Hi Tom,

Historical costing versus valuation is primarily a debate over primacy of balance sheets versus income statements. In valuation models like exit and entry value models, primacy is given to balance sheet accounts. Income accounts are residuals that typically blend realized and unrealized changes in values in a confusing way that often obscures the importance of a bird in hand versus 100 in the bush. Most temporal ups and downs in unrealized values are never realized. They're like vapors that never condense if you'll pardon my mixed metaphors.

In historical costing the primacy is on the matching concept with net income being the major focus on how well management performed as stewards with the resources entrusted to those managers. Balance sheet accounts emerge as leftovers from the measurement of income. The Paton and Littleton (1940) monograph is mostly a statement on how to compute net income based upon realized revenues.

There is also the issue that historical cost ledger balances are attested to history of auditing standards. We've not yet reached a point where most entry and exit values are allowed to be attested to in the auditing standards.

Historical cost has the advantage in the presumption that historical cost is equal to value when resources are first acquired. This greatly facilitates auditing of historical costs in the ledger accounts, and I know of no system where historical costs are erased from the ledgers.

I don't think AC Littleton argued that there was not value added in also learning how management is performing in terms of unrealized value changes. He just did not think they should be booked into the ledgers until realization took place. He also thought that there were many types of exit values that auditors had no business including in the attestation process, including the appraisal values of over 300 hotels provided in the 1981 Days Inn financial statements as a separate column beside the historical cost column.

To this day in 2010 auditing standards do not allow auditors to attest to appraisal values of hotels and to do so would be an enormous leap in the scope of attestation services. In comparison the attestation to exit values of financial and derivative financial instruments is a mini-step in that direction. To attest to real estate exit or entry values would be a giant step.

By being forced to have only one horrid column in mixed model financial statements, this has forced scholars like Mary Barth to comtend that the matching concept is dead meat. If she were allowed the to add valuation columns alongside the historical costing column the matching concept could be revived and put to good use in my judgment.

The reference is
"Global Financial Reporting: Implications for U.S.," by Mary Barth, The Accounting Review, Vol. 83, No. 5, September 2008 ---
Not free at http://www.atypon-link.com/AAA/doi/pdfplus/10.2308/accr.2008.83.5.1159

In the area of fair value accounting I agree with Mary Barth on fair value accounting for financial assets. I strongly disagree on fair value accounting for most non-financial assets. My disagreements are stated at http://www.trinity.edu/rjensen/theory01.htm#FairValue

On Page 1166 she flatly asserts:

First, there is no “matching principle.” That is, matching is not an end in itself and matching is not an acceptable justification for asset or liability recognition or measurement. The conceptual framework explains that matching involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events (FASB 1985, para. 146; IASB 2001, para. 95). Matching will be an outcome of applying standards if the standards require accounting information that meets the qualitative characteristics and other criteria in the conceptual framework. Matched economic positions will naturally result in matched accounting outcomes. However, the application of a matching concept in the conceptual framework does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or liabilities (IASB 2001, para. 95). Thus, there would be no justification for deferring expense recognition for an expenditure that provides no future economic benefit or for deferring income recognition for a cash inflow that will not result in a future economic sacrifice.

I strongly disagree. The standards just do not allow automobile inventories to be written up to expected sales prices until those sales are finalized. Carrying the inventories at historical cost or LCM (if permanently impaired)  is part and parcel to the "matching principle" eloquently laid out years ago by Paton and Littleton. Both international and domestic standards still require cost amortization, depreciation, and creation of warranty reserves. These are all rooted in the "matching principle" which has not yet died when defining assets and liabilities in the conceptual framework. In most instances the historical cost is still being booked and spread over the expected life of future economic benefits. Even if a company adopted a replacement cost (current cost) adjustment of historical cost of a depreciable asset, those replacement costs still have to be depreciated since old equipment cannot simply be adjusted upward to new, un-depreciated replacement cost.

Automobile manufacturers should not be allowed to report earnings when they produce more vehicles to add to vast parking lots of unsold vehicles.

Paton and Littleton never argued that the "matching principle" for expense deferral applies to assets that have "no future economic benefits." In that case there would be no benefits against which to match the deferred expense.  Hence there's no deferral in such instances. I do not buy Barth's contention that there is no longer any "matching principle." If there are potential future benefits, the matching principle still is king except in certain instances where assets are carried at exit values such is the case for precious metals actively traded in commodity markets that are extremely liquid.

Bob Jensen

Issues in Replacing Historical Cost of Inventories with Replacement Costs (Entry Values)

Aside of John Canning's famous dissertation, perhaps the best known advocate, across several decades of writing and speaking, of replacement cost accounting for fixed assets is the University of Michigan's famous Bill Paton. When Patricia Walters declared on the AECM that she, like Tom Selling, was an advocate of replacing historical costs of inventories with replacement costs, I became inspired to quote what Bill Paton had to say about replacing historical costs of inventories with replacement costs. That quotation appears near the end of this tidbit.

Before quoting Professor Paton, however, I thought I might mention some of the most famous advocates of current value theory theorists and advocates in history. You can read about most of the theorists mentioned in this tidbit in their Accounting Hall of Fame citations at
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/
Of course other Hall of Famers like Edgar O. Edwards and Philip Bell also advocated some forms of current value accounting, but their writings were somewhat more complex than the Hall of Famers mentioned below.

Famous Historical Cost Theorists
Probably the best known historical cost advocate of all time is AC Littleton followed by mathematician Yuji Ijiri. Both argued that historical cost balance sheets do not pretend to be valuations beyond the original dates on which the transactions were booked into the ledgers. Balance sheet numbers are simply residuals in from the calculation of income statement numbers under the Realization Principle for revenues and the Matching Principle for costs and expenses. Although Littleton and Ijiri also advocate price level adjustments, they are not advocates of current value adjustments beyond supplementary disclosures of exit values or entry values.

The most famous publication of the American Accounting Association is the 1941 monograph on historical cost theory by Paton and Littleton ---
http://www.trinity.edu/rjensen/theory02.htm#Paton
The biggest selling monographs in the AAA's Studies in Accounting Research series are the double/triple bookkeeping monographs by Yuji Ijiri that were rooted in historical cost accounting ---
http://aaahq.org/market/display.cfm?catID=5

Famous Exit Value (Disposal Value) Theorists
In history, the strongest advocates of exit value replacement of historical costs in financial statements included Kenneth McNeal, Bob Sterling, and Australia's famous Ray Chambers. Their main arguments boiled down to very simple wash sale illustrations. Suppose Company H and Company S begin with identical balance sheets of A=$1000 Corn Inventory and E=$1.000 Equity where each company paid $1 for 1,000 bushels of corn. In order to dress up the financial statements before closing its books, Company S sells its corn for $2 per bushel in an intended wash sale. Then immediately after closing its books Company S buys back corn for $2 per bushel. Company S now has a balance sheet of A=$2,000 Corn Inventory and E=$1000 Invested Capital + $1,000 retained earnings.

In the above example Company S looks like it performed twice as well as Company H even though in the final outcome both remain identical in terms of all economic criteria. Company H has simply undervalued its historical cost inventories and did not realize any revenue from sales. In real life, however, the situation is not so simple. In 1981 when Days Inns of America wanted to dress up its historical cost balance sheet (for an IPO) the transactions cost of selling each of its 300+ hotels would've been immense for selling and then buying back each hotel. Accounting rules did not permit departing from historical cost valuations for each of these hotels in its main Price Waterhouse-audited financial statements.. However, nothing prevented Days in from hiring a large real estate appraisal firm from deriving 1981 unaudited exit value estimates of each of the 300+ hotels.

To make matters worse, the "value in use" of these 300+ plus hotels most likely plunged dramatically the day its dynamic President had a sudden heart attack and died at a very young age. A "value in use" estimate is much more volatile than historical cost or replacement cost valuations.

The 1981 Days Inns Annual Report (for which I have three copies in my barn remaining from my days of teaching in which I loaned a copy of this 1981 Annual Report to each of my students) would've made McNeal, Chambers, and Sterling ecstatic. The historical cost book values of these 300+ hotels aggregated to $87,356,000 whereas the exit values aggregated to an unaudited amount of $194,812,000. Wow!

This is probably value added when it comes to financial analysts and investors willing to trust these unaudited estimates from a real estate appraisal firm. The numbers of course are much more subjective and easy to manipulate for devious purposes than the cost numbers. Ande even if totally accurate, there's a huge problem of having measured current hotel values of a company's assets in there worst possible economic uses --- disposing each asset separately in assumed liquidation of the company. The $194,812,000. sum of disposal values of Days Inns hotels  totally ignores the synergy value of these when grouped together under the management of Days Inns. Exit value theorists have never provided us with a way of measuring the value of the whole other than by summing the exit disposal values of the parts. In reality the "value in use" of these 300+ hotels might've been $294,812,000, $394,812,000, or $494,812,000. We will never know because exit theorists cannot measure "value in use" of grouped assets of one company let alone the "value in use" if these hotels are sold to other companies like Holiday Inns of America where "value in use" is probably very different than "value in use" for Days Inns.

Famous Replacement Cost (Entry Value) Theorists
I think the best known theorists advocating entry values (replacement costs) are John Canning (in a published doctoral thesis) and William A Paton (in a lifetime of writing and speaking). Although Paton's most famous book is probably the 1941 Paton and Littleton monograph on historical cost theory this was more of an academic exercise for Bill Paton since his heart was truly in replacement cost fixed asset valuations ---
http://www.trinity.edu/rjensen/theory01.htm#Paton

Whereas the exit value of a 20 year old hotel might be $1 million in a liquidation sale, the replacement cost (entry value) of a new hotel might be $5 million. In entry value theory this $5 million would have to be adjusted for 20 years of hypothetical depreciation to arrive at its $2 million replacement cost estimate. Exit value theorists are proud of their not having to resort to arbitrary depreciation calculations. Entry value theorists are proud of being able to estimate current values when exit values are meaningless.

 Many older assets may have $0 exit value even though their value in use is still considerable. This is especially the case when costs of dismantling an old and large piece of equipment and re-installing it in another factory is so prohibitive that nobody will pay to re-install the item. There's also the problem of the way exit value markets work even for new assets. If a farmer pays $500,000 for a new diesel tractor the exit value may decline by 100,000 before the tractor is moved from tractor dealer's show room. Such is the nature of "new" versus "used" equipment exit values even when used is still or almost new.. Entry values are not quite so flaky since the replacement cost of that tractor might remain constant between the date of purchase and a month later after the tractor was used vigorously.

Also in the case of exit values of 300+ hotels, exit values of a New Orleans Days Inn versus a Fargo Days Inn (of identical age, style, and sizes) may differ greatly due to variations resale markets  in local economies. This is not generally true of replacement costs since the cost of constructing new hotels is not so variable in terms of local economies.

Thus replacement costs overcome the flaky nature of many exit value estimates. But replacement costs suffer from the same maladies of historical cost valuations in that arbitrary formulas for such things as depreciation and amortization.

To put my Bill Paton quotations into perspective it should be noted that most accounting historians describe him as a "replacement cost" man ---
http://www.trinity.edu/rjensen/theory01.htm#Paton

Also Paton's writings are best known from the days before we had accounting standard setting bodies like the APB, FASB, and IASB. The AICPA and its ARB committees seldom set accounting rules on really controversial issues. Instead GAAP, like common law, was drawn from "generally accepted" practices of accounting in industry and practices acceptable to accounting system auditors. The SEC was formed in 1933 with powers to dictate accounting standards for corporations listed on major stock exchanges in the U.S. However, the SEC was then and still is reluctant to take standard setting away from professional accountants.

In 1932 corporations and their auditors had much more flexibility than today in how to value current and fixed assets than the have today. For example in 2010 both the FASB and IASB rules virtually require historical cost inventory valuation for the majority of inventories reported globally in balance sheets. But in 1932 it was much easier for a company to report inventories at current values if its shareholders did not make a big fuss over exit value or entry value reporting of inventories.

But in since the crash of 1929, most companies stuck with historical cost valuation. Beside my desk I always keep the Second Edition of Accountants' Handbook edited by and heavily written by William A. Paton. The First Edition is dated 1923, and my copy is the Second Edition dated 1932.

I think the following quotation from Paton's 1932 handbook pretty well describes the debate among theorists that carries on to the 21st Century: Perhaps the doctoral thesis of John Canning eventually strengthened Paton's advocacy of replacement cost accounting. He generally did not advocate exit values for going concerns.

 

Accountants' Handbook. Edited by William A. Paton,  Second Edition (Ronald Press, 1932, pp. 741-742).
(emphasis added with red underlining)

The Balance Sheet of Going Concern --- Conventional View In connection with special statements for enterprises undergoing reorganization or liquidation it is generally conceded that appraisal values---"fair market values"---are of decided importance; in the case of regular balance sheets for the going concern, however, most accountants question the general and continuous use of other bases of valuation than cost. In "Limitations of the Present Balance Sheet," Journal of Accountancy, 1928, Couchman states: The theory underlying the balance sheet of a going concern is that every classification displayed therein shall have resulted from accomplished financial transactions and/or unfilled obligations to which the organization is a party, modified by the attempt allocate to proper fiscal periods all earnings and all expenses.  Kester writes in "Accounting Theory and Practice," Vol. II The controlling purpose in the valuation of assets subject to depreciation is not so much the statement of accurate values for use of the balance sheet but rather a distribution of the depreciation charge as will spread the cost of the depreciating asset most equitably over the product turned out by the asset. It is the operating (income statement) rather than the balance sheet view of what should govern. Canning, emphasizing the distinction between cost of replacing the existing agent and cost of replacement of service, in Economics of Accountancy, writes The consequential difficulties and losses from substituting one instrument for another, whether they are like or unlike in physical character, are in services is nearly always a more appropriate value than any other, even in the case in which the capital item in use can be replaced by another at a price less than was paid for the one in use, it does not follow that this price reduction should necessarily affect the proper valuation of the present instrument. It may not pay actually to replace now. And at another point in the same treatise, he writes substantially as follows: Accountants are properly skeptical of valuation bases other than original cost. But when the weight of evidence tends to show that some higher or lower basis is really more significant they are not unwilling to revise valuations. Outlay cost is a real thing. So too will replacement cost become a real thing when it is incurred. But because prices of equipment fluctuate because of the amount and kind of service needed in an enterprise change with its selling opportunities---because of all these extremely elusive matters requires a good deal of positive evidence to show on which side of experienced cost per unit of service a future unit cost is likely to lie. It must be cost, as such, to serve as a datum point for revaluations. On the other hand it must be emphatically asserted that adequately to consider possible future substitutions it is a difficult and expensive a task as redesigning all plants and fixed equipment. Cost of reproduction new (of existing agencies) les an allowance for depreciation may be a good working rule in damage suits; it is absurd as a sole rule of going-concern value. Littleton in "Value and Price in Accounting," Accounting Review, September 1929, holds: "Cost is not value and is not entered in the accounts as such/" And again, "Accounting is a record function, not a valuation function."   Limited Recognition of Changing Values On the other hand, there are numerous accountants who are inclined to disagree with the conventional position. H.C. Daines in "The Changing Objectives of Accounting," Accounting Review, 1929 writes: The adoption of the completed-transaction theory of income has forced the accountant into a rather embarrassing position with reference to the valuation of his balance-sheet items. In keeping with the double-entry process the accountant has thought it necessary to tie his income statements to the balance sheet. This has resulted in a rather artificial showing of values in the balance sheet and an attempt on the part of the accountant to justify this method of showing values as proper for a going concern. Quotations that follow suggest limited recognition of changing values

What the FASB and IASB has given us in ensuing years are rules for "limited recognition" of changing values in a single-column horrid mixed model for financial statements that pleases nobody and renders aggregations such as the number for "Total Assets" or "Net Income" meaningless summations of apples plus oranges plus partridges in a pear tree. Bob Jensen's contention is that the "limited recognition" show be required in the form of historical cost columns alongside current value columns.

 

Famous Replacement Cost (Entry Value) of Inventories
Replacement cost advocates are generally pretty consistent when it comes to fixed assets although they vary as to whether replacement costs should replace historical costs or whether they should just be supplements to historical cost statements as they were during the short life of FAS 33. Replacement cost advocates are less consistent when it comes to inventories where even some replacement cost theorists contend that profits should only be booked when goods are sold rather than for value changes while the goods sit finished goods inventory. A huge problem here is the moral hazard that management may overproduce inventory or capitulate in labor negotiations just to dress up inventory profits when replacement costs are increasing, especially when managers have generous profit sharing compensation plans.

 

Accountant's Handbook. Edited by William A. Paton,  Second Edition (Ronald Press, 1932, Page 419).

Replacement Cost Inventories . . . Further in the retail market selling prices do not always fluctuate closely in terms of replacement costs and accordingly the point that the merchandise reports to management should in all cases show current costs rather than actual book costs has less force in this field. This is particularly true of style goods and highly specialized goods in general; it is less true in staples such as flour, sugar, coal, etc. In the wholesale market, on the other hand, selling prices tend to move more closely with changing costs and hence there is more force to the argument in favor of valuation on a replacement cost basis in this field. Specific Objections It is not approved for income tax purposes by the Bureau of Internal Revenue. (in 1932 there were no computers such that having more than one basis of inventory valuation was a computational nightmare)   Where it means the inclusion of appreciation in income it has no general legal standing. (meaning that co-mingling unrealized price appreciations with realized revenues renders mixed-model income statements confusing)   It is viewed as non-conservative by accountants, bankers, and business men generally. (in 1932 there was a significantly lower proportion of business women)   It requires the determination of replacement costs for entire stock at the inventory date, a considerable task, especially for certain classes of goods. (this is a problem that still exists in the 21st Century after having witnessed the extreme inaccuracies of firms that tried to comply with FAS 33 while it was in effect)   It leaves the more or less dependable field of book records for a territory where estimate plays a considerable part. (which is why auditors to this day are not allowed by auditing standards to generally attest to current values of non-financial assets except in the cases of extreme impairment where inaccuracies are more acceptable in the accounting standards) Paton continues the discussion here with the "Meaning of Replacement Cost"

 

And thus I've added a bit of history to my ongoing debate with my friends Tom Selling and Patricia Walters. . I don't think it will change their minds, but it does add historical perspective to the debate.

Bob Jensen's threads on bases of valuation in accounting are at
http://www.trinity.edu/rjensen/theory02.htm#BasesAccounting

Hi Zane,

You just made my point. Especially note David Reily's article quoted below.
By being constrained to single-column in a set of financial statements, standard setters have created mixed model nonsense with some items measured at amortized historical cost, some items measured at exit values, some items measured at replacement costs, some items measured at discounted cash flows, and on and on and on. Aggregations become meaningless.

Consider the simple model of a farmer's recent estate during probate. Financial statements typically have two columns for such items as the two shown below:

Historical cost serves a number of purposes including data for the estate's various tax returns plus audited stewardship reporting. Exit values serve a number of purposes mostly surrounding the unaudited estate settlement among the heirs especially settlements are made before assets are liquidated such as when a brother inherits the entire farm with a single settlement payment to his sister. In terms of auditing and accuracy, the historical cost column is much more accurate but is subject to arbitrary time allocations for depreciation. The exit values are highly inaccurate, especially for big ticket items like the value of land that depends heavily upon what buyers decide to eventually make offers. Auditors refuse to attest to land and building exit valuations.

If forced to mix the above columns into one "mixed model" single column it destroys the use of the model for all the various purposes mentioned above. That's essentially what has happened with both FASB and IFRS standards today that are restricted to one column. Aggregations become meaningless ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

The 2009 Balance Sheet of Bank of America lists the following from the Interactive Annual Report 2009 --- http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-reportsannual

Total Assets is a "mixed model" mess of thousands of bank buildings valued at straight-line historical cost book values, investment portfolios valued at current exit values, some assets valued at replacement costs, some assets valued at discounted future cash flows, and so on. Total Assets also contains badly hundreds of millions of underestimated loan loss reserves.

Total Liabilities is a "mixed model" mess of millions of debt contracts valued at amortized cost, millions of debt contracts valued at exit values, and big ticket items like pensions valued at discounted cash flows.

The mixed model Total Equity E=A-L becomes a meaningless aggregation. It could be more meaningful if Bank of America was required to report multiple-column financial statements. Instead the FASB sticks with a single mixed model that produces misleading aggregations.

Rather than fix the problem with more columns in the financial statements the FASB is contemplating doing away with rows in the financial statements, the rows providing nonsensical aggregations.

"Profit as We Know It Could Be Lost With New Accounting Statements," by David Reilly, The Wall Street Journal, May 12, 2007; Page A1 --- http://online.wsj.com/article/SB117893520139500814.html?mod=DAT

Pretty soon the bottom line may not be, well, the bottom line.

In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.

ACCOUNTING OVERHAUL

Get a glimpse of what new financial statements could look like, according to an early draft recently provided by the Financial Accounting Standards Board to one of its advisory groups. The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting -- from clerks to chief executives -- to relearn how to compile and analyze information that shows what is happening in a business.

This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.

At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.

The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.

There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.

"The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

Such opposition doesn't surprise many accounting experts. Net income is "the basis for bonuses and judgments about what a company's stock is worth," says Stephen A. Zeff, an accounting professor at Rice University. "I just don't know what the markets would do if companies stopped reporting a bottom line somewhere." In the U.S., professional investors and analysts have taken a more nuanced view, perhaps because the manipulation of numbers was more pronounced in U.S. markets.

That said, net profit has been around for some time. The income statement in use today, along with the balance sheet, generally dates to the 1940s when the SEC laid out regulations on financial disclosure. But many companies have included net profit in one form or another since the 1800s.

In its fourth annual report, General Electric Co. provided investors with a consolidated balance sheet and consolidated profit-and-loss account for the year ended Jan. 31, 1896. The company, whose board at the time included Thomas Edison, generated "profit of the year" -- what today would be called net income or net profit -- of $1,388,967.46.

For the moment, net profit will probably exist in some form, although its days are likely numbered. "We've decided in the interim to keep a net-income subtotal, but that's all up for discussion," the FASB's Mr. Herz says.

I would rather see multiple-column financial statements that would take very little training for financial analysts to understand why historical cost net income differs from exit value change net income. More importantly financial analysts should understand the advantages and limitations of each column in a multiple-column set of financial statements. Historical cost is subject to arbitrary cost allocations where, in the terms of the Paton and Littleton (1940) monograph, costs do not "attach." Exit values are subject to high levels of inaccuracy, especially where market exchanges do not exist or are too shallow to provide reliable estimates. Discounted cash flows are ideal in theory but may require highly inaccurate estimates of future cash flow streams and discount rates.

Exit value accounting also makes a mashing of the income statement by by combining realized revenue with unrealized value changes as if they were the same things when computing net income. In some cases such as debt to be held to maturity, the unrealized value changes are pure fiction.

December 21, 2010 message from Bob Jensen

I've really enjoy these intense friendly debates about single-column versus multiple column financial statements with Tom Selling and Patricia Walters on the AECM. But I do not want to leave anybody with the impression that I'm an advocate of historical costing balance sheets. I'm opposed to such balance sheets for reasons never envisioned by current value reporting scholars like Kenneth McNeal, John Canning, Ray Chambers, Bob Sterling, Edgar Edwards, Phillip Bell, and others. I merely advocate a historical cost column in the balance sheet because I believe there is value added in reporting net earnings based upon only legally realized revenues and profits under the matching principle. I do think the historical cost balance accounts are residuals of the realized revenue matching concept that have enormous limitations in terms of evaluating financial opportunities and risks.

For one thing, historical cost balance sheets are too easy to abuse in terms of off-balance sheet financing. Secondly, historical cost balance sheets are bad alternatives for both speculation and hedging derivative financial instruments.

In 1941 Paton and Littleton could deal with some derivative financial instruments. Futures contracts presented no problems since they're cleared in cash each day. Purchased options were not viewed as being especially problematic for historical costing because financial risk was limited to cash lost in the rather nominal premiums paid. Covered written options were not problematic since they have an inherent hedge that limits financial risk. Naked written options were huge problems that I don't know that Paton and Littleton ever wrote about. But there is an escape clause in the Paton and Littleton monograph --- the escape clause that allows departures from historical cost based upon conservatism. Presumably, a company facing huge losses in naked written options must bring those estimated losses into the ledgers based upon conservatism. I don't think this escape clause is nearly as good as adding a current value column alongside a historical cost column in financial statements.

In their 1941 monograph Paton and Littleton did not envision interest rate swaps invented in 1984. Interest rate swaps are really portfolios of forward contracts and, as a matter of tradition, forward contracts usually have zero historical costs as counterparties take differing long and short positions without paying a premium like they would when buying or writing options. Until FAS 119 was passed in 1994, clients worldwide entered into over $100 trillion in interest rate swap notionals without even disclosing those swaps. One of the incentives to enter into such swaps was the ease of off-balance-sheet financing. These swaps also replaced U.S. Treasury note inventories as a means of managing cash.

In the early 1990's the Director of the SEC ordered the Chairman of the FASB to issue standards for disclosure and eventually booking of interest rate swaps on some basis other than historical costs since historical cost of a swap contract was $0. In doing so the Director of the SEC declared that the three main problems with financial reporting were "derivatives, derivatives, and derivatives." :

Video and audio clips of FASB updates on FAS 133 

• Audio 1 --- Dennis Beresford in 1994 in New York City  BERES01.mp3
• Audio 2 --- Dennis Beresford in 1995 in Orlando  BERES02.mp3

I support at least one required current value column alongside a historical cost column in every set of financial statements. I do not support the current mixed model, single-column financial statements under IFRS and FASB rules today because they're such a conglomeration of historical cost and fair value components that aggregations are meaningless and the mix of audited and unaudited numbers mangles the credibility of the presentation. I favor a historical cost column to that does not co-mingle realized revenues with unrealized price changes. I support a current value column that provides more insights into financial risks and risk management.

Maintaining any derivatives, including credit derivatives, in the historical cost column at zero historical cost or a nominal premium cost is totally non-informative of financial risks of the derivative contracts in their present state. I support maintaining the FAS 133 rules and their amendments in the current value column of a set of financial statements. In order to distinguish speculation derivatives from hedging derivatives I advocate allowing hedge accounting relief for qualified hedges even though the relief varies of cash flow and FX hedges using OCI for relief and fair value hedging that uses the "firm commitment" account for fair value hedges of unbooked purchase contracts at fixed future rates/prices.

I don't think historical cost accounting is suited for other types contracts in the 21st century, including securitization contracts, mezzanine debt, and variable interest entities (SPEs). It's impossible to conclude that that any single-column set of financial statements can be an optimal choice. What I believe is that the time has come to disaggregate the current mixed-model, single column GAAP reporting under current IFRS or FASB standards. My first suggestion would be to disaggregate the historical cost alternatives from the current value alternatives for two main reasons. The first would be to disaggregate realized income statement items from unrealized income statement items arising from changes in fair values. The second would be to disaggregate numbers that are audited from numbers that are either not audited at all or have audit-lite attestations to the actual numbers themselves such as auditor reviews of the fair value estimation process without attesting to the actual fair value numbers themselves. Flags should be put on numbers to indicate the degree of verification with the audit process. For example, cash balances are audited better than most anything else in traditional CPA audits. Current appraisal values of real estate cannot be attested to at all by CPA auditors under present auditing standards. I recommend putting these appraisals into the current value column with strong warnings that these numbers have not be verified by auditors.

I think Tom Selling and Patricia Walters and Bob Jensen are in full agreement on most things. The difference is that Tom and Pat seem to be advocating a single-column set of financial statements that inevitably becomes a mixed model that co-mingles too many bases of measurement. Bob Jensen advocates a multiple-column set of financial statements that segregates realized transaction outcomes from unrealized changes in current values. GAAP rules should cover all multiple columns.

I'm not a fan of having a pro-forma column because I think this makes it too easy for clients to manipulate the numbers outside of GAAP rules. Until GAAP contains strict rules about pro-forma reporting, auditors should not associate their names with any financial statements having a pro-forma column ---
http://www.trinity.edu/rjensen/theory02.htm#ProForma

Yes, multiple-column statements might create some short-term confusion among analysts and investors. But I think the current single-column financial statements create more confusion, especially with the co-mingling of realized revenues with unrealized current value changes.

Bob Jensen

Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory02.htm#FairValue

"IASB publishes exposure draft on hedge accounting," IAS Plus, December 9, 2010 ---
http://www.iasplus.com/index.htm

The International Accounting Standards Board (IASB) has published for public comment an exposure draft on the accounting for hedging activities. The exposure draft proposes requirements designed to enable companies to better reflect their risk management activities in their financial statements, and, in turn, help investors to understand the effect of those activities on future cash flows.

The proposed model is principle-based, and is designed to more closely align hedge accounting with risk management activities undertaken by companies when hedging their financial and non-financial risk exposures.

Summary of the ED proposals A new hedge accounting model which combines a management view that aims to use information produced internally for risk management purposes and an accounting view that seeks to address risk management issue of the timing of recognition of gains and losses Look only at whether a risk component can be identified and measured, as opposed to determining what can be hedged by type of item (financial or non-financial) Base qualification for hedge accounting on how entities design hedges for risk management purposes and permit hedging relationships to be adjusted without necessarily stopping and potentially restarting hedge accounting Treat the time value premium of a purchased option as a cost of hedging, which will be presented in other comprehensive income (OCI) Extending the use of hedge accounting to net positions (to improve the link to risk management) A comprehensive set of new disclosures that focus on the risks being hedged, how those risks are being managed and the effect of hedging those risks upon the primary financial statements

The exposure draft forms part of the IASB’s overall project to replace IAS 39 Financial Instruments: Recognition and Measurement, and when its proposals are confirmed they will be incorporated into IFRS 9 Financial Instruments. The exposure draft does not include consideration of portfolio macro hedge accounting which the IASB will continue to discuss.

The exposure draft ED/2010/13 Hedge Accounting is open for comment until 9 March 2011. The IASB intends to finalise and issue the proposals during the first half of 2011.

Click for:

• IASB press release (PDF 40k)
• Access to the Exposure Draft (link to IASB's website)
• IASB Snapshot: Hedge Accounting (PDF 106k)
• History of the IASB's hedge accounting project on IAS Plus

Jensen Comment
Because preparers and auditors complained over the years about the complexity of IAS 39, the IASB in this ED mistakenly assumes that doing away with bright lines in favor of ambiguity reduces complexity. But replacing bright lines with ambiguity in and of itself creates more rather than less complexity. It is analogous to replacing a bright line speed sign reading "20 mph maximum" with "Drive Safely in this School Zone."

For example the ED replaces the bright line 80-125 rule for effectiveness limits of in offset testing of effectiveness with ambiguity about when a hedge of a hedged item should be deemed effective. Similarly, IAS 39 was relatively clear about when portfolios of hedged items could be hedged as a portfolio. The ED creates a very ambiguous term "Group Hedging" that is both ambiguous and takes international hedge accounting further and further away from the U.S. FAS 133 standard that does allows portfolio or group hedging in under vastly more limiting and clear cut rules.

Effectiveness testing of purchased options used as hedging instruments is pretty clear cut under FAS 133 and IAS 39. The new IASB ED complicates accounting for the time values of options used for hedging purposes. It introduces the concept of "aligned time value" which will really confuse most auditors and financial analysts.

The net result will be that two different companies are likely to treat many hedging contracts differently when applying hedge accounting under the revised IFRS 9 into which FAS 39 is to be phased into IFRS 9. By introducing greater ambiguity the price will be that comparability between financial statements of different companies will be destroyed or highly uncertain.

I repeat that replacing bright lines with ambiguity may actually increase complexity rather than reduce complexity. The complexity of hedge accounting essentially arises from the immense complexity and variations of hedge accounting contracts. IAS 39 was rooted in FAS 133 which I viewed as a good standard, as amended,  that provided more consistent accounting for derivative financial instruments and hedging activities. The new IAS 39 ED is a move in the wrong direction from FAS 133.

Greater ambiguity is not the solution to dealing with complexity. Ambiguity does eliminate the main problems accountants have with derivatives when the main problems are not really understanding derivatives rather than writing ambiguous accounting standards for complex derivatives contracts.

PwC's Summary --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=THUG-8C4QMZ&SecNavCode=MSRA-84YH44&ContentType=Content

Bob Jensen's reply to Pat Walter's assertion that the IASB and FASB should just do away with hedge accounting alternatives and post all gains and losses on derivative financial instruments.

Hi Pat,
Can you think of a better way to distinguish between speculating and hedging in financial reporting? There's no distinction if hedge accounting relief is not built into the standards. .

Also making accounting standards simple and easy to understand for auditors should not trump the need for complications in accounting standards. The FASB and IASB have never seriously considered simplifying FAS 133 and IAS 39 to take away special hedge accounting relief altogether. The boards believe that investors will be misinformed by not making a distinction between speculating in derivatives versus managing risk with hedging derivatives. .

Historically, I think the FASB initially did not think that special hedge accounting relief was necessary when FAS 133 was first being formulated. FAS 133 would've been about 50 pages long and no big deal other than some technical problems of measuring derivative financial instrument fair values of customized contracts traded over the counter rather than on exchanges. Hedge accounting made FAS 133 and its amendments extended FAS 133 to over 700 pages long and requires that auditors learn about risk management contracts they never had to understand prior to FAS 133 and IAS 39. .

It took about a NY minute for companies that manage risk by hedging, tens of thousands of companies,to convince the FASB that this was far more than a neutrality issue. What this could do is mask the information content value of eps with with all that was to be gained by bringing derivative financial instruments into the financial statements. .

For example, the genuine value of having eps vary with changes in value of speculative derivative derivative contract investments (e.g., a speculative call option on gold) could be totally obscured by a changes in value of hedging contacts (e.g., a hedging option on gold) simply because the changes in the value of unbooked hedged items could not offset the value changes of their hedging contracts. .

In other words, not having hedge accounting could erase the value of having changed accounting rules for speculators if there is no distinction between hedging and speculating in FAS 133 and IAS 39. .

For this reason neither the FASB nor the IASB have seriously considered doing away with special treatment for hedge accounting even though it greatly complicates the lives of accountants and auditors. .

Your solution of doing away with hedge accounting certainly would make the lives of auditors easier because then they really could sign off on complicated derivatives contracts without truly having to understand those contracts beyond the trouble of finding their fair values. .

Can you think of a better way to distinguish between speculating and hedging in financial reporting?

Bob Jensen

Bob Jensen's tutorials on accounting for derivative financial instruments and hedging activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm

Say What?
Common sense dictates that employees would ceteris paribus rather have pay raises than bonuses, but on Wall Street there seems to be something beyond economics in the desire for bonuses.

"Mental accounting on Wall Street," Nudges, December 20, 2010 ---
http://nudges.org/2010/12/20/mental-accounting-on-wall-street/

Even though employees will receive roughly the same amount of money, the psychological blow of not getting a bonus is substantial, especially in a Wall Street culture that has long equated success and prestige with bonus size. So there are sure to be plenty of long faces on employees across the financial sector who have come to expect a bonus on top of their base pay. Wall Streeters typically find out what their bonuses will be in January, with the payout coming in February.

One executive, whose firm prohibited discussing the topic with the news media, said the bump in base salaries had confused people, even though their overall compensation was the same. “People expect a big bonus,” this person said. “It is as if they don’t even see their base doubled last year.”

The AICPA is not happy with the proposed joint FASB-IASB standard on revenue recognition --- Click Here
http://www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources/AcctgFinRptg/AcctgFinRptgAdvocacy/DownloadableDocuments/December_13_2010_FinRec_Revenue_Recognition.pdf
Also at http://www.cs.trinity.edu/~rjensen/temp/Revenue_Recognition.pdf

Jensen Comment
I wonder myself about these issues such as auditor-client disputes about weighted average probability distributions.

This tidbit was inspired by a November 20, 2010 WSJ article (about engineering faculty supply and demand and tenure) that is quoted near the bottom of the tidbit.
It shows why some engineering faculty prefer non-tenure tracks to tenure tracks 

I apologize for so often repeating my sermons about the sad state of accounting doctoral programs.

Question
If engineering is such a tough discipline, why do they have hundreds of PhD applicants for even non-tenure track positions in colleges when accounting programs in major universities get less than ten PhD applicants for tenure-track positions and many universities cannot get a single applicant?

Answer
It's obviously a matter of supply and demand. There are around 140 new accounting PhDs annually in the U.S. facing over 1,000-tenure track openings --- http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
Studies show increasing shortages of supply as baby boomer accounting professors commence to retire in greater numbers. Universities that cannot get enough suitable tenure-track assistant professor applicants are now filling teaching needs with professionally qualified non-doctoral adjunct instructors. This, however, detracts from the accounting research missions of major universities.

There are somewhere in the neighborhood of 7,000 new engineering PhDs annually in the U.S. ---
http://engtrends.com/IEE/1006D.php
This number is higher for engineering than for accounting largely because, unlike in accounting, there's heavy demand for engineering PhDs seeking non-academic careers. In the U.K. there is even a distinction between academic/research versus professional engineering doctorates ---
http://www.professionaldoctorates.com/explained.asp 

Whereas new accounting PhDs are getting tenure-track offers in academe for well over $100,000 and in some cases closer to $200,000 in top U.S. universities, the lower starting salaries of engineering assistant professors is a reflection that shortage is much less of a problem in engineering academe than in accounting academe ---
http://www.payscale.com/research/US/Degree=Doctorate_(PhD)%2c_Engineering/Salary

Why is there a much greater shortage of accounting doctoral graduates than engineering doctoral graduates?
This is a very complicated question with no definitive answers. One reason is that, when there were twice as many accounting doctoral graduates annually before 1990, there were some very large "mills" like the University of Texas and the University of Illinois each graduating 10-20 accounting PhDs per year that are now producing less than five each per year. Some universities like Rice dropped their doctoral programs completely. Whereas some very large engineering programs like Purdue University produce hundreds of engineering PhDs per year, Purdue now averages graduating less than one accounting PhD per year --- http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf

One reason for the shortage of accounting faculty commences clear back with high school counselors who encourage high school graduates to seek "exciting" engineering careers and discourage "dull" accounting careers by portraying accounting work as clerical drudgery. Hence first year demand to major in engineering is very heavy relative to very low, almost non-existent, first year demand to major in accounting. Demand picks up a bit on campus after word-of-mouth broadcasts that accounting graduates are getting some of the best jobs among all majors in the university except, perhaps, graduates of the medical school.

Probably the main reason for so few accounting PhD graduates per year, however, is the length of time it takes to finally earn a PhD or DBA in accounting. An engineer can earn a PhD in about 7-8 years beyond a K-12 education. In accounting it's more like 10-12 years beyond K-12. The typical accounting major now is required to have 5-6 years of college with a major in accounting just to sit for the CPA examination. Most earn professional masters degrees. Then accounting doctoral programs want applicants to have 1-5 years of industry experience. When accounting doctoral program applicants with graying hair are finally admitted to accounting doctoral programs they face another five years or more on average of full-time, on-campus study and research. There are no respectable online accounting doctoral programs. The good news is that onsite accounting doctoral programs are virtually free from major universities that often pay living support stipends as well. However, for accounting doctoral students who by now have young children to support, it can be a financial and academic struggle that discourages them from enrolling in doctoral programs at such advanced stages of their lives.

Running a close second to discouraging accounting doctoral program applicants is the "accountics" nature of virtually all North American accounting doctoral programs. Accountants were educated to pass the CPA or CA examinations in North America. They afterwards worked in their professions. But the accounting doctoral programs have virtually no professional accounting courses. The accounting doctoral courses are in advanced mathematics, statistics, econometrics, and psychometrics for which most doctoral applicants have little interest in after being professional accountants. This is a really huge impediment to attracting applicants to accounting doctoral programs ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

Lastly, but certainly not leastly, is that the "old" prospects for admission to accounting programs at relatively advanced stages in their lives have heard horror stories about what it takes to earn tenure in universities. Some of the horror tales are probably exaggerated, but assistant accounting professors will all discover that teaching performance is less important for tenure than research and publication. And publish or parish research is not mere scholarship. Researchers must contribute to new knowledge and then publish papers in accounting research journals that reject over 80%-90% of submissions. But they probably have not heard about the games assistant accounting professors play to obtain tenure:

Gaming for Tenure as an Accounting Professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)

"How to Succeed in Teaching Without Lifetime Tenure:  The Franklin W. Olin College of Engineering attracts 140 applicants for every faculty position. And they can even be fired," by Naomi Schaefer Riley, The Wall Street Journal, November 20,2010 ---
http://online.wsj.com/article/SB10001424052748703440004575548320163094444.html

When Richard Miller told his colleagues that he was leaving his tenured position as dean of the University of Iowa's engineering school, a number of them asked if he was smoking dope. Mr. Miller was stepping down to become the first president of the Franklin W. Olin College of Engineering in Massachusetts—and Olin, which opened its doors 10 years ago, does not offer tenure to its faculty.

"Don't you realize that if you go there you'll never work in higher education again?" Mr. Miller recalls his friends asking. "They'll think you turned in your union card—that you don't care about the core values of academic freedom." Mr. Miller, a jovial man who now presides over a campus of 350 students in this suburb west of Boston, says he didn't care. Having tenure is like being placed in "golden handcuffs," he told me. "There are more important things than permanent employment"—like offering students a fulfilling education.

One wishes that other academics shared his opinion. In the meantime, Olin is showing what's possible when a school sheds tenure, one of the most antiquated and counterproductive employment policies in the American economy. Instituted at a time when people in most professions remained in the same job for life, tenure today is an economic anomaly. The policy protects laziness and incompetence—and rewards often obscure research rather than good teaching.

F.W. Olin was an engineer and industrialist who amassed a fortune from a variety of manufacturing enterprises in the early 20th century. In 1938, he transferred much of his wealth to a foundation that bore his name, and, for the next 50 years or so, the foundation supported higher education on more than 50 campuses across the country.

But by the 1990s, the trustees were frustrated with their inability to promote change—particularly in the field of engineering. Engineering, a commission of the National Science Foundation concluded a number of years ago, had become too specialized and wasn't giving young engineers the skills to compete globally.

Little came of the commission's work. And so the Olin board of trustees decided to start over. Along with a $200 million founding gift, the trustees laid out their idea for a college, which included creating a "culture of innovation" and thus deciding not to offer faculty tenure.

This creative culture is apparent to any campus visitor. Unlike students in most engineering programs, who spend their first three years taking physics and math before they work on designing an actual structure, Olin students begin to design things on the first day. I watched as one professor gave his mechanical engineering students instructions to build a bridge spanning two tables. They would be judged on how much weight it could bear, its aesthetic appeal and its cost efficiency.

Olin students—a significant number of whom turn down more prestigious schools like MIT, Stanford and Berkeley partly because of Olin's significantly lower tuition—take a variety of liberal arts courses as part of their general curriculum, as well as courses at Babson College, a business school adjacent to their own. During senior year, they work with a local company as consultants for an engineering project.

Some have worked on products like a photovoltaic system to power greenhouses. Others have helped develop advanced robotic devices and medical instruments that will result in less invasive surgeries. Their school is ranked 8th in undergraduate engineering by U.S. News and World Report.

Mr. Miller says that promoting a culture of entrepreneurship has been especially important. Like entrepreneurs, "engineers are people who envision things that have never been and do whatever it takes to make them happen," he says.

Olin's trustees put some structures in place to keep that entrepreneurial culture strong. In addition to the lack of tenure, the entire curriculum must be re-evaluated every seven years. There are no formal departments.

Students are also engaged in a constant process of evaluating their education: They are asked for extensive feedback about each course, and alumni are surveyed routinely. When I asked senior Theresa Edmonds how these policies affect her education, she said her professors are very "responsive" to the concerns of students.

Though Olin doesn't offer lifetime employment, the school's vision has been appealing enough to attract an average of 140 applicants for every faculty position. In all but three cases, Olin got its top choice to fill each teaching slot.

Mark Somerville left a tenure-track position in the physics department at Vassar to teach at Olin. "It was not a hard decision to make," he says. Mr. Somerville says he has found that the lack of tenure has changed his teaching and research interests for the better.

"When one is on the tenure track," he says, "the clock is ticking. There is a certain day on which you will have to produce a stack of papers." He's no longer worried about publishing a certain amount by a particular date. Instead, he's free to pursue research he finds interesting—something Mr. Somerville says has been "liberating."

The passion of the Olin faculty and students is unmistakable. Mr. Miller calls them "a community of zealots"—not exactly what you expect from a bunch of engineers. But then giving up tenure seems to do some strange things to people.

Ms. Riley is a former Wall Street Journal editor. Her book, "The Faculty Lounges . . . And Other Reasons That You Won't Get the College Education You Pay For" is forthcoming from Rowman and Littlefield.

November 20, 2010 reply on the AAA Commons from Amelia A. Baldwin

Bob says:

Why is there a much greater shortage of accounting doctoral graduates than engineering doctoral graduates? This is a very complicated question with no definitive answers. One reason is that, when there were twice as many accounting doctoral graduates annually before 1990, there were some very large "mills" like the University of Texas and the University of Illinois each graduating 10-20 accounting PhDs per year that are now producing less than five each per year. Some universities like Rice dropped their doctoral programs completely. Whereas some very large engineering programs like Purdue University produce hundreds of engineering PhDs per year, Purdue now averages graduating less than one accounting PhD per year --- http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf

In fact, the vast majority of established programs have all shrunk significantly in the past 20 years. In that period, the only growth in program size has been in new programs. Unfortunately, only a handful of new programs have been created in recent years (UTSA, Jackson State, etc.) and they are small. A few programs have even disappeared off the radar.

I don't know if this is only because programs are not getting enough applicants or if it is only because programs are not accepting enough applicants, or some combination of the two (more likely) but it is a disturbing and now established trend. See the related table illustrating the few growing programs versus the many shrinking programs in:

Baldwin, A. A., C. E. Brown and B. S. Trinkle. 2010. Accounting Doctoral Program Demographics. Advances in Accounting Education 11, 101-128.

Or, the article that originated the presentation that started this thread:

Baldwin, A. A. and C. E. Brown. 2011. An Analysis of the Accounting Doctoral Industry: Observations and Unanswered Questions, Advances in Business Research, forthcoming.

Both chronicle the shrinkage factor (the first only as one of many factors and the second in a more comprehensive and visual way). We should all be disturbed by the trends and looking for solutions.

Is hiring accounting faculty difficult now? ...especially for non-doctoral granting departments? Wait a few years, it's only going to get worse.

November 20, 2010 reply from Jagdish Gangolly

Bob,

I agree with most of your points in the message below. However,

1. Professional doctorates exist even in the US. In engineering, there is Dr. Ing or D. Eng. Some (such as Texas A&M and Berkeley offer them, but as academic degrees.

In business, I guess DBA was supposed to be our equivalent of a Dr. Ing, but it never caught on, and most have reverted to a PhD.

2. Unlike in accounting, an engineering PhD is not expected to walk on water immediately on graduation. Many who want an academic career do post docs for a few years. Such post doc positions prepare them for research far better than straight teaching as in accounting. That may be the reason for a culture of excellence that exists there.

Also, there are dozens of industrial research labs that value PhDs in engineering as well as science. Our neighbours, GE Global Research at Schenectady and IBM Watson Research at Hawthorne and Yorktown Heights employ hundreds of PhDs in those fields, mostly from wellknown universities.

This is in contrast to the lack of PhDs in the accounting firms in research, and many of the PhDs there are in practice rather than research.

3. PhD programs in engineering and science emphasise methodology, tools, techniques, and most importantly protocols which reflect best practices. Most accounting PhD programs, on the other hand do not provide the students the tools and techniques, and protocols. This is reflected, for example, in the neanderthal statistical techniques used that mimic past work in related areas.

I do have suggestions for improving the quality of the program, but they are likely to be perceived as subversive. Also, in my humble opinion, the only test of the quality will be the high regard that the practice holds accounting PhDs. Until then, we will be plodding along to meet the job quotas dictated by mass low quality relatively skill-free education.

 Jagdish Gangolly (gangolly@albany.edu )
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 received the message below from a professor friend. I'm still working on finding the answer and perhaps somebody on the AECM can lend a hand.

In the process of starting to search for an answer, I stumbled upon a great Website and blog maintained by a finance professor. That site did not have the answer to the Excel question below, but it is a great, great site for students seeking help with finance functions in Excel. You might pass the two links below to your students:

TVMCalc.com --- http://www.tvmcalcs.com/
In particular note the Bond Yield Calculations .

Excel Blog --- http://www.tvmcalcs.com/blog/ 

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

November 20, 2010 message from Chris Deeley

Hi Bob,

Thank you very much for your email. Please don’t go to any trouble to dig up old adaptive factor analysis and multi-dimensional scaling material on my account. I now realize I’m working at a much more basic level using fairly simple analytical tools.

However, there is one thing that you may be able to help me with. This concerns Microsoft’s Excel YIELD function, which uses 100 iterations of Newton’s Method. What I would like to know is how does that function arrive at a starting-point? No information on this aspect is provided by Microsoft (or, if it is, I haven’t been able to find it). The point of my inquiry is that I have devised a more efficient way of determining a coupon bond’s yield than Newton’s Method. But I can’t demonstrate this without using the same starting-point as Microsoft. Any help you give me to obtain this information would be much appreciated and duly acknowledged. I could also provide you with details of my method if it’s of any interest.

Kindest regards,

Chris

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

Email: cdeeley@csu.edu.au
Web: www.csu.edu.au

November 21, 2010 message from Bob Jensen to Tim Mayes

Hi Tim,

I stumbled onto your Excel helper page and discovered that you and I share a lot in common. I'm a retired accounting professor (named American Accounting Association's Outstanding Educator in 2002)and provide a massive amount of helper material at my Website --- http://www.trinity.edu/rjensen/ 

This morning I received a request for help (on Bond Yield interations) from a professor in Australia, and perhaps you can help me answer the following. You can send the answer directly to him (with a copy to me) or you can send it to me and I will forward it to Chris. 

Bob Jensen

November 20, 2010 reply from Timothy R. Mayes

Bob and Chris,

Unfortunately, after a great deal of searching, I can't seem to find anything of value. I haven't even seen anything that definitively says that they are using Newton's method, though I assume that they are (they must be). I'll ask John Walkenbach and a couple of Excel MVPs that I "know" and see if they know who I could contact to get a definitive answer.

I ran across several links to Chris' paper (“Superseding Newton with a superior bond yield algorithm”), but I haven't been able to access it. The SSRN site isn't responding for for me at the moment. So, Chris, if you could send me a copy I would be very interested in seeing it.

In fact, if you don't have a publication outlet for the paper I would ask that you take a look at the new online refereed journal that I, and a few others, created last year:

http://www.afmet-online.org/ 

We are currently trying to publish once per year until we can attract enough attention to get more submissions.

Tim

Timothy R. Mayes, Ph.D.
Professor of Finance
Metropolitan State College of Denver

http://www.tvmcalcs.com 
Free financial calculator, Excel and time value of money tutorials.

My Excel Blog: http://www.tvmcalcs.com/blog/ 

http://www.facebook.com/mayest

November 21, 2010 reply from Bob Jensen

Wow! What a quick response on a Sunday no less.

May I post your response in two of my blogs?
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

One of my AECM buddies responded as follows in an interesting reply that, nevertheless, did not really answer the Excel starting point question.

Bob,

The following webpage explains the method graphicallyvery well.
http://www.instructables.com/id/Spreadsheet-Calculus-Newtons-method/


So long as the function is "well-behaved" (satisfies the hypothesis of the Banach
fixed point theorem), the algorithm should converge to the yield very quickly.
Netwon's method is an example of the application of fixed point iteration.
A very good page for this, as usual is the wikipedia entry at:
http://en.wikipedia.org/wiki/Fixed_point_iteration

Hope the above helps.
Jagdish

Are first year students suddenly shying away from business studies in your college?
"Souring on Business?" by Dan Barrett, Inside Higher Ed, December 13, 2010 ---
http://www.insidehighered.com/news/2010/12/13/business

But beneath such anecdotes lies a more notable and widespread change, according to researchers from the Higher Education Research Institute at the University of California at Los Angeles. Researchers gathered data from nearly 220,000 first-year students at almost 300 colleges, and asked what major and career path they planned to pursue. Results in 2009 revealed that 14.4 percent of first-year students planned to major in business -- a more than 3 percentage-point drop since 2006 -- and a low not seen since the Ford Administration. "They will likely be graduating with higher debts and have shifted majors and career aspirations away from business fields," researchers wrote in their summary of findings from the American Freshman survey.

Continued in article

Jensen Comment
It would be interesting to observe what majors are choosing in place of business. I suspect that many are tracking job growth disciplines like nursing and other medical career options. I also suspect that grade averages have become so vital to success in life that some students are tracking into disciplines where top grades are easier to obtain. Business degrees have become very competitive in terms of top grades.

Amongst the Alternatives to Buy Books on Google ebookstore
"A Sample of Free Google eBooks from the Google ebookstore," by Jim Martin, MAAW Blog, December 12, 2010 ---
http://maaw.blogspot.com/2010/12/sample-of-free-google-ebooks-from.html

"Colleges Lock Out Blind Students Online" by Marc Parry, Chronicle of Higher Education, December 12, 2010 ---
http://chronicle.com/article/Blind-Students-Demand-Access/125695/

Jensen Comment
I just don't think colleges are taking advantage of some of the technology advances to aid online use by various types of handicapped students ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped

Breaking a Vow of Poverty in a Big Way
"Nun Is Arrested for Allegedly Stealing $1.2-Million From Iona College," by Andrea Fuller, Chronicle of Higher Education, December9, 2010 ---
http://chronicle.com/article/Nun-Is-Arrested-for-Allegedly/125678/

Bob Jensen's Fraud Updates are at
http://chronicle.com/article/Nun-Is-Arrested-for-Allegedly/125678/

"In Fraud the Big Boys Walk Free," by Via Zamansky & Associates, Sleight of Hand Blog, December 15, 2010 ---
http://sleightfraud.blogspot.com/2010/12/in-fraud-big-boys-walk-free.html

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

Laugh of the Day (if some attorneys weren't making money on this)
Who is suing the SEC for $3.87 trillion of taxpayer money?
http://www.jrdeputyaccountant.com/2010/12/cmkm-greatest-financial-statements-weve.html

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

"Heads Up Play With David Einhorn," by Bess Levin, DealBreaker, December 21, 2010 --- Click Here
http://dealbreaker.com/2010/12/heads-up-play-with-david-einhorn-a-qa/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dealbreaker+%28Dealbreaker%29

If you’re going to commit financial fraud, you probably don’t want to find yourself sitting at a table across from David Einhorn, who will know what you’re up to and share it with the world. Similarly, if you’ve never played poker and have only ever had a 15 minute tutorial on the game, you probably should avoid playing with the Greenlight Capital founder, whose vastly superior skills will demonstrate just how much you suck. As I like to live on the edge, yesterday in an undisclosed location, I choose not to heed the wisdom of the latter. Over several hands, Einhorn and I discussed the new edition of his 2008 book, “Fooling Some Of The People, All Of The Time.”

The latest version includes an epilogue, and concludes the story of Allied and Einhorn’s years of trying to get other people to listen when he said something was up. As we now know, Allied’s shares collapsed, Greenlight collected $35 million, and the hedge fund made another big (and correct) call on a bank called Lehman Brothers, whose failure was, according to Einhorn, “the Allied story all over again,” just on a bigger scale, with more resounding consequences. Even after the last crisis, which should have been a wake-up call, Einhorn doesn’t think we’ve changed much and if anything, the reforms passed only “encourage poor behavior and will likely foster an even bigger crisis.” He and I chatted about that exciting event, Quantitative Easing, Steve Eisman’s illicit pleasure of choice and more, plus poker tips for people who really, really need them.

Continued in article

An older tidbit from http://www.trinity.edu/rjensen/Fraud001.htm

Selling New Equity to Pay Dividends:  Reminds Me About the South Sea Bubble of 1720 ---
http://en.wikipedia.org/wiki/South_Sea_bubble

"Fooling Some People All the Time"

"Melting into Air:  Before the financial system went bust, it went postmodern," by John Lanchester, The New Yorker, November 10, 2008 --- http://www.newyorker.com/arts/critics/atlarge/2008/11/10/081110crat_atlarge_lanchester

This is also why the financial masters of the universe tend not to write books. If you have been proved—proved—right, why bother? If you need to tell it, you can’t truly know it. The story of David Einhorn and Allied Capital is an example of a moneyman who believed, with absolute certainty, that he was in the right, who said so, and who then watched the world fail to react to his irrefutable demonstration of his own rightness. This drove him so crazy that he did what was, for a hedge-fund manager, a bizarre thing: he wrote a book about it.

 

The story began on May 15, 2002, when Einhorn, who runs a hedge fund called Greenlight Capital, made a speech for a children’s-cancer charity in Hackensack, New Jersey. The charity holds an annual fund-raiser at which investment luminaries give advice on specific shares. Einhorn was one of eleven speakers that day, but his speech had a twist: he recommended shorting—betting against—a firm called Allied Capital. Allied is a “business development company,” which invests in companies in their early stages. Einhorn found things not to like in Allied’s accounting practices—in particular, its way of assessing the value of its investments. The mark-to-market accounting that Einhorn favored is based on the price an asset would fetch if it were sold today, but many of Allied’s investments were in small startups that had, in effect, no market to which they could be marked. In Einhorn’s view, Allied’s way of pricing its holdings amounted to “the you-have-got-to-be-kidding-me method of accounting.” At the same time, Allied was issuing new equity, and, according to Einhorn, the revenue from this could be used to fund the dividend payments that were keeping Allied’s investors happy. To Einhorn, this looked like a potential Ponzi scheme.

 

The next day, Allied’s stock dipped more than twenty per cent, and a storm of controversy and counter-accusations began to rage. “Those engaging in the current misinformation campaign against Allied Capital are cynically trying to take advantage of the current post-Enron environment by tarring a great and honest company like Allied Capital with the broad brush of a Big Lie,” Allied’s C.E.O. said. Einhorn would be the first to admit that he wanted Allied’s stock to drop, which might make his motives seem impure to the general reader, but not to him. The function of hedge funds is, by his account, to expose faulty companies and make money in the process. Joseph Schumpeter described capitalism as “creative destruction”: hedge funds are destructive agents, predators targeting the weak and infirm. As Einhorn might see it, people like him are especially necessary because so many others have been asleep at the wheel. His book about his five-year battle with Allied, “Fooling Some of the People All of the Time” (Wiley; $29.95), depicts analysts, financial journalists, and the S.E.C. as being culpably complacent. The S.E.C. spent three years investigating Allied. It found that Allied violated accounting guidelines, but noted that the company had since made improvements. There were no penalties. Einhorn calls the S.E.C. judgment “the lightest of taps on the wrist with the softest of feathers.” He deeply minds this, not least because the complacency of the watchdogs prevents him from being proved right on a reasonable schedule: if they had seen things his way, Allied’s stock price would have promptly collapsed and his short selling would be hugely profitable. As it was, Greenlight shorted Allied at $26.25, only to spend the next years watching the stock drift sideways and upward; eventually, in January of 2007, it hit thirty-three dollars.

 

All this has a great deal of resonance now, because, on May 21st of this year, at the same charity event, Einhorn announced that Greenlight had shorted another stock, on the ground of the company’s exposure to financial derivatives based on dangerous subprime loans. The company was Lehman Brothers. There was little delay in Einhorn’s being proved right about that one: the toppling company shook the entire financial system. A global cascade of bank implosions ensued—Wachovia, Washington Mutual, and the Icelandic banking system being merely some of the highlights to date—and a global bailout of the entire system had to be put in train. The short sellers were proved right, and also came to be seen as culprits; so was mark-to-market accounting, since it caused sudden, cataclysmic drops in the book value of companies whose holdings had become illiquid. It is therefore the perfect moment for a short-selling advocate of marking to market to publish his account. One can only speculate whether Einhorn would have written his book if he had known what was going to happen next. (One of the things that have happened is that, on September 30th, Ciena Capital, an Allied portfolio company to whose fraudulent lending Einhorn dedicates many pages, went into bankruptcy; this coincided with a collapse in the value of Allied stock—finally!—to a price of around six dollars a share.) Given the esteem with which Einhorn’s profession is regarded these days, it’s a little as if the assassin of Archduke Franz Ferdinand had taken the outbreak of the First World War as the timely moment to publish a book advocating bomb-throwing—and the book had turned out to be unexpectedly persuasive.

Heavy Insider Trading --- http://investing.businessweek.com/research/stocks/ownership/ownership.asp?symbol=ALD

Allied's independent auditor is KPMG
KPMG has a lot of problems with litigation --- http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on the collapse of the Banking System are at http://www.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm
Also see Fraud Rotten at http://www.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory01.htm
Also see the theory of fair value accounting at http://www.trinity.edu/rjensen/theory01.htm#FairValue

History of Fraud in America ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

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

"Mayer Hoffman McCann Blows a Bunch of Hot GAAS (And a Serious Audit) ," Los Angeles Times via Jr. Deputy Accountant, December 22, 2010 ---
http://www.jrdeputyaccountant.com/2010/12/mayer-hoffman-mccann-blows-bunch-of-hot.html

More Absurd Dictatorial and Counterproductive Behavior of Big Brother (read that the  Texas State Board of Public Accountancy)
Courtesy of his former doctoral student Bill Kinney, Bob Jensen was contacted by Danny and was then briefly quoted in this one ---
"Accountants, Texas board still at odds over Enron," by Danny Robbins, Bloomberg, December 24, 2010 ---
http://www.bloomberg.com/news/2010-12-24/accountants-texas-board-still-at-odds-over-enron.html 

To many in the accounting world, Carl Bass is a hero. Long before Enron became a worldwide symbol of scandal, Bass told his supervisors at Arthur Andersen LLP that something was amiss with the Houston energy giant.

But the Texas state board that licenses accountants sees Bass differently — as unfit to continue in his profession.

Nearly a decade after Enron collapsed and took Arthur Andersen with it, the work of Bass and another former Andersen partner, Thomas Bauer, as Enron auditors is still being debated in a highly contentious and costly proceeding.

The Texas State Board of Public Accountancy has stripped Bass and Bauer of their CPA licenses after determining they violated professional standards in their audits. But the pair has pushed back with a legal challenge that led a judge to rule that the license revocations should be voided because the board violated the Texas Open Meetings Act.

The revocations remain in effect while the matter is under appeal, which could take at least a year.

The upshot is a standoff playing out after most of the figures in the Enron scandal have had their days in court and raising questions about a little-known state agency that doesn't rely on the Legislature for funding.

William Treacy, the board's executive director, said it's in the public interest for Bass and Bauer to be barred from working as CPAs. He cited the depth of the Enron scandal, which led to more than $60 million in lost company stock value and more than $2 billion in losses from employee pension plans.

"There's a lot more than two licenses at stake," Treacy said. "Let's not forget the thousands of people who lost their life savings, their jobs and their pensions."

The board argues that Bass and Bauer should have their licenses revoked because they failed to follow accepted accounting practices in conducting Enron audits in 1997 and 1998.

But some observers believe the case is more one of overzealousness by the agency than insufficient audits.

Wayne Shaw, a professor of corporate governance at SMU's Cox School of Business in Dallas, said it's unusual to see licenses revoked over flawed audits unless the accountants were complicit or showed total disregard for accepted procedures. That's particularly true for audits like those involved with Enron, he said.

"I don't think people comprehend how complex Enron was, the mathematics behind some of these transactions," Shaw said.

Some experts contacted by The Associated Press were stunned to learn that the state was taking such drastic action against Bass. Documents released by a U.S. House committee in 2002 showed that he challenged Enron's accounting practices as early as 1999 and was later removed from Andersen's Professional Standards Group because of complaints from Enron over his criticism.

"Instead of punishing Carl Bass, he should be given a medal," said Bob Jensen, a former accounting professor at Trinity University in San Antonio.

Jensen said the Texas accounting board has gained a reputation as "Big Brother."

"What's happening (with Bass and Bauer) strikes me as absolutely absurd, but it doesn't surprise me," he said.

The two former accountants, both of whom still live in the Houston area, declined interview requests through their attorneys.

The state board voted to revoke the licenses in June 2008 even after a panel of administrative law judges recommended that the accountants merely be fined and admonished. But State District Judge Rhonda Hurley kept the issue alive in April when she agreed with Bass, Bauer and another plaintiff that the board engaged in a "charade of deliberation" when it went into executive session four times while considering the panel's recommendations.

The board contends that it went into executive session only to discuss potential litigation with its attorney, a scenario that would make the meetings legal.

Arthur Andersen, once one of the so-called "Big Five" accounting firms, was found guilty of obstructing justice in 2002 for the shredding of Enron-related documents. Although the conviction was reversed by the U.S. Supreme Court, the damage to the Chicago-based firm's reputation was enough to put it out of business.

The document destruction occurred in the Houston office, where both Bass and Bauer worked, but neither one was involved.

Records obtained by the AP show that the Texas board has spent $3.1 million over the last eight years to investigate and prosecute Bass, Bauer and five other former Andersen employees for their work on Enron audits related to the company's now-famous spinoffs with Star Wars-inspired names, Chewco and Jedi.

Documents that came to light when Enron filed for bankruptcy showed Andersen auditors failed to uncover that the company was using the entities to hide its debt illegally.

Bauer was barred from practicing before the Securities and Exchange Commission for three years because he didn't exercise due professional care despite "numerous red flags" associated with the transactions. Bass wasn't disciplined by the SEC.

Treacy said the expenditures aren't out of line because the board is one of Texas' seven self-directed, semi-independent regulatory agencies. That means its funding comes strictly from fees, fines and other revenue it generates.

"We're not subsidized by the state of Texas, and the (accounting) profession wants it that way," he said. "If we need to raise our license fees to prosecute cases, the profession supports us."

Cowboy Examination, by Garrison Keillor, Prairie Home Companion ---
http://prairiehome.publicradio.org/programs/2010/11/20/scripts/cowboy.shtml

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

November 6, 2010 message from Bob Jensen to the AECM

Does this all come down to turf protection hidden agenda?
Is Big Brother just a dupe?
Please hear me out.

The Texas Board Big Brother already demands that candidates allowed to sit for the CPA examination must be graduates of AACSB or ACBSP accredited programs. But that alone is not enough!

Omnipotent education and learning experts on the Texas Board have declared that even AACSB Accounting-Accredited distance education degree programs are inferior to onsite programs. For example, AACSB-accredited universities like Rice, the University of Texas, Texas A&M, SMU, TCU, and Texas Tech are not allowed by Big Brother to offer distance education accounting degree programs if they want graduates to be eligible to sit for the CPA examination in Texas. 

Dual-accreditation means initial AACSB accreditation plus AACSB in Accounting specialized accreditation.
Consider the University of Connecticut's highly regarded Master of Science in Accounting (MSA) distance education degree program that is the "First dual-accredited AACSB asynchronous MS in Accounting program" in the world. It is also UCONN's first online degree program. To my knowledge the State Accounting Boards in 49 states will allow UCONN's MSA graduates to sit for the CPA examination but not Big Brother in the State of Texas. .

By the way if you want to see pictures of Amy Dunbar and her husband John on UCONN's MSA home page, go to
http://msaccounting.business.uconn.edu/  

Is it merely that accounting faculty in Texas just don't care?
Big Brother will not allow similar education innovation in Texas It's so sad that Big Brother in Texas will not allow a single Texas public or private university such as TCU, SMU, UT, UTSA, Trinity, Houston, or Texas A&M to develop a UCONN-like AACSB Accounting- accredited distance education degree program at either the undergraduate or masters levels. Big Brother not only dictates required accounting topics that must be taken to sit for the CPA examination, it dictates that online degree programs in accounting are forbidden even if the AACSB accredits such degree programs with specialties in accounting. 

Big Brother in Texas has extended its authority over pedagogy well beyond what accounting educators in Texas should allow on principle if nothing else. If flagship University of Texas and Texas A&M can offer science and engineering online degree programs, why shouldn't they also be trusted to develop quality online accounting degree programs?

Ironically, Big Brother does not require AACSB's dual accreditation of onsite programs such that Texas universities are not required to have AACSB in Accounting accreditation. In this respect Big Brother is not all that holy after all. 

Making UCONN MSA Graduates Retake Accounting Courses from Texas Universities
Omnipotent education and learning experts on the Texas Board have declared distance education degree programs are inferior even when they are accredited by the AACSB. But in reality is it just trying to discourage Texas CPA firms from hiring out-of-state graduates.

I suspect the above type of trade restraint is not behind all this!
The big fear is of something already within the State of Texas!

Texas accounting faculty in reality are probably not worried about a few UCONN graduates slipping into the state. What they're really worried about is a four-ton gorrilla that's already in the state --- the University of Phoenix. The University of Phoenix is the largest university in the United States! .

The Four-Ton Gorilla: Is this the real reason Texas accounting faculty ordered Big Brother to ban distance education accounting degree programs?
If the University of Phoenix did not have ACBSP accreditation, Texas university accounting professors would probably be as free as UCONN professors to innovate with distance education degree programs. This is an illustration of what economists call an "externality." To keep University of Phoenix graduates from getting into the Texas CPA firm job market, Big Brother was a convenient dupe to restrain the competition in the eyes of Texas accounting faculty.

Does this all come down to turf protection hidden agenda?

Is it simply fear that too many University of Phoenix graduates might pass the CPA examination and seriously compete for jobs with Texas university graduates? 

Big Brother may just be a wimp run by turf-protecting Texas accounting faculty. 

Bob Jensen's threads on distance education training and education alternatives are at
http://www.trinity.edu/rjensen/crossborder.htm

Bob Jensen's Codec Saga: How I Lost a Big Part of My Life's Work
Until My Friend Rick Lillie Solved My Problem
Bob Jensen at Trinity University

The essay below is on the Web at
http://www.cs.trinity.edu/~rjensen/video/VideoCodecProblems.htm

There are many newer 64-bit Windows 7 computers that will not playback videos compressed on computers such as my 32-bit Windows XP computer. Give your 64-bit computer a test. The most popular video I ever produced is my 133ex05a.wmv video that's still being downloaded by thousands of security analysts and auditors. Even before I purchased a new computer I was getting complaints that this video would not play on 64-bit Windows 7 computers.

Give your computer test by trying to playback the 133ex05a.wmv video at
http://www.cs.trinity.edu/~rjensen/video/acct5341/

Playback problems are also arising in videos created by millions of people other than me, especially Camtasia videos produced on 32-bit computers. The trouble is that Microsoft's set of codecs embedded in Windows 7 leaves out some important codecs in earlier versions of Windows.Many high level tech support groups still don't know how to solve this problem. For example, two days ago three Level 2 experts in the Dell Technical Support Division did not have a clue on how to solve the problem. Even though the video above would not run on my various video players such as Windows Media Player, VLC Player, Realtime, and Quicktime, Dell Level 2 technicians suggested I try three other players. None of these players corrected my problem.

Codec --- http://en.wikipedia.org/wiki/Codec
Warning: There are many outfits on the Web that offer free or fee downloads of codecs. Don't trust any of them unless somebody you really trust informs you that these downloads are safe. Many of codec downloads carry malware malicious code that will put such things as Trojan horse viruses into your computer. One outfit even claims to playback virtually all videos without using a codec. I don't trust this company enough to even try its download. Quite a few people have downloaded the K-Lite Codec Pack, but my Sophos Security blocker would not allow this download. Friends who have the K-Lite does tell me that they still can't run many older videos in 64-bit machines that will run in 32-bit computers.

To make a long story short, a technical support expert named Ian at California State University in San Bernardino proposed a solution to the problem at the behest of my good friend and education technology expert Professor Rick Lillie.

On Thanksgiving Day Rick sent the following recommendation:

The problem is specifically an audio codec that did not come with Windows 7. Ian found a trustworthy place which provides that particular codec:
http://www.voiceage.com/acelp_eval_eula.php

Trinity University requires that I honor a relatively tough Cisco Systems security barrier called Sophos if I want to run my files on servers at Trinity. The VoiceAge download mentioned above not only passed through my Sophos barrier, unlike the K-Lite Codec Pack, the download took place in the blink of an eye.

Now old videos play wonderfully on my new 64-bit Windows 7 laptop from Dell. However, this is a limited solution in that users around the world who do not know about this solution or an equivalent solution will either not be able to run many old videos or they will be clogging my email box. I am asking that all of you inform your tech support group about this solution. I informed the Dell Support Group.

A better solution for my hundreds of videos still being served up on the Web would take weeks of my time. Windows 7 OS 64-bit computers will play my huge uncompressed avi files that I store in my barn. It is out of the question to serve up enormous avi files that can be compressed into files that save over 90% of of storage and transmission size. However, I did experiment with recompressing a couple of avi files on my 64-bit machine. These files will playback in wmv, rm, swf, and mov formats using only Windows 7 codecs. But at this stage of my life I don't want to spend weeks of my time solving a problem that Microsoft could solve with little cost or trouble.

Why compress raw avi videos into compressed wmv, mov, mpg, rm, scf, or some other compressed versions?
The reason is largely a file size issue with raw avi videos. If I captured an avi file that is over 200 mb in size it takes up a huge amount of space on a server and takes forever to download over the Internet. By compressing it into something liike a wmv format for Windows Media Player, a mov format for Apple's Quicktime, or a rm format for Real Media, or a swf format for an Adobe Flash player, I can reduce the file size by over 90% without serious loss in video playback quality. I should, however, store the original avi file somewhere if I think I may want to edit and recompress the video in the future.

Hilarious Enron home video (originally reported by the Houston Chronicle)
A hilarious Enron home video (really made by genuine Enron executives like Jeff Skilling at Rich Kinder's resignation party) example is shown at http://www.cs.trinity.edu/~rjensen/video/
The raw Enron1.avi video of 201 mb is poor quality video that a friend at Villanova captured in 2003. It will take you over 20 minutes to download this avi video, but since it is in avi format it will play on my new 64-bit Windows 7 computer. When I compressed the video into an Enron1.wmv format it only takes up 20 mb of space (over a 90% savings) on the server and will download in less than two minutes.

However, until I downloaded the VoiceAge codec this wmv compressed version would not play on my new 64-bit Windows 7 computer. It always did play on my old 32-bit computer. The reason is that Microsoft left out some historic codecs for in the latest version of 64-bit computers.

In fact the problem is so severe with old 32-bit media that in Windows 7 Microsoft made the 32-bit version of Windows Media Player (WMP) the default player even though a 64-bit version is also available such that techies can, if you so choose, make the 64-bit version your default WMP ---
WMP 64-bit switch --- http://www.mydigitallife.info/2009/10/25/how-to-set-64-bit-windows-media-player-12-wmp12-as-default-player/

However, even if you are using the default 32-bit WMP video player in your new 64-bit computer, there are historic Windows XP codecs missing such that many historic compressed videos will not play on your 64-bit computer using Microsoft's default 32-bit Windows Media Player, and that is the reason I am writing this essay today.

Camtasia Studio (for Windows and belatedly the Mac OS) --- http://en.wikipedia.org/wiki/Camtasia_Studio
TechSmith's Home Page for Camtasia Studio --- http://www.techsmith.com/camtasia/

I was an early adopter of Camtasia and produced Camtasia videos on Win95, XP 32-bit, and Windows 7 64-bit computers. In the earliest days I recorded hundreds of Camtasia videos with a microphone so I could narrate while solving homework, quiz, and examination problems on my computer screen. Since many of these were textbook problems and cases  that I could not legally solve in videos  for public viewing, I served my Camtasia video solutions up on a LAN server that only my students could study. Textbook publishers would not have been happy if I put video solutions to their homework problems and cases on a public Web server.

An example of a very early homework solution video can be found at in the
PDQ05-15tEST2/PDQ05-.15tEST2.wmv file at
http://www.cs.trinity.edu/~rjensen/temp/PDQ05-15tEST2/
The mouse motion in this video begins after a minute or so. J had to dig up the original avi version recorded years ago and then recompress the avi version into a wmv compressed video on my new 64-bit, Windows 7 computer.

Some historic (e.g., 2001) compressions created on my old 32-bit computer will run on 64-bit Windows 7 computers. See for yourself by trying to run any of the sample videos at
http://www.cs.trinity.edu/~rjensen/video/acct1302/camtasia/
I suspect that I recorded these sample videos at a different audio sampling rate years ago. This does show that there will be problems playing back all 32-bit computer compressions of avi files.

After some playing around I think that the problem is in the audio sampling rates that TechSmith used in compressing some of my historic videos. TechSmith did not always use the same sampling rates when compressing avi files into wmv,mov, rm, scf, and other compressed versions of avi files.

The reason for this compatibility problem is that TechSmith does not write codecs. TechSmith relies on codecs available in whatever among codecs built into the Windows operating system you're using. And Microsoft in an uncaring way did not include some of the Windows XP codecs for 32-bit computers  in its Windows 7 upgrade for 64-bit computers.

Another solution I attempted and that failed to add needed codecs (actually I need Expression since FrontPage is no longer being upgraded)
Microsoft Expression --- http://social.expression.microsoft.com/Forums/en-US/encoder/thread/3eabf903-b49f-4f92-b508-f28a795d6c90
Some known problems with Microsoft Expression---
http://thepiratebay.org/torrent/5863960/MICROSOFT_EXPRESSION_STUDIO_4_ULTIMATE_(activated)_%5Bthethingy%5D

There are many downloads that might work that I would not trust downloading into my computer. If you want to take a chance with your 64-bit computer be my guest --- http://www.x64bitdownload.com/downloads/t-64-bit-dziobas-rar-player-download-wbwseasx.html
Also see http://www.canadiancontent.net/tech/download/Dziobas_Rar_Player.html
Please let me know if you can playback the 133ex05a.wmv file using these or other solutions (if they did not infect your computer with malware)..
My playback test videos are at http://www.cs.trinity.edu/~rjensen/video/acct5341/
Email:  rjensen@trinity.edu

Prestigious U.K. MBA Program Offers Courses on Facebook
"British Business School Offers M.B.A. Courses on Facebook." by Travis Kaya, Chronicle of Higher Education, November 30, 2010 ---
http://chronicle.com/blogs/wiredcampus/british-university-offers-m-b-a-courses-on-facebook/28463?sid=wc&utm_source=wc&utm_medium=en

Facebook has changed the way students, faculty members, and administrators communicate outside the classroom. Now, with the introduction of the London School of Business & Finance’s Global MBA Facebook app, Facebook is becoming the classroom.

The Global MBA app—introduced in October—lets users sample typical business-school courses like corporate finance and organizational behavior through the social-networking site. The free course material includes interactive message boards, a note-taking tool, and video lectures and discussions with insiders from industry giants like Accenture Management Consulting and Deloitte. This may be a good way to market a school, notes an observer from a business-school accrediting organization, but it may not be the best way to deliver courses.

Unlike most online business courses, the Global MBA program will not require students to pay an enrollment fee up front. Instead, students can access basic course material free of charge and pay the school only when they are ready to prepare for their exams. School administrators hope that letting students “test drive” the online courses before actually shelling out the tuition money will boost graduation rates.

While the school offers a large collection of study material on Facebook—including 80 hours of Web video—students seeking formal accreditation must qualify for entrance into the M.B.A. program. Once enrolled in the paid course, students are given access to additional content on the business school’s InterActive course management system, and are required to sit for examinations—like they would if they were enrolled in more traditional distance-learning or brick-and-mortar programs. The Facebook MBA program is accredited by the University of Wales and costs a total of £14,500—about $22,000.

Steve Parscale, director of accreditation for the Kansas-based Accreditation Council for Business Schools & Programs, said sample classes offered through social-networking sites could provide great advertising opportunities for online colleges. “The younger generation is all on social media,” Mr. Parscale said. “If you can get them on Facebook to test-drive a class, then you can get them to actually enroll.”

Continued in article

Bob Jensen's threads on distance education training and education alterntives ---
http://www.trinity.edu/rjensen/Crossborder.htm

"Fixing the Broken Audit Model," by David Albrecht, The Summa, December 15, 2010 ---
http://profalbrecht.wordpress.com/2010/12/15/fixing-the-broken-audit-model/

Jensen Comment
Some of David's suggestions are drastic and may create moral hazard. For example, the suggestion for a whistle blowing reward for "for every financial reporting problem identified in the audit opinion" could be really hazardous. A disgruntled auditor might intentionally create a problem so that his the nephew of the brother-in-law of his third cousin can claim the reward. I think the issues of who is damaged and by how much must also be considered when we are investigating negligence.

Firstly, I think the problem of audit firms providing advisory services is nearly as severe in the 21st Century as it was in the 20th Century. A much more severe problem is having audit clients that are too big to lose, including medium-sized audit clients upon which local offices are highly dependent upon to cover fixed costs of those offices.

Then there's an issue of defining what is a "problem?" ---
"Mortgage-Bond Math Means Everyone Is a Winner," by: Jonathan Weil, Bloomberg, December 15, 2010 --- Click Here
http://www.bloomberg.com/news/2010-12-16/mortgage-bond-math-means-everyone-is-a-winner-commentary-by-jonathan-weil.html

We are at a stage where one enormous lawsuit can wipe out any of the largest international CPA firms. I'm not certain that its healthy to have such a fragile system and certainly there can be enormous ramifications of unlimited liability. There also is a question of what is meant by liability. What if the audit firm is only 10% at fault and ends up as being the only deep pockets defendant? Are we still going to limit the liability to 10%? There are also many instances where I think the client truly duped the auditors, and I'm not certain that auditors should be held liable for all instances in which they were duped.

I most certainly do not buy into a total ban of "attest services" for audit clients. I assume here that David really means "advisory services." I'm very critical of the hazards of conflicts of interest, but I don't think these have reached a level where we should buy into a "total ban" on advisory services

There are some alternatives that sound a lot better to me. Firms can do much more audit quality control testing. Perhaps the day will come when audits must be handed off to other audit firms, although this would greatly increase the costs of auditing and may induce audit firms to drop some big clients completely because of enormous fixed cost of audit services for some clients.

I think David made these suggestions to ignite debate more than to imply that he really advocates these suggestions.

I might add that I'm totally against taking auditing out of the private sector. Public sector auditors are often very good, but they too easily give up by declaring some government agencies like the IRS and the Pentagon as being unauditable. If the massive frauds in government are any indication, the public sector auditing model is also broken.

We could look for benchmark models of auditing in socialist regimes. Yeah right!

We might consider having investors pay for higher quality audits, but I'm not certain there is a good way around the free-rider problem among users of financial information.

It's relative rare to find a criminal auditor in a CPA firm. It's common to find a criminal client and herein the major problem is that the courts are lenient with white collar criminals --- I think the length of time served in prison should be 100% correlated with damages inflicted. For example, people stealing over a million dollars should never again see the light of day outside the walls of a penitentiary ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

And that includes the likes of Andy Fastow and Scott Sullivan.

"Towards an Understanding of the Role of Standard Setters in Standard Setting," 
by Abigail Allen and Karthik Ramanna, 
Harvard Business School, December 7, 2010 --- 

Executive Summary:

Accounting standards promulgated by the Financial Accounting Standards Board (FASB) play an important role in the development and maintenance of capital markets worldwide, so it is important to understand how these standards come to be. Prior research has focused on the effect of corporate lobbying on the development of FASB standards, but has largely overlooked the role of the FASB members themselves. Looking at these individuals between 1973 and 2007, Harvard Business School doctoral candidate Abigail M. Allen and professor Karthik Ramanna examine how board members' professional experience, length of service on the board, and political leanings influenced accounting standards. Key concepts include:

• While corporate lobbying is likely to influence the nature of accounting standards proposed by the FASB, the board members themselves are likely to shape Generally Accepted Accounting Principles (GAAP) by controlling which standards are proposed.
• Length of service on the board is associated with proposing standards perceived both as more favorable by big auditors and as decreasing accounting "reliability."
• Affiliation with the Democratic Party, measured by political donations, is associated with proposing standards perceived both as less favorable by big auditors and as increasing accounting reliability.
• The evidence in this study can be used toward building a more comprehensive theory of accounting standard setting, which can be helpful in informing future efforts at designing standard setting institutions, including considerations on term limits and prior work experience.

Abstract

We investigate the idiosyncratic influence of standard setters in standard setting. In particular, we examine how FASB members' length of tenure on the board, their past professional experience, and their political contributions vary with the degree to which the accounting standards they propose are perceived as increasing accounting "relevance" and/or decreasing accounting "reliability." Among other results, we find that length of tenure on the board and a prior career in investment banking/investment management are associated with proposing standards perceived as decreasing accounting "reliability"; while contributions to the Democratic Party are associated with proposing standards perceived as increasing accounting "reliability." Broadly, the evidence, by highlighting the influence of standard setters, can broaden our understanding of the political economy of standard setting beyond the role of corporate lobbying.

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

"The Real Story Behind Those "Record" Corporate Profits," by Justin Fox, Harvard Business Review Blog, November 25, 2010 --- Click Here
http://blogs.hbr.org/fox/2010/11/the-real-story-behind-those-re.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
A couple of nights ago the controversial liberal commentator Keith Olbermann (MSNBC) lambasted all critics of President Obama who claim Obama is anti-business. Olbermann's "proof" is that, under President Obama, corporations have reported record profits for 2010 ---
http://www.msnbc.msn.com/id/3036677/#40363881

What Keith fails to mention is that those record profits are largely the result, during present economic recovery, of dubious accounting, deep cost cutting by plant closings, labor layoffs, outsourcing overseas, and as in GM's case profits mainly arising from accounting tricks and profitability of foreign operations such as GM plants in Brazil.

President Obama is being given all sorts of credit for saving the auto industry without mentioning that the biggest new Chrysler automobile manufacturing plant will be in Mexico to make Fiats destined for the U.S. market, and that GM invested over $1 billion of its bailout money to build a new plant in Brazil.

My main point, however,  is that the media commentators like Keith Olbermann and Rush Limbaugh often make too much of profit reports of corporations whether the news is good or bad.
One huge problem is double entry bookkeeping that requires offsets to changes in highly dubious valuations of some things like goodwill, financial instruments, derivative financial instruments, and intangibles in  ledger accounts. In the opinion of some accounting experts, including me, GM's financial statements may have been more misleading than helpful to investors bidding on shares of its highly successful IPO in November 2010. I'm also dubious of reported "record profits" of the private sector in 2010.

One problem of fair value accounting is the many-to-one mapping of balance sheet fair value adjustments to a single eps residual number. As with nearly all aggregations, many-to-one mapping is a systemic problem that is too severe (link nutritional ratings of vegetables) ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

Early extinguishment of debt instruments is often impractical because of transactions costs of buying back debt plus transactions cost of issuing replacement debt.
Investors who track earnings/eps often fail to appreciate how the FASB and the IASB are obsessed with balance sheet reporting accounting standards that leave earnings statements of dubious value for even informed investors. Both accounting  standard setting bodies have conceptual framework definitions for assets and liabilities but leave the concept of earnings somewhere off in the residual either. For example, in corporate fair market value (mark-to-market) adjustments of assets and liabilities, the offsetting adjustments to earnings probably include many adjustments to accrued earnings that will never be realized in cash. For example, if a company has fixed-rate debt that is marked-to-market, the unrealized earning adjustments over the years will never be realized if the company holds that debt to maturity. All those intervening interim earnings adjustments are certain to sum to zero even though they went up and down in a misleading way before final maturity of the debt.

."Fair Value or Not Fair Value:  The loan is the question," by Marco Trombetta, WebCPA, October 27, 2010 ---
http://www.webcpa.com/news/Fair-Value-Not-Fair-Value-56078-1.html

I might add that my intention at this point in time is to vote for President Obama in 2010, and I do not think this President is anti-business. Because of Obama's ability to silence his overwhelmingly liberal constituency, President Obama probably has the best chance among future 2012 rivals for the Presidency of reducing the trillion+ dollar annual budget deficits.

In fact the November 20, 2010 edition of The Economist magazine has a front cover picture of President Obama in a lumberjack shirt while holding a huge budget cutting chain saw. I doubt that any contender to the Presidency has any chance compared to President Obama of cutting the trillion-dollar deficits. Liberals can just take on the liberal media in ways that conservatives would find their budget chain saws pushed back to their throats. This is not to say that legislators, be they liberal or conservative, will work with President Obama to cut the deficit. In fact, the politics of cost cutting probably make it impossible for any chain saw cuts in the federal budget. States, however, will be forced to cut budgets because, unlike Ben Bernanke, they can't simply print money without taxation or borrowing.

"Speak softly and carry a big chainsaw:  Sorting out America’s fiscal mess is relatively simple. What’s needed is political courage," The Economist, November 20, 2010 ---
http://www.economist.com/node/17522328?story_id=17522328

LAST week Asia, this week Europe: no wonder Barack Obama has been to so many foreign summits since his party took a pounding in the mid-term elections. With the prospect of gridlock at home, a president naturally turns abroad. Yet Mr Obama badly needs to show that he can still lead on domestic policy. He should start by cajoling Congress into an agreement to tackle America’s ominous fiscal arithmetic.

Conventional wisdom says such an agreement is impossible: the problem is too big, the politics too difficult. But it is wrong to suppose that the deficit is unfixable, as two proposals for fixing it have shown this month (see article). And even the politics may not be totally intractable.

A trillion-dollar trove

The scale of America’s fiscal problem depends on how far ahead you look. Today’s deficit, running at 9% of GDP, is huge. Federal debt held by the public has shot up to 62% of GDP, the highest it has been in over 50 years. But that is largely thanks to the economy’s woes. If growth recovers, the hole left by years of serial tax-cutting and overspending can be plugged: you need to find spending cuts or tax increases equal only to 2% of GDP to stabilise federal debt by 2015. But look farther ahead and a much bigger gap appears, as an ageing population needs ever more pensions and health care. Such “entitlements” will double the federal debt by 2027; and the number keeps on rising after then. The figures for state and local debt are scary too.

The solution should start with an agreement between Mr Obama and Congress on a target for a manageable level of publicly held federal debt: say, 60% of GDP by 2020. They should also agree on the broad balance between lower spending and higher taxes to achieve this. This newspaper believes that the lion’s share of the adjustment should come on the spending side. Entitlements are at the root of the problem and need to be trimmed, and research has shown that although spending cuts weigh on growth in the short run, they hurt less than higher taxes. And in the long run later retirement and other reforms will expand the labour force and thus potential output, whereas higher taxes dull incentives to work and invest.

Yet even to believers in small government, like this newspaper, there are good reasons for letting taxes take at least some of the strain. Politically, this will surely be the price of any bipartisan agreement. Economically, there is sensible room for manoeuvre without damaging growth. American taxes are relatively low after the reductions of recent years. In an ideal world the tax burden would be gradually shifted from income to consumption (including a carbon tax). But that is politically hard—and there is a much easier target for reform.

America’s tax system is riddled with exemptions, deductions and credits that feed an industry of advisers but sap economic energy. Simply scrapping these distortions—in other words, broadening the base of taxation without any new taxes—could bring in some $1 trillion a year. Even though some of this would have to go in lowering marginal rates, it is a little like finding money behind the sofa cushions. The tax system would be simpler, fairer and more efficient. All this means that America can sensibly aim for a balance between spending cuts and higher taxes similar to the benchmark set by Britain’s coalition government. A ratio of 75:25 is about right.

There is legitimate concern that, done hastily, austerity could derail a weak recovery. But this strengthens the case for a credible deficit-reduction plan. By reassuring markets that America will control its debt, the government will have more scope to boost the economy in the short term if need be—for instance by temporarily extending the Bush tax cuts.

Mr Obama and the Republicans are brimming with ideas for freezing discretionary spending, which covers most government operations from defence to national parks. They have found common cause in attacking “earmarks”, the pet projects that lawmakers insert into bills. But discretionary outlays, including defence, are less than 40% of the total budget. Entitlements, in particular Social Security (pensions) and Medicare and Medicaid (health care for the elderly and the poor), represent the bulk of spending and even more of spending growth.

On pensions, the solution is clear if unpopular: people will need to work longer. America should index the retirement age to longevity and make the benefit formula for upper-income workers less generous. The ceiling on the related payroll tax should be increased to cover 90% of earnings, from 86% now.

Health-care spending is a much tougher issue, because it is being fed by both the ageing of the population and rising per-person demand for services. Richer beneficiaries should pay more of their share of Medicare, while the generosity of the system should be kept in check by the independent panel set up under Mr Obama’s health reform to monitor services and payments. The simplest way for the federal government to restrain Medicaid would be to end the current system of matching state spending and replace this with block grants, which would give the states an incentive to focus on cost-control.

Chainsaw you can believe in

Devising a plan that reduces the deficit, and eventually the debt, to a manageable size is relatively easy. Getting politicians to agree to it is a different thing. The bitter divide between the parties means that politicians pay a high price for consorting with the enemy. So Democrats cling to entitlements, and Republicans live in fear of losing their next party nomination to a tea-party activist if they bend on taxes. Even the president’s own bipartisan commission can’t agree on what to do.

But true leaders turn the hard into the possible. Two things should prompt Mr Obama. First, the politics of fiscal truth may be less awful than he imagines. Ronald Reagan and Bill Clinton both won second terms after trimming entitlements or raising taxes. Polls in other countries suggest that nowadays tough love can sell. Second, in the long term economics will tell: unless it changes course, America is heading for a bust. If Mr Obama lacks the guts even to start tackling the problem, then ever more Americans, this paper and even those foreign summiteers will get ever more frustrated with him.

 

Even those who will not vote for President Obama in 2012 might find the following article to be interesting:
"True To His Word:  Note to critics: Read (or reread) his books. Obama is doing just what he said he would do," by Harvard Professor James T. Kloppenberg, Newsweek Magazine, November 17, 2010 ---
http://www.newsweek.com/2010/11/17/obama-is-doing-just-what-he-said-he-would-do.html

I don't know if there are any hidden gimmicks or not, but I stumbled upon this interesting offer of a free book entitled "Auditing With Excel" ---
http://www.auditingwithexcel.com/?gclid=CO_nko6A4KUCFYLd4AodDGNq1w

Jensen Comment
It's not common to offer a choice between a free electronic version of a book versus a free hard copy version. Check the shipping and handling costs.

December 9, 2010 reply from Bob Jensen

I downloaded the PDF version of his book. The problem with it is that it would require a very sophisticated Excel user to implement, ensure accuracy and interpret.

I was trying to work out my namesake’s (Mr Walker) ‘angle’. Basically it is this. Near the end of the book he tells you that he has developed Excel applications that, presumably, implement the formulae presented throughout his book. I assume he will charge for that.

Investors Appear to Be Betting on New GM Manufacturing Plants in Brazil and Asia
Ford's Not Worried in the U.S.

From The Wall Street Journal Accounting Weekly Review on December 3, 2010

Total for GM Offering Rises to $23.1 Billion .
by: John Kell
Nov 27, 2010
Click here to view the full article on WSJ.com

TOPICS: Equity, Financial Accounting
SUMMARY: General Motors Corp.'s initial public offering priced much higher than expectations. The related article indicates that an optional purchase of an additional block shares available for 30 days after the IPO was already exercised.
CLASSROOM APPLICATION: The article is useful in covering stockholders' equity and refers to information on the company's web site in addition to the WSJ articles.
QUESTIONS:
1. (Introductory) Why is General Motors making an initial public offering in November 2010 after having originally been founded in 1908?

2. (Advanced) Access the company's web site and the announcement describing its offering at http://www.gm.com/news-article.jsp?id=/content/Pages/news/global/en/2010/1117_pricing.html  What types of securities are begin sold?

3. (Advanced) If the company is issuing shares, why is it that "none of the money from the common stock sale will flow to the auto maker"?

4. (Advanced) What is mandatory convertible junior preferred stock?

5. (Introductory) Refer to the related article. What does its author mean by "Uncle Sam's Woe"?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
GM's Benign Outlook, and Uncle Sam's Woe --- http://online.wsj.com/article/SB10001424052748703945904575645090740395652.html
by Brendan Conway
Nov 29, 2010
Online Exclusive

"Total for GM Offering Rises to $23.1 Billion," by: John Kell, The Wall Street Journal, November 27, 2010 ---
http://online.wsj.com/article/SB10001424052748704693104575639003273175656.html?mod=djem_jiewr_AC_domainid

General Motors Co. said the underwriters of its initial public offering have exercised their full overallotment options to purchase an additional 71.7 million shares of common stock, boosting the total offering size to $23.1 billion.

On Friday, the company said the additional shares sold totaled $2.37 billion. The auto maker also disclosed an additional 13 million shares of mandatory convertible junior preferred shares were purchased from the company, for a total of $650 million.

The closing for the additional shares is expected to take place on Dec. 2.

Last week, GM priced its IPO at $33 per share, raising $20.1 billion in common and preferred stock in one of the largest U.S. stock offerings ever. The stock closed Friday on the New York Stock Exchange at $33.80.

None of the money from the common stock sale will flow to the auto maker. The majority of the shares sold came from the U.S. Treasury, which took a controlling stake in GM as part of a taxpayer-financed bailout last year.

Earlier this month, GM reported it earned $2 billion in the third quarter, marking a third straight quarterly profit as the company sold more pickup trucks and consumers paid higher prices for its vehicles.

"New Video on Risk and Return," The Unknown Professor, Financial Rounds, November 14, 2010 ---
http://financialrounds.blogspot.com/

Bob Jensen's threads on this topic are at
http://www.trinity.edu/rjensen/roi.htm

Reviewed by Steve Zeff and Michael Granof
"Small Business Inventory Expensing," by Calvin H. Johnson University of Texas at Austin - School of Law
Tax Notes, 2010 U of Texas Law, Law and Econ Research Paper No. 193 The Shelf Project
SSRN. November 16, 2010 ---  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1710153 

Calvin H. Johnson is a professor of law at the University of Texas. The author wishes to thank Stephen Zeff and Michael Granof for helpful comments without binding them to conclusions with which they disagree.

The President’s Economic Recovery Advisory Board (PERAB) recently recommended allowing small businesses to expense their inventory and exclude their customer receivables from tax. The PERAB proposals are a tax shelter or subsidy that are better than no tax. Investing with deducted or excluded funds is economically equivalent to an exemption of profit from tax, and when the interest deduction is taken into account, the result is a negative tax.

Records to reflect inventory and receivables are easy to maintain and are getting cheaper with the availability of computerized accounting. Every business knows how much its customers owe it, and no business has lost money reflected in valuable inventory it still has on hand. The PERAB proposal is prone to abuse as dentists and lawyers seek shelter. Indeed it would always be open to abuse.

The Shelf Project is a collaboration among tax professionals to develop proposals to raise revenue in the impending revenue crisis by defending the tax base. It is intended to raise revenue without a VAT or a rate increase in ways that will improve the fairness, efficiency, and rationality of the tax system. The Shelf Project ordinarily proposes amendments to close existing loopholes, and the PERAB proposal to allow expensing of inventory and deferral on receivables is a loophole. Blocking enactment of the PERAB proposal would prevent the revenue loss that the PERAB proposal would cause.

An overview of the Shelf Project is found in ‘‘How to Raise $1 Trillion Without a VAT or a Rate Hike,’’ Tax Notes, July 5, 2010, p. 101, Doc 2010-13081, or 2010 TNT 129-4. Congress adopted its first Shelf Project in March 2010. New section 871(1), enacted in the Hiring Incentives to Restore Employment Act, is based on the Shelf Project proposal by Reuven Avi-Yonah, ‘‘Enforcing DividendWithholding on Derivatives,’’ Tax Notes, Nov. 10, 2008, p. 747, Doc 2008-22806, or 2008 TNT 219-34.

Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.

Paul Caron notes possible abuses ---
http://taxprof.typepad.com/

The President’s Economic Recovery Advisory Board (PERAB) recently recommended allowing small businesses to expense their inventory and exclude their customer receivables from tax. The PERAB proposals are a tax shelter or subsidy that are better than no tax. Investing with deducted or excluded funds is economically equivalent to an exemption of profit from tax, and when the interest deduction is taken into account, the result is a negative tax.

Records to reflect inventory and receivables are easy to maintain and are getting cheaper with the availability of computerized accounting. Every business knows how much its customers owe it, and no business has lost money reflected in valuable inventory it still has on hand. The PERAB proposal is prone to abuse as dentists and lawyers seek shelter. Indeed it would always be open to abuse.

Bob Jensen's small business helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#SmallBusiness

November 26, 2010 message from James Martin

I developed a bibliography for Advances in Environmental & Social
Accounting at
http://maaw.info/AdvancesInEnvironmentalAccountingandManagement.htm

"Teaching Online Professors ... Online," by Steve Kolowich, Inside Higher Ed, November 10, 2010 ---
http://www.insidehighered.com/news/2010/11/10/pearson

Will colleges and universities buy online courses designed to train the instructors who teach online courses?

Pearson, the education and media conglomerate, is betting on it. The company will announce today a plan to sell courses aimed at preparing professors to teach online.

As more traditional institutions look to scale up their online offerings, Pearson -- which already sells some pre-packaged courses, as well as textbooks and online learning platforms — sees demand for training rising. “We’re pretty bullish on the opportunity," says Don Kilburn, CEO of Pearson Learning Solutions. “There’s a real need to help.”

Pearson officials say the target audience for the new courses, scheduled to be offered beginning in January, will be institutions and systems looking to outsource training of existing faculty as they grow their Web-based programs, as well as freelancers looking to bolster their résumés as they apply for adjunct gigs. The company is also hoping to team up with one or more accredited graduate programs to offer the courses as part of a degree — or at least a certificate — in online teaching.

The move is part of Pearson’s strategy to expand beyond publishing into more segments of the e-learning industry — not unlike Blackboard, which recently announced that it will soon start packaging and selling remedial education courses to community colleges in conjunction with another e-learning company, K-12.

Like Blackboard’s remedial courses, Pearson’s courses in online teaching are still in development. The Louisiana Community and Technical College System is piloting some of the courses, but it is only two weeks in — and while Pearson has provided a good foundation, there is still tweaking to be done before the courses are shelf-ready, says Tammy Hall, director of academic services there.

Still, a preliminary menu available on Pearson’s website lists eight course titles: Introduction to Online Learning, Instructor Technology Preparation, Instructional Design for Online Learning, Promoting Student Success in the Online Learning Environment, Assessing Knowledge and Skills in the Online Learning Environment, Beyond the Online Classroom, Online Teaching Internship, and Course Design/Project Practicum.

The company plans to market the courses in the K-12 and corporate training sectors too, but it plans to do about half of its business in higher education, Kilburn says.

Many higher ed institutions with large online enrollments — including the University of Phoenix, the largest employer of online instructors — run their own training programs. But there are a few third-party providers that handle online instructor training, both for individuals and for institutions.

One is the Sloan Consortium, a nonprofit that focuses on technology and online education. Sloan runs nearly 100 workshops, averaging about a week in length and costing $400 to $500 each for individuals or $3,500 for a 100-seat institutional license. It provides online training for around 2,500 instructors per year, according to John Bourne, the organization’s executive director.

Another nonprofit, called LERN, offers a three-course sequence, plus course materials, for about $800 per head. LERN has found an accredited partner in the University of South Dakota, which offers a handful of LERN courses in online instruction for credit toward a master’s degree in educational administration. Outside of that, the organization handles online teacher training for a number of institutions, including Middle Tennessee State University, Missouri Baptist University, New Mexico State University, Norfolk State University, and several University of Texas campuses, according to Tammy Peterson, head of customer service at LERN.

Kilburn, the Pearson executive, says it is too early to estimate how his company will price its courses. But it is hoping to attract not only institutions looking to grow online that lack any scalable training mechanism for faculty, but also institutions that already do online instructor training in-house that might decide it is cheaper or more effective to outsource that task to Pearson. “I do think there will be some folks who have their own in-house programs who will look at [our offering] and evaluate it,” Kilburn says.

Continued in article

"Enrollment in Online Courses Increases at the Highest Rate Ever," by Tavis Kaya, Chronicle of Higher Education, November 16, 2010 ---
http://chronicle.com/blogs/wiredcampus/enrollment-in-online-courses-increases-at-the-highest-rate-ever/28204?sid=wc&utm_source=wc&utm_medium=en

Despite predictions that the growth of online education would begin to level off, colleges reported the highest-ever annual increase in online enrollment—more than 21 percent—last year, according to a report on an annual survey of 2,600 higher-education institutions from the Sloan Consortium and the Babson Survey Research Group.

In fall 2009, colleges—including public, nonprofit private, and for-profit private institutions—reported that one million more students were enrolled in at least one Web-based course, bringing the total number of online students to 5.6 million. That unexpected increase—which topped the previous year’s 17-percent rise—may have been helped by higher demand for education in a rocky economy and an uptick in the number of colleges adopting online courses.

Although the survey found sustained interest in online courses across all sectors, there was a spike in the number of for-profit institutions—a 20-percent increase over last year—that said online education is critical to their long-term strategies. However, more public colleges than  private for-profits—74.9 percent versus 60.5 percent—say it’s part of their long-term plans.

Elaine Allen, associate professor of statistics and entrepreneurship at Babson College and co-director of the Babson Survey Research Group, said that the disproportionate increase in the for-profit sector may mean that online programs are becoming their “bread and butter.” Colleges are telling themselves that “if we want to grow and have profits, we need to be in the online sector,” she said.

Increased government scrutiny of the for-profit sector has complicated plans for expansion online. Approximately 32 percent of for-profit institutions—compared with about 17 percent of public colleges—said it will be difficult to comply with government regulations on financial aid. Those new regulations include a pending “gainful employment” rule that could cut off federal aid to programs with high levels of student debt relative to what students make after graduation—a move that could slash revenue for institutions dependent on student-aid money. “For the first time, we saw the government regulate financial aid and some kind of return on investment,” Ms. Allen said. “The for-profits are feeling the pressure there.”

Administrators also continue to wrestle with the question of quality in online education. According to the survey report, “Class Differences: Online Education in the United States, 2010,” 66 percent of college administrators say that online education is the same as or better than face-to-face classes—a slight decline from last year. Still, Ms. Allen said it appears that more faculty members are warming up to online education as a quality alternative to face-to-face learning and are finding new ways to use the technology.

Ms. Allen expects Web enrollment to plateau as more competitors—whether they are Web programs from established universities or from new for-profit institutions—hit the market. And for-profit colleges will probably take advantage of their more-nimble business models to expand much more rapidly online than will their government-reliant public competitors. As more budget cuts loom, public institutions are already beginning to “feel competition from the for-profits,” she said.

"Are The Social Security Trust Funds A Mirage?" by Alex Blumberg and Chana Joffe-Walt, NPR Audio, November 19, 2010 ---
http://www.npr.org/blogs/money/2010/11/18/131420919/are-the-social-security-trust-funds-a-mirage

Proposals to fix the deficit are coming fast and furious in Washington these days. One major target: Social Security.

Whether you favor cutting Social Security may depend on how you view the Social Security trust funds, which currently contain $2.5 trillion for retirement benefits. That's $2.5 trillion that, according to some people, don't actually exist.

Here's the back story.

If you look at your paycheck, in the spot where it lists deductions, there's a line that says "FICA." That's the money that gets taken out of your check to pay for Social Security.

For the past 25 years or so, the amount of money the government has raised through those taxes has been greater than what it's been spending to fund Social Security.

The surplus came largely from the baby boomers — and we're going to need that extra money when they retire and start collecting Social Security.

This is where the $2.5 trillion trust funds come in.

The government has invested all that money in Treasury bonds, which are traditionally considered among the safest investments in the world.

But a Treasury bond, remember, is the way the government borrows money. So the government is lending the Social Security surplus to itself. And the obligation to repay those loans is the trust funds.

"They are nothing like any trust fund that any one of us would think of," says Maya MacGuineas of the New America Foundation. "It conjures up an image of really holding savings, and it doesn't do that at all."

But there's another way to think about what the government is doing here.

The federal government owes $2.5 trillion to the Social Security trust funds. And if the government doesn't pay that money, it will default on its debt — something the U.S. has never done in its history.

By the middle of the next decade, the Social Security surplus will turn into yearly deficits as more Baby Boomers retire. And the government will have to come up with hundreds of billions of dollars a year to cover its obligations to the trust fund.

At that point, the debate over whether or not the trust funds exist becomes a moot.

"The policy choices that we have to make good on Social Security obligations are exactly the same with the trust fund or if we'd never had the trust fund," MacGuineas says. "Raise taxes, cut Social Security benefits, cut other government spending, or borrow the money. That's the only way to repay the money."

As with hospitals, over 98% of the billing mistakes screw the customers indicating that the errors are not random
"FCC Fines Verizon a Record-Breaking $25 Million for Screwing Customers," Gizmoto, October 30, 2010 ---
http://gizmodo.com/5677758/fcc-fines-verizon-a-record+breaking-25-million-for-screwing-customers

Three of the nation's four biggest accounting firms have been accused in a lawsuit of fraudulently overbilling clients by hundreds of millions of dollars for travel-related expenses, and the Justice Department has been conducting an investigation of the billing practices of at least one of the firms, PricewaterhouseCoopers LLP.

Documents describing the government's investigation are contained in the previously unpublicized lawsuit filed here in October 2001 that could pose both a public-relations embarrassment and a big legal challenge to the firms. The industry has been under intense scrutiny for its audit work following the 2001 collapse of Enron Corp., which brought down another big accounting firm, Arthur Andersen LLP, and for its perceived lack of oversight at other companies, including Tyco International Ltd., Xerox Corp. and others.

The suit, pending in an Arkansas state circuit court, accuses PricewaterhouseCoopers, KPMG LLP and Ernst & Young LLP of padding the travel-related expenses they billed thousands of clients over a 10-year period dating back to 1991.

The suit alleges that the firms systematically billed their clients for the full face amount of certain travel expenses, including airline tickets, hotel rooms and car-rental expenses, while pocketing undisclosed rebates and volume discounts they received under contracts with various airline, car-rental, lodging and other companies. At times, the rebates retained by the various firms were for up to 40% of the purchase price of travel-related services, the suit has alleged, citing internal firm documents filed with the court.

The lawsuit shines a light on how some professional-services firms, including law firms and medical practices, in recent years have turned reimbursable out-of-pocket expenses, such as bills for travel and meals, into profit centers, which itself isn't illegal or improper. As big accounting, law and other firms have grown over the past decade, they increasingly have used their size in negotiations with travel companies, credit-card companies and others to secure significant rebates of upfront costs. Such rebates don't generate disputes between firms and their clients when fully disclosed. But any that aren't fully disclosed, as alleged in the Texarkana suit, could open firms up to potential liability.

The suit, filed by closely held Warmack-Muskogee Limited Partnership, a shopping-mall operator, also accuses the accounting firms of colluding with each other to secure favorable deals with various travel vendors. It also alleges the firms operated under an agreement not to disclose the existence of the rebates to clients or credit clients fully for the rebates.

The defendants in the suit, all of which deny the lawsuit's allegations, have filed motions seeking to dismiss the case as groundless and to defeat requests that the lawsuit be certified as a class action, the class for which could include a majority of the nation's publicly held corporations. Still, the lawsuit, for which no trial date has been set, already has proved costly to the firms. In an affidavit last month, a PricewaterhouseCoopers partner estimated the firm's partners and staff had spent 125,000 hours, valued at $10.3 million at the firm's billing rates, gathering and analyzing information to be produced for discovery. KPMG in a July court filing estimated that its discovery expenses could approach $26 million.

Continued in the article

Ernst & Young was awarded $98.8 million of undisclosed rebates on airline tickets from 1995 through 2000, mostly on client-related travel for which the accounting firm billed clients at full fare, internal Ernst records show.

The rebates are at the crux of a civil lawsuit here in a state circuit court, in which Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP are accused of fraudulently overbilling clients for travel expenses by hundreds of millions of dollars since the early 1990s. The tallies are the first precise annual airline-rebate figures to emerge in the case for any of the three accounting firms.

Ernst and the other defendants, in the lawsuit brought by closely held shopping-mall operator Warmack-Muskogee LP, have acknowledged retaining large rebates from travel companies without disclosing their existence to clients. But they deny that their conduct was fraudulent, saying they used the proceeds to offset costs they otherwise would have billed to clients through higher hourly rates. Confidentiality provisions in the firms' contracts, standard in the airline industry, barred parties from disclosing the contracts' existence or terms.

Court records show that Ernst had rebate agreements with three airlines: American Airlines' parent AMR Corp., Continental Airlines, and Delta Air Lines. The airline rebates soared to $36.7 million in 2000, compared with $21.2 million in 1999 and $5.2 million in 1995, reflecting a trend among major accounting firms to structure their volume discounts with select airlines as rebates rather than upfront price reductions.

A May 2001 chart by Ernst's travel department shows the firm estimated that its 2001 rebates would be $39.8 million to $44 million, including at least $21.2 million from AMR and $8.3 million from Continental.

Of Ernst's three "preferred carriers," two -- AMR and Continental -- are audit clients of the firm. Some investors say the large dollar figures, combined with a reference in one Ernst document to the firm's arrangements with AMR, Continental and seven other travel companies as "strategic partnering relationships," raise questions about how such payments mesh with Securities and Exchange Commission requirements that auditors be independent. The reference was contained in a 2001 presentation outlining the travel department's goals and objectives for the following year.

Audit firms generally aren't allowed to have partnership arrangements with clients in which the auditor would appear to be a client's advocate, rather than a watchdog for the public. SEC rules bar auditors from having direct business relationships with audit clients, with one exception: if the auditor is acting as "a consumer in the normal course of business."

The rules don't clearly spell out the full range of business relationships that would fall under that category. Ernst says its relationships with AMR and Continental qualified for the exception. Generally, auditors can buy goods and services from audit clients at volume discounts, if the prices are fair market and negotiations are arm's length. Ernst, American and Continental say theirs were. Ernst's terms with American and Continental were similar to those with Delta, which wasn't an audit client.

In a January 2000 e-mail to an Ernst consultant, Ernst's travel director explained that, within the airline industry, "point-of-sale discounts are the industry norm, not back-end rebates." Many large professional-services firms tended to prefer back-end rebates, however. A September 2000 presentation by Ernst's travel department said "the back-end rebate structure is consistent with practices in other large professional-services firms," including the other four major accounting firms and investment banks Credit Suisse First Boston and Morgan Stanley. It also said an outside consulting firm, Caldwell Associates, had deemed the competitiveness of Ernst's travel contracts "to be above average," compared with those of the other four major accounting firms.

In a statement, Ernst says: "There is no independence rule of any sort that would prohibit our receipt of rebates for volume travel in the normal course of business. As is the case with any large airline customer, we receive discounts on tickets purchased from American based on the volume of our business. ... It is entirely unrelated to our audit work for the airline."

"Pricewaterhouse's Records Indicate Some Partners Opposed Keeping Payments," by Johathan Weil, The Wall Street Journal, September 19, 2003 --- http://online.wsj.com/article/0,,SB106391830284530300,00.html?mod=mkts_main_news_hs_h

PricewaterhouseCoopers LLP's practice of retaining undisclosed rebates on client-related travel expenses generated internal dissent within the accounting firm, some of whose partners complained it was improper to keep the payments rather than passing them on to clients, internal records of the firm show.

The records, including internal e-mails and slide-show presentations to top executives of the firm, were filed this year with a Texarkana, Ark., state circuit court as exhibits to a deposition of PricewaterhouseCoopers Chairman Dennis Nally. The deposition of Mr. Nally was conducted in February in connection with a continuing lawsuit against PricewaterhouseCoopers and four other accounting and consulting firms that accuses them of fraudulently overbilling clients for travel-related expenses by hundreds of millions of dollars.

Continued in the article.

Attorneys alleging that PricewaterhouseCoopers LLP overbilled its clients for travel expenses have released a flurry of the accounting firm's e-mails, including one from April 2000 in which the head of its ethics department described the firm's practices as "a bit greedy."

The e-mails and other internal records, filed Friday with a state circuit court here, mark the broadest display yet of evidentiary material in the lawsuit by a closely held shopping-mall operator, Warmack-Muskogee LP, against three of the nation's Big Four accounting firms. The records include complaints by more than a dozen PricewaterhouseCoopers partners and other personnel about the firm's billing practices, as well as case logs for three separate internal ethics-department investigations into the practices since 1999. The firm halted the practices in question in October 2001.

PricewaterhouseCoopers has acknowledged that it retained rebates on various travel expenses for which the firm had billed clients at their prerebate prices, including rebates from airlines, hotels, rental-car companies and credit-card issuers. It also has acknowledged that it didn't disclose the rebates to clients and that most of its partners had been unaware of them. The firm, however, has denied Warmack-Muskogee's allegations that the rebate arrangements constituted fraud, saying the proceeds offset amounts it otherwise would have billed to clients through higher hourly rates.

In her April 2000 e-mail, the top partner in PricewaterhouseCoopers's ethics department, Boston-based Barbara Kipp, scolded Albert Thiess, the New York-based partner responsible for overseeing the firm's infrastructure, including its travel department. "Al, in general, while I appreciate the importance of managing as tight a fiscal ship as we can, I somehow feel that we are being a bit greedy here," she wrote. "I think that, in most of our clients' and partners'/staff's minds, when we say [in our engagement letters] that 'we will bill you for our out-of-pocket expenses, including travel ...', they don't contemplate true overhead types of items being included in that cost."

Continued in the article.

 Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

Don't MessWith the IRS or da Judge
You Realize We Will Be Without Wesley Snipes for Three Years, Don’t You? --- Click Here
http://goingconcern.com/2010/11/you-realize-we-will-be-without-wesley-snipes-for-three-years-dont-you/

Is this just because he did not read Bob Jensen's tax helpers?
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

"Video: Trapped (A Must See!)," by Nadine Sabai, Sleight of Hand Blog, November 29, 2010 ---
http://sleightfraud.blogspot.com/2010/11/video-trapped-must-see.html

Summary (Via Cato Institute):

Trapped: When Acting Ethically Is against the Law featuring John Hasnas, a Professor of Law and Ethics at Georgetown University Business School and with comments by Alice Fisher, Assistant Attorney General in the Criminal Law Division at the Department of Justice.

Since Enron's collapse in 2002, the federal government has stepped up its campaign against white-collar crime. In "Trapped: When Acting Ethically Is against the Law", John Hasnas compellingly illustrates how the campaign against corporate fraud has gone overboard. Hasnas debunks the common assumption that the law only mandates ethical behavior. That may have been true 20 years ago, but no longer. Hasnas points out that business executives have responsibilities to their stockholders, employees, customers, and suppliers. And in addition to their contractual obligations, CEOs have ordinary ethical obligations as human beings to honor their informal commitments. Those ethical complexities are rarely acknowledged by contemporary federal policies that demand compliance with myriad rules and regulations. The result is increasingly a Catch-22 situation in which businesspeople must act either unethically or illegally.

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

Too Asian?" in Canada's Elite Universities
Please don't shoot the messenger!

This is racially explosive, but I forward it on the grounds that it's published in a very respectable and non-biased journal (in my viewpoint). Also it is not really disrespectful of Asians --- in fact quite the reverse is true in this article.

I think this relates somewhat to accounting in that our accountics-dominated doctoral programs where the quants excel may become dominated by Asians. This is not in and of itself a bad thing if those students are also well grounded in accountancy before entering accountics doctoral programs that in modern times focus very little on accounting. Perhaps this counteracts what continues to be Anglo-dominated accounting doctoral programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

The goal should probably be to make our accounting doctoral programs more multicultural in the middle --- an effort that is being helped considerably by the KPMG Foundation minority doctoral initiative that's been both funding and helping minority doctoral students in other ways.

See one of my heroes, Bernie Milano, on Video --- http://www.diversityinc.com/public/3150.cfm

"KPMG Foundation Celebrates 15th Year of Minority Accounting Doctoral Program," SmartPros, August 1, 2009 --- http://accounting.smartpros.com/x67298.xml 

""Too Asian?" in Canada," by Steve Hsu, MIT's Technology Review, November 10, 2010 ---
http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=26008&nlid=3766

Watch the CNN Video
"Make certain when you sign those papers that you didn't rely on accountants."
Rep. Charlie Rangel, Recently censured member the U.S. House of Representatives
http://goingconcern.com/2010/12/from-now-on-charlie-rangel-wont-be-relying-on-accountants/

Watch the Video
"Make certain that you rely on Turbo Tax, because then you have something non-human to blame for underpayment of your taxes."
Timothy Geithner, Secretary of the U.S. Treasury
http://www.youtube.com/watch?v=eKVxGlkPRlo

Questions
Do College Rankings Matter?
Should College Rankings Matter?

Existing tools and measurements could allow colleges to develop meaningful rankings to replace widely discredited rankings developed by magazines, according to a report being released today by Education Sector, a think tank. The report repeats criticisms that have been made of the U.S. News & World Report rankings, saying that they are largely based on fame, wealth and exclusivity. A new system might use data from the National Survey of Student Engagement and the Collegiate Learning Assessment as well as considering new approaches to graduation rates and retention, the report says. Current rankings reward colleges that enroll highly prepared, wealthy students who are most likely to graduate on time. But a system that compared predicted and actual retention and graduation rates — based on socioeconomic and other data — would give high marks to colleges with great track records on educating disadvantaged students, even if those rates were lower than those of some colleges that focus only on top students.
Inside Higher Ed, September 22, 2006

Bob Jensen's threads on misleading rankings of accounting education programs ---
http://www.trinity.edu/rjensen/TheoryRankings.htm

When person is unfamiliar with details of a school that they are to evaluate, the elitist reputation of the university as a whole, in my viewpoint, dominates the evaluation of the business school. For example, Princeton University does not have a business school. If Princeton started up a business school, before evaluators knew a single thing about that business school they would probably rate it in the Top 20 simply because it is la la Princeton. The same thing would never happen if one of the various St. Cecelia institutions started up a business school. They aren't sufficiently la la la in terms of international prestige of their universities as a whole.

I do know these rankings are important to some schools for some purposes. Seattle University undergraduate business school comes in at Business Week's Rank 46 in the West region, It's probably a big deal for Seattle University to be ranked so far ahead of the University of Utah coming in at Rank 109. And Seattle University is not all that far down from cross town "rival" --- that immense research University of Washington that came in at Rank 33. Can these two business schools even be compared meaningfully? Yeah I know they can be compared on some basis, but I don't think there's any use for comparing Rank 33 with Rank 46 among the hundreds of schools being ranked by Business Week.

And its probably an embarrassment for the University of Utah that will probably not mention its Rank 109 on its Website. The business school at Utah might've mentioned it if it had made the Top 20. Sigh!

It's probably an embarrassment for Southern Methodist to fall from grace according to Business Week graduate business rankings? But its fall from grace in football is probably more of an embarrassment to alumni of SMU.

Business Week's Business 2010 School Rankings of Undergraduate Business School Programs --- Click Here
http://www.businessweek.com/bschools/rankings/index.html?chan=bschools_special+report+--+best+b-schools+2010_special+report+--+best+b-schools+2010

• Top 20
• 1  University of Notre Dame (Mendoza)
• 2  University of Virginia (McIntire)
• 3  Massachusetts Institute of Technology (Sloan)
• 4  University of Pennsylvania (Wharton)
• 5  Cornell University
• 6  University of California - Berkeley (Haas)
• 7  Emory University (Goizueta)
• 8  University of Michigan (Ross)
• 9  Boston College (Carroll)
• 10  University of Texas - Austin (McCombs)
• 11  Brigham Young University (Marriott)
• 12  New York University (Stern)
• 13  Washington University - St. Louis (Olin)
• 14  University of North Carolina - Chapel Hill (Kenan-Flagler)
• 15  University of Richmond (Robins)
• 16  Miami University (Farmer)
• 17  Babson College
• 18  Wake Forest University
• 19  Indiana University (Kelley)
• 20  Villanova University

There are also rankings by region

Top Global Business Schools ---Click Here
 http://www.businessweek.com/bschools/content/nov2010/bs2010119_517831.htm?chan=bschools_special+report+--+best+b-schools+2010_special+report+--+best+b-schools+2010

Top Graduate Business Programs --- Click Here
http://www.businessweek.com/interactive_reports/rankings_history_us_10.html?chan=bschools_special+report+--+best+b-schools+2010_special+report+--+best+b-schools+2010

The methodology behind Bloomberg Business Week's rankings of the world's best business schools --- Click Here
http://www.businessweek.com/bschools/content/nov2010/bs2010111_640958.htm?chan=bschools_special+report+--+best+b-schools+2010_special+report+--+best+b-schools+2010

To begin the ranking process, we sent a 50-question survey to 17,941 MBA graduates from the Class of 2010 at 101 schools in North America, Europe, and Asia. We received 9,827 responses for a response rate of 55 percent. In 2008, Harvard Business School (Harvard Full-Time MBA Profile) and the University of Pennsylvania's Wharton School (Wharton Full-Time MBA Profile) declined to provide student contact information for our survey; this year all 101 schools helped us contact grads, either by supplying e-mail addresses or distributing the survey invitations to students on our behalf.

The Web-based survey asks graduates to rate their programs according to teaching quality, the effectiveness of career services, and other aspects of their b-school experience, using a scale of 1 to 10. The Class of 2010 survey results count for 50 percent of each school's total student satisfaction score. Our 2008 survey, which polled 16,704 graduates, and our 2006 survey, which polled 16,565, each count for an additional 25 percent. Using six years' worth of survey data encompassing 26,389 individual responses effectively ensures that short-term issues, problems, and improvements won't skew results.

Next we asked David M. Rindskopf and Alan L. Gross, professors of educational psychology at City University of New York Graduate Center, to analyze the data. The idea was to ensure that the results were not marred by any attempts to influence student responses or otherwise affect the outcome. The professors tested the responses to verify the data's credibility and to guarantee the poll's integrity.

The second stage of the ranking process involves a survey of corporate MBA recruiters. This year we surveyed 514 recruiters and received 215 responses, for a response rate of 42 percent.

Recruiters were asked to rate the top 20 schools according to the perceived quality of grads and their company's experience with MBAs past and present. Companies could rate only schools at which they have actively recruited in recent years, on- or off-campus. With the survey completed, we first calculated each school's point total, awarding 20 points for every No. 1 ranking, 19 points for every No. 2 ranking, and so on. Using each school's point total—along with information on the schools where each recruiter hires and the number of MBAs it hires—we calculate a recruiter score. The 2010 score was then combined with scores from the 2008 and 2006 recruiter surveys, totaling 680 responses. (The 2010 survey contributes 50 percent, while the 2008 and 2006 polls each contribute 25 percent.)

At this stage, 26 schools with poor response rates on one or both 2010 surveys were eliminated from ranking consideration, leaving 75 schools eligible to be ranked.

Continued in article

Jensen Comment
The top business school media ranking outfits are US News, The Wall Street Journal (WSJ) and Business Week. Business Week used to use alumni.  It tends to be a bit more of a combination approach using alumni and recruiters.

US News rankings are based upon surveys of business school deans who tend to favor research reputations in such schools as Stanford, Chicago, UC Berkeley, Wharton, MIT, Harvard, etc. The WSJ surveys recruiters who hire MBA graduates. Recruiters are often looking for "best buys" in terms of quality at less price which, at least before the demise of Wall Street investment banks, tended to favor Dartmouth's Tuck School over outrageously high priced Harvard and Wharton graduates.

"The Rankings, Rejiggered," by Eric Hoover , Chronicle of Higher Education, August 17, 2010 ---
http://chronicle.com/blogPost/The-Rankings-Rejiggered/26253/?sid=at&utm_source=at&utm_medium=en

The most glaring weakness in all of these media rankings is that the people providing inputs to these rankings have such variable knowledge of all the schools being ranked. They are most familiar with the schools they attended, the schools where they visit on recruiting trips, and in the case of deans the schools where they are employed.

When person is unfamiliar with details of a school that they are to evaluate, the elitist reputation of the university as a whole, in my viewpoint, dominates the evaluation of the business school. For example, Princeton University does not have a business school. If Princeton started up a business school, before evaluators knew a single thing about that business school they would probably rate it in the Top 20 simply because it is la la Princeton. The same thing would never happen if one of the various St. Cecelia's institutions started up a business school. They aren't sufficiently la la la in terms of traditional prestige.

There is also a certain amount of tradition that keeps some schools ahead of the pack. For example, Babson (Rank 17 undergraduate) has always ranked ahead of Bentley and will probably continue to do so even though I personally think Bentley should move ahead of its cross town rival Babson.

There was a time when one professor could make or break the reputation of a program such as back in the 1950s when having accounting research professor Carl Nelson on the faculty of the University of Minnesota made the Gofer's accounting PhD program Golden. Minnesota never attained such prominence among the top accounting doctoral programs since the days of Carl Nelson (who by the way like Ohio State's Tom Burns was more of a research leader than a research publisher) --- http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf

And thus I return to sleep not caring two hoots about how business schools get ranked basically on the basis of either how they ranked the last time or the prestige image of their host universities as a whole.

Bob Jensen's threads on misleading rankings of accounting education programs ---
http://www.trinity.edu/rjensen/TheoryRankings.htm

Bob Jensen's threads on ranking controversies in general ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

Book:  Auditing Real-World Frauds: A Practical Case Application Approach
Lynda M. Dennis, Ph.D., CPA, CGFO
Publisher: AICPA for CPE Self-Study
Price:  $174 discounted to $139 for AICPA members

 Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

"A Closer Look at Higher Education: Facts and figures expose the shortcomings of American higher education," by Jenna Ashley Robinson, The John William Pope Center for Higher Education Policy, October 27, 2010 ---
http://popecenter.org/clarion_call/article.html?id=2428
I thank Dick Haar for pointing out the above link to me.
 

Jensen Caution:  Some facts and figures cited by the Pope Center need to be independently replicated and are somewhat controversial. The reported facts and figures do conform to my intuitions about higher education. Keep in mind that studying demands in higher education do vary both by college and by disciplines within a college. For example, since an extremely high proportion of pre-med majors in their first year of college change majors before the third year of college, it suggests that being a pre-med major may take more study time, effort, and ability than most other majors. Also at universities like BYU, only the cream of the crop lower-division students are allowed to major in accounting, thereby suggesting that it takes more time, effort, and ability to be an accounting major at BYU than in many other majors. There are various other disciplines that are so rigorous that they lose nearly half their majors before the third year.

In fairness, the report below does cite statistics from very credible sources such as the College Board, AAUP, and government agencies.

Also keep in mind that education serves a far greater purpose than landing a high paying job. A philosophy major, art major or accounting major graduating with a C average who's now flipping burgers learned much that is valuable in life that we just don't measure well or even talk about much. These range from little things (better grammar) to big things (interest in scholarly books and libraries in general).

The United States’ universities are the envy of the world! Attending college will make students smarter, happier, and more successful!

Such fawning statements have become so ubiquitous that few question their veracity.

But a quick review of the facts reveals that American universities often deliver easy, biased, or useless content—at great expense to students, parents and taxpayers. While college still helps many individual students achieve their financial and academic goals, looking at the “big picture” shows that college isn’t everything it’s cracked up to be.

The Pope Center has compiled the following list of facts that readers may find surprising. (The list, with illustrations, is also available as a PDF here.) --- http://www.popecenter.org/download/Fast-Facts.pdf 

University students learn less than many people think.

• Only 29% of college graduates achieve a score of “proficient” on national literacytests. (National Assessment of Adult Literacy)

[Exhibit not shown here]

• Only 53% of students who begin college have graduated after six years. (The College Board)

• American colleges fail to significantly increase students’ civic knowledge; in a multiple-choice exam on America’s history and institutions, the average freshman scored 50.4% and the average senior scored 54.2%. (The Intercollegiate Studies Institute)

• Today’s students study only 14 hours per week outside of classes, compared to 24 hours in 1961. (Babcock, Philip and Marks, Mindy. “Leisure College USA” Review of Economics and Statistics.)

• Only 15 out of 70 leading colleges and universities require English majors to take a course in Shakespeare’s works. (The American Council of Trustees and Alumni)

Universities are expensive for students, parents, and taxpayers.

• In 2008-09, total federal, state, and institutional aid to students totaled $168 billion. (The College Board)

• On average, full-time faculty members at 4-year and 2-year universities in the United States make $80,368 per year. (American Association of University Professors)

• An average full-time staff member at a 4-year university in the United States makes $75,245 per year. (National Center for Education Statistics)

• Between 1993 and 2007, inflation-adjusted spending on administration per student increased by 61%. (The Goldwater Institute)

• States spend an average of $4.4 billion each per year on higher education. (U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2007-08)

• In 2008, average debt of graduating seniors with student loans was $23,200—up 24 percent from $18,650 in 2004. (The Project on Student Debt)

[Exhibit not shown here]

The average price of one year of college—including tuition, fees, room, board, supplies, books, and transportation—is nearly $40,000 at private 4-year universities and more than $19,000 for in-state students at public 4-year universities. (The College Board)

A college degree is no guarantee of future success.

• 29% of college grads work in high school-level jobs, including ticket-taker, barista, and flight attendant. (Carnevale, Smith, and Strohl. “Help Wanted: Projections of Jobs and Education Requirements Through 2018”)

• 20% of individuals making less than $20,000 per year have bachelor’s or master’s degrees. (U.S. Census Bureau, Current Population Survey, 2009)

• After factoring in forgone wages and the cost of a college education, the average lifetime earnings advantage for college graduates ranges from $150,000 to $500,000—not the million dollar figure that is often cited. (The American Enterprise Institute)

Continued in article --- http://popecenter.org/clarion_call/article.html?id=2428

In previous correspondence Tom Selling made the statement that hedging is just another form of speculation and, therefore, presumably changes in value of derivative financial instruments should be charged to current earnings whether or not they are speculations or hedges. I don't agree and have said previously at many points in my Web sites and in my FAS 133 dog and pony shows ---
http://www.cs.trinity.edu/~rjensen/Calgary/CD/

The big difference between using a derivative financial instrument as a speculation or as a hedge lies in whether of not the derivative is used to manage some type of risk with tradeoffs between this risk and opposing risks. As hedging instruments the derivatives are used to manage such risks as foreign currency (FX exchange) losses, fair value losses of inventory on hand and fixed rate loan values, and/or cash flow risk when a purchased option is used to lock in the future cash flow of a forecasted transaction such when Southwest Airlines anticipates purchasing a million gallons of jet fuel at a specified future date. In locking in the cash outflow of the future purchase, Tom is correct in that Southwest is sacrificing possible opportunity gains if the future price of jet fuel plunges. But it is also avoiding losses if the future price of jet fuel soars.

The ironic thing about financial risk is that firms must choose, even when hedged, between cash flow risk or value risk. Hedging trades off one for the other such that managers can choose how much of each type of risk they want accept. Without hedging they cannot manage this nearly as efficiently and effectively. More importantly, managers can shift risk preferences very quickly by taking different position contracts. For example, if Southwest Airlines changes its predictions of rising fuel prices it can quickly enter other derivatives contracts to take advantage of falling prices. Risk management is dynamic from day-to-day or hour-to-hour.

I don't think finance experts are viewing hedges the same way as they view speculations with derivative financial instruments. And I think the accounting should vary depending upon whether companies are managing risk versus when they are not managing risk with derivative financial instruments. I think the FASB got it right in FASB 133 and would hate to see standard setters do away with hedge accounting relief that hedgers now get by posting to OCI instead of current earnings.

The following is an elementary introduction that students might find useful before delving into FAS 133. I thank finance professor Jim Mahar for suggesting this link on Twitter and in his blog.

"How Companies Use Derivatives for Hedging & Risk Management," November 15, 2010 By Abhijeet Bhandari, Cool Avenues, November 15, 2010,
http://www.coolavenues.com/mba-journal/finance/how-companies-use-derivatives-hedging-risk-management

Hedging
Hedging, in simple words, means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes. A simple example will help us understand it better.

A wheat farmer can sell wheat futures to protect the value of his crop prior to harvest. If there is a fall in price, the loss in the cash market position will be countered by a gain in futures position.

Derivatives
Derivatives are financial instruments whose values depend on the value of not only the underlying financial instruments but on any underlying asset. We can take the same example of the wheat farmer.

Here, the wheat farmer can protect itself of any fall in price by entering into a contract with the merchant.

The main types of derivative instruments are: Futures, Forwards, Options, Swap.

So, to sum up, Hedging can be defined as a method whereby one can reduce the financial exposure faced in an underlying asset due to volatility in prices by taking an opposite position in the derivatives market in order to off-set the losses in the cash market by a corresponding gain in the derivatives market.

The sentence might appear to be a bit long but captures the basic essence of derivatives hedging.

Now having understood the basic meaning of hedging and derivatives, we would now see how corporate use these derivative instruments for hedging.

Foreign Exchange Risks
The most common corporate uses of derivatives is for hedging foreign-currency risk, or foreign exchange risk, which is the risk that a change in currency exchange rates adversely impacts business results.

Let's consider an example with Infosys Technologies, a multi-national IT company which even exports softwares to other countries, and mainly to US. Let's make an assumption that Infosys Technologies exports software worth 1000 Crores to US in 2006-07 when the price of per US Dollar was at Rs. 40 (assumption).

When the rupee per dollar exchange rate increases from Rs. 40, Rs. 42, Rs. 44, it takes more rupees to buy one dollar, meaning the rupee is depreciating or weakening. As the rupee depreciates, the softwares which Infosys exports would translate into greater sales in rupee terms. This demonstrates how a weakening rupee is not all that bad: it can boost export sales of Indian companies.

Now let's illustrate a simple hedge that a company like Infosys Technologies might use to minimize the effects of any Rupee / USD exchange rates, Infosys purchases 2000 foreign-exchange futures contracts against the Rupee / USD exchange rate. The value of the futures contracts will not, in practice, correspond exactly on a 1:1 basis with a change in the current exchange rate (that is, the futures rate won't change exactly with the spot rate), but we will assume that it does anyway. Each futures contract has a value equal to the "gain" above the Rs. 40 Rupee/USD rate. (Only because Infosys took this side of the futures position, somebody - the counter-party - will take the opposite position.)

Of course, it's not a free lunch: If the strategy of Infosys goes against it, that is, if the dollar were to weaken instead, then the increased export sales are mitigated (partially offset) by losses on the futures contract.

Hedging Interest Rate Risks
Companies can hedge interest-rate risks in various ways. Consider a company that expects to sell a division in one year and at that time to receive a cash wind-fall that it wants to "park" in a good risk-free investment or a company had an unexpected profit, if the company strongly believes that interest rates will drop between now and then, it could purchase (or 'take a long position on') a treasury futures contract. The company is effectively locking in the future interest rate.

Fair Value Hedges - The Company [XYZ] had two interest rate swaps outstanding at January 1, 2008 designated as a hedge of the fair value of a portion of fixed-rate bonds. The change in fair value of the swaps exactly offsets the change in fair value of the hedged debt, with no net impact on earnings.

XYZ Company uses an interest rate swap. Before it entered into the swap, it was paying a variable interest rate on some of its bonds. (For example, a common arrangement would be to pay LIBOR plus something and to reset the rate every six months.)

Here the Swap is receive variable and pay fixed.

Now let's look at the impact of the swap, the swap requires XYZ to pay a fixed rate of interest while receiving floating-rate payments. The received floating-rate payments are used to pay the pre-existing floating-rate debt. XYZ is then left only with the floating-rate debt, and has. therefore. managed to convert a variable-rate obligation into a fixed-rate obligation with the addition of a derivative. Here. we can call this as a "perfect hedge": The variable-rate coupons that XYZ received compensates for the company's variable-rate obligation.

Commodity or Product Input Hedge
Companies that depend heavily on raw-material inputs or commodities are sensitive, sometimes significantly, to the price change of the inputs. Airlines, for example, consume lots of jet fuel. Historically, most airlines have given a great deal of consideration to hedging against crude-oil price increases - although they need to be very careful and a great forecasting before going for such a strategy because the strategy itself would cost them a lot.

Conclusion
We have reviewed three of the most popular types of corporate hedging with derivatives. There are many other derivative uses, and new types are being invented. The derivatives we have reviewed are not generally speculative for the company. They help to protect the company from unanticipated events: adverse foreign-exchange or interest-rate movements, and unexpected increases in input costs. The investor on the other side of the derivative transaction is the speculator. However, in no case are these derivatives free. Even if, for example, the company is surprised with a good-news event like a favourable interest-rate move, the company (because it had to pay for the derivatives) receives less on a net basis than it would have without the hedge.

Warren Buffett's stand is famous: he has attacked all derivatives, saying he and his company "view them as time bombs, both for the parties that deal in them and the economic system."

Jensen Comment
The above quotation from Buffett should not be taken out of context. He was talking about much more complicated portfolios of investments and types of  derivatives, particularly credit derivatives that are much more complicated than when Southwest Airlines simply purchases options to lock in future jet fuel acquisition prices. Warren uses derivatives in much more complicated entanglements of financial contracting  ---
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_XX1k9rMDnQ

FAS 133 hedge accounting relief is designed for one hedging contract and one hedged item at a time. FAS 133 mostly banned hedge accounting relief for portfolio investments and thereby did not get into complexities of managing risks at the level that Warren Buffett manages risk.

Bob Jensen's free helpers for learning about FAS 133 hedge accounting ---
http://www.trinity.edu/rjensen/caseans/000index.htm

The word "easing" below refers to the easing of credit to banks, in part, by simply printing $600 billion without taxing or borrowing --- what is otherwise known as the Zimbabwe Monetary Policy

"What's Really Behind Bernanke's Easing? My guess is that the Fed chairman knows that we still have too many banks overstuffed with toxic real estate loans and derivatives." by Andy Kessler, The Wall Street Journal, November 19, 2010 ---
http://online.wsj.com/article/SB10001424052748704648604575621093223928682.html#mod=djemEditorialPage_t

Federal Reserve Chairman Ben Bernanke's $600 billion quantitative easing program has been roundly criticized in this country and around the world. So why is he doing it? Does he know something the rest of us don't?

Mr. Bernanke claimed earlier this month in a Washington Post op-ed that "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy. It is also unlikely, as some claim, that the Fed chairman is whipping up a stealth stimulus or orchestrating a currency devaluation. He knows these have been tried and are more likely to destroy jobs than create them.

I have a different explanation for the Fed's latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.

The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.

Because of unexpectedly bad construction loans, the staid Wilmington Trust was sold to M&T Bank earlier this month in a rare "takeunder"—what Wall Street calls a deal done below a company's stock value, in this case by 40%.

In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff.

In a normal economic recovery, the stock market rises in anticipation of higher corporate profits. Companies then use their higher stock prices to raise capital and hire workers, who buy homes and remodel kitchens.

Before growth can occur, however, we have to fix what caused a recession in the first place. Often that means drawing down inventory that built up in the last boom, or tightening credit to whip inflation, as then-Fed Chairman Paul Volcker did in 1981. In late 2010, though, we still have banks overstuffed with toxic real estate loans and derivatives. But what about the trillion in bank reserves sitting at the Fed and earning 0.25% interest? Why isn't it being lent out? Perhaps because it's needed to offset unrealized losses on these fouled loans.

Like it or not, banks are still weak, and another panic may be on its way. Bank of America is the best example. As of Sept. 30, its balance sheet claimed a book value (assets minus liabilities) of $230 billion. But the stock market values the company at just $118 billion. Who's right? Usually the stock market is ahead of bad news and write-offs. Citibank is selling at 20% below its book value. The market wasn't gloomy enough on Wilmington Trust—hence the takeunder.

Mr. Bernanke is clearly buying time with our dollars. If real estate drops, we're back to September 2008 in a hurry. On Wednesday, the Fed announced that all 19 banks that underwent stress tests in 2009 need to pass another one. This suggests central bankers are nervous about real-estate loans and derivatives on bank balance sheets. In 2009, even with TARP money injected directly into their balance sheets, banks faced a $75 billion capital shortfall. Mr. Bernanke orchestrated a stock market rally so they could sell equity for much needed capital.

My sense is the stock market is less likely to cooperate this time. Since the QE2 announcement, the Dow is down 254 points and bond yields have backed up, exactly the opposite of what Mr. Bernanke was trying to achieve. If the latest boost doesn't work, we may see real estate seek its true lower value, causing a sell-off of bank stock that requires them to begin paying more for short-term debt.

The Fed may have to act quickly. It can't reprise the 2009 bailouts, which failed when banks wouldn't sell their distressed mortgage-backed securities because they didn't have enough capital to stay solvent. No politician would agree to bailouts anyway. This time, the Fed should do what it didn't do in 2008-09: detoxify and recapitalize the big banks. The Dodd-Frank banking reform provides the authority for the Fed and the Federal Deposit Insurance Corp. (FDIC) to do this.

Think of it as what the FDIC does on Fridays (taking over failed banks), but on a huge scale. First, guarantee deposits so lines don't form at branches, and provide short-term loan guarantees as a backstop to short-term lenders. Then move the toxic debt onto the balance sheets of the FDIC and the Fed, and refloat the banks with fresh capital to open on Monday morning. Also, fire management. And get the banks public again so that the market can properly value them and provide an early warning of bad loan portfolios.

All that's missing is a mechanism to make sure foreclosures continue in a fair and measured way so real estate prices stay accurate. But the freshly capitalized banks, free of nonperforming loans, will help fund an economic recovery. The stock market will fly based on prospects for future corporate profits, rather than on unsustainable Fed goosing.

As commercials for Fram oil filters used to say, "You can pay me now or pay me later." In our case today, "pay me later" is a perpetuation of weak banks, substandard growth, persistent unemployment and stymied productivity. Better to do takeunders of banks now than to hire an undertaker for the whole U.S. economy later.

Mr. Kessler, a former hedge-fund manager, is the author of "Eat People—And Other Unapologetic Rules for Game-Changing Entrepreneurs," due out from Portfolio next February.

Continued in article

Jensen Comment
But if you read the audited financial statements, all banks are not overstuffed with toxic real estate loans or derivatives --- just showing once again that auditors care more about clients than investors.

Credit Derivatives Buffett Goldman
From The Wall Street Journal Accounting Weekly Review on November 20, 2010

Goldman Hits a Setback on Payback
by: Liz Rappaport and Serena Ng
The Wall Street Journal
November 15, 2010
Click here to view the full article on WSJ.com

TOPICS: Banking, Dividend Yield, Dividends SUMMARY: "Goldman Sachs Group has hit a delay in its efforts to win U.S. government approval to pay back a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc....The Fed must approve the transaction because it is Goldman's banking supervisor. Goldman officials hoped to win clearance quickly, but the request has been caught up in the wider process of setting a dividend increase policy for all U.S. banks overseen by the Fed...Redeeming the shares would save Goldman hefty dividend payments of 10% a year on the investment." CLASSROOM APPLICATION: Berkshire Hathaway's investment in Goldman Sachs was made via a 10% preferred stock so the article is useful in any class covering stockholders' equity and preferred stock. QUESTIONS: 1. (Introductory) According to the article, when and in what form did Berkshire Hathaway, under the direction of Warren Buffett, make its investment in Goldman Sachs?

2. (Introductory) Why is Goldman now in a position to return Berkshire Hathaway's investment? Why is Goldman limited in the actions it can take because of federal regulation?

3. (Advanced) How will redeeming these shares "save Goldman hefty dividend payments of 10% a year"? Be specific in describing the way that dividends on preferred stock are determined.

4. (Advanced) Berkshire Hathaway made a similar investment in Zurich-based Swiss Re after that insurer suffered significant losses from credit derivatives. How did foreign exchange further impact Berkshire Hathaway's results from holding this investment?

Reviewed By: Judy Beckman, University of Rhode Island

 

"Goldman Hits a Setback on Payback," by Liz Rappaport and Serena Ng," The Wall Street Journal, November 15, 2010 ---
http://online.wsj.com/article/SB10001424052748704327704575614453669634766.html?mod=djem_jiewr_AC_domainid

Goldman Sachs Group Inc. has hit a delay in its efforts to win U.S. government approval to pay back a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc. because the Federal Reserve first wants to hammer out guidelines on bank-dividend increases, according to people familiar with the matter.

Goldman formally sought permission from the Fed for the transaction in late October, shortly after The Wall Street Journal reported that the New York company was considering the move, in part because Goldman has emerged from the financial crisis with a comfortable cushion to absorb losses. Berkshire's cash investment also has cost Goldman about $1 billion in dividend payments so far.

The Fed must approve the transaction because it is Goldman's banking supervisor. Goldman officials hoped to win clearance quickly, but the request has been caught up in the wider process of setting a dividend-increase policy for all U.S. banks overseen by the Fed, said people familiar with the matter.

A Goldman spokesman declined to comment.

Experience WSJ professional Editors' Deep Dive: Banks Await New Dividend PolicyDOW JONES BUSINESS NEWS Tarullo Warns Big Banks Against Rushing to Boost Dividends Barron's Banks Buck Up Dow Jones Business News J.P. Morgan's Options Suggest Dividend Hikes Access thousands of business sources not available on the free web. Learn More The Fed may be reluctant to give Goldman a go-ahead to make adjustments to its capital level before other banks get the same flexibility, the people said.

Federal Reserve Governor Daniel Tarullo said Friday that he expects the Fed's first approvals for banks to increase dividends will be issued in next year's first quarter. Banks will need to show they can meet high capital hurdles before they can increase payouts to shareholders, he said.

Before the financial crisis, banks typically had to just inform the Fed of dividend adjustments. During the crisis, banks slashed their dividends and were required to seek permission from the Fed to raise the payouts again. The toughened stance encouraged battered financial firms, many of which sharply reduced their dividends, to conserve more capital.

At the end of the third quarter, Goldman had a healthy $75.66 billion of shareholder equity. The company also has plenty of money to repay Berkshire under the new Basel III capital guidelines.

Goldman has the option to redeem the preferred shares held by Berkshire at any time for $5.5 billion, subject to Fed approval, though the move would trigger a charge of $1.6 billion. The infusion was announced in September 2008.

Redeeming the shares would save Goldman dividend payments of 10% a year on the investment.

Berkshire would retain warrants allowing the company to purchase as many as 43.5 million Goldman common shares at about $115 apiece before Oct. 1, 2013. Goldman shares were trading near that level at the time of the infusion but have since rebounded sharply. On Friday, Goldman shares fell $1.88, or 1.1%, to $165.83 on the New York Stock Exchange.

In 2008 and 2009, Berkshire invested more than $21 billion in Goldman, General Electric Co., Swiss Reinsurance Co., Dow Chemical Co. and Wm. Wrigley Jr. Co. in the form of preferred equity, bonds or other capital instruments.

Many of the investments had terms that guaranteed fat returns for Berkshire, run by Mr. Buffett, whose reputation helped boost investor confidence in the companies when financial markets were in turmoil and capital was scarce.

Earlier this month, Swiss Re reached an agreement with Berkshire to redeem a three billion Swiss franc ($3.06 billion) capital instrument for roughly 3.9 billion francs. The Swiss Re instrument, which paid Berkshire 12% annually, previously wasn't expected to be redeemed before March 2011. Berkshire had made the investment in March 2009, after Swiss Re reported large losses from credit derivatives.

The Zurich-based insurer's capital position is stronger now, and it paid Berkshire no penalty charge "for bringing forward the repayment date," Swiss Re said in a statement accompanying its latest financial results.

Since March 2009, the Swiss franc has strengthened against the U.S. dollar, juicing Berkshire's returns; its original investment cost about $2.7 billion.

GE also has indicated it intends to redeem Berkshire's $3 billion investment, in the form of 10% preferred shares, at some point in the future.

As Berkshire's crisis-period investments are redeemed, Mr. Buffett and new investment manager Todd Combs will likely have to find new investment avenues for the company's cash hoard, which totaled more than $34 billion at the end of September.

With interest rates and bond yields at low levels, double-digit-percentage annual returns will be harder to come by. Berkshire noted in its recent third-quarter earnings report that "based on current market conditions, reinvestment of any redemption proceeds would likely generate significantly lower investment income in the future."

Bob Jensen's threads on credit derivatives are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

New Essay Site by Robert Bruce Walker, Practitioner in New Zealand --- walkerrb@actrix.co.nz

I have begun to go back over all my many writings on the matter of accounting. I have decided to start publishing this material on my website and I will do so progressively over the next few weeks and months.

The first offering is an essay I wrote as a submission to what is now NZICA on the occasion of a restructure in about 1992.

For those of you who have read my messages over the last decade or so you will see that I am a musician with a single score in my repertoire. Or less self deprecatingly I have had a consistent message for what is now becoming decades rather than years.

Was I listened to back then? I doubt it. Was I right in what I said? My answer to that may surprise.

Please read it and circulate it. I am slightly uneasy about pushing people to read what I write. It seems so egotistical. But then that would be true of all writers or would-be writers.

http://www.robertbwalker.co.nz/documents/archives 

Papyrus --- http://en.wikipedia.org/wiki/Papyrus
Early accounting records were written on papyrus

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

Questions
What was an ancient Greek ploy to combat inflation?
How do you account for interest paid in cabbages during hyperinflation?

"The time has come," the Walrus said,
"To talk of many things:
Of shoes--and ships--and sealing-wax--
Of cabbages--and kings--
And why the sea is boiling hot--
And whether pigs have wings."
Lewis Carroll, The Walrus and the Carpenter --- http://www.jabberwocky.com/carroll/walrus.html

"Papyrus Research Provides Insights Into 'Modern Concerns' of Ancient World," Science Daily, October 30, 2010 --- Click Here
http://www.sciencedaily.com/releases/2010/10/101029092045.htm?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+sciencedaily+%28ScienceDaily%3A+Latest+Science+News%29

A University of Cincinnati-based journal devoted to research on papyri is due out Nov. 1. That research sheds light on an ancient world with surprisingly modern concerns: including hoped-for medical cures, religious confusion and the need for financial safeguards.

What's old is new again. That's the lesson that can be taken from the University of Cincinnati-based journal Bulletin of the American Society of Papyrologists, due out Nov. 1.

The annually produced journal, edited since 2006 by Peter van Minnen, UC associate professor of classics, features the most prestigious global research on papyri, a field of study known as papyrology. (Papyrology is formally known as the study of texts on papyrus and other materials, mainly from ancient Egypt and mainly from the period of Greek and Roman rule.)

It's an area of research that is more difficult than you might think. That's because it was common among antiquities dealers of the early 20th century to tear papyri pages apart in order to increase the number of pieces they could sell.

Below are five topics treated in the upcoming 2010 volume of the Bulletin of the American Society of Papyrologists. The five issues resonate with our own concerns today.

IOU cabbage

Katherine Blouin from the University of Toronto publishes on a papyrus text regarding a Greek loan of money with interest in kind, the interest being paid in cabbages. Such in-kind interest protected the lender from currency inflation, which was rampant after 275 AD -- and no doubt also provided a convenient way to get groceries.

Hippo strapped for cash

Cavan Concannon from Harvard University edits a Greek letter in which a priest of the hippopotamus goddess, Thoeris, asks for a money transfer he is waiting for. Such money transfers were for large amounts and required mutual cooperation between two banks in different places that had sufficient trust between them to accept one another's "checks."

"American Gladiators" ca. 300 AD

Sofie Remijsen of Leuven University in Belgium discusses a Greek letter in which the author details his visit to Alexandria in Egypt, at a time (ca. 300 AD) when the Roman Emperor Diocletian was also visiting the city -- and demanding entertainment. The letter's author, an amateur athlete, was selected to entertain the emperor in "pankration" (Greco-Roman wrestling with very few rules). He did poorly in this event and so challenged five others to do "pammachon," which literally translates to "all-out fight," with even fewer rules. The letter's author fought five "pammachon" rounds, and it appears he won first prize.

Alternative medicine: Don't try this at home

Magali de Haro Sanchez from Liège University in Belgium discusses magical texts from Greco-Roman Egypt that use technical terms for fevers (over 20), wounds, including scorpion bites and epilepsy. The "prescriptions" (magical spells) were as difficult-to-decipher as any written in modern medical scrawl. Here is a translation of an amulet against epilepsy written on gold leaf: "God of Abraham, God of Isaac, God of Jacob, our God, deliver Aurelia from every evil spirit and from every attack of epilepsy, I beg you, Lord Iao Sabaoth Eloai, Ouriel, Michael, Raphael, Gabriel, Sarael, Rasochel, Ablanathanalba, Abrasax, xxxxxx nnnnnn oaa iiiiiiiiii x ouuuuuuu aoooooooo ono e (cross) e (cross) Sesengenbarpharanges, protect, Ippho io Erbeth (magical symbols), protect Aurelia from every attack, from every attack, Iao, Ieou, Ieo, Iammo, Iao, charakoopou, Sesengenbarpharanges, Iao aeeuuai, Ieou, Iao, Sabaoth, Adonai, Eleleth, Iako."

Spelling counts: Orthodoxy and orthography in early Christianity

An essay by Walter Shandruk from the University of Chicago examines the ways in which Christ and Christian are spelled in Greek papyri. Chrestos, which was pronounced the same way as Christos, was a common slave name meaning "good" or "useful." Confused by this, representatives of the Roman government often misspelled Christ's name "Chrestos" instead of "Christos" meaning "anointed" or "messiah." They also called the early followers of Christ "Chrestianoi" rather than "Christianoi." The early Christians themselves went with the Romans here and often spelled their own name "Chrestianoi," but they stuck to the correct spelling "Christos" for Christ's name.

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory

Times are changing in higher education and lines that used to separate non-profit and profit universities are beginning to fade
Unusual Distance Education Ventures with Non-Profit and Profit Partners
What's to prevent a Northwestern-Deloitte for-profit venture to supplement Deloitte's new onsite campus with general public online offerings?
What's to prevent a Thunderbird-University of Phoenix for-profit venture in a global MBA program?

There are various types of hybrid distance education programs in accountancy.
First there are distance education courses that have substantial onsite modules where students and faculty interact in physical presence. DeVry University, for example, has hybrid accounting courses of this nature and so does the Chartered Accountancy School of Business in western Canada although CASB's onsite components are relatively small.

A second type of program would be one that is primarily an onsite program but has selected courses that are taught online in the curriculum. This is becoming popular for students want to go online in the summers and while in the field on internships. Also for-profit schools like DeVry University and the University of Phoenix use their own hundreds of learning centers to allow students to mix online and onsite courses.

A third hybrid that is not nearly as common is an entirely online distance education program that's a partnership between public and private owners. Although it's common for large corporations to arrange for special-admission programs within universities such as the University of  Georgia's distance education MBA program conducted especially for PwC consulting division employees, it would be quite a stretch if the University of Georgia (hypothetically) partnered with PwC to create a distance education for-profit MBA distance education venture that might be called something like the Bulldog PwC Global Executive MBA Program that seeks worldwide applicants from the public in general and not just PwC employees. Such a program has not yet been conceived, but times are changing in higher education.

Although I'm not Thunderbird's biggest fan for reasons I won't go into here, Thunderbird is a well-known AACSB-accredited non-profit international business school --- Click Here 
http://programs.thunderbird.edu/index.php?content=schoolwide&campaign=Google&adgroup=Branded&keyword=thunderbird training&_vsrefdom=GoogPPC&gclid=CMee_KiOoKUCFeFM5QodmV6nIw

#1 "International" Full–time MBA	U.S. News & World Report 2011 (15th consecutive #1 ranking)
#1 "Best in International Business" Full–time MBA	Financial Times 2010
#3 "Best Executive MBA Program"	The Wall Street Journal 2010
Among the top 5 Distance Learning MBA Programs in the World	The Economist 2010
#10 "Top 10 for Corporate Social Responsibility"	Financial Times 2010

 

Unusual Public-Private Partnerships
"Online Education's New Campus-Thunderbird:   In what would be an unusual public-private partnership, Thunderbird School of Global Management seeks private capital to help it launch a new online executive-education program," by Francesca Di Meglio, Business Week, November 8, 2010 ---
http://www.businessweek.com/bschools/content/nov2010/bs2010115_478844.htm?link_position=link18 

Online education has been gathering momentum for some time. Enrollment in for-profit degree programs is growing, and the response in academia signals growing acceptance of an educational format once considered a poor substitute for classroom-based learning. Now a well-regarded business school is planning an ambitious online venture that represents a new model for online education.

The Thunderbird School of Global Management (Thunderbird Full-Time MBA Profile) intends to announce its plans in the coming months, says President Ángel Cabrera. Details are sketchy, but Cabrera says Thunderbird is setting the foundation for "a commercial venture on the professional training side that will provide nondegree programs around the world through an online format."

After hundreds of years educating people more or less the same way—via a teacher in front of a class—online courses are the wave of the future, says Cabrera, who adds that his school doesn't want to be left out. Of the 4,160 U.S. colleges and universities surveyed by the National Center for Education Statistics, 66 percent offered college-level distance-education programs in the 2006-07 academic year, the most recent year for which information is available.

Years of Web and Satellite Offerings

"It's a tsunami in the industry and what you've seen happen with the media moving to the Internet is coming to education," says Cabrera. "It's a [trend] that you can ignore at your own peril."

Continued in article

Jensen Comment
Wouldn't it be interesting if the University of Phoenix approached Thunderbird with a proposal to invest in Thunderbird's initiative to attract investing partners?

The IRS takes a dim view of most business ventures of non-profit organizations, but this partnering initiative is a such a big deal for Thunderbird that tax experts will undoubtedly create a work around to satisfy the IRS.

Possibly a bigger stumbling block is the AACSB given the AACSB's aversion for for-profit onsite or online universities in North America
The AACSB generally does not accredit for-profit universities in North America as a matter of practice even if not stated verbatim writing. I also don't know of any stand-alone distance education programs, profit or non-profit, that are accredited by the AACSB in North America. However, if the AACSB has accredited an onsite non-profit onsite degree program, it will extend its accreditation to distance education degree programs that co-exist with accredited onsite programs such as the dual AACSB business and accounting accreditation of the Master of Science in Accounting (MSA) degree program at the University of Connecticut ---
http://msaccounting.business.uconn.edu/  
Similar AACSB accredited undergraduate and graduate accounting degree programs can be found at such places as the University of Wisconsin System and the University of Maryland System.

Question
Why would non-profit and profit partnering be a North American turf concern of the AACSB?

Answer
The AACSB probably worries that North American for-profit universities will use these partnerships to make an end run to obtain AACSB accreditation of North American for-profit ventures. The business school deans of non-profit North American universities virtually run the AACSB. Fear that massive for-profit universities like the University of Phoenix (with 500,000 students annually) will invade non-profits' turf resulted in for-profit university paranoia among all-powerful AACSB deans. This is why they will fret and stew about non-profit and profit partnerships such as that being proposed by Thunderbird.

There are basically two extremes when it comes to distance education markets.
At one extreme we have poor, often unemployed, people who want a college degree but are located a long distance from onsite degree alternatives and/or are single parents that prefer to both learn on line and care for their children at the same time. At the other extreme we have busy executives who can afford to travel anywhere in the world but find it difficult to take the time to travel/commute to onsite learning centers. For example, an executive with an oil company might like to earn an MBA online while working in Nigeria.

Whereas the University of Phoenix targets the lower end of the admissions spectrum (e.g., an unemployed single parent having virtually no chance for a degree other than an online degree), a totally different non-profit university in Phoenix, Thunderbird, targets the higher end of the admissions spectrum (rising stars in management who are employees of big companies that are reluctant to grant time off for purposes of onsite classroom attendance). One distinction for the time being is that the University of Phoenix is a for-profit university versus the non-profit Thunderbird. Now Thunderbird is trying to inch forward into the for-profit world with partnership ventures. Will the University of Phoenix take the bait?

Although I've never seen it mentioned, it would seem possible for some non-profit colleges to partner with the University of Phoenix. In a way this is already happening without formal partnerships. Suppose a small non-profit liberal arts college has a very limited accounting degree program (maybe only a minor) that cannot offer all the very expensive specialty courses required to for career opportunities in accounting, such as courses in AIS, forensic auditing, corporate tax, and governmental accounting. Those limited-budget liberal arts colleges might now allow accounting majors to transfer in these specialty course credits from such accredited schools as the University of Phoenix that has ACBSB business specialty accreditation ( http://www.acbsp.org/ ) as well as North Central Association regional accreditation.

It would be a bit of a stretch, but it might be possible to approach the University of Phoenix with a proposal for tuition discounts for students from a particular non-profit college. Perhaps the University of Phoenix might even work with the non-profit college to jointly design a particular course for that college or even a partnered curriculum of specialty courses. 

Partnering with non-profit colleges in this manner would save the University of Phoenix a great deal of trouble in the admissions process since it's non-profit partners would handle admissions and graduation certifications.

The next step would be for the University of Phoenix to invest money in a partnership with a non-profit college venture.

Anything seems possible these days
Anything seems possible these days since for-profit universities are seeking ways to overcome their recent admissions scandals  ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Anything seems possible these days since non-profit universities are seeking ways to overcome budgetary crises. Accounting programs are especially vulnerable to budgetary crises since new tenure-track faculty in some accounting specialties command over $200,000 starting salaries per year. The University of Phoenix and other online programs tend to find these specialists to teach online whereas traditional colleges seem to have more difficulties finding these specialists part-time for onsite courses. There are various economies of scale in distance education, and hiring instructors seems to be one of these vis-à-vis trying to hire a governmental accounting specialist to teach a night course onsite for a small Baptist College in Cactus Gulch, Nevada that's 100 miles from civilization.

Times are changing in higher education and lines that used to separate non-profit and profit universities are beginning to fade!

Times are changing in higher education and lines that used to separate non-profit and profit universities are beginning to fade
Unusual Distance Education Ventures with Non-Profit and Profit Partners
What's to prevent a Northwestern-Deloitte for-profit venture to supplement Deloitte's new onsite campus with general public online offerings?
What's to prevent a Thunderbird-University of Phoenix for-profit venture in a global MBA program?

There are various types of hybrid distance education programs in accountancy.
First there are distance education courses that have substantial onsite modules where students and faculty interact in physical presence. DeVry University, for example, has hybrid accounting courses of this nature and so does the Chartered Accountancy School of Business in western Canada although CASB's onsite components are relatively small.

A second type of program would be one that is primarily an onsite program but has selected courses that are taught online in the curriculum. This is becoming popular for students want to go online in the summers and while in the field on internships. Also for-profit schools like DeVry University and the University of Phoenix use their own hundreds of learning centers to allow students to mix online and onsite courses.

A third hybrid that is not nearly as common is an entirely online distance education program that's a partnership between public and private owners. Although it's common for large corporations to arrange for special-admission programs within universities such as the University of  Georgia's distance education MBA program conducted especially for PwC consulting division employees, it would be quite a stretch if the University of Georgia (hypothetically) partnered with PwC to create a distance education for-profit MBA distance education venture that might be called something like the Bulldog PwC Global Executive MBA Program that seeks worldwide applicants from the public in general and not just PwC employees. Such a program has not yet been conceived, but times are changing in higher education.

Although I'm not Thunderbird's biggest fan for reasons I won't go into here, Thunderbird is a well-known AACSB-accredited non-profit international business school --- Click Here 
http://programs.thunderbird.edu/index.php?content=schoolwide&campaign=Google&adgroup=Branded&keyword=thunderbird training&_vsrefdom=GoogPPC&gclid=CMee_KiOoKUCFeFM5QodmV6nIw

#1 "International" Full–time MBA	U.S. News & World Report 2011 (15th consecutive #1 ranking)
#1 "Best in International Business" Full–time MBA	Financial Times 2010
#3 "Best Executive MBA Program"	The Wall Street Journal 2010
Among the top 5 Distance Learning MBA Programs in the World	The Economist 2010
#10 "Top 10 for Corporate Social Responsibility"	Financial Times 2010

 

Unusual Public-Private Partnerships
"Online Education's New Campus-Thunderbird:   In what would be an unusual public-private partnership, Thunderbird School of Global Management seeks private capital to help it launch a new online executive-education program," by Francesca Di Meglio, Business Week, November 8, 2010 ---
http://www.businessweek.com/bschools/content/nov2010/bs2010115_478844.htm?link_position=link18 

Online education has been gathering momentum for some time. Enrollment in for-profit degree programs is growing, and the response in academia signals growing acceptance of an educational format once considered a poor substitute for classroom-based learning. Now a well-regarded business school is planning an ambitious online venture that represents a new model for online education.

The Thunderbird School of Global Management (Thunderbird Full-Time MBA Profile) intends to announce its plans in the coming months, says President Ángel Cabrera. Details are sketchy, but Cabrera says Thunderbird is setting the foundation for "a commercial venture on the professional training side that will provide nondegree programs around the world through an online format."

After hundreds of years educating people more or less the same way—via a teacher in front of a class—online courses are the wave of the future, says Cabrera, who adds that his school doesn't want to be left out. Of the 4,160 U.S. colleges and universities surveyed by the National Center for Education Statistics, 66 percent offered college-level distance-education programs in the 2006-07 academic year, the most recent year for which information is available.

Years of Web and Satellite Offerings

"It's a tsunami in the industry and what you've seen happen with the media moving to the Internet is coming to education," says Cabrera. "It's a [trend] that you can ignore at your own peril."

Continued in article

Jensen Comment
Wouldn't it be interesting if the University of Phoenix approached Thunderbird with a proposal to invest in Thunderbird's initiative to attract investing partners?

The IRS takes a dim view of most business ventures of non-profit organizations, but this partnering initiative is a such a big deal for Thunderbird that tax experts will undoubtedly create a work around to satisfy the IRS.

Possibly a bigger stumbling block is the AACSB given the AACSB's aversion for for-profit onsite or online universities in North America
The AACSB generally does not accredit for-profit universities in North America as a matter of practice even if not stated verbatim writing. I also don't know of any stand-alone distance education programs, profit or non-profit, that are accredited by the AACSB in North America. However, if the AACSB has accredited an onsite non-profit onsite degree program, it will extend its accreditation to distance education degree programs that co-exist with accredited onsite programs such as the dual AACSB business and accounting accreditation of the Master of Science in Accounting (MSA) degree program at the University of Connecticut ---
http://msaccounting.business.uconn.edu/  
Similar AACSB accredited undergraduate and graduate accounting degree programs can be found at such places as the University of Wisconsin System and the University of Maryland System.

Question
Why would non-profit and profit partnering be a North American turf concern of the AACSB?

Answer
The AACSB probably worries that North American for-profit universities will use these partnerships to make an end run to obtain AACSB accreditation of North American for-profit ventures. The business school deans of non-profit North American universities virtually run the AACSB. Fear that massive for-profit universities like the University of Phoenix (with 500,000 students annually) will invade non-profits' turf resulted in for-profit university paranoia among all-powerful AACSB deans. This is why they will fret and stew about non-profit and profit partnerships such as that being proposed by Thunderbird.

There are basically two extremes when it comes to distance education markets.
At one extreme we have poor, often unemployed, people who want a college degree but are located a long distance from onsite degree alternatives and/or are single parents that prefer to both learn on line and care for their children at the same time. At the other extreme we have busy executives who can afford to travel anywhere in the world but find it difficult to take the time to travel/commute to onsite learning centers. For example, an executive with an oil company might like to earn an MBA online while working in Nigeria.

Whereas the University of Phoenix targets the lower end of the admissions spectrum (e.g., an unemployed single parent having virtually no chance for a degree other than an online degree), a totally different non-profit university in Phoenix, Thunderbird, targets the higher end of the admissions spectrum (rising stars in management who are employees of big companies that are reluctant to grant time off for purposes of onsite classroom attendance). One distinction for the time being is that the University of Phoenix is a for-profit university versus the non-profit Thunderbird. Now Thunderbird is trying to inch forward into the for-profit world with partnership ventures. Will the University of Phoenix take the bait?

Although I've never seen it mentioned, it would seem possible for some non-profit colleges to partner with the University of Phoenix. In a way this is already happening without formal partnerships. Suppose a small non-profit liberal arts college has a very limited accounting degree program (maybe only a minor) that cannot offer all the very expensive specialty courses required to for career opportunities in accounting, such as courses in AIS, forensic auditing, corporate tax, and governmental accounting. Those limited-budget liberal arts colleges might now allow accounting majors to transfer in these specialty course credits from such accredited schools as the University of Phoenix that has ACBSB business specialty accreditation ( http://www.acbsp.org/ ) as well as North Central Association regional accreditation.

It would be a bit of a stretch, but it might be possible to approach the University of Phoenix with a proposal for tuition discounts for students from a particular non-profit college. Perhaps the University of Phoenix might even work with the non-profit college to jointly design a particular course for that college or even a partnered curriculum of specialty courses. 

Partnering with non-profit colleges in this manner would save the University of Phoenix a great deal of trouble in the admissions process since it's non-profit partners would handle admissions and graduation certifications.

The next step would be for the University of Phoenix to invest money in a partnership with a non-profit college venture.

Anything seems possible these days
Anything seems possible these days since for-profit universities are seeking ways to overcome their recent admissions scandals  ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Anything seems possible these days since non-profit universities are seeking ways to overcome budgetary crises. Accounting programs are especially vulnerable to budgetary crises since new tenure-track faculty in some accounting specialties command over $200,000 starting salaries per year. The University of Phoenix and other online programs tend to find these specialists to teach online whereas traditional colleges seem to have more difficulties finding these specialists part-time for onsite courses. There are various economies of scale in distance education, and hiring instructors seems to be one of these vis-à-vis trying to hire a governmental accounting specialist to teach a night course onsite for a small Baptist College in Cactus Gulch, Nevada that's 100 miles from civilization.

Times are changing in higher education and lines that used to separate non-profit and profit universities are beginning to fade!

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

Changes are coming (forwarded by Gene and Joan except change Number 10)
Whether these changes are good or bad depends in part on how we adapt to them. But, ready or not, here they come

1. The Post Office.

Get ready to imagine a world without the post office. They are so deeply in financial trouble that there is probably no way to sustain it long term. Email, Fed Ex, and UPS have just about wiped out the minimum revenue needed to keep the post office alive. Most of your mail every day is junk mail and bills.


2. The Check.

Britain is already laying the groundwork to do away with checks by 2018. It costs the financial system billions of dollars a year to process checks. Plastic cards and online transactions will lead to the eventual demise of the check. This plays right into the death of the post office. If you never paid your bills by mail and never received them by mail, the post office would absolutely go out of business.


3. The Newspaper.

People in younger generations seldom buy magazines and newspapers in newstands. They certainly don't subscribe to daily delivered print editions. Hardcopy newstands may go the way of the milkman and the laundry man. As for reading the paper online, get ready to pay for it. The rise in mobile Internet devices and e-readers has caused all the newspaper and magazine publishers to form an alliance. They have met with Apple, Amazon, and the major cell phone companies to develop a model for paid subscription services.


4. The Book.

You say you will never give up the physical book that you hold in your hand and turn the literal pages. I said the same thing about downloading music from iTunes. I wanted my hard copy CD. But I quickly changed my mind when I discovered that I could get albums for half the price without ever leaving home to get the latest music. The same thing will happen with books. You can browse a bookstore online and even read a preview chapter before you buy. And the price is less than half that of a real book. And think of the convenience! Once you start flicking your fingers on the screen instead of the book, you find that you are lost in the story, can't wait to see what happens next, and you forget that you're holding a gadget instead of a book.


5. The Land Line Telephone (and the associated White Pages of telephone directories that are already declared dead).

Unless you have a large family and make a lot of local calls, you don't need it anymore. Most people keep it simply because they've always had it. But you are paying double charges for that extra service. All the cell phone companies will let you call customers using the same cell provider for no charge against your minutes


6. Music.

This is one of the saddest parts of the change story. The music industry is dying a slow death. Not just because of illegal downloading. It's the lack of innovative new music being given a chance to get to the people who would like to hear it. Greed and corruption is the problem. The record labels and the radio conglomerates are simply self-destructing. Over 40% of the music purchased today is "catalog items," meaning traditional music that the public is familiar with. Older established artists. This is also true on the live concert circuit. To explore this fascinating and disturbing topic further, check out the book, "Appetite for Self-Destruction" by Steve Knopper, and the video documentary, "Before the Music Dies."


7. Television.

Revenues to the networks are down dramatically. Not just because of the economy. People are watching TV and movies streamed from their computers. And they're playing games and doing lots of other things that take up the time that used to be spent watching TV. Prime time shows have degenerated down to lower than the lowest common denominator. Cable rates are skyrocketing and commercials run about every 4 minutes and 30 seconds. I say good riddance to most of it. It's time for the cable companies to be put out of our misery. Let the people choose what they want to watch online and through Netflix.


8. The "Things" That You Own.

Many of the very possessions that we used to own are still in our lives, but we may not actually own them in the future. They may simply reside in "the cloud." Today your computer has a hard drive and you store your pictures, music, movies, and documents. Your software is on a CD or DVD, and you can always re-install it if need be. But all of that is changing. Apple, Microsoft, and Google are all finishing up their latest "cloud services." That means that when you turn on a computer, the Internet will be built into the operating system. So, Windows, Google, and the Mac OS will be tied straight into the Internet. If you click an icon, it will open something in the Internet cloud. If you save something, it will be saved to the cloud. And you may pay a monthly subscription fee to the cloud provider.
In this virtual world, you can access your music or your books, or your whatever from any laptop or handheld device. That's the good news. But, will you actually own any of this "stuff" or will it all be able to disappear at any moment in a big "Poof?" Will most of the things in our lives be disposable and whimsical? It makes you want to run to the closet and pull out that photo album, grab a book from the shelf, or open up a CD case and pull out the insert.


9. Privacy.

If there ever was a concept that we can look back on nostalgically, it would be privacy. That's gone. It's been gone for a long time anyway. There are cameras on the street, in most of the buildings, and even built into your computer and cell phone. But you can be sure that 24/7, "They" know who you are and where you are, right down to the GPS coordinates, and the Google Street View. If you buy something, your habit is put into a zillion profiles, and your ads will change to reflect those habits. And "They" will try to get you to buy something else. Again and again.

Are we allowed to take video of passengers having orgasms to ticklish theatrics while having security pat downs at  airports?
Can pat downs be avoided by wearing a bikini or going topless when traveling by airplane?

10. For-profit and not-for profit joint ventures in higher education.

"Online Education's New Campus-Thunderbird:   In what would be an unusual public-private partnership, Thunderbird School of Global Management seeks private capital to help it launch a new online executive-education program," by Francesca Di Meglio, Business Week, November 8, 2010 ---
http://www.businessweek.com/bschools/content/nov2010/bs2010115_478844.htm?link_position=link18 

Securities Docket’s free webcasts are held regularly and feature leading attorneys and industry professionals in the securities litigation, SEC enforcement and white collar areas ---
http://www.securitiesdocket.com/webcasts/

Texas A&M Case on Computing the Cost of Professors and Academic Programs

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

From The Wall Street Journal Accounting Weekly Review on November 5, 2010

Putting a Price on Professors
by: Stephanie Simon and Stephanie Banchero
Oct 23, 2010
Click here to view the full article on WSJ.com

TOPICS: Contribution Margin, Cost Management, Managerial Accounting

SUMMARY: The article describes a contribution margin review at Texas A&M University drilled all the way down to the faculty member level. Also described are review systems in place in California, Indiana, Minnesota, Michigan, Ohio and other locations.
CLASSROOM APPLICATION: Managerial concepts of efficiency, contribution margin, cost management, and the managerial dashboard in university settings are discussed in this article.

QUESTIONS:
1. (Introductory) Summarize the reporting on Texas A&M University's Academic Financial Data Compilation. Would you describe this as putting a "price" on professors or would you use some other wording? Explain.

2. (Introductory) What is the difference between operational efficiency and "academic efficiency"?

3. (Advanced) Review the table entitled "Controversial Numbers: Cash Flow at Texas A&M." Why do you think that Chemistry, History, and English Departments are more likely to generate positive cash flows than are Oceanography, Physics and Astronomy, and Aerospace Engineering?

4. (Introductory) What source of funding for academics is excluded from the table review in answer to question 3 above? How do you think that funding source might change the scenario shown in the table?

5. (Advanced) On what managerial accounting technique do you think Minnesota's state college system has modeled its method of assessing campuses' performance?

6. (Advanced) Refer to the related article. A large part of cost increases in university education stem from dormitories, exercise facilities, and other building amenities on campuses. What is your reaction to this parent's statement that universities have "acquiesced to the kids' desire to go to school at luxury resorts"?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Letters to the Editor: What Is It That We Want Our Universities to Be?
by Hank Wohltjen, David Roll, Jane S. Shaw, Edward Stephens
Oct 30, 2010
Page: A16

"Putting a Price on Professors," by Stephanie Simon and Stephanie Banchero, The Wall Street Journal, October 23, 2010 ---
http://online.wsj.com/article/SB10001424052748703735804575536322093520994.html?mod=djem_jiewr_AC_domainid

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

Bob Jensen's threads on managerial and cost accounting are at
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting

"5 tips for effective cloud security," by Jerry Trites, IS Assurance Blog, November 15, 2010 ---
http://uwcisa-assurance.blogspot.com/

"When Disaster Strikes, Customer Relationships Can Be Critical," by Christopher J. Bucholtz, Ecommerce Times, November 11, 2010 ---
http://www.ecommercetimes.com/story/When-Disaster-Strikes-Customer-Relationships-Can-Be-Critical-71216.html?wlc=1290208191 
I thank Jerry Trites E-Business Blog for this heads up.

Tenure Tacks for Professionally Qualified (PQ) Faculty as well as Academically Qualified (AQ) Faculty

December 23, 2010 message from Bob Jensen to Patricia Walters

Hi Pat,

I think your question should be reworded as follows:

Rhetorical question: How many new doctoral program graduates would opt for a clinical appointment if (as in medical schools) the clinical faculty could get tenure alongside the research faculty? .

Clinical faculty presumably would have heavier teaching loads and in some ways more difficult loads in that they have to stay as up to date as practicing accountants on standards, interpretations, tax laws, and business applications of accountancy. As far as teaching is concerned they may have to be more generalists in covering intermediate, advanced, auditing, systems, and masters level professional accountancy courses. .

Research faculty would have to make original contributions to knowledge and joust with research referees and journal editors. They could become more narrowly focused on research specialties, methodologies, and data mining. .

Of course there are a few areas where clinical faculty could become more narrowly specialized such as in ERP and XBRL and forensic accounting specialties. .

How would clinical faculty be judged for tenure beyond teaching excellence and outstanding service?
Clinical faculty might be required to become active in case writing associations such as NACRA and be required to write Harvard-style cases and teaching notes upon which they would be judged on the quality of the cases and even publication of the cases. Hence, publish or parish may not completely disappear for clinical faculty.

Clinical faculty might be required to publish in some top professional journals such as* Issues in Accounting Edu*cation and *Accounting Horizons*and the *Harvard Business Review*.

As an example of a case that I think would make a great contribution toward tenure for a clinical faculty member I recommend one of my all time favorite cases published in IAE:

"Questrom vs. Federated Department Stores, Inc.: A Question of Equity Value," May 2001 edition of* Issues in Accounting Educati*on, by University of Alabama faculty members *Gary Taylor, William Sampson, and Benton Gup*, pp. 223-256. .

Perhaps clinical faculty would even have to take annual professional examinations as one of the conditions for tenure granting.

It's important that clinical faculty do not have an easier track for tenure.
The clinical track should be a rigorous track based on teaching excellence, scholarly publications, and evidence of professional competency much like clinical medical faculty are judged upon their superb skills in medical practice.

It may even be easier to conduct research on the brain than to become an outstanding and tenured brain surgeon in a leading medical school

In one of my think tank years I lived in Staford housing on campus. Across the street I became close with a clinical hand surgeon in the Stanford Medical School. His duties included teaching and performing experimental surgeries installing metal joints in hands. Surgeons came from far and wide just to watch him perform surgeries.

I once asked him why he took such a sacrifice in income to be a medical school professor? He said it was to avoid the hassle of practice including such things as having to deal with malpractice insurance and a larger patient caseload. In medical school he could cherry pick the most interesting surgery cases. He said he also got more sleep as a medical school surgeon than as a surgeon in private practice.

Beside me lived a tenured research professor in the Stanford Medical School who was not even an MD. He was a PhD engineer with a specialty in the kidney and fluid dynamics. He was tenured on the basis of his research and publication record. I remember he and his wife especially well. They had a huge doberman that was gentle as a lamb when my daughter watched their baby in their house. But I didn't dare step inside the house when my daughter was baby sitting.

Respectfully,
Bob Jensen

 

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

Hi Tom,

You mentioned Denny Beresford standing tall in a crowd. Denny also stands tall in another department for the last 13-14 years of his career. Although he holds a named professorship at the University of Georgia he's probably viewed more as a clinical professor than a research professor by his colleagues. He's also one of our pioneers in distance education who's not burned out when he teaches online to students in the PwC online MBA Program at the University of Georgia. .

As a clinical professor Denny stands tall as my role model for a clinical professor who actively publishes articles in practitioner journals such as the *CPA Journal* and elsewhere where he has published some excellent articles. And he's one of the more popular speakers in the academy. Hall of Fame Citation --- Click Here  http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/dennis-robert-beresford/  .

Thus if we are to grant tenure to clinical professors it would not be unreasonable to still require that they publish even if their articles are scholarly-professional rather than research contributions. .

Denny is well beyond traditional retirement age with substantial savings. He remains in harness (rather being pastured like me) largely out of the love of teaching and the love of still making a difference in our craft. .

For those clinical professors who are younger, like Patricia Walters, I would like to stress that trying to get employers to grant tenure to PQ full-time professors should be a goal. There are many advantages to tenure. In times of financial crisis, tenured professors are the last employees standing.

Contract employees serve at the whim of an administrator. If the new Dean or new Department Chair does not particularly like a contract employee it's c'est la vie. .

Also when it comes time to make deals for early retirement tenured professors are given much better offers than most contract employees --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#Retire  .

Of course there is one huge drawback of being on tenure track. Tenure track faculty face an up-or-out crisis point after six or seven years. Contract employees not on tenure track face contract renewals but these are not quite the same as the tenure decision hurdle. .

Perhaps PQ faculty should be given a choice as to whether they want to take a tenure track.

Respectfully,
Bob Jensen

Bob Jensen's threads on tenure appear in various places at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

FASB Exposure Draft:  Does this make "channel stuffing" legitimate?
"Reconsideration of Effective Control for Repurchase Agreements" File Reference No. 1900-100 --- Click Here
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175821684412&blobheader=application%2Fpdf

Jensen Question
Am I missing something here or would the controversial Lehman Repo 105/108 "sales" be required to still be accounted for as sales even though 100% of those sales will be sales returns in a matter of weeks?

Will the Ernst & Young contention that Lehman had no choice other than to record those transactions as sales continue to leave no choice but to account for them as sales?

Has the FASB really protected investors in this exposure draft?

How can you call something a "sale" that you are 100% certain will be returned just after the books are closed?
Didn't we used to call this fraudulent "channel stuffing?" --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#ChannelStuffing
The buyer may have "effective control" but the economics may be such that the buy will return all items purchased.

Is "effective control" a lousy criterion when the probability is 100% that the sold item will be returned?

Am I missing something in this exposure draft by calling it a farce?

November 5, 2010 reply from Jim Furermeyer, Jr.

Bob,

My recollection is that it was the absence of subparagraph “b” that allowed Lehman to derecognize the repos. Now that subparagraph “b” has been removed from the list of items that must all be present to preclude derecognition I would think it would be more difficult to get those off the books.

I might also add that derecognition of financial instruments – “sales accounting” – might be more interesting if the guidance included the sales return concept from revenue recognition. That is, they might get sales treatment, but if there’s an ability by the purchaser to return those instruments sales treatment would be precluded unless one could estimate, and provide an allowance for, those returns.

Jim

JAMES L. FUEHRMEYER, JR.
Associate Teaching Professor
Department of Accountancy
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MENDOZA COLLEGE OF BUSINESS
UNIVERSITY OF NOTRE DAME
384 Mendoza College of Business
Notre Dame, IN 46556
office: (574) 631-1752 | fax: (574) 631-5255
 jfuehrme@nd.edu  |
w: http://business.nd.edu

"Auditors Face Fraud Charge:  New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books," by Liz Rappaport and Michel Rapoport, The Wall Street Journal, December 20, 2010 ---
http://online.wsj.com/article/SB10001424052748704138604576029991727769366.html?mod=djemalertNEWS 

New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.

State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.

Lehman Brothers was long one of Ernst & Young's biggest clients, and the accounting firm earned approximately $100 million in fees for its auditing work from 2001 through 2008, say people familiar with the matter.

The suit, led by Mr. Cuomo, New York's governor-elect, could come as early as this week. It is part of a broader investigation into whether some banks misled investors by removing debt from their balance sheets before they reported their financial results to mask their true levels of risk-taking, a person familiar with the case said. The state may seek to impose fines and other penalties.

Mr. Cuomo's office has sought documents and information from several firms, including Bank of America Corp., which earlier this year disclosed six transactions that were wrongly classified. Jerry Dubrowski, a Bank of America spokesman, said the bank's practice is to cooperate with any inquiry from regulators.

It is possible that Ernst & Young will try to settle before any suit is filed. The firm declined to comment. A spokesman for the Lehman Brothers estate also declined to comment.

The transactions in question, known as "window dressing," involve repurchase agreements, or repos, a form of short-term borrowing that allows banks to take bigger trading risks. Some banks have systematically lowered their repo debt at the ends of fiscal quarters, making it appear they were less risk-burdened than they actually were most of the time.

Lehman Brothers dubbed transactions of this type "Repo 105." The maneuver came to light in March, when the bankruptcy examiner investigating the firm's collapse more than two years ago found that it moved some $50 billion in assets off its balance sheet. Lehman labeled those transactions as securities sales instead of loans, which led investors to believe the firm was financially healthier than it really was.

The bankruptcy examiner's report and the attorney general's investigation found that Lehman Brothers carried out the Repo 105 transactions on a quarterly basis in 2007 and 2008 without telling investors. Mr. Cuomo's investigation found that Repo 105 transactions started as far back as 2001, said the person familiar with the probe.

The attorney general's investigation, which began after the bankruptcy examiner's report, found that Ernst & Young specifically approved of Lehman's use of Repo 105 transactions and provided the investment bank with a complete audit opinion from 2001 through 2007, said the person.

Mr. Cuomo's office has also been investigating suspected window-dressing transactions at other banks, said the person, and is probing whether they similarly misled investors.

An analysis earlier this year by The Wall Street Journal found that other banks were reducing their level of debt at quarter-end.

The attorney general's office has sought documents and information from several firms, including Bank of America Corp., which earlier this year disclosed six transactions that were wrongly classified. The Journal's analysis found that Bank of America was among the most active banks in reducing its debt at reporting time.

The state's investigations into other firms' window dressing are less advanced than its Ernst & Young probe, said a person familiar with the probes.

Other regulators have said they are looking into window dressing as well. The Securities and Exchange Commission's investigation into Lehman's collapse is focusing on Repo 105 transactions, said people familiar with the matter. It has proposed new types of disclosures to help investors identify when banks are window dressing. But the SEC has said it hasn't found any widespread inappropriate practices in that area.

Britain's Financial Reporting Council, which oversees corporate reporting rules, is also investigating Ernst & Young's role in the Lehman collapse.

The Lehman bankruptcy examiner's report also stated that there may be evidence to support negligence and malpractice claims against Ernst & Young regarding Lehman's audits and its lack of response to a whistle-blower at Lehman who raised red flags about the repo trades.

The whistle-blower was Matthew Lee, a Lehman Brothers senior vice president. He had complained to his boss, and eventually wrote a letter in May 2008 to senior Lehman executives expressing concern that the Repo 105 transactions violated Lehman's ethics code by misleading investors and regulators about the true value of the firm's assets. Days later, Mr. Lee was ousted from the firm.

According to the Lehman bankruptcy examiner's report, Ernst & Young auditors saw the letter, and later interviewed Mr. Lee after he was let go from Lehman. Ernst & Young previously said in a statement that Lehman management determined Mr. Lee's "allegations were unfounded." Mr. Lee couldn't be reached for comment.

Continued in article

"Making Sense of the Ernst & Young Defense," by Caleb Newquist, Going Concern, December 23, 2010 ---
http://goingconcern.com/2010/12/making-sense-of-the-ernst-young-defense/ 

Over at Bloomberg, Jonathan Weil (who has the tendency to let the dust settle before chiming in) takes Ernst & Young to task for their lack of willingness to take responsibility for the Lehman Brothers bankruptcy and digs up a bunch of old bodies in the process.

E&Y had established itself as a repeat offender long before Governor-Elect Cuomo filed his suit. In recent years we’ve seen four former E&Y partners sentenced to prison for selling illegal tax shelters, while other partners have been disciplined by the SEC for blessing fraudulent financial statements at a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp.

In the Bally case, E&Y last year paid an $8.5 million fine, without admitting or denying the SEC’s professional-misconduct claims. The SEC also has imposed sanctions against E&Y three times since 2004 for violating its auditor-independence rules.

After that friendly reminder (which certainly makes some people wince), JW takes a look at the E&Y’s response to the suit, specifically the part where they more or less say that Cuomo is off his rocker, “There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP).”

Weil says E&Y is missing the point entirely:

That isn’t an accurate depiction of the claims Cuomo brought, though. Cuomo’s suit unambiguously took the position that Lehman violated GAAP. What’s more, it’s not credible for E&Y to say that Lehman didn’t. (An E&Y spokesman, Charles Perkins, said he “can’t comment beyond our statement.”)

In the footnotes to its audited financial statements, Lehman said it accounted for all its repurchase agreements as financings. This was false, because Lehman accounted for its Repo 105 transactions as sales, a point the Valukas report chronicled in exhaustive detail.

The question is, of course, if this all adds up to fraud on E&Y’s part. Cuomo says it does. Weil says that E&Y needs to come up with a better story. Colin Barr, on the other hand, writes that E&Y could easily turn the tables:

The Ernst & Young statement suggests the firm will argue that it can’t be prosecuted under the Martin Act because Lehman, not E&Y, was the outfit actually producing the financial reports, and because it was Lehman, not E&Y, that was peddling billions of dollars of securities just months before its implosion.

In this view, E&Y was just a gatekeeper hired to vouch for Lehman’s books, something it will claim it did well within the confines of the law. This strikes lawyers who are familiar with the law as an eminently reasonable approach, if not exactly a surefire recipe for success.

“If I were Ernst & Young, I would assert I was not a primary actor,” said Margaret Bancroft, a partner at Dechert LLP and author of a 2004 memo that explained the Martin Act soon after Spitzer began brandishing it against Wall Street. “You can say that with more than a straight face.”

“Just gatekeepers,” and not “fraudsters,” is obviously the preferred view but the catch is, E&Y would be admitting that they are really shitty gatekeepers.

Also see
"The Case Against Ernst & Young: NY AG Cuomo Sues Over Lehman," by Francine McKenna, re:TheAuditors, December 22, 2010 ---
http://retheauditors.com/2010/12/22/the-case-against-ernst-young-ny-ag-cuomo-sues-over-lehman/

The State of New York's filing against Ernst & Young ---
http://goingconcern.com/2010/12/lunchtime-reading-the-complaint-against-ernst-young/#more-23070

Professor Mark Zimbelman and his son (accounting PhD student at Illinois) don't think the State of NY has much of a case against Ernst & Young ---
http://fraudbytes.blogspot.com/2010/12/more-on-ernst-and-young-and-lehman.htm

Francine on the other hand
"Fraud Happened. The No-Account Accountants Stood By," by Francine McKenna, re: The Auditors, April 18, 2010 ---
http://retheauditors.com/2010/04/18/fraud-happened-the-no-account-accountants-stood-by/

Bob Jensen's threads on Lehman's Repo 105/108 transactions are at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

"Ernst & Young — Cuomo Initiates Settlement Talks With Filing," by Walter Pavlo, Forbes, December 24, 2010 ---
http://blogs.forbes.com/walterpavlo/2010/12/24/ernst-young-cuomo-initiates-settlement-talks-with-filing/?boxes=financechannelforbes
Thanks to David Albrecht for the heads up.

Andrew Cuomo, New York’s attorney general, filed a civil complaint again Ernst & Young claiming that the accounting firm helped Lehman Brothers mislead investors by using transactions called Repo 105s (aka Cooking The Books).  Anyone who thinks that E&Y and the state of New York are going to make it to a courtroom to settle this in front of a jury has got to be kidding.  Last time I checked, there were four major accounting firms (The Big 4) and there have been numerous calls that a fifth is needed to take the place of the ill-fated Arthur Andersen.  A guilty verdict for E&Y would mean we would have “The Big 3” (look how well that number worked out for the automotive industry).  A settlement is imminent.

We have all seen this type of theater play out before.  A prosecutor calls out a company for some “massive wrongdoing” then settles within a year for a new record dollar figure (Goldman Sachs, Bank of America, AIG, etc.).  This filing by Cuomo simply gets the negotiations started with E&Y.  But are these types of settlements effective?

Corporate Counsel’s Sue Reisinger did an in-depth piece as to whether these large settlements work in deterring future bad behavior.  Her conclusion…THEY DON’T.  A look at BP alone provides plenty of evidence of this.  Back in 2005, a BP facility was cited for over 300 safety violations at a plant that had an explosion killing 15 and injuring 270.  To correct this bad behavior, BP got a $21 million fine as a deterrent.  This past April that same BP facility released thousands of pounds of cancer-causing chemicals into the air for 40 days…another fine.  Then the BP oil spill in the Gulf of Mexico, killing 11 and impacting lives all along America’s Gulf Coast.  So how do you punish the company to correct the behavior?  My son was even perplexed when we bought gas at the local BP station, “should we purchase gas elsewhere to protest the oil spill or purchase it here to help pay for the cleanup?”  I didn’t have an answer, but I do know this, put someone in jail that was responsible and these questions go away.

So what should be done?  Start locking people up and here’s why:

1)    We need people as examples, not companies.  Shareholders are shouldering most of the financial penalty, not the individuals responsible.

2)    Prison is effective punishment.  While I will argue that prison sentences for some are too long, the experience does get your mind right.  White-Collar recidivism is negligible for a reason….the punishment works.

3)    Hold People Accountable.  I would rather see the CEO of a company go to jail saying he was sorry, than see one more commercial about how sorry the company is about the wrong they did (a la BP).

4)    Arresting one person will lead you to the real person responsible.  Once someone is arrested they will start talking, and so on, and so on.

The corporate veil has a place in business but it should not protect those that are guilty of crimes…and it seems to me that more than a few bad guys have gotten away.  Civil litigation has become too easy for both the prosecutors and the defense, so let’s up the game and put some butts on the line.  I’m speaking from experience, prison hurts, is a great deterrent and will go a long way to clean things up in corporate wrongdoing.

Bob Jensen's threads on white collar crime are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

Bob Jensen's threads on the Lehman/Ernst Repo 105 scandal are at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

"The Difficulty of Proving Financial Crimes," by Peter J. Henning, DealBook, December 13, 2010 ---
http://blogs.law.harvard.edu/corpgov/2010/12/20/why-do-cfos-become-involved-in-material-accounting-manipulations/

The prosecution revolved around the recognition of revenue from Network Associates’ sales of computer security products to a distributor through what is called “sell-in” accounting rather than the “sell-through” method. Leaving aside the accounting minutiae, prosecutors asserted that Mr. Goyal chose “sell-in” accounting as a means to overstate revenue from the sales and did not disclose complete information to the company’s auditors about agreements with the distributor that could affect the amount of revenue generated from the transactions.

The line between aggressive accounting and fraud is a thin one, involving the application of unclear rules that require judgment calls that may turn out to be incorrect in hindsight. While Mr. Goyal was responsible as the chief financial officer for adopting an accounting method that likely enhanced Network Associates’ revenue, the problem with the securities fraud theory was that prosecutors did not introduce evidence that the “sell-in” method was improper under Generally Accepted Accounting Principles. And even if it was, the court pointed out lack of evidence that that this accounting method had a “material” impact on Network Associates’ revenue, which must be shown to prove fraud.

A more significant problem for prosecutors was the absence of concrete proof that Mr. Goyal intended to defraud or that he sought to mislead the auditors. The Court of Appeals for the Ninth Circuit found that the “government’s failure to offer any evidence supporting even an inference of willful and knowing deception undermines its case.”

The court rejected the proposition that an executive’s knowledge of accounting and desire to meet corporate revenue targets can be sufficient to establish the intent to commit a crime. The court stated, “If simply understanding accounting rules or optimizing a company’s performance were enough to establish scienter, then any action by a company’s chief financial officer that a juror could conclude in hindsight was false or misleading could subject him to fraud liability without regard to intent to deceive. That cannot be.”

The court further explained that an executive’s compensation tied to the company’s performance does not prove fraud, stating that such “a general financial incentive merely reinforces Goyal’s preexisting duty to maximize NAI’s performance, and his seeking to meet expectations cannot be inherently probative of fraud.”

Don’t be surprised to see the court’s statements about the limitations on corporate expertise and financial incentives as proof of intent quoted with regularity by defense lawyers for corporate executives being investigated for their conduct related to the financial meltdown. The opinion makes the point that just being at the scene of financial problems alone is not enough to show criminal intent.

If the Justice Department decides to try to hold senior corporate executives responsible for suspected financial chicanery or misleading statements that contributed to the financial meltdown, the charges are likely to be similar to those brought against Mr. Goyal, requiring proof of intent to defraud and to mislead investors, auditors, or the S.E.C.

The intent element of the crime is usually a matter of piecing together different tidbits of evidence, such as e-mails, internal memorandums, public statements and the recollection of participants who attended meetings. Connecting all those dots is not an easy task, as prosecutors learned in the case against two former Bear Stearns hedge fund managers when e-mails proved to be at best equivocal evidence of their intent to mislead investors, resulting in an acquittal on all counts.

The collapse of Lehman Brothers raises issues about whether prosecutors could show criminal conduct by its executives. The bankruptcy examiner’s report highlighted the firm’s use of the so-called “Repo 105” transactions to make its balance sheet look healthier than it was each quarter, which could be the basis for criminal charges. But the appeals court opinion highlights how great the challenge would be to establish a Lehman executive’s knowledge of improper accounting or the falsity of statements because just arguing that a chief executive or chief financial officer had to be aware of the impact of the transactions would not be enough to prove the case.

The same problems with proving a criminal case apply to other companies brought down during the financial crisis, like Fannie Mae, Freddie Mac and American International Group. Many of the decisions that led to these companies’ downfall were at least arguably judgment calls made with no intent to defraud, short-sighted as they might have been. Disclosures to regulators and auditors, and public statements to shareholders, are rarely couched in definitive terms, so proving that a statement was in fact false can be difficult, and then showing knowledge of its falsity even more daunting.

In a concurring opinion in the Goyal case, Chief Judge Alex Kozinski bemoaned the use of the criminal law for this type of conduct, stating that this prosecution was “one of a string of recent cases in which courts have found that federal prosecutors overreached by trying to stretch criminal law beyond its proper bounds.”

Despite the public’s desire to see some corporate executives sent to jail for their role in the financial meltdown, the courts will hold the government to the requirement of proof beyond a reasonable doubt and not simply allow the cry for retribution to lead to convictions based on high compensation and presiding over a company that sustained significant losses.

Continued in article

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

Questions
Since most business and accounting graduate school applicants take the GMAT, I can't figure is why prospective business and accounting majors are taking the GRE?

Do the smart accounting graduate school applicants take the GMAT and the dumb ones take the GRE?

"Verbal vs. mathematical aptitude in academics," Discover Magazine, December 11, 2010 ---
http://blogs.discovermagazine.com/gnxp/2010/12/verbal-vs-mathematical-aptitude-in-academics/

Some observations:

- Social work people have more EQ than IQ (this is not a major achievement because of the scale obviously).

- Accountants never made it into the “blue bird” reading group.

- Philosophers are the smartest humanists, physicists the smartest scientists, economists the smartest social scientists.

- Yes, anthropologists can read and write far better than they can do math.

The raw data below.

Major	Verbal	Quant	Writing
Philosophy	589	636	5.1
English	559	552	4.9
History	543	556	4.8
Art History	538	554	4.7
Religion	538	583	4.8
Physics	534	738	4.5
Anthropology	532	571	4.7
Foreign Language	529	573	4.6
Political Science	522	589	4.8
Economics	504	706	4.5
Math	502	733	4.4
Earth Science	495	637	4.4
Engineering, Materials	494	729	4.3
Biology	491	632	4.4
Art & Performance	489	571	4.3
Chemistry	487	682	4.4
Sociology	487	545	4.6
Education, Secondary	486	577	4.5
Engineering, Chemical	485	727	4.3
Architecture	477	614	4.3
Banking & Finance	476	709	4.3
Communications	470	533	4.5
Psychology	470	543	4.5
Computer Science	469	704	4.2
Engineering, Mechanical	467	723	4.2
Education, Higher	465	548	4.6
Agriculture	461	596	4.2
Engineering, Electrical	461	728	4.1
Engineering, Civil	457	702	4.2
Public Administration	452	513	4.3
Education, Elementary	443	527	4.3
Engineering, Industrial	440	710	4.1
Business Administration	439	562	4.2
Social Work	428	468	4.1
Accounting	415	595	3.9

"The 11 Most Shocking Insider Trading Scandals Of The Past 25 Years," Business Insider, November 4, 2010 --- 
http://www.businessinsider.com/biggest-insider-trading-scandals-2010-11#ixzz14WznUXEr

1986: Ivan Boesky, Dennis Levine and the fall of Drexel Burnham Lambert

2001: Martha Stewart and ImClone (I think this is less about what she did than who she was)

2001: Art Samberg's Illegal Microsoft Trades

2001: Rene Rivkin Convicted For Insider Trading That Netted Him Only $346

2005: Joseph Nacchio and Qwest Communications

2006: Livedoor and Murakami, The Enron Of Japan

2007: Mitchel Guttenberg, David Tavdy and Erik Franklin

Read more: http://www.businessinsider.com/biggest-insider-trading-scandals-2010-11#2007-mitchel-guttenberg-david-tavdy-and-erik-franklin-7#ixzz14X1N1ftN

2007: Mitchel Guttenberg, David Tavdy and Erik Franklin

2007: Randi and Christopher Collotta

2009: The Galleon Mess

2010: Some Very Wily Brothers - Charles and Sam Wyly And An Alleged $550 M Scheme

2010: Insider Trading By French Doc Might Have Helped FrontPoint Avoid Huge Losses

"Giuliani Asks Congress to Define Insider Trading," by Nathaniel C. Nash, The New York Times, April 23, 1987 --- Click Here
http://query.nytimes.com/gst/fullpage.html?res=9B0DEFD8113FF930A15757C0A961948260&n=Top/Reference/Times Topics/People/G/Giuliani, Rudolph W.

The United States Attorney in Manhattan, Rudolph W. Giuliani, asked Congress today to pass legislation that would define illegal insider trading, saying it would help him in prosecuting criminal cases.

Such a definition would ''end the debate'' over what are legal and illegal practices, said Mr. Giuliani, whose office has brought almost a dozen criminal insider trading cases against participants in the current Wall Street scandal.

Mr. Giuliani's prominence in the investigations led the White House to offer to appoint him chairman of the Securities and Exchange Commission, succeeding John S. R. Shad, who is retiring. But Mr. Giuliani declined the appointment.

Mr. Giuliani told the Senate Banking Committee in hearings today that his office and the S.E.C. were investigating at least one case that involved criminal collusion by various investors or firms on Wall Street. He declined to provide any specifics about the case, citing his policy of not commenting on continuing investigations. An Investigation Confirmed

''Are you finding problems with such issues as collusion, say among arbitrage firms or other investors, in your investigations?'' asked Senator Donald W. Riegle Jr., Democrat of Michigan, who is chairman of the Banking Committee's securities subcommittee.

After consulting with Gary G. Lynch, the head of the S.E.C.'s enforcement division, who was also testifying, Mr. Giuliani said such an investigation was being conducted by both agencies and that a public development in the case might ''be coming fairly soon.''

Since the insider-trading scandal began last year, there has been much debate over what should be done to stop what some in Congress say is a ''systemic'' problem of insider trading and other abuses of the takeover process. Several Proposals Put Forward

Mr. Giuliani had several recommendations:

* In addition to increasing the size of the S.E.C. enforcement staff and that of the Justice Department to handle the growing caseload, he recommended that the penalties for insider trading be increased from the current five-year maximum to eight or 10 years.

* He suggested that Congress send a message to the judiciary that ''prison sentences should be given in most of these cases,'' saying he strongly believed that the likelihood of spending time in prison would be the single largest deterrent to traders, ''as opposed to the organized-crime figure who factors a six-year prison term into his strategy.''

* He recommended that a mandatory prison sentence of one to two years be given anyone convicted of obstruction of justice or perjury in an insider-trading investigation and that firms be subject to penalties for the illegal actions of their employees if the firms are found to be negligent on self-policing.

Mr. Giuliani's call for a clear definition of insider trading comes amid considerable debate over whether such a statute would restrict, rather than preserve, the S.E.C.'s current enforcement reach.

For years, S.E.C. officials have opposed such a definition, but Mr. Lynch said he would not oppose a definition provided it was sufficiently broad and ''neither narrows the current case law, discards the misappropriate theory or increases the evidentiary burdens on the S.E.C.''

Both Mr. Lynch and Mr. Giuliani said they were surprised at the pervasiveness of insider trading they had discovered on Wall Street. Mr. Lynch said 20 of the 100 professionals on his staff were working on cases that have come out of current scandal; Mr. Giuliani said as much as 20 percent of his staff was involved in insider-trading cases.

Bob Jensen's threads on greater sinners ---
http://www.trinity.edu/rjensen/FraudRotten.htm

American History of Fraud ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

From The Wall Street Journal Accounting Weekly Review on December 3, 2010

SEC Charges Ex-Partner at Deloitte, Wife in Insider-Trading Case
by: Jessica Holzer
Dec 01, 2010
Click here to view the full article on WSJ.com

TOPICS: Ethics, Insider Trading, Public Accounting, Securities and Exchange Commission
SUMMARY: "The Securities and Exchange Commission on Tuesday charged a former partner at Deloitte Tax LLP and his wife with passing nonpublic information about pending corporate deals to relatives in London, in an alleged multimillion-dollar insider-trading scheme uncovered jointly by U.K. and U.S. authorities... The McClellans allegedly learned about the deals through Mr. McClellan's work leading one of Deloitte's regional mergers and acquisitions teams and passed along nonpublic information about the transactions in phone calls and during visit (sic) with the [relatives]... The U.K. Financial Services Authority last week announced criminal charges... The SEC decided...to avoid duplicating efforts already being made by the U.K. authorities, the official said.... 'The McClellans might have thought that they could conceal their illegal scheme by having close relatives make illegal trades offshore. They were wrong,' the SEC's enforcement chief Robert Khuzami said in a statement. "
CLASSROOM APPLICATION: The article can be used to discuss the temptations towards unethical behavior facing practicing accountants at all levels.
QUESTIONS:
1. (Advanced) What is insider information?

2. (Advanced) Why is trading insider information illegal? Why is trading on insider information illegal?

3. (Advanced) Of what illegal actions are a former Deloitte Tax partner and his wife accused? What entities investigated these alleged illegal activities?

4. (Advanced) How do partners at public accounting firms have access to insider information? Do lower levels of employees of these firms have this access to insider information?

5. (Introductory) Refer to the related article. How is it possible that regulating and prosecuting insider trading by observing market trades misses some illegal transfers of insider information?

6. (Advanced) If Mr. McClellan is guilty of these alleged crimes, what professional code has he also violated? What are the implications of such violations for Mr. McClellan and his wife to produce a personal income in the future?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Learning to Love Insider Trading --- http://online.wsj.com/article/SB10001424052748704224004574489324091790350.html
by Donald J. Boudreaux
Oct 24, 2009
Page: W1

"SEC Charges Ex-Partner at Deloitte, Wife in Insider-Trading Case," by: Jessica Holzer, The Wall Street Journal, December 1, 2010 ---
http://online.wsj.com/article/SB10001424052748704679204575646912282141410.html?mod=djem_jiewr_AC_domainid

The Securities and Exchange Commission on Tuesday charged a former partner at Deloitte Tax LLP and his wife with passing nonpublic information about pending corporate deals to relatives in London, in an alleged multimillion-dollar insider-trading scheme uncovered jointly by U.K. and U.S. authorities.

The SEC, in a civil complaint filed in federal district court in Northern California, alleged that San Francisco residents Arnold McClellan and his wife Annabel alerted her sister and brother-in-law Miranda and James Sanders about at least seven pending transactions from 2006 to 2008.

The McClellans allegedly learned about the deals through Mr. McClellan's work leading one of Deloitte's regional mergers and acquisitions teams and passed along nonpublic information about the transactions in phone calls and during visit with the Sanders, the SEC said.

James Sanders, who co-founded a derivatives-trading firm in London, allegedly took financial positions in the acquisition targets based on the tips and shared the insider information with his colleagues at the now-defunct firm Blue Index Ltd.

The SEC said the Sanderses netted $3 million from transactions based on the tips, half of which they shared with the McClellans. Mr. Sanders's colleagues and clients made $20 million in profits from the tips, according to the SEC.

Annabel McClellan worked previously in the London, San Jose and San Francisco offices of Deloitte.

The U.K. Financial Services Authority last week announced criminal charges against the Sanderses and three of James Sanders's colleagues. The Sanderses and the three other defendants in the case were first arrested by authorities in May 2009.

An SEC official said the two regulators worked very closely on the case, which involved overseas travel by enforcement staff. The SEC decided not to charge the Sanders to avoid duplicating efforts already being made by the U.K. authorities, the official said.

"The McClellans might have thought that they could conceal their illegal scheme by having close relatives make illegal trades offshore. They were wrong," the SEC's enforcement chief Robert Khuzami said in a statement.

Lawyers for Arnold McClellan said he denies the SEC's charges and will vigorously contest them. "He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone," Elliot R. Peters and Christopher Kearney of the law firm Keker & Van Nest LLP said in a statement.

A lawyer for Annabel McClellan also said her client will fight the charges. "Ms. McClellan did not possess or receive insider information, nor did she pass it," Nanci Clarence from the law firm Clarence & Dyer in San Francisco said.

Lawyers for the Sanderses couldn't immediately be reached for comment.

A Deloitte spokesman said the firm is shocked by the allegations and is cooperating with the SEC's investigation.

Mr. Sanders allegedly used derivatives instruments called "spread bet" contracts to take positions in the stocks of U.S. companies based on the information he received from the McClellans. Spread bets allow traders to make large bets on the price movements of an underlying security with relatively small investments.

Mr. Sanders allegedly traded in the contracts quickly after he or his wife received fresh information about the prospects of a transaction occurring.

Some of the alleged insider trading involved the planned acquisition of Kronos Inc., a Massachusetts data collection and payroll software company bought by one of McClellan's clients, San Francisco private-equity firm Hellman & Friedman LLC, in 2007.

The SEC, in its complaint, alleged that Mr. McClellan tipped his wife off to Hellman & Friedman's planned acquisition of Kronos early in 2007.

On Jan. 31, 2007, there was a phone call from Annabel McClellan's cellphone to the Sanders home, the SEC said. Later that day, Mr. Sanders made his first purchase of spread bet contracts tied to Kronos stock.

Mr. Sanders increased his position in the contracts on March 12, a day after a nearly 20-minute phone call from Mr. McClellan's cell phone to Annabel's mother's home in France, where the Sanders were staying. The phone call occurred less than one hour after Mr. McClellan participated in a two-hour call with his client discussing Kronos.

A spokesman for Hellman & Friedman declined to comment.

Also on March 12, Blue Index sent around to its traders a document pitching Kronos stock to the firm's clients. In a recorded phone call on March 16 with his father, Mr. Sanders identified Annabel McClellan as the source of information about the timing and pricing of the Kronos acquisition and told him he had agreed to split his trading profits with her.

"We are shocked and saddened by these allegations against our former tax partner and members of his family," Deloitte spokesman Jonathan Gandal said in a statement. "If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies." Deloitte is cooperating with the SEC's investigation, Mr. Gandal said.

"Did Deloitte Compromise Independence in McClellan Insider Trading Scandal?" by Francine McKenna, Forbes, December 7, 2010 ---
http://blogs.forbes.com/francinemckenna/2010/12/07/did-deloitte-compromise-independence-in-mcclellan-insider-trading-scandal/?boxes=Homepagechannels

There are plenty of sexy externalities associated with the latest insider trading charges against a former Deloitte tax partner and his wife. Spicing things up: A May-December marriage, a XXX-rated website, and lots of trips between San Francisco and London to “vacation.”

Who woulda thunk it’s the tax partners having all the fun?

The McClellan case – their UK relatives were arrested in May 2009 and formally charged by the FSA last month – and another one against former Deloitte Vice Chairman Thomas Flanagan, settled this past August, were on the SEC’s desk at the same time. Deloitte has not been charged by the SEC in either. I doubt they will be. Deloitte played the “We were duped” card with the SEC and their clients. They sued Flanagan to save face with both.

Continued in article

Jensen Comment
Deloitte's formal statements on the firm's efforts to guarantee independence and transparency are at
http://www.cs.trinity.edu/~rjensen/temp/DeloitteTransparency Report.pdf

Bob Jensen's threads on Deloitte are at
http://www.trinity.edu/rjensen/Fraud001.htm

A brief follow-up on the manager who received the disciplinary action handed down by the PCAOB  ---
http://goingconcern.com/2010/12/update-on-censured-ernst-young-manager/

We attempted to reach Jacqueline Higgins late yesterday at her office number in Boston, however we discovered that when we were transferred to her extension we simply bounced back to reception, who needless to say, was very confused about that phenomenon. After attempting to page Ms. Higgins, only then did the receptionist learn and then relay to us that Ms. Higgins was no longer with the firm.

We checked with Ernst & Young spokesman Charlie Perkins on this development and he confirmed that Ms. Higgins “will be leaving the firm at the end of the year.”

And lest there still be any confusion due to the carefully worded E&Y statement, the partner and senior manager in question have been dismissed from the firm.

We’ll keep you updated if we hear more from inside at the firm or if further action is taken by the PCAOB.

Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm

Video:  Charles Furgeson has produced a powerful documentary, “Inside Job,” about the deep capture of financial (de)regulation ---
http://thesituationist.wordpress.com/2010/11/14/the-situation-of-the-2008-economic-crisis/

Dodd–Frank Wall Street Reform and Consumer Protection Act ---
http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act

I've been a long-time advocate of increased regulations of derivatives financial instruments that turned bankers into banksters defrauding investors ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

But the mess that Dodd and Frank engineered this year is way off the mark. After the hidden and downstream costs of the Dodd-Frank legislation are considered for Main Stereet, and the partying and political pats on the back of Dodd, Frank, and Obama die down, I hope Congress will consider greatly revised legislation that does not destroy Main Street while trying to discourage derivatives abuses of Wall Street.

The article below also discusses how Main Street uses derivatives to manage financial risks in order to focus greater attention on the main products and services of their enterprises. This is enterprise risk management in action.

"The Hangover, Part II:  New derivatives rules could punish firms that pose no systemic risk," The Wall Street Journal, November 29, 2010 ---
http://online.wsj.com/article/SB10001424052748704104104575622583155296368.html

. . .

But after the pair completed their mad-cap all-nighter, no hilarity ensued. That's because Main Street companies that had nothing to do with the financial crisis woke up to find billions of dollars in potential new costs. The threat was new authority for regulators to require higher margins on various financial contracts, even for small companies that nobody considers a systemic risk. The new rules could apply to companies that aren't speculating but are simply trying to protect against business risks, such as a sudden price hike in a critical raw material.

Businesses with good credit that have never had trouble off-loading such risks might have to put up additional cash at the whim of Washington bureaucrats, or simply hold on to the risks, making their businesses less competitive. Companies that make machine tools, for example, want to focus on making machine tools, not on the fluctuations of interest rates or the value of a foreign customer's local currency. So companies pay someone else to manage these risks. But Washington threatens to make that process much more costly.

Messrs. Frank and Dodd responded to the uproar first by suggesting that the problem could be fixed later in a "corrections" bill and then by denying the problem existed. Both proclaimed that their bill did not saddle commercial companies with new margin rules. But as we noted last summer, comments from the bill's authors cannot trump the language of the law.

Flash forward to today, and the Commodity Futures Trading Commission (CFTC) is drafting its new rules for swaps, the common derivatives contracts in which two parties exchange risks, such as trading fixed for floating interest rates. We're told that CFTC Chairman Gary Gensler has said privately that his agency now has the power to hit Main Street with new margin requirements, not just Wall Street.

Main Street companies that use these contracts are known as end-users. When we asked the CFTC if Mr. Gensler believes regulators can require swap dealers to demand margin from all end-users, a spokesman said, "It would be premature to say that a rule would include such a requirement or that the Chairman supports such a requirement."

It may only be premature until next month, when the CFTC is expected to issue its draft rules. While the commission doesn't have jurisdiction over the entire swaps market, other financial regulators are expected to follow its lead. Mr. Gensler, a Clinton Administration and Goldman Sachs alum, may not understand the impact of his actions outside of Washington and Wall Street.

In a sequel to the Dodd-Frank all-nighter, the law requires regulators to remake financial markets in a rush. CFTC Commissioner Michael Dunn said recently that to comply with Dodd-Frank, the commission may need to write 100 new regulations by next July.

"In my opinion it takes about three years to really promulgate a rule," he said, according to Bloomberg News. Congress instructed us to "forget what's physically possible," he added. The commission can't really use this impossible schedule as an excuse because Mr. Gensler had as much impact as anyone in crafting the derivatives provisions in Dodd-Frank. No surprise, the bill vastly expands his agency's regulatory turf.

And if anyone can pull off a complete overhaul of multi-trillion-dollar markets in a mere eight months, it must be the CFTC.

Just kidding. An internal CFTC report says that communication problems between the CFTC's enforcement and market oversight divisions "impede the overall effectiveness of the commission's efforts to not only detect and prevent, but in certain circumstances, to take enforcement action against market manipulation." The report adds that the commission's two primary surveillance programs use incompatible software. Speaking generally and not in response to the report, Mr. Gensler says that the agency is "trying to move more toward the use of 21st century computers," though he warns that "it's a multiyear process." No doubt.

The CFTC report also noted that "the staff has no standard protocol for documenting their work." If we were tasked with restructuring a complex trading market to conform to the vision of Chris Dodd and Barney Frank, we wouldn't want our fingerprints on it either.

The report was completed in 2009 but only became public this month thanks to a Freedom of Information Act request from our colleagues at Dow Jones Newswires. Would Messrs. Dodd and Frank have responded differently to Mr. Gensler's power grab if they had realized how much trouble the CFTC was having fulfilling its traditional mission? We doubt it, but it certainly would have made their reform a tougher sell, even to the Washington press corps.

Congress should scrutinize this process that is all but guaranteed to result in ill-considered, poorly crafted regulation. In January, legislators should start acting, not like buddies pulling all-nighters, but like adults who understand it's their job to make the tough calls, rather than kicking them over to the bureaucracy with an arbitrary deadline.

Bob Jensen's free tutorials and videos on accounting for derivative financial instruments and hedging activities are linked at
http://www.trinity.edu/rjensen/caseans/000index.htm

A Lost Generation:  Joe Hoyle has a chat with an official in the Afghanistan government
"We Shouldn’t Take It For Granted," by Joe Hoyle, November 18, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/11/we-shouldnt-take-it-for-granted.html

CEO Compensation Leaders for Non-Profit Private Universities

From the Chronicle of Higher Education, November 14, 2010 ---
http://chronicle.com/article/College-Chief-Executives/125311/

The above table is continued at http://chronicle.com/article/College-Chief-Executives/125311/ 

Jensen Comment
This year Trinity University has a new President, the former Dean of the college of business at the University of Colorado. I've no idea what his compensation package is, although Trinity normally provides a large house on campus, new car, and many other benefits to its CEO. Because the fringe benefits vary so much and are so difficult to value, the numbers in the Total Compensation column should be compared with great caution.

John Brazil is a good friend so I will refrain from making any comments about his compensation package. The reported compensation may have been increased in honor of the last year of his Presidency.

In recent years students have turned more toward majoring in professional programs which might explain, in part, why Trinity appointed a President with a background outside the disciplines of humanities and science, although Trinity has had economists lead the university in the past. At Trinity economics is not part of the Department of Business.

Listings of U.S. University Endowments (including a table on endowments per student) 2005-2009 ---
http://en.wikipedia.org/wiki/List_of_colleges_and_universities_in_the_United_States_by_endowment

A more current listing of many university data tables is provided in the "Almanac Issue 2010-2011" from the Chronicle of Higher Education. August 27, 2010. I got my booklet in hard copy in late August 2010. Non-subscribers can get the booklet at a cover price of $15. Most online links to this Almanac data are only available to subscribers, although students and faculty on campus may be able to use their library's subscription ---
http://chronicle.com/section/Almanac-of-Higher-Education/463/

Dr. Brazil's roots are in English with an undergraduate degree from Stanford and a PhD from Yale. Before coming to Trinity, he was President of Butler University and a member of the Board of Directors of Caterpillar Tractor. Trinity is a small liberal arts school with a relatively large endowment (rank 33 per student the last time I looked at the national rankings for the year 2006 rankings). Surprising things happen in tables for endowments per student. Number 1 is Princeton University and Number 2 is Bryn Athyn College (never heard of it until recently). The table shown in the following link is for years 2005 and 2006.
http://en.wikipedia.org/wiki/List_of_colleges_and_universities_in_the_United_States_by_endowment

U.S. News and World Report has ranked Trinity #1 in the West among colleges offering undergraduate and master's degrees for nearly two decades. ---
http://web.trinity.edu/x836.xml

View IRS Tax Form 990 Outcomes ---
http://www2.guidestar.org/rxg/products/GuideStar-premium.aspx?gclid=CMThoN2bpaUCFQl_5Qod5zl95w

2008 990 Tax Report Information --- http://www.irs.gov/newsroom/article/0%2C%2Cid=176722%2C00.html

990 Ground Zero:  The 2008 990 Tax Forms are difficult to compare with prior years
"The New 990 Tax Form: More Data, More Headaches," by Paul Fain, Chronicle of Higher Education, November 14, 2010 ---
http://chronicle.com/article/The-New-990-More-Data-More/125376/

Also see http://www.irs.gov/charities/article/0,,id=212597,00.html 

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

A New Teaching Module for Ethics Courses:  Channel Checking and Trading

Question
When should channel checking (e.g., traders bribing employees of trade channel suppliers and distributors) and channel trading (e.g., trading by Minnie Pearl in a supplier's Accounts Receivable Department in securities or derivative securities of customers)?

"Who’s Checking Your Channel?" by Bruce Carton, Securities Docket, December 8, 2010

Two months ago I declared September 2010 “Insider Trading Month” for the Securities and Exchange Commission’s sudden burst of enforcement activity on that front. Then came November, and boy, did enforcement go off the charts.

The extraordinary activity of prosecutors and regulators that month set Wall Street traders abuzz, but compliance officers and other executives at public companies should also take careful notice. And what’s so different about the latest round of insider-trading cases? Investigators are focusing on the flow of supply-chain information. That includes a lot more people than the gossipy traders working in lower Manhattan.

On November 20, reports circulated that both the Justice Department and the SEC were preparing insider-trading cases against a long list of Wall Street entities: consultants, investment bankers, hedge fund and mutual fund traders, and analysts. According to the Wall Street Journal, the charges would allege “a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies.” Two days later, the FBI raided the offices of three hedge funds as part of the investigation, with more raids expected.

Portions of the investigation are fairly standard—hedge funds tipped off to pending merger deals, for example; that’s nothing new under the sun. But another wrinkle has equity research analysts on red alert. Regulators are now thought to be probing whether an analyst practice commonly known as “channel checking” constitutes illegal insider trading. If so, the public companies whose information is in play could soon be pulled into the whirlwind.

One company where channel checks have reportedly now become a widely used and highly relied-upon source of information for traders is Apple.

In a channel check, analysts try to glean information about a company’s production via interviews with the company’s suppliers, distributors, contract manufacturers, and sometimes even current company employees. The goal is to piece together a better picture of the company’s performance. Apple, always secretive about its products, is an example of a company where channel checking is reportedly common. Indeed, analyst reports based on channel checks routinely cause Apple stock to dip or surge.

As supply-chain expert Pradheep Sampath of GXS noted on his blog, these interviews typically occur without the target company’s permission or participation. Sampath adds that:

Data collected from these sources is seemingly innocuous when viewed separately. When pieced together however, these data points from a company’s supply chain can deliver startling insights into revenue and future earnings of a company—much in advance of such information becoming publicly available. This practice becomes more pronounced for companies such as Apple that are extremely guarded and secretive about information they make publicly available.

Reasons abound to question whether the Justice Department or the SEC will ever decide to bring a channel-checking case. First, the information gleaned from any one individual in the channel is unlikely to be material by itself. For example, the maker of screens for Apple’s iPhones may reveal that sales of those screens to Apple ticked up in December. But given that Apple has so many revenue streams and just as many channels for those streams, this one detail from our screen-maker is not likely to be material by itself.

Only when that information is pieced together with many other pieces of information to build a “mosaic” does a larger picture emerge that might arguably be material information about the company. This is, in effect, what equity research analysts are paid to do. But as the U.S. Supreme Court stated in the SEC’s ultimately unsuccessful insider-trading case against research analyst Raymond Dirks, analysts play an important role in preserving a healthy market, and imposing “an inhibiting influence” on that role may not be desirable.

Nonetheless, if prosecutors are now scrutinizing analysts’ practices of gathering information from a public company’s supply chain—which have a long, established history—that presents an important opportunity for public companies to re-examine their own policies and procedures concerning how such information is tracked and controlled. Here are some questions that public companies will want to consider:

1. Are analysts interested in, and attempting to obtain, information from our supply-chain?

If not, then channel checks may be more of a back-burner issue for you. If yes, press on.

2. As part of our agreements with suppliers, distributors, and manufacturers, do we have confidentiality or non-disclosure agreements (NDAs) in place?

Implicit in any enforcement action or prosecution that might result from the ongoing channel-check probe is the idea that the information in question is confidential and a company’s suppliers should not be sharing it. Suppliers speaking to Apple analysts, for example, may well be violating NDA agreements with Apple and allowing analysts to access confidential information. That doesn’t differ much from committing insider trading by obtaining information from inside the company itself.

If the SEC and prosecutors now view supply-chain information as material, non-public information that can support an insider-trading case, then companies should take a fresh look at how they try to prevent the misuse of such information.

Jacob Frenkel, a former SEC enforcement attorney now with law firm Shulman, Rogers, Gandal, Pordy & Ecker, says that weak corporate controls over supply chains has been a looming issue and was bound to become a compliance headache sooner or later. Frenkel says companies should adopt rules governing the conduct of their business partners, including what information they may share.

3. If we do have confidentiality agreements or NDAs in place with suppliers, distributors, and manufacturers, are they being violated? And are we seeking to enforce them?

To continue the Apple example: If traders routinely receive and act upon analyst reports based on supply chain interviews about the company, one wonders whether any NDAs with suppliers are in place or enforced. (Regulators would certainly be wondering about it.) For the record, Apple told the Wall Street Journal that the company does not release that type of information about its production, and declined to comment further.

Consider this hypothetical:

Company X’s supply-chain information is material and non-public, meaning Company X or a “person acting on its behalf” could not selectively disclose it to one analyst under Regulation FD without making a public disclosure of that same information; Company X is fully aware that its suppliers are providing supply-chain information regularly to select analysts; and Company X either (a) does not impose an NDA on its suppliers, or (b) does impose an NDA but never enforces it. Is the supplier’s disclosure of information to select analysts, with Company X’s knowledge, a “back door” violation of Regulation FD (or at least the spirit of Regulation FD)?

4. Are we permitting current company employees to hold discussions with analysts or traders as industry “consultants”?

Law professor Peter Henning noted in a recent article that many employees are providing information as consultants do so openly, and “it may even be that these consultants were authorized by corporate employers—or it was at least tolerated as a cost of keeping talented employees.” Given the risk that an employee/consultant may end up talking about the company, however, Henning says it is an “interesting issue” why a company would allow one of its employees to consult in this fashion.

Given the SEC’s intense focus on insider trading, there is certainly more to come on this front, so keep an eye on developments in the coming months. And keep an ear to the ground for those whispers from your suppliers, distributors, and contract manufacturers.

Originally published in Compliance Week.

A hedge fund is really an investment club formed to get around many regulations constraining mutual funds and more traditional investment alternatives.
"Do Hedge Funds Create Criminals?" by Lynn Stout, Harvard Business Review Blog, December 14, 2010 --- Click Here
http://blogs.hbr.org/cs/2010/12/how_hedge_funds_create_crimina.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date