?" She stares into his eyes..

    He can't believe what he's hearing. "You mean..." he swallows excitedly as tears start to form in his eyes, "You've built a Golf Course?"


    Forwarded by Paula

    A blonde was weed-eating her yard and accidentally cut off the tail of her cat which was hiding in the grass.

    She rushed her cat, along with the tail, over to WAL-MART!

    Why WAL-MART??


    WAL-MART is the largest re-tailer in the world!!!

    Forwarded by Gene and Joan

    While creating Husbands, God promised Women that good and ideal Husbands would be found in all corners of the world.

    And then God made the earth round.

    Forwarded by Paula


    The Fasting & Prayer Conference includes meals.
    ------------ --------- -----
    The sermon this morning: 'Jesus Walks on the Water.' The sermon
    tonight: 'Searching for Jesus.'
    ------------ --------- -----
    Ladies, don't forget the rummage sale. It's a chance to get rid of
    those things not worth keeping around the house. Bring your husbands.
    ----------- --------- -----
    Remember in prayer the many who are sick of our community. Smile at
    someone who is hard to love. Say 'Hell' to someone who doesn't care
    much about you.
    ------------ --------- -----
    Don't let worry kill you off - let the Church help.
    ------------ --------- -----
    Miss Charlene Mason sang 'I will not pass this way again,' giving
    obvious pleasure to the congregation.
    ------------ --------- -----
    For those of you who have children and don't know it, we have a nursery
    ------------ --------- -----
    Next Thursday there will be tryouts for the choir. They need all the
    help they can get.
    ------------ --------- -----
    Irving Benson and Jessie Carter were married on October 24 in the
    church. So ends a friendship that began in their school days..
    ------------ --------- -----
    A bean supper will be held on Tuesday evening in the church hall. Music
    will follow.
    ------------ --------- -----
    At the evening service tonight, the sermon topic will be 'What Is
    Hell?' Come early and listen to our choir practice.
    ------------ --------- -----
    Eight new choir robes are currently needed due to the addition of
    several new members and to the deterioration of some older ones.
    ------------ --------- -----
    Scouts are saving aluminum cans, bottles and other items to be
    recycled. Proceeds will be used to cripple children.
    ------------ --------- -----
    Please place your donation in the envelope along with the deceased
    person you want remembered.
    ------------ --------- -----
    The church will host an evening of fine dining, super entertainment and
    gracious hostility.
    ------------ --------- -----
    Potluck supper Sunday at 5:00 PM - prayer and medication to follow.
    ------------ --------- -----
    The ladies of the Church have cast off clothing of every kind. They may
    be seen in the basement on Friday afternoon.
    ------------ --------- ---- -
    This evening at 7 PM there will be a hymn singing in the park across
    from the Church. Bring a blanket and come prepared to sin.
    ------------ --------- -----
    Ladies Bible Study will be held Thursday morning at 10 AM. All ladies
    are invited to lunch in the Fellowship Hall after the B. S. is done.
    ------------ --------- -----
    The pastor would appreciate it if the ladies of the Congregation would
    lend him their electric girdles for the pancake breakfast next Sunday.
    ------------ --------- -----
    Low Self Esteem Support Group will meet Thursday at 7 PM.. Please use
    the back door.
    ------------- --------- ----
    The eighth-graders will be presenting Shakespeare' s Hamlet in the
    Church basement Friday at 7 PM. The congregation is invited to attend
    this tragedy.
    ------------ --------- -----
    Weight Watchers will meet at 7 PM at the First Presbyterian Church.
    Please use large double door at the side entrance.
    ------------ --------- -----
    and the best for last:

    The Associate Minister unveiled the church's new campaign slogan last
    Sunday: "I Upped My Pledge - Up Yours."


    Forwarded by Gene and Joan

    Absolutely Brilliant!

    The European Commission has just announced an agreement whereby English will be the official language of the European Union rather than German, which was the other possibility. 

    As part of the negotiations, the British Government conceded that English spelling had some room for improvement and has accepted a 5- year phase-in plan that would become known as "Euro-English". 

    In the first year, "s" will replace the soft "c".. Sertainly, this will make the sivil servants jump with joy. The hard "c" will be dropped in favour of "k". This should klear up konfusion, and keyboards kan have one less letter.

    There will be growing publik
     enthusiasm in the sekond year when the troublesome "ph" will be replaced with "f".. This will make words like fotograf 20% shorter. 

    In the 3rd year, publik akseptanse of the new spelling kan be expekted to reach the stage where more komplikated changes are possible. 

    Governments will enkourage the removal of double letters which have always ben a deterent to akurate speling. 

    Also, al wil agre that the horibl mes of the silent "e" in the languag is disgrasful and it should go away. 

    By the 4th yer people wil be reseptiv to steps such as replasing "th" with "z" and "w" with "v". 

    During ze fifz yer, ze unesesary "o" kan be dropd from vords 
    kontaining "ou" and after ziz fifz yer, ve vil hav a reil sensi bl riten styl. 

    Zer vil be no mor trubl or difikultis and evrivun vil find it ezi TU understand ech oza. Ze drem of a united urop vil finali kum tru. 

    Und efter ze fifz yer, ve vil al be speking German like zey vunted in ze forst plas. 

    If zis mad you smil, pleas pas on to oza pepl.


    Forwarded by Paula

     So, there's this yellow toad wandering around in the forest kinda pissed off because he doesn't want to be yellow.

    Life would be easier if he were brown like the other toads... He'd sure be less visible to predators for one thing. Anyway... This yellow toad bumps into a fairy godmother. "Fairy godmother, please make me brown like the other toads," begs her. "I'm hacked off being so visible to predators. The stress is like, killing me, you know?" "Okay" says the fairy godmother, who whips out her magic wand and goes "Abracapokus! You're brown!" The toad looks down and sees that he is brown ! Except..... for his weenie, which is still yellow.

    "Hang about lady," he says to the fairy godmother, "My pecker's still yellow!"

    "Yeah, well I don't do weenies," she says, "You'll have to go see the Wizard of Oz for that." So the toad thanks her and hops off on his way. There is also a purple bear wandering about the very same woods. As luck would have it, he encounters the very same fairy godmother (yes okay it's a coincidence, but it's true).

    "Fairy Godmother! You're just the person I need!" says the purple bear, "I can't pull any bearesses cos they don't want to be seen with me on account of the hunters. They can spot me from a mile off." Being a fairly nice fairy godmother, she takes out her magic wand. "Oh for goodness sake, what is the matter with you lot round here." she says. And with that, she yells: "Pokuscadabra! You're brown!" The bear looks down and sees that he is, in fact, brown. Except for his goolies, which remain purple.

    "Hold up sweetheart!", he says to the fairy godmother, "My goolies are still purple!" "Yeah, well I don't do those goolie things," she replies, "You'll have to go see the Wizard of Oz for that." "Well that's just dandy, innit?" the bear replies, "How the hell do I find the Wizard of Oz?" "Easy," says the fairy godmother as she flew off...........

    you know what's coming don't you ?

    you'll be sorry you ever gave me your email address after this...

    she flew off, saying........

    "Just follow the yellow-dick toad !! "


    Video forwarded by Auntie Bev
    Obama at Bat (humor, sort of) --- 

    Humor Between December 1-31, 2010 ---
    Humor Between November 1-30, 2010 --- 
    Humor Between October 1-31, 2010 ---  

    Humor Between August 1 and Sept. 30, 2010 --- 

    Humor Between June 1 and July 31, 2010 ---

    Humor Between June 1 and June 30, 2010 ---

    Humor Between May 1 and May 31, 2010 ---

    Humor Between April 1 and April 30, 2010 ---  

    Humor Between March 1 and March 31, 2010 ---  

    Humor Between February 1 and February 28, 2010 --- 

    Humor Between January 1 and January 31, 2010 ---



    And that's the way it was on September 30 2010 with a little help from my friends.

    Bob Jensen's gateway to millions of other blogs and social/professional networks ---

    Bob Jensen's Threads ---

    Bob Jensen's Blogs ---
    Current and past editions of my newsletter called New Bookmarks ---
    Current and past editions of my newsletter called Tidbits ---
    Current and past editions of my newsletter called Fraud Updates ---
    Bob Jensen's past presentations and lectures ---   

    Free Online Textbooks, Videos, and Tutorials ---
    Free Tutorials in Various Disciplines ---
    Edutainment and Learning Games ---
    Open Sharing Courses ---

    Bob Jensen's Resume ---

    Bob Jensen's Homepage ---


    Concerns That Academic Accounting Research is Out of Touch With Reality

    I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)

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


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


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

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


    What went wrong in accounting/accountics research? 
    How did academic accounting research become a pseudo science?


    What has the academy provided that's truly relevant to equity asset management in practice?

    "Economists’ Hubris – The Case of Equity Asset Management," Shahin Shojai, George Feiger, and Rajesh Kumar, SSRN, April 29, 2010 ---

    In this, the fourth article in the economists’ hubris paper series we look at the contributions of academic thought to the field of asset management. We find that while the theoretical aspects of the modern portfolio theory are valuable they offer little insight into how the asset management industry actually operates, how its executives are compensated, and how their performances are measured. We find that very few, if any, portfolio managers look for the efficiency frontier in their asset allocation processes, mainly because it is almost impossible to locate in reality, and base their decisions on a combination of gut feelings and analyst recommendations. We also find that the performance evaluation methodologies used are simply unable to provide investors with the necessary tools to compare portfolio managers’ performances in any meaningful way. We suggest a novel way of evaluating manager performance which compares a manager against himself, as suggested by Lord Myners. Using the concept of inertia, an asset manager’s end of period performance is compared to the performance of their portfolio assuming their initial portfolio had been held, without transactions, during this period. We believe that this will provide clients with a more reliable performance comparison tool and might prevent unnecessary trading of portfolios. Finally, given that the performance evaluation models simply fail in practice, we suggest that accusing investors who look for raw returns when deciding who to invest their assets with is simply unfair.

    Jensen Comment
    I repeatedly contend that if accountics research added any value to practice then there would be more efforts to validate/replicate accountics research ---
    At least in the economics academy, there are a greater number of validation studies, especially validation studies of the Efficient Market Hypothesis ---


    Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  ---

    Accounting Professors Who Blog ---

    Cool Search Engines That Are Not Google ---

    Free (updated) Basic Accounting Textbook --- search for Hoyle at

    CPA Examination ---
    Free CPA Examination Review Course Courtesy of Joe Hoyle ---

    Bob Jensen's Personal History in Pictures ---

    Bob Jensen's Homepage ---




    July 31, 2010


    Bob Jensen's New Bookmarks on  July 31, 2010
    Bob Jensen at Trinity University 

    For earlier editions of Fraud Updates go to
    For earlier editions of Tidbits go to
    For earlier editions of New Bookmarks go to 

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

    Bob Jensen's Blogs ---
    Current and past editions of my newsletter called New Bookmarks ---
    Current and past editions of my newsletter called Tidbits ---
    Current and past editions of my newsletter called Fraud Updates ---

    Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  ---

    Accounting Professors Who Blog ---

    Cool Search Engines That Are Not Google ---

    Accounting program news items for colleges are posted at
    Sometimes the news items provide links to teaching resources for accounting educators.
    Any college may post a news item.

    How to author books and other materials for online delivery
    How Web Pages Work ---

    Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at

    Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---

    The Master List of Free Online College Courses ---

    Free Online Textbooks, Videos, and Tutorials ---
    Free Tutorials in Various Disciplines ---
    Edutainment and Learning Games ---
    Open Sharing Courses ---
    The Master List of Free Online College Courses ---

    Bob Jensen's threads for online worldwide education and training alternatives ---

    "U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---

    Social Networking for Education:  The Beautiful and the Ugly
    (including Google's Wave and Orcut for Social Networking and some education uses of Twitter)
    Updates will be at

    Pete Wilson provides some great videos on how to make accounting judgments ---

    FEI Second Life Video (thank you Edith) ---
    If I Were an Auditor ---

    Teaching History With Technology ---
    Some these ideas apply to accounting history and accounting education in general

    "U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---

    Bob Jensen's threads on accounting novels, plays, and movies ---

    Bob Jensen's threads on tricks and tools of the trade ---

    Bob Jensen's threads on education technology ---

    "College Groups Share Health Care Worries With White House," Inside Higher Ed, June 3, 2010 ---

    Supporters of student health insurance plans who saw provisions of the Patient Protection and Affordable Care Act threatening the plans were reassured Wednesday in a meeting with President Obama’s chief health care deputy. Representatives of the American College Health Association, the National Association of College and University Business Officers, College and University Professional Association for Human Resources and the six presidential higher education associations met Wednesday with Nancy-Ann DeParle, director of the White House Office of Health Reform, to share their concerns. They worry that student plans -- currently defined as "limited duration," a category that exempts the plans from being part of the individual market -- would under the new law become too expensive for colleges and universities to offer.

    One person in the room for the meeting, Steven Bloom, assistant director of government and public affairs at the American Council on Education, said that DeParle assured the group that the absence of language making clear that the plans could continue to operate just as they do today was "not intentional." The Obama administration has emphasized that "if you like the insurance you have, you get to keep it," Bloom said, "and they view student insurance as part of that.... It's just fallen through the cracks."

    College health advocates first met with Congressional aides last fall to discuss this same concern, but language supporting student health insurance plans never made it into the final bill. Now that the bill has been passed and legislation is all but frozen on Capitol Hill, Bloom and his peers expect that a fix will come through regulations

    Bob Jensen's threads on healthcare in the U.S. are at

    Video on IOUSA Bipartisan Solutions to Saving the USA

    If you missed CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at   (Scroll Down a bit)
    Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause. 

    One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
    This going to greatly constrain the global influence and economic choices of the United States.

    By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions  to roll over funding our National Debt.

    The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

    Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
    Drastic measures must be taken to keep Medicare sustainable.

    I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.


    Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are is important solutions, but they are not solutions that will save the USA.

    The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):


    • Extend retirement age significantly (75 years maybe?).
      When Social Security was enacted, life expectancy was slightly over 65 years of age.
      Now it is well over 75 years of age.

    • Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
      Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.

    • Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.;lst;3
      (wait for the commercials to play out)

    • Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.


    Watch for the other possible solutions in the 30-minute summary video ---
    (Scroll Down a bit)

    Here is the original (and somewhat dated video that does not delve into solutions very much)
    IOUSA (the most frightening movie in American history) ---
    (see a 30-minute version of the documentary at )

    Now the IOUSA Bipartisan Solutions
    I suggest that as many people as possible divert their attention from the Tiger Woods at the Masters Tournament today (April 11) to watch bipartisan proposals (‘Solutions”) on how to delay the Fall of the United States Empire. By the way, Bill Bradley was one of the most liberal Democratic senators in the History of the United States Senate.

    Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
    Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

    Featured Panelists Include:

    • Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
    • David Walker, President & CEO, Peter G. Peterson Foundation
    • Sen. Bill Bradley
    • Maya MacGuineas, President of the Committee for a Responsible Federal Budget
    • Amy Holmes, political contributor for CNN
    • Joe Johns, CNN Congressional Correspondent
    • Diane Lim Rodgers, Chief Economist, Concord Coalition
    • Jeanne Sahadi, senior writer and columnist for

    Watch for the other possible solutions in the 30-minute summary video ---
    (Scroll Down a bit)


    CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
    High Cost of Dying ---;lst;3
    (wait for the commercials to play out)

    No sugar coating from this Wharton professor
    "National Retirement Expert: 75 needs to be the new 62," by Carla Fried, CBS Moneywatch, June 2010 ---

    Olivia Mitchell is one of the nation’s foremost retirement experts, having spent an impressive career studying the evolving nature of retirement planning issues for individuals, corporations and government. The short version of Mitchell’s resume is that she is a professor at the Wharton School at the University of Pennsylvania and executive director of the Pension Research Council. I’ll let you peruse Mitchell’s full 23-page CV at your own leisure.

    So I was interested to read a recent PRC paper Mitchell penned that digs into some of the most pressing retirement security issues in the wake of the financial crisis.

    Sugarcoating is not her way.

    My message is straightforward and, I fear, not particularly upbeat: current and future generations of managers and employees will not be able to use the ‘old fashioned’ model of provisioning for retirement. Instead, the 21st century economy will require an entirely new perspective on retirement risk management.

    From there Mitchell ticks off the big risks weighing on the current model: We’re not saving enough, we don’t have a clue how to deal with longevity risk — in fact, we don’t have a clue about basic financial concepts — traditional pensions are in major trouble, the PBGC is not exactly rock solid, and then there’s the little issue of Social Security, a topic near and dear to her heart, having served on the 2001 bipartisan presidential Commission to Strengthen Social Security

    The Retirement Fix

    Mitchell concludes the report with a perfectly serviceable call to action:

    Part of the task is to enhance financial literacy and political responsibility.  We will also need to save more, invest smarter, and insure better against longevity. Another task will be to develop new products which can be used to hedge longevity and better protect against very long term risks including inflation.

    What struck me in her report was this final thought:

    But when all is said and done, most of us will simply have to work longer to preserve some flexibility against shocks in the long run.

    And there it is: one of the nation’s foremost retirement thinkers concludes that at the end of the day, it’s working longer that is going to be our ticket out of any shortfalls and “shocks.”

    Retire Early….at 75

    Mitchell points out that working two to four more years can go a long way to closing a retirement funding gap. But that’s directed at Baby Boomers. Given ever-expanding longevity forecasts for younger generations she has this bit of advice for Gen X and Gen Y:

    For the younger generation, age 75 might be a good target for early retirement, and later if possible!

    Confirmation, from one of the country’s leading retirement thinkers, that 75 may indeed be the new 55.

    Jensen Comment
    At the moment we're between a rock and a hard place apart from each person's private problem concerning retirement. The global problem is that extending retirement age to 75 contributes significantly to decline of employment opportunities for younger people versus the need to extend retirement age to 75 to save the U.S. Social Security and Medicare entitlement programs.

    Video on IOUSA Bipartisan Solutions to Saving the USA

    If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at   (Scroll Down a bit)
    Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

    One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
    This going to greatly constrain the global influence and economic choices of the United States.

    By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions  to roll over funding our National Debt.

    The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

    Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
    Drastic measures must be taken to keep Medicare sustainable.


    I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

    Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are important solutions, but they are not solutions that will save the USA.

    The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):


    • Extend retirement age significantly (75 years maybe?).
      When Social Security was enacted, life expectancy was slightly over 65 years of age.
      Now it is well over 75 years of age.


    • Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
      Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.

    • Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.;lst;3
      (wait for the commercials to play out)

    • Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.


    Watch for the other possible solutions in the 30-minute summary video ---
    (Scroll Down a bit)

    Humor Between December 1-31, 2010 ---
    Humor Between November 1-30, 2010 --- 
    Humor Between October 1-31, 2010 ---  

    Humor Between August 1 and Sept. 30, 2010 --- 

    Humor Between June 1 and July 31, 2010 ---

    Humor Between June 1 and June 30, 2010 ---

    Humor Between May 1 and May 31, 2010 ---

    Humor Between April 1 and April 30, 2010 ---  

    Humor Between March 1 and March 31, 2010 ---  

    Humor Between February 1 and February 28, 2010 --- 

    Humor Between January 1 and January 31, 2010 ---



    Bob Jensen's threads on accounting humor ---


    At the AAA Annual Meetings (in San Francisco at 10:15 a.m. on Monday, August 2) I will be the fifth wheel on an IFRS Convergence Panel formed by David Albrecht. The other panel members, aside from David and me, are Ed Ketz (Penn State),  Charley Niemeier (almost the SEC Chief Accountant), and Shyam Sunder (Yale).

    Charley may well have been the SEC's Chief Accountant had he not had so many doubts about letting the IASB take over the world of accounting standard setting. Ed Ketz is such a mild and meek personality, I don't know why David invited him? Shyam Sunder is a former President of the AAA who is even more economist than accountant and despises monopolies.

    I mean is this a deviously stacked panel or what? I may have to play devil's advocate in the debate and (gasp) sing the praises of convergence. I will feel like Keith Olbermann at a tea party.

    Some Defining Issues publications from KPMG ---



    Jensen Comment
    I signed up for my first attempt to join a KPMG Webcast on an IFRS topic. It is entitled "Intangible Assets and Development Costs" where there are some serious differences between FASB versus IFRS rulings, especially in selected industries. That Webcast is on July 15 at noon eastern standard time.



    Intangible Assets and Development Costs – July 15 >


    IFRS for Private Companies-Possible U.S. Models - July 22 >


    Bob Jensen's threads on FASB-IASB convergence ---

    David Albrecht sent me this supposed humor link that Francine will especially appreciate ---

    I reworded the lyrics slightly.

    Where have all the accounting professors gone?
    Long time passing.
    Where have all the accounting professors gone?
    Long time ago.
    Where have all the accounting professors gone?
    They became TAR mathematicians every one.
    Equilibrium and game theory are now what they learn?
    FASB Codification and IFRS are not what they learn?

    Bob Jensen's threads on related issues ---

    From PwC Direct (very slow loading)
    Get ready for sweeping changes in accounting rules

    Week of July 22, 2010

    Welcome Robert E. Jensen, to this week's edition of What's new at CFOdirect, PwC's periodic guide to developments in financial reporting, business news, and management issues.

    Inside this issue

    FlashLine: A weekly update on financial reporting - July 22, 2010
    PCAOB Proposes New Auditing Standard on Confirmations
    Accounting Implications of Recent Events in Venezuela
    Get ready for sweeping changes in accounting rules
    Point of View: Team-based learning
    From Paper to Platform: Transforming the B2B publishing business model
    Revenue Expectations Up for US Multinationals, Spending Plans Increase

    PwC technical publications

    FlashLine: A weekly update on financial reporting - July 22, 2010
    This week's topics include:
    -  Get ready for sweeping changes in accounting rules
    -  Smaller Companies and Debt-Only Issuers Permanently Exempted from Sarbanes-Oxley Internal
       Control Audit Requirements
    -  10Minutes on U.S. Financial Reform
    -  Accounting Implications of Recent Events in Venezuela
    -  PwC DataLine Discusses PCAOB's Proposed New Auditing Standard on Confirmations
    -  Reminder: HIRE Act Expands Statute of Limitations Period for Tax Returns
    -  PwC Comments on IASB Proposal re: Fair Value Option for Financial Liabilities
    -  PwC Responds to FASB/IASB Proposal on 'Reporting Entity' Phase of Conceptual Framework Project
    -  FASB Issues Final Accounting Standards Update on Disclosures about Financing Receivables and
       the Allowance for Credit Losses
    -  FASB Proposes Changes to Disclosures of Certain Loss Contingencies
    -  FASB Issues 2011 US GAAP Financial Reporting Taxonomy "Pre-Release" for Public View
    -  FASB Meetings and Project Updates
    -  Minutes of April 6, 2010 SEC Regulations Committee Meeting with SEC Staff
    -  Materials for July 29 EITF Meeting
    -  AICPA Issues Four Technical Practice Aids
    -  GASB Issues Guidelines for Voluntary Reporting of Service Efforts and Accomplishments (SEA)
       Performance Information
    -  IAASB Seeks Comments on Exposure Draft re: Using the Work of Internal Auditors

    PCAOB Proposes New Auditing Standard on Confirmations
    On July 13, the PCAOB released for public comment a proposed auditing standard, Confirmation, and related amendments to its interim standards.  The proposed standard includes updates to the PCAOB's existing interim standard to reflect significant advances in technology, including increased use of electronic communication methods, and proposes new requirements regarding the confirmation of specific accounts, confirmation procedures, and the evaluation of audit evidence obtained from performing confirmation procedures.  Comments on the proposed standard and amendments are due September 13, 2010.  The standard would be effective for audits of fiscal years ending on or after December 15, 2011, subject to approval by the SEC.  This PwC DataLine summarizes the proposal and provides the firms observations on it.

    Accounting Implications of Recent Events in Venezuela
    In May 2010, the government of Venezuela effectively eliminated the indirect market of foreign currency exchange (referred to as the "parallel" market).  On June 9, 2010, several large Venezuelan commercial banks began operating the Transaction System for Foreign Currency Denominated Securities (SITME).  Continued use of the parallel market rate for re-measurement of bolivar denominated transactions is no longer acceptable.  This PwC DataLine provides an update on Venezuela being considered a highly-inflationary economy.

    Financial reporting

    Get ready for sweeping changes in accounting rules
    This article presents an overview of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) convergence projects, as well as the impact of the associated changes on many areas of a company's business.  It was originally written for Financial Executives International (FEI) by Michael Gallagher, U.S. National Office Leader for PricewaterhouseCoopers.

    Strategic management

    Point of View: Team-based learning
    As businesses strive to shake off the shockwaves of the Great Recession, forward-thinking leaders turn their focus to matters of strategy, quality, and competitive advantage.  High performance, driven by top talent, will distinguish the players that will dominate in tomorrow's market.  With a dramatically different kind of labor pool and a talent shortage on their doorsteps, organizations will need to identify thoughtful, creative ways to train and retain talent to fuel long-term success.  The best answers will not be found in the training room, but instead by engaging teams of employees in ways that may be new to the business world, but are nonetheless proven, trusted, and budget-savvy.  Find out more in this edition of PwC's Point of View series.

    Entertainment and media

    From Paper to Platform: Transforming the B2B publishing business model
    The challenges created by digital transformation and an uncertain economic environment mean changing rules of engagement, and the quest for relevance is now a top priority.  A change of mind set is needed to re-evaluate what it takes for B2B publishers to survive and thrive.  This PwC report examines the challenging outlook for B2B publishing from the perspective of information users (business professionals), advertisers, and publishers in five key territories (US, UK, Netherlands, France and Germany), setting out the three main challenges for publishers and PwC's view of the way forward in seizing the digital opportunity.

    Business and finance

    Revenue Expectations Up for US Multinationals, Spending Plans Increase
    The latest PwC Management Barometer survey presents findings from interviews with senior executives of US-based multinational companies who were asked about their company's current business performance, the state of the economy, and their expectations for business growth over the next 12 months.

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    July 21, 2010 message from Charles Wankel [wankelc@VERIZON.NET]

    I have started a new list called MANAGING-FOR-SUSTAINABILITY. It will be to discuss ecological, social and economic sustainability from the perspective of business management opportunities/threats and related decision-making. If you are interested in joining the fray, perhaps on the importance of this issue from an accounting standpoint, you are welcome. To join/leave easily use the link: 

    Best regards,
    Charles Wankel
    St. John's University, New York 
    Add me on LinkedIn: 

    Hi Charles,

    It might help if you give us your definition of sustainability in the context of your new list.

    I might add that the AAA Commons has a keyword for "sustainability" that can be attached to any Commons posting ---  (The link to the Commons is in the left-side column)
    But the Commons has not adequately defined many of its keywords, including "sustainability.".

    I suggest that you, Charles, post the most interesting messages you receive to the AAA Commons on a regular basis much like I post many AECM and CPA-L messages to the Commons.

    I also suggest that you post the above announcement now to the AAA Commons, although the AAA Commons is still disappointing to me in terms of volume of readership. I'm not sure whether my thousands of postings are helping or hurting the cause.

    Bob Jensen



    From the AICPA
    Overview of Certified in Financial Forensics (CFF) Credential --- Click Here Certified in Financial Forensics Credential.aspx 

    How Do Scholars and Researchers Search the Web?

    Bob Jensen's threads on how researchers/scholars search the Web are at

    "Automating Research with Google Scholar Alerts," by Ryan Cordell, Chronicle of Higher Education, July 1. 2010 ---

    This post is something of a public service announcement. Two weeks ago the Google Scholar team announced that users could now create alerts for their favorite queries.

    I would explain how to set up a Google Scholar Alert, but both Google and Resource Shelf have already done so. Instead, I'll discuss how this new featuer might be useful to the ProfHacker community.

    Google Alerts have been around for awhile. Users can set up a Google Alert for any query, and Google will automatically email them a digest of all new hits for that query. Users can set how many results they'd like included in the emails, how often the emails should be sent, and what email address(es) different alerts should be sent to. Google Alerts can help you stay abreast of a particular topic, such as a developing news story. Many folks also set up Google Alerts for their name, their company, or a particular project, so they can track how those topics are being discussed across the net.

    Google Alerts pull from Google's entire index, however, which is not always useful for research questions. I could set up a Google Alert for an author I write on—say, Nathaniel Hawthorne—but I'd likely have to wade through many high schoolers complaining about reading The Scarlet Letter before finding any new scholarly work on the author. Google Scholar Alerts pull results only from scholarly literature—"articles, theses, books, abstracts," and other other resources from "academic publishers, professional societies, "online repositories, universities," and other scholarly websites. In other words, Google Scholar Alerts provide scholars automatic updates when new material is published on research topics they're interested in. A Google Scholar Alert for "Nathaniel Hawthorne" would email me whenever a book or article about Hawthorne was added to Google Scholar's index.

    I worded that last sentence carefully in order to point to some problems with Google Scholar, and by extension with the new Google Scholar Alerts. Peter Jacso wrote last September about serious errors in Google Scholar's metadata, particularly with article attribution. What counts as "new" in Google Scholar is also problematic. An article will appear in a Google Scholar Alert when it's indexed—that is, when it's new to Google Scholar, even if it's actually an older article.

    As Jacso points out, however, Google Scholar remains valuable for "topical keyword searches," which is what most folks will set up Alerts to track. No one should set up a Google Scholar Alert and consider their research complete&dash;but Alerts can be a good way to keep abreast of new scholarship on a variety of topics, or on the wider context of a particular research interest. I work on nineteenth-century apocalyptic literature, for example, and I've set up a Google Scholar Alert for several variations on the word "apocalyptic." The emails I've received comprise work on apocalypticism from a variety of periods and geographical areas. Even if I can't read most of these works in full, I've found it useful to get this larger overview of scholarship on the topic.

    Video:  Wolfram Alpha has gotten much better ---
    It is best described as a search engine that will perform complicated computations

    Wolfram Alpha ---

    Find a College
    College Atlas ---
    Among other things the above site provides acceptance rate percentages
    Online Distance Education Training and Education ---
    For-Profit Universities Operating in the Gray Zone of Fraud  (College, Inc.) ---

    Bob Jensen's threads on how researchers/scholars search the Web are at

    Why do sales (cash) discounts have such high annual percentage rates?

    Hi Pat and Tom,

    In theory there may be justification for not treating the entire sales discount as interest revenue. When setting the amount of a sales discount, a vendor may be factoring in considerations other than time value of money.

    There’s a concise illustration at   


    Note the last paragraph and the wording “about the same.”

    There’s another consideration that I’ve not seen raised anywhere. If sales discounts are recorded net and the “Discount Not Taken” account is considered interest revenue, some discounts are so great that they might  be a violation of usury law in many states of the United States.

    This begs the question of why sales discounts have such high APR amounts. The reason I think is that there are factors other than time value of money built into sales discounts. One such factor is that sales discounts may reduce the probabilities of bad debts. If a customer is on the edge and has to ration payoffs of accounts payable, the vendors with the highest sales discounts are likely to be paid off much faster than vendors with no sales discounts. It would be stupid for a customer to miss a sales discount and then ration payments of all accounts due at the end of the month.

    Or put it in another way. Bad debt expense in reality is factored into the gross price of goods sold by vendors on account. Vendors that offer sales discounts are really rewarding customers who won’t become bad debts.

    And there is another factor in setting a high APR for sales discounts. Vendors may be trying to buy customer loyalty and goodwill among their best customers who keep coming back in part because of the high sales discounts (without reasoning that the vendor might treat them even better with a lower gross price). This is what I would call a Dan Ariely argument ---

    Here’s the traditional basic accounting way “gross” sales discounts have been taught for maybe 100 years or more.

    Video:  Sales Discounts ---

    It’s harder to find a video on the net method, possibly because basic accounting instructors often only teach the gross method so as not to complicate accounting instruction at the very earliest stages.

    Bob Jensen

    Why do auditors continue to allow earnings management with loan loss reserves?

    July 19, 2010 message from Francine McKenna [retheauditors@GMAIL.COM]


    Sound familiar? The banks are making what they can based on technical accounting manipulation including playing with loan loss reserves. There's still a lot of bad debt on their books. 
    "Citigroup’s net income declined 37 percent, to $2.7 billion, and Bank of America’s net income fell 3 percent, to $3.1 billion, from a year earlier. Both banks padded those results with a big release of funds that had been set aside to cover future loan losses, with executives citing improvements in the economy."  "
    Citigroup also got $599 million of mark-ups on loans and securities in a “special asset pool” of trading positions left over from before the credit crisis. Citigroup booked a $447 million gain from writing down the value of its own debt, under an accounting rule that allows companies to profit when their creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

    About $1.2 billion of Bank of America’s revenue came from writing down the value of obligations assumed from its purchase of Merrill Lynch & Co., according to the bank’s CFO, Charles Noski."



    July 19, 2010 reply from Bob Jensen

    Hi Francine,

    Bank behaviors with auditor blessings are so sad.

    Thanks for the tidbit.

     Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them. “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said
    "Bank Profits Appear Out of Thin Air ," by Andrew Ross Sorkin, The New York Times, April 20, 2009 ---

    This is starting to feel like amateur hour for aspiring magicians.

    Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

    But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

    With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

    Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

    Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

    “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

    Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

    Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

    What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

    “If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

    But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

    The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

    This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

    “I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

    The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

    The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

    But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

    The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

    And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.

    "Watch Banks Pull Rabbits Out of Hats, Ably Assisted by Their Auditors," by Francine McKenna, re:TheAuditors, July 19, 2010 ---

    Do you own stock in a large money center bank?  Work for one?  Count on one to lend you money for a small business?  Expect them to stimulate the economy via commercial loans and lending again for residential or commercial real estate?

    You’ve been deluded by the illusion of their self-serving public relations – rah-rah intended to help you forget financial reform that barely is and no safety net for anyone but the elite.

    The global money center banks are masters at managing financial reporting. Regulators repeatedly feign surprise at balance sheet sleight of hand, prestidigitation at the expert level intended to buy time until the banks can grow out of the black hole that bubble lending put them in. They announce their quarterly results, with all the details – they don’t even try to hide them anymore – and they’re ignored or the con is traded on for short term profits.

    The New York Times, July 16, 2010

    “Citigroup’s net income declined 37 percent, to $2.7 billion, and Bank of America’s net income fell 3 percent, to $3.1 billion, from a year earlier. Both banks padded those results with a big release of funds that had been set aside to cover future loan losses, with executives citing improvements in the economy.”

    Business Week reports that Citigroup flip flopped on the value of assets acquired with Merrill Lynch and magic happened:

    “Citigroup also got $599 million of mark-ups on loans and securities in a “special asset pool” of trading positions left over from before the credit crisis. Citigroup booked a $447 million gain from writing down the value of its own debt, under an accounting rule that allows companies to profit when their creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

    About $1.2 billion of Bank of America’s revenue came from writing down the value of obligations assumed from its purchase of Merrill Lynch & Co., according to the bank’s CFO, Charles Noski.”

    Interestingly enough, the opposite move also netted them a gain last year. How exactly did this years write down equal a gain too?

    Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.
    “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

    John Talbott, meanwhile, explains today why Treasury Secretary Tim Geithner doesn’t want watchdog Elizabeth Warren as the head of the new post-reform consumer protection agency – she’ll prevent banks from making money off the little guy while lending and trading remain unreliable profit drivers.

    “Hank Paulson, the Treasury Secretary at the time, had announced that the $700 billion TARP funds would be used to buy toxic assets like bad mortgage loans from the commercial banks. But this never happened and now the amount of bad bank loans has increased in the trillions. Immediately after receiving authorization of the funding for TARP from Congress, Paulson reversed direction and decided to make direct equity investments in the banks rather than using the TARP funds to acquire their bad loans.

    So where are the trillions of dollars of bad loans that the banks had on their books? They are still there. The Federal Reserve took possession temporarily of some of them as collateral for lending to the banks in an attempt to clean up the banks for their supposed” stress tests”. But as of now, the trillions of dollars of underwater mortgages, CDO’s and worthless credit default swaps are still on the banks books. Geithner is going to the familiar “bank in crisis” playbook and hoping that the banks can earn their way out of their solvency problems over time so the banks are continuing to slowly write off their problem loans but at a rate that will take years, if not decades, to clean up the problem.”

    Paul Krugman predicted this roller coaster ride with bank earnings back in October, in particular with regard to Bank of America and Citigroup. What he missed is that when trading profits are down too, the banks – with the assistance of their auditors advice –  must be ever more creative to avoid having to write off those bad assets all at once or without cover.

    …while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.

    You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.

    But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?

    Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations.”

    I’ve told you more than once that Citigroup is still a mess. Anyone who isn’t a senior insider is nuts to buy their stock or count on them for a job or business. Listen to me talk about AIG, Bank of America and Citigroup, “an accident waiting to happen,” at the 8:15 mark on this video for Stocktwits TV recorded June 3, 2010.

    . . .

    Both AIG and Goldman Sachs executives have been questioned recently by the Financial Crisis Inquiry Commission.. The Commission seeks to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” We’ve also seen Lehman executives called to account by Congressional inquisitors.

    But we’ve yet to see the auditors – Pricewaterhouse Coopers (auditor of AIG, Goldman Sachs, and Freddie Mac), Ernst & Young (auditor of Lehman) or KPMG (auditor of Citigroup, previously of Countrywide, Wells Fargo and Wachovia and earlier of Fannie Mae) – called to testify to explain their role in blessing fraudulent bank balance sheet accounting.

    Isn’t it about time?

    July 19, 2010 reply from Bob Jensen

    Hi Francine,

    Here’s an important citation on this topic --- my favorite!

    My all-time heroes Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction: Watch the video! (a bit slow loading) Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets" "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 --- 
    Watch the above video!

    Abusive off-balance sheet accounting was a major cause of the financial crisis.  These abuses triggered a daisy chain of dysfunctional decision-making by removing transparency from investors, markets, and regulators.  Off-balance sheet accounting facilitating the spread of the bad loans, securitizations, and derivative transactions that brought the financial system to the brink of collapse.

    As in the 1920s, the balance sheets of major corporations recently failed to provide a clear picture of the financial health of those entities.  Banks in particular have become predisposed to narrow the size of their balance sheets, because investors and regulators use the balance sheet as an anchor in their assessment of risk.  Banks use financial engineering to make it appear that they are better capitalized and less risky than they really are.  Most people and businesses include all of their assets and liabilities on their balance sheets.  But large financial institutions do not.

    Click here to read the full chapter.--- Sheet Transactions.pdf

    Frank Partnoy is the George E. Barnett Professor of Law and Finance and is the director of the Center on Coporate and Securities Law at the University of San Diego.  He worked as a derivatives structurer at Morgan Stanley and CS First Boston during the mid-1990s and wrote F.I.A.S.C.O.: Blook in the Water on Wall Street, a best-selling book about his experiences there.  His other books include Infectious Greed: How Deceit and Risk Corrupted the Financial Markets and The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals.

    Lynn Turner has the unique perspective of having been the Chief Accountant of the Securities and Exchange Commission, a member of boards of public companies, a trustee of a mutual fund and a public pension fund, a professor of accounting, a partner in one of the major international auditing firms, the managing director of a research firm and a chief financial officers and an executive in industry.  In 2007, Treasury Secretary Paulson appointed him to the Treasury Committee on the Auditing Profession.  He currently serves as a senior advisor to LECG, an international forensics and economic consulting firm.

    The views expressed in this paper are those of the authors and do not necessarily reflect the positions of the Roosevelt Institute, its officers, or its directors. 


    Bob Jensen

    July 19, 2010 message from Steven Kachelmeier, University of Texas at Austin [kach@MAIL.UTEXAS.EDU]

    An article by Kanagaretnam, Krishnan, and Lobo that is forthcoming in the November 2010 issue of The Accounting Review is the most recent effort on this topic of which I am aware.  You can find it on the SSRN network at:

    The title is "An Empirical Analysis of Auditor Independence in the Banking Insustry," but don't be fooled by the title -- it's about manipulation of banks' loan loss reserves, with an emphasis on how auditors bear upon that phenomenon.  Kanagaretnam et al. (2010) also cite most of the earlier studies on earnings management involving bank loan loss reserves.  Kiridan Kanagaretnam is at McMaster University, Gopal Krishnan is at Lehigh University, and Gerald Lobo is at the University of Houston.


    July 19, 2010 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    I have briefly gone through this paper. Its main thesis is that there is lack of an association between banks fiddling with earnings via LLLP (loan loss provisions) and "unexpected" audit fees for large banks, while for the small banks that association is strongly negative. The authors consider this evidence of a relationship between audit independence and earnings management at least in the case of smaller banks. They provide a blizzard of regressions and other data.

    The paper is interesting from a policy perspective, and would be a great paper in a policy oriented economics journal. I am glad for the authors that it got accepted. However, does it have a bearing on accounting' practice beyond setting the regulators on a chase of auditors of small banks? Does it give us a better way of computing LLP? Does it give us a way of finding out the reliability of the LLP number? Does it even tell us if the LLP numbers are more (or less) reliable for the larger banks? Does the age distribution of the loan portfolio vary between the two types of banks? What is the distribution of auditors between the two types of banks? There are a host of questions that should be triggered by this thread. Of course, the authors pick the hypothesis they want to study, but an accounting or auditing orientation (as opposed to "about" accounting orientation in Sterling's language) would make a lot more sense for is accountants.

    The other issue, endemic to most of these types of papers is the oblique way of introducing causality (a definite no-no for a positivist) to obfuscate discussions. Figure 1 in the paper is what is usually called a path graph giving the trace of causality (the direction of the arrows indicating causality), but the statistical analysis is entirely associational. Statistical techniques have existed for causal analysis for almost half a century, but accounticians have uniformly pretended they do not exist. Stating the models in causal terms but testing them associationally is certainly less than truthful advertising. Unless, of course, I am misstating the model, which I doubt. I have been in this game for too long.

    Nothing I have said above should be construed as indicating my doubt on the questions raised by the authors; they should be of great interest to a policy oriented audience. It is just that when it comes to accounting practice, they are trying to sell kryptonite or worse.

    Jagdish Gangolly (
    Department of Informatics College of Computing & Information
    State University of New York at Albany
    7A, Harriman Campus Road, Suite 220 Albany, NY 12206 Phone: (518) 956-8251, Fax: (518) 956-8247

    I urge you to polish up this validity-challenging comment and then submit it to TAR in December after the article in question is in print in TAR. I have an agenda of opening TAR up to publishing validity-challenging comments about its articles where readers have serious doubts about validity ---



    Only one such validity-challenging comment was submitted to TAR in recent years, was refereed, was rejected, and later was expanded into a full-blown research paper that eventually was accepted. It’s likely that virtually nobody submits validity-challenging comments to TAR because of a perceived hopelessness of having TAR put the short comment into print.



    However, the current Senior Editor of TAR assures me that if any validity-challenging comment is submitted to TAR and passes the initial screening test before being sent out to referees, a short validity-challenging or quality control comment will be published in TAR if the referees accept it for publication.



    Since there’s only one failed test of this policy across recent years, I would really like you to submit the above comment (after polishing) to TAR to put TAR to the test about willingness to publish validity-challenging and quality control comments. Then I hope you will comment on the entire saga for the benefit of the AECM.



    Your short comment above is an example of a good test case.
    I recently wrote a validity challenging comment that I did not submit to TAR because it’s not such a good test case ---


    Much of my challenge is based on the following:


    Another assumption is that the audit firm's ex ante utility function and a client firm's utility function are respectively as follows:

    Yeah right. Have these utility functions ever been validated for any real world client and auditor? As a matter of fact, what is the utility function of any corporation that according to agency theory is a nexus of contracts? My feeble mind cannot even imagine what a realistic utility function looks like for a nexus of contracts.

    I would instead contend that there is no audit firm utility function apart from the interactions of the utilities of the major players in client acceptance/retention decision and audit pricing decisions. For example, before David Duncan was fired by Andersen, the decision to keep Enron as a client was depended upon the interactive utility functions of David Duncan versus Carl Bass versus Joseph Berardino. None of them worked from a simplistic Andersen utility function such as the one shown in Equation 20 above. Each worked interactively with each other in a very complicated way that had Bass being released from the Enron audit and Berardino buring his head in the sands of Lake Michigan.

    The audit firm utility function, if it exists, is based on the nexus of people rather than the nexus of contracts that we call a "corporation."


    But perhaps this is an unfair validity-challenging comment, because if TAR did publish this comment, scores of comments might ensue that challenge the reality of implicit and untested assumptions in most analytical models published in TAR. If analytical modelers had to defend the validity of their assumptions it would probably destroy mathematical/analytical methods in accounting research.


    Hence I do not consider my validity challenge an appropriate test of whether TAR will really publish any validity-challenge commentary. My comment would most assuredly be rejected for TAR publication.


    Your above comment is a much more appropriate test case Jagdish.


    I also once had a terrible time getting Issues in Accounting Education to publish my comment on a case’s Teaching Note. The Editor of IAE and the case authors finally conceded to let me publish my “Amendment” on my own Website ---
    I do admit to making some false assumptions of my own (being overly critical) when I wrote the first version of this Amendment. My wording was corrected in due course at the suggestion of one the case’s authors.


    PS Jagdish,

    Perhaps you will have more to write after you really dig into the article. Although you’ve given the AECM many references on the correlation-causality topic in the past, here are a few others to consider:

    Beyond Bayes: causality vs. correlation," by Steve Hsu Professor of physics at the University of Oregon, Information Processing, July 10, 2010 ---

    A draft paper by Harvard graduate student James Lee (student of Steve Pinker; I'd love to post the paper here but don't know yet if that's OK) got me interested in the work of statistical learning pioneer Judea Pearl. I found the essay Bayesianism and Causality, or, why I am only a half-Bayesian (excerpted below) a concise, and provocative, introduction to his ideas.

    Pearl is correct to say that humans think in terms of causal models, rather than in terms of correlation. Our brains favor simple, linear narratives. The effectiveness of physics is a consequence of the fact that descriptions of natural phenomena are compressible into simple causal models. (Or, perhaps it just looks that way to us ;-)

    Judea Pearl: I turned Bayesian in 1971, as soon as I began reading Savage’s monograph The Foundations of Statistical Inference [Savage, 1962]. The arguments were unassailable: (i) It is plain silly to ignore what we know, (ii) It is natural and useful to cast what we know in the language of probabilities, and (iii) If our subjective probabilities are erroneous, their impact will get washed out in due time, as the number of observations increases.

    Thirty years later, I am still a devout Bayesian in the sense of (i), but I now doubt the wisdom of (ii) and I know that, in general, (iii) is false. Like most Bayesians, I believe that the knowledge we carry in our skulls, be its origin experience, schooling or hearsay, is an invaluable resource in all human activity, and that combining this knowledge with empirical data is the key to scientific enquiry and intelligent behavior. Thus, in this broad sense, I am a still Bayesian. However, in order to be combined with data, our knowledge must first be cast in some formal language, and what I have come to realize in the past ten years is that the language of probability is not suitable for the task; the bulk of human knowledge is organized around causal, not probabilistic relationships, and the grammar of probability calculus is insufficient for capturing those relationships. Specifically, the building blocks of our scientific and everyday knowledge are elementary facts such as “mud does not cause rain” and “symptoms do not cause disease” and those facts, strangely enough, cannot be expressed in the vocabulary of probability calculus. It is for this reason that I consider myself only a half-Bayesian. ...


    Statistics Lesson:  Spanking is a cause of lower IQ?
    U.S. children who were spanked had lower IQs four years later than those not spanked, researchers found. University of New Hampshire Professor Murray Straus, who is presenting the findings Friday at the 14th International Conference on Violence, Abuse and Trauma, in San Diego, called the study "groundbreaking." "The results of this research have major implications for the well being of children across the globe," Straus said in a statement. "It is time for psychologists to recognize the need to help parents end the use of corporal punishment and incorporate that objective into their teaching and clinical practice." "How often parents spanked made a difference. The more spanking the, the slower the development of the child's mental ability," Straus said. "But even small amounts of spanking made a difference."
    "Study: Spanking linked to lower IQ," Breitbart, September 25, 2009 ---

    Jensen Comment
    I think Straus was frequently spanked as a child. Could it be that lower IQ students get more frustrated and are inclined toward greater degrees of misbehavior?


    This is a little like the historic 0.63 correlation between stork nests and birth rates ---

    July 20, 2010 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]


    I would like to add the following five to the bibliography on causality:

    1. Causality and Causal Inference,

    2. Sander Greenland, Judea Pearl and James M. Robins, "Causal Diagrams for Epidemiologic Research", Epidemiology 10 (1999): 37--48

     3. Causal Modeling and the Origins of Path Analysis, Daniel J. Denis and Joanna Legerski
    (A beautifully written essay in a historical context).

    4.Causality: Models, Reasoning and Inference by Judea Pearl
    Cambridge University Press; 2nd edition (September 14, 2009
    (A must read)


    5.Counterfactuals and Causal Inference: Methods and Principles for Social Research by Stephen L. Morgan and Christopher Winship
    Cambridge University Press; 1 edition (July 30, 2007)
    (A treat for the mind. A must read)

     Granger, C.W.J., 1969. "Investigating causal relations by econometric models and cross-spectral methods". Econometrica 37 (3), 424–438.

    7.Tests for causality between integrated variables using asymptotic and bootstrap distributions: theory and application, by R. Scott Hacker and Abdulnasser Hatemi-J


    If I were teaching a course (masters or doctoral) 1-5 would be required readings.

     These are mostly publications during the past four years or so, but the stuff has been around almost for a century.

    I doubt most accounticians have even heard of any of them.=

    Jagdish Gangolly (
    Department of Informatics
    College of Computing & Information
    |State University of New York at Albany
    7A, Harriman Campus Road, Suite 220
    Albany, NY 12206
    Phone: (518) 956-8251, Fax: (518) 956-8247


    Bob Jensen's threads on creative accounting and earnings management

    Where were the auditors when over 1,000 banks failed ---

    July 20, 2010 message from Orenstein, Edith [eorenstein@FINANCIALEXECUTIVES.ORG]

    Earlier today, FASB released its Exposure Draft (ED) of a proposed Accounting Standards Update: Contingencies (Topic 450): : Contingencies (Topic 450): Disclosure of Certain Loss Contingencies. The 30-day comment period ends August 20, 2010. Further info is in the FEI Blog ---

    Thank you,


    Jensen Comment
    Thank you Edith,
    Here are some highlights from

    Litigation Disclosures Controversial The most controversial issue in the ED, which is being reissued after FASB considered the comments received on the original ED issued a few years ago, revolved around the enhanced disclosures on litigation contingencies.

    Due to some critical feedback in the original comment letters on the prior ED, on litigation contingency disclosures in particular, FASB conducted additional outreach, including field tests and a public roundtable, before reissuing this ED.

    Among the proposed changes noted in the ED (this is just one of the proposed changes):

    The proposed amendments would retain the current qualitative disclosures and enhance them by requiring additional disclosures, for example, in the case of litigation contingencies, disclosure of the contentions of the parties and how users can obtain additional information about the litigation.

    Similarly, in addition to the quantitative disclosures required under current U.S. generally accepted accounting principles (GAAP), the amendments in this proposed Update would require disclosure of publicly available quantitative information (such as the claim amount for asserted litigation contingencies), other relevant nonprivileged information, and, in some cases, information about possible recoveries from insurance and other sources.

    Furthermore, a public entity would be required to provide tabular reconciliations, by class, of recognized (accrued) loss contingencies that present the activity in the account during the reporting period.

    Nonpublic Companies Receive Some Disclosure Relief The ED is applicable to public and nonpublic companies, but proposes one point of disclosure relief for nonpublic companies, that nonpublic companies "would not be required to provide a tabular reconciliation of accrued loss contingencies."

    Continued in article

    Bob Jensen's threads on the vexing problem of contingencies with pictures of icebergs are at

    Internal Control? What's internal control?

    This is absolutely astounding. One of the first rules of database security is to restrict access to subsets of the database on a need-to-know basis and to be really, really careful about permissions to access the entire database. Somehow I think national security officers threw caution to the wind by allowing a 22-year old pfc access to the entire database of security-sensitive war communications.

    Heads should roll at the very top in this breach that jeopardizes lives of the men and women on the ground of battle!
    To say nothing of how this will change our relationships with our closes allies in this war.

    "Wikileaks' Afghanistan docs: Pentagon Papers 2.0," by Stephen Hsu, MIT's Technology Review, July 26, 2010 ---

    Read more about Bradley Manning at


    Can you imagine sending a TAR submission out to the AECM for refereeing or maybe the AAA Commons?

    "Leading Humanities Journal Debuts 'Open' Peer Review, and Likes It," by Jennifer Howard, Chronicle of Higher Education, July 26, 2010 ---

    Getting published in a humanities journal usually works like this: Submit an article, then hope for the best as the editors send it to a few hand-picked specialists for critique. The reviewers and the authors are not supposed to know one another's identity.

    But now scholars are asking whether this double-blind peer-review system is still the best way to pass judgment. The Internet makes it possible to share work with many people openly and simultaneously, so why not tap the public wisdom of a crowd? One of the top journals in literary studies, Shakespeare Quarterly, decided to put that question to the test.

    For this year's fall issue, a special publication devoted to Shakespeare and new media, the journal offered contributors the chance to take part in a partially open peer-review process. Authors could opt to post drafts of their articles online, open them up for anyone to comment on, and then revise accordingly. The editors would make the final call about what to publish (hence the "partially open" label). As far as the editors know, it's the first time a traditional humanities journal has tried out a version of crowd-sourcing in lieu of double-blind review.

    The verdict from several scholars who took part: mostly a thumbs up, with a few cautionary notes and a dollop of "It's about time" mixed in.

    "It was on the whole a successful experiment," said Martin Mueller, a professor of English and classics at Northwestern University, who took part as a reviewer.

    Michael Witmore, a professor of English at the University of Wisconsin at Madison, co-authored an article on the use of statistical analysis and a text-tagging database to reveal linguistic patterns in Shakespeare. He and his co-author "got some terrific ideas and some citations" from the comments of the six or so people who actively responded to the article, he said. "It produced a more interesting paper."

    Scholars and editors in the sciences have been trying out open peer review for some time, with not entirely rosy results. The journal Nature did a test run in 2006. In a published overview, the editors concluded the venture had not been a success. Many authors expressed interest but few participated, and the quantity and quality of the comments were disappointing.

    Interviews with participants in Shakespeare Quarterly's open peer-review trial, however, suggest this attempt went much better than Nature's did. At least one participant pointed out that the humanities' subjective, conversational tendencies may make them well suited to open review—better suited, perhaps, than the sciences.

    Katherine Rowe, chair of the English department at Bryn Mawr College, guest-edited the special issue. She and the editorial board decided that the issue's new-media theme offered a chance to investigate how scholarly authority works in a networked environment.

    "This was genuinely an experiment," Ms. Rowe said. "We didn't know what would result."

    The journal's publisher, the Johns Hopkins University Press, supported the idea. MediaCommons, a digital scholarly network set up to encourage such experiments and conversations, agreed to host the project. So Ms. Rowe and other editors put out a call for papers, culled submissions, then offered authors still in the running a chance to post drafts online. All accepted.

    Rounding Up Experts

    Ms. Rowe invited about 90 scholars, including Northwestern's Mr. Mueller, to comment. Anybody willing to publish thoughts under his or her own name could join in, but the guest editor wanted recognized authorities as part of the field.

    "'What's the nature of expertise?' is one of the questions that really gets opened up by an open process," Ms. Rowe said. "Everybody wanted to be sure that experts would be involved." By her count, about 40 commenters, invited and self-selected, finally participated.

    All told, four articles and three review essays were posted on MediaCommons during a two-month review period this past spring. (The articles and comments remain archived on the MediaCommons site.) As it turned out, all seven submissions will appear in the issue.

    Some of the authors acknowledged doubts going into the experiment. Would open review be rigorous enough? Was it risky to post work in progress? But "the results were terrific," said Mr. Witmore, who wrote his paper on Shakespearean linguistic analysis with Jonathan Hope, a reader in the English department of the University of Strathclyde, in Glasgow. "It's very different from getting a two-paragraph reader's report from a journal," Mr. Witmore said. "In this case, what you get is individual readers from a wide range of subspecialties zooming in on a particular paragraph, saying 'Tell me more about this' or 'Why did you do this?' It seemed more like a dialogue."

    Another scholar, Alan Galey, submitted an article about Shakespeare and the history of information. An assistant professor on the Faculty of Information at the University of Toronto, he worried that an article vetted this way might carry less professional weight—a matter of particular concern to a junior professor going for tenure. "It was very much going on faith in a way," he said.

    Mr. Galey's dean told him to make sure the process would be rigorous and fair. The stature of the journal also helped reassure him on that point. So did Ms. Rowe's willingness to answer questions and her decision to invite established scholars to join in. Many crowd-sourcing experiments depend on scale, Mr. Galey pointed out, but this relied "on relationships among scholars where you know you can trust somebody. It wasn't a Wild West by any means. It was as controlled a process as traditional peer review. It was just controlled in a different way."

    Mr. Galey wound up feeling that the experiment paid off. "I got better feedback from this process than I've had from any other peer-review process," he said.

    Another participant, Ayanna Thompson, an associate professor of English at Arizona State University, wrote an article focused on race in performance-based teaching of Shakespeare. She called the experiment "a fascinating process." But she also found it stressful, and saw evidence that some old ways die hard.

    Better Feedback

    On the positive side, she got lots of feedback—"the equivalent of eight single-spaced pages of comments," she told The Chronicle via e-mail. She felt that the lack of anonymity encouraged reviewers to engage with the material "in a much more thoughtful and thorough way than in blind reviews because their names were attached to the comments." That helped her clarify and revise sections of her argument. But going through a public critique "was a stressful experience, and I kept saying to myself, 'I'm glad I have tenure,'" she said.

    She also discovered that academic status still played a role. "The people who were commenting online were very established, senior scholars. In fact, several junior scholars notified me offline that they had comments, but that they did not want to post them in case they contradicted the senior scholars," she said. "So while the process was supposed to democratize the review process, it did keep some of the old hierarchies in place."

    Still, Ms. Thompson is glad she took part. "The revised article is much stronger for the feedback, and I feel lucky to have received so much deep engagement with my work," she said.

    David Schalkwyk is editor of the journal and director of research at the Folger Shakespeare Library. He called the experiment a success and said that Shakespeare Quarterly plans to try it again for its future special issues, whose focused topics are most likely to attract a critical mass of knowledgeable reviewers.

    The system did, however, come at a cost from an editor's perspective, he said. For instance, editors and writers had to keep tabs on the evolving discussion and build in extra time for revisions; authors also tended to make their articles longer and longer in response to multiple comments. "I think we underestimated the amount of time that was required," Mr. Schalkwyk said.

    That's what keeps him from adopting the approach for every issue. He said, "My reservation about applying open peer review to normal issues is entirely practical. It's not philosophical. If I could do it, I would."

    For Mr. Mueller, the reviewer from Northwestern, the journal's experiment was welcome—and past due. "I think it will take a decade for scholarly communication to find ways of fitting itself into this new technological environment," he said. "It takes time. The human problems always take more time to manage and solve than the technological problems."

    Jensen Comment
    Years ago I sent a message to the AECM regarding a submission that I was asked to referee for three different journals. I worked hard on writing down the reasons I recommended rejecting the paper for The Accounting Review. Within a few months another U.S. journal requested that I referee the paper (the only change in the paper was a revised title to the paper). I recommended rejection and forwarded a photocopy of my earlier rejection decision. In less than a year I received a request from a foreign journal to referee the same paper (even the title was not changed for the third round).

    What this shows me is how the refereeing process, on occasion, can be far more narrow than we think even among the global explosion of publishing alternatives even within one academic discipline. The poor guys that authored this submission could not get away from me. Actually, I think the system was being unfair to them.

    Since these were blind reviews, I really never learned who the authors were on the submission.

    When I was a relatively young PhD and still full of myself, the Senior Editor, Charlie Griffin, of The Accounting Review sent me a rather large number of accountics papers to referee (there weren't many accountics referees available 1968-1970). I think it was at a 1970 AAA Annual Meeting that I inadvertently overheard Charlie tell somebody else that he was not sending any more TAR submissions to Bob Jensen because "Jensen rejects every submission." My point in telling you this is that having only one or two referees can really be unfair if the referees are still full of themselves.

    Bob Jensen's threads on The Accounting Review's double blind refereeing process (with nearly 600 referees to choose from and only two who normally even see a submission) ---

    "Dell Is the Latest to Go the SEC’s Woodshed; Settlement of $100 million for Fraudulent Accounting, Disclosure Violations," by Caleb Newquist, Going Concern, July 22, 2010 ---

    Also see;jsessionid=5YIC355EBYCZNQE1GHPSKHWATMY32JVN

    Bob Jensen's threads on Deloitte are at

    You may want to liven up your accounting, math or history courses by illustrating the art and science of the Abacus Calculator

    Abacus: The Art of Calculating with Beads ---



    Construction  ·  Basics  ·  Java Applet  ·  Technique  ·  The Abacus Today


    Timeline  ·  Salamis Tablet  ·  Counting Board  ·  Roman Hand Abacus  ·  Suan Pan  ·  Soroban  ·  Schoty  ·  Nepohualtzitzin  ·  Khipu  ·  Lee Abacus

    Interactive Abacus Tutor

    Sarat Chandran and David A. Bagley's incredible Java abacus with a built-in tutor for counting, addition and subtraction.

    Addition  ·  Subtraction  ·  Multiplication & Division  ·  Square Roots  ·  Cube Roots

    The Lee Abacus

    The manual for the Lee Abacus, c. 1958 is available as Text  ·  Images

    The Abacus as Art

    Michael Mode builds exotic abaci as art objects.

    Abacus: Mystery of the Bead

    Abacus Techniques by Totton Heffelfinger & Gary Flom.

    Articles, Excerpts and Analysis

    The Abacus vs.The Electric Calculator

    In 1946, a contest held in Tokyo, pitted an abacus against an electric calculator; the abacus won, of course.

    Feynman vs. The Abacus

    Richard Feynman battles against the abacus; the result is not surprising (if you know Feynman).

    Comparing the Chinese and the Mesoamerican Abacus

    An analysis contributed by David B. Kelley.

    The Roman Hand-Abacus

    An analysis contributed by Steve Stephenson.

    The Incan Khipu

    String, and Knot, Theory of Inca Writing by John Noble Wilford.
    Talking Knots of the Incas by Viviano and Davide Domenici.

    Lost Tribes, Lost Knowledge

    An article about the dangers of forgetting knowledge learned from the past, by Eugene Linden.

    All Things Abacus

    Additional Abacus Resources

    Purchase  or build an abacus  ·  An abacus for your Palm  ·  Books about the abacus  ·  Java applet source code  ·  The Mesoamerican abacus

    Resources For Teachers

    The abacus in the classroom  ·  Abacus lesson plan  ·  Math and science resources for teachers


    High-resolution photos of my abacus collection.

    Bob Jensen's threads on early accounting history are at

     The Accounting Review Annual Report for 2010

    July 14, 2010 message from Steve Kachelmeier [

    Hi Bob –

    I thought you would be interested in the attached TAR Annual Report and Editorial Commentary for 2010, particularly Table 3 and the corresponding discussion. If any of this makes it to your list-serve, please let me know.

    Best regards,


    July 14, 2010 reply from Bob Jensen

    Steve Kachelmeier's latest message to me is shown at above. Since his public-information attachment is 50 pages long, I am serving it up at rather than attaching it to my AECM messages --- ReportTAR_2010.pdf

    As you recall, I’ve been critical of the lack of validity challenges of TAR articles across the past 60 years, including the most recent years ---

    Replications and commentaries on validity are very, very rare for a TAR journal striving to be scientific.

    Although Steve and I have gone round and round about the issue of validity challenges, I highly respect Steve for being one of the most open TAR editors in history (at least open with me) and thank him for the time he devoted to a succession of private messages with me. His TAR annual reports are much more detailed than those of most previous editors. The 2010 50-page TAR annual report is certainly no exception. I should note that this is the last year of Steve’s tenure as TAR Editor. The task of editing TAR has become overwhelming in many ways, although it is made more manageable by the sacrifices made by associate editors and ad hoc reviewers.

    Members of the AAA owe Steve a huge round of applause!

    Although Steve is deeply rooted in accountics, he is perhaps easier to deal with than most accountics professors who simply ignore their critics and shut their critics out of Plato’s Cave.

    I will probably have more to say about Steve’s 2010 TAR annual report, but I’ve not yet had time to read it.

    Perhaps this time I will let AECM subscribers take the first cut at this report. It’s probably impossible for me to be an AECM lurker, but I will give it a shot for at least a few hours.

    Bob Jensen

    July 14, 2010 reply from Paul Williams [Paul_Williams@NCSU.EDU]


    Thank you for providing the report. Even a cursory glance shows that nothing has changed. Everything published can be classified by the same simplistic "area" rubrics, e.g., auditing, financial -- the undergraduate curriculum. Astonishingly, 63.5% of the papers were empirical-archival, which means the data utilized in these studies was not gathered by the experimenter -- an odd way to do "science" one can have confidence in.

    As part of a paper Sue Ravenscroft and I are working on, I compiled a profile of TAR for 2009. Sixty-nine papers appeared in 2009; four of those were invited "opinion" pieces (you can predict from which institutions those invited to express their opinions received their PhDs). Of the remaining 65 papers, 93% involved constructing a linear model: 47 regression models and eight ANOVAs (this is the mandated method for doing "behavioral work). Seven papers were what TAR refers to as "analytic." These are mathematical demonstrations that the world conforms to pnicipal/agent theory. Given the growing skepticism even among economists and other social sciences that the methodology (the template to use Lee Parker's description) that dominates TAR produces anything that actually increases our understanding of anything, it does seem remarkable that TAR reproduces itself so faithfully year after year.

    A paper by Jon Elster ("Excess Ambitions"), a political scientist, that Bob put us on to, makes the case that the current methodology (methidolitry) that dominates the social sciences is not just useless but harmful.

    To Steve's credit, he concludes his report with an homage to Anthony Hopwood whose presidential address called for more diversity in accounting scholarship. As Anthony said, accounting isn't a science but a practice (Philip Stamp, a physicist and son of Edward Stamp has an excellent essay ("In Search of Reality") that cogently explains why accounting perhaps will never be one and if it does become one it will be more like linguistics than natural sciences.)

    Steve concludes his report by encouraging his successors to agree with Hopwood's challenge, but passes the buck to the "scholarly community" to make it happen. That's code for submitting other than 20 variable regression models constructed out of arhived financial data to TAR, but the catch 22 of that is that if you do the community of scholars at TAR doesn't recognize it as scholarship (Joni Young and I tried that and were told rather emphatically that TAR was a journal ONLY for the kind of work that is published there).

    What it takes is an editor with some spine to acknowledge that 20 variable regression equations constructed from COMPUSTAT data are meaningless (in accounting Occam's razor has been dulled so that it cuts nothing). We need an editor that has the guts to issue a moratorium (like Schipper did with JAR and behavioral experiments): TAR will publish no more empirical, financial studies that are constructed out of the same material as the thousands of previous ones that have been done over the last 40 years.

    Until we have some leadership that has the courage to admit the obvious (the emperor has no clothes), then nothing will change. As long as we retain such a simple-minded, natural science view of what constitutes valid scholarship there is no prospect that things will be different. In spite of Steve's protestations that he has tried to broaden the content of TAR, this report looks the same as the ones submitted by TAR editors in the past 25 years (Steve Zeff and Gary Sundem responded well to the changes that were happening in the academy -- I have published empirical evidence of that); however, political correctness reared its ugly head (the so-called financial reporting revolution, which was actually a political revolution) and the world of accounting was compelled to comply with a particular ideology. (Nihel Chabrak has a working paper that rather meticulously documents the connections between the Chicago and Rochester Schools to the ideological movement of neoliberalism; follow the money and see who funded these programs and what their purpose for funding them is -- increasing our understanding of accounting's role in society is far from being the purpose).

    July 14, 2010 reply from Steve Kachelmeier []

    Hi Bob –

    Though I am very tempted to just let this ride, I am struck by your earlier observation that ignoring our critics is worse than responding to our critics, so I will try to offer a brief response that you are welcome to post if you wish.

    The close of Professor Williams’ first paragraph unmasks the fact that his beef is not so much with The Accounting Review or even with accounting research as it is with the concept of a “social science.” To quote, “the current methodology (methidolitry) that dominates the social sciences is not just useless but harmful.” Sorry, but that train has already left the station. When the bulk of our 500+ new submissions per year reflect Professor Williams’ view, I will listen. Until then, The Accounting Review is faithfully representing the cross-section of the scholarship we receive. I think Table 3 of the Annual Report (and the similar table last year) demonstrates that point directly.

    The broader point that I have been trying to virtually scream out over the past two years is that The Accounting Review is not controlled by the conniving editor or by any individual school (or school’s ideology) or even by the leadership of the American Accounting Association. Rather, it is largely controlled by the community, as represented by 582 different members of the scholarly community across a wide variety of topical and methodological interests and a wide variety of institutions who kindly reviewed TAR submissions last year. Surely, the editor must step in (sometimes boldly) and overrule reviewers from time to time, especially when they are split. But I cannot recall a single instance in which a TAR editor overruled two favorable reviewers. And the reviewers are us. TAR names all 582 in the Annual Report (with my heartfelt thanks). Are all 582 members of the same conspiracy? Or put differently, is it conceivable that 582 different people fail to see that the emperor has no clothes, to use Professor Williams’ metaphor? I think not.

    Quickly, a couple of clarifications – of the four “invited opinion pieces” TAR published in 2009 that were referenced in Professor Williams’ note, two were AAA Presidential Scholar Lectures, which we publish automatically (Anthony Hopwood’s 2007 TAR article is another example). The other two were discussions of special research forums – one by Greg Waymire in the January 2009 issue and the other by Mark Bradshaw in the July 2009 issue. I stand behind both invitations, and somewhat ironically, given the tenor of Professor Williams’ comments, both call for a more inclusive view of accounting scholarship.

    Professor Williams’ TAR anecdote dates back before the current editorial regime. But without getting into the specifics of that anecdote, what does an example of one suggest for a journal that receives over 500 new submissions per year? Show me 200 such examples, and I’ll surely take stock. Until then, I stand by the assertion based on Table 3 of the Annual Report that we run a fair game.

    Finally, the “follow the money” sentence at the end of Professor Williams’ note is telling of the cynicism underlying concerns of this nature. Is the implication that editors are somehow being bribed to conform to a certain ideology? If so, I haven’t seen any of the payoff yet. Perish the thought, because I know it doesn’t fit conspiracy theories very well, but my coeditors and I are actually doing this job to provide a service. Notwithstanding our disagreement, I do appreciate Bob Jensen’s note of thanks in his comments. Apparently, not all are convinced.

    Best regards,

    Steven Kachelmeier
    Senior Editor, The Accounting Review

    June 14, 2010 reply from Dan Stone, Univ. of Kentucky [dstone@UKY.EDU]

    Wow -- Steve K produces a 45+ page report that details TAR's process for selecting editors, reviewers and manuscripts and Pauls' reaction is -- "nothing has changed"? I disagree. This has changed:

    How about the level of accountability to the AAA community? How about the level of commitment to transparency and openness?


    Dan Stone

    June 14, 2010 reply from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    I have one comment on the following sentence in Steve's response: "When the bulk of our 500+ new submissions per year reflect Professor Williams’ view, I will listen. Until then, The Accounting Review is faithfully representing the cross-section of the scholarship we receive."

    Tenure clocks are short. (Almost) no one believes a non-empirical or non-analytical paper would be published in TAR. What rational tenure track asst prof would send a different kind of research to TAR? In my view, that would be tenure suicide at any school that demands TAR level publications.

    How many of those 500+ submission come from non-tenured profs? (If in report, my apologies.)

    If the "leadership" truly believes there should be greater diversity, then they have to be seen to publish it (maybe by invitation). Otherwise, the status quo will be maintained. The risk to most non-tenured faculty is too great.

    This current experience is a self-fulfilling prophecy.


    Who left a tenure-track position in 1995 because I didn't want to spin tapes and beat the data into submission for the rest of my life and is now reasonably happy as a clinical.

    And who had collected almost all data for my admittedly empirical dissertation (including price data for companies not in CRSP) by reading microfilm at the SEC library in NYC. Do they even have SEC libraries now?

    As an aside to a comment Bob made earlier about hand collecting data: I wanted to point out that April Klein at NYU who one a best paper one year at the AAA hand collected all of her data on directors from annual reports. I know because I watched her. And, this was before pdfs of annual reports.



    Informative and Concise
    "INFORMS Guidelines for Copyright & Plagiarism ," InformsOnline --- Click Here
    Thank you Dan Stone for the heads up.

    Bob Jensen's threads on the dreaded DMCA ---

    "How Sharia-compliant is Islamic banking?:" by John Foster, BBC News, December 11, 2009 ---

    The Islamic finance industry has often battled with the question: How Islamic is Islamic banking?

    The question's pertinence was raised in March last year, when Sheikh Muhammad Taqi Usmani, of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.

    Usmani is the granddaddy of modern-day Islamic finance, so having him make this statement is synonymous with Adam Smith saying that free-markets are inefficient.

    Because Sukuk underpin the modern-day Islamic financial system, one of its pre-eminent proponents arguing that the epicentre of the system was flawed sent shockwaves through the industry.

    It also gave ammunition to the many critics who see Islamic finance as an industry more driven by cultural identity than practical problem solving: as a hodgepodge of incoherent, incomplete, impractical and irrelevant ideas.

    Recognisable products

    The products that modern-day Islamic bankers have created are very similar to conventional products.

    This immediately creates a problem for Islamic banks, as conventional banks charge borrowers an interest rate through which they can reward their depositors and make some profit for being the broker.

    With interest ruled out it is harder to make money.

    The modern Islamic banker has found a way around this prohibition, however.

    As in many Islamic products, the bank enters a partnership with its depositors and invests his money in a Sharia compliant business.

    The profit from this investment is then shared between the depositor and the bank after a set time.

    In many cases this "profit rate" is competitive with the conventional banking system's interest rate for savers.

    Lease agreements

    Alternatively, an Islamic banker might enter into a lease agreement for a car or a house with an individual.

    The bank would buy a vehicle outright and then lease it back to the person who wanted it, over a time period that would ensure that the capital was repaid and the bank made a profit.

    Alternatively the bank would enter into a partnership with a person wanting to buy a house. The bank would buy 70% of the house, the individual 30%.

    The bank then rents its share of the house back to the individual until the house is fully paid for.

    The bank makes a profit on the rent, which would be higher than equivalent rents in the area, but on an annualised percentage basis, would look very much like a conventional mortgage interest rate.

    To the casual observer, a spade is a spade.

    Whether the product is dressed up in Arabic terminology, such as Mudarabah, or Ijarah, if it looks and feels like a mortgage, it is a mortgage and to say anything else is semantics.

    Sophisticated finance

    The potential wealth locked up in oil-rich Gulf states encouraged the conventional banks to enter Islamic finance.

    HSBC established the Amanah Islamic Finance brand in 1998 and Deutsche Bank, Citi, UBS and Barclays quickly joined the fray, all offering interest-free products for wealthy Arabs.

    However, this new generation of Islamic bankers had cut their teeth in the City and Wall Street, and were used to creating sophisticated financial products.

    They often bumped heads with the Sharia scholars who authorised their products as Sharia compliant.

    However, these bankers had a way of dealing with this, as one investment banker based in Dubai, working for a major Western financial organisation explains:

    "We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari'ah compliant].

    "If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic."

    No consensus

    This "Fatwa shopping", which was carried out by some institutions, brings us back to the Sharia scholars.

    Even these scholars do not agree all the time, which means that in some cases a product is deemed Sharia compliant in one market and not in another.

    This is especially the case with Malaysian products, which are often deemed not Sharia complaint in the more austere Gulf.

    "Often no rulings exist for modern day problems, such as use of narcotics," Alamad explains.

    "In Islam intoxication by wine is forbidden, but at the time of the Prophet Mohammed there was no crack cocaine."

    Modern scholars had to interpret the rules on intoxication, and the consensus was that crack should also be forbidden to Muslims, as it is a dangerous intoxicant.

    "This is how we make rulings, whether in finance or societal," Alamad says. "The consensus rules, which usually will become mandatory for all Muslims to follow, but there are some opinions and sometimes scholars are not in the consensus."

    Banking is banking

    This makes it more important to be in the consensus, and so getting a favourable ruling from a leading Sharia scholar is important for a product manager.

    That is why the top scholars can earn so much money - often six-figure sums for each ruling.

    The most creative scholars are the ones in the most demand, says Tarek El Diwany, analyst at London-based Islamic financial consultancy Zest Advisory.

    "To date, most Islamic financiers have been looking at examples of financing in Islamic history and figuring out how to apply them to today's financial products."

    Continued in article

    Bob Jensen's threads on Islamic accounting are at

    "How Big Banks Fail and What to Do about It," Stanford GSB News, July 2010 --- Click Here

    In a new book Professor Darrell Duffie describes the financial network of incentives and financial contracts that lead to run-on-the-bank calamities during the financial crisis of 2007-2009. The Stanford Graduate School of Business finance professor argues that placing the global financial system on a sounder footing depends on an understanding of how the largest and most connected banks — the major dealer banks — can make a sudden transition from weakness to failure.

    July 2010

    STANFORD GRADUATE SCHOOL OF BUSINESS—In a forthcoming book, Stanford Graduate School of Business finance expert Darrell Duffie goes behind the scenes to describe the financial network of incentives and financial contracts that lead to run-on-the-bank calamities during the financial crisis of 2007-2009. He argues that success in placing the global financial system on a sounder footing going forward depends on an understanding of how the largest and most connected banks — the major dealer banks — can make a sudden transition from weakness to failure.

    In How Big Banks Fail and What To Do About It, to be published by Princeton University Press in July, Duffie, the Dean Witter Distinguished Professor of Finance, describes the failure mechanics of dealer banks in clinical detail. He also outlines improvements in regulations and market infrastructure that are likely to reduce the risks of these failures and reduce the damage they cause to the wider financial system when they do fail. The dealer banks are at the center of the plumbing of the financial system. Among other crucial activities, they intermediate over-the-counter markets for securities and derivatives. Although the financial crisis has passed, the dealer banks remain among the most serious points of weakness along the backbone of the financial system.

    Once the solvency of a dealer bank is questioned, its relationships with its customers, equity investors, secured creditors, derivatives counterparties, and clearing bank can change suddenly. The incentives at play are similar to those of a depositor run at a commercial bank. That is, fear over the solvency of the bank leads to a rush by many to reduce their potential losses in the event that the bank fails. At first, the bank must signal its strength, giving up some of its slim stocks of remaining capital and cash, for to do otherwise would increase perceptions of weakness. Finally, it is impossible for the bank to stem the tide of cash outflows. The bank fails.

    The key mechanisms of a dealer-bank failure, such as the collapses of Bear Stearns and Lehman Brothers in 2008, depend on special institutional and regulatory frameworks that influence the flight of short-term secured creditors, hedge-fund clients, derivatives counter- parties, and most devastatingly, the loss of clearing and settlement services. Dealer banks, sometimes referred to as "large complex financial institutions" or as "too big to fail," are indeed of a size and complexity that sharply distinguish them from typical commercial banks.

    Even today, the failure of a dealer bank would pose a significant risk to the entire financial system and the wider economy.

    Current regulatory approaches to mitigating bank failures do not adequately treat the special risks posed by dealer banks, writes Duffie. Some of the required reforms are among those suggested in 2009 by the Basel Committee on Banking Supervision and in the U.S. Restoring American Financial Stability Bill. Other needed reforms to regulations or market infrastructure still do not receive adequate attention. A January 2010 speech by Paul Tucker, Deputy Governor of the Bank of England, shows that some regulators are aware of the significant changes still required.

    Bob Jensen's threads on the Greatest Swindle in the History of the World ---

    "Five Major Defects of the Financial Reform Bill," by Nobel Laureate Gary Becker, Becker-Posner Blog, July 11, 2010 --- 

    A 2300 page bill is usually an indication of many political compromises. The Dodd-Frank financial reform bill is no exception, for it is a complex, disorderly, politically motivated, and not well thought out reaction to the financial crisis that erupted beginning with the panic of the fall of 2008. Not everything about the bill is bad-e.g., the requirement that various derivatives trade through exchanges may be a good suggestion- but the disturbing parts of the bill are far more important. I will concentrate on five major defects, including omissions.

    1. The bill adds regulations and rules about many activities that had little or nothing to do with the crisis. For example, it creates a consumer financial protection bureau to be housed at the Fed that is supposed to protect consumers from fraud and other abusive financial practices. Yet it is not apparent that many consumers were victimized during the financial boom years, or that consumer behavior had anything of importance to do with the crisis. For example, consumers who took out subprime mortgages that required almost no down payments and had low interest rates were not victimized since these conditions enabled them to cheaply own houses, at least for a while. The “victims” were the banks, and especially Fannie Mae and Freddie Mac, that were foolishly willing to hold such risky mortgages.

    The bill gives the Fed authority to limit interchange or “swipe” fees that merchants pay for each debit-card transaction, although these fees had not the slightest connection to the financial crisis. Such price controls are in general undesirable, and hardly seem to require the attention of the Federal Reserve. The bill also gives the SEC authority to empower stockholders to run their own candidates for corporate boards of directors. Corporate boards often receive some blame for the crisis-mainly unjustified in my opinion- but stockholder election of some members will not improve corporate governance, and will probably make that worse.

    2. The Dodd-Frank bill gives several government agencies considerable additional discretion to try to forestall another crisis, even though they already had the authority to take many actions. The Fed could have tightened the monetary base and interest rates as the crisis was developing, but chose not to do so. The SEC and various Federal Reserve banks-especially the New York Fed- had the authority to stop questionable lending practices and increase liquidity requirements. These and other government bodies did not use their authority to try to head off the crisis partly because they got caught up in the same bubble hysteria as did banks and consumers. In addition, regulators are often “captured” by the firms they are regulating, not necessarily because the regulators are corrupt, but because they are mainly exposed to arguments made by the banks and other groups they are regulating.

    Despite the fact that regulators failed to use the powers they already had, the bill mainly adds not clear rules of behavior for banks, but additional governmental discretionary power. For example, the bill creates the Financial Stability Oversight Council, a nine-member panel drawn from the Fed, SEC, and other government agencies, that is supposed to monitor Wall Street’s largest companies and other market participants to spot and respond to any emerging growth in systemic risk in the economy. With a two-thirds vote this Council could impose higher capital requirements on lenders and place hedge funds and dealers under the Fed’s authority. Given the regulators reluctance to use the power they already had to forestall the crisis, it seems highly unlikely that this Council will act decisively prior to the emergence of a crisis, especially when a two thirds majority is required.

    3. Insufficient capital relative to bank assets was an important cause of the financial crisis. The bill does reduce the ability of banks to count as bank capital certain risky assets, such as trust preferred securities, and gives the Fed authority to impose additional capital and liquidity requirements on banks and non-bank financial companies, including insurers. I would have preferred a simple rule that raised capital requirements of banks relative to their assets, especially capital of larger and more interconnected banks. As suggested by Raghu Rajan and the Squam Lake group of economists, the bill probably should have required larger banks to issue “contingent” capital, such as debt that automatically converts to equity when the banks are experiencing large losses, or when a bank’s capital to asset ratio falls below a certain level.

    4. One of the most serious omissions is that the bill essentially says nothing about Freddie Mac or Fannie Mae. In 2008 these organizations were placed into conservatorship of the Federal Housing Finance Agency. During the run up to the crisis, Barney Frank and others in Congress encouraged Freddie and Fannie to absorb most of the subprime mortgages. In 2008 they held over half of all mortgages, and almost all the subprimes. They have absorbed even a larger fraction of the relatively few mortgages written after 2008. Freddie and Fannie deserve a considerable share of the blame for the crisis, but they continue to have strong political support. I would like to see both of them eventually dissolved, but that is unlikely to happen. Instead we are promised that they will be dealt with in future legislation, but I am skeptical that anything will be done to terminate either organization, or even improve their functioning.

    5. Many proposals in the bill will have highly uncertain impacts on the economy. These include, among many other provisions, the requirement that originators of mortgages and other assets retain at least 5% of the assets they originate, that many derivatives go on organized exchanges (may be an improvement but far from certain), that hedge funds become more closely regulated, and that consumer be “protected” from their financial decisions.

    Most of these and other changes in the bill are not based on a serious analysis of what contributed to the financial crisis, but rather are the result of political and emotional reactions to the crisis. Usually, such reactions do more harm than good. That is likely to be the fate of the great majority of the provisions of the Dodd-Frank bill.

    Are proposed IFRS changes to IAS 39 becoming too complicated for internal auditors, external auditors, regulators, preparers, and investors?

    "Deloitte comment letter on financial instruments," July 6, 2010 ---

    We agree with the Board’s objective in this phase of the IASB project to replace IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) to address weaknesses of the incurred loss model in IAS 39 that were highlighted during the global financial crisis. An impairment loss model that focuses on an assessment of recoverable cash flows reflecting all current information about the borrower’s ability to repay would be an improvement on the current approach in IAS 39 which relies on identification of trigger events and often leads to a delay in loss recognition. However, we have concerns about the specific requirements proposed by the IASB, in particular those to determine, and allocate, the initial estimate of expected credit losses on a financial asset and to use a probability-weighted outcome approach. We believe that this approach will in many cases be unnecessarily complex. Further, the incorporation of potential future economic environments in estimating recoverable cash flows would be extremely complex, costly and burdensome to apply by preparers.
    The requirement in the ED to forecast future economic environments and events without providing sufficient guidance with respect to the level of objectivity, verifiability, or support for the underpinnings of these inputs presents significant challenges to internal auditors, external auditors, and regulators. Overall, we believe that the measurement principle would not be operational if the Board were to adopt the ED in its current form.

    Jensen Comment
    One huge advantage of FAS 133 over IAS 39 is the tremendous amount of implementation guidance given by the FASB for implementation in a raft of implementation documents, illustrations, and pronouncements from the Derivatives Implementation Group. For educators and practitioners, the ever-increasing complexity of IFRS should be accompanied my more illustrations and implementation guidance. The IASB seemingly just does not have enough high quality support staff for helping educators and practitioners.

    Bob Jensen's threads on the controversies of FASB-IFRS convergence rules are at


    Are you still teaching an obsolete Black-Scholes Model

    "Coarse Thinking, Implied Volatility, and the Price of Call and Put Options," by Hammad Siddiqi, SSRN, January 8, 2010 ---

    People think by analogies and comparisons. Such way of thinking, termed coarse thinking by Mullainathan et al [Quarterly Journal of Economics, May 2008] is intuitively very appealing. We derive a new option pricing formula based on the notion that the market consists of coarse thinkers as well as rational investors. The new formula, called the behavioral option pricing formula is a generalization of the Black-Scholes formula. The new formula not only provides explanations for the implied volatility skew and term structure puzzles in equity index options but is also consistent with the observed negative relationship between contemporaneous equity price shocks and implied volatility.

    Jensen Comment
    Since valuation of options is required under FAS 133 and FAS 123-R, I think many intermediate accounting instructors are still leaving their students with the impression that the Black-Scholes formula is the appropriate alternative for valuing options. It is a poor valuation model for FAS 133 and a really lousy valuation model for FAS 123-R where employees have great aversion to the possibility that their stock options will tank out of the money.

    I've no thoughts yet on the appropriateness of the Siddiqi model proposed above, but for years when I was still teaching accounting theory I made my students learn the lattice model.

    The problem in theory and practice is that the Black-Scholes model that is popular in financial markets for purchased options is not especially well suited for employee stock options where employees tend to have greater fears that option values will tank before expiration dates. It's a little like having to put your salary in suspension and then losing it before you get it back. As a result the lattice model described below may be more approprate.

     "How to “Excel” at Options Valuation," by Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of Accountancy, December 2005 ---
    This is one of the best articles for accounting educators on issues of option valuation!

    Research shows that employees value options at a small fraction of their Black-Scholes value, because of the possibility that they will vest underwater. ---

    "Toting Up Stock Options," by Frederick Rose, Stanford Business, November 2004, pp. 21 --- 

    How to value stock options in divorce proceedings ---

    How the courts value stock options ---

    Search for the term options at

    "Guidance on fair value measurements under FAS 123(R)," IAS Plus, May 8, 2006 ---

    Deloitte & Touche (USA) has updated its book of guidance on FASB Statement No. 123(R) Share-Based Payment: A Roadmap to Applying the Fair Value Guidance to Share-Based Payment Awards (PDF 2220k). This second edition reflects all authoritative guidance on FAS 123(R) issued as of 28 April 2006. It includes over 60 new questions and answers, particularly in the areas of earnings per share, income tax accounting, and liability classification. Our interpretations incorporate the views in SEC Staff Accounting Bulletin Topic 14 "Share-Based Payment" (SAB 107), as well as subsequent clarifications of EITF Topic No. D-98 "Classification and Measurement of Redeemable Securities" (dealing with mezzanine equity treatment). The publication contains other resource materials, including a GAAP accounting and disclosure checklist. Note that while FAS 123 is similar to IFRS 2 Share-based Payment, there are some measurement differences that are Described Here.

    Bob Jensen's threads on employee stock options are at

    Bob Jensen's threads on fair value accounting are at

    Bob Jensen's threads on valuation are at

    Cleveland my be losing Lebron James, but at least the accounting faculty at Case Western are doing their best to offset the loss
    A Good Year for Case Western's Accounting Faculty ---



    Lee Blazey to Associate Professor

    Karen Braun to Associate Professor

    Julia Grant to Full Professor




    Dr. Timothy Fogarty, 2010 Issues Best Paper Award, Issues in Accounting Education, for "Blessed Are the Gatekeepers: A Longitudinal Study of the Editorial Boards of The Accounting Review" coauthored by Chih-Hsien (Debra) Liao (PhD, Case Western Reserve University).


    Dr. Gary Previts, 2010 Outstanding Educator Award, from the American Accounting Association.


    Jensen Comment
    I'm pleased with Case because it made a faculty home for one of my excellent former accounting students at Trinity University ---
    Yi-Jing Wu was a concert pianist until we convinced her the future was brighter with an accounting PhD
    She carried her tireless music work ethic into accounting

    "Asking The Difficult Questions: An Article About Audit Committees For The IIA’s Internal Auditor," by Francine McKenna, re:TheAuditors, July 5, 2010 ---

    Norman Marks asked me to write an article for Internal Auditor’s June 2010 issue.

    Norman Marks, CPA, is vice president, governance, risk, and compliance for SAP’s BusinessObjects division, and has been a chief audit executive of major global corporations for more than 15 years. He is the contributing editor to Internal Auditor’s “Governance Perspectives” column.

    This article is reprinted by permission with additional hyperlinks added that were not available in print editions.

    Asking The Difficult Questions

    Audit committees must proactively probe management and the auditors to gain insight and to make necessary oversight decisions.

    by Francine McKenna

    Audit committees have specific responsibilities with regard to their organization’s external auditors as a result of the U.S. Sarbanes-Oxley Act of 2002. The IIA’s Sample Audit Committee Charter emphasizes the importance of reviewing the proposed audit scope and approach for the audit, including coordination with internal auditing. Audit committees are expected to review the auditors’ performance and exercise final approval of their appointment or discharge. External auditor independence is required, thus any nonaudit services provided must be reviewed. Finally, audit committees are expected to hold regular private meetings with the external auditors to discuss important concerns.

    External auditors also are required to communicate consistently and effectively with the audit committee. in the united states, the Public Company Accounting Oversight Board (PCAOB). Interim Auditing Standard AU 380 requires auditors to determine whether all audit-related matters are communicated to the committee:

    • The auditor’s responsibility under Generally Accepted Auditing Standards (GAAS)
    • Significant accounting policies
    • Management judgments and accounting estimates
    • Audit adjustments
    • The auditor’s judgments about the quality of the entity’s accounting principles
    • The quality of the management discussion and analysis (MD&A)
    • Disagreements with management
    • Consultation with other accountants
    • Major issues discussed with management before retention
    • Difficulties encountered in performing the audit

    Audit committees too often rely on the auditors’ required disclosures without comment. They sometimes lack the independence, experience, or determination to ask the probing questions. It’s critical, however, that committees seek answers to vexing questions and not accept the response, “But that’s the way management has always done it.”

    When audit committees take for granted that important issues will be raised without prompting, they risk failing to exercise business judgment, which can be personally and professionally damaging. The issue is so important that the PCAOB is considering a proposed audit standard on communications with audit committees and related amendments to its interim standards. From the audit committee perspective, the most sensitive and highly challenging issues it will ever likely deal with are:

    • Responding to reports of possible fraud by senior executives
    • Responding to whistleblower reports
    • Evaluating the likelihood of management override of internal controls

    According to the Powers Report of the Special Investigation Committee of the Board of Directors of Enron Corp., the Enron board and its committees needed to significantly improve their monitoring of executives and the internal and external auditors: “The board, and in particular the audit and compliance committee, has the duty of ultimate oversight over the company’s financial reporting. While the primary responsibility for financial reporting abuses discussed in the report lies with management, the participating members of the committee believe those abuses could and should have been prevented or detected at an earlier time had the board been more aggressive and vigilant.”

    It’s very difficult to detect management override of internal controls. Audit committees can address this risk by:

    • Maintaining an appropriate level of skepticism
    • Continually strengthening the committee’s understanding of the business
    • Brainstorming with the internal and external auditors about fraud risks
    • Using the code of conduct/ethics to assess the financial reporting culture
    • Ensuring the support of a vigorous whistleblower program
    • Developing a broad information and feedback network that includes the internal and external auditors

    It’s essential to implement the automatic and direct submission of all complaints involving senior management, including whistleblower complaints, to the audit committee to effectively monitor management override of controls. This means direct access without filtering by management or the internal or external auditors.

    A whistleblower hotline is a statutory responsibility of the audit committee and cannot be delegated to company officials. Section 301 of Sarbanes-Oxley requires that audit committees establish effective whistleblowing procedures. Unfortunately, a recent Ethics Resource Center survey that examines how employees choose to report misconduct reveals that only 3 percent take their complaints to a hotline.

    When allegations are made, the audit committee must decide whether to initiate a formal investigation. Under U.S. Securities and Exchange Commission (SEC) rules, the committee can engage the external audit firm to carry out a forensic/fraud investigation. However, this may not be the best course of action.

    The Lehman Bankruptcy Examiner’s Report says the Lehmann audit committee asked Ernst & Young (E&Y) to support Internal Audit’s investigation of allegations made in a May 16, 2008, “whistleblower” letter sent to senior management. On June 12, 2008, Lehman’s Matthew Lee informed E&Y about his company’s alleged use of “Repo 105” transactions to move US $50 billion temporarily off the balance sheet at the end of the second quarter of 2008. Lee stated that these transactions created a misleading picture of the firm’s financial condition. According to the bankruptcy examiner, E&Y failed to disclose that allegation to the audit committee at a meeting the following day (Lehman bankruptcy report, v3, page 945).

    Lehman Brothers’ internal audit vice president was in charge of the investigation, not E&Y. Lehman “naturally” asked its trusted adviser, E&Y, to help. However, it’s poor practice to request that the external auditor lead or assist with internal investigations of potential fraud or illegal acts by top executives. In the Siemens’ U.S Foreign Corrupt Practices Act case, Siemens’ external auditor, KPMG, was initially asked to assist with the internal investigation of bribery and corruption of foreign officials. KPMG subsequently became a target of internal and SEC investigations and a defendant in shareholder lawsuits.

    In the Lehman case, E&Y had reviewed the company’s policy with respect to the accounting for these off-balance sheet devices. Reportedly, they concurred with management’s proposed treatment. However, they did not inform the audit committee of the transactions, or their growing volume and materiality with respect to the financial statements — and key indicators of the company’s health, such as their liquidity ratios.

    Continued in article

    Also see
    "My Commentary Part 1: Ernst & Young’s Letter To Audit Committee Members," by Francine McKenna, re: The Auditors, March 31, 2010 ---

    One of the Many illustrations in Jensen's Archives:  Update on the ConAgra Case
    Some questions were raised at a subsequent date about independence between KPMG and head of ConAgra's Audit Committee who is a former CEO of KPMG

    ConAgra Allegedly Cooks the Books
    The Securities and Exchange Commission filed a civil complaint accusing three former ConAgra Foods Inc. executives of improper accounting practices that helped pump up profit statements. The SEC named former Chief Financial Officer James P. O'Donnell, former Controller Jay D. Bolding and Debra L. Keith, a former vice president of taxes, as defendants in the complaint filed in U.S. District Court. The complaint alleged improper accounting from fiscal 1999 through 2001. The SEC filed a separate complaint against former controller Kenneth W. DiFonzo, 55, of Newport Beach, Calif.
    "ConAgra's Books Draw SEC Action," The Wall Street Journal, July 2, 2007; Page A10 --- Click Here

    The Securities and Exchange Commission has filed civil charges against ConAgra Foods, Inc., alleging that it engaged in improper, and in certain instances fraudulent, accounting practices during its fiscal years 1999 through 2001, including the misuse of corporate reserves to manipulate reported earnings in fiscal year 1999 and a scheme at its former subsidiary, United Agri-Products (UAP), in 2000 that involved, among other things, improper and premature revenue recognition. ConAgra is a diversified international food company headquartered in Omaha, Neb. Linda Thomsen, Director of the Commission's Division of Enforcement, said, "This case again illustrates that the Commission will take strong action when a company and its officers engage in accounting fraud that distorts the company's true financial condition. The facts here are particularly troubling because of the number of different improprieties engaged in by Con Agra, the length of time over which they occurred, and the fact that senior management was involved in the misconduct.", August 9, 2007 ---


    Jensen Comment on Audit Committee Successes

    When investigating audit committee outcomes, I hope Francine will mention successes as well as failures. I suspect there are countless successes of audit committees, most of which are never reported to the public. A few, however, are reported such as the success of the Audit Committee of Huron Consulting in discovering and disclosing executive-level fraud within the company ---
    In the case of Huron, the Audit Committee did its homework.

    Some of previous academic research on audit committees has been artificial and simplistic. Here's an example of what I consider to be bad accountics research:

    "Are Independent Audit-Committee Members Objective?" The Harvard Law School, July 6, 2009 ---
    Based upon a forthcoming Accounting Review article by Matthew Magilke of the University of Utah, Brian W. Mayhew of the University of Wisconsin-Madison, and Joel Pike of the University of Illinois at Urbana-Champaign.)
    The working paper can be downloaded from SSRN at

    We use experimental markets to examine stock-based compensation's impact on the objectivity of participants serving as audit committee members. We compare audit committee member reporting objectivity under three regimes: no stock-based compensation, stock-based compensation linked to current shareholders, and stock-based compensation linked to future shareholders. Our experiments show that student participants serving as audit committee members prefer biased reporting when compensated with stock-based compensation. Audit committee members compensated with current stock-based compensation prefer aggressive reporting, and a